# Order Granting Conditional Substituted Compliance in Connection With Certain Capital and Financial Reporting Requirements Applicable to Nonbank Swap Dealers Subject to Regulation by the United Kingdom Prudential Regulation Authority > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-15094 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** July 18, 2024 - **Citation:** 89 FR 58535 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Chapter I Order Granting Conditional Substituted Compliance in Connection With Certain Capital and Financial Reporting Requirements Applicable to Nonbank Swap Dealers Subject to Regulation by the United Kingdom Prudential Regulation Authority AGENCY: Commodity Futures Trading Commission. ACTION: Order. SUMMARY: On February 5, 2024, the Commodity Futures Trading Commission issued a notice and request for comment on an application submitted by the Institute of International Bankers, International Swaps and Derivatives Association, and Securities Industry and Financial Markets Association requesting that the Commission determine that registered nonbank swap dealers organized and domiciled in the United Kingdom may comply with certain capital and financial reporting requirements under the Commodity Exchange Act and Commission regulations by being subject to, and complying with, corresponding capital and financial reporting requirements of the United Kingdom Prudential Regulation Authority. The Commission also solicited public comment on a proposed comparability determination and related order providing for the conditional availability of substituted compliance in connection with the application. The Commission is adopting the proposed order with certain modifications and clarifications to address comments. The final order provides that a nonbank swap dealer organized and domiciled in the United Kingdom may satisfy the capital requirements under the Commodity Exchange Act and Commission applicable Commission regulations and the financial reporting rules under the Commodity Exchange Act and applicable Commission regulations by complying with certain specified United Kingdom laws and regulations and conditions set forth in the order. DATES: This determination was made by the Commission on June 24, 2024. FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-5283, aolear@cftc.gov; Thomas Smith, Deputy Director, 202-418-5495, tsmith@cftc.gov; Rafael Martinez, Associate Director, 202-418-5462, rmartinez@cftc.gov; Liliya Bozhanova, Special Counsel, 202-418-6232, lbozhanova@cftc.gov; Joo Hong, Risk Analyst, 202-418-6221, jhong@cftc.gov; Justin McPhee, Risk Analyst, 202-418-6223; jmchpee@cftc.gov, Market Participants Division; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: The Commodity Futures Trading Commission (“Commission” or “CFTC”) is issuing an order providing that registered nonbank swap dealers (“SDs”) organized and domiciled in the United Kingdom (“UK”) may satisfy certain capital and financial reporting requirements under the Commodity Exchange Act (“CEA”) 1 and Commission regulations 2 by being subject to, and complying with, comparable capital and financial reporting requirements under relevant UK laws and regulations, subject to certain conditions set forth in the order below. The order is based on the proposed comparability determination and related proposed order published by the Commission on February 5, 2024, 3 as modified in certain aspects to address comments and to clarify its terms. 1 7 U.S.C. 1 et seq. The CEA may be accessed through the Commission's website, www.cftc.gov. 2 17 CFR Chapter I. Commission regulations may be accessed through the Commission's website, www.cftc.gov. 3 Notice of Proposed Order and Request for Comment on an Application for Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Subject to Capital and Financial Reporting Requirements of the United Kingdom and Regulated by the United Kingdom Prudential Regulation Authority, 89 FR 8026 (Feb. 5, 2024) (“2024 Proposal”). 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 4 directs the Commission and “prudential regulators” 5 to impose capital requirements on SDs and major swap participants (“MSPs”) registered with the Commission. 6 Section 4s(e) 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”). 4 7 U.S.C. 6s(e). 5 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. 7 U.S.C. 1a(39). 6 Subject to certain exceptions, the term “swap dealer” is generally defined as any person that: (i) holds itself out as a dealer in swaps; (ii) makes a market in swaps; (iii) regularly enters into swaps with counterparties as an ordinary course of business for its own account; or (iv) engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in swaps. 7 U.S.C. 1a(49). The term “major swap participant” is generally defined as any person who is not an SD, and: (i) subject to certain exclusions, maintains a substantial position in swaps for any of the major swap categories as determined by the Commission; (ii) whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the U.S. banking system or financial markets; or (iii) is a financial entity that: (a) is highly leveraged relative to the amount of capital it holds and that is not subject to capital requirements established by an appropriate Federal banking agency; and (b) maintains a substantial position in outstanding swaps in any major swap category as determined by the Commission. 7 U.S.C. 1a(33). Section 4s(e) applies a bifurcated approach with respect to the above Congressional directives, requiring each SD and MSP that is subject to the regulation of a prudential regulator (“bank SD” and “bank MSP,” respectively) to meet the minimum capital requirements and uncleared swaps margin requirements adopted by the applicable prudential regulator, and requiring each SD and MSP that is not subject to the regulation of a prudential regulator (“nonbank SD” and “nonbank MSP,” respectively) to meet the minimum capital requirements and uncleared swaps margin requirements adopted by the Commission. 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. 8 7 7 U.S.C. 6s(e)(2). 8 7 U.S.C. 6s(e)(1) and (2). The prudential regulators implemented section 4s(e) in 2015 by amending existing capital requirements applicable to bank SDs and bank MSPs to incorporate swap transactions into their respective bank capital frameworks, and by adopting rules imposing initial and variation margin requirements on bank SDs and bank MSPs that engage in uncleared swap transactions. 9 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. 10 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”). 11 9 Margin and Capital Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015). 10 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016). 11 Capital Requirements of Swap Dealers and Major Swap Participants, 85 FR 57462 (Sept. 15, 2020). On April 30, 2024, the Commission amended the capital and financial reporting requirements to revise certain financial reporting obligations, among other changes. See Capital and Financial Reporting Requirements for Swap Dealers and Major Swap Participants, 89 FR 45569 (May 23, 2024). The amendments have limited impact on nonbank SDs covered by this order. Section 4s(f) of the CEA addresses SD and MSP financial reporting requirements. 12 Section 4s(f) 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) provides, in relevant part, that each registered SD and MSP must make financial condition reports as required by regulations adopted by the Commission. 13 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”). 14 12 7 U.S.C. 6s(f). 13 7 U.S.C. 6s(f)(1)(A). 14 85 FR 57462. B. Commission Capital Comparability Determinations for Non-U.S. Nonbank Swap Dealers and Non-U.S. Nonbank Major Swap Participants Commission Regulation 23.106 establishes a substituted compliance framework whereby the Commission may determine that compliance by a non-U.S. domiciled nonbank SD or non-U.S. domiciled nonbank MSP with its home country's capital and financial reporting requirements will satisfy all or parts of the CFTC Capital Rules and all or parts of the CFTC Financial Reporting Rules (such a determination referred to as a “Comparability Determination”). 15 The Commission's capital adequacy and financial reporting requirements are designed to address and manage risks that arise from a firm's operation as an SD or MSP. Given their functions, both sets of requirements and rules must be applied on an entity-level basis (meaning that the rules apply on a firm-wide basis, irrespective of the type of transactions involved) to effectively address risk to the firm as a whole. The availability of such substituted compliance is conditioned upon the Commission issuing a Comparability Determination finding that the relevant foreign jurisdiction's capital adequacy and financial 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 would issue a Comparability Determination in the form of an order (“Comparability Order”). 16 15 17 CFR 23.106. Commission Regulation 23.106(a)(1) provides that a request for a 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. However, Commission regulations also provide that any non-U.S. nonbank SD or non-U.S. nonbank MSP that is dually-registered with the Commission as a futures commission merchant (“FCM”) is subject to the capital requirements of Commission Regulation 1.17 (17 CFR 1.17) and may not petition the Commission for a Comparability Determination. 17 CFR 23.101(a)(5) and (b)(4), respectively. Furthermore, substituted compliance is not available to non-U.S. bank SDs and non-U.S. bank MSPs with respect to their respective financial reporting requirements under Commission Regulation 23.105(p). Commission Regulation 23.105(p), however, permits non-U.S. bank SDs and non-U.S. bank MSPs that do not submit financial reports to a U.S. prudential regulator to file with the Commission a statement of financial condition, certain regulatory capital information, and Schedule 1 of Appendix C to Subpart E of Part 23 of the Commission's regulations prepared and presented in accordance with the accounting standards permitted by the non-U.S. bank SD's or non-U.S. bank MSP's home country regulatory authorities. 17 CFR 23.105(p)(2). 16 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 assessing whether the applicable foreign jurisdiction's capital and financial reporting requirements have comparable objectives with, and achieve comparable outcomes to, corresponding CFTC requirements. 17 The Commission's assessment is not a line-by-line evaluation or comparison of a foreign jurisdiction's regulatory requirements with the Commission's requirements. 18 In performing the analysis, the Commission recognizes that jurisdictions may adopt differing approaches to achieving regulatory objectives and outcomes, and the Commission will focus on whether the foreign jurisdiction's capital and financial reporting requirements are based on regulatory objectives, and produce regulatory outcomes, that are comparable to the Commission's in purpose and effect, and not whether they are comparable in every aspect or contain identical elements. 17 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521. 18 85 FR 57462 at 57521. A person requesting a 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 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. 19 19 17 CFR 23.106(a)(2). The Commission will consider an application for a 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. 20 Each non-U.S. nonbank SD or non-U.S. nonbank MSP that seeks to rely on a Comparability Order is responsible for determining whether it is subject to the foreign laws and regulations found comparable in the Comparability Order. 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 and/or regulations determined to be comparable in a Comparability Order may not voluntarily comply with such laws and/or regulations in lieu of compliance with the CFTC Capital Rules or the CFTC Financial Reporting Rules. 20 The Commission provides the applicant with an opportunity to review for accuracy and completeness the Commission's description of relevant home country laws and regulations on which a proposed Comparability Determination and a proposed Comparability Order are based. The Commission relies on this review, and any corrections or feedback received, as part of the comparability assessment. A Comparability Determination and Comparability Order based on an inaccurate description of foreign laws and regulations may not be valid. The Commission may consider all relevant factors in making a 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. 21 21 17 CFR 23.106(a)(3) and 85 FR 57462 at 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 an assessment 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. 22 22 The Commission would conduct a similar analysis, adjusted as appropriate to account for regulatory distinctions, in performing a comparability assessment for foreign nonbank MSPs. Commission Regulation 23.101(b) requires a nonbank MSP to maintain positive tangible net worth. There are no MSPs currently registered with the Commission. 17 CFR 23.101(b). Commission Regulation 23.106 further provides that the Commission may impose any terms or conditions that it deems appropriate in issuing a Comparability Determination. 