2 November 2012

Mr. David A. Stawick
Secretary
US Commodity Futures Trading Commission
Three Lafayette Center
1155 21st Street
NW Washington
DC 20581
Comment letter on proposed Cross-Border Swap Regulations 1
Dear Mr Stawick,
The Japan Financial Market Council (JFMC) would like to share with you our concerns
as the CFTC pursues the final shaping and implementation of regulatory proposals
relating to cross-border swap transactions.
The JFMC is a new industry association which includes representatives from five
Japan-based institutions and five international firms active in Japanese capital markets.
Its aim is to ensure that authorities deciding on regulatory initiatives that have a global
impact are aware of and take into account the effect of new regulations on Japanese
capital markets. 2The JFMC endorses the goals, adopted at the 2009 Group of 20 Pittsburgh summit andreaffirmed in Toronto in 2010, regarding the strengthening of the regulation ofderivatives. Our members therefore welcome the CFTC’s active participation andleadership in the process of achieving those goals through its implementation of theDodd Frank Act.
The JFMC has identified two specific concerns regarding the CFTC’s proposed changes
to the rules governing swaps, first the cross-border application of the rules, and second
the confusion resulting from the rules’ implementation process.
Cross-border application
With regards cross-border application, the JFMC is sympathetic to the CFTC’s concernthat risks associated with swaps trading at overseas affiliates of a major US financialgroup, might flow back to the entire group. We believe all G20 members share both anunderstanding of this danger and a strong desire to avoid it.

1 This letter is a follow up to your recent consultation on: Cross-Border Application of Certain Swaps Provisions ofthe Commodity Exchange Act (RIN 3038–AD57).
2The JFMC membership consists of Bank of Tokyo-Mitsubishi UFJ, Daiwa Securities Group, Mizuho Securities, NomuraHoldings, SMBC Nikko Securities Inc, Bank of America Merrill Lynch, BNP Paribas, Deutsche Bank Group, JPMorganSecurities Japan Co., Ltd. and Morgan Stanley Japan Holdings. The co-chairs of the JFMC are the representatives fromMorgan Stanley and Nomura.

The G20, however, have called for the global harmonization of rules, an appeal that ismirrored in the CFTC’s own explicit recognition of the importance of comity between
international jurisdictions. The JFMC is concerned the cross-border applications of theCFTC’s rules, as they stand now, run counter to this ideal and may indeed undermine
the goal of reducing risks in the swaps market.
Japan has made the outcomes of G20 discussions a priority. The Japanese Diet passed
reforms including the mandatory clearing, trade reporting of swaps (in May 2010) andtrading on electronic platforms (in September 2012). From the beginning of November
2012 mandatory central clearing requirements have been put in place and therefore
Japan has met the agreed end-2012 deadline. While Japan's regulatory regime is not
identical to that of the US, it shares the same goals as the CFTC and is consistent withthe objectives of the G20.
In fulfilling commitments to the G20, Japan’s experience is instructive. The amendments
to its Financial Instruments and Exchange Law allowed for central clearing of yen
interest rate transactions as a successful first step toward broader strengthening ofderivatives regulation. The JFMC understands each country has specific needs
requiring tailored regulation. But an approach that settles domestic issues first, followedby the coordination of cross-border applications through agreements between
regulators or through trans-national institutions, would go a long way toward avoiding
uncertainty, and facilitating the introduction of a strengthened regulatory regime.
While the JFMC welcomes some of the CFTC’s current cross-border proposals, such as
the exemption of overseas branches of US affiliates from de minimis calculation, wewould urge the CFTC, before writing the final version of any rules or implementing
deadlines, to prioritize consistency with the principles of comity, equivalence andsubstituted compliance, wherever local jurisdictional rules are supportive of the G20
objectives and thereby substantially similar to those of the US.
A failure to accept this principle will result in unintended consequences. It will potentiallysubject swap market participants to two different sets of rules, which in their final forms
may conflict with one another, and as a result, lead to avoidance of certain
counterparties or a reduction in liquidity as participants seek to avoid regulatory risk by acurtailment of trading.
Implementation
The JFMC remains concerned about the implementation process for the CFTC’s
various proposed rule changes regarding swaps. We already see in Japan a rising
danger that the market for non-cleared derivatives is becoming fragmented andunnaturally concentrated as a result of the hurried and uneven implementation ofCFTC’s rules.
The recent no action letters helped clear up confusion to a limited extent. But many
counterparties in Japan still face considerable uncertainty over how these rules willaffect their business over the long term. For example, Japanese institutions remain
unclear over which counterparties will be deemed U.S. persons or if the US Treasury
will formally exempt foreign exchange forwards and swaps. Other concerns include thepotential trading stoppages or disruptions caused by fears of transactional requirements
such as duplicative clearing or other similarly conflicting regulation.

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The implementation schedule for registration, before the final rules are known, iscausing many to rethink counterparties and trading patterns based on the potential
regulatory considerations rather than market considerations. Some are looking at ways
to avoid any transaction that might lead to a requirement to register with the CFTC.
Others are simply refraining from trading. Both of these have significant implications forliquidity, pricing and concentration risk.
Conclusion
We are all aware that participants in the 2009 G20 summit agreed the regulation of thederivatives market should be strengthened, and that a significant effort is underway toset new international standards. Derivatives, and swaps in particular, remain crucialinstruments for risk management, hedging and the facilitation of growth. For the swaps
market to provide this important function, it is crucial the market remain liquid, pricecompetitive and ultimately driven by market considerations within a harmonized set ofglobal regulatory parameters.
The JFMC would caution against rules that, in pursuing the goals of the G20,
inadvertently pose risks associated with a reduction in liquidity. Moreover, any
regulatory regime that is significantly out of step with those being developed elsewhere,
either in substance or in implementation, will inevitably cause distortions andunintended consequences.
That puts the responsibility on regulators and industry to ensure rules are effective not
only domestically but internationally as well. May we therefore suggest the CFTC
consider implementing its cross-border swaps regulations, as applied to non-U.S.
persons, with the achievement of full coordination with each relevant G20 regulator,
through formal and comprehensive intergovernmental agreements.
If you require further information we would be very happy to provide it.
Yours sincerely,Jonathan B. Kindred
Shigesuke Kashiwagi
Co-chairmen of the Japan Financial Markets Council
Contact: International Bankers Association (IBA Japan): Paul Hunter
Telephone +81 (0)3-6225-2212
E-mail paul.hunter@ibajapan.org

cc. Chairman Gary Gensler
Commissioner Bart Chilton
Commissioner Scott O’Malia
Commissioner Jill Sommers
Commissioner Mark Wetjen

3or g-info@ibajapan.org