15 August, 2013
Elizabeth M. Murphy
Secretary of the Commission
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Submitted by email: rule-comments@sec.gov(File Numbers S7-02-13, S7-34-10 and S7-40-11)

Comment letter: Cross-Border Security-Based Swap Activities; Re-Proposal ofRegulation SBSR and Certain Rules and Forms Relating to the Registration ofSecurity-Based Swap Dealers and Major Security-Based Swap Participants
RIN 3235-AL25
Dear Ms Murphy
1. Overall Position
The Japan Financial Markets Council (JFMC)1 is grateful for the opportunity to commenton the Securities and Exchange Commission’s (SEC) regulatory proposals forcross-border security-based swaps.

The JFMC welcomes many aspects of the SEC’s proposals and is particularly
encouraged by the strong focus on substituted compliance including acommitment to an ‘outcomes based approach’. This is a major step towardhonoring the spirit of international comity, and the cooperation that was a specificcommitment by the G20 countries at the Pittsburgh Summit of 2009. We also
applaud the SEC’s effort to have a constructive dialogue between regulators andthe industry, and to first agree on the overall regime rather than putting in place
an arbitrary timeline for the completion of different aspects of the proposal. Thisapproach will allow for a more efficient and rational implementation of the final
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The JFMC is an association which includes representatives from five Japan-based institutions and five internationalfirms active in Japanese capital markets. Its aim is to ensure that authorities deciding on regulatory initiatives thathave a global impact are aware of and take into account the effect of new regulations on Japanese capital markets.
The current JFMC members are: Bank of Tokyo-Mitsubishi UFJ, Daiwa Securities Group, Mizuho Securities,Nomura Holdings, SMBC Nikko Securities Inc, BNP Paribas, Citigroup Japan Holdings Corp, Deutsche Bank Group,
JPMorgan Securities Japan Co., Ltd. and Morgan Stanley Japan Holdings. The co-chairs of the JFMC are therepresentatives from Morgan Stanley and Nomura.

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rules. But we also have concerns about the proposals and in particular some areasthat will result in a lack of harmonization across the regulation of swap andsecurity-based swap markets.
The JFMC notes that the Commodity Futures Trading Commission (CFTC) has
recently finalized its own interpretive guidance and exemptive order forcross-border swaps regulation2 which has an impact on the overall regulatoryenvironment. In light of this the JFMC calls on the SEC to:a. Seek greater harmony, where appropriate, between the SEC and theCFTC’s cross border swaps regulations·On a number of issues which are fundamental to the entire market (forexample the definition of a U.S. person) there are significant benefitsof having one standard in place. We need to recognize that the CFTC
has already finalized its guidance and in these cases we believe theapproaches should be harmonized.

·For these fundamental issues the duplicative costs would cause themarket to be ‘too complicated to implement’ for participants in Japan,
where swaps and security-based swaps are considered one market.

·

But the JFMC does support some of the SEC’s proposals including how
de minimus thresholds are calculated.3

b. Apply substituted compliance to Japan··

The CFTC’s public release on July 11, 2013 of ‘A Path Forward’ is usefulin that it sets an approach of how to coordinate U.S. and European
Commission swap regulations, and a recognition that substitutedcompliance will play an important role.
We encourage that an agreement, which recognizes the role ofsubstituted compliance, is also made between the Japanese regulatory
authorities and the joint U.S agencies (both the SEC and the CFTC).
This might be done in a bilateral way, for example by employing a
Memorandum of Understanding similar to the agreement with the EU2

17 CFR Chapter 1 RIN 3038-AD85 ‘Interpretive Guidance and Policy Statement Regarding Compliance withCertain Swap’ and RIN 3038–AE05 ‘Exemptive Order Regarding Compliance With Certain Swap Regulations’.
3 For example, a security-based swap dealing with a non-U.S persons conducted outside the U.S. should not
be counted towards the securities-based swap dealder’s (SBSD) threshold, even if they are guaranteed by aU.S. person, and also dealings with a foreign branch of a U.S. bank are not part of the SBSD calculation).