23 Any specific terms or conditions with respect to capital adequacy or financial reporting requirements will be set forth in the Commission's Comparability Order. As a general condition to all Comparability Orders, the Commission will require notification from the 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 foreign jurisdiction's relevant laws and regulations, as well as changes to the relevant supervisory or regulatory regime. 23 17 CFR 23.106(a)(5). To rely on a Comparability Order, 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 Comparability Order in lieu of all or parts of the CFTC Capital Rules and/or CFTC Financial Reporting Rules. 24 Notices must be filed electronically with the Commission's Market Participants Division (“MPD”). 25 The filing of a notice by a non-U.S. nonbank SD or non-U.S. nonbank MSP provides MPD staff 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 Comparability Order and that it will comply with any listed conditions. MPD will issue a letter under 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 Comparability Order in lieu of complying with the CFTC Capital Rules and CFTC Financial Reporting Rules upon MPD's confirmation through discussions with the non-U.S. nonbank SD or non-U.S. nonbank MSP 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 the conditions in the Comparability Order. 26 24 17 CFR 23.106(a)(4)(i). 25 Notices must be filed in electronic form to the following email address: MPDFinancialRequirements@cftc.gov. 26 17 CFR 23.106(a)(4)(ii) and 17 CFR 140.91(a)(11). Each non-U.S. nonbank SD and each non-U.S. nonbank MSP that receives confirmation from the Commission that it may comply with a foreign jurisdiction's capital adequacy and 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. 27 A non-U.S. nonbank SD or non-U.S. nonbank MSP that receives confirmation of substituted compliance remains subject, however, to the Commission's examination and enforcement authority. 28 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. 29 In addition, a finding of a violation by a foreign jurisdiction's regulatory authority is not a prerequisite for the exercise of such examination and enforcement authority by the Commission. 27 17 CFR 23.106(a)(4)(ii). Confirmation will be issued by MPD under authority delegated by the Commission. Commission Regulation 140.91(a)(11). 17 CFR 140.91(a)(11). 28 17 CFR 23.106(a)(4)(ii). 29 Id. C. Application for a Comparability Determination for Nonbank Swap Dealers Domiciled in the United Kingdom and Subject to Regulation by the Prudential Regulation Authority On May 4, 2021, the Institute of International Bankers (“IIB”), International Swaps and Derivatives Association (“ISDA”), and Securities Industry and Financial Markets Association (“SIFMA”) (together, the “Applicants”) submitted an application (the “UK Application”) requesting that the Commission conduct a Comparability Determination and issue a Comparability Order finding that compliance with certain designated capital and financial reporting requirements of the United Kingdom satisfy certain Commission capital rules and financial reporting rules for nonbank SDs. 30 Specifically, the Applicants requested that the Commission determine that registered nonbank SDs 31 organized and domiciled within the UK, licensed as investment firms, and designated for prudential supervision by the UK Prudential Regulation Authority (“PRA-designated UK nonbank SDs”), may satisfy corresponding CFTC Capital Rules and CFTC Financial Reporting Rules applicable to a nonbank SD under sections 4s(e) and (f) of the CEA and Commission Regulations 23.101 and 23.105. 32 30 Letter dated May 4, 2021 from Stephanie Webster, General Counsel, IIB, Steven Kennedy, Global Head of Public Policy, ISDA, and Kyle Brandon, Managing Director, Head of Derivatives Policy, SIFMA. The UK Application is available on the Commission's website at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm. 31 As discussed in Section I.A. immediately below, the Commission has the authority to impose capital requirements on registered SDs that are not subject to regulation by a U.S. prudential regulator ( i.e., nonbank SDs). 32 The Applicants also requested that the Commission determine that nonbank SDs licensed as investment firms and prudentially regulated by the UK Financial Conduct Authority (“FCA”) (“FCA-regulated UK nonbank SDs”) may satisfy certain capital and financial reporting requirements under the CEA by being subject to, and complying with, comparable capital and financial reporting requirements under UK laws and regulations. Due to the differences between the capital and financial reporting regimes applicable to PRA-designated UK nonbank SD and FCA-regulated UK nonbank SDs, the Commission anticipates assessing the comparability of the rules applicable to FCA-regulated UK nonbank SDs through a separate comparability determination. To be designated for prudential supervision by the UK Prudential Regulation Authority (“PRA”), a UK-domiciled investment firm must be authorized, or have requested authorization, to deal in investments as principal. 33 For an investment firm that is authorized, or has requested authorization, to deal in investments as principal, the PRA may designate the firm for prudential supervision if the PRA determines that the dealing activities of the firm should be a PRA-regulated activity. The PRA considers the following in determining whether an investment firm should be subject to PRA supervision: (i) the assets of the investment firm; and (ii) where the investment firm is a member of a group, (a) the assets of other firms within the group that are authorized, or have sought authorization, to deal in investments as principal, (b) whether any other member of the group is subject to prudential supervision by the PRA, and (c) whether the investment firm's activities have, or might have, a material impact on the ability of the PRA to advance any of its objectives in relation to a PRA-authorized person in its group. 34 The PRA also must consult with the FCA before designating a person for prudential supervision. 35 33 Article 3(1) and (2) of The Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013. 34 Id., Article 3(4). 35 Id., Article 3(6). The PRA also has issued a Statement of Policy providing further detail regarding the factors that are considered in assessing an investment firm for prudential supervision. 36 The factors include: (i) whether the firm's balance sheet exceeds an average of GBP 15 billion total gross assets over four quarters; (ii) where the investment firm is part of a group, whether the sum of the balance sheets of all firms within the group that are authorized, or have requested authorization, to deal in investments as principals exceeds an average of GBP 15 billion over four quarters; and/or (iii) where the firm is part of a group subject to PRA supervision, whether the investment firm's revenues, balance sheet and risk taking is significant relative to the group's revenues, balance sheet, and risk-taking. 37 There are currently six PRA-designated UK nonbank SDs registered with the Commission: Citigroup Global Markets Limited, Goldman Sachs International, Merrill Lynch International, Morgan Stanley & Co. International Plc, MUFG Securities EMEA Plc, and Nomura International Plc. 36 PRA, Statement of Policy, Designation of Investment Firms for Prudential Supervision by the Prudential Regulation Authority, December 2021, available here: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/statement-of-policy/2021/designation-of-investment-firms-for-prudential-supervision-by-the-pra-december-2021.pdf?la=en&hash=007EB17EDF2FA84714D372095F9E03627355776F. 37 Id., at p. 5. The Applicants represented that the capital and financial reporting framework applicable to PRA-designated UK nonbank SDs is primarily based on the framework established by the European Union's (“EU”) Capital Requirements Regulation 38 and Capital Requirements Directive, 39 which set forth capital and financial reporting requirements applicable to “credit institutions” 40 and “investment firms.” 41 CRR, as a regulation, is directly applicable in all member states of the EU (“EU Member States”) and was, therefore, binding law in the UK during the UK's membership in the EU. 42 CRD, as a directive, was required to be transposed into EU Member States' national law, including UK law. 43 With regard to PRA-designated UK nonbank SDs, the UK implemented CRD primarily through a series of regulations, including the Capital Requirements Regulations 2013 44 and the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014, 45 and the rules of the PRA. 46 38 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (“Capital Requirements Regulation” or “CRR”). 39 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (“Capital Requirements Directive” or “CRD”). 40 The term “credit institution” is defined as an entity whose business consists of taking deposits and other repayable funds from the public and granting credits. CRR, Article 4(1), as applicable in the UK. For a reference to CRR provisions applicable in the UK, see infra note 50. 41 The term “investment firm” is defined as an entity authorized under Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (“Markets in Financial Instruments Directive” or “MiFID”), and whose regular business is the provision of one or more investment services to third parties and/or the performance of one or more investment-related activities on a professional basis, which includes dealing in derivatives for its own account. CRR, Article 4(1)(2) cross-referencing Article 4(1)(1) of MiFID. 42 Consolidated Version of the Treaty on the Functioning of the European Union, OJ (C 326) 171, Oct. 26, 2012 (“TFEU”), Article 288. 43 Id., Article 288 (stating that a directive is binding as to the result to be achieved upon each EU Member State to which the directive is addressed, and further provides, however, that each EU Member State elects the form and method of implementing the directive). In this connection, EU Member States were required to implement and start applying amendments to CRD, introduced by Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (“CRD V”) by December 29, 2020. Some CRD V provisions were subject to delayed implementation deadlines of June 28, 2021 and January 1, 2022. CRD V, Article 2. 44 Capital Requirements Regulations 2013, Statutory Instrument 2013 No. 3115 (“Capital Requirements Regulations 2013”). 45 Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014, Statutory Instrument 2014 No. 894 (“Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014”). 46 The PRA's rules (“PRA Rulebook”) are available here: https://www.prarulebook.co.uk/. Following the UK's withdrawal from EU membership (“Brexit”), EU laws that were in effect and applicable as of December 31, 2020, were retained in UK law subject to certain non-substantive amendments seeking to reflect the UK's new position outside of the EU. 47 As such, directly applicable EU law, such as CRR, was converted into domestic UK law and UK legislation implementing EU directives, such as CRD, was preserved. The UK subsequently adopted additional changes, generally consistent with amendments introduced by the EU to CRR, CRD and other relevant EU provisions, 48 and incorporated certain CRR provisions in the PRA Rulebook. 49 The CRR provisions as applicable in the UK are referred hereafter as “UK CRR.” 50 The UK capital and financial reporting framework also comprises UK-specific requirements in respect of certain matters. Requirements applicable to PRA-designated UK nonbank SDs are included in the PRA Rulebook. In addition, Commission Delegated Regulation (EU) 2015/61, 51 which supplements UK CRR with regard to liquidity coverage requirement for credit institutions, applies to PRA-designated UK nonbank SDs and imposes separate liquidity requirements to these firms. 52 47 See, An Act to Repeal the European Communities Act 1972 and make other provisions in connection with the withdrawal of the United Kingdom from the EU (2018 c.16) (“European Union (Withdrawal) Act 2018”). 48 PRA, Policy Statement 21/21—The UK Leverage Framework, October 2021, available here: https://www.bankofengland.co.uk/prudential-regulation/publication/2021/june/changes-to-the-uk-leverage-ratio-framework, and Policy Statement 22/21—Implementation of Basel standards: Final rules, October 2021, available here: https://www.bankofengland.co.uk/prudential-regulation/publication/2021/october/implementation-of-basel-standards. 49 Pursuant to the Financial Services and Markets Act 2023 (“FSMA 2023”), the UK revoked CRR and replaced it with: (i) PRA rules adopted under Section 144 of the Financial Services and Markets Act 2000 (“FSMA”) and (ii) UK regulations, adopted under Section 4 of FSMA 2023, restating CRR provisions. 50 The UK CRR is available here: https://www.legislation.gov.uk/eur/2013/575/contents. The provisions that were incorporated in the PRA Rulebook are no longer part of UK CRR and appear instead in the PRA Rulebook. 51 Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions (“Liquidity Coverage Delegated Regulation”). 