[Federal Register Volume 89, Number 24 (Monday, February 5, 2024)]
[Proposed Rules]
[Pages 8026-8063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02070]



[[Page 8025]]

Vol. 89

Monday,

No. 24

February 5, 2024

Part III





Commodity Futures Trading Commission





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17 CFR Chapter I





Notice of Proposed Order and Request for Comment on an Application for 
a 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; Proposed Rule

Federal Register / Vol. 89 , No. 24 / Monday, February 5, 2024 / 
Proposed Rules

[[Page 8026]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I


Notice of Proposed Order and Request for Comment on an 
Application for a 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

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed order and request for comment.

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SUMMARY: The Commodity Futures Trading Commission is soliciting public 
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 the capital and financial reporting laws 
and regulations of the United Kingdom applicable to CFTC-registered 
swap dealers organized and domiciled in the United Kingdom, which are 
licensed under the United Kingdom Financial Services and Markets Act 
2000 as investment firms and designated for prudential supervision by 
the United Kingdom Prudential Regulation Authority, provide sufficient 
bases for an affirmative finding of comparability with respect to the 
Commission's swap dealer capital and financial reporting requirements 
adopted under the Commodity Exchange Act. The Commission is also 
soliciting public comment on a proposed order providing for the 
conditional availability of substituted compliance in connection with 
the application.

DATES: Comments must be received on or before March 24, 2024.

ADDRESSES: You may submit comments, identified by ``UK-PRA Swap Dealer 
Capital Comparability Determination,'' by any of the following methods:
    <bullet> CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this proposed order and follow the 
instructions on the Public Comment Form.
    <bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Commission Regulation 145.9.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to in this 
release are found at 17 CFR chapter I, and are accessible on the 
Commission's website: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the proposed determination and order will be retained in 
the public comment file and will be considered as required under the 
Administrative Procedure Act and other applicable laws, and may be 
accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, <a href="/cdn-cgi/l/email-protection#4627292a232734067a27662e3423207b" http: cftc.gov">cftc.gov</a>">aolear@cftc.gov</a>; Thomas Smith, Deputy Director, 202-418-5495, 
<a href="/cdn-cgi/l/email-protection#1165627c786579512d7031796374772c" http: cftc.gov">cftc.gov</a>">tsmith@cftc.gov</a>; Rafael Martinez, Associate Director, 202-418-5462, 
<a href="/cdn-cgi/l/email-protection#7a08171b080e13141f003a461b5a12081f1c47" http: cftc.gov">cftc.gov</a>">rmartinez@cftc.gov</a>; Liliya Bozhanova, Special Counsel, 202-418-6232, 
<a href="/cdn-cgi/l/email-protection#7d111f1207151c13120b1c3d411c5d150f181b40" http: cftc.gov">cftc.gov</a>">lbozhanova@cftc.gov</a>; Joo Hong, Risk Analyst, 202-418-6221, 
<a href="/cdn-cgi/l/email-protection#a8c2c0c7c6cfe894c988c0dacdce95" http: cftc.gov">cftc.gov</a>">jhong@cftc.gov</a>; Justin McPhee, Risk Analyst, 202-418-6223; 
<a href="/cdn-cgi/l/email-protection#452f28262d352020057924652d37202378" http: cftc.gov">cftc.gov</a>">jmchpee@cftc.gov</a>, Market Participants Division; Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street NW, 
Washington, DC 20581.

SUPPLEMENTARY INFORMATION: The Commodity Futures Trading Commission 
(``Commission'' or ``CFTC'') is soliciting public comment on an 
application dated May 4, 2021 (the ``UK Application'') submitted by the 
Institute of International Bankers, International Swaps and Derivatives 
Association, and Securities Industry and Financial Markets Association 
(together, the ``Applicants'').\2\ The Applicants request that the 
Commission determine that registered nonbank swap dealers \3\ 
(``nonbank SDs'') organized and domiciled within the United Kingdom 
(``UK''), which are licensed as investment firms and designated for 
prudential supervision by the UK Prudential Regulation Authority 
(``PRA'') (``PRA-designated UK nonbank SDs''), may satisfy certain 
capital and financial reporting requirements under the Commodity 
Exchange Act (``CEA'') \4\ by being subject to, and complying with, 
comparable capital and financial reporting requirements under UK laws 
and regulations.\5\ The Commission also is soliciting public comment on 
a proposed order under which PRA-designated UK nonbank SDs would be 
able, subject to defined conditions, to comply with certain CFTC 
nonbank SD capital and financial reporting requirements in the manner 
set forth in the proposed order.
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    \2\ See Letter dated May 4, 2021 from Stephanie Webster, General 
Counsel, Institute of International Bankers, Steven Kennedy, Global 
Head of Public Policy, International Swaps and Derivatives 
Association, and Kyle Brandon, Managing Director, Head of 
Derivatives Policy, Securities Industry and Financial Markets 
Association. The UK Application is available on the Commission's 
website at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
    \3\ As discussed in Section I.A. immediately below, the 
Commission has the authority to impose capital requirements on 
registered swap dealers (``SDs'') that are not subject to regulation 
by a U.S. prudential regulator (i.e., nonbank SDs).
    \4\ 7 U.S.C. 1 et seq. The CEA may be accessed through the 
Commission's website at: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
    \5\ 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 
capital comparability determination.
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I. Introduction

A. Regulatory Background--Swap Dealer and Major Swap Participant 
Capital and Financial Reporting Requirements

    Section 4s(e) of the CEA \6\ directs the Commission and 
``prudential regulators'' \7\ to impose capital

[[Page 8027]]

requirements on all SDs and major swap participants (``MSPs'') 
registered with the Commission.\8\ Section 4s(e) of the CEA also 
directs the Commission and prudential regulators to adopt regulations 
imposing initial and variation margin requirements on swaps entered 
into by SDs and MSPs that are not cleared by a registered derivatives 
clearing organization (``uncleared swaps'').
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    \6\ 7 U.S.C. 6s(e).
    \7\ The term ``prudential regulator'' is defined in the CEA to 
mean the Board of Governors of the Federal Reserve System (``Federal 
Reserve Board''); the Office of the Comptroller of the Currency; the 
Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency. See 7 U.S.C. 
1a(39).
    \8\ 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. See 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) maintains a substantial position in outstanding swaps in 
any major swap category as determined by the Commission. See 7 
U.S.C. 1a(33).
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    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.\9\ 
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.\10\
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    \9\ 7 U.S.C. 6s(e)(2).
    \10\ 7 U.S.C. 6s(e)(1) and (2).
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    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.\11\ 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.\12\ 
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'').\13\
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    \11\ See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840 (Nov. 30, 2015).
    \12\ See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
    \13\ See Capital Requirements of Swap Dealers and Major Swap 
Participants, 85 FR 57462 (Sept. 15, 2020).
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    Section 4s(f) of the CEA addresses SD and MSP financial reporting 
requirements.\14\ Section 4s(f) of the CEA authorizes the Commission to 
adopt rules imposing financial condition reporting obligations on all 
SDs and MSPs (i.e., nonbank SDs, nonbank MSPs, bank SDs, and bank 
MSPs). Specifically, Section 4s(f)(1)(A) of the CEA provides, in 
relevant part, that each registered SD and MSP must make financial 
condition reports as required by regulations adopted by the 
Commission.\15\ The Commission's financial reporting obligations were 
adopted with the Commission's nonbank SD and nonbank MSP capital 
requirements, and have a compliance date of October 6, 2021 (``CFTC 
Financial Reporting Rules'').\16\
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    \14\ 7 U.S.C. 6s(f).
    \15\ 7 U.S.C. 6s(f)(1)(A).
    \16\ See 85 FR 57462.
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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 
``Capital Comparability Determination'').\17\ The availability of such 
substituted compliance is conditioned upon the Commission issuing a 
determination that the relevant foreign jurisdiction's capital adequacy 
and financial reporting requirements, and related financial 
recordkeeping requirements, for non-U.S. nonbank SDs and/or non-U.S. 
nonbank MSPs are comparable to the corresponding CFTC Capital Rules and 
CFTC Financial Reporting Rules. The Commission will issue a Capital 
Comparability Determination in the form of a Commission order 
(``Capital Comparability Determination Order'').\18\
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    \17\ 17 CFR 23.106. Commission Regulation 23.106(a)(1) provides 
that a request for a Capital Comparability Determination may be 
submitted by a non-U.S. nonbank SD or a non-U.S. 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-U.S. nonbank SDs or non-
U.S. nonbank MSPs. In addition, Commission regulations provide that 
any non-U.S. nonbank SD or non-U.S. nonbank MSP that is dually-
registered with the Commission as a futures commission merchant 
(``FCM'') is subject to the capital requirements of Commission 
Regulation 1.17 (17 CFR 1.17) and may not petition the Commission 
for a Capital Comparability Determination. See 17 CFR 23.101(a)(5) 
and (b)(4), respectively. Furthermore, non-U.S. bank SDs and non-
U.S. bank MSPs may not petition the Commission for a Capital 
Comparability Determination with respect to their respective 
financial reporting requirements under Commission Regulation 
23.105(p) (17 CFR 23.105(p)). Commission staff has issued, however, 
a time-limited no-action letter stating that the Market Participants 
Division will not recommend enforcement action against a non-U.S. 
bank SD that files with the Commission certain financial information 
that is provided to its home country regulator in lieu of certain 
financial reports required by Commission Regulation 23.105(p). See 
CFTC Staff Letter 21-18, issued on August 31, 2021, and CFTC Staff 
Letter 23-11, issued on July 10, 2023 (extending the expiration of 
CFTC Staff 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)). On December 15, 2023, the 
Commission issued for public comment proposed amendments to 
Regulation 23.105(p) addressing the financial reporting requirements 
applicable to bank SDs in a manner consistent with the position 
taken in CFTC Letters 21-18 and 23-11. See CFTC Press Release 8836-
23 issued on December 15, 2023, available at cftc.gov.
    \18\ 17 CFR 23.106(a)(3).
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    The Commission's approach for conducting a Capital Comparability 
Determination with respect to the CFTC Capital Rules and the CFTC 
Financial Reporting Rules is a principles-based, holistic approach that 
focuses on whether the applicable foreign jurisdiction's capital and 
financial reporting requirements achieve comparable outcomes to the 
corresponding CFTC requirements.\19\ In this regard, the approach is 
not a line-by-line assessment or comparison of a foreign jurisdiction's 
regulatory requirements with the Commission's requirements.\20\ In 
performing the analysis, the Commission recognizes that jurisdictions 
may adopt differing approaches to achieving comparable outcomes, and 
the Commission will focus on whether the foreign

[[Page 8028]]

jurisdiction's capital and financial reporting requirements are 
comparable to the Commission's in purpose and effect, and not whether 
they are comparable in every aspect or contain identical elements.
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    \19\ See 85 FR 57462 at 57521.
    \20\ Id.
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    A person requesting a Capital Comparability Determination is 
required to submit an application to the Commission containing: (i) a 
description of the objectives of the relevant foreign jurisdiction's 
capital adequacy and financial reporting requirements applicable to 
entities that are subject to the CFTC Capital Rules and the CFTC 
Financial Reporting Rules; (ii) a description (including specific legal 
and regulatory provisions) of how the relevant foreign jurisdiction's 
capital adequacy and financial reporting requirements address the 
elements of the CFTC Capital Rules and CFTC Financial Reporting Rules, 
including, at a minimum, the methodologies for establishing and 
calculating capital adequacy requirements and whether such 
methodologies comport with any international standards; and (iii) a 
description of the ability of the relevant foreign regulatory authority 
to supervise and enforce compliance with the relevant foreign 
jurisdiction's capital adequacy and financial reporting requirements. 
The applicant must also submit, upon request, such other information 
and documentation as the Commission deems necessary to evaluate the 
comparability of the capital adequacy and financial reporting 
requirements of the foreign jurisdiction.\21\
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    \21\ 17 CFR 23.106(a)(2).
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    The Commission may consider all relevant factors in making a 
Capital Comparability Determination, including: (i) the scope and 
objectives of the relevant foreign jurisdiction's capital and financial 
reporting requirements; (ii) whether the relevant foreign 
jurisdiction's capital and financial reporting requirements achieve 
comparable outcomes to the Commission's corresponding capital 
requirements and financial reporting requirements; (iii) the ability of 
the relevant foreign regulatory authority or authorities to supervise 
and enforce compliance with the relevant foreign jurisdiction's capital 
adequacy and financial reporting requirements; and (iv) any other facts 
or circumstances the Commission deems relevant, including whether the 
Commission and foreign regulatory authority or authorities have a 
memorandum of understanding (``MOU'') or similar arrangement that would 
facilitate supervisory cooperation.\22\
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    \22\ See 17 CFR 23.106(a)(3) and 85 FR 57520-57522.
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    In performing the comparability assessment for foreign nonbank SDs, 
the Commission's review will include the extent to which the foreign 
jurisdiction's requirements address: (i) the process of establishing 
minimum capital requirements for nonbank SDs and how such process 
addresses risk, including market risk and credit risk of the nonbank 
SD's on-balance sheet and off-balance sheet exposures; (ii) the types 
of equity and debt instruments that qualify as regulatory capital in 
meeting minimum requirements; (iii) the financial reports and other 
financial information submitted by a nonbank SD to its relevant 
regulatory authority and whether such information provides the 
regulatory authority with the means necessary to effectively monitor 
the financial condition of the nonbank SD; and (iv) the regulatory 
notices and other communications between a nonbank SD and its foreign 
regulatory authority that address potential adverse financial or 
operational issues that may impact the firm. With respect to the 
ability of the relevant foreign regulatory authority to supervise and 
enforce compliance with the foreign jurisdiction's capital adequacy and 
financial reporting requirements, the Commission's review will include 
a review of the foreign jurisdiction's surveillance program for 
monitoring nonbank SDs' compliance with such capital adequacy and 
financial reporting requirements, and the disciplinary process imposed 
on firms that fail to comply with such requirements.
    In performing the comparability assessment for foreign nonbank 
MSPs,\23\ 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 a nonbank MSP and how 
such process establishes a minimum level of capital to ensure the 
safety and soundness of the nonbank MSP; (ii) the financial reports and 
other financial information submitted by a nonbank MSP to its relevant 
regulatory authority and whether such information provides the 
regulatory authority with the means necessary to effectively monitor 
the financial condition of the nonbank MSP; and (iii) the regulatory 
notices and other communications between a nonbank MSP and its foreign 
regulatory authority that address potential adverse financial or 
operational issues that may impact the firm. With respect to the 
ability of the relevant foreign regulatory authority to supervise and 
enforce compliance with the foreign jurisdiction's capital adequacy and 
financial reporting requirements, the Commission's review will include 
a review of the foreign jurisdiction's surveillance program for 
monitoring nonbank MSPs' compliance with such capital adequacy and 
financial reporting requirements, and the disciplinary process imposed 
on firms that fail to comply with such requirements.
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    \23\ 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).
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    Commission Regulation 23.106 further provides that the Commission 
may impose any terms or conditions that it deems appropriate in issuing 
a Capital Comparability Determination.\24\ Any specific terms or 
conditions with respect to capital adequacy or financial reporting 
requirements will be set forth in the Commission's Capital 
Comparability Determination Order. As a general condition to all 
Capital Comparability Determination Orders, the Commission expects to 
require notification from applicants of any material changes to 
information submitted by the applicants in support of a comparability 
finding, including, but not limited to, changes in the relevant foreign 
jurisdiction's supervisory or regulatory regime.
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    \24\ See 17 CFR 23.106(a)(5).
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    The Commission's capital adequacy and financial reporting 
requirements are designed to address and manage risks that arise from a 
firm's operation as a SD 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. Therefore, in order to rely on a Capital Comparability 
Determination, a nonbank SD or nonbank MSP domiciled in the foreign 
jurisdiction and subject to supervision by the relevant regulatory 
authority (or authorities) in the foreign jurisdiction must file a 
notice with the Commission of its intent to comply with the applicable 
capital adequacy and financial reporting requirements of the foreign 
jurisdiction set forth in the Capital Comparability Determination in 
lieu of all or parts of the CFTC Capital Rules and/or CFTC Financial 
Reporting Rules.\25\ Notices must be filed electronically with the 
Commission's

[[Page 8029]]

Market Participants Division (``MPD'').\26\ The filing of a notice by a 
non-U.S. nonbank SD or non-U.S. nonbank MSP provides MPD staff, acting 
pursuant to authority delegated by the Commission,\27\ with the 
opportunity to engage with the firm and to obtain representations that 
it is subject to, and complies with, the laws and regulations cited in 
the Capital Comparability Determination and that it will comply with 
any listed conditions. MPD will issue a letter under its delegated 
authority from the Commission confirming that the non-U.S. nonbank SD 
or non-U.S. nonbank MSP may comply with foreign laws and regulations 
cited in the Capital Comparability Determination in lieu of complying 
with the CFTC Capital Rules and the CFTC Financial Reporting Rules upon 
MPD's determination that the firm is subject to and complies with the 
applicable foreign laws and regulations, is subject to the jurisdiction 
of the applicable foreign regulatory authority (or authorities), and 
can meet any conditions in the Capital Comparability Determination.
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    \25\ 17 CFR 23.106(a)(4).
    \26\ Notices must be filed in electronic form to the following 
email address: <a href="/cdn-cgi/l/email-protection#024f5246446b6c636c616b636e506773776b70676f676c7671423e63226a7067643f" http: cftc.gov">cftc.gov</a>">MPDFinancialRequirements@cftc.gov</a>.
    \27\ See 17 CFR 140.91(a)(11).
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    Each non-U.S. nonbank SD and/or non-U.S. nonbank MSP that receives, 
in accordance with the applicable Commission Capital Comparability 
Determination Order, confirmation from the Commission that it may 
comply with a foreign jurisdiction's capital adequacy and/or financial 
reporting requirements will be deemed by the Commission to be in 
compliance with the corresponding CFTC Capital Rules and/or CFTC 
Financial Reporting Rules.\28\ Accordingly, if a nonbank SD or a 
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 non-
U.S. nonbank SD or non-U.S. nonbank MSP that receives confirmation of 
its ability to use substituted compliance remains subject to the 
Commission's examination and enforcement authority.\30\ 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.
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    \28\ 17 CFR 23.106(a)(4).
    \29\ Id.
    \30\ Id.
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    The Commission will consider an application for a Capital 
Comparability Determination to be a representation by the applicant 
that the laws and regulations of the foreign jurisdiction that are 
submitted in support of the application are finalized and in force, 
that the description of such laws and regulations is accurate and 
complete, and that, unless otherwise noted, the scope of such laws and 
regulations encompasses the relevant non-U.S. nonbank SDs and/or non-
U.S. nonbank MSPs domiciled in the foreign jurisdiction.\31\ A non-U.S. 
nonbank SD or non-U.S. nonbank MSP that is not legally required to 
comply with a foreign jurisdiction's laws or regulations determined to 
be comparable in a Capital Comparability Determination may not 
voluntarily comply with such laws or regulations in lieu of compliance 
with the CFTC Capital Rules or the CFTC Financial Reporting Rules. Each 
non-U.S. nonbank SD or non-U.S. nonbank MSP that seeks to rely on a 
Capital Comparability Determination Order is responsible for 
determining whether it is subject to the foreign laws and regulations 
found comparable in the Capital Comparability Determination and the 
Capital Comparability Determination Order.
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    \31\ The Commission has provided the Applicants with an 
opportunity to review for accuracy and completeness, and comment on, 
the Commission's description of relevant UK laws and regulations on 
which this proposed Capital Comparability Determination is based. 
The Commission relies on this review and any corrections received 
from the Applicants in making its proposal. Thus, to the extent that 
the Commission relies on an inaccurate description of foreign laws 
and regulations submitted by the Applicants, the comparability 
determination may not be valid.
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C. Application for a Capital Comparability Determination for PRA-
Designated UK Nonbank Swap Dealers

    The Applicants submitted the UK Application requesting that the 
Commission issue a Capital Comparability Determination finding that a 
PRA-designated UK nonbank SD's compliance with the capital requirements 
of the UK and the financial reporting requirements of the UK, as 
specified in the UK Application and applicable to PRA-designated UK 
nonbank SDs, satisfies corresponding CFTC Capital Rules and the CFTC 
Financial Reporting Rules applicable to a nonbank SD under sections 
4s(e)-(f) of the CEA and Commission Regulations 23.101 and 23.105.\32\
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    \32\ UK Application, p. 1. There are currently no MSPs 
registered with the Commission, and the Applicants have not 
requested that the Commission issue a Capital Comparability 
Determination concerning UK nonbank MSPs. Accordingly, the 
Commission's Capital Comparability Determination and proposed 
Capital Comparability Determination Order do not address UK nonbank 
MSPs.
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    To be designated for prudential supervision by the 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 PRA-authorized person in its 
group.\34\ The PRA also must consult with the FCA before designating a 
person for prudential supervision.\35\
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    \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).
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    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:

[[Page 8030]]

Citigroup Global Markets Limited, Goldman Sachs International, Merrill 
Lynch International, Morgan Stanley & Co. International Plc, MUFG 
Securities EMEA Plc, and Nomura International Plc.
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    \36\ See 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.
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    The Applicants represent 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\
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    \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 notes 49 and 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/.
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    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\
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    \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\ See 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\ See PRA Rulebook, CRR Firms, Liquidity Coverage 
Requirement--UK Designated Investment Firms Part.
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    The Applicants also represent 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\
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    \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. See 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, the 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 represent 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'')

[[Page 8031]]

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 III 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\
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    \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.
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    The Applicants also represent 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 note 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\
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    \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\ See 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 bank capital 
standards. See 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).
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II. General Overview of Commission and UK PRA Nonbank Swap Dealer 
Capital Rules