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·authorities. Such an agreement should take into account thedifferences in the two markets in terms of size, liquidity and stages ofregulatory development. Alternatively, a mutli-national approach
might also be desirable to avoid a profusion of global agreements.
The U.S regulatory authorities should recognize the Japanese programof reforms which are in line with G20 commitments, including in theareas of mandatory clearing, trade execution and reporting

2. Detailed response
We have divided our detailed response below into two sections: harmonization,and substituted compliance and time relief.
Part A: Harmonization
Coordination and achieving regulatory consistency and comparability, to theextent it is possible, between the U.S. regulatory agencies is a specificrequirement of the Dodd Frank statute. In addition, the participating
governments in the G20 Pittsburgh Summit agreed to international coordination.
The JFMC is concerned that on a number of significant cross-cutting areas (suchas the definition of a U.S. person), there is a discrepancy between the SEC’sproposal and CFTC’s final guidance. Such differences would impose a significant
burden on market participants. It would require firms to use limited resources todistinguish between swaps and security-based swaps and also a long complex listof other criteria regarding counterparty status, as well as the location of trade
solicitation, negotiation, booking and execution. Additional client representations
would also be required, which would be particularly challenging to obtain fromnon-U.S. clients.
In addition to the complexities stemming from the lack of co-ordination in theUnited States, market participants are also likely to have to accommodate rules
from non-U.S. regulatory authorities. The likely outcome is that marketparticipants will avoid trading products with U.S. counterparties or indeed avoid
any trading at all lest they fail to navigate correctly the uneven regulatoryenvironment and unintentionally breach rules and bear the risks of regulatory
sanction. The outcome may result in a number of unintended consequences3

including reduced liquidity.
From the perspective of participants in Japan, the SEC proposals need to be
examined in the context of the final guidance adopted by the CFTC on July 12,
2013. In Japan, as in many other jurisdictions, swaps and security-based swaps
are treated as similarly managed products within one large and active market.
A1.U.S. Persons
Given the CFTC has issued its final guidance the JFMC believes for such afundamental issue as the definition of a ‘U.S. person’, the SEC should adopt thesame definition as set out by the CFTC.
The JFMC is not necessarily supportive of every aspect of the CFTC’sdefinition, including the impractical and burdensome standard of a ‘principal
place of business’ as a factor in assessing a U.S. person. But even with theseimperfections, the JFMC believes that a single definition of U.S. person ispreferable to multiple tests. The JFMC is especially supportive of a single
approach if the SEC, like the CFTC, allows for participants to rely on
representations in determining whether or not a counterparty is a U.S. person.
The JFMC also believes a uniform approach between the SEC and CFTC
should also apply to the definitions for ‘natural persons’, ‘corporate entities’and ‘discretionary /non-discretionary accounts’, and a number of other parts ofthe consultation such as the treatment of commodity pools.
Security-based swap activities are part of a global market. They include
transactions in Japanese Yen that may be with or between Japan market
participants for the purpose of hedging the risk associated with capital raisingand debt issuing in the international market place. The JFMC therefore
supports the exclusion of international organizations from the U.S. person
definition and requests that all Foreign Public Sector Financial Institutions andtheir affiliates be excluded.
A2.Transactions Conducted Within the United States
The JFMC believes the SEC should, in the interest of harmonization, removefrom its proposed regulations the concept of rules being applied based on4whether the transactions are conducted within the United States. The CFTC
did not include a territorial approach in its final guidance.
The use of such an approach might, for example, capture transactions between
non-U.S. persons simply because they may be executed through a U.S. 24-hourelectronic facility to which two participants in Japan might have access. TheJFMC therefore requests that the SEC, like the CFTC, exempt security-based
swaps executed anonymously on a security-based SEF or exchange fromcounting towards the de minimus threshold4. Such transactions do not poserisks to the U.S. financial system that the Dodd Frank statute is designed toregulate. They could also create competitive disadvantages.
The JFMC believes the SEC’s approach of capturing on a trade-by-trade basis
any transaction that is ‘solicited, negotiated, executed or booked’ within theUnited States is highly impractical. It would subject participants to duplicativeand conflicting rules, and that it would result in unintended consequences
likely to discourage market participation, and ultimately impair liquidity. We
believe the risks to the United States appear to arise only form the resulting
positions and not the dealing activity. We therefore suggest the SEC would
better achieve its goals by focusing instead on the status of counterparties
under the U.S. person definition.
A3.Classification of Entity and Transaction Level Requirements
For the classification of requirements for Security-Based Swap Dealers andMajor Security-Based Swap Participants, the SEC, unlike the CFTC, proposesto treat margin for non-cleared swaps as an entity level requirement so as toprotect the registered entity against the default of counterparties. But margin
is calculated based on the circumstances of any given transaction, including
the status of the counterparty. Documentation, confirmation, netting andvaluation requirements will also vary for different types of counterparties.
The JFMC understands however that capital and margin rules are still not final
and this may have an impact on the overall approach. Depending on theoutcome of these deliberations, it may be that the SEC should treat bothmargin for non-cleared swaps and requirements relating to documentation,
4CFTC Final Guidance, page 27