52 PRA Rulebook, CRR Firms, Liquidity Coverage Requirement—UK Designated Investment Firms Part. The Applicants also represented that in addition to UK CRR and the PRA Rulebook, the Banking Act 2009 and its related secondary legislation, through which the UK transposed the Bank Recovery and Resolution Directive (“BRRD”), include relevant UK capital requirements. 53 Specifically, pursuant to the Banking Act 2009 and its secondary legislation, the Bank of England, in its role as resolution authority, requires certain investment firms, including PRA-designated UK nonbank SDs, to satisfy a firm-specific minimum requirement for own funds and eligible liabilities (“MREL”). 54 53 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council. UK Application, p. 7. 54 Banking Act 2009, Section 3A (4) and (4B); Bank Recovery and Resolution (No 2) Order 2014, Statutory Instrument No. 3348 (“Bank Recovery and Resolution (No 2) Order 2014”), Part 9. UK CRR, Capital Requirements Regulations 2013, Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014, Liquidity Coverage Delegated Regulation, relevant provisions of Banking Act 2009 and its secondary legislation, and relevant parts of the PRA Rulebook are referred to hereafter as the “UK PRA Capital Rules.” The Applicants further represented that with respect to supervisory financial reporting, the framework applicable to PRA-designated UK nonbank SDs is also based on the EU requirements. In addition, the framework comprises PRA-specific rules for matters not addressed by the EU-based requirements. Specifically, Commission Implementing Regulation (EU) 680/2014, 55 which was initially retained in UK law following Brexit, supplemented CRR with implementing technical standards (“CRR Reporting ITS”) specifying, among other things, uniform formats and frequencies for the financial and capital requirements reporting required under CRR. 56 CRR Reporting ITS included templates for the common reporting (“COREP”) and the financial reporting (“FINREP”) that specify the contents of the EU-based supervisory reporting requirements. As part of the regulatory reforms that followed Brexit and sought to implement Basel standards, the PRA incorporated the entire body of the UK version of COREP and FINREP requirements into the PRA Rulebook to create a single source for reporting requirements for firms. 57 For PRA-designated UK nonbank SDs that are not subject to the EU-based FINREP requirements, the PRA Rulebook includes PRA-specific requirements. 58 55 Commission Implementing Regulation (EU) 680/2014 of 16 April 2014 laying down implementing technical standards with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council. 56 UK Application, p. 24 and Responses to Staff Questions dated October 5, 2023. 57 PRA Rulebook, CRR Firms, Reporting (CRR) Part. 58 PRA Rulebook, CRR Firms, Regulatory Reporting Part. The Applicants also represented that the Companies Act 2006 contains provisions related to financial reporting, including a mandate that entities of a certain size be required to prepare annual audited financial statements and a strategic report. 59 UK CRR, relevant provisions of the PRA Rulebook, and relevant provisions of the Companies Act 2006, are collectively referred to hereafter as the “UK PRA Financial Reporting Rules.” 59 UK Application, p.7. Companies Act 2006, Part 15 and 16. The Companies Act 2006 is available here: https://www.legislation.gov.uk/ukpga/2006/46/contents. The Applicants also noted that the U.S. Securities and Exchange Commission (“SEC”) has issued orders permitting an SEC-registered nonbank security-based swap dealer domiciled in the UK (“UK nonbank SBSD”) 60 to satisfy SEC capital 61 and financial reporting requirements via substituted compliance with applicable UK capital and financial reporting. 62 The UK Order conditioned substituted compliance for capital requirements on a UK nonbank SBSD complying with specified laws and regulations, including relevant parts of UK CRR and the PRA Rulebook, and also maintaining total liquid assets in an amount that exceeds the UK nonbank SBSD's total liabilities by at least $100 million and by at least $20 million after applying certain deductions to the value of the liquid assets to reflect market, credit, and other potential risks to the value of the assets. 63 60 All six of the PRA-designated UK nonbank SDs currently registered with the Commission are also UK nonbank SBSDs. 61 Section 15F(e)(1)(B) of the Exchange Act (15 U.S.C. 78o-10) directs the SEC to adopt capital rules for security-based swap dealers (“SBSDs”) that do not have a prudential regulator. 62 Order Granting Conditional Substituted Compliance in Connection with Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the United Kingdom, 86 FR 43318 (July 30, 2021) (“Final UK Order”); Amended and Restated Order Granting Conditional Substituted Compliance in Connection with Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the Federal Republic of Germany; Amended Orders Addressing Non-U.S. Security-Based Swap Entities Subject to Regulation in the French Republic or the United Kingdom; and Order Extending the Time to Meet Certain Conditions Relating to Capital and Margin, 86 FR 59797 (Oct. 28, 2021) (“Amended UK Order,” together with the Final UK Order, “UK Order”); and Order Specifying the Manner and Format of Filing Unaudited Financial and Operational Information by Security-Based Swap Dealers and Major Security-Based Swap Participants that are not U.S. Persons and are Relying on Substituted Compliance with Respect to Rule 18a-7, 86 FR 59208 (Oct. 26, 2021) (“SEC Order on Manner and Format of Filing Unaudited Financial and Operational Information”). 63 The conditioning of the UK substituted compliance order on UK nonbank SBSDs maintaining liquid assets in an amount that exceeds the UK nonbank SBSD's total liabilities by at least $100 million and by at least $20 million after applying certain deductions to the value of the liquid assets reflects that the SEC's capital rule for nonbank SBSDs is a liquidity-based requirement and that the SEC capital requirements are not based on the Basel standards. 17 CFR 240.18a-1(a)(1) (requiring a SBSD to maintain, in relevant part, net capital of $20 million or, if approved to use capital models, $100 million of tentative net capital and $20 million of net capital). D. Proposed Comparability Determination and Proposed Comparability Order for PRA-Designated UK Nonbank Swap Dealers On February 5, 2024, the Commission published the 2024 Proposal, seeking comment on the Application and the Commission's proposed Comparability Determination and related Comparability Order. 64 The 2024 Proposal set forth the Commission's preliminary Comparability Determination and proposed Comparability Order providing that, based on its review of the UK Application and applicable UK laws and/or rules, the Commission preliminarily found that the UK PRA Capital Rules and the UK PRA Financial Reporting Rules, subject to the conditions set forth in the proposed Comparability Order, achieve comparable outcomes and are comparable in purpose and effect to the CFTC Capital Rules and CFTC Financial Reporting Rules. 65 The Commission, however, noted that there were certain differences between the UK PRA Capital Rules and CFTC Capital Rules and certain differences between the UK PRA Financial Reporting Rules and the CFTC Financial Reporting Rules. As such, the Commission proposed certain conditions to the Comparability Order. 66 The proposed conditions were designed to promote consistency in regulatory outcomes, to reflect the scope of substituted compliance that would be available notwithstanding the differences, and to ensure that the Commission and National Futures Association (“NFA”) receive information to monitor PRA-designated UK nonbank SDs for ongoing compliance with the Comparability Order. 67 The Commission further stated that, in its preliminary view, the identified differences would not be inconsistent with providing a substituted compliance framework for PRA-designated UK nonbank SDs subject to the conditions specified in the proposed Comparability Order. 68 64 2024 Proposal, 89 FR 8026 (Feb. 5, 2024). 65 Id. Consistent with the process specified in Section I.B. above for conducting Comparability Determinations, the Commission provided the Applicants with an opportunity to review for factual accuracy and completeness the Commission's description of relevant UK laws and regulations on which the proposed Comparability Determination and proposed Comparability Order were based. The Commission has relied on the Applicants' review, and has incorporated feedback and corrections received from the Applicants. As previously noted, a Comparability Determination and Comparability Order based on an inaccurate description of foreign laws and regulations may not be valid. 66 See 2024 Proposal at 8058-8061. 67 NFA is a registered futures association (“RFA”) under Section 17 of the CEA (7 U.S.C. 21). Each SD registered with the Commission is required to be an NFA member. 17 CFR 170.16. NFA, as an RFA, is also required by the CEA to adopt rules imposing minimum capital, segregation, and other financial requirements, as applicable, to its members, including SDs, that are at least as stringent as the Commission's minimum capital, segregation, and other financial requirements for such registrants, and to implement a program to audit and enforce such requirements. 7 U.S.C. 21(p). Therefore, the Commission's proposed Comparability Order required PRA-designated UK nonbank SDs to file certain financial reports and notices with NFA so that it may perform oversight of such firms as required under Section 17 of the CEA. The Commission will refer to NFA in this Comparability Determination when referring to the requirements or obligations of an RFA. 68 Id. The proposed Comparability Order was limited to the comparison of the UK PRA Capital Rules to the CFTC Capital Rules' Bank-Based Capital Approach (“Bank-Based Approach”) for computing regulatory capital for nonbank SDs, which is based on certain capital requirements imposed by the Federal Reserve Board for bank holding companies. 69 As noted by the Commission in the 2024 Proposal, the Applicants have not requested, nor has the Commission performed, a comparison of the UK PRA Capital Rules to the Commission's TNW Approach or NLA Approach. 70 69 Id. As described in the 2024 Proposal, 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 Approach. See 2024 Proposal at 8031-8033, and 17 CFR 23.101. The Bank-Based Approach is consistent with the Basel Committee on Banking Supervision's (“BCBS”) international framework for bank capital requirements (“BCBS framework” or “Basel standards”). The BCBS is the primary global standard-setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Institutions represented on the BCBS include the Federal Reserve Board, the European Central Bank, Deutsche Bundesbank, Bank of England, Bank of France, Bank of Japan, Banco de Mexico, and Bank of Canada. The BCBS framework is available at https://www.bis.org/basel_framework/index.htm. 70 See 2024 Proposal at 8035-8036. E. General Comments on the UK Application and the Commission's Proposed Finding of Comparability Between the CFTC Capital Rules and CFTC Financial Reporting Rules and the UK PRA Capital Rules and the UK PRA Financial Reporting Rules The public comment period on the UK Application, the proposed Comparability Determination, and the proposed Comparability Order ended on March 24, 2024. The Commission received comments from the following four interested parties: Michael Ravnitzky (“Ravnitzky”); William J. Harrington (“Harrington”); Better Markets, Inc. (“Better Markets”); and the Applicants. 71 71 Letters from: Michael Ravnitzky (“Ravnitzky Letter”); Dennis M. Kelleher, Co-founder, President and CEO, and Cantrell Dumas, Director of Derivatives Policy, Better Markets (March 24, 2024) (“Better Markets Letter”); and Stephanie Webster, General Counsel, IIB, Steven Kennedy, Global Head of Public Policy, ISDA, and Kyle L. Brandon, Managing Director, Head of Derivatives Policy, SIFMA (March 24, 2024) (“Applicants' Letter”); Letter from William J. Harrington dated March 24, 2024 (“Harrington 03/24/2024 Letter”) and supporting material. The comment letters and related documents for the 2024 Proposal are available at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7478. The Applicants filed a comment letter generally expressing support for the proposed Comparability Determination and Comparability Order, agreeing with the Commission's overall analysis and determination of comparability of the CFTC Capital Rules and CFTC Financial Reporting Rules and the UK PRA Capital Rules and UK PRA Financial Reporting Rules. 72 The Applicants also included several technical comments, further discussed in section II. below, on the proposed conditions requiring PRA-designated UK nonbank SDs to file a notice with the Commission and NFA upon the occurrence of certain events. Finally, the Applicants recommended that the Commission refine the condition defining the scope of the UK PRA Capital Rules to specify that only the MREL-related provisions of the Banking Act 2009 would be considered part of UK PRA Capital Rules. 