A. General Overview of the CFTC Nonbank Swap Dealer Capital Rules

    The CFTC Capital Rules provide nonbank SDs with three alternative 
capital approaches: (i) the Tangible Net Worth Capital Approach (``TNW 
Approach''); (ii) the Net Liquid Assets Capital Approach (``NLA 
Approach''); and (iii) the Bank-Based Capital Approach (``Bank-Based 
Approach'').\64\
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    \64\ 17 CFR 23.101.
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    Nonbank SDs that are ``predominantly engaged in non-financial 
activities'' may elect the TNW Approach.\65\ The TNW Approach requires 
a nonbank SD to maintain a level of ``tangible net worth'' \66\ equal 
to or greater than the higher of: (i) $20 million plus the amount of 
the nonbank SD's ``market risk exposure requirement'' \67\ and ``credit 
risk exposure requirement'' \68\ associated with the nonbank SD's swap 
and related hedge positions that are part of the nonbank SD's swap 
dealing activities; (ii) 8 percent of the nonbank SD's ``uncleared swap 
margin'' amount; \69\ or (iii) the amount of capital required by a 
registered futures association of which the nonbank SD is a member.\70\ 
The TNW Approach is intended to ensure the safety and soundness of a 
qualifying nonbank SD by requiring the firm to maintain a minimum level 
of tangible net worth that is based on the nonbank SD's swap dealing 
activities to provide a sufficient level of capital to absorb losses 
resulting from its swap dealing and other business activities.
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    \65\ 17 CFR 23.101(a)(2). The term ``predominantly engaged in 
non-financial activities'' is defined in Commission Regulation 
23.100 and generally provides that: (i) the nonbank SD's, or its 
parent entity's, annual gross financial revenues for either of the 
previous two completed fiscal years represents less than 15 percent 
of the nonbank SD's or the nonbank SD's parent's, annual gross 
revenues for all operations (i.e., commercial and financial) for 
such years; and (ii) the nonbank SD's, or its parent entity's, total 
financial assets at the end of its two most recently completed 
fiscal years represents less than 15 percent of the nonbank SD's, or 
its parent's, total consolidated financial and nonfinancial assets 
as of the end of such years. 17 CFR 23.100.
    \66\ The term ``tangible net worth'' is defined in Commission 
Regulation 23.100 and generally means the net worth (i.e., assets 
less liabilities) of a nonbank SD, computed in accordance with 
applicable accounting principles, with assets further reduced by a 
nonbank SD's recorded goodwill and other intangible assets. 17 CFR 
23.100.
    \67\ The terms ``market risk exposure'' and ``market risk 
exposure requirement'' are defined in Commission Regulation 23.100 
and generally mean the risk of loss in a financial position or 
portfolio of financial positions resulting from movements in market 
prices and other factors. 17 CFR 23.100. Market risk exposure is the 
sum of: (i) general market risks including changes in the market 
value of a particular asset that results from broad market 
movements, which may include an additive for changes in market value 
under stressed conditions; (ii) specific risk, which includes risks 
that affect the market value of a specific instrument but do not 
materially alter broad market conditions; (iii) incremental risk, 
which means the risk of loss on a position that could result from 
the failure of an obligor to make timely payments of principal and 
interest; and (iv) comprehensive risk, which is the measure of all 
material price risks of one or more portfolios of correlation 
trading positions.
    \68\ The term ``credit risk exposure requirement'' is defined in 
Commission Regulation 23.100 and generally reflects the amount at 
risk if a counterparty defaults before the final settlement of a 
swap transaction's cash flows. 17 CFR 23.100.
    \69\ 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. See 17 CFR 23.154.
    \70\ The National Futures Association (``NFA'') is currently the 
only entity that is a registered futures association. The Commission 
will refer to NFA in this document when referring to the 
requirements or obligations of a registered futures association.
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    The TNW approach requires a nonbank SD to compute its market risk 
exposure requirement and credit risk

[[Page 8032]]

exposure requirement using standardized capital charges set forth in 
SEC Rule 18a-1 \71\ that are applicable to entities registered with the 
SEC as SBSDs or standardized capital charges set forth in Commission 
Regulation 1.17 applicable to entities registered as FCMs or entities 
dually-registered as an FCM and nonbank SD.\72\ Nonbank SDs that have 
received Commission or NFA approval pursuant to Commission Regulation 
23.102 may use internal models to compute market risk and/or credit 
risk capital charges in lieu of the SEC or CFTC standardized capital 
charges.\73\
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    \71\ 17 CFR 240.18a-1.
    \72\ 17 CFR 23.101(a)(2)(ii)(A).
    \73\ Id.
---------------------------------------------------------------------------

    A nonbank SD that elects the NLA Approach is required to maintain 
``net capital'' in an amount that equals or exceeds the greater of: (i) 
$20 million; (ii) 2 percent of the nonbank SD's uncleared swap margin 
amount; or (iii) the amount of capital required by NFA.\74\ The NLA 
Approach is intended to ensure the safety and soundness of a nonbank SD 
by requiring the firm to maintain at all times at least one dollar of 
highly liquid assets to cover each dollar of the nonbank SD's 
liabilities.
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    \74\ 17 CFR 23.101(a)(1)(ii)(A). ``Net capital'' consists of a 
nonbank SD's highly liquid assets (subject to haircuts) less all of 
the firm's liabilities, excluding certain qualified subordinated 
debt. See 17 CFR 240.18a-1 for the calculation of ``net capital.''
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    A nonbank SD is required to reduce the value of its highly liquid 
assets by the market risk exposure requirement and/or the credit risk 
exposure requirement in computing its net capital.\75\ A nonbank SD 
that does not have Commission or NFA approval to use internal models 
must compute its market risk exposure requirement and/or credit risk 
exposure requirement using the standardized capital charges contained 
in SEC Rule 18a-1 as modified by the Commission's rule.\76\
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    \75\ See 17 CFR 240.18a-1(c) and (d).
    \76\ See 17 CFR 23.101(a)(1)(ii).
---------------------------------------------------------------------------

    A nonbank SD that has obtained Commission or NFA approval, may use 
internal market risk and/or credit risk models to compute market risk 
and/or credit risk capital charges in lieu of the standardized capital 
charges.\77\ A nonbank SD that is approved to use internal market risk 
and/or credit risk models is further required to maintain a minimum of 
$100 million of ``tentative net capital.'' \78\
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    \77\ See 17 CFR 23.102.
    \78\ 17 CFR 23.101(a)(1)(ii)(A)(1). The term ``tentative net 
capital'' is defined in Commission Regulation 23.101(a)(1)(ii)(A)(1) 
by reference to SEC Rule 18a-1 and generally means a nonbank SD's 
net capital prior to deducting market risk and credit risk capital 
charges.
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    The Commission's NLA Approach is consistent with the SEC's SBSD 
capital rule, and is based on the Commission's capital rule for FCMs 
and the SEC's capital rule for securities broker-dealers (``BDs''). The 
quantitative and qualitative requirements for NLA Approach internal 
market and credit risk models are also consistent with the quantitative 
and qualitative requirements of the Commission's Bank-Based Approach as 
described below.
    The Commission's Bank-Based Approach for computing regulatory 
capital for nonbank SDs is based on certain capital requirements 
imposed by the Federal Reserve Board for bank holding companies.\79\ 
The Bank-Based Approach also is consistent with the Basel Committee on 
Banking Supervision's (``BCBS'') international framework for bank 
capital requirements.\80\ The Bank-Based Approach requires a nonbank SD 
to maintain regulatory capital equal to or in excess of each of the 
following requirements: (i) $20 million of common equity tier 1 
capital; (ii) an aggregate of common equity tier 1 capital, additional 
tier 1 capital, and tier 2 capital (including qualifying subordinated 
debt) equal to or greater than 8 percent of the nonbank SD's risk-
weighted assets (provided that common equity tier 1 capital comprises 
at least 6.5 percent of the 8 percent minimum requirement); (iii) an 
aggregate of common equity tier 1 capital, additional tier 1 capital, 
and tier 2 capital equal to or greater than 8 percent of the nonbank 
SD's uncleared swap margin amount; and (iv) an amount of capital 
required by NFA.\81\ The Bank-Based Approach is intended to ensure that 
the safety and soundness of a nonbank SD by requiring the firm to 
maintain at all times qualifying capital in an amount sufficient to 
absorb unexpected losses, expenses, decrease in firm assets, or 
increases in firm liabilities without the firm becoming insolvent.
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    \79\ See 17 CFR 23.101(a)(1)(i).
    \80\ 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.
    \81\ 17 CFR 23.101(a)(1)(i).
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    The terms used in the Commission's Bank-Based Approach are defined 
by reference to regulations of the Federal Reserve Board.\82\ 
Specifically, the term ``common equity tier 1 capital'' is defined for 
purposes of the CFTC Capital Rules to generally mean the sum of a 
nonbank SD's common stock instruments and any related surpluses, 
retained earnings, and accumulated other comprehensive income.\83\ The 
term ``additional tier 1 capital'' is defined to include equity 
instruments that are subordinated to claims of general creditors and 
subordinated debt holders, but contain certain provisions that are not 
available to common stock, such as the right of nonbank SD to call the 
instruments for redemption or to convert the instruments to other forms 
of equity.\84\ The term ``tier 2 capital'' is defined to include 
certain types of instruments that include both debt and equity 
characteristics (e.g., certain perpetual preferred stock instruments 
and subordinated term debt instruments).\85\ Subordinated debt also 
must meet certain requirements to qualify as tier 2 capital, including 
that the term of the subordinated debt instrument is for a minimum of 
one year (with the exception of approved revolving subordinated debt 
agreements which may have a maturity term that is less than one year), 
and the debt instrument is an effective subordination of the rights of 
the lender to receive any payment, including accrued interest, to other 
creditors.\86\
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    \82\ Id. Commission Regulation 23.101(a)(1)(i) references 
Federal Reserve Board Rule 217.20 for purposes of defining the terms 
used in establishing the minimum capital requirements under the 
Bank-Based Approach. 17 CFR 23.101(a)(1)(i) and 12 CFR 217.20.
    \83\ See 12 CFR 217.20(b).
    \84\ See 12 CFR 217.20(c).
    \85\ See 12 CFR 217.20(d).
    \86\ The subordinated debt must meet the requirements set forth 
in SEC Rule 18a-1d (17 CFR 240.18a-1d). See 17 CFR 
23.101(a)(1)(i)(B) providing that the subordinated debt used by a 
nonbank SD to meet its minimum capital requirement under the Bank-
Based Approach must satisfy the conditions for subordinated debt 
under SEC Rule 18a-1d.
---------------------------------------------------------------------------

    Common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital are unencumbered and generally long-term or permanent forms of 
capital that help ensure that a nonbank SD will be able to absorb 
losses resulting from its operations and maintain confidence in the 
nonbank SD as a going concern. In addition, in setting an equity ratio 
requirement, this limits the amount of asset growth and leverage a 
nonbank SD can incur, as a nonbank SD must fund its asset growth with a 
certain percentage of regulatory capital.
    A nonbank SD also must compute its risk-weighted assets using 
standardized capital charges or, if approved, internal models. Risk-
weighting assets involves adjusting the notional or carrying value of 
each asset based on the inherent risk of the asset. Less risky assets 
are

[[Page 8033]]

adjusted to lower values (i.e., have less risk-weight) than more risky 
assets. As a result, nonbank SDs are required to hold lower levels of 
regulatory capital for less risky assets and higher levels of 
regulatory capital for riskier assets.
    Nonbank SDs not approved to use internal models to risk-weight 
their assets must compute market risk capital charges using the 
standardized charges contained in Commission Regulation 1.17 and SEC 
Rule 18a-1, and must compute their credit risk charges using the 
standardized capital charges set forth in regulations of the Federal 
Reserve Board for bank holding companies in subpart D of 12 CFR part 
217.\87\
---------------------------------------------------------------------------

    \87\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the 
term BHC risk-weighted assets in 17 CFR 23.100.
---------------------------------------------------------------------------

    Standardized market risk charges are computed under Commission 
Regulation 1.17 and SEC Rule 18a-1 by multiplying, as appropriate to 
the specific asset schedule, the notional value or market value of the 
nonbank SD's proprietary financial positions (such as swaps, security-
based swaps, futures, equities, and U.S. Treasuries) by fixed 
percentages set forth in the Regulation or Rule.\88\ Standardized 
credit risk charges require the nonbank SD to multiply on-balance sheet 
and off-balance sheet exposures (such as receivables from 
counterparties, debt instruments, and exposures from derivatives) by 
predefined percentages set forth in the applicable Federal Reserve 
Board regulations contained in subpart D of 12 CFR part 217.
---------------------------------------------------------------------------

    \88\ See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3-1(c)(2).
---------------------------------------------------------------------------

    A nonbank SD also may apply to the Commission or NFA for approval 
to use internal models to compute market risk exposure and/or credit 
risk exposure for purposes of determining its total risk-weighted 
assets.\89\ Nonbank SDs approved to use internal models for the 
calculation of credit risk or market risk, or both, must follow the 
model requirements set forth in Federal Reserve Board regulations for 
bank holding companies codified in subpart E and F, respectively, of 12 
CFR part 217. Credit risk and market risk capital charges computed with 
internal models require the estimation of potential losses, with a 
certain degree of likelihood, within a specified time period, of a 
portfolio of assets. Internal models allow for consideration of 
potential co-movement of prices across assets in the portfolio, leading 
to offsets of gains and losses. Internal credit risk models can also 
further include estimation of the likelihood of default of 
counterparties.
---------------------------------------------------------------------------

    \89\ See 17 CFR 23.102.
---------------------------------------------------------------------------

B. General Overview of UK PRA Capital Rules for PRA-Designated UK 
Nonbank SDs

    The Applicants state that the UK PRA Capital Rules impose bank-like 
capital requirements on a PRA-designated UK nonbank SD that are 
consistent with the BCBS framework for international bank-based capital 
standards.\90\ The Applicants further state that the UK PRA Capital 
Rules are intended to require each PRA-designated UK nonbank SD to hold 
a sufficient amount of qualifying equity capital and subordinated debt 
based on the PRA-designated UK nonbank SD's activities, to absorb 
decreases in the value of firm assets, increases in the value of firm 
liabilities, and to cover losses from business activities, including 
possible counterparty defaults and margin collateral shortfalls 
associated with swap dealing activities, without the firm becoming 
insolvent.\91\
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    \90\ See UK Application, p. 12.
    \91\ See UK Application, pp. 7 and 12.
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    The UK PRA Capital Rules require each PRA-designated UK nonbank SD 
to hold and maintain regulatory capital in the form of qualifying 
common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital in an aggregate amount that equals or exceeds 8 percent of the 
PRA-designated UK nonbank SD's total risk exposure amount, which is 
calculated as a sum of the firm's risk-weighted assets and 
exposures.\92\ Common equity tier 1 capital must comprise a minimum of 
4.5 percent of the 8 percent capital ratio,\93\ and tier 1 capital 
(which is the aggregate of common equity tier 1 capital and additional 
tier 1 capital) must comprise a minimum of 6 percent of the total 8 
percent capital ratio.\94\ Tier 2 capital may comprise a maximum of 2 
percent of the total 8 percent capital ratio.\95\
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    \92\ UK CRR, Articles 26, 28, 50-52, 61-63 and 92.
    \93\ Id., Article 92(1)(a).
    \94\ Id., Article 92(1)(b).
    \95\ Id., Article 92(1)(c) (providing that the total capital 
ratio must be equal to or greater than 8 percent, with a minimum 
common equity and additional tier 1 capital comprising at least 6 
percent of the 8 percent minimum requirement). In addition to the 
requirement to maintain minimum capital ratios, a PRA-designated UK 
nonbank SD must maintain at all times capital resources equal to or 
in excess of GBP 750,000. PRA Rulebook, CRR Firms, Definition of 
Capital Part, Chapter 12 Base Capital Resource Requirement, Rule 
12.1.
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    Under the UK PRA Capital Rules, common equity tier 1 capital is 
composed of common equity capital instruments, retained earnings, 
accumulated other comprehensive income, and other reserves of the PRA-
designated UK nonbank SD.\96\ Additional tier 1 capital is composed of 
capital instruments other than common equity and retained earnings 
(i.e., common equity tier 1 capital), and includes certain long-term 
convertible debt securities.\97\ Tier 2 capital instruments, which 
provide an additional layer of supplementary capital, include other 
reserves, hybrid capital instruments, and certain subordinated 
debt.\98\
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    \96\ UK CRR, Articles 26 and 28. Retained earnings, accumulated 
other comprehensive income and other reserves qualify as common 
equity tier 1 capital only where the funds are available to the PRA-
designated UK nonbank SD for unrestricted and immediate use to cover 
risks or losses as such risks or losses occur. See UK CRR, Article 
26(1).
    \97\ Id., Articles 51-52.
    \98\ Id., Articles 62-63.
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    To qualify as tier 2 regulatory capital, capital instruments and 
subordinated debt must meet certain conditions including that: (i) the 
capital instruments are issued by the PRA-designated UK nonbank SD and 
are fully paid-up; (ii) the capital instruments are not purchased by 
the PRA-designated UK nonbank SD or its subsidiaries; (iii) the claims 
on the principal amount of the capital instruments rank below any claim 
from instruments that are ``eligible liabilities,'' \99\ meaning that 
they are effectively subordinated to claims of all non-subordinated 
creditors of the PRA-designated UK nonbank SD; (iv) the capital 
instruments have an original maturity of at least five years; and (v) 
the provisions governing the capital instruments do not include any 
incentive for the principal amount to be redeemed or repaid by the PRA-
designated UK nonbank SD prior to the capital instruments' respective 
maturities.\100\
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    \99\ ``Eligible liabilities'' are non-capital instruments, 
including instruments that are directly issued by the PRA-designated 
UK nonbank SD and fully paid up with remaining maturities of at 
least a year. Bank Recovery and Resolution (No. 2) Order 2014, 
Article 123. In addition, the liabilities cannot be owned, secured, 
or guaranteed, by the PRA-designated UK nonbank SD itself, and the 
PRA-designated UK nonbank SD cannot have either directly or 
indirectly funded their purchase. Id.
    \100\ UK CRR, Article 63 (listing the conditions that capital 
instruments must meet to qualify as tier 2 instruments) and Bank 
Recovery and Resolution (No. 2) Order 2014, Article 123. See also 
infra note 121.
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    In addition to the requirement to maintain total regulatory capital 
in an amount equal to or in excess of 8 percent of its risk-weighted 
assets, the UK PRA Capital Rules also require a PRA-designated UK 
nonbank SD to maintain a capital conservation buffer composed 
exclusively of common equity tier 1 capital in an amount equal to 2.5 
percent of the firm's total risk-

[[Page 8034]]

weighted assets.\101\ The common equity tier 1 capital used to meet the 
2.5 percent capital conservation buffer must be separate and 
independent of the 4.5 percent of common equity tier 1 capital used to 
meet the 8 percent core capital requirement.\102\
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    \101\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2 
Capital Conservation Buffer, Rule 2.1.
    \102\ Id. In effect, the UK PRA Capital Rules require a PRA-
designated UK nonbank SD to hold common equity tier 1 capital equal 
to or in excess of 7 percent of the firm's risk-weighted assets, and 
total capital equal to or in excess of 10.5 percent of the firm's 
risk-weighted assets.
    In addition, a PRA-designated nonbank SD may also be subject to 
a firm-specific countercyclical capital buffer, whose rate consists 
of the weighted average of the countercyclical buffer rates that 
apply to exposures in the jurisdictions where the firm's relevant 
credit exposures are located. The rate for each jurisdiction is 
determined by the UK Financial Policy Committee or a third country 
countercyclical buffer authority, as applicable. See PRA Rulebook, 
CRR Firms, Capital Buffers Part, Chapter 3 Countercyclical Capital 
Buffer, Rule 3.1., and Capital Requirements (Capital Buffers and 
Macro-prudential Measures) Regulations 2014, Articles 7-20. The sum 
of the capital conservation buffer and the countercyclical buffer is 
referred to as the ``combined buffer.'' PRA Rulebook, CRR Firms, 
Capital Buffers Part, Chapter 1 Application and Definitions, Rule 
1.2. To meet these additional capital buffer requirements, the PRA-
designated UK nonbank SD must maintain a level of common equity tier 
1 capital that is in addition to the common equity tier 1 capital 
required to meet its core capital requirement of 4.5 percent of its 
risk-weighted assets and the common equity tier 1 capital required 
to meet its capital conservation buffer. See PRA Rulebook, CRR 
Firms, Capital Buffers Part, Chapter 1 Application and Definitions, 
Rule 1.2, and Capital Buffers Part, Chapter 4 Capital Conservation 
Measures, Rule 4.1. In practice, the countercyclical buffer rate in 
the UK, as of July 2023, is 2 percent of risk-weighted assets. 
Several EU Member States of relevance to the UK have also 
implemented countercyclical capital buffers with rates ranging from 
0.5 percent to 2.5 percent of risk-weighted assets. The 
countercyclical capital buffer rate is published by the Bank of 
England, and is available at: https://bankofengland.co.uk/financial-stability/the-countercyclical-capital-buffer.
---------------------------------------------------------------------------

    The UK PRA Capital Rules also impose a 3.25 percent leverage ratio 
floor on PRA-designated UK nonbank SDs that hold significant amounts of 
non-UK assets, as an additional element to the capital 
requirements.\103\ Specifically, a PRA-designated UK nonbank SD that 
has non-UK assets equal to or greater than GBP 10 billion is required 
to maintain an aggregate amount of common equity tier 1 capital and 
additional tier 1 capital equal to or in excess of 3.25 percent of the 
firm's on-balance sheet and off-balance sheet exposures, including 
exposures on uncleared swaps but excluding certain exposures to central 
banks, without regard to any risk-weighting.\104\ The leverage ratio is 
a non-risk based minimum capital requirement that is intended to 
prevent a PRA-designated UK nonbank SD from engaging in excessive 
leverage, and complements the risk-based minimum capital requirement 
that is based on the PRA-designated UK nonbank SD's risk-weighted 
assets.
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    \103\ PRA Rulebook, CRR Firms, Leverage Ratio--Capital 
Requirements and Buffers Part, Chapter 1 Application and Definitions 
and Chapter 3 Minimum Leverage Ratio. The Applicants represented 
that the six PRA-designated UK nonbank SDs currently registered with 
the Commission are subject to a leverage ratio floor requirement. 
See Responses to Staff Questions dated October 5, 2023.
    \104\ Total exposures are required to be computed in accordance 
with PRA Rulebook, CRR Firms, Leverage Ratio (CRR) Part, Chapter 3 
Leverage Ratio (Part Seven CRR), Article 429 et seq. A PRA-
designated UK nonbank SD may also be subject to a countercyclical 
leverage ratio buffer of common equity tier 1 capital equal to the 
firm's institution-specific countercyclical capital buffer rate 
multiplied by 35 percent, multiplied by the firm's total exposures. 
PRA Rulebook, CRR Firms, Leverage Ratio--Capital Requirements and 
Buffers Part, Chapter 4 Countercyclical Leverage Ratio Buffer.
---------------------------------------------------------------------------

