Time limited no-action relief from regulation 23.105(p) for certain alternative financial reporting by SDs subject to the capital requirements of a prudential regulator.

Summary: Time limited no-action relief from regulation 23.105(p) for certain alternative financial reporting by SDs subject to the capital requirements of a prudential regulator.

CFTC LETTER NO. 23-11 NO-ACTION JULY 10, 2023

Kyle Brandon

Managing Director, Head of Derivatives Policy

Securities Industry and Financial Markets Association

120 Broadway, 35th Floor

New York, NY 10271

Stephen Kennedy

Global Head of Public Policy

International Swaps and Derivatives Association

10 E. 53rd Street, 9th Floor

New York, NY 10022

Re:

Extension of Time-Limited No-Action Position for Bank Swap Dealers from Certain

Financial Reporting Requirements

Dear Ms. Brandon and Mr. Kennedy:

The Market Participants Division (the “Division”) of the U.S. Commodity Futures

Trading Commission (“Commission” or “CFTC”) is extending its time-limited no-action

position taken in CFTC Staff Letter 21-18 (“Letter 21-18”),1 regarding financial reporting

requirements for eligible swap dealers (“SDs”). Letter 21-18 was issued in response to your joint

letter dated August 20, 2021 to the Division. The Division has subsequently received from you a

second request letter dated June 15, 2023 asking for extension of the position taken in Letter 21-

18. Letter 21-18 provided, subject to the conditions therein, that the Division would not

recommend an enforcement action to the Commission prior to the time-limited date of October

6, 2023 if certain SDs subject to capital requirements of a prudential regulator (“Bank SDs”) fail

to comply with financial reporting requirements set forth in Regulation 23.105(p)(2) 2 as

described below.

I.

Regulatory Background

1 CFTC Staff Letter No. 21-18, August 31, 2021.

2 Commission regulations are found at 17 CFR Ch. I, and are available at the Commission’s website,

www.CFTC.gov.

U.S

udential regulator (“Bank SDs”) fail

to comply with financial reporting requirements set forth in Regulation 23.105(p)(2) 2 as

described below.

I.

Regulatory Background

1 CFTC Staff Letter No. 21-18, August 31, 2021.

2 Commission regulations are found at 17 CFR Ch. I, and are available at the Commission’s website,

www.CFTC.gov.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

www.cftc.gov

Market Participants

Division

Amanda L. Olear

Director

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Section 4s of the Commodity Exchange Act (the “CEA”) authorizes the Commission to

adopt rules imposing minimum capital requirements on SDs that are not subject to rules of a

prudential regulator (“Nonbank SDs”),3 as well as financial reporting requirements for Bank SDs

and Nonbank SDs.4 Pursuant to Section 4s(f), the Commission adopted Regulation

23.105(p)(2),5 which requires each Bank SD to file unaudited quarterly financial information

with the Commission within 30 calendar days of the end of the Bank SD’s fiscal quarter. The

required financial information for a Bank SD consists of a statement of financial condition

(“Balance Sheet”), a statement of regulatory capital (“Statement of Regulatory Capital”), and a

schedule of the Bank SD’s aggregate positions in security-based swaps, mixed swaps, swaps, and

other derivatives (“Schedule 1”).6 The Bank SD is required to submit its Financial Reports on

the specific forms set forth in Appendix C to Subpart E of Part 23 of the Commission’s

regulations (“Appendix C”).7

The Balance Sheet and Statement of Regulatory Capital contained in Appendix C were

intended to be identical to the Federal Financial Institutions Examination Council (“FFIEC”)

Form 031 (“Call Report”) generally filed by banks, including certain Bank SDs, with their

respective prudential regulator.8 In this regard, the Balance Sheet was designed to be identical

regulations (“Appendix C”).7

The Balance Sheet and Statement of Regulatory Capital contained in Appendix C were

intended to be identical to the Federal Financial Institutions Examination Council (“FFIEC”)

Form 031 (“Call Report”) generally filed by banks, including certain Bank SDs, with their

respective prudential regulator.8 In this regard, the Balance Sheet was designed to be identical

with Schedule RC—Balance Sheet of the Call Report, and the Statement of Regulatory Capital

was designed to be identical to Schedule RC-R—Regulatory Capital of the Call Report. The use

of identical forms was intended to allow Bank SDs to file the same financial information with the

Commission that they file with their applicable prudential regulators.