73 In support of their request, the Applicants stated that the reference to the Banking Act 2009 is included only because it imposes MREL on PRA-designated UK nonbank SDs. 74 The Commission notes that in the process leading to this Comparability Determination, the Commission has considered the Banking Act 2009 more broadly, including as it relates to the powers conferred to the PRA in its role as resolution authority. With respect to the definition of the UK PRA Capital Rules with which a PRA-designated UK nonbank SD must comply, however, the Commission believes that referring to the Banking Act 2009 only to the extent it imposes MREL on PRA-designated UK nonbank SDs is appropriate. Accordingly, the Commission has adjusted the language in final Condition 4 consistent with the Applicants' recommendation. 72 Applicants' Letter at p. 2. 73 Id. at p. 4. 74 Id. Conversely, two commenters disagreed with the CFTC's proposed Comparability Determination and proposed Comparability Order. 75 Better Markets asserted that the principles-based, holistic approach applied by the Commission, which assesses whether the applicable foreign jurisdiction's capital and financial requirements achieve comparable outcomes to the corresponding Commission requirements, “is insufficiently rigorous, leaving far too much room for inaccurate and unwarranted comparability determinations.” 76 Better Markets further asserted that in an attempt to restore London to its status of a global financial center in the post-Brexit environment, both major political parties in the UK are promising “light touch” regulation and incentivizing regulatory arbitrage. 77 75 Better Markets Letter at p. 3-5; Harrington 03/24/2024 Letter at p. 4 (asserting, as further discussed below, that the Commission should condition the Comparability Determination on a prohibition against PRA-designated UK nonbank SDs' entering into swap contracts with certain specified features). 76 Better Markets Letter at p. 5. 77 Id. The Commission does not believe that the principles-based, holistic assessment that it conducted on the comparability of the UK PRA Capital Rules and UK PRA Financial Reporting Rules with the CFTC Capital Rules and CFTC Financial Reporting Rules was “insufficiently rigorous,” nor does the Commission believe that it left “room for inaccurate and unwarranted comparability determinations.” The principles-based, holistic approach employed in the Comparability Determination was performed in accordance with the substituted compliance assessment framework adopted by the Commission for capital and financial reporting requirements for foreign nonbank SDs and set out in Commission Regulation 23.106. Consistent with this assessment framework, the Commission focused on whether the UK PRA Capital Rules and UK PRA Financial Reporting Rules are designed with the objective of ensuring overall safety and soundness of the PRA-designated UK nonbank SDs in a manner that is comparable with the Commission's overall objective of ensuring the safety and soundness of nonbank SDs. As stated in the 2024 Proposal, due to the detailed and complex nature of the capital frameworks, differences in how jurisdictions approach and implement the requirements are expected, even among jurisdictions that base their requirements on the principles and standards set forth in the BCBS framework. 78 Furthermore, as discussed in section I.B. above, when adopting Commission Regulation 23.106, the Commission stated that “its approach to substituted compliance is a principles-based, holistic approach that focuses on whether the foreign regulations are designed with the objectives of ensuring the overall safety and soundness of the [non-US nonbank SD] in a manner that is comparable with the Commission's overall capital and financial reporting requirements, and is not based on a line-by-line assessment or comparison of a foreign jurisdiction's regulatory requirements with the Commission's requirements.” 79 78 See 2024 Proposal at 8036. 79 85 FR 57462 at 57521. The approach and standards set forth in Commission Regulation 23.106, with the focus on “comparable outcomes,” are also consistent with the Commission's precedents of undertaking a principles-based, holistic assessment of the comparability of foreign regulatory regimes for purposes of substituted compliance for cross-border swap transactions. The Commission first outlined its approach to substituted compliance with respect to swaps requirements in 2013, when it issued an Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations. 80 In the Guidance, the Commission stated that “[i]n evaluating whether a particular category of foreign regulatory requirement(s) is comparable and comprehensive to the applicable requirement(s) under the CEA and Commission regulations, the Commission will take into consideration all relevant factors, including but not limited to, the comprehensiveness of those requirement(s), the scope and objectives of the relevant regulatory requirement(s), the comprehensiveness of the foreign regulator's supervisory compliance program, as well as the home jurisdiction's authority to support and enforce its oversight of the registrant.” 81 The Commission emphasized that in this context, “comparable does not necessarily mean identical.” 82 Rather, the Commission stated that it would evaluate whether the home jurisdiction's regulatory requirement is comparable to, and as comprehensive as, the corresponding U.S. regulatory requirement(s). 83 In conducting comparability determinations based on the policy set forth in the Guidance, the Commission noted that the “outcome-based” approach recognizes that “foreign regulatory systems differ and their approaches vary and may differ from how the Commission chose to address an issue, but that the foreign jurisdiction's regulatory requirements nonetheless achieve the regulatory outcome sought to be achieved by a certain provision of the CEA or Commission regulation.” 84 80 Interpretative Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 2013) (“Guidance”). 81 Guidance at 45343. 82 Id. 83 Id. 84 See e.g., Comparability Determination for the European Union: Certain Entity-Level Requirements, 78 FR 78923 (December 27, 2013) at 78926. The Commission further elaborated on the required elements of comparability in 2016, when it issued final rules to address the cross-border application of the Commission's margin requirements for uncleared swap transactions. Specifically, the Commission stated that its substituted compliance approach reflects an outcome-based assessment of the comparability of a foreign jurisdiction's margin requirements with the Commission's corresponding requirements. 85 The Commission further stated that it would evaluate the objectives and outcomes of the foreign margin requirements in light of foreign regulator(s)' supervisory and enforcement authority. 86 Consistent with its previously stated position, the Commission recognized that jurisdictions may adopt different approaches to achieving the same outcome and, therefore, the assessment would focus on whether the foreign jurisdiction's margin requirements are comparable to the Commission's in purpose and effect, not whether they are comparable in every aspect or contain identical elements. 87 The Commission's policy thus reflects an understanding that a line-by-line evaluation of a foreign jurisdiction's regulatory regime is not the optimum approach to assessing the comparability of complex structures whose individual components may differ based on jurisdiction-specific considerations, but which achieve the objective and outcomes set forth in the Commission's framework. 85 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross-Border Application of the Margin Requirements, 81 FR 34817, 34836-34837 (May 31, 2016). 86 Id. 87 Id. With respect to the UK Application, the process leading to the Commission's Comparability Determination involved Commission staff reviewing relevant UK laws, rules, and regulations cited in the UK Application. Staff verified the assertions and citations contained in the UK Application regarding the specific UK PRA Capital Rules and UK PRA Financial Reporting Rules to the relevant UK laws, rules, and regulations. 88 88 Staff also reviewed various documents relevant to the proposed Comparability Determination and proposed Comparability Order published by the PRA. Commission staff also evaluated the comparability of the UK PRA Capital Rules and UK PRA Financial Reporting Rules with the CFTC Capital Rules and CFTC Financial Reporting Rules with respect to the following areas: (i) the process of establishing minimum capital requirements for PRA-designated UK nonbank SDs and how such process addresses risk, including market risk and credit risk of the PRA-designated UK 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 a PRA-designated UK nonbank SD's minimum capital requirements; (iii) the financial reports and other financial information submitted by a PRA-designated UK nonbank SD to the PRA, and whether such information provides the PRA with the means necessary to effectively monitor the financial condition of the PRA-designated UK nonbank SD; and (iv) the regulatory notices and other communications between a PRA-designated UK nonbank SD and the PRA that address potential adverse financial or operational issues that may impact the firm. 89 With respect to the ability of the PRA to supervise and enforce compliance with the UK PRA Capital Rules and UK PRA Financial Reporting Rules, the Commission's assessment included a review of the PRA's surveillance program for monitoring compliance by PRA-designated UK nonbank SDs with the UK PRA Capital Rules and the UK PRA Financial Reporting Rules, and the disciplinary process imposed on firms that fail to comply with such requirements. 90 In conducting its assessment of the PRA's regulatory and supervisory framework, the Commission did not identify elements supporting Better Markets' assertion that the framework is characterized by “light touch” regulation. 91 89 2024 Proposal at 8036-8058. 90 Id. at 8057-8058. 91 For a further discussion of the Commission's assessment of the PRA's supervision and enforcement powers, see Section II.F. below. In addition, in its policy statement discussing the forthcoming implementation of Basel 3.1 standards, the PRA noted that despite some adjustments to the international standards, the PRA considers that its policy and rules proposals align with the international framework. In this regard, the PRA expressed the view that alignment with international standards in turn supports the UK's competitiveness, including relative standing of the UK as a global financial center, by “strengthening key stakeholders' confidence in the UK banking system” and “assuring regulators in other jurisdictions of UK's authorities' commitment to robust standards.” See PRA, PS17/23—Implementation of the Basel 3.1 Standards Near-Final Part 1, December 12, 2023, available here: https://www.bankofengland.co.uk/news/2023/december/pra-publishes-first-of-two-policy-statements-for-basel-3-1-standards-implementation. Contrary to the position articulated by Better Markets regarding the nature of the comparability assessment, the Commission believes that the principles-based, holistic assessment of the UK PRA Capital Rules and UK PRA Financial Reporting Rules against the CFTC Capital Rules and CFTC Financial Reporting Rules, as outlined above and discussed in detail in section II below, was sufficiently rigorous for purposes of determining if the UK PRA regulations are comparable in purpose and effect to the CEA and Commission regulations. Better Markets further asserted that even under a principles-based, holistic approach, the UK PRA capital and financial reporting requirements for PRA-designated UK nonbank SDs do not satisfy the test for an order granting substituted compliance as the PRA's regulatory framework governing capital and financial reporting is not comparable to the corresponding CFTC requirements. 92 Better Markets cited the Commission's inclusion of conditions in the proposed Comparability Order as demonstrating the Commission's need “to compensate for the acknowledged gaps in the UK PRA framework” and as a “de facto admission that the regulations are not comparable and that the [UK Application] should be denied.” 93 Better Markets claimed that the Commission proposed 12 filing requirements that must be met as a condition for the comparability determination, and stated that the Commission was not issuing a comparability finding, but was engaging in a “de facto rewriting” of the PRA's laws and rules in the form of conditions. 94 92 Better Markets Letter at p. 5. 93 Id. 94 Id. at p. 4. Conversely, another commenter, Ravnitzky, noted that the “CFTC need not be limited to finding a binary yes or no answer to the comparability determination” and “has the flexibility to grant conditional substituted compliance.” 95 In this regard, Ravnitzky recommended that the Commission exercise its authority “to make a flexible and nuanced decision, and strive to impose only the necessary conditions for approving the UK PRA rules as substitutes, to minimize the regulatory burden while achieving the necessary risk reduction.” 