    As noted above, the amount of regulatory capital that a PRA-
designated UK nonbank SD is required to hold is determined by 
calculating the firm's total risk exposure, which requires the PRA-
designated UK nonbank SD to risk-weight its on-balance sheet and off-
balance sheet assets and exposures using specified standardized weights 
or, if approved for use by the PRA, internal model-based 
methodologies.\105\ Risk-weighting assets and exposures involves 
adjusting the notional or carrying value of each asset and risk 
exposure based on the inherent risk of the asset or exposure. Less 
risky assets and exposures are adjusted to lower values (i.e., have 
less weight) than more risky assets or exposures. As a result, PRA-
designated UK nonbank SDs are required to hold lower levels of 
regulatory capital for less risky assets and exposures and higher 
levels of regulatory capital for riskier assets and exposures. The 
categories of risk charges that a PRA-designated UK nonbank SD must 
include in determining its total risk exposure include charges 
reflecting: (i) market risk; (ii) credit risk; (iii) settlement risk; 
(iv) CVA risk of OTC derivative instruments; and (v) operational 
risk.\106\ The methods for calculating such risk charges are based on 
the BCBS framework.\107\
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    \105\ With regulator permission, PRA-designated UK nonbank SDs 
may use internal models to calculate credit risk (UK CRR, Article 
143), including certain counterparty credit risk exposures (UK CRR, 
Article 283), operational risk (UK CRR, Article 312(2)), market risk 
(UK CRR, Article 363), and credit valuation adjustment risk (``CVA 
risk'') of over-the-counter (``OTC'') derivatives instruments (UK 
CRR, Article 383). The permission to use, and continue using, 
internal models is subject to strict criteria and supervisory 
oversight by the PRA.
    \106\ UK CRR, Article 92(3).
    \107\ UK Application, pp. 12-15.
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    Standardized market risk charges are generally calculated by 
multiplying the notional or carrying amount of net positions or of 
adjusted net positions by risk-weighting factors, which are based on 
the underlying market risk of each asset or exposure. The sum of the 
calculated amounts comprises the portion of the risk exposure amount 
attributable to market risk.\108\ Standardized credit risk charges are 
generally calculated by multiplying the notional or carrying value of 
the PRA-designated UK nonbank SD's on-balance sheet and off-balance 
sheet assets and exposures by clearly defined risk-weighting factors, 
which are based on the underlying credit risk of each asset or 
exposure. The sum of the calculated amounts comprises the portion of 
the risk exposure amount attributable to credit risk.\109\
---------------------------------------------------------------------------

    \108\ UK CRR, Articles 326-361.
    \109\ Id., Articles 111-134 and PRA Rulebook, CRR Firms, 
Standardised Approach and Internal Ratings Based Approach to Credit 
Risk (CRR) Part, Chapter 3 Credit Risk (Part Three Title Two 
Chapters Two and Three CRR), Article 132.
---------------------------------------------------------------------------

    Settlement risk charges are intended to account for the price 
difference to which a PRA-designated UK nonbank SD is exposed if its 
transactions remain unsettled after the respective transaction's due 
delivery date.\110\ CVA risk charges reflect the current market value 
of the credit risk of the counterparty to the PRA-designated UK nonbank 
SD in an OTC derivatives transaction.\111\ Operational risk charges 
reflect the risk of loss resulting from inadequate or failed internal 
processes, people and systems or from external events, and includes 
legal risk.\112\
---------------------------------------------------------------------------

    \110\ UK CRR, Article 378.
    \111\ Id., Article 381.
    \112\ Id., Article 4(1)(52).
---------------------------------------------------------------------------

    As noted above, PRA-designated UK nonbank SDs may use internal 
model-based methodologies to calculate certain categories of risk 
charges in lieu of standardized charges if they have obtained the 
requisite regulatory approval.\113\ The UK PRA Capital Rules set out 
quantitative and qualitative requirements that internal models must 
meet in order to obtain and maintain approval.\114\ Quantitative and 
qualitative requirements address, among other issues, governance, 
validation, monitoring, and review. Modeled risk charges generally 
require the estimation of potential losses, with a certain degree of 
likelihood, within a specified time

[[Page 8035]]

period, of a portfolio of assets.\115\ Internal models allow for 
consideration of potential co-movement of prices across assets in the 
portfolio, leading to offsets of gains and losses. Credit risk models 
can also further include estimation of the likelihood of default of 
counterparties.
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    \113\ Id., Articles 143 (credit risk), 283 (counterparty credit 
risk); 312(2) (operational risk), 363 (market risk), and 383 (CVA 
risk).
    \114\ See e.g., UK CRR, Articles 144, 283; 321-322 and 365-369.
    \115\ The UK PRA Capital Rules require PRA-designated UK nonbank 
SDs with internal model approval for market risk to use a VaR model 
with a 99 percent, one-tailed confidence interval with: (i) price 
change equivalent to 10 business-day movement in rates and prices; 
(ii) effective historical observation periods of at least one year; 
and (iii) at least monthly data set updates. See UK CRR, Article 
365(1). PRA-designated UK nonbank SDs approved to use internal 
ratings-based credit risk models must support the assessment of 
credit risk, the assignment of exposures to rating grades or pools, 
and the quantification of default and loss estimates that have been 
developed for a certain type of exposures, among other conditions. 
See UK CRR, Articles 142-144. In addition, when PRA-designated UK 
nonbank SDs are approved to use a model to calculate counterparty 
credit risk exposures for OTC derivatives transactions, the model 
must specify the forecasting distribution for changes in the market 
value of a netting set attributable to joint changes in relevant 
market variables and calculate the exposure value for the netting 
set at each of the future dates on the basis of the joint changes in 
the market variables. See UK CRR, Article 284. PRA-designated 
nonbank SDs allowed to follow the ``advanced method'' of calculating 
CVA risk charges for OTC derivatives transactions must also use an 
internal market risk model to simulate changes in the credit spreads 
of counterparties, applying a 99 percent confidence interval and a 
10-day equivalent holding period. See UK CRR, Article 383. Finally, 
PRA-designated UK nonbank SDs using ``advanced measurement 
approaches'' based on their own measurement systems to compute 
operational risk exposures must calculate capital requirements as 
comprising both expected loss and unexpected loss and capture 
potentially severe tail events, achieving a sound standard 
comparable to a 99.9 confidence interval over a one-year period. See 
UK CRR, Article 322.
---------------------------------------------------------------------------

    Furthermore, the UK PRA Capital Rules also impose separate 
requirements on an PRA-designated UK nonbank SD to address liquidity 
risk. More specifically, PRA-designated UK nonbank SDs are subject to 
the liquidity coverage requirement applicable under UK CRR to credit 
institutions.\116\ The liquidity coverage requirement provides that 
PRA-designated UK nonbank SDs must hold liquid assets in an amount 
sufficient to cover liquidity outflows (less liquidity inflows) under 
stressed conditions over a period of 30 days.\117\ For purposes of the 
liquidity coverage requirement, the term ``stressed'' means a sudden or 
severe deterioration in the solvency or liquidity position of a firm 
due to changes in market conditions or idiosyncratic factors as a 
result of which there is a significant risk that the firm becomes 
unable to meet its commitments as they become due within the next 30 
days.\118\
---------------------------------------------------------------------------

    \116\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part and PRA 
Rulebook, CRR Firms, Liquidity Coverage Requirement--UK Designated 
Investment Firms Part.
    \117\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4 
Liquidity (Part Six CRR), Article 412(1).
    \118\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4 
Liquidity (Part Six CRR), Article 411(10).
---------------------------------------------------------------------------

    In addition, Article 413 of UK CRR, which has been incorporated 
into the PRA Rulebook, establishes a general requirement that firms 
ensure that long-term obligations and off-balance sheet items are 
adequately met with a diverse set of funding instruments that are 
stable under both normal and stressed conditions.\119\
---------------------------------------------------------------------------

    \119\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4 
Liquidity (Part Six CRR), Article 413(1).
---------------------------------------------------------------------------

    In addition, the Bank of England, in its capacity of resolution 
authority,\120\ requires that PRA-designated UK nonbank SDs satisfy a 
firm-specific MREL pursuant to provisions of the Banking Act 2009 and 
the Bank Recovery and Resolution (No. 2) Order 2014, which transposed 
BRRD.\121\ The MREL requirement is separate from the minimum capital 
requirements imposed on PRA-designated UK nonbank SDs under UK CRR and 
PRA Rulebook and is designed to ensure that PRA-designated UK nonbank 
SDs maintain at all times sufficient eligible instruments to facilitate 
resolution consistently with the resolution objectives under the 
preferred resolution strategy.\122\ Specifically, the MREL is intended 
to permit loss absorption, where appropriate, such that the PRA-
designated UK nonbank SD's capital ratio could be restored to the level 
necessary for compliance with its capital requirements.\123\ The Bank 
of England calculates a firm's baseline MREL as the sum of two 
component: a loss absorption amount and a recapitalization amount.\124\ 
The loss absorption amount is equal to a firm's capital requirements 
plus its capital buffers.\125\ The Bank of England has some discretion 
to adjust the amount. The MREL amount varies depending on the entity's 
size, funding model, and risk profile, among other considerations.\126\
---------------------------------------------------------------------------

    \120\ In application of BRRD, Article 3, EU Member States 
designate resolution authorities that are empowered to apply the 
resolution tools and exercise the resolution powers described in 
BRRD. In the UK, the resolution authority is the Bank of England.
    \121\ Banking Act 2009, Section 3A(4) and (4B) and the Bank 
Recovery and Resolution (No. 2) Order 2014, Part 9. Eligible 
liabilities include, among others items, instruments that are 
directly issued by the PRA-designated UK nonbank SD and fully paid 
up with remaining maturities of at least a year. See Bank Recovery 
and Resolution (No. 2) Order 2014, Part 9, Article 123(4). In 
addition, the liabilities cannot arise from a derivative, be owned, 
secured or guaranteed by the PRA-designated UK nonbank SD itself, 
and the PRA-designated UK nonbank SD cannot have either directly or 
indirectly funded its purchase. Id.
    \122\ The Bank of England's Approach to Setting a Minimum 
Requirement for Own Funds and Eligible Liabilities (MREL), Statement 
of Policy, 3 December 2021, at 3, available at: https://www.bankofengland.co.uk/-/media/boe/files/paper/2021/mrel-statement-of-policy-december-2021-updating-2018.pdf. See also The Minimum 
Requirement for Own Funds and Eligible Liabilities (MREL)--Buffers 
and Threshold Conditions, Supervisory Statement 16/16, 28 December 
2020, available at: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2020/ss1616-update-dec-2020.pdf.
    \123\ Bank Recovery and Resolution (No. 2) Order 2014, Part 9, 
Article 123(6).
    \124\ See The Bank of England's Approach to Setting a Minimum 
Requirement for Own Funds and Eligible Liabilities (MREL), Statement 
of Policy, Dec. 3, 2021, at 5.
    \125\ Id. The reference to ``capital requirements'' in this 
context means the amount of capital the PRA thinks the firm should 
maintain at all times under PRA Rulebook, CRR Firms, Internal 
Capital Adequacy Assessment.
    \126\ Bank Recovery and Resolution (No. 2) Order 2014, Part 9, 
Article 123(6).
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III. Commission Analysis of the Comparability of the UK PRA Capital 
Rules and UK PRA Financial Reporting Rules With CFTC Capital Rules and 
CFTC Financial Reporting Rules

    The following section provides a description and comparative 
analysis of the regulatory requirements of the UK PRA Capital Rules and 
UK PRA Financial Reporting Rules to the CFTC Capital Rules and CFTC 
Financial Reporting Rules. Immediately following a description of the 
requirement(s) of the CFTC Capital Rules or the CFTC Financial 
Reporting Rules for which a comparability determination was requested 
by the Applicants, the Commission provides a description of the UK's 
corresponding laws, regulations, or rules. The Commission then provides 
a comparative analysis of the UK PRA Capital Rules or the UK PRA 
Financial Reporting Rules with the corresponding CFTC Capital Rules or 
CFTC Financial Reporting Rules and identifies any material differences 
between the respective rules.
    The Commission performed this proposed Capital Comparability 
Determination by assessing the comparability of the UK PRA Capital 
Rules for PRA-designated UK nonbank SDs as set forth in the UK 
Application with the Commission's Bank-Based Approach. For clarity, the 
Commission did not assess the comparability of the UK PRA Capital Rules 
to the Commission's TNW Approach or NLA Approach as the Commission 
understands that PRA-designated UK nonbank SDs, as of the date of the 
UK Application, are subject to bank-based capital requirements pursuant 
to the UK

[[Page 8036]]

PRA Capital Rules. In addition, as noted above, 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 capital 
comparability determination.\127\ Accordingly, when the Commission 
makes a preliminary determination herein regarding the comparability of 
the UK PRA Capital Rules with the CFTC Capital Rules, the determination 
solely pertains to the comparability of the UK PRA Capital Rules as 
applicable to PRA-designated UK nonbank SD with the Bank-Based Approach 
under the CFTC Capital Rules.
---------------------------------------------------------------------------

    \127\ See supra note 5.
---------------------------------------------------------------------------

    As described below, it is proposed that any material changes to the 
UK PRA Capital Rules would require notification to the Commission. 
Therefore, if there are subsequent material changes to the UK PRA 
Capital Rules to include, for example, another capital approach, the 
Commission will review and assess the impact of such changes on the 
Capital Comparability Determination Order as it is then in effect, and 
may amend or supplement the Order.\128\
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    \128\ The Commission also may amend or supplement the Capital 
Comparability Determination Order to address any material changes to 
the CFTC Capital Rules and CFTC Financial Reporting Rules that are 
adopted after a final Order is issued.
    The Commission is aware that the UK PRA is considering changes 
to the 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 
UK 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 UK PRA's proposed 
regulatory changes and may amend or supplement the Capital 
Comparability Determination Order, as appropriate, after a final 
Order is issued. As noted, the Commission proposes to require 
notification of any material changes to the UK PRA Capital Rules, 
including any Basel 3.1 implementing provisions.
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    In addition, although the BCBS bank capital standards establish 
minimum capital standards that are consistent with the requirements of 
the Commission's Bank-Based Approach, the Commission notes that 
consistency with the international standards is not determinative of a 
finding of comparability with the CFTC Capital Rules. In the 
Commission's view, a foreign jurisdiction's consistency with the BCBS 
international bank capital standards is an element in the Commission's 
comparability assessment, but, in and of itself, it may not be 
sufficient to demonstrate comparability with the CFTC Capital Rules 
without an assessment of the individual elements of the foreign 
jurisdiction's capital framework.
    Capital and financial reporting regimes are complex structures 
comprised of a number of interrelated regulatory components. 
Differences in how jurisdictions approach and implement these regimes 
are expected, even among jurisdictions that base their requirements on 
the principles and standards set forth in the BCBS international bank 
capital framework. Therefore, the Commission's comparability 
determination involves a detailed assessment of the relevant 
requirements of the foreign jurisdiction and whether those 
requirements, viewed in the aggregate, lead to an outcome that is 
comparable to the outcome of the CFTC's corresponding requirements. 
Consistent with this approach, the Commission has grouped the CFTC 
Capital Rules and CFTC Financial Reporting Rules into the key 
categories that focus the analysis on whether the UK PRA capital and 
financial reporting requirements are comparable to the Commission's SD 
requirements in purpose and effect, and not whether the UK PRA 
requirements meet every aspect or contain identical elements as the 
Commission's requirements.
    Specifically, as discussed in detail below, the Commission used the 
following key categories in its review: (i) the quality of the equity 
and debt instruments that qualify as regulatory capital, and the extent 
to which the regulatory capital represents committed and permanent 
capital that would be available to absorb unexpected losses or 
counterparty defaults; (ii) the process of establishing minimum capital 
requirements for a PRA-designated UK nonbank SD and how such process 
addresses market risk and credit risk of the firm's on-balance sheet 
and off-balance sheet exposures; (iii) the financial reports and other 
financial information submitted by a PRA-designated nonbank SD to the 
PRA to effectively monitor the financial condition of the firm; and 
(iv) the regulatory notices and other communications between the PRA-
designated UK nonbank SD and the PRA that detail potential adverse 
financial or operational issues that may impact the firm. The 
Commission also reviewed the manner in which compliance by a PRA-
designated UK nonbank SD with the UK PRA Capital Rules and UK PRA 
Financial Reporting rules is monitored and enforced. The Commission 
invites public comment on all aspects of the UK Application and on the 
Commission's proposed Capital Comparability Determination discussed 
below.

A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial 
Reporting Rules and UK PRA Capital Rules and UK PRA Financial Reporting 
Rules

1. Regulatory Objectives of CFTC Capital Rules and CFTC Financial 
Reporting Rules
    The regulatory objectives of the CFTC Capital Rules and the CFTC 
Financial Reporting Rules are to further the Congressional mandate to 
ensure the safety and soundness of nonbank SDs to mitigate the greater 
risk to nonbank SDs and the financial system arising from the use of 
swaps that are not cleared.\129\ A primary function of the nonbank SD's 
capital is to protect the solvency of the firm from decreases in the 
value of firm assets, increases in the value of firm liabilities, and 
from losses, including losses resulting from counterparty defaults and 
margin collateral failures, by requiring the firm to maintain an 
appropriate level of quality capital, including qualifying subordinated 
debt, to absorb such losses without becoming insolvent. With respect to 
swap positions, capital and margin perform complementary risk 
mitigation functions by protecting nonbank SDs, containing the amount 
of risk in the financial system as a whole, and reducing the potential 
for contagion arising from uncleared swaps.
---------------------------------------------------------------------------

    \129\ See 7 U.S.C. 6s(e)(3)(A).
---------------------------------------------------------------------------

    The objective of the CFTC Financial Reporting Rules is to provide 
the Commission with the means to monitor and assess a nonbank SD's 
financial condition, including the nonbank SD's compliance with minimum 
capital requirements. The CFTC Financial Reporting Rules are designed 
to provide the Commission and NFA, which, along with the Commission, 
oversees nonbank SDs' compliance with Commission regulations, with a 
comprehensive view of the financial health and activities of the 
nonbank SD. The Commission's rules require nonbank SDs to file 
financial information, including periodic unaudited and annual audited 
financial statements, specific financial position information, and 
notices of certain events that may indicate a potential financial or 
operational issue that may adversely impact the nonbank SD's ability to 
meet its obligations to counterparties and other creditors in the

[[Page 8037]]

swaps market, or impact the firm's solvency.\130\
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    \130\ See 17 CFR 23.105.
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2. Regulatory Objective of UK PRA Capital Rules and UK PRA Financial 
Reporting Rules
    The regulatory objective of the UK PRA Capital Rules is to ensure 
the safety and soundness of PRA-designated UK nonbank SDs.\131\ The UK 
PRA Capital Rules are designed to preserve the financial stability and 
solvency of a PRA-designated UK nonbank SD by requiring the firm to 
maintain a sufficient amount of qualifying equity capital and 
subordinated debt based on the PRA-designated UK nonbank SD's 
activities to absorb decreases in the value of firm assets, increases 
in the value of firm liabilities, and to cover losses from business 
activities, including possible counterparty defaults and margin 
collateral shortfalls associated with the firm's swap dealing 
activities.\132\ The UK PRA Capital Rules are also designed to ensure 
that the PRA-designated UK nonbank SDs have sufficient liquidity to 
meet their financial obligations to counterparties and other creditors 
in a distress scenario by requiring each firm to hold an amount of 
liquid assets to ensure that the firm could face any possible imbalance 
between liquidity inflows and outflows under gravely stressed 
conditions over a period of 30 days \133\ and to hold a diversity of 
stable funding instruments sufficient to meet long-term obligations 
under both normal and stressed conditions.\134\
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    \131\ See PRA, The Prudential Regulation Authority's Approach to 
Banking Supervision, July 2023, available here: https://www.bankofengland.co.uk/prudential-regulation/publication/pras-approach-to-supervision-of-the-banking-and-insurance-sectors.
    \132\ Id.
    \133\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4 
Liquidity (Part Six CRR), Article 412 (Liquidity Coverage 
Requirement). Liquid assets primarily include cash, exposures to 
central banks, government-backed assets and other highly liquid 
assets with high credit quality. PRA Rulebook, CRR Firms, Liquidity 
(CRR) Part, Chapter 4 Liquidity (Part Six CRR), Article 416 
(Reporting on Liquid Assets).
    \134\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4 
Liquidity (Part Six CRR), Article 413 (Stable Funding Requirement). 
Stable funding instruments include common equity tier 1 capital 
instruments, additional tier 1 capital instruments, tier 2 capital 
instruments, and other preferred shares and capital instruments in 
excess of the tier 2 allowable amount with an effective maturity of 
one year or greater. PRA Rulebook, CRR Firms Liquidity (CRR) Part, 
Chapter 4 Liquidity (Part Six CRR), Article 427 (Reporting on Stable 
Funding).
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    With respect to financial reporting, the objective of the UK PRA 
Financial Reporting Rules is to enable the PRA to assess the financial 
condition and safety and soundness of PRA-designated UK nonbank 
SDs.\135\ The UK PRA Financial Reporting Rules aim to achieve this 
objective by requiring a PRA-designated nonbank SD to provide financial 
reports and other financial position and capital information to the PRA 
on a regular basis.\136\ The financial reporting by a PRA-designated UK 
nonbank SD provides the PRA with information necessary to effectively 
monitor the PRA-designated UK nonbank SD's overall financial condition 
and its ability to meet its regulatory obligations as a nonbank SD.
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    \135\ See generally PRA, The Prudential Regulation Authority's 
Approach to Banking Supervision, July 2023, available here: https://www.bankofengland.co.uk/prudential-regulation/publication/pras-approach-to-supervision-of-the-banking-and-insurance-sectors.
    \136\ PRA Rulebook, CRR Firms, Reporting (CRR) Part.
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3. Commission Analysis
    The Commission has reviewed the UK Application and the relevant UK 
laws and regulations, and has preliminarily determined that the overall 
objectives of the UK PRA Capital Rules and CFTC Capital Rules are 
comparable in that both sets of rules are intended to ensure the safety 
and soundness of nonbank SDs by establishing a regulatory regime that 
requires nonbank SDs to maintain a sufficient amount of qualifying 
regulatory capital to absorb losses, including losses from swaps and 
other trading activities, and to absorb decreases in the value of firm 
assets and increases in the value of firm liabilities without the 
nonbank SDs becoming insolvent. The UK PRA Capital Rules and CFTC 
Capital Rules are also based on, and consistent with, the BCBS 
international bank capital framework, which is designed to ensure that 
banking entities hold sufficient levels of capital to absorb losses and 
decreases in the value of assets without the banks becoming insolvent.
    The Commission further preliminarily believes that the UK PRA 
Financial Reporting Rules have comparable objectives with the CFTC 
Financial Reporting Rules as both sets of rules require nonbank SDs to 
file and/or publish, as applicable, 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, with the goal of 
providing the PRA and the CFTC staff with information necessary to 
comprehensively assess the financial condition of a nonbank SD on an 
ongoing basis. In addition, to achieve this objective, 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. Such changes in 
account balances may indicate that the nonbank SD has entered into new 
lines of business, has increased its activity in an existing line of 
business relative to other activities, or has terminated a previous 
line of business.
    The prompt and effective monitoring of the financial condition of 
nonbank SDs through the receipt and review of periodic financial 
reports supports the Commission and the PRA in meeting their respective 
objectives of ensuring the safety and soundness of nonbank SDs. In 
connection with these objectives, 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 the 
issues develop to a state where the financial condition of the firm is 
impaired such that it may no longer hold a sufficient amount of 
qualifying regulatory capital to absorb decreases in the value of firm 
assets or increases in the value of firm liabilities, or to cover 
losses from the firm's business activities, including the firm's swap 
dealing activities and obligations to swap counterparties.
    The Commission invites public comment on its analysis above, 
including comment on the UK Application and relevant UK laws and 
regulations.