Schedule 1, however, was not based on a corresponding statement or schedule contained

in the Call Report. Schedule 1 contains position information that the Commission requested to

monitor the activities of Bank SDs in the derivatives markets. The Financial Reports were also

identical to corresponding statements and schedule required by the Securities and Exchange

Commission (“SEC”) for security-based swap dealers that are subject to the capital requirements

of a prudential regulator.9

II.

Extension of Time-Limited No-Action Position

The Division issued Letter 21-18 on August 31, 2021. Letter 21-18 provides that the

Division will not recommend enforcement action if Bank SDs, subject to certain conditions, do

3 The term “prudential regulator” is defined by section 1a(39) (7 U.S.C. 1a(39)) of the CEA (7 U.S.C. 1a et. seq.) to

mean the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the

Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency.

4 See 7 U.S.C. 6s.

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

(7 U.S.C. 1a(39)) of the CEA (7 U.S.C. 1a et. seq.) to

mean the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the

Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency.

4 See 7 U.S.C. 6s.

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

6 The Balance Sheet, Regulatory Capital Statement, and Schedule 1 are collectively referred to in this letter as a

Bank SD’s “Financial Reports.”

7 The Division acknowledges an error in Regulation 23.105(p)(2) that provides that a Bank SD is required to file the

information contained in Appendix B to Subpart E of Part 23 with the Commission within 30 calendar days of the

end of each quarter. The reference should be to Appendix C to Subpart E of Part 23 of the Commission’s

regulations.

8 See, 85 FR 57462, 57516-57517.

9 See SEC Rule 18a-7(a)(2) (17 CFR 240.18a-7(a)(2)) and Rule 249.617 (17 CFR 249.617).

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not comply with the financial reporting requirements under Commission Regulation 23.105(p).

The time-limited no-action position set forth in Letter 21-18 will expire on October 6, 2023.10

Letter 21-18 permits Bank SDs to submit a Schedule RC—Balance Sheet and a Schedule

RC-R—Regulatory Capital from the Call Report with the Commission in lieu of the Balance

Sheet and Statement of Regulatory Capital required by Regulation 23.105(p)(2) and Appendix C.

Letter 21-18 also allows certain non-U.S. domiciled Bank SDs subject to home country capital

standards in a G-20 jurisdiction or to capital standards that are consistent with the Capital Accord

of the Basel Committee on Banking Supervision (a “Covered Non-U.S. Bank SD”) to provide

the Commission with financial reports submitted to home country regulators subject to certain

conditions, and further provides that such Covered Non-U.S

.S. domiciled Bank SDs subject to home country capital

standards in a G-20 jurisdiction or to capital standards that are consistent with the Capital Accord

of the Basel Committee on Banking Supervision (a “Covered Non-U.S. Bank SD”) to provide

the Commission with financial reports submitted to home country regulators subject to certain

conditions, and further provides that such Covered Non-U.S. Bank SDs are permitted to file with

the Commission balance sheet and statement of regulatory capital information in accordance

with home country requirements provided the information is in English, converted to US dollars,

and filed within 15 days of the earlier of the date such financial statements are filed or required

to be filed with the home country regulator.11 Finally, recognizing additional limitations

imposed by the SEC following adoption of Regulation 23.105(p)(2), dually-registered Covered

Non-U.S. Bank SDs are permitted to file comparable SEC approved financial reports and

schedules.12

As mentioned above, you have requested that the Division extend the position set forth in

Letter 21-18. In your request, you indicate that you are concerned that imposing the full rule set

at the time of the expiration of Letter 21-18 while the Commission’s actions remain pending

would prove to be a significant operational challenge for Bank SDs and may ultimately be

unnecessary and duplicative. Further, you indicate that there are no known issues with

compliance of the conditions within Letter 21-18 and that Bank SDs are reporting consistent with

that position.

Due to the time required for the Commission to issue a proposed rulemaking revising the

financial reporting requirements for Bank SDs under Regulation 23.105(p), and address any

comments received, the Division believes that an extension of the expiration date of Letter 21-18

is necessary and appropriate

ons within Letter 21-18 and that Bank SDs are reporting consistent with

that position.