96 95 Ravnitzky Letter at p. 6. 96 Id. The Commission disagrees that the inclusion of conditions in the Comparability Order precludes a finding of comparability with respect to the UK PRA Capital Rules and UK PRA Financial Reporting Rules. The Commission's comparability assessment process, consistent with the holistic approach, contemplates the potential need for a Comparability Order to contain conditions. Specifically, Commission Regulation 23.106(a)(5) states that the Commission may impose any terms and conditions it deems appropriate in issuing a Comparability Order, including conditions with respect to capital adequacy and financial reporting requirements of non-U.S. nonbank SDs. 97 97 17 CFR 23.106(a)(5), which provides that in issuing a Capital Comparability Determination, the Commission may impose any terms and conditions it deems appropriate, including certain capital adequacy and financial reporting requirements on swap dealers . . . (Emphasis added). Commission Regulation 23.106(a)(3) establishes the Commission's standard of review for performing a Comparability Determination and provides that the Commission may consider all relevant factors, including whether the relevant foreign jurisdiction's capital adequacy and financial reporting requirements achieve comparable outcomes to the Commission's corresponding capital adequacy and financial reporting requirements for SDs. 17 CFR 23.106(a)(3)(ii). The process employed in this Comparability Determination is consistent with the Commission's established approach to conducting comparability assessments. Upon a finding of comparability, the Commission's policy generally is that eligible entities may comply with a substituted compliance regime subject to the conditions the Commission places on its finding, and subject to the Commission's retention of its examination authority and its enforcement authority. 98 In this regard, the Commission has stated that certain conditions included in a Comparability Order may be designed to ensure the Commission's direct access to books and records required to be maintained by an SD registered with the Commission. 99 Other conditions may address areas where the foreign jurisdiction lacks analogous requirements. 100 The inclusion of conditions in a Comparability Order was contemplated as an integral part of the Commission's holistic, principles-based approach to conducting comparability assessments and is not inconsistent with a grant of substituted compliance. 98 85 FR 57462 at 57520. See also Guidance at 45342-45344 and Comparability Determination for the European Union: Certain Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at 78880. 99 Comparability Determination for the European Union: Certain Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at 78880. 100 Guidance at 45343. In particular, Commission Regulation 23.106(a)(5) states the Commission's authority to impose conditions in issuing a Comparability Determination in connection with the CFTC Capital Rules and the CFTC Financial Reporting Rules. As further discussed below, the conditions proposed in the 2024 Proposal are clearly of the nature contemplated by Commission Regulation 23.106(a)(5). The Commission also does not believe that the inclusion of the conditions in the Comparability Order reflects a “rewriting” of the UK laws and regulations as asserted by Better Markets. Consistent with the Commission's policy described above, a majority of the conditions contained in the Comparability Order are designed to ensure that: (i) the PRA-designated UK nonbank SD is eligible for substituted compliance based on the UK laws and regulations that were reviewed by the Commission in performing the comparability assessment, and (ii) the Commission and NFA receive timely financial information and notices to effectively monitor a PRA-designated nonbank SD's compliance with relevant UK capital and financial reporting rules and to assess the ongoing safety and soundness of the PRA-designated UK nonbank SD. Specifically, there are 25 conditions in the final Comparability Order. Six conditions set forth criteria that a PRA-designated UK nonbank SD must meet to be eligible for substituted compliance pursuant to the Comparability Order. 101 The six conditions ensure that only PRA-designated UK nonbank SDs that are within the scope of, and comply with, the UK PRA Capital Rules and UK PRA Financial Reporting Rules that were part of the Commission's comparability assessment may apply for substituted compliance. Ten additional conditions require PRA-designated UK nonbank SDs within the scope of the Comparability Order to provide notice to the Commission and NFA of certain defined events, 102 and a further two conditions require PRA-designated nonbank SDs to file with the Commission and NFA copies of certain unaudited and audited financial reports that the firms provide to the PRA. 103 In addition, two additional conditions reflect administrative matters necessary to implement the substituted compliance framework. 104 Lastly, five conditions impose obligations on PRA-designated UK nonbank SDs that align with certain of the Commission's requirements for nonbank SDs. The five conditions require a PRA-designated UK nonbank SD to: (i) maintain common equity tier 1 capital denominated in GBP equal to or in excess of the equivalent of $20 million (Condition 7); (ii) prepare and keep current financial books and records (Condition 9); (iii) file a monthly schedule of the firm's financial positions on Schedule 1 of appendix B to Subpart E of part 23 of the Commission's regulations (Condition 12); (iv) file a monthly report listing the custodians holding margin posted by, and collected by, the PRA-designated UK nonbank SD, the amount of margin held by each custodian, and the aggregate amount of margin required to be posted and collected by the PRA-designated UK nonbank SD (Condition 14); and (v) submit, with each filing of financial information, a statement by an authorized representative that, to the best knowledge and belief of the person making the representation, the information is true and correct (Condition 13). 101 The six criteria provide that the PRA-designated UK nonbank SD: (i) is not subject to capital rules of a U.S. prudential regulator (Condition 1); (ii) is organized and domiciled in the UK (Condition 2); (iii) is licensed as an investment firm and designated for prudential supervision by the PRA (Condition 3); (iv) is subject to the UK CRR, CRD provisions as implemented in the UK, the Liquidity Coverage Delegated Regulation, the provisions of the Banking Act 2009 and its secondary legislation related to the MREL, and the rules of the PRA as reflected in the PRA Rulebook (Condition 4); (v) satisfies at all times applicable UK CRR and PRA Rulebook capital ratios, leverage ratios, and capital conservation buffer ratios, and maintains a liquidity risk management program as required under the PRA Rulebook (Condition 5); and (vi) is subject to and complies with the UK financial reporting requirements that are part of the Commission's comparability assessment (Condition 6). 102 The ten conditions require a PRA-designated UK nonbank SD to provide notice to the Commission in the event that the firm: (i) is informed by the PRA that the firm has failed to comply with any component of the UK PRA Capital Rules or UK PRA Financial Reporting Rules (Condition 15); (ii) fails to maintain common equity tier 1 capital denominated in GBP in an equivalent amount of at least $20 million (Condition 16); (iii) breaches its combined capital buffer requirement and is required to file a capital conservation plan with the PRA (Condition 17); (iv) is required by the PRA to maintain additional capital or additional liquidity (Condition 18); (v) fails to meet the required MREL (Condition 19); (vi) experiences a 30 percent or more decrease in its excess regulatory capital (Condition 20); (vii) fails to make or keep current financial books and records (Condition 21); (viii) fails to post or collect margin for uncleared swaps and non-cleared security-based swaps with one or more counterparties in amounts that exceed defined limits (Condition 22); (ix) changes its fiscal year-end date (Condition 23); and (x) is subject to material changes to the UK PRA Capital Rules, UK PRA Financial Reporting Rules, or the supervisory authority of the PRA (Condition 24). 103 The two conditions provide that a PRA-designated UK nonbank SD must file with the Commission and NFA: (i) a copy of SEC Form X-17A-5 (“FOCUS Report”) that the PRA-designated UK nonbank SD files with the SEC or copies of certain financial reporting templates that the PRA-designated UK nonbank SD is required to submit to the PRA pursuant to PRA Rulebook rules, as applicable (Condition 10), and (ii) copies of its annual audited accounts and strategic report that are required to be prepared and published pursuant to Parts 15 and 16 of Companies Act 2006 (Condition 11). 104 One of the administrative conditions provides that a PRA-designated UK nonbank SD must provide a notice to the Commission of its intent to comply with the Comparability Order and the UK PRA Capital Rules and UK PRA Financial Reporting Rules in lieu of the CFTC Capital Rules and CFTC Financial Reporting Rules. The notice must include the PRA-designated UK nonbank SD's representation that the firm is organized and domiciled in the UK, is a licensed investment firm designated for prudential supervision by the PRA, and is subject to and complies with the UK PRA Capital Rules and the UK PRA Financial Reporting Rules (Condition 8). The second administrative condition provides that a PRA-designated UK nonbank SD must file any documents with the Commission and NFA via electronic transmission (Condition 25). As the substance of these conditions demonstrates, the primary objective of a majority of the conditions is not to compensate for regulatory gaps in the UK PRA capital and financial reporting framework, but rather to ensure that the Commission and NFA receive information to conduct ongoing monitoring of PRA-designated UK nonbank SDs for compliance with relevant capital and financial reporting requirements and to assess the firm's overall safety and soundness. As discussed above, in issuing the Comparability Order, the Commission is not ceding its supervisory and enforcement authorities. The Comparability Order permits PRA-designated UK nonbank SDs to satisfy the Commission's capital and financial reporting requirements by complying with certain UK laws and/or regulations that have been found comparable to the Commission's laws and/or regulations in purpose and effect. The Commission and NFA, however, have a continuing obligation to conduct ongoing oversight, including potential examination, of PRA-designated UK nonbank SDs that operate under a Comparability Order to ensure compliance with the Comparability Order, including its conditions. 105 To that effect, the notice and financial reporting conditions set forth in the Comparability Order provide the Commission and NFA with information necessary to monitor for such compliance and to evaluate the operational condition and ongoing financial condition of PRA-designated UK nonbank SDs. The Commission may also initiate an enforcement action against a PRA-designated UK nonbank SD that fails to comply with the conditions of the Comparability Order. 105 As the Commission stated in the 2024 Proposal, a non-U.S. nonbank SD that operates under a Comparability Order issued by the Commission remains subject to the Commission's examination and enforcement authority. Specifically, the Commission may initiate an enforcement action against a non-U.S. nonbank SD that fails to comply with its home-country capital adequacy and/or financial reporting requirements cited in a Comparability Order. See 2024 Proposal at 8029. See also 17 CFR 23.106(a)(4)(ii), which provides that the Commission may examine all nonbank SDs, regardless of whether the nonbank SDs rely on substituted compliance, and that the Commission may initiate an enforcement action under the Commission's capital and financial reporting regulations against a non-U.S. nonbank SD that fails to comply with a foreign jurisdiction's capital adequacy and financial reporting requirements. Furthermore, to the extent that a condition imposes a new regulatory obligation on PRA-designated UK nonbank SDs, the imposition of such condition is also consistent with Commission Regulation 23.106 and the Commission's established policy with regard to comparability determinations. As discussed above, the Commission contemplated that even in circumstances where the Commission finds two regulatory regimes comparable, the Commission may impose requirements on entities relying on substituted compliance where the Commission determines that the home jurisdiction's regime lacks comparable and comprehensive regulation on a specific issue. 106 The Commission's authority to impose such conditions is set out in Commission Regulation 23.106(a)(5), which states that the Commission may impose “any terms and conditions it deems appropriate, including certain capital adequacy and financial reporting requirements [on SDs].” 107 106 Guidance at 45343. 