B. Nonbank Swap Dealer Qualifying Capital

1. CFTC Capital Rules: Qualifying Capital Under Bank-Based Approach
    The CFTC Capital Rules require a nonbank SD electing the Bank-Based 
Approach to maintain regulatory capital in the form of common equity 
tier 1 capital, additional tier 1 capital, and tier 2 capital in 
amounts that meet certain stated minimum requirements set forth in 
Commission Regulation 23.101.\137\ Common equity tier 1 capital, 
additional tier 1 capital, and tier 2 capital are composed of certain 
defined forms of equity of the nonbank SD, including common stock, 
retained earnings, and qualifying subordinated debt.\138\ The 
Commission's requirement for a nonbank SD to maintain a minimum amount 
of defined qualifying capital and subordinated debt is intended to

[[Page 8038]]

ensure that the firm maintains a sufficient amount of regulatory 
capital to absorb decreases in the value of the firm's assets and 
increases in the value of the firm's liabilities, and to cover losses 
resulting from the firm's swap dealing and other activities, including 
possible counterparty defaults and margin collateral shortfalls, 
without the firm becoming insolvent.
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    \137\ See 17 CFR 23.101(a)(1)(i).
    \138\ The terms ``common equity tier 1 capital,'' ``additional 
tier 1 capital,'' and ``tier 2 capital'' are defined in the bank 
holding company regulations of the Federal Reserve Board. See 12 CFR 
217.20.
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    Common equity tier 1 capital is generally composed of an entity's 
common stock instruments and any related surpluses, retained earnings, 
and accumulated other comprehensive income, and is a more conservative 
or permanent form of capital than additional tier 1 and tier 2 
capital.\139\ 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.\140\ Total 
tier 1 capital is composed of common equity tier 1 capital and further 
includes additional tier 1 capital.\141\ Tier 2 capital includes 
certain types of instruments that include both debt and equity 
characteristics such as qualifying subordinated debt.\142\
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    \139\ 12 CFR 217.20.
    \140\ Id.
    \141\ Id.
    \142\ Id.
---------------------------------------------------------------------------

    Subordinated debt must meet certain conditions to qualify as tier 2 
capital under the CFTC Capital Rules. Specifically, subordinated debt 
instruments must have a term of at least one year (with the exception 
of approved revolving subordinated debt agreements which may have a 
maturity term that is less than one year), and contain terms that 
effectively subordinate the rights of lenders to receive any payments, 
including accrued interest, to other creditors of the firm.\143\
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    \143\ The subordinated debt must meet the requirements set forth 
in SEC Rule 18a-1d (17 CFR 240.18a-1d). See 17 CFR 
23.101(a)(1)(i)(B) (providing that the subordinated debt used by a 
nonbank SD to meet its minimum capital requirement under the Bank-
Based Approach must satisfy the conditions for subordinated debt 
under SEC Rule 18a-1d).
---------------------------------------------------------------------------

    Common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital are permitted to be included in a nonbank SD's regulatory 
capital and used to meet the firm's minimum capital requirement due to 
their characteristics of being permanent forms of capital that are 
subordinate to the claims of other creditors, which ensures that a 
nonbank SD will have this regulatory capital to absorb decreases in the 
value of the firm's assets and increases in the value of the firm's 
liabilities, and to cover losses from business activities, including 
swap dealing activities, without the firm becoming insolvent.
2. UK PRA Capital Rules: Qualifying Capital
    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) CVA risk of OTC derivatives instruments; and 
(v) capital charges for operational risk.\144\ The UK 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 bank capital framework.\145\ In this regard, 
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, retained earnings, and accumulated other comprehensive 
income; \146\ (ii) additional tier 1 capital instruments, which include 
other forms of capital instruments and certain long-term convertible 
debt instruments; \147\ and (iii) tier 2 capital instruments, which 
includes other reserves, hybrid capital instruments, and certain 
qualifying subordinated term debt.\148\
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    \144\ UK CRR, Article 92.
    \145\ Id.
    \146\ UK CRR, Articles 26 and 28. 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. In addition, the principal amount of the 
instruments may not be reduced or repaid, except in the liquidation 
of the PRA-designated UK nonbank SD.
    \147\ Id., Articles 51-52. To qualify as additional tier 1 
capital, the 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.
    \148\ Id., Articles 62-63.
---------------------------------------------------------------------------

    Furthermore, 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.\149\
---------------------------------------------------------------------------

    \149\ UK CRR, Article 63.
---------------------------------------------------------------------------

    A PRA-designated UK nonbank SD must also maintain a capital 
conservation buffer equal to 2.5 percent of the firm's total risk 
exposure in addition to the requirement to maintain qualifying 
regulatory capital in excess of 8 percent of its total risk 
exposure.\150\ The 2.5 percent capital conservation buffer must be met 
with common equity tier 1 capital.\151\ Common equity tier 1 capital, 
as noted above, is limited to the

[[Page 8039]]

PRA-designated UK nonbank SD's common equity, retained earnings, and 
accumulated other comprehensive income, and represents a more permanent 
form of capital than equity instruments that qualify as additional tier 
1 capital and tier 2 capital.
---------------------------------------------------------------------------

    \150\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2 
Capital Conservation Buffer, Rule 2.1. In addition, a PRA-designated 
nonbank SD may also be subject to a firm-specific countercyclical 
capital buffer, which requires the PRA-designated UK nonbank SD to 
hold an additional amount of common equity tier 1 capital equal to 
its total risk-weighted assets multiplied by the weighted average of 
the countercyclical buffer rates that apply to exposures in the 
jurisdictions where the firm's relevant credit exposures are 
located. The rate for each jurisdiction is determined by the UK 
Financial Policy Committee or a third country countercyclical buffer 
authority, as applicable. See PRA Rulebook, CRR Firms, Capital 
Buffers Part, Chapter 3 Countercyclical Capital Buffer, Rule 3.1., 
and Capital Requirements (Capital Buffers and Macro-prudential 
Measures) Regulations 2014, Articles 7-20. In practice, the 
countercyclical buffer rate in the UK, as of July 2023, is 2 percent 
of risk-weighted assets. The countercyclical capital buffer rate is 
published by the Bank of England, and is available at: https://bankofengland.co.uk/financial-stability/the-countercyclical-capital-buffer. Several EU Member States of relevance to the UK have also 
implemented countercyclical capital buffers with rates ranging from 
0.5 percent to 2.5 percent of risk-weighted assets.
    \151\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2 
Capital Conservation Buffer, Rule 2.1.
---------------------------------------------------------------------------

    The UK PRA Capital Rules also impose different ratios for the 
various components of regulatory capital that are consistent with the 
BCBS bank capital framework.\152\ In this regard, the UK PRA Capital 
Rules provide that a PRA-designated UK nonbank SD's minimum regulatory 
capital must satisfy the following requirements: (i) common equity tier 
1 capital ratio of 4.5 percent of the firm's total risk exposure 
amount; (ii) total tier 1 capital (i.e., common equity tier 1 capital 
plus additional tier 1 capital) ratio of 6 percent of the firm's total 
risk exposure amount; and (iii) total capital (i.e., an aggregate 
amount of common equity tier 1 capital, additional tier 1 capital, and 
tier 2 capital) ratio of 8 percent of the firm's total risk exposure 
amount. As noted above, a PRA-designated UK nonbank SD must also 
maintain a capital conservation buffer of 2.5 percent of its total risk 
exposure amount that must be met with common equity tier 1 
capital.\153\ With the addition of the capital conservation buffer, 
each PRA-designated UK nonbank SD is required to maintain minimum 
regulatory capital that equals or exceeds 10.5 percent of the firm's 
total risk exposure amount, with common equity tier 1 capital 
comprising at least 7 percent of the 10.5 percent minimum regulatory 
capital requirement.\154\
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    \152\ UK CRR, Article 92(1).
    \153\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2 
Capital Conservation Buffer, Rule 2.1.
    \154\ The countercyclical capital buffer is not included in the 
analysis given that it is firm-specific and its rate depends on the 
location of the firm's exposures.
---------------------------------------------------------------------------

    Common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital are permitted to be included in a PRA-designated UK nonbank 
SD's regulatory capital and used to meet the firm's minimum capital 
requirement due to their characteristics of being permanent forms of 
capital that are subordinate to the claims of other creditors, which 
ensures that a PRA-designated UK nonbank SD will have this regulatory 
capital to absorb decreases in the value of the firm's assets and 
increases in the value of the firm's liabilities, and to cover losses 
from business activities, including swap dealing activities, without 
the firm becoming insolvent.
3. Commission Analysis
    The Commission has reviewed the UK Application and the relevant UK 
laws and regulations, and has 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. 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 capital and permanent capital, all defined in a manner that is 
consistent with the BCBS international bank capital framework, that 
based on the firm's activities and on-balance sheet and off-balance 
sheet exposures, is sufficient to absorb losses and decreases in the 
value of the firm's assets and increases in the value of the firm's 
liabilities without resulting in the firm becoming insolvent. 
Specifically, equity instruments that qualify as common equity tier 1 
capital and additional tier 1 capital under the UK PRA Capital Rules 
and the CFTC Capital Rules have similar characteristics (e.g., the 
equity must be in the form of high-quality, committed and permanent 
capital) and the equity instruments generally have no priority in 
distribution of firm assets or income with respect to other 
shareholders or creditors of the firm, which makes the equity available 
to a nonbank SD to absorb unexpected losses, including counterparty 
defaults.\155\
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    \155\ Compare 12 CFR 217.20(b) (defining capital instruments 
that qualify as common equity tier 1 capital under the rules of the 
Federal Reserve Board) and 12 CFR 217.20(c) (defining capital 
instruments that qualify as additional tier 1 capital under the 
rules of the Federal Reserve Board) with UK CRR, Articles 26 and 28 
(defining items and capital instruments that qualify as common 
equity tier 1 capital under the UK PRA Capital Rules) and UK CRR, 
Article 52 (defining capital instruments that qualify as additional 
tier 1 capital under the UK PRA Capital Rules).
---------------------------------------------------------------------------

    In addition, the Commission has preliminarily determined that the 
conditions imposed on subordinated debt instruments under the UK PRA 
Capital Rules and the CFTC Capital Rules are comparable and are 
designed to ensure that the subordinated debt has qualities that 
support its recognition by a nonbank SD as equity for regulatory 
capital purposes. Specifically, in both sets of rules, the conditions 
include a requirement that the debt holders have effectively 
subordinated their claims for repayment of the debt to the claims of 
other creditors of the nonbank SD.\156\
---------------------------------------------------------------------------

    \156\ Compare 17 CFR 240.18a-1d with UK CRR, Article 63(d).
---------------------------------------------------------------------------

    Having reviewed the UK Application and the relevant UK laws and 
regulations, the Commission has made a preliminary determination that 
the UK PRA Capital Rules and CFTC Capital Rules impose comparable 
requirements on PRA-designated UK nonbank SDs with respect to the types 
and characteristics of equity capital that must be used to meet minimum 
regulatory capital requirements. The Commission invites public comment 
on its analysis above, including comment on the UK Application and 
relevant UK laws and regulations.

C. Nonbank Swap Dealer Minimum Capital Requirement

1. CFTC Capital Rules: Nonbank SD Minimum Capital Requirement
    The CFTC Capital Rules require a nonbank SD electing the Bank-Based 
Approach to maintain regulatory capital that satisfies each of the 
following criteria: (i) an amount of common equity tier 1capital of at 
least $20 million; (ii) an aggregate of common equity tier 1 capital, 
additional tier 1 capital, and tier 2 capital in an amount equal to or 
in excess of 8 percent of the nonbank SD's uncleared swap margin 
amount; (iii) an aggregate amount of common equity tier 1 capital, 
additional tier 1 capital, and tier 2 capital equal to or greater than 
8 percent of the nonbank SD's total risk-weighted assets, provided that 
common equity tier 1 capital comprises at least 6.5 percent of the 8 
percent; and (iv) the amount of capital required by the NFA.\157\
---------------------------------------------------------------------------

    \157\ See 17 CFR 23.101(a)(1)(i). NFA has adopted the CFTC 
minimum capital requirements for nonbank SDs, but has not adopted 
additional capital requirements at this time.
---------------------------------------------------------------------------

    Prong (i) above requires each nonbank SD electing the Bank-Based 
Approach to maintain a minimum of $20 million of common equity tier 1 
capital to operate as a nonbank SD. The requirement that each nonbank 
SD electing the CFTC Bank-Based Approach maintain a minimum of $20 
million of common equity tier 1 capital is also consistent with the 
minimum capital requirement for nonbank SDs electing the NLA Approach 
and the TNW Approach.\158\ The Commission adopted this minimum 
requirement as it believed that the role a nonbank SD performs in the 
financial

[[Page 8040]]

markets by engaging in swap dealing activities warranted a minimum 
level of capital, stated as a fixed dollar amount that does not 
fluctuate with the level of the firm's dealing activities to help 
ensure the safety and soundness of the nonbank SD.\159\
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    \158\ Nonbank SDs electing the NLA Approach are subject to a 
minimum capital requirement that includes a fixed minimum dollar 
amount of net capital of $20 million. See 17 CFR 
23.101(a)(1)(ii)(A)(1). Nonbank SDs electing the TNW Approach are 
required to maintain levels of tangible net worth that equals or 
exceeds $20 million plus the amount of the nonbank SDs' market risk 
and credit risk associated with the firms' dealing activities. See 
17 CFR 23.101(a)(2)(ii)(A).
    \159\ See, e.g., 85 FR 57492.
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    Prong (ii) above is a minimum capital requirement that is based on 
the amount of uncleared margin for swap transactions entered into by 
the nonbank SD and is computed on a counterparty by counterparty basis. 
The requirement for a nonbank SD to maintain minimum capital equal to 
or greater than 8 percent of the firm's uncleared swap margin provides 
a capital floor based on a measure of the risk and volume of the swap 
positions, and the number of counterparties and the complexity of 
operations, of the nonbank SD. The intent of the minimum capital 
requirement based on a percentage of the nonbank SD's uncleared swap 
margin was to establish a minimum capital requirement that would help 
ensure that the nonbank SD meets all of its obligations as a SD to 
market participants, and to cover potential operational risk, legal 
risk, and liquidity risk in addition to the risks associated with its 
trading portfolio.\160\
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    \160\ See 85 FR 57462.
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    Prong (iii) above is a minimum capital requirement that is based on 
the Federal Reserve Board's capital requirements for bank holding 
companies and is consistent with the BCBS international capital 
framework for banking institutions. As noted above, a nonbank SD under 
prong (iii) must maintain an aggregate of common equity tier 1 capital, 
additional tier 1 capital, and tier 2 capital in an amount equal to or 
greater than 8 percent of the nonbank SD's total risk-weighted assets, 
with common equity tier 1 capital comprising at least 6.5 percent of 
the 8 percent. Risk-weighted assets are a nonbank SD's on-balance sheet 
and off-balance sheet exposures, including proprietary swap, security-
based swap, equity, and futures positions, weighted according to risk. 
The Bank-Based Approach requires each nonbank SD to maintain regulatory 
capital in an amount that equals or exceeds 8 percent of the firm's 
total risk-weighted assets to help ensure that the nonbank SD's level 
of capital is sufficient to absorb decreases in the value of the firm's 
assets and increases in the value of the firm's liabilities, and to 
cover unexpected losses resulting from business activities, including 
uncollateralized defaults from swap counterparties, without the nonbank 
SD becoming insolvent.
    A nonbank SD must compute its risk-weighted assets using 
standardized market risk and/or credit risk charges, unless the nonbank 
SD has been approved by the Commission or NFA to use internal 
models.\161\ For standardized market risk charges, the Commission 
incorporates by reference the standardized market risk charges set 
forth in Commission Regulation 1.17 for FCMs and SEC Rule 18a-1 for 
nonbank SBSDs.\162\ The standardized market risk charges under 
Commission Regulation 1.17 and SEC Rule 18a-1 are calculated as a 
percentage of the market value or notional value of the nonbank SD's 
marketable securities and derivatives positions, with the percentages 
applied to the market value or notional value increasing as the 
expected or anticipated risk of the positions increases.\163\ The 
resulting total market risk exposure amount is multiplied by a factor 
of 12.5 to cancel the effect of the 8 percent multiplication factor 
applied to all of the nonbank SD's risk-weighted assets, which 
effectively requires a nonbank SD to hold qualifying regulatory capital 
equal to or greater than 100 percent of the amount of its market risk 
exposure.\164\
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    \161\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the 
term BHC equivalent risk-weighted assets in 17 CFR 23.100.
    \162\ See paragraph (3) of the definition of the term BHC 
equivalent risk-weighted assets in 17 CFR 23.100.
    \163\ See 17 CFR 240.18a-1(c)(1).
    \164\ See 17 CFR 23.100 (Definition of BHC equivalent risk-
weighted assets). As noted, a nonbank SD is required to maintain 
qualifying capital (i.e., an aggregate of common equity tier 1 
capital, additional tier 1 capital, and tier 2 capital) in an amount 
that exceeds 8 percent of its market risk-weighted assets and 
credit-risk-weighted assets. The regulations, however, require the 
nonbank SD to effectively maintain qualifying capital in excess of 
100 percent of its market risk-weighted assets by requiring the 
nonbank SD to multiply its market-risk-weighted assets by 12.5.
---------------------------------------------------------------------------

    With respect to standardized credit risk charges for exposures from 
non-derivatives positions, a nonbank SD computes its on-balance sheet 
and off-balance sheet exposures in accordance with the standardized 
credit risk charges adopted by the Federal Reserve Board and set forth 
in subpart D of 12 CFR 217 as if the SD itself were a bank holding 
company subject to subpart D.\165\ Standardized credit risk charges are 
computed by multiplying the amount of the exposure by defined 
counterparty credit risk factors that range from 0 percent to 150 
percent.\166\ A nonbank SD with off-balance sheet exposures is required 
to calculate a credit risk charge by multiplying each exposure by a 
credit conversion factor that ranges from 0 percent to 100 percent, 
depending on the type of exposure.\167\ In addition to the risk-
weighted assets for general credit risk, a nonbank SD calculating risk 
charges under subpart D of 12 CFR 217 must also calculate risk-weighted 
assets for unsettled transactions involving securities, foreign 
exchange instruments, and commodities that have a risk of delayed 
settlement or delivery.
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    \165\ See 17 CFR 23.101(a)(1)(i)(B) and paragraph (1) of the 
definition of the term BHC equivalent risk-weighted assets in 17 CFR 
23.100.
    \166\ See 17 CFR 217.32. Lower credit risk factors are assigned 
to entities with lower credit risk and higher credit risk factors 
are assigned to entities with higher credit risk. For example, a 
credit risk factor of 0% is applied to exposures to the U.S. 
government, the Federal Reserve Bank, and U.S. government agencies 
(see 12 CFR 217.32 (a)(1)), and a credit risk factor of 100% is 
assigned to an exposure to foreign sovereigns that are not members 
of the Organization of Economic Co-operation and Development (see 12 
CFR 217.32(a)(2)).
    \167\ See 17 CFR 217.33.
---------------------------------------------------------------------------

    A nonbank SD may compute standardized credit risk charges for 
derivatives positions, including uncleared swaps and non-cleared 
security-based swaps, using either the current exposure method 
(``CEM'') or the standardized approach for measuring counterparty 
credit risk (``SA-CCR'').\168\ Both CEM and SA-CCR are non-model, 
rules-based, approaches to calculating counterparty credit risk 
exposures for derivatives positions. Credit risk exposure under CEM is 
the sum of: (i) the current exposure (i.e., the positive mark-to-
market) of the derivatives contract; and (ii) the potential future 
exposure, which is calculated as the product of the notional principal 
amount of the derivatives contract multiplied by a standard credit risk 
conversion factor set forth in the rules of the Federal Reserve 
Board.\169\ Credit risk exposure under SA-CCR is defined as the 
exposure at default amount of a derivatives contract, which is computed 
by multiplying a factor of 1.4 by the sum of: (i) the replacement costs 
of the contract (i.e., the positive mark-to market); and (ii) the 
potential future exposure of the contract.\170\
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    \168\ See 17 CFR 217.34. See also, Commission Regulation 23.100 
(17 CFR 23.100) defining the term BHC risk-weighted assets, which 
provides that a nonbank SD that does not have model approval may use 
either CEM or SA-CCR to compute its exposures for over-the-counter 
derivative contracts without regard to the status of its affiliate 
entities with respect to the use of a calculation approach under the 
Federal Reserve Board's capital rules.
    \169\ See 12 CFR 217.34.
    \170\ See 12 CFR 217.132(c).
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    A nonbank SD may also obtain approval from the Commission or NFA to 
use internal models to compute market risk and/or credit risk charges 
in lieu of the standardized charges. A nonbank SD seeking approval to 
use an internal model is required to submit an

[[Page 8041]]

application to the Commission or NFA.\171\ The application is required 
to include, among other things, a list of categories of positions that 
the nonbank SD holds in its proprietary accounts and a brief 
description of the methods that the nonbank SD will use to calculate 
market risk and/or credit risk charges for such positions, as well as a 
description of the mathematical models used to compute market risk and 
credit risk charges.
---------------------------------------------------------------------------

    \171\ See 17 CFR 23.102(c).
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    A nonbank SD approved by the Commission or NFA to use internal 
models to compute market risk is required to comply with subpart F of 
the Federal Reserve Board's Part 217 regulations (``Subpart F'').\172\ 
Subpart F is based on models that are consistent with the BCBS Basel 
2.5 capital framework.\173\ The Commission's qualitative and 
quantitative requirements for internal capital models are also 
comparable to the SEC's existing internal capital model requirements 
for broker-dealers in securities and SBSDs,\174\ which are broadly 
based on the BCBS Basel 2.5 capital framework.
---------------------------------------------------------------------------