Due to the time required for the Commission to issue a proposed rulemaking revising the

financial reporting requirements for Bank SDs under Regulation 23.105(p), and address any

comments received, the Division believes that an extension of the expiration date of Letter 21-18

is necessary and appropriate. The Division is currently unaware of any instances where eligible

Bank SDs are not complying with or are inappropriately relying upon Letter 21-18. Further, the

Division has received and reviewed financial reporting in accordance with Letter 21-18 without

issue, and does not anticipate any issues with the approach taken with Letter 21-18 at this time.

The Division hereby extends the expiration of Letter 21-18 until the earlier of October

6, 2025 or the adoption of any revised financial reporting requirements applicable to Bank SDs

under Regulation 23.105(p). In light of its analysis preformed to date, the Division believes that

the extension of the no-action position, subject to the conditions below, on a time-limited basis

would not limit its ability to monitor the capital position of Bank SDs. For full clarity, the

Division’s No-Action Position of Letter 21-18, with all the conditions and the newly revised

time-limited date of the earlier of October 6, 2025 or the adoption of any revised financial

10 See CFTC Staff Letter No. 21-18.

11 Id. at 5, Conditions 2-4.

12 Id., Condition 5. In comparison to the SEC’s approach to similarly situated Bank SBSDs, the Commission’s

capital comparability process adopted in Commission Regulation 23.106 does not extend to Bank SDs.

the earlier of October 6, 2025 or the adoption of any revised financial

10 See CFTC Staff Letter No. 21-18.

11 Id. at 5, Conditions 2-4.

12 Id., Condition 5. In comparison to the SEC’s approach to similarly situated Bank SBSDs, the Commission’s

capital comparability process adopted in Commission Regulation 23.106 does not extend to Bank SDs.

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reporting and notification requirements applicable to such SDs under Regulation 23.105(p), is

fully restated herein below.

III.

Division No-Action Position

The Commission adopted limited financial reporting requirements for Bank SDs in

recognition that prudential regulators have an obligation to impose capital requirements on Bank

SDs and have primary responsibility under the CEA to monitor Bank SD capital.13 The limited

financial reporting required by Regulation 23.105(p) is intended to provide the Commission with

information necessary to monitor the overall financial condition of Bank SDs at a high level due

to their status as dealers in the swaps market and as counterparties to market participants,

including Nonbank SDs. The Division believes that extending the no-action position, subject to

the conditions below, on a time-limited basis while potential rule amendments are considered by

the Commission would not adversely impact the Division’s ability to monitor the capital position

of Bank SDs.

Based on the facts and representations set forth in the request letters dated August 20,

2021 and June 15, 2023, and those summarized above, the Division will not recommend that the

Commission take an enforcement action against a Bank SD for failure to comply with certain

financial reporting requirements of Regulation 23.105(p)(2) if:

1. A Bank SD that files a Call Report with its applicable U.S

d on the facts and representations set forth in the request letters dated August 20,

2021 and June 15, 2023, and those summarized above, the Division will not recommend that the

Commission take an enforcement action against a Bank SD for failure to comply with certain

financial reporting requirements of Regulation 23.105(p)(2) if:

1. A Bank SD that files a Call Report with its applicable U.S. prudential regulator files

the Schedule RC—Balance Sheet and the Schedule RC-R—Regulatory Capital from

the Call Report, and Schedule 1 from Appendix C, with the Commission on a quarterly

basis in lieu of the Balance Sheet and Statement of Regulatory Capital required under

Appendix C, provided that the Bank SD files the above schedules with the Commission

within the timeframe permitted by its applicable prudential regulator to file its Call

Report.

2. A Covered Non-U.S. Bank SD that does not file a Call Report with a U.S. prudential

regulator files a statement of financial condition and a statement of regulatory capital

in lieu of the Balance Sheet and Statement of Regulatory Capital required under

Appendix C, provided that the statements filed with the Commission: (i) contain

comparable financial information to the information contained in the Balance Sheet

and Statement of Regulatory Capital, and such statements are filed with the Covered

Non-U.S. Bank SD’s home country regulator; and (ii) include Schedule 1 of Appendix

C with its balance sheet and statement of regulatory capital when filed with the

Commission.