107 17 CFR 23.106(a)(5). Better Markets further stated that, if the Commission grants substituted compliance with regard to materially different regulatory requirements, it must make a well-supported, evidence-based determination that those different requirements nevertheless will, in fact, lead to comparable regulatory outcomes. 108 In this connection, Better Markets stated that if the Commission grants the Comparability Determination and Comparability Order, it must, at a minimum, clearly and specifically set forth the desired regulatory outcome and provide a detailed, evidence-based explanation as to how the jurisdiction's different legal requirements nonetheless lead to that regulatory outcome. 109 Better Markets further asserted that “[a] determination that a foreign jurisdiction's nonbank SDs rules would produce comparable regulatory outcomes is the beginning, not the end, of the CFTC's obligation to ensure that the activities of the foreign nonbank SD entities do not pose risks to the U.S. financial system. As time goes on, regulatory requirements that, in theory, are expected to produce one regulatory outcome may, in practice, produce a different one. And, of course, the regulatory requirements may themselves be changed in a variety of ways. Finally, the effectiveness of an authority's supervision and enforcement program can become weakened for any number of reasons—the CFTC cannot assume that an enforcement program that it believes is presently effective will continue to be effective.” 110 Better Markets further asserted that to fulfill its obligation to protect the U.S. financial system, the CFTC must ensure, on an ongoing basis, that each grant of substituted compliance remains appropriate over time by requiring, at a minimum, each order of substituted compliance, and each MOU with a foreign regulatory authority, to impose an obligation on the applicant, as appropriate, to: (i) periodically apprise the Commission of the activities and results of its supervision and enforcement programs, to ensure that they remain sufficiently robust to deter and address violations of the law; and (ii) immediately apprise the Commission of any material changes to the regulatory regime, including changes to rules or interpretations of rules. 111 108 Better Markets at p. 10. 109 Id. 110 Id. 111 Id. at p. 11. Although the Commission disagrees that the UK PRA Capital Rules and the UK PRA Financial Reporting Rules, as a whole, are materially different or do not achieve comparable regulatory outcomes, the Commission concurs that granting substituted compliance should be the result of a well-supported comparability assessment. Consistent with that view, the Commission believes that this final Comparability Determination clearly states the desired regulatory outcomes, articulates the Commission's analysis in sufficient detail, and provides an appropriate explanation of how the foreign jurisdiction's requirements are comparable in purpose and effect with the Commission's requirements, and lead to comparable regulatory outcomes with the Commission's requirements. Specifically, section III of the 2024 Proposal and section II of the final Comparability Determination reflect, among other observations, the Commission's detailed analysis with respect to each of the elements for consideration listed in Commission Regulation 23.106(a)(3). The Commission also concurs that the availability of substituted compliance is conditioned upon a non-US nonbank SD's ongoing compliance with the terms and conditions of the final Comparability Order, and the Commission's ongoing assessment that the UK PRA Capital Rules and UK PRA Financial Reporting Rules remain comparable in purpose and effect with the CFTC Capital Rules and CFTC Financial Reporting Rules. As noted above, and discussed in more detail in sections II.D. and E. below, PRA-designated UK nonbank SDs are subject to notice and financial reporting requirements under the final Comparability Order that provide Commission and NFA staff with the ability to monitor the PRA-designated UK nonbank SDs' ongoing compliance with the conditions set forth in the final Comparability Order. In addition, the final Comparability Order requires a PRA-designated UK nonbank SD, or an entity acting on its behalf, to inform the Commission of changes to the relevant UK PRA Capital Rules and UK PRA Financial Reporting Rules so that the Commission may assess the continued effectiveness of the Comparability Order in ensuring that the relevant UK laws and regulations have the comparable regulatory objectives of the CEA and Commission regulations of ensuring the safety and soundness of nonbank SDs. 112 Commission staff will also monitor the PRA-designated UK nonbank SDs directly as part of its supervisory program and will discuss with the firms any proposed or pending revisions to specific rules cited in the final Comparability Order. Lastly, in addition to assessing the effectiveness of the Comparability Order as a result of revisions or proposed revisions to the UK laws, regulations, or supervisory regime administered by the PRA, the Commission further notes that future material changes to the CFTC Capital Rules or CFTC Financial Reporting Rules, or the Commission's or NFA's supervisory programs, may necessitate an amendment to the Comparability Determination and Comparability Order to reflect those changes. 113 112 Condition 24 of the final Comparability Order requires a PRA-designated UK nonbank SD, or an entity acting on its behalf, to notify the Commission of any material changes to the information submitted in its application, including, but not limited to, proposed and final material changes to the UK PRA Capital Rules or UK PRA Financial Reporting Rules and proposed and final material changes to the PRA's supervisory authority or supervisory regime over PRA-designated UK nonbank SDs. The Commission notes that it made certain non-substantive, clarifying changes to the language of final Condition 24 as compared to proposed Condition 24. 113 2024 Proposal at 8036 (n. 128). Another commenter, Harrington, stated that the Commission must condition the Comparability Order on an “outright prohibition against regulated entities providing [swap contracts that include a “flip clause”].” 114 Harrington has elsewhere referred to a description of a “flip clause” as a provision in swap contracts with structured debt issuers that reverses or “flips” the priority of payment obligations owed to the swap counterparty on the one hand and the noteholders on the other, following a specified event of default. 115 Based on Harrington's description, flip clauses present a risk to the SD in synthetic transactions where payments under a swap contract are secured with the same collateral that would serve to cover payments under the notes issued by a structured debt issuer. In such circumstances, an “event of default” by the SD would cause the SD's priority of payment from the collateral under a swap to “flip” to a more junior priority position, including for mark-to-market gains on “in the money” swaps. 116 Harrington argued that swap contracts with a flip clause incentivize SDs to “self-sabotage by under-sourcing themselves.” 117 Harrington recognized, however, that the CFTC margin requirements for uncleared swap transactions address his concerns associated with the inclusion of a flip clause. 118 Nonetheless, according to Harrington, risks arise in circumstances when non-U.S. margin rules exempt SDs from margin obligations in connection with swaps with a structured debt issuer. 119 114 Harrington 03/24/2024 Letter at p. 4. Harrington also referenced the following two separate submissions to the Commission and noted that these submissions support the Harrington 03/24/2024 Letter: a letter dated October 20, 2022 (“Harrington 10/20/2022 Letter”), submitted in connection with the Commission's Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination From the Financial Services Agency of Japan, 87 FR 48092, (August 8, 2022) and a letter dated August 28, 2023 (“Harrington 08/28/2023 Letter”), submitted in connection with the Commission's Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Domiciled in the French Republic and Federal Republic of Germany and Subject to Capital and Financial Reporting Requirements of the European Union, 88 FR 41774 (June 27, 2023). Harrington 03/24/2024 Letter at p.7. 115 William J. Harrington, Submission to the U.S. Securities and Exchange Commission Re: File No. S7-08-12 (Nov. 19, 2018) at p.8. 116 For additional information on the legal mechanics of a flip clause, see Lehman Brothers Special Financing Inc v. Bank of America N.A., No. 18-1079 (2nd Cir. 2020). 117 Harrington 03/24/2024 Letter at p. 8. 118 Harrington 03/24/2024 Letter at p. 21 (noting that “[the CFTC margin requirements] render the flip-clause-contract commercially impracticable in the U.S.” and that “U.S. swap margin rules, including the CFTC swap margin rule, have greatly benefited U.S. persons by subduing financial sector credit exposures that might otherwise draw bailouts or other U.S. government support”). 119 Harrington 03/24/2024 Letter at p. 25 (arguing that “U.K. and other non-U.S. swap margin and capital rules perpetuate the flip-clause-swap-contract by allowing [asset-backed securities] issuers, other structured debt issuers, banks, and swap dealers to under-resource their [respective] contract exposures via both exemptions from margin posting and see-no-evil capital rules that treat the contract as ` plain vanilla'.” ) The Commission recognizes that given some definitional differences and differences in the activity thresholds with respect to the scope of application of the CFTC margin requirements and non-U.S. margin requirements, some transactions that are subject to the CFTC margin requirements for uncleared swaps may not be subject to margin requirements in another jurisdiction. In connection with this Comparability Determination, however, the Commission notes that both under the CFTC Capital Rules and the UK PRA Capital Rules, uncollateralized exposures from uncleared swap transactions would generate a higher counterparty credit risk amount than the exposures resulting from transactions under which the counterparties have posted collateral. 120 Accordingly, the Commission does not believe that the respective sets of rules adopt a conflicting approach or lead to a disparate outcome with respect to the capital treatment of uncollateralized uncleared swap exposures that would warrant a finding of non-comparability of the CFTC Capital Rules and the UK PRA Capital Rules. 120 12 CFR 217.34 and 12 CFR 217.132 (indicating that nonbank SDs may recognize the risk-mitigating effects of financial collateral for collateralized derivatives contracts) and PRA Rulebook, CRR Firms, Counterparty Credit Risk Part, Article 276 and UK CRR, Article 285 (setting forth rules for the recognition and treatment of collateral in calculating the PRA-designated UK nonbank SD's counterparty credit risk exposure). Finally, one commenter, Ravnitzky, noted that due to differences in how the respective jurisdictions define the regulatory categories of registrants involved in swap dealing activity ( i.e., differences between the term “swap dealer” as defined under the Commission's regulations and the term “investment firm” as defined under the PRA's framework), it may be “unclear or inconsistent which entities can use substituted compliance under the [proposed Comparability Order].” 121 The Commission notes, as discussed above, that the Comparability Order will apply with respect to UK-domiciled, PRA-designated investment firms that are registered with the Commission as SDs and not subject to regulation by a U.S. prudential regulator. In this regard, the Commission believes that proposed Conditions 1 through 4, which the Commission adopts without material changes, clearly define the scope of entities that may request to rely on the Comparability Order. 121 Ravnitzky Letter at p. 4. II. Final Capital and Financial Reporting Comparability Determination and Comparability Order The following section provides the Commission's comparative analysis of the UK PRA Capital Rules and the UK PRA Financial Reporting Rules with the corresponding CFTC Capital Rules and CFTC Financial Reporting Rules, as described in the 2024 Proposal, further modified to address comments received. As emphasized in the 2024 Proposal, the capital and financial reporting regimes are complex structures comprised of a number of interrelated regulatory components. 122 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 framework. 