    \172\ See paragraph (4) of the definition of BHC equivalent 
risk-weighted assets in 17 CFR 23.100.
    \173\ Compare 17 CFR 23.100 (providing for a nonbank SD that is 
approved to use internal models to calculate market and credit risk 
to calculate its risk-weighted assets using subparts E and F of 12 
CFR part 217), subpart F of 12 CFR, 17 CFR 23.101(a)(1)(ii) 
(providing for an SD that elects the Net Liquid Assets Approach to 
calculate its net capital in accordance with Rule 18a-1), and 17 CFR 
23.102(a), with Basel Committee on Banking Supervision, Revisions to 
the Basel II Market Risk Framework (2011), https://www.bis.org/publ/bcbs193.pdf (describing the revised internal model approach under 
Basel 2.5).
    \174\ The SEC internal model requirements for SBSDs are listed 
in 17 CFR 240.18a-1(d).
---------------------------------------------------------------------------

    A nonbank SD approved to use internal models to compute credit risk 
charges is required to perform such computation in accordance with 
subpart E of the Federal Reserve Board's Part 217 regulations \175\ as 
if the SD itself were a bank holding company subject to subpart E.\176\ 
The internal credit risk modeling requirements are also based on the 
Basel 2.5 capital framework and the Basel 3 capital framework. A 
nonbank SD that computes its credit risk charges using internal models 
must multiply the resulting capital requirement by a factor of 
12.5.\177\
---------------------------------------------------------------------------

    \175\ 12 CFR 217 subpart E.
    \176\ See 85 FR 57462 at 57496.
    \177\ 12 CFR 217.131(e)(1)(iii), 217.131(e)(2)(iv), and 
217.132(d)(9)(iii).
---------------------------------------------------------------------------

    In adopting the final Bank-Based Approach rules, the Commission 
also noted that in choosing an alternative calculation, the nonbank SD 
must adopt the entirety of the alternative. As such, if the nonbank SD 
is calculating its risk-weighted assets using the regulations in 
subpart E of 12 CFR 217, the nonbank SD must include charges reflecting 
all categories of risk-weighted assets applicable under these 
regulations, which include among other things, charges for operational 
risk, CVA of OTC derivatives contracts, and unsettled transactions 
involving securities, foreign exchange instruments, and commodities 
that have a risk of delayed settlement or delivery.\178\ The capital 
charge for operational risk and CVA of OTC derivatives contracts 
calculated in accordance with subpart E of 12 CFR 217 must also be 
multiplied by a factor of 12.5.\179\
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    \178\ Settlement risk for OTC derivatives contracts is addressed 
as part of the counterparty-credit risk calculation methodology 
described in 12 CFR 217.132.
    \179\ 12 CFR 217.162(c) (operational risk) and 217.132(e)(4) 
(CVA of OTC derivative contracts).
---------------------------------------------------------------------------

    Under the Basel 2.5 capital framework, nonbank SDs have flexibility 
in developing their internal models, but must follow certain minimum 
standards. Internal market risk and credit risk models must follow a 
Value-at-Risk (``VaR'') structure to compute, on a daily basis, a 99th 
percentile, one-tailed confidence interval for the potential losses 
resulting from an instantaneous price shock equivalent to a 10-day 
movement in prices (unless a different time-frame is specifically 
indicated). The simulation of this price shock must be based on a 
historical observation period of minimum length of one year, but there 
is flexibility on the method used to render simulations, such as 
variance-covariance matrices, historical simulations, or Monte Carlo.
    The Commission and the Basel standards for internal models also 
have requirements on the selection of appropriate risk factors as well 
as on data quality and update frequency.\180\ One specific concern is 
that internal models must capture the non-linear price characteristics 
of options positions, including but not limited to, relevant 
volatilities at different maturities.\181\
---------------------------------------------------------------------------

    \180\ See 17 CFR appendix A to subpart E of part 23(i)(2)(iii), 
and Basel Committee on Banking Supervision, Revisions to the Basel 
II Market Risk Framework (2011), paragraph 718(Lxxvi)(e), available 
at: https://www.bis.org/publ/bcbs193.pdf.
    \181\ The Commission's requirement is set forth in paragraph 
(i)(2)(iv)(A) of appendix A to subpart E of 17 CFR part 23. See 
also, Basel Committee on Banking Supervision, Revisions to the Basel 
II Market Risk Framework (2011), paragraph 718(Lxxvi)(h), available 
at: https://www.bis.org/publ/bcbs193.pdf.
---------------------------------------------------------------------------

    In addition, BCBS standards for market risk models include a series 
of additive components for risks for which the broad VaR is ill-suited 
or that may need targeted calculation. These include the calculation of 
a Stressed VaR measure (with the same specifications as the VaR, but 
calibrated to historical data from a continuous 12-month period of 
significant financial stress relevant to the firm's portfolio); a 
Specific Risk measure (which includes the effect of a specific 
instrument); an Incremental Risk measure (which addresses changes in 
the credit rating of a specific obligor which may appear as a reference 
in an asset); and a Comprehensive Risk measure (which addresses risk of 
correlation trading positions).
2. UK PRA Capital Rules: PRA-Designated UK Nonbank Swap Dealer Minimum 
Capital Requirements
    The UK PRA Capital Rules impose bank-like capital requirements on a 
PRA-designated UK nonbank SD that, consistent with the BCBS 
international bank capital framework, require the PRA-designated UK 
nonbank SD to hold a sufficient amount of qualifying equity capital and 
subordinated debt based on the PRA-designated UK nonbank SD's 
activities to absorb decreases in the value of firm assets and 
increases in the value of the firm's liabilities, and to cover losses 
from its business activities, including possible counterparty defaults 
and margin collateral shortfalls associated with the firm's swap 
dealing activities, without the firm becoming insolvent. Specifically, 
the UK PRA Capital Rules require each PRA-designated UK nonbank SD to 
maintain sufficient levels of capital to satisfy the following capital 
ratios, 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; \182\ (ii) a tier 1 capital ratio 
of 6 percent; \183\ and (iii) a total capital ratio of 8 percent.\184\ 
The UK PRA Capital Rules further require a PRA-designated UK nonbank SD 
to maintain a capital conservation buffer composed of common equity 
capital tier 1 capital in amount equal to 2.5 percent of the firm's 
total risk exposure.\185\ The common equity tier 1 capital used to

[[Page 8042]]

meet the capital conservation buffer must be separate and in addition 
to the 4.5 percent of common equity tier 1 capital that the PRA-
designated UK nonbank is required to maintain in meeting its core 8 
percent capital requirement.\186\ Thus, a PRA-designated UK nonbank SD 
is required to maintain regulatory capital equal to at least 10.5 
percent of its total risk exposure amount, with common equity tier 1 
capital comprising at least 7 percent of the regulatory capital (4.5 
percent of the core capital plus the 2.5 percent capital conservation 
buffer).
---------------------------------------------------------------------------

    \182\ UK CRR, Article 92(1)(a).
    \183\ Id., Article 92(1)(b). Tier 1 capital is the sum of the 
PRA-designated UK nonbank SD's common equity tier 1 capital and 
additional tier 1 capital.
    \184\ Id., Article 92(1)(c). The total capital is the sum of the 
PRA-designated UK nonbank SD's tier 1 capital and tier 2 capital.
    \185\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2 
Capital Conservation Buffer, Rule 2.1.
    \186\ Id. A PRA-designated UK nonbank SD may also be required to 
maintain a countercyclical capital buffer composed of common equity 
tier 1 capital equal to the firm's total risk exposure multiplied by 
an institution-specific countercyclical buffer rate. The 
institution-specific countercyclical capital buffer rate is 
determined by calculating the weighted average of the 
countercyclical buffer rates that apply in the jurisdictions in 
which the PRA-designated UK nonbank SD has relevant credit 
exposures. See PRA Rulebook, CRR Firms, Capital Buffers Part, 
Chapter 3 Countercyclical Capital Buffer. The rate for each 
jurisdiction is determined by the UK Financial Policy Committee or a 
third country countercyclical buffer authority, as applicable. See 
PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 3 
Countercyclical Capital Buffer, Rule 3.1., and Capital Requirements 
(Capital Buffers and Macro-prudential Measures) Regulations 2014, 
Articles 7-20. In practice, the countercyclical buffer rate in the 
UK, as of July 2023, is 2 percent of risk-weighted assets. The 
countercyclical capital buffer rate is published by the Bank of 
England, and is available at: https://bankofengland.co.uk/financial-stability/the-countercyclical-capital-buffer. Several EU Member 
States of relevance to the UK have also implemented countercyclical 
capital buffers with rates ranging from 0.5 percent to 2.5 percent 
of risk-weighted assets.
---------------------------------------------------------------------------

    A PRA-designated UK nonbank SD's total risk exposure amount is 
calculated as the sum of the firm's: (i) capital requirements for 
market risk; (ii) risk-weighted exposure amounts for credit risk; (iii) 
capital requirements for settlement risk; (iv) capital requirements for 
CVA risk of OTC derivatives instruments; and (v) capital requirements 
for operational risk.\187\ Capital charges for market risk and risk-
weighted exposures for credit risk are computed based on the PRA-
designated UK nonbank SD's on-balance sheet and off-balance sheet 
exposures, including proprietary swap, security-based swap, equity, and 
futures positions, weighted according to risk.\188\ Settlement risk 
capital charges reflect the price difference to which a PRA-designated 
UK nonbank SD is exposed if its transactions in debt instruments, 
equity, foreign currency, and commodities remain unsettled after the 
respective product's due delivery date.\189\ CVA is an adjustment to 
the mid-market value of the portfolio of OTC derivative transactions 
with a counterparty and reflects the current market value of the credit 
risk of the counterparty to the PRA-designated UK nonbank SD.\190\ 
Operational risk capital charges reflect the risk of loss resulting 
from inadequate or failed internal processes, people and systems or 
from external events, and includes legal risk.\191\
---------------------------------------------------------------------------

    \187\ UK CRR, Article 92(3).
    \188\ To compute capital requirements for market risk, PRA-
designated UK nonbank SDs are required to calculate capital charges 
for all trading book positions and non-trading book positions that 
are subject to foreign exchange or commodity risk. See UK CRR, 
Article 325. The risk-weighted exposure amounts for credit risk 
include: (i) risk-weighted exposure amounts for credit risk and 
dilution risk in respect of all the business activities of the PRA-
designated UK nonbank SD, excluding risk-weighted exposure amounts 
from the trading book business of the firm; and (ii) risk-weighted 
exposure amounts for counterparty risk arising from the trading book 
business for certain derivatives transactions, repurchase 
agreements, securities or commodities lending or borrowing 
transactions, margin lending or long settlement transactions. See UK 
CRR, Article 92(3)(a) and (f).
    \189\ UK CRR, Article 378. Settlement risk is calculated as 8 
percent, 50 percent, 75 percent, or 100 percent of the price 
difference for transactions that are not settled within 5 to 15 
business days, 16 to 30 business days, 31 to 45 business days, or 46 
or more business days, respectively, from the due settlement date.
    \190\ Id., Article 381.
    \191\ Id., Article 4(1)(52).
---------------------------------------------------------------------------

    To compute its total risk exposure amount, a PRA-designated UK 
nonbank SDs is also required to multiply the capital requirements for 
market risk, settlement risk, CVA risk, and operational risk, 
calculated in accordance with the UK PRA Capital Rules, by a factor of 
12.5, which effectively requires a PRA-designated UK nonbank SD to hold 
qualifying regulatory capital equal to or greater than the full amount 
of the relevant risk exposures.\192\ The formulae for calculating risk-
weighted exposure amounts for credit risk also include a 12.5 
multiplication factor.\193\
---------------------------------------------------------------------------

    \192\ Id., Article 92(4).
    \193\ Id., Article 153 et seq.
---------------------------------------------------------------------------

    Consistent with the Commission's Bank-Based Approach and the BCBS 
capital framework, the UK PRA Capital Rules require PRA-designated UK 
nonbank SDs to compute market risk exposures and credit risk exposures 
using a standardized approach or, if approved by the PRA, internal risk 
models.\194\ In addition, UK PRA Capital Rules, consistent with the 
BCBS capital framework, require PRA-designated UK nonbank SDs to 
compute capital charges for CVA risk and operational risk using 
standardized approaches, unless approved to use internal models by the 
PRA.\195\
---------------------------------------------------------------------------

    \194\ With the permission of the PRA, a PRA-designated UK 
nonbank SD may use internal models to calculate market risk (see UK 
CRR, Article 363) and credit risk (see UK CRR, Articles 143 and 
283).
    \195\ See UK CRR, Articles 382-384 for CVA risk calculations; 
and Article 312(2) for operational risk.
---------------------------------------------------------------------------

    PRA-designated UK nonbank SDs calculate standardized market risk 
charges generally by multiplying the notional or carrying amount of net 
positions by risk-weighting factors, which are based on the underlying 
market risk of each asset or exposure and increase as the expected risk 
of the positions increase. Market risk requirements for debt 
instruments and equity instruments are calculated separately under the 
standardized approach, and are each calculated as the sum of specific 
risk and general risk of the positions.\196\ Securitizations are 
treated as debt instruments for market risk requirements,\197\ whereas 
derivative positions are generally treated as exposures on their 
underlying assets,\198\ with options being delta-adjusted.\199\
---------------------------------------------------------------------------

    \196\ Id., Article 326.
    \197\ Id. See also UK CRR, Articles 334-340 (provisions related 
to debt instruments) and 341-343 (provisions related to equities).
    \198\ Id., Articles 328-330, 358.
    \199\ Id., Article 329.
---------------------------------------------------------------------------

    The UK PRA Capital Rules also require PRA-designated UK nonbank SDs 
to include in their risk-weighted assets market risk exposures to 
certain foreign currency and gold positions. Specifically, a PRA-
designated UK nonbank SD with net positions in foreign exchange and 
gold that exceed 2 percent of the firm's total capital must calculate 
capital requirements for foreign exchange risk.\200\ The capital 
requirement for foreign exchange risk under the standardized approach 
is 8 percent of the PRA-designated UK nonbank SD's net positions in 
foreign exchange and gold.\201\
---------------------------------------------------------------------------

    \200\ Id., Article 351.
    \201\ Id.
---------------------------------------------------------------------------

    The UK PRA Capital Rules further require PRA-designated UK nonbank 
SDs to include exposures to commodity positions in calculating the 
firm's risk-weighted assets. The standardized calculation of commodity 
risk exposures may follow one of three approaches depending on type of 
position or exposure. The first is the sum of a flat percentage rate 
for net positions, with netting allowed among tightly defined sets, 
plus another flat percentage rate for the gross position.\202\ The 
other two standardized approaches are based on maturity-ladders, where 
unmatched portions of each maturity band (i.e., portions that do not 
net out to zero) are charged at a step-up rate in comparison

[[Page 8043]]

to the base charges for matched portions.\203\
---------------------------------------------------------------------------

    \202\ Id., Article 360.
    \203\ Id., Articles 359 and 361.
---------------------------------------------------------------------------

    With respect to credit risk, the UK PRA Capital Rules require a 
PRA-designated UK nonbank SD to calculate its standardized credit risk 
exposure in a manner aligned with the Commission's Bank-Based Approach 
and the BCBS framework by taking the carrying value or notional value 
of each of the PRA-designated UK nonbank SD's on-balance sheet and off-
balance sheet exposures, making certain additional credit risk 
adjustments, and then applying specific risk-weights based on the type 
of counterparty and the asset's credit quality.\204\ For instance, 
credit exposures to the ECB, the UK government, and the Bank of England 
carry a zero percent risk-weight; exposures to other central 
governments and central banks may carry risk-weights between 0 and 150, 
depending on the credit rating available for the central government or 
central bank; and exposures to banks, PRA-designated investment firms, 
or other businesses may carry risk-weights between 20 percent and 150 
percent depending on the credit ratings available for the entity or, 
for exposures to banks and investment firms, for the central government 
of the jurisdiction in which the entity is incorporated.\205\ If no 
credit rating is available, the PRA-designated UK nonbank SD must 
generally apply a 100 percent risk-weight, meaning the total accounting 
value of the exposure is used.\206\
---------------------------------------------------------------------------

    \204\ Id., Articles 111 and 113(1).
    \205\ Id., Articles 114-122.
    \206\ Id., Articles 121(2) and 122(2).
---------------------------------------------------------------------------

    With respect to counterparty credit risk for derivatives 
transactions and certain other agreements that give rise to bilateral 
credit risk, the UK PRA Capital Rules require a PRA-designated UK 
nonbank SD that is not approved to use credit risk models to calculate 
its exposure using the standardized approach for counterparty credit 
risk (i.e., SA-CCR),\207\ which is one of the methods that a nonbank SD 
may use to calculate its credit risk exposure under a derivatives 
transaction pursuant to the Commission's Bank-Based Approach.\208\ The 
exposure amount under the SA-CCR is computed, under both the UK PRA 
Capital Rules and the Commission's Bank-Based Approach, as the sum of 
the replacement cost of the contract and the potential future exposure 
of the contract, multiplied by a factor of 1.4.\209\
---------------------------------------------------------------------------

    \207\ UK CRR, Articles 92(3)(f) and PRA Rulebook, CRR Firms, 
Counterparty Credit Risk (CRR) Part, Chapter 3 Counterparty Credit 
Risk (Part Three, Title Two, Chapter Six CRR). PRA-designated UK 
nonbank SDs with smaller-sized derivatives business may also use a 
``simplified standardized approach to counterparty credit risk'' or 
an ``original exposure method'' as simpler methods for calculating 
exposure values. PRA Rulebook, CRR Firms, Counterparty Credit Risk 
(CRR) Part, Chapter 3 Counterparty Credit Risk (Part Three, Title 
Two, Chapter Six CRR), Articles 281-282. To use either of these 
alternative methods, an entity's on-and off-balance sheet 
derivatives business must be equal or less than 10 percent of the 
entity's total assets and GBP 260 million or 5 percent of the 
entity's total assets and GBP 88 million, respectively. PRA 
Rulebook, CRR Firms, Counterparty Credit Risk (CRR) Part, Chapter 3 
Counterparty Credit Risk (Part Three, Title Two, Chapter Six CRR), 
Article 273a.
    \208\ 12 CFR 217.34.
    \209\ PRA Rulebook, CRR Firms, Counterparty Credit Risk (CRR) 
Part, Chapter 3 Counterparty Credit Risk (Part Three, Title Two, 
Chapter Six CRR), Article 274 and 12 CFR 217.132(c).
---------------------------------------------------------------------------

    UK PRA Capital Rules also require a PRA-designated UK nonbank SD to 
calculate capital requirements for settlement risk.\210\ Consistent 
with the BCBS framework, the capital charge for settlement risk for 
transactions settled on a delivery-versus-payment basis is computed by 
multiplying the price difference to which a PRA-designated UK nonbank 
SD is exposed as a result of an unsettled transaction by a percentage 
factor that varies from 8 percent to 100 percent based on the number of 
working days after the due settlement date during which the transaction 
remains unsettled.\211\ The CFTC's Bank-Based Approach provides for a 
similar calculation methodology for risk-weighted asset amounts for 
unsettled transactions involving securities, foreign exchange 
instruments, and commodities.\212\
---------------------------------------------------------------------------

    \210\ UK CRR, Article 378 (indicating that if transactions in 
which debt instruments, equities, foreign currencies and commodities 
excluding repurchase transactions and securities or commodities 
lending and securities or commodities borrowing are unsettled after 
their due delivery dates, a PRA-designated UK nonbank SD must 
calculate the price difference to which it is exposed).
    \211\ Id. The price difference to which a PRA-designated UK 
nonbank SD is exposed is the difference between the agreed 
settlement price for an instrument (i.e., a debt instrument, equity, 
foreign currency or commodity) and the instrument's current market 
value, where the difference could involve a loss for the firm. UK 
CRR, Article 378.
    \212\ 17 CFR 23.100 (definition of BHC equivalent risk-weighted 
assets), 12 CFR 217.38 and 12 CFR 217.136.
---------------------------------------------------------------------------

    Consistent with the BCBS framework, a PRA-designated UK nonbank SD 
is also required to calculate capital charges for CVA risk for OTC 
derivative instruments \213\ to reflect the current market value of the 
credit risk of the counterparty to the PRA-designated UK nonbank 
SD.\214\ CVA can be calculated following similar methodologies as those 
described in subpart E of the Federal Reserve Board's part 217 
regulations.\215\
---------------------------------------------------------------------------

    \213\ UK CRR, Article 382 (1). CVA risk charges need not be 
calculated for credit derivatives recognized to reduce risk-weighted 
exposure amounts for credit risk. Id.
    \214\ Id., Article 381. CVA is defined to exclude debit 
valuation adjustment.
    \215\ See UK CRR, Articles 383-384 and 12 CFR 217.132(e)(5) and 
(6). Under the CFTC's Bank-Based Approach, nonbank SDs calculating 
their credit risk-weighted assets using the regulations in subpart D 
of the Federal Reserve Board's part 217 regulations, do not 
calculate CVA of OTC derivatives instruments.
---------------------------------------------------------------------------

    A PRA-designated UK nonbank SD's total risk exposure amount also 
includes operational risk charges. Consistent with the BCBS framework, 
PRA-designated UK nonbank SDs may calculate standardized operational 
risk charges using either one of two approaches--the Basic Indicator 
Approach or the Standardized Approach.\216\ Both the Basic Indicator 
Approach and the Standardized Approach use as a calculation basis the 
three-year average of the ``relevant indicator,'' which is the sum of 
certain items on the statement of income/loss (i.e., the firm's net 
interest income and net non-interest income). Under the Basic Indicator 
Approach, PRA-designated UK nonbank SDs are required to multiply the 
relevant indicator by a factor of 15 percent. When using the 
Standardized Approach, firms need to allocate the relevant indicator 
into eight business lines specified by regulation (e.g., trading and 
sales; retail brokerage; corporate finance) and multiply the 
corresponding portion by a percentage factor ranging from 12 to 18 
percent depending on the business line. The capital requirements for 
operational risk are calculated as the sum of the individual business 
lines' charges.
---------------------------------------------------------------------------

    \216\ UK CRR, Article 312 and PRA Rulebook, CRR Firms, 
Operational Risk (CRR) Part.
---------------------------------------------------------------------------

    As noted above, if approved by the PRA, a PRA-designated UK nonbank 
SD may use internal models to calculate its market risk charges, credit 
risk charges, including counterparty credit risk charges, CVA risk 
charges, and operational risk charges in lieu of using a standardized 
approach.\217\ To obtain permission, a PRA-designated UK nonbank SD 
must demonstrate to the satisfaction of the PRA that it meets

[[Page 8044]]

certain conditions for the use of models.\218\
---------------------------------------------------------------------------

    \217\ UK CRR, Articles 143 (credit risk), 283 (counterparty 
credit risk), 312 (operational risk), 363 (market risk) and 383 (CVA 
risk). PRA-designated UK nonbank SDs are not permitted, however, to 
calculated counterparty credit risk charges using internal models 
when calculating large exposures. PRA Rulebook, CRR Firms, Large 
Exposures (CRR) Part, Chapter 4 Large Exposures (Part Four CRR), 
Article 390.
    \218\ UK CRR, Articles 143, 283, 312(2) and 363(1).
---------------------------------------------------------------------------