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netting and valuation, as transaction-level requirements rather than entity
level requirements. We suggest therefore this rule should not be finalized until
further information is available.
A4.Dealer Requirements and Substituted Compliance
The JFMC notes that the CFTC has signaled its willingness to rely on‘substituted compliance’ when deciding whether to apply entity andtransaction level requirements to non-U.S. swap dealers; non-U.S. affiliates
guaranteed by a U.S. person; and foreign branches of U.S. persons. The SEC
has helpfully proposed that substituted compliance would be permissible inmany scenarios where a non-U.S. swap dealer trades with a U.S. person or aU.S. swap dealer trades with a non-U.S. person. Japan has put in place a robust
set of rules and infrastructure for all types of swaps to comply with thecommitments made at the G20 Summit in Pittsburgh. Given this environment
the JFMC is highly supportive of the SEC taking a similar approach, which
would ideally rely on an outcomes based comparability determination.
A5.Aggregation and Operational Independence
Under the CFTC final guidance a U.S. and non-U.S. persons in an affiliatedgroup may engage in swap dealing until the aggregate level of swaps
conducted by all group affiliates, with certain counterparties, clears thede-minimis threshold. Once that threshold is surpassed, then one or more of
the group’s most active affiliates would be required to register as a swap
dealer, whether or not they are organized within the United States. Less active
affiliates would not have to aggregate their activity with registered affiliatesthus allowing them to avoid a requirement to register simply because of theircorporate affiliations.
The JFMC notes, however, that under the SEC’s proposal a relatively inactive
affiliate would only be eligible for the above exclusion if it is deemed to be
operationally independent (defined as having separate sales and trading,operations, and risk management). We believe this proposal is vague andoverly broad and severely limits the efficient leveraging of key functions andalso impedes the growth of different business models.
This is an important issue to the Tokyo market which is a significant regional

6financial center and home to many affiliates of international banking groups.
The JFMC believe that the CFTC’s final guidance provides a more appropriate
framework and therefore requests that the SEC withdraws the operational
independence requirement to exclude activities of affiliated registeredsecurity-based swap dealer.
Part B: Substituted Compliance and Time Relief
B1.Comparability Standard
The JFMC supports the SEC’s proposed ‘outcomes-based’ approach tosubstituted compliance. The JFMC also believes that to the extent the SEC’sproposal had an impact on the CFTC’s final guidance this is an extremely
positive development.
When the SEC and the CFTC consider the level of comparability for
substituted compliance, the U.S. agencies should take an overview of thetiming of international regulatory developments, the local market conditions
and the wider environment. Different conditions do not mean they areunequal. For example, because a derivatives market is less liquid or active
than the U.S. and thus repository reporting requirements are less detailed orhave different time frames, this does not mean that the market is lesscarefully regulated than in the United States.
Japan, as a G20 member nation, is working towards complying withcommitments made at the 2009 Pittsburgh Summit, to implement mandatory
clearing, trade execution, and trade reporting requirements for cross-borderswap transactions. Because of the inter-connected global nature of OTC
derivatives markets, Japan has not yet established or introduced its own setof cross-border rules because it believes that applying such rules without
international collaboration will lead to inconsistent approaches and cause
market disruption and deterioration. The SEC should take into account when
considering the Japanese regime that potentially comparable requirements
are proposed and under consideration, but are not yet final.
B2.Substituted Compliance Determination Procedure
The CFTC has provided that applications for substituted compliance can bemade by individual firms, trade associations or foreign regulators. The JFMC

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urges the SEC to adopt a similar approach and that the SEC and the CFTC
work together (either as part of a multilateral or bilateral approach) with
their Japanese counterparts to determine comparability. Memorandums ofUnderstanding or equivalent approaches, could be employed as appropriate.
This joint U.S. agency approach would avoid unnecessary delays orduplication.
B3.Substituted Compliance, Clearing, Trade Execution and Reporting
Japan has taken the lead in implementing mandatory clearing (introduced inNovember 2012), mandatory reporting (introduced in April 2013) and has also
passed legislation that would meet G20 requirements for trade execution,
which will be implemented by 2015. Given these conditions the JFMC
specifically requests the SEC (as well as the CFTC) to determine that Japan
has comparable standards in the areas of clearing, trade execution andreporting.
3. Conclusion
The JFMC acknowledges the detailed SEC consultation paper and welcomes its
commitment to substituted compliance. We strongly urge a co-ordinatedapproach between the U.S. agencies in the area of cross-border swaps regulation.
We would be happy to provide the SEC with any further information on any of thepoints raised in this letter.

Yours faithfully,

Jonathan B. Kindred

Shigesuke Kashiwagi

Co-chairs of the Japan Financial Markets Council
Contact: International Bankers Association (IBA Japan): Paul Hunter
Telephone +81 (0)3-6225-2211

E-mail g-info@ibajapan.org

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