3. A Covered Non-U.S

the Commission: (i) contain

comparable financial information to the information contained in the Balance Sheet

and Statement of Regulatory Capital, and such statements are filed with the Covered

Non-U.S. Bank SD’s home country regulator; and (ii) include Schedule 1 of Appendix

C with its balance sheet and statement of regulatory capital when filed with the

Commission.

3. A Covered Non-U.S. Bank SD that prepares and presents the statement of financial

condition, the statement of regulatory capital, and Schedule 1 in accordance with the

accounting standards permitted by its applicable home country regulator, including the

accounting principles established in its home jurisdiction, provided the statement of

financial condition, statement of regulatory capital, and Schedule 1 are submitted to the

Commission in the English language, with balances converted to U.S. dollars.

13 See 7 U.S.C. 6s(e)(2)(i).

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4. A Covered Non-U.S. Bank SD files the statement of financial condition, statement of

regulatory capital, and Schedule 1 within 15 days of the earlier of the date such financial

statements are filed with its home country regulator or the date such financial

statements are required to be filed with its home country regulator. A Covered Non-

U.S. Bank SD is required to file the financial statements and Schedule 1 with the

Commission as of the end of each quarter, unless the Covered Non-U.S. Bank SD is

only required to file such financial statements with its home country regulator on a

semi-annual basis, in which case its financial statements and Schedule 1 must be filed

with the Commission on a semi-annual basis.

5. A Covered Non-U.S

ank SD is required to file the financial statements and Schedule 1 with the

Commission as of the end of each quarter, unless the Covered Non-U.S. Bank SD is

only required to file such financial statements with its home country regulator on a

semi-annual basis, in which case its financial statements and Schedule 1 must be filed

with the Commission on a semi-annual basis.

5. A Covered Non-U.S. Bank SD that is dually-registered with the SEC as a security-

based swap dealer files a FOCUS Report Part IIC, or other SEC approved financial

reports and schedules, with the Commission in lieu of its reporting obligation under

Regulation 23.105(p)(2), provided that (i) the FOCUS Report Part IIC, or other SEC-

approved financial reports and schedules, are filed with the Commission on the earlier

of the due date for the reports under the SEC rules, or (ii) the date the reports were filed

with the SEC. The FOCUS Report Part IIC or other SEC-approved financial reports

and schedules must be filed with the Commission in the English language with balances

converted to U.S dollars.

The no-action position set forth in this letter is time-limited and will expire the earlier of

October 6, 2025 or the adoption of any revised financial reporting and notification requirements

applicable to Bank SDs under Regulation 23.105(p).

This letter, and the position taken herein, represent the views of Division only, and do not

necessarily represent the position or view of the Commission or of any other office or division of

the Commission. This letter and the no-action position taken herein are not binding on the

Commission.14 The position taken in this letter does not excuse persons relying on it from

compliance with any other applicable requirements contained in the CEA or in Commission

regulations. Further, this letter, and the positions taken herein, are based upon the facts and

circumstances presented to Division staff

. This letter and the no-action position taken herein are not binding on the

Commission.14 The position taken in this letter does not excuse persons relying on it from

compliance with any other applicable requirements contained in the CEA or in Commission

regulations. Further, this letter, and the positions taken herein, are based upon the facts and

circumstances presented to Division staff. Any different, changed or omitted material facts or

circumstances might render the position taken in this letter void. Finally, as with all staff letters,

the Division retains the authority to condition further, modify, suspend, terminate, or otherwise

restrict the terms of the position taken herein, in its discretion.

If you have any questions concerning this correspondence, please feel free to contact

Thomas Smith, Deputy Director, at 202-418-5495, Josh Beale, Associate Director at 202-418-

5446, Jennifer Bauer, Special Counsel at 202-418-5472, or Andrew Pai, Attorney Advisor at 646-

746-9893.

Sincerely,

Amanda L. Olear

Director

14 See 17 CFR 140.99(a)(2) (“A no-action letter binds only the issuing Division… and not the Commission or other

Commission staff.”).