    With respect to market risk, the PRA may grant a PRA-designated UK 
nonbank SD permission to use internal models to calculate one or more 
of the following risk categories: (i) general risk of equity 
instruments, (ii) specific risk of equity instruments, (iii) general 
risk of debt instruments, (iv) specific risk of debt instruments, (v) 
foreign exchange risk, or (vi) commodities risk,\219\ along with 
interest rate risk on derivatives.\220\ To obtain approval to use a 
market risk model, a PRA-designated UK nonbank SD must meet conditions 
related to specified model elements and controls including risk and 
stressed risk calculations,\221\ back-testing and multiplication 
factors,\222\ risk measurement requirements,\223\ governance and 
qualitative requirements,\224\ internal validation,\225\ and specific 
requirements by risk categories.\226\ A PRA-designated UK nonbank SD 
approved to use models must also obtain approval from the PRA to 
implement a material change to the model or make a material extension 
to the use of the model.\227\ The UK PRA Capital Rules' market risk 
model-based methodology is based on the Basel 2.5 standard \228\ and 
incorporates relevant aspects of the BCBS framework in terms of 
requiring PRA-designated UK nonbank SDs with model approval to use a 
VaR model with a 99 percent, one-tailed confidence level with: (i) 
price changes equivalent to a 10-business day movement in rates and 
prices, (ii) effective historical observation periods of at least one 
year, and (iii) at least monthly data set updates.\229\ The UK PRA 
Capital Rules also include a framework for governance that includes 
requirements related to the implementation of independent risk 
management,\230\ senior management's involvement in the risk-control 
process,\231\ establishment of procedures for monitoring and ensuring 
compliance with a documented set of internal policies and 
controls,\232\ and the conducting of independent review of the models 
as part of the internal audit process.\233\
---------------------------------------------------------------------------

    \219\ Id., Article 363(1).
    \220\ Id., Article 331(1), using sensitivity models.
    \221\ Id., Articles 364-365.
    \222\ Id., Article 366.
    \223\ Id., Article 367.
    \224\ Id., Article 368.
    \225\ Id., Article 369.
    \226\ Id., Articles 364-377.
    \227\ Id., Article 363(3).
    \228\ Compare UK CRR, Articles 362-377 with Revisions to the 
Basel II Market Risk Framework.
    \229\ UK CRR, Article 365(1).
    \230\ Id., Articles 368 (1)(b).
    \231\ Id., Articles 368 (1)(c).
    \232\ Id., Articles 368 (1)(e).
    \233\ Id., Articles 368 (1)(h).
---------------------------------------------------------------------------

    With regulatory permission, PRA-designated UK nonbank SDs may also 
use models to calculate credit risk exposures.\234\ Credit risk models 
may include internal ratings based on the estimation of default 
probabilities and loss given default, consistent with the BCBS 
framework and subject to similar model risk management guidelines.\235\ 
To obtain approval for the use of internal ratings-based models, a PRA-
designated UK nonbank SD must meet requirements related to, among other 
things, the structure of its rating systems and its criteria for 
assigning exposures to grades and pools within a rating system, the 
parameters of risk quantification, the validation of internal 
estimates, and the internal governance and oversight of the rating 
systems and estimation processes.\236\
---------------------------------------------------------------------------

    \234\ Id., Article 143.
    \235\ Id.
    \236\ Id., Articles 170-177 (rating systems), 178-184 (risk 
quantification), 185 (validation of internal estimates), and 189-191 
(internal governance and oversight).
---------------------------------------------------------------------------

    In addition, subject to regulatory approval, PRA-designated UK 
nonbank SDs may use internal models to calculate counterparty credit 
risk exposures for derivatives, securities financing, and long 
settlement transactions.\237\ The prerequisites for approval for such 
models include requirements related to the establishment and 
maintenance of a counterparty credit risk management framework, stress 
testing, the integrity of the modelling process, the risk management 
system, and validation.\238\ The UK PRA Capital Rules' internal 
counterparty credit risk model-based methodology is also based on the 
Basel 2.5 standard.\239\ The UK PRA Capital Rules allow for the 
estimation of expected exposure as a measure of the average of the 
distribution of exposures at a particular future date,\240\ with 
adjustments to the period of risk, as appropriate to the asset and 
counterparty.
---------------------------------------------------------------------------

    \237\ Id., Article 283. As noted above, however, PRA-designated 
UK nonbank SDs are not permitted to calculate counterparty credit 
risk charges using internal models when calculating large exposures. 
PRA Rulebook, CRR Firms, Large Exposures (CRR) Part, Chapter 4 Large 
Exposures (Part Four CRR), Article 390.
    \238\ Id., Articles 283-294.
    \239\ Compare UK CRR, Article 362-377 with Revisions to the 
Basel II Market Risk Framework.
    \240\ UK CRR, Article 272(19), 283-285.
---------------------------------------------------------------------------

    PRA-designated UK nonbank SDs may also obtain regulatory permission 
to use ``advanced measurement approaches'' based on their own 
operational risk measurement systems, to calculate capital charges for 
operational risk. To obtain such permission, PRA-designated UK nonbank 
SDs must meet qualitative and quantitative standards, as well as 
general risk management standards set forth in the UK PRA Capital 
Rules.\241\ Specifically, among other qualitative standards, PRA-
designated UK nonbank SDs must meet requirements related to the 
governance and documentation of their operational risk management 
processes and measurement systems.\242\ In addition, PRA-designated UK 
nonbank SDs must meet quantitative standards related to process, data, 
scenario analysis, business environment and internal control factors 
laid down in the UK PRA Capital Rules.\243\
---------------------------------------------------------------------------

    \241\ UK CRR, Article 312(1), cross-referencing UK CRR, Articles 
321 and 322; PRA Rulebook, CRR Firms, General Organizational 
Requirements Part, Rules 2.1 and 2.2; and PRA Rulebook, CRR Firms, 
Internal Liquidity Adequacy Assessment Part.
    \242\ UK CRR, Article 321.
    \243\ Id., Article 322.
---------------------------------------------------------------------------

    As an additional element to the capital requirements, the UK PRA 
Capital Rules further impose a 3.25 percent leverage ratio floor on 
PRA-designated UK nonbank SDs that hold significant amounts of non-UK 
assets.\244\ Specifically, a PRA-designated UK nonbank SD that has non-
UK assets equal to or greater than GBP 10 billion is required to 
maintain an aggregate amount of common equity tier 1 capital and 
additional tier 1 capital equal to or in excess of 3.25 percent of the 
firm's on-balance sheet and off-balance sheet exposures, including 
exposures on uncleared swaps but excluding certain exposures to central 
banks, without regard to any risk-weighting.\245\ For the purposes of 
complying with the leverage ratio requirement, at least 75 percent of 
the firm's tier 1 capital must consist of common equity tier 1 
capital.\246\ The leverage ratio is a non-risk based minimum capital 
requirement that is intended to prevent a PRA-designated

[[Page 8045]]

UK nonbank SD from engaging in excessive leverage, and complements the 
risk-based minimum capital requirement that is based on the PRA-
designated UK nonbank SD's risk-weighted assets.
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    \244\ PRA Rulebook, CRR Firms, Leverage Ratio--Capital 
Requirements and Buffers Part, Chapter 1 Application and Definitions 
and Chapter 3 Minimum Leverage Ratio.
    \245\ Total exposures are required to be computed in accordance 
with PRA Rulebook, CRR Firms, Leverage Ratio (CRR) Part, Chapter 3 
Leverage Ratio (Part Seven CRR), Article 429 et seq. A PRA-
designated UK nonbank SD may also be subject to a countercyclical 
leverage ratio buffer of common equity tier 1 capital equal to the 
firm's institution-specific countercyclical capital buffer rate 
multiplied by 35 percent, multiplied by the firm's total exposures. 
PRA Rulebook, CRR Firms, Leverage Ratio--Capital Requirements and 
Buffers Part, Chapter 4 Countercyclical Leverage Ratio Buffer.
    \246\ PRA Rulebook, CRR Firms, Leverage Ratio--Capital 
Requirements and Buffers Part, Chapter 3 Minimum Leverage Ratio, 
Rule 3.2.
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    Furthermore, the UK PRA Capital Rules also impose a separate 
liquidity coverage requirement on a PRA-designated UK nonbank SD to 
address liquidity risk. The liquidity coverage requirement provides 
that PRA-designated UK nonbank SDs must hold liquid assets in an amount 
sufficient to cover liquidity outflows (less liquidity inflows) under 
stressed conditions over a period of 30 days.\247\ For purposes of the 
liquidity coverage requirement, the term ``stressed'' means a sudden or 
severe deterioration in the solvency or liquidity position of a firm 
due to changes in market conditions or idiosyncratic factors as a 
result of which there is a significant risk that the firm becomes 
unable to meet its commitments as they become due within the next 30 
days.\248\ In addition, Article 413 of UK CRR, which has been 
incorporated into the PRA Rulebook, establishes a general requirement 
that firms ensure that long-term obligations and off-balance sheet 
items are adequately met with a diverse set of funding instruments that 
are stable under both normal and stressed conditions.\249\
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    \247\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4 
Liquidity (Part Six CRR), Article 412(1).
    \248\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4 
Liquidity (Part Six CRR), Article 411(10).
    \249\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4 
Liquidity (Part Six CRR), Article 413(1).
---------------------------------------------------------------------------

    The UK PRA Capital Rules also require PRA-designated UK nonbank SDs 
to maintain at all times a minimum base capital requirement of GBP 
750,000.\250\
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    \250\ PRA Rulebook, CRR Firms, Definition of Capital Part, 
Chapter 12 Base Capital Resource Requirement, Rule 12.1.
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3. Commission Analysis
    The Commission has reviewed the UK Application and the relevant UK 
laws and regulations, and has preliminarily determined that the UK PRA 
Capital Rules are comparable in purpose and effect to the CFTC Capital 
Rules with regard to the establishment of the nonbank SD's minimum 
capital requirement and the calculation of the nonbank SD's amount of 
regulatory capital to meet that requirement.\251\ Although there are 
differences between the UK PRA Capital Rules and the CFTC Capital 
Rules, as discussed below, the Commission preliminarily believes that 
the UK PRA Capital Rules and the CFTC Capital Rules are designed to 
ensure the safety and soundness of a nonbank SD and, subject to the 
proposed conditions discussed below, will achieve comparable outcomes 
by requiring the firm to maintain a minimum level of qualifying 
regulatory capital, including subordinated debt, to absorb losses from 
the firm's business activities, including swap dealing activities, and 
decreases in the value of the firm's assets and increases in the value 
of the firm's liabilities, without the nonbank SD becoming insolvent. 
The Commission's preliminary finding of comparability is based on a 
comparative analysis of the three minimum capital requirements 
thresholds of the CFTC Capital Rules' Bank-Based Approach (i.e., the 
three prongs recited in Section III.C.1. above) and the respective 
elements of the UK PRA Capital Rules' requirements, as discussed below.
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    \251\ The Commission notes that pursuant to Article 7 of UK CRR, 
the PRA may exempt an entity subject to UK CRR from the applicable 
capital requirements, provided certain conditions are met. In such 
case, the relevant requirements would apply to the entity's parent 
entity, on a consolidated basis. The Commission's assessment does 
not cover the application of Article 7 of UK CRR and therefore an 
entity that benefits from an exemption under Article 7 of UK CRR 
would not qualify for substituted compliance under the Capital 
Comparability Determination Order.
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a. Fixed Amount Minimum Capital Requirement
    CFTC Capital Rules and the UK PRA Capital Rules both require 
nonbank SDs to hold a minimum amount of regulatory capital that is not 
based on the risk-weighted assets of the firms. 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.\252\ 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.\253\
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    \252\ 85 FR 57492.
    \253\ PRA Rulebook, CRR Firms, Definition of Capital Part, 
Chapter 12 Base Capital Resource Requirement, Rule 12.1.
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    The Commission recognizes that the $20 million fixed-dollar minimum 
capital required under the CFTC Capital Rules is substantially higher 
than the GBP 750,000 minimum base capital required under the UK PRA 
Capital Rules and the Commission preliminarily believes that the $20 
million represents a more appropriate level of minimum capital to help 
ensure the safety and soundness of the nonbank SD that is engaging in 
uncleared swap transactions. Accordingly, the Commission is proposing 
to condition the Capital Comparability Determination Order to require 
each PRA-designated UK nonbank SD to maintain, at all times, a minimum 
level of $20 million regulatory capital in the form of common equity 
tier 1 items as defined in Article 26 of UK CRR.\254\ The proposed 
condition would require each PRA-designated UK nonbank SD to maintain 
an amount of common equity tier 1 capital denominated in British pound 
that is equivalent to the $20 million in U.S. dollars.\255\ The 
Commission is also proposing that a PRA-designated UK nonbank SD may 
convert the pound-denominated common equity tier 1 capital amount to 
the U.S. dollar equivalent based on a commercially reasonable and 
observable exchange rate.
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    \254\ The Commission notes that the proposed requirement that 
PRA-designated UK nonbank SDs maintain a minimum level of $20 
million of common equity tier 1 capital is consistent with 
conditions set forth in the proposed Capital Comparability 
Determination Orders for Japan, Mexico, and the EU, respectively. 
See, 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 (Aug. 8, 2022) 
(``Proposed Japan Order''); Notice of Proposed Order and Request for 
Comment on an Application for a Capital Comparability Determination 
Submitted on behalf of Nonbank Swap Dealers subject to Regulation by 
the Mexican Comision Nacional Bancaria y de Valores, 87 FR 76374 
(Dec. 13, 2022) (``Proposed Mexico Order''); and 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 (June 27, 2023) (``Proposed EU Order'').
    \255\ Each of the six current PRA-designated UK nonbank SDs 
currently maintains common equity tier 1 capital in excess of $20 
million based on financial filings made with the Commission. 
Therefore, the Commission does not anticipate that the proposed 
condition would have any material impact on the PRA-designated UK 
nonbank SDs currently registered with the Commission. Nonetheless, 
the Commission requests comment on the proposed condition.
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b. Minimum Capital Requirement Based on Risk-Weighted Assets
    Prong (iii) of the CFTC Capital Rules requires each nonbank SD to 
maintain an aggregate of common equity tier 1 capital, additional tier 
1 capital, and tier 2 capital in an amount equal to or

[[Page 8046]]

greater than 8 percent of the nonbank SD's total risk-weighted assets, 
with common equity tier 1 capital comprising at least 6.5 percent of 
the 8 percent.\256\ Risk-weighted assets are a nonbank SD's on-balance 
sheet and off-balance sheet market risk and credit risk exposures, 
including exposures associated with proprietary swap, security-based 
swap, equity, and futures positions, weighted according to risk. The 
requirements and capital ratios set forth in prong (iii) are based on 
the Federal Reserve Board's capital requirements for bank holding 
companies and are consistent with the BCBS international bank capital 
adequacy framework. The requirement for each nonbank SD to maintain 
regulatory capital in an amount that equals or exceeds 8 percent of the 
firm's total risk-weighted assets is intended to help ensure that the 
nonbank SD's level of capital is sufficient to absorb decreases in the 
value of the firm's assets and increases in the value of the firm's 
liabilities, and to cover unexpected losses resulting from the firm's 
business activities, including losses resulting from uncollateralized 
defaults from swap counterparties, without the nonbank SD becoming 
insolvent.
---------------------------------------------------------------------------

    \256\ 17 CFR 23.101(a)(1)(B).
---------------------------------------------------------------------------

    The UK PRA Capital Rules contain capital requirements for PRA-
designated UK nonbank SDs that the Commission preliminarily believes 
are comparable to the requirements contained in prong (iii) of the CFTC 
Capital Rules. Specifically, the UK PRA Capital Rules require a PRA-
designated UK nonbank SD to maintain: (i) common equity tier 1 capital 
equal to at least 4.5 percent of the PRA-designated UK nonbank SD's 
total risk exposure amount; (ii) total tier 1 capital (i.e., common 
equity tier 1 capital plus additional tier 1 capital) equal to at least 
6 percent of the PRA-designated UK nonbank SD's total risk exposure 
amount; and (iii) total capital (i.e., an aggregate amount of common 
equity tier 1 capital, additional tier 1 capital, and tier 2 capital) 
equal to at least 8 percent of the PRA-designated UK nonbank SD's total 
risk exposure amount.\257\ In addition, the UK PRA Capital Rules 
further require each PRA-designated UK nonbank SD to maintain an 
additional capital conservation buffer equal to 2.5 percent of the PRA-
designated UK nonbank SD's total risk exposure amount, which must be 
met with common equity tier 1 capital.\258\ Thus, a PRA-designated UK 
nonbank SD is effectively required to maintain total qualifying 
regulatory capital in an amount equal to or in excess of 10.5 percent 
of the market risk, credit risk, CVA risk, settlement risk and 
operational risk of the firm (i.e., total capital requirement of 8 
percent of risk-weighted assets and an additional 2.5 percent of risk-
weighted assets as a capital conservation buffer), which is higher than 
the 8 percent required of nonbank SDs under prong (iii) of the CFTC 
Capital Rules.\259\
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    \257\ UK CRR, Article 92(1).
    \258\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2 
Capital Conservation Buffer.
    \259\ UK CRR, Article 92(1) and PRA Rulebook, CRR Firms, Capital 
Buffers Part, Chapter 2 Capital Conservation Buffer.
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    The Commission also preliminarily believes that the UK PRA Capital 
Rules and the CFTC Capital Rules are comparable with respect to the 
calculation of capital charges for market risk and credit risk 
(including as it relates to aspects of settlement risk and CVA risk), 
in determining the nonbank SD's risk-weighted assets. More 
specifically, with respect to the calculation of market risk charges 
and general credit risk charges, both regimes require a nonbank SD to 
use standardized approaches to compute market and credit risk, unless 
the firms are approved to use internal models. The standardized 
approaches follow the same structure that is now the common global 
standard: (i) allocating assets to categories according to risk and 
assigning each a risk-weight; (ii) allocating counterparties according 
to risk assessments and assigning each a risk factor; (iii) calculating 
gross exposures based on valuation of assets; (iv) calculating a net 
exposure allowing offsets following well-defined procedures and subject 
to clear limitations; (v) adjusting the net exposure by the market 
risk-weights; and (vi) finally, for credit risk exposures, multiplying 
the sum of net exposures to each counterparty by their corresponding 
risk factor.
    Internal market risk and credit risk models under the UK PRA 
Capital Rules and the CFTC Capital Rules are based on the BCBS 
framework and contain comparable quantitative and qualitative 
requirements, covering the same risks, though with slightly different 
categorization, and including comparable model risk management 
requirements. As both rule sets address the same types of risk, with 
similar allowed methodologies and under similar controls, the 
Commission preliminarily believes that these requirements are 
comparable.
    The Commission also preliminarily believes that the UK PRA Capital 
Rules and CFTC Capital Rules are comparable in that nonbank SDs are 
required to account for operational risk in computing their minimum 
capital requirements. In this connection, the UK PRA Capital Rules 
require a PRA-designated UK nonbank SD to calculate an operational risk 
exposure as a component of the firm's total risk exposure amount.\260\ 
PRA-designated UK nonbank SDs may use either a standardized approach 
or, if the PRA-designated UK nonbank SD has obtained regulatory 
permission, an internal approach based on the firm's own measurement 
systems, to calculate their capital charges for operational risk. The 
CFTC Capital Rules address operational risk both as a stand-alone, 
separate minimum capital requirement that a nonbank SD is required to 
meet under prong (ii) of the Bank-Based Approach \261\ and as a 
component of the calculation of risk-weighted assets for nonbank SDs 
that use subpart E of the Federal Reserve Board's Part 217 regulations 
to calculate their credit risk-weighted assets via internal 
models.\262\
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    \260\ UK CRR, Article 92(3).
    \261\ Specifically, as further discussed below, prong (ii) of 
the CFTC Capital Rules' Bank-Based Approach requires a nonbank SD to 
maintain regulatory capital in an amount equal to or greater than 8 
percent of the firm's total uncleared swaps margin amount associated 
with its uncleared swap transactions to address potential 
operational, legal, and liquidity risks. 17 CFR 101(a)(i)(C). The 
term ``uncleared swap margin'' is defined by Commission Regulation 
23.100 as the amount of initial margin, computed in accordance with 
the Commission's margin rules for uncleared swaps, 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 and 
23.154. 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 
margin regulations for uncleared swaps pursuant to Commission 
Regulation 23.150, exempt foreign exchange swaps or foreign exchange 
forwards, or netting set of swaps or foreign exchange swaps, for 
each counterparty, as if that counterparty was an unaffiliated swap 
dealer. 17 CFR 23.100 and 23.150. Furthermore, in computing the 
uncleared swap margin amount, a nonbank SD may not exclude any de 
minis thresholds contained in Commission Regulation 23.151. 17 CFR 
23.100 and 23.151.
    \262\ 17 CFR 23.101(a)(1)(i) and 17 CFR 23.100 (definition of 
BHC equivalent risk-weighted assets).
---------------------------------------------------------------------------

c. Minimum Capital Requirement Based on the Uncleared Swap Margin 
Amount
    As noted above, prong (ii) of the CFTC Capital Rules' Bank-Based 
Approach requires a nonbank SD to maintain regulatory capital in an 
amount equal to or greater than 8 percent of the firm's total uncleared 
swaps margin amount associated with its uncleared swap transactions to 
address potential operational, legal, and liquidity risks.
    The UK PRA Capital Rules differ from the CFTC Capital Rules in that 
they do not impose a capital requirement on PRA-designated UK nonbank 
SDs based