122 See 2024 Proposal at 8036. The Commission performed the analysis by assessing the comparability of the UK PRA Capital Rules for PRA-designated UK nonbank SDs as set forth in the UK Application and in certain applicable UK laws and regulations with the Commission's Bank-Based Approach for nonbank SDs. The Commission understands that all PRA-designated UK nonbank SDs addressed by the UK Application, as of the date of the final Comparability Determination, are subject to a bank-based capital approach under the UK PRA Capital Rules. Accordingly, when the Commission makes its final determination herein about the comparability of the UK PRA Capital Rules with the CFTC Capital Rules, the determination pertains to the comparability of the UK PRA Capital Rules with the Bank-Based Approach under the CFTC Capital Rules. The Commission notes that any material changes to the information submitted in the UK Application, including, but not limited to, proposed and final material changes to the UK PRA Capital Rules or UK PRA Financial Reporting Rules, as well as any proposed and final material changes to the PRA's supervisory authority or supervisory regime over PRA-designated UK nonbank SDs, will require notification to the Commission and NFA pursuant to Condition 24 of the final Comparability Order. 123 Therefore, if there are subsequent material changes to the UK PRA Capital Rules, UK PRA Financial Reporting Rules, or PRA's supervisory authority or regime, the Commission will review and assess the impact of such changes on the final Comparability Determination and Comparability Order as they are then in effect, and may amend or supplement the Comparability Order as appropriate. 124 123 Condition 24 of the final Comparability Order. The Commission notes that it made certain non-substantive, clarifying changes to the language of final Condition 24 as compared to proposed Condition 24. 124 See 2024 Proposal at 8036. As stated in the 2024 Proposal, the Commission may also amend or supplement the final Comparability Order to address any material changes to the CFTC Capital Rules and CFTC Financial Reporting Rules, including rule amendments to capital rules of the Federal Reserve Board that are incorporated into the CFTC Capital Rules' Bank-Based Approach under Commission Regulation 23.101(a)(1)(i), that are adopted after the final Comparability Order is issued. See id., (n. 128). As noted in the 2024 Proposal, the Commission is aware that the PRA is considering changes to the UK PRA Capital Rules to implement Basel 3.1 standards. See PRA, PS17/23—Implementation of the Basel 3.1 Standards Near-Final Part 1, December 12, 2023, available here: https://www.bankofengland.co.uk/news/2023/december/pra-publishes-first-of-two-policy-statements-for-basel-3-1-standards-implementation. If the PRA proceeds with the implementation of the Basel 3.1 standards as proposed, the regulatory changes would be applicable after July 1, 2025 with a 4.5-year transitional period ending on January 1, 2030. The Commission will monitor progress on the PRA's proposed regulatory changes and may amend or supplement the Comparability Order. As noted, the Commission requires notification of any material changes to the UK PRA Capital Rules, including any Basel 3.1 implementing provisions. A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial Reporting Rules and UK PRA Capital Rules and UK PRA Financial Reporting Rules 1. Preliminary Determination As reflected in the 2024 Proposal and discussed above, the Commission preliminarily determined that the overall objectives of the UK PRA Capital Rules and the CFTC Capital Rules are comparable in that both sets of rules are intended to ensure the safety and soundness of nonbank SDs by establishing regulatory regimes that require nonbank SDs to maintain a sufficient amount of qualifying regulatory capital to absorb losses, including losses from swaps and other trading activities, and to absorb decreases in the value of firm assets and increases in the value of firm liabilities without the nonbank SDs becoming insolvent. 125 The Commission further noted that the UK PRA Capital Rules and CFTC Capital Rules are based on, and consistent with, the BCBS framework, which was designed to ensure that banking entities hold sufficient levels of capital to absorb losses and decreases in the value of firm assets and increases in the value of firm liabilities without the banks becoming insolvent. 126 125 See 2024 Proposal at 8037. 126 The BCBS's mandate is to strengthen the regulation, supervision, and practices of banks with the purpose of enhancing financial stability. See Basel Committee Charter available on the Bank for International Settlement website: www.bis.org/bcbs/charter.htm. See 2024 Proposal at 8037. The Commission also preliminarily found that the UK PRA Capital Rules are comparable in purpose and effect to the CFTC Capital Rules given 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 or decreases in the value of firm assets or increases in the value of firm liabilities resulting from such exposures. The Commission observed that the UK PRA Capital Rules and CFTC Capital Rules provide for a comparable approach to the calculation of market risk and credit risk exposures using standardized or internal model-based approaches. 127 In addition, as discussed in the 2024 Proposal, the UK PRA 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 framework for identifying and measuring on-balance sheet and off-balance sheet exposures. 128 127 2024 Proposal at 8039-8047. 128 Id. Finally, the Commission preliminarily noted that the UK PRA Capital Rules and CFTC Capital Rules further achieve comparable outcomes and are comparable in purpose and effect in that both sets of rules limit the types of capital instruments that 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. 129 As discussed in the 2024 Proposal and in section II.B. below, both the UK PRA 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. 130 129 2024 Proposal at 8039. 130 Id. The Commission further stated that it preliminarily found the UK PRA Financial Reporting Rules to be comparable in purpose and effect to the CFTC Financial Reporting Rules as both the PRA 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. 131 As discussed in the 2024 Proposal, in addition to providing the CFTC and the PRA 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 the PRA with information regarding potential changes in a nonbank SD's risk profile by disclosing changes in account balances reported over a period of time. 132 Such changes in account balances may indicate, among other things, 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. 133 131 Id. at 8037. 132 Id. 133 Id. In assessing the comparability between the CFTC Financial Reporting Rules and the UK PRA Financial Reporting Rules, the Commission noted that the prompt and effective monitoring of the financial condition of nonbank SDs through the receipt and review of periodic financial reports supports the Commission and the PRA in meeting their respective objectives of ensuring the safety and soundness of nonbank SDs. In this regard, the Commission stated that the early identification of potential financial issues provides the Commission and the PRA with an opportunity to address such issues with the nonbank SD before 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, absorb increases in the value of firm liabilities, or cover losses from its business activities, including the firm's swap dealing activities and obligations to swap counterparties. 134 134 Id. 2. Comment Analysis and Final Determination In response to the Commission's request for comment, Better Markets identified certain differences between the CFTC Capital Rules and Financial Reporting Rules and the UK PRA Capital Rules and Financial Reporting Rules and stated that the differences mandated denial of the request for a comparability determination. 135 Better Markets further stated that the nature and number of conditions that the Commission deemed necessary to impose are inconsistent with a finding of comparability. 136 In this connection, Better Markets also noted that the imposition of conditions will exacerbate complexity as the Commission will have to monitor compliance with the conditions, including reviewing the financial reports of the PRA-designated UK nonbank SDs and tracking developments in the UK PRA regulatory regime more generally. 137 Finally, Better Markets asserted that the proposed Comparability Order failed to provide sufficient analysis as to exactly how and why the Commission concluded that the UK and U.S. frameworks would produce “comparable outcomes.” 138 135 Better Markets Letter at p. 15. 136 Id. at p. 11. 137 Id. at p. 16. 138 Id. at p. 11. As described herein and in the 2024 Proposal, Commission staff has engaged in a detailed, comprehensive study and evaluation of the UK PRA capital and financial reporting framework and has confirmed that its understanding of the elements and application of the framework is accurate. The Commission has also concluded, based on its evaluation, that the PRA has a comprehensive oversight program for monitoring PRA-designated UK nonbank SDs' compliance with relevant UK PRA Capital Rules. Furthermore, as discussed in section I.E. above, the conditions set forth in the Comparability Order are generally intended to ensure that: (i) only PRA-designated UK nonbank SDs that are subject to the laws and regulations assessed under the Comparability Determination are eligible for substituted compliance; (ii) the PRA-designated UK nonbank SDs are subject to supervision by the PRA; and (iii) the PRA-designated UK nonbank SDs provide information to the Commission and NFA that is relevant to the ongoing supervision of their operations and financial condition. Considering this thorough analysis, and the ongoing requirement for PRA-designated UK nonbank SDs to provide information to the Commission and NFA demonstrating compliance with the Comparability Order, the Commission is confident that it is capable of effectively conducting, together with NFA, oversight of the PRA-designated UK nonbank SDs consistent with the conduct of oversight of U.S.-domiciled nonbank SDs. In light of the Commission's ultimate conclusion that the UK PRA capital and financial reporting requirements are comparable based on the standards articulated in Commission Regulation 23.106(a)(3), the Commission believes that a failure to issue a Comparability Determination and Comparability Order would in fact “exacerbate complexity” as it would impose duplicative requirements that would result in increased costs for registrants and market participants without a commensurate benefit from an oversight perspective. As discussed in sections I.B. and E. above, and detailed herein, the Commission finds that the CFTC Capital Rules and Financial Reporting Rules and the UK PRA Capital Rules and Financial Reporting Rules are comparable in purpose and effect, and have overall comparable objectives, notwithstanding the identified differences. In this regard, the Commission notes that, as described above, instead of conducting a line-by-line assessment or comparison of the UK PRA Capital and Financial Reporting Rules and the CFTC Capital and Financial Reporting Rules, it has applied in the assessment set forth in the determination and order, a principles-based, holistic approach in assessing the comparability of both regimes, consistent with the standard of review it adopted in Commission Regulation 23.106(a)(3). Based on that principles-based, holistic assessment, the individual elements of which are described in more detail in sections II.B. through II.F. below, the Commission has determined that both sets of rules are designed to ensure the safety and soundness of nonbank SDs and achieve comparable outcomes. As such, the Commission adopts the Comparability Determination and Comparability Order as proposed with respect to the analysis of the regulatory objectives of the CFTC Capital Rules and Financial Reporting Rules and the UK PRA Capital and Financial Reporting Rules. B. Nonbank Swap Dealer Qualifying Capital 1. Preliminary Determination As discussed in the 2024 Proposal, the Commission preliminarily determined that the UK PRA Capital Rules are comparable in purpose and effect to the CFTC Capital Rules with regard to the types and characteristics of a nonbank SD's equity that qualifies as regulatory capital in meeting its minimum requirements. 139 The Commission explained that the UK PRA Capital Rules and the CFTC Capital Rules for nonbank SDs both require a nonbank SD to maintain a quantity of high-quality 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 firm assets and increases in the value of firm liabilities without resulting in the firm becoming insolvent. 140 The Commission observed that the UK PRA 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 UK PRA Capital Rules and the CFTC Capital Rules emphasizing high quality capital instruments. 141 139 See 2024 Proposal at 8039. 140 Id. 141 Id. In support of its preliminary Comparability Determination, the Commission noted that the CFTC Capital Rules require a nonbank SD electing the Bank-Based Approach to maintain regulatory capital in the form of common equity tier 1 capital, additional tier 1 capital, and tier 2 capital in amounts that meet certain stated minimum requirements set forth in Commission Regulation 23.101. 142 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 that is last in line to receive distributions in the event of the entity's insolvency. 143 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 and may have a preference in distributions over common equity tier 1 capital in the event of an insolvency. 144 Total tier 1 capital is composed of common equity tier 1 capital and further includes additional tier 1 capital. Tier 2 capital includes certain types of instruments that include both debt and equity characteristics such as qualifying subordinated debt. 145 Subordinated debt must meet certain conditions to qualify as tier 2 capital under the CFTC Capital Rules. 146 142 17 CFR 23.101(a)(1)(i) and 2024 Proposal at 8037-8038. 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. 12 CFR 217.20. 143 12 CFR 217.20(b). 144 12 CFR 217.20(c). 145 12 CFR 217.20(d). 146 Subordinated debt must meet requirements set forth in SEC Rule 18a-1d. 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. 17 CFR 23.101(a)(1)(i)(B) and 17 CFR 240.18a-1d. The preliminary Comparability Determination also noted that the UK PRA Capital Rules require a PRA-designated nonbank SD to maintain an amount of regulatory capital ( i.e., equity capital and qualifying subordinated debt) equal to or greater than 8 percent of the PRA-designated UK nonbank SD's total risk exposure, which is calculated as the sum of the firm's: (i) capital charges for market risk; (ii) risk-weighted exposure amounts for credit risk; (iii) capital charges for settlement risk; (iv) credit valuation adjustment (“CVA”) risk of over-the-counter (“OTC”) derivatives instruments; and (v) capital charges for operational risk. The UK PRA Capital Rules limit the composition of regulatory capital to common equity tier 1 capital, additional tier 1 capital, and tier 2 capital in a manner consistent with the BCBS framework. Specifically, the UK PRA Capital Rules provide that a PRA-designated UK nonbank SD's regulatory capital may be composed of: (i) common equity tier 1 capital instruments, which generally include the PRA-designated UK nonbank SD's common equity (stock), retained earnings, and accumulated other comprehensive income; (ii) additional tier 1 capital instruments, which includes other forms of capital instruments and certain long-term convertible debt instruments; and (iii) tier 2 capital instruments, which include other reserves, hybrid capital instruments, and certain qualifying subordinated term debt. 147 Capital instruments that qualify as common equity tier 1 capital under the UK PRA Capital Rules include instruments that: (i) are issued directly by the PRA-designated UK nonbank SD; (ii) are paid in full and not funded directly or indirectly by the PRA-designated UK nonbank SD; and (iii) are perpetual. 148 In addition, the principal amount of the common equity tier 1 capital instruments may not be reduced or repaid, except in the liquidation of the PRA-designated UK nonbank SD. 149 Furthermore, to qualify as additional tier 1 capital, the capital instruments must meet certain conditions including: (i) the instruments are issued directly by the PRA-designated UK nonbank SD and paid in full; (ii) the instruments are not owned by the PRA-designated UK nonbank SD or its subsidiaries; (iii) the purchase of the instruments is not funded directly or indirectly by the PRA-designated UK nonbank SD; (iv) the instruments rank below tier 2 instruments in the event of the insolvency of the PRA-designated UK nonbank SD; (v) the instruments are not secured or guaranteed by the PRA-designated UK nonbank SD or an affiliate; (vi) the instruments are perpetual and do not include an incentive for the PRA-designated UK nonbank SD to redeem them; and (vii) distributions under the instruments are pursuant to defined terms and may be cancelled under the full discretion of the PRA-designated UK nonbank SD. 150 Lastly, subordinated debt instruments must meet certain conditions to qualify as tier 2 regulatory capital under the UK PRA Capital Rules, including that the: (i) loans are not granted by the PRA-designated UK nonbank SD or its subsidiaries; (ii) claims on the principal amount of the subordinated loans under the provisions governing the subordinated loan agreement rank below any claim from eligible liabilities instruments ( i.e., certain non-capital instruments), meaning that they are effectively subordinated to claims of all non-subordinated creditors of the PRA-designated UK nonbank SD; (iii) subordinated loans are not secured, or subject to a guarantee that enhances the seniority of the claim, by the PRA-designated UK nonbank SD, its subsidiaries, or affiliates; (iv) loans have an original maturity of at least five years; and (v) provisions governing the loans do not include any incentive for the principal amount to be repaid by the PRA-designated UK nonbank SD prior to the loans' maturity. 151 147 2024 Proposal at 8038. 148 Id. and UK CRR, Articles 26 and 28. 149 Id. 150 Id. and UK CRR, Articles 51-52. 151 Id. and UK CRR, Article 63. Based on its comparative assessment, the Commission preliminarily found that the types and characteristics of the equity instruments that qualify as common equity tier 1 capital and additional tier 1 capital under the UK PRA 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. 152 Specifically, the Commission noted that the UK PRA Capital Rules' common equity tier 1 capital and additional tier 1 capital 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 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, absorb increases in the value of firm liabilities, and cover losses from business activities, including the firm's swap dealing activities. 153 152 See 2024 Proposal at 8039. 153 Id. The Commission also found subordinated debt under the UK PRA Capital Rules comparable to tier 2 capital under the CFTC Capital Rules. 154 Specifically, the Commission noted that the qualifying conditions imposed on subordinated debt instruments are comparable under the UK PRA Capital Rules and the CFTC Capital Rules in that they are designed to ensure that the debt has qualities supporting its recognition by a nonbank SD as equity for capital purposes, including by effectively subordinating the debt lenders' claims for repayment on the debt to other creditors of the nonbank SD and by limiting or restricting repayment of the subordinated loans if such repayments result in the nonbank SD's equity falling below certain defined thresholds. 155 The Commission preliminarily concluded that these terms and conditions provided 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 and increases in the value of firm liabilities. 156 154 Id. 155 Id. 156 Id. 2. Comment Analysis and Final Determination The Commission did not receive comments regarding its preliminary determination that the UK PRA Capital Rules are comparable in purpose and effect to the CFTC Capital Rules with regard to the types and characteristics of a nonbank SD's equity and subordinated debt that qualifies as regulatory capital in meeting its minimum requirements. In conclusion, the Commission finds that the UK PRA Capital Rules and the CFTC Capital Rules are comparable in purpose and effect, and achieve comparable regulatory outcomes, with respect to the types of capital instruments that qualify as regulatory capital. Both the UK PRA Capital Rules and the CFTC Capital Rules limit regulatory capital to permanent and conservative forms of capital, including common equity, capital surpluses, retained earnings, and subordinate debt where debt holders effectively subordinate their claims to repayment to all other creditors of the nonbank SD in the event of the firm's insolvency. Limiting regulatory capital to the above categories of equity and debt instruments promotes the safety and soundness of the nonbank SD by helping to ensure that the regulatory capital is not withdrawn or converted to other equity instruments that may have rights or priority with respect to payments, such as dividends or distributions in insolvency, over other creditors, including swap counterparties. The Commission, therefore, is adopting the Comparability Order as proposed with respect to the types and characteristics of equity and subordinated debt that qualifies as regulatory capital to meet minimum capital requirements under the UK PRA Capital Rules. C. Nonbank Swap Dealer Minimum Capital Requirement 1. Introduction to Nonbank Swap Dealer Minimum Capital Requirements As reflected in the 2024 Proposal, 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 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; (iii) 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; 157 and (iv) the amount of capital required by NFA. 158 157 17 CFR 23.101(a)(1)(i). See also 2024 Proposal at 8039. The term “uncleared swap margin” is defined in Commission Regulation 23.100 to generally mean the amount of initial margin that a nonbank SD would be required to collect from each counterparty for each outstanding swap position of the nonbank SD. 17 CFR 23.100. A nonbank SD must include all swap positions in the calculation of the uncleared swap margin amount, including swaps that are exempt or excluded from the scope of the Commission's uncleared swap margin regulations. A nonbank SD must compute the uncleared swap margin amount in accordance with the Commission's margin rules for uncleared swaps. 17 CFR 23.154. 158 17 CFR 23.101(a)(1)(i)(D). See also 2024 Proposal at 8039. Commission Regulation 23.101(a)(1)(i)(D) sets forth one of the minimum thresholds that a nonbank SD must meet as the “the amount of capital required by a registered futures association.” As previously noted, NFA is currently the only entity that is registered with the Commission as a futures association. NFA has adopted the Commission's capital requirements as its own requirements, and has not adopted any additional or stricter minimum capital requirements. See NFA rulebook, Financial Requirements Section 18 Swap Dealer and Major Swap Participant Financial Requirements, available at nfa.futures.org. In comparison, the UK PRA Capital Rules, consistent with the BCBS framework, require each PRA-designated UK nonbank SD to maintain sufficient levels of capital to satisfy the following, expressed as a percentage of the PRA-designated UK nonbank SD's “total risk exposure amount” ( i.e., the sum of the PRA-designated UK nonbank SD's risk-weighted assets and exposures): (i) a common equity tier 1 capital ratio of 4.5 percent; (ii) a tier 1 capital ratio of 6 percent; and (iii) a total capital ratio of 8 percent. Furthermore, PRA-designated UK nonbank SDs must maintain a capital conservation buffer composed of common equity tier 1 capital in an amount equal to 2.5 percent of the firm's total risk exposure. The common equity tier 1 capital used to meet the capital conservation buffer must be separate and in addition to the 4.5 percent of common equity tier 1 capital required to meet its core 8 percent capital requirement. 159 As explained in the 2024 Proposal, the “total risk exposure amount” is calculated as the sum of the PRA-designated UK nonbank SD's: (i) capital requirements for market risk; (ii) risk-weighted exposure amounts for credit risk; (iii) capital requirements for CVA risk of OTC derivatives; and (iv) capital requirements for operational risk. 160 Capital charges for market risk and credit risk are computed based on a PRA-designated UK nonbank SD's on-balance sheet and off-balance sheet exposures, weighted according to risk. 161 159 See 2024 Proposal at 8041-8042. 160 Id. at 8042. 161 Id. 2. Preliminary Determination and Comment Analysis While noting certain differences in the minimum capital requirements and calculation of regulatory capital between the UK PRA Capital Rules and the CFTC Capital Rules, the Commission preliminarily found that the UK PRA Capital Rules and CFTC Capital Rules achieve, subject to the conditions in the proposed Comparability Determination and proposed Comparability Order, comparable outcomes by requiring a nonbank SD 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 and increases in the firm's liabilities without the nonbank SD becoming insolvent. 162 As further discussed below, the Commission's preliminary finding of comparability was based on a principles-based, holistic comparative analysis of the three minimum capital requirement thresholds of the CFTC Capital Rules' Bank-Based Approach referenced above and the respective elements of the UK PRA Capital Rules' requirements. 162 Id. at 8045. a. Fixed Amount Minimum Capital Requirement As noted above, prong (i) of the CFTC Capital Rules requires each nonbank SD electing the Bank-Based Approach to maintain a minimum of $20 million of common equity tier 1 capital. The CFTC's $20 million fixed-dollar minimum capital requirement is intended to ensure that each nonbank SD maintains a level of regulatory capital, without regard to the level of the firm's dealing and other activities, sufficient to meet its obligations to swap market participants given the firm's status as a CFTC-registered nonbank SD and to help ensure the safety and soundness of the nonbank SD. 163 In comparison, the UK PRA Capital Rules also contain a requirement that a PRA-designated UK nonbank SD maintain a fixed amount of minimum initial capital of GBP 750,000. 164 163 85 FR 57462 at 57492. 164 2024 Proposal at 8045. The Commission, in the 2024 Proposal, recognized that the $20 million fixed-dollar minimum capital required under the CFTC Capital Rules is substantially [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-15094. Public record. Not legal advice.