[[Page 8047]]

on a percentage of the margin for uncleared swap transactions. The 
Commission notes, however, that the UK PRA Capital Rules impose capital 
and liquidity requirements that may compensate for the lack of direct 
analogue to the 8 percent uncleared swap margin requirement. 
Specifically, as discussed above, under the UK PRA Capital Rules, the 
total risk exposure amount is computed as the sum of the PRA-designated 
UK nonbank SD's capital charges for market risk, credit risk, 
settlement risk, CVA risk of OTC derivatives instruments, and 
operational risk.\263\ Notably, the UK PRA Capital Rules require that 
PRA-designated UK nonbank SDs, including firms that do not use internal 
models, calculate capital charges for operational risk as a separate 
component of the total risk exposure amount. The UK PRA Capital Rules 
also impose separate liquidity requirements designed to ensure that the 
PRA-designated UK nonbank SDs can meet both short- and long-term 
obligations, in addition to the general requirement to maintain 
processes and systems for the identification of liquidity risk.\264\ In 
comparison, the Commission requires nonbank SDs to maintain a risk 
management program covering liquidity risk, among other risk 
categories, but does not have a distinct liquidity requirement.\265\
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    \263\ UK CRR, Article 92(3).
    \264\ More specifically, the UK PRA Capital Rules impose 
separate liquidity buffers and ``stable funding'' requirements 
designed to ensure that PRA-designated UK nonbank SDs can cover both 
long-term obligations and short-term payment obligations under 
stressed conditions for 30 days. PRA Rulebook, CRR Firms, Liquidity 
(CRR) Part, Chapter 4 Liquidity (Part Six CRR), Article 412-413. In 
addition, PRA-designated UK nonbank SDs are required to maintain 
robust strategies, policies, processes, and systems for the 
identification of liquidity risk over an appropriate set of time 
horizons, including intra-day. PRA Rulebook, CRR Firms, Internal 
Liquidity Adequacy Assessment Part.
    \265\ Specifically, CFTC Regulation 23.600(b) requires each SD 
to establish, document, maintain, and enforce a system of risk 
management policies and procedures designed to monitor and manage 
the risks related to swaps, and any products used to hedge swaps, 
including futures, options, swaps, security-based swaps, debt or 
equity securities, foreign currency, physical commodities, and other 
derivatives. The elements of the SD's risk management program are 
required to include the identification of risks and risk tolerance 
limits with respect to applicable risks, including operational, 
liquidity, and legal risk, together with a description of the risk 
tolerance limits set by the SD and the underlying methodology in 
written policies and procedures. 17 CFR 23.600.
---------------------------------------------------------------------------

    As such, the Commission preliminarily believes the inclusion of an 
operational risk charge in the PRA-designated UK nonbank SD's total 
risk exposure amount in all circumstances, and the existence of 
separate liquidity requirements, will achieve a comparable outcome to 
the Commission's requirement for nonbank SDs to hold regulatory capital 
in excess of 8 percent of its uncleared swap margin amount. In that 
regard, the Commission, in establishing the requirement that a nonbank 
SD must maintain a level of regulatory capital in excess of 8 percent 
of the uncleared swap margin amount associated with the firm's swap 
transactions, stated that the intent of the requirement was to 
establish a method of developing a minimum amount of required capital 
for a nonbank SD to meet its obligations as an SD to market 
participants, and to cover potential operational, legal, and liquidity 
risks.\266\
---------------------------------------------------------------------------

    \266\ See 85 FR 57462 at 57485.
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d. Preliminary Finding of Comparability
    Based on a principles-based, holistic assessment, the Commission 
has preliminarily determined, subject to the proposed condition below, 
and further subject to its consideration of public comments to the 
proposed Capital Comparability Determination and Order, that the 
purpose and effect of the UK PRA Capital Rules and the CFTC Capital 
Rules are comparable. In this regard, the UK PRA Capital Rules and the 
CFTC Capital Rules are both designed to require a nonbank SD to 
maintain a sufficient amount of qualifying regulatory capital and 
subordinated debt to absorb losses resulting from the firm's business 
activities, and decreases in the value of firm assets, without the 
nonbank SD becoming insolvent.
    The Commission invites comment on the UK Application, the relevant 
UK laws and regulations, and the Commission's analysis above regarding 
its preliminary determination that, subject to the $20 million minimum 
capital requirement, the UK PRA Capital Rules and the CFTC Capital 
Rules are comparable in purpose and effect and achieve comparable 
outcomes with respect to the minimum regulatory capital requirements 
and the calculation of regulatory capital for nonbank SDs. The 
Commission also specifically seeks public comment on the question of 
whether the requirements under the UK PRA Capital Rules that PRA-
designated UK nonbank SDs calculate an operational risk exposure as 
part of the firm's total risk exposure amount and meet separate 
liquidity requirements are sufficiently comparable in purpose and 
effect to the Commission's requirement for a nonbank SD to hold 
regulatory capital equal to or greater than 8 percent of its uncleared 
swap margin amount.

D. Nonbank Swap Dealer Financial Reporting Requirements

1. CFTC Financial Recordkeeping and Reporting Rules for Nonbank Swap 
Dealers
    The CFTC Financial Reporting Rules impose financial recordkeeping 
and reporting requirements on nonbank SDs. The CFTC Financial Reporting 
Rules require each nonbank SD to prepare and keep current ledgers or 
similar records summarizing each transaction affecting the nonbank SD's 
asset, liability, income, expense, and capital accounts.\267\ The 
nonbank SD's ledgers and similar records must be prepared in accordance 
with generally accepted accounting principles as adopted in the United 
States (``U.S. GAAP''), except that if the nonbank SD is not otherwise 
required to prepare financial statements in accordance with U.S. GAAP, 
the nonbank SD may prepare and maintain its accounting records in 
accordance with International Financial Reporting Standards (``IFRS'') 
issued by the International Accounting Standards Board.\268\
---------------------------------------------------------------------------

    \267\ 17 CFR 23.105(b).
    \268\ Id.
---------------------------------------------------------------------------

    The CFTC Financial Reporting Rules also require each nonbank SD to 
prepare and file with the Commission and with NFA periodic unaudited 
and annual audited financial statements.\269\ A nonbank SD that elects 
the TNW Approach is required to file unaudited financial statements 
within 17 business days of the close of each quarter, and its annual 
audited financial statements within 90 days of its fiscal year-
end.\270\ A nonbank SD that elects the NLA Approach or the Bank-Based 
Approach is required to file unaudited financial statements within 17 
business days of the end of each month, and to file its annual audited 
financial statements within 60 days of its fiscal year-end.\271\
---------------------------------------------------------------------------

    \269\ 17 CFR 23.105(d) and (e).
    \270\ 17 CFR 23.105(d)(1) and (e)(1).
    \271\ Id.
---------------------------------------------------------------------------

    The CFTC Financial Reporting Rules provide that a nonbank SD's 
unaudited financial statements must include: (i) a statement of 
financial condition; (ii) a statement of income/loss; (iii) a statement 
of changes in liabilities subordinated to claims of general creditors; 
(iv) a statement of changes in ownership equity; (v) a statement 
demonstrating compliance with and calculation of the applicable 
regulatory requirement; and (vi) such further material information 
necessary to make the required statements not misleading.\272\ The 
annual audited

[[Page 8048]]

financial statements must include: (i) a statement of financial 
condition; (ii) a statement of income/loss; (iii) a statement of cash 
flows; (iv) a statement of changes in liabilities subordinated to 
claims of general creditors; (v) a statement of changes in ownership 
equity; (vi) a statement demonstrating compliance with and calculation 
of the applicable regulatory capital requirement; (vii) appropriate 
footnote disclosures; and (viii) a reconciliation of any material 
differences from the unaudited financial report prepared as of the 
nonbank SD's year-end date.\273\
---------------------------------------------------------------------------

    \272\ 17 CFR 23.105(d)(2).
    \273\ 17 CFR 23.105(e)(4).
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    A nonbank SD that has obtained approval from the Commission or NFA 
to use internal capital models also must submit certain model metrics, 
such as aggregate VaR and counterparty credit risk information, each 
month to the Commission and NFA.\274\ A nonbank SD also is required to 
provide the Commission and NFA with a detailed list of financial 
positions reported at fair market value as part of its monthly 
unaudited financial statements.\275\ Each nonbank SD is also required 
to provide information to the Commission and NFA regarding its 
counterparty credit concentration for the 15 largest exposures in 
derivatives, a summary of its derivatives exposures by internal credit 
ratings, and the geographical distribution of derivatives exposures for 
the 10 largest countries.\276\
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    \274\ 17 CFR 23.105(k) and (l) and appendix B to subpart E of 
part 23.
    \275\ 17 CFR 23.105(l) and appendix B to subpart E of part 23.
    \276\ 17 CFR 23.105(l) in Schedules 2, 3, and 4, respectively.
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    CFTC Financial Reporting Rules also require a nonbank SD to attach 
to each unaudited and audited financial report an oath or affirmation 
that to the best knowledge and belief of the individual making the 
affirmation the information contained in the financial report is true 
and correct.\277\ The individual making the oath or affirmation must be 
a duly authorized officer if the nonbank SD is a corporation, or one of 
the persons specified in the regulation for business organizations that 
are not corporations.\278\
---------------------------------------------------------------------------

    \277\ 17 CFR 23.105(f).
    \278\ Id.
---------------------------------------------------------------------------

    The CFTC Financial Reporting Rules further require a nonbank SD to 
make certain financial information publicly available by posting the 
information on its public website.\279\ Specifically, a nonbank SD must 
post on its website a statement of financial condition and a statement 
detailing the amount of the nonbank SD's regulatory capital and the 
minimum regulatory capital requirement based on its audited financial 
statements and based on its unaudited financial statements that are as 
of a date that is six months after the nonbank SD's audited financial 
statements.\280\ Such public disclosure is required to be made within 
10 business days of the filing of the audited financial statements with 
the Commission, and within 30 calendar days of the filing of the 
unaudited financial statements required with the Commission.\281\ A 
nonbank SD also must obtain written approval from NFA to change the 
date of its fiscal year-end for financial reporting.\282\
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    \279\ 17 CFR 23.105(i).
    \280\ Id.
    \281\ Id.
    \282\ 17 CFR 23.105(g).
---------------------------------------------------------------------------

    The CFTC Financial Reporting Rules also require a nonbank SD to 
provide the Commission and NFA with information regarding the 
custodianship of margin for uncleared swap transactions (``Margin 
Report'').\283\ The Margin Report must contain: (i) the name and 
address of each custodian holding initial margin or variation margin 
that is required for uncleared swaps subject to the CFTC margin rules 
(``uncleared margin rules''), on behalf of the nonbank SD or its swap 
counterparties; (ii) the amount of initial and variation margin 
required by the uncleared margin rules held by each custodian on behalf 
of the nonbank SD and on behalf its swap counterparties; and (iii) the 
aggregate amount of initial margin that the nonbank SD is required to 
collect from, or post with, swap counterparties for uncleared swap 
transactions subject to the uncleared margin rules.\284\ The Commission 
requires this information in order to monitor the use of custodians by 
nonbank SDs and their swap counterparties. Such information assists the 
Commission in monitoring the safety and soundness of a nonbank SD by 
verifying whether the firm is current with its swap counterparties with 
respect to the posting and collecting of margin required by the 
uncleared margin rules. By requiring the nonbank SD to report the 
required amount of margin to be posted and collected, and the amount of 
margin that is actually posted and collected, the Commission could 
identify potential issues with the margin practices and compliance by 
nonbank SDs that may hinder the ability of the firm to meet its 
obligations to market participants. The Margin Report also allows the 
Commission to identify custodians used by nonbank SDs and their 
counterparties, which may permit the Commission to assess potential 
market issues, including a concentration of custodial services by a 
limited number of banks.
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    \283\ 17 CFR 23.105(m).
    \284\ Id.
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2. PRA-Designated UK Nonbank Swap Dealer Financial Reporting 
Requirements
    The UK PRA Financial Reporting Rules impose financial reporting 
requirements on a PRA-designated UK nonbank SD that are designed to 
provide the PRA with a comprehensive view of the financial information 
and capital position of the firm.
    Specifically, Article 430 of the Reporting (CRR) Part of the PRA 
Rulebook requires a PRA-designated UK nonbank SD to report information 
concerning its capital and financial condition, including information 
on the firm's capital requirements, leverage ratio, large exposures, 
and liquidity requirements.\285\ PRA-designated UK nonbank SDs must 
follow the templates and instructions provided in the PRA Rulebook for 
purposes of the prudential requirements reporting referred to 
COREP.\286\ Under the COREP requirements, PRA-designated UK nonbank SDs 
are required to provide, on a quarterly basis,\287\ calculations in 
relation to the PRA-designated UK nonbank SD's capital and capital 
requirements,\288\ capital ratios and capital levels,\289\ and market 
risk,\290\ among other items.
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    \285\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 4 
Reporting (Part Seven A CRR), Rule 1.
    \286\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions.
    \287\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, 5 Reporting 
Requirements, Chapter 3 Format and Frequency of Reporting on Own 
Funds, Own Funds Requirements.
    \288\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Annex I, Templates C 01.00 and C 02.00.
    \289\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Annex I, Template C 03.00.
    \290\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Annex I, Template C 02.00.
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    In addition to the prudential requirements reporting, Article 
430(3) of the Reporting (CRR) Part of the PRA Rulebook imposes 
financial information reporting on PRA-designated UK nonbank SDs that 
are subject to Section 403(1) of the Companies Act 2006 (i.e., entities 
that are parent companies \291\ and report on a consolidated basis 
using UK-adopted IFRS and that issue securities admitted to trading on 
a UK-

[[Page 8049]]

regulated market).\292\ The relevant reporting templates and 
instructions, referred to as FINREP, are included in Chapter 6 of the 
Reporting (CRR) Part of the PRA Rulebook. Under the FINREP 
requirements, PRA-designated UK nonbank SDs subject to the requirements 
of Article 430(3) of the Reporting (CRR) Part of the PRA Rulebook are 
required to provide the following documents to the PRA, among other 
items: (i) on a quarterly basis, a balance sheet statement (or 
statement of financial position) that reflects the PRA-designated UK 
nonbank SD's financial condition; \293\ (ii) on a quarterly basis, a 
statement of profit or loss; \294\ (iii) on a quarterly basis, a 
breakdown of financial liabilities by product and by counterparty 
sector; \295\ (iv) on a quarterly basis, a listing of subordinated 
financial liabilities; \296\ and (v) on an annual basis, a statement of 
changes in equity.\297\
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    \291\ A parent company (i.e., ``parent undertaking'') is defined 
in Companies Act 2006, Section 1162.
    \292\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 4 
Reporting (Part Seven A CRR), Article 430, Rule 3.
    \293\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Templates 1.1., 1.2., and 1.3 at Annex 
III (for reporting according to IFRS) and Templates 1.1., 1.2., and 
1.3 at Annex IV (for reporting according to national accounting 
frameworks).
    \294\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 2 at Annex III (for reporting 
according to IFRS) and Template 2 at Annex IV (for reporting 
according to national accounting frameworks).
    \295\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 8.1 at Annex III (for reporting 
according to IFRS) and Template 8.1 at Annex IV (for reporting 
according to national accounting frameworks).
    \296\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 8.2 at Annex III (for reporting 
according to IFRS) and Template 8.2. at Template 8.2 at Annex IV 
(for reporting according to national accounting frameworks).
    \297\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 46 at Annex III (for reporting 
according to IFRS) and Template 46 at Annex IV (for reporting 
according to national accounting frameworks).
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    Under the FINREP requirements, a PRA-designated UK nonbank SD 
subject to the requirements of Article 430(3) of the Reporting (CRR) 
Part of the PRA Rulebook is also required to provide the PRA with 
additional financial information, including a breakdown of its loans 
and advances by product and type of counterparty,\298\ as well as 
detailed information regarding its derivatives trading activities,\299\ 
collateral and guarantees.\300\
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    \298\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Templates 5.1 and 6.1 at Annex III (for 
reporting according to IFRS) and Templates 5.1 and 6.1 at Annex IV 
(for reporting according to national accounting frameworks).
    \299\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 10 at Annex III (for reporting 
according to IFRS) and Template 10 at Annex IV (for reporting 
according to national accounting frameworks).
    \300\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 13 at Annex III (for reporting 
according to IFRS) and Template 13 at Annex IV (for reporting 
according to national accounting frameworks).
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    For PRA-designated UK nonbank SD that are not subject to financial 
information reporting under Article 430(3) of the Reporting (CRR) Part 
of the PRA Rulebook, the Regulatory Reporting Part of the PRA Rulebook 
dictates the applicable reporting requirements.\301\ Specifically, as 
firms that fall into Regulated Activity Group 3 (``RAG 3''), PRA-
designated UK nonbank SDs are required to provide the following 
documents to the PRA, among other items: (i) on a quarterly basis, a 
balance sheet statement (or statement of financial position) that 
reflects the PRA-designated UK nonbank SD's financial condition; \302\ 
(ii) on a quarterly basis, a statement of profit or loss; \303\ and 
(iii) on an annual basis, an annual report and accounts.\304\ The 
Applicants represented that the six UK PRA-designated nonbank SDs 
currently registered with the Commission are designated as RAG 3 firms 
and are required to provide the aforementioned documents.\305\
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    \301\ As indicated by the Applicants, the Regulatory Reporting 
Part of the PRA Rulebook applies to all PRA-designated UK nonbank 
SDs. See Responses to Staff Questions dated October 5, 2023.
    \302\ PRA Rulebook, CRR Firms, Regulatory Reporting Part, 
Chapter 9 Regulated Activity Group 3, Rule 9.2 (referencing 
Templates 1.1., 1.2., and 1.3 at Annex III and Templates 1.1., 1.2., 
and 1.3 at Annex IV of Chapter 6 of the Reporting (CRR) Part) and 
Rule 9.3.
    \303\ PRA Rulebook, CRR Firms, Regulatory Reporting Part, 
Chapter 9 Regulated Activity Group 3, Rule 9.2 (referencing Template 
2 at Annex III and Template 2 at Annex IV of Chapter 6 of the 
Reporting (CRR) Part) and Rule 9.3.
    \304\ PRA Rulebook, CRR Firms, Regulatory Reporting Part, 
Chapter 9 Regulated Activity Group 3, Rule 9.2 and Rule 9.3.
    \305\ See Response to Staff Questions of October 5, 2023. For 
the avoidance of doubt, as represented by the Applicants, the six 
PRA-designated UK nonbank SDs currently registered with the 
Commission are subject to the RAG 3 requirements in the Regulatory 
Reporting Part of the PRA Rulebook but are not subject the FINREP 
requirements set forth in Article 430(3) of the Reporting (CRR) Part 
of the PRA Rulebook. As such, the six PRA-designated UK nonbank SDs 
currently registered with the Commission are required to submit to 
the PRA only Templates 1 through 3 of FINREP.
---------------------------------------------------------------------------

    Furthermore, all PRA-designated UK nonbank SDs are required to 
prepare annual audited accounts and a strategic report (together, 
``annual audited financial report'') pursuant to Parts 15 and 16 of the 
Companies Act 2006.\306\ The audit of the accounts and report is 
required to be performed by one or more independent statutory auditors, 
which have the required skill, resources, and experience to perform 
their duties based on the complexity of the firm's business and the 
regulatory requirements to which the firm is subject.\307\ PRA-
designated UK nonbank SDs must submit the annual audited financial 
report to the PRA within 80 business days from the firm's accounting 
reference date.\308\ In addition, under generally applicable company 
law requirements, PRA-designated UK nonbank SDs are required to submit 
the annual audited financial report to the UK Registrar of 
Companies.\309\ The registrar makes the report available to the public 
on its website, free of charge.\310\
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    \306\ Companies Act 2006, Sections 393 to 414D and 475. Section 
475 provides for an exemption from the audit requirement for certain 
entities (i.e., ``small companies'', qualifying ``subsidiary 
companies'' and ``dormant companies.'') None of the six PRA-
designated UK nonbank SD, however, falls into the exempt categories. 
See Responses to Staff Questions dated October 5, 2023.
    \307\ Companies Act 2006, Section 485 et seq.; see also PRA 
Rulebook, CRR Firms, Auditors Part, Rule 3 Auditors' Qualifications, 
and Rule 4 Auditors' Independence.
    \308\ PRA Rulebook, CRR Firms, Regulatory Reporting Part, 
Chapter 9 Regulatory Activity Group 3, Rules 9.1. and 9.4. The 
``accounting reference date'' is determined in accordance with 
Section 391 of the Companies Act 2006 and depending on the firm's 
date of incorporation.
    \309\ See Companies Act 2006, Section 441. The deadline for 
filing the annual audited financial report with the UK Registrar of 
Companies is nine months from the firm's accounting reference date 
for private companies and six months from the firm's accounting 
reference date for public companies. Id., Articles 442 (setting 
forth the filing deadlines by category of firm) and 391 (defining 
the terms ``accounting reference period'' and accounting reference 
date'').
    \310\ See Companies Act 2006, Sections 1080 and 1085. 
Information filed with the UK Registrar of Companies is available 
at: https://www.gov.uk/government/organisations/companies-house.
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    The annual audited accounts must comprise, at a minimum, a balance 
sheet, a profit and loss statement, and notes about the accounts.\311\ 
The auditor's audit report must include: (i) a description of the 
annual accounts subject to the audit and the financial reporting 
framework that was applied in their preparation; (ii) a description of 
the scope of the audit, which must specify the auditing standards used 
to conduct the audit; (iii) an audit opinion stating whether the annual 
accounts give a true and fair view of the state of affairs and/or the 
profit and loss of the firm, as applicable, and whether the annual 
accounts have been prepared in accordance with the relevant financial 
reporting framework; and (iv) a

[[Page 8050]]

reference to any matters emphasized by the auditor that did not qualify 
the audit opinion.\312\
---------------------------------------------------------------------------

    \311\ Companies Act 2006, Section 396.
    \312\ Id., Section 495.
---------------------------------------------------------------------------

    The strategic report is required to include a review of the 
development and performance of the PRA-designated UK nonbank SD's 
during the financial year and a description of the principal risks and 
uncertainties that the firm faces.\313\ The auditors are required to 
express an opinion on whether the strategic report is consistent with 
the accounts for the same financial year, and whether the strategic 
report has been prepared in accordance with applicable legal 
requirements.\314\ The opinion also must state whether the auditor has 
identified material misstatements in the strategic report and, if so, 
describe the misstatement.\315\
---------------------------------------------------------------------------

    \313\ Id., Section 414C.
    \314\ Id., Section 496.
    \315\ Id.
---------------------------------------------------------------------------

    In addition, the SEC's UK Order granting substituted compliance for 
financial reporting to UK nonbank SBSDs, as supplemented by the SEC 
Order on Manner and Format of Filing Unaudited Financial and 
Operational Information, require a UK nonbank SBSD to file an unaudited 
SEC Form X-17A-5 Part II (``FOCUS Report'') with the SEC on a monthly 
basis.\316\ The FOCUS Report is required to include, among other 
statements and schedules: (i) a statement of financial condition; (ii) 
a statement of the UK nonbank SBSD's capital computation in accordance 
with home country Basel-Based requirements; (iii) a statement of 
income/loss; and (iv) a statement of capital withdrawals.\317\ A UK 
nonbank SBDS is required to file its FOCUS Report with the SEC within 
35 calendar days of the month end.\318\
---------------------------------------------------------------------------

    \316\ See, UK Order. See also, SEC Order on Manner and Format of 
Filing Unaudited Financial and Operational Information.
    \317\ See, SEC Order on Manner and Format of Filing Unaudited 
Financial and Operational Information.
    \318\ Id.
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3. Commission Analysis
    The Commission has reviewed the UK Application and the relevant UK 
laws and regulations, and has preliminarily determined that, subject to 
the proposed conditions described below, the financial reporting 
requirements of the UK PRA Financial Reporting Rules are comparable to 
CFTC Financial Reporting Rules in purpose and effect as they are 
intended to provide the PRA and the Commission, respectively, with 
financial information to monitor and assess the financial condition of 
nonbank SDs and their ability to absorb decreases in firm assets and 
increases in firm liabilities, and to cover losses from business 
activities, including swap dealing activities, without the firm 
becoming insolvent.
    The UK PRA Financial Reporting Rules require PRA-designated UK 
nonbank SDs to prepare and submit to the PRA on a quarterly basis 
unaudited financial information that includes a statement of financial 
condition and a statement of profit or loss. Under the FINREP reporting 
requirements, a PRA-designated UK nonbank SD subject to the 
requirements set forth in Article 430(3) of the Reporting (CRR) Part of 
the PRA Rulebook is also required to provide the PRA with additional 
financial information, including: (i) a schedule of the breakdown of 
financial liabilities by product and by counterparty sector; (ii) a 
breakdown of its loans and advances by product and type of 
counterparty; and (iii) detailed information regarding its derivatives 
trading activities, collateral, and guarantees. PRA-designated UK 
nonbank SDs subject to the Regulatory Reporting Part of the PRA 
Rulebook are not required to submit such additional financial 
information. To the extent the Commission believes some of this 
additional information is necessary to the exercise of its and NFA's 
oversight function, the Commission is proposing, as noted below, to 
require the submission of such information as a condition to the 
Capital Comparability Determination Order.
    In addition, under the COREP reporting requirement, all PRA-
designated UK nonbank SDs are required to provide the PRA on a 
quarterly basis with calculations in relation to the PRA-designated UK 
nonbank SD's capital requirements and capital ratios, among other 
items. The UK PRA Financial Reporting Rules further require all PRA-
designated UK nonbank SDs to prepare and publish an annual audited 
financial report. The annual audited financial report is required to 
include a statement of financial condition and a statement of profit or 
loss, and must also include relevant notes to the financial 
statements.\319\
---------------------------------------------------------------------------

    \319\ Companies Act 2006, Section 396.
---------------------------------------------------------------------------

    The Commission preliminarily finds that the UK PRA Financial 
Reporting Rules impose reporting requirements that are comparable with 
respect to overall form and content to the CFTC Financial Reporting 
Rules, which require each nonbank SD to file, among other items, 
periodic unaudited financial reports with the Commission and NFA that 
contain at a minimum: (i) a statement of financial condition; (ii) a 
statement of profit or loss; and (iii) a statement demonstrating 
compliance with the capital requirements. Accordingly, the Commission 
has preliminarily determined that a PRA-designated UK nonbank SD may 
comply with the financial reporting requirements contained in 
Commission Regulation 23.105 by complying with the corresponding UK PRA 
Financial Reporting Rules, subject to the conditions set forth 
below.\320\
---------------------------------------------------------------------------

    \320\ A PRA-designated UK nonbank SD that qualifies and elects 
to seek substituted compliance with the UK PRA Capital Rules must 
also seek substituted compliance with the UK PRA Financial Reporting 
Rules.
---------------------------------------------------------------------------

    The Commission is proposing to condition the Capital Comparability 
Determination Order on a PRA-designated UK nonbank SD providing the 
Commission and NFA with copies of the relevant templates of the FINREP 
reports and COREP reports that correspond to the PRA-designated UK 
nonbank SD's statement of financial condition, statement of income/
loss, and statement of regulatory capital, total risk exposure, and 
capital ratios. These templates consist of FINREP templates 1.1 
(Balance Sheet Statement: assets), 1.2 (Balance Sheet Statement: 
liabilities), 1.3 (Balance Sheet Statement: equity), and 2 (Statement 
of profit or loss), and COREP templates 1 (Own Funds), 2 (Own Funds 
Requirements) and 3 (Capital Ratios).
    The Commission also notes that PRA-designated UK nonbank SDs submit 
COREP templates in addition to the ones listed above to the PRA. These 
templates generally provide supporting detail to the core templates 
that the Commission is proposing to require from each PRA-designated UK 
nonbank SD. The Commission is not proposing to require a PRA-designated 
UK nonbank SD to file these additional COREP templates as a condition 
to the Capital Comparability Order, and alternatively would exercise 
its authority under Commission Regulation 23.105(h) to direct PRA-
designated UK nonbank SDs to provide such additional information to the 
Commission and NFA on an ad hoc basis as necessary to oversee the 
financial condition of the firms.\321\
---------------------------------------------------------------------------

    \321\ Commission Regulation 23.105(h) provides that the 
Commission or NFA may, by written notice, require any nonbank SD to 
file financial or operational information as may be specified by the 
Commission or NFA. 17 CFR 23.105(h).
---------------------------------------------------------------------------

    As noted in Section D.2. of this Determination, the UK PRA 
Financial Reporting Rules require PRA-designated UK nonbank SDs to 
submit the unaudited FINREP and COREP templates to PRA on a quarterly 
basis.

[[Page 8051]]

The CFTC Financial Reporting Rules contain a more frequent reporting 
requirement by requiring nonbank SDs that elect the Bank-Based Approach 
to file unaudited financial information with the Commission and NFA, on 
a monthly basis.\322\ The financial statement reporting requirements 
are an integral part of the Commission's and NFA's oversight programs 
to effectively and timely monitor nonbank SDs' compliance with capital 
and other financial requirements, and for Commission and NFA staff to 
assess the overall financial condition and business operations of 
nonbank SDs. The Commission has extensive experience with monitoring 
the financial condition of registrants through the receipt of financial 
statements, including FCMs and, more recently, nonbank SDs. Both FCMs 
and nonbank SDs that elect the Bank-Based Approach or NLA Approach file 
financial statements with the Commission and NFA on a monthly basis. 
The Commission preliminarily believes that receiving financial 
information from PRA-designated UK nonbank SDs on a quarterly basis is 
not comparable with the CFTC Financial Reporting Rules and would impede 
the Commission's and NFA's ability to effectively and timely monitor 
the financial condition of PRA-designated UK nonbank SDs for the 
purposes of assessing their safety and soundness, as well as their 
ability to meet obligations to creditors and counterparties without 
becoming insolvent. Therefore, the Commission is preliminarily 
proposing to include a condition in the Capital Comparability 
Determination Order to require PRA-designated UK nonbank SDs to file 
the applicable templates of the FINREP reports and COREP reports with 
the Commission and NFA on a monthly basis. The Commission also is 
proposing to condition the Capital Comparability Determination Order on 
the PRA-designated UK nonbank SD filing the above-listed templates of 
the FINREP reports and COREP reports with the Commission and NFA within 
35 calendar days of the end of each month.\323\
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    \322\ Commission Regulation 23.105(d) (17 CFR 23.105(d)).
    \323\ The proposed condition for PRA-designated UK nonbank SDs 
to file monthly unaudited financial information with the Commission 
and NFA is consistent with proposed conditions contained in the 
Commission's proposed Capital Comparability Determinations for 
Japanese nonbank SDs, Mexican nonbank SDs, and EU nonbank SDs. See 
Proposed Japan Order, Proposed Mexico Order, and Proposed EU Order.
---------------------------------------------------------------------------

    The Commission is further proposing that in lieu of filing such 
FINREP and COREP reports, PRA-designated UK nonbank SDs that are 
registered with the SEC as UK nonbank SBSDs could satisfy this 
condition by filing with the CFTC and NFA, on a monthly basis, copies 
of the unaudited FOCUS Reports that the PRA-designated UK nonbank SDs 
are required to file with the SEC pursuant to the SEC UK Order, as 
supplemented by the SEC Order on Manner and Format of Filing Unaudited 
Financial and Operational Information. The FOCUS Report is required to 
include, among other statements and schedules: (i) a statement of 
financial condition; (ii) a statement of the UK nonbank SBSD's capital 
computation in accordance with home country Basel-Based requirements; 
(iii) a statement of income/loss; and (iv) a statement of capital 
withdrawals.\324\
---------------------------------------------------------------------------

    \324\ See, SEC Order on Manner and Format of Filing Unaudited 
Financial and Operational Information.
---------------------------------------------------------------------------

    The filing of a FOCUS Report would be at the election of the PRA-
designated UK nonbank SD as an alternative to the filing of unaudited 
FINREP and COREP templates that such firms would otherwise be required 
to file with the Commission and NFA pursuant to the proposed Order. All 
six of the PRA-designated UK nonbank SDs are currently registered with 
the SEC as UK nonbank SBSDs and would be eligible to file copies of 
their monthly FOCUS Report with the Commission and NFA in lieu of the 
FINREP and COREP templates and Schedule 1. A PRA-designated UK nonbank 
SD electing to file copies of its monthly FOCUS Report would be 
required to submit the reports to the Commission and NFA within 35 
calendar days of the end of each month.\325\
---------------------------------------------------------------------------

    \325\ Commission Regulation 23.105(d)(3) currently provides that 
a nonbank SD or nonbank MSP that is also registered with the SEC as 
a broker or dealer, an SBSD, or a major security-based swap 
participant may elect to file a FOCUS Report in lieu of the 
financial reports required by the Commission. In a separate 
rulemaking, the Commission has proposed to amend Regulation 
23.105(d)(3) to mandate the filing of a FOCUS Report by such dually-
registered entities, including dually-registered non-U.S. nonbank 
SDs, in lieu of the Commission's financial reports. See CFTC Press 
Release 8836-23 issued on December 15, 2023, available at cftc.gov. 
If the Commission adopts such a requirement, the Commission would 
also require PRA-designated UK nonbank SDs that are registered with 
the SEC as UK nonbank SBSDs to file FOCUS Reports with the 
Commission.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to condition the Capital 
Comparability Determination Order on a PRA-designated UK nonbank SD 
submitting to the Commission and NFA copies of the PRA-designated UK 
nonbank SD's annual audited financial report that is required to be 
prepared pursuant to the Companies Act 2006.\326\ PRA-designated UK 
nonbank SDs would be required to file the annual audited financial 
report with the Commission and NFA on the earlier of the date the 
report is filed with the PRA or the date the report is required to be 
filed with the PRA.\327\
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    \326\ Companies Act 2006, Parts 15 and 16.
    \327\ PRA-designated UK nonbank SDs are required to submit the 
annual audited financial report to the PRA within 80 business days 
of the firm's accounting reference date. See PRA Rulebook, 
Regulatory Reporting Part, Rule 9.1.
---------------------------------------------------------------------------

    The Commission is also proposing to condition the Capital 
Comparability Determination Order on the PRA-designated UK nonbank SD 
providing the reports and statements with balances converted to U.S. 
dollars.\328\ The Commission, however, recognizes that the requirement 
to convert accounts denominated in British pound to U.S. dollars on the 
annual audited financial report may impact the opinion provided by the 
independent auditor. The Commission is therefore proposing to accept 
the annual audited financial report denominated in British pound.
---------------------------------------------------------------------------

    \328\ The conversion of account balances from British pound to 
U.S. dollars is not required to be subject to the audit of the 
independent auditor. A PRA-designated UK nonbank SD must report the 
exchange rate that it used to convert balances from British pound to 
U.S. dollars to the Commission and NFA as part of the financial 
reporting.
---------------------------------------------------------------------------

    The Commission is proposing to impose these conditions as they are 
necessary to ensuring that the CFTC Financial Reporting Rules and UK 
PRA Financial Reporting Rules, supplemented by the proposed conditions, 
are comparable and provide the Commission and NFA with appropriate 
financial information to effectively monitor the financial condition of 
PRA-designated UK nonbank SDs. Frequent financial reporting is a 
central component of the Commission's and NFA's programs for monitoring 
and assessing the safety and soundness of nonbank SDs as required under 
section 4s(e) of the CEA. Although, as further discussed in Section 
F.2. below, the Commission preliminarily believes that the PRA has the 
necessary powers to supervise and enforce compliance by PRA-designated 
UK nonbank SDs with applicable capital and financial reporting 
requirements, the Commission is proposing the conditions to facilitate 
the timely access to information allowing the Commission and NFA to 
effectively monitor and assess the ongoing financial condition of all 
nonbank SDs, including PRA-designated UK nonbank SDs, to help ensure 
their safety and soundness and their ability to meet their financial 
obligations to customers, counterparties, and creditors.
    The Commission preliminarily considers that its approach of 
requiring

[[Page 8052]]

PRA-designated UK nonbank SDs to provide the Commission and NFA with 
the selected FINREP and COREP templates and the annual audited 
financial report that the firms currently file with the PRA strikes an 
appropriate balance of ensuring that the Commission receives the 
financial reporting necessary for the effective monitoring of the 
financial condition of the nonbank SDs, while also recognizing the 
existing regulatory structure of the UK PRA Financial Reporting Rules. 
Under the proposed conditions, with limited exceptions, the PRA-
designated UK nonbank SD would not be required to prepare different 
financial reports and statements for filing with the Commission, but 
would be required to prepare selected reports and statements in the 
content and format used for submissions to the PRA and convert the 
balances to U.S. dollars so that Commission staff may efficiently 
analyze the financial information. Although the Commission is proposing 
to require submission of certain reports (i.e., selected FINREP and 
COREP templates) on a more frequent basis (monthly instead of quarterly 
as required by the UK PRA Financial Reporting Rules), the proposed 
conditions provide the PRA-designated UK nonbank SDs with 35 calendar 
days from the end of each month to convert balances to U.S. dollars. In 
addition, PRA-designated UK nonbank SDs that are registered as SBSDs 
with the SEC would have the option of filing a copy of the FOCUS Report 
they submit to the SEC in lieu of the FINREP and COREP templates. The 
Commission preliminarily believes that by requiring that PRA-designated 
UK nonbank SDs file unaudited financial reports on a monthly basis 
instead of quarterly, the Commission would help ensure that the CFTC 
Financial Reporting Rules and the UK PRA Financial Reporting Rules 
achieve a comparable outcome.
    The Commission is also proposing to condition the Capital 
Comparability Determination Order on PRA-designated UK nonbank SDs 
filing with the Commission and NFA, on a monthly basis, the aggregate 
securities, commodities, and swap positions information set forth in 
Schedule 1 of appendix B to subpart E of part 23.\329\ The Commission 
is proposing to require that Schedule 1 be filed with the Commission 
and NFA as part of the PRA-designated UK nonbank SD's monthly 
submission of selected FINREP and COREP templates or FOCUS Report, as 
applicable. Schedule 1 provides the Commission and NFA with detailed 
information regarding the financial positions that a nonbank SD holds 
as of the end of each month, including the firm's swap positions, which 
will allow the Commission and NFA to monitor the types of investments 
and other activities that the firm engages in and will enhance the 
Commission's and NFA's ability to monitor the safety and soundness of 
the firm.
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    \329\ Schedule 1 of appendix B to subpart E of part 23 includes 
a nonbank SD's holding of U.S Treasury securities, U.S. government 
agency debt securities, foreign debt and equity securities, money 
market instruments, corporate obligations, spot commodities, cleared 
and uncleared swaps, cleared and non-cleared security-based swaps, 
and cleared and uncleared mixed swaps in addition to other position 
information.
---------------------------------------------------------------------------

    The Commission is also proposing to condition the Capital 
Comparability Determination Order on a PRA-designated UK nonbank SD 
submitting with each set of selected FINREP and COREP templates, annual 
audited financial report, and the applicable Schedule 1, a statement by 
an authorized representative or representatives of the PRA-designated 
UK nonbank SD that to the best knowledge and belief of the person(s) 
the information contained in the respective reports and statements is 
true and correct, including the conversion of balances in the 
statements to U.S. dollars, as applicable. The statement by the 
authorized representative or representatives of the PRA-designated UK 
nonbank SD is in lieu of the oath or affirmation required of nonbank 
SDs under Commission Regulation 23.105(f), and is intended to ensure 
that reports and statements filed with the Commission and NFA are 
prepared and submitted by firm personnel with knowledge of the 
financial reporting of the firm who can attest to the accuracy of the 
reporting and translation.
    The Commission is further proposing to condition the Capital 
Comparability Determination Order on a PRA-designated UK nonbank SD 
filing the Margin Report specified in Commission Regulation 23.105(m) 
with the Commission and NFA. The Margin Report contains: (i) the name 
and address of each custodian holding initial margin or variation 
margin on behalf of the nonbank SD or its swap counterparties; (ii) the 
amount of initial and variation margin held by each custodian on behalf 
of the nonbank SD and on behalf its swap counterparties; and (iii) the 
aggregate amount of initial margin that the nonbank SD is required to 
collect from, or post with, swap counterparties for uncleared swap 
transactions.\330\
---------------------------------------------------------------------------

    \330\ 17 CFR 23.105(m).
---------------------------------------------------------------------------

    The Commission preliminarily believes that receiving this margin 
information from PRA-designated UK nonbank SDs will assist in the 
Commission's assessment of the safety and soundness of the PRA-
designated UK nonbank SDs. Specifically, the Margin Report would 
provide the Commission with information regarding a PRA-designated UK 
nonbank SD's swap book, the extent to which it has uncollateralized 
exposures to counterparties or has not met its financial obligations to 
counterparties. This information, along with the list of custodians 
holding both the firms' and counterparties' collateral for swap 
transactions, is expected to assist the Commission in assessing and 
monitoring potential financial impacts to the nonbank SD resulting from 
defaults on its swap transactions. The Commission is further proposing 
to require a PRA-designated UK nonbank SD to file the Margin Report 
with the Commission and NFA within 35 calendar days of the end of each 
month, which corresponds with the proposed timeframe for the PRA-
designated UK nonbank SD to file the selected FINREP and COREP 
templates or FOCUS Report, as applicable, and proposing to require the 
Margin Report to be provided with balances reported in U.S. dollars.
    The Commission notes that the proposed conditions in the UK PRA 
Capital Comparability Determination Order are consistent with the 
proposed conditions set forth in the proposed Capital Comparability 
Determination Orders for Japan, Mexico, and the EU,\331\ and reflects 
the Commission's approach of preliminarily determining that non-U.S. 
nonbank SDs could meet their financial statement reporting obligations 
to the Commission by filing financial reports currently prepared for 
home country regulators, albeit in the case of certain financial 
reports under a more frequent submission schedule, and, in certain 
circumstances, with balances expressed in U.S. dollars. The 
Commission's proposed conditions also include certain financial 
information and notices that the Commission believes are necessary for 
effective monitoring of PRA-designated UK nonbank SDs that are not 
currently part of the PRA's supervision regimes.
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    \331\ See Proposed Japan Order, Proposed Mexico Order, and 
Proposed EU Order.
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    The Commission is not proposing to require that a PRA-designated UK 
nonbank SD that has been approved by the PRA to use capital models 
files with the Commission or NFA the monthly model metric information 
contained in

[[Page 8053]]

Commission Regulation 23.105(k) \332\ or that a PRA-designated UK 
nonbank SD files with the Commission or NFA the monthly counterparty 
credit exposure information specified in Commission Regulation 
23.105(l) and Schedules 2, 3, and 4 of appendix B to subpart E of part 
23.\333\
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    \332\ Commission Regulation 23.105(k) requires a nonbank SD that 
has obtained approval from the Commission or NFA to use internal 
capital models to submit to the Commission and NFA each month 
information regarding its risk exposures, including VaR and credit 
risk exposure information when applicable. The model metrics are 
intended to provide the Commission and NFA with information that 
would assist with the ongoing oversight and assessment of internal 
market risk and credit risk models that have been approved for use 
by a nonbank SD. 17 CFR 23.105(k).
    \333\ Commission Regulation 23.105(l) requires each nonbank SD 
to provide information to the Commission and NFA regarding its 
counterparty credit concentration for the 15 largest exposures in 
derivatives, a summary of its derivatives exposures by internal 
credit ratings, and the geographic distribution of derivatives 
exposures for the 10 largest countries in Schedules 2, 3, and 4, 
respectively. 17 CFR 23.105(l).
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    The Commission, in making the preliminary determination to not 
require a PRA-designated UK nonbank SD to file the model metrics and 
counterparty exposures required by Commission Regulations 23.105(k) and 
(l), respectively, recognizes that NFA's current risk monitoring 
program requires each bank SD and each nonbank SD, including each PRA-
designated UK nonbank SD, to file risk metrics addressing market risk 
and credit risk with NFA on a monthly basis. NFA's monthly risk metric 
information includes: (i) VaR for interest rates, credit, foreign 
exchange, equities, commodities, and total VaR; (ii) total stressed 
VaR; (iii) interest rate, credit spread, foreign exchange market, and 
commodity sensitivities; (iv) total swaps current exposure both before 
and after offsetting against collateral held by the firm; and (v) a 
list of the 15 largest swaps counterparty current exposures before 
collateral and net of collateral.\334\
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    \334\ See NFA Financial Requirements, Section 17--Swap Dealer 
and Major Swap Participant Reporting Requirements, and Notice to 
Members--Monthly Risk Data Reporting for Swap Dealers (May 30, 
2017).
---------------------------------------------------------------------------

    Although there are differences in the information required under 
Commission Regulations 23.105(k) and (l), the NFA risk metrics provide 
a level of information that allows NFA to identify SDs that may pose 
heightened risk and to allocate appropriate NFA regulatory oversight 
resources. The Commission preliminarily believes that the proposed 
financial statement reporting set forth in the proposed Capital 
Comparability Determination Order, and the risk metric and counterparty 
exposure information currently reported by nonbank SDs (including PRA-
designated UK nonbank SDs) under NFA rules, provide the appropriate 
balance of recognizing the comparability of the UK PRA Financial 
Reporting Rules to the CFTC Financial Reporting Rules while also 
ensuring that the Commission and NFA receive sufficient data to monitor 
and assess the overall financial condition of PRA-designated UK nonbank 
SDs. The Commission has access to the monthly risk metric filings 
collected by NFA. In addition, the Commission retains authority to 
request PRA-designated UK nonbank SDs to provide information regarding 
their model metrics and counterparty exposures on an ad hoc basis.
    Furthermore, the Commission notes that although the UK PRA 
Financial Reporting Rules do not contain an analogue to the CFTC's 
requirements for nonbank SDs to file monthly model metric information 
and counterparty exposures information, the PRA has access to 
comparable information. More specifically, under the UK PRA Financial 
Reporting Rules, the PRA has broad powers to request any information 
necessary for the exercise of its functions.\335\ As such, the PRA has 
access to information allowing it to assess the ongoing performance of 
risk models and to monitor the PRA-designated UK nonbank SD's credit 
exposures, which may be comprised of credit exposures to primarily 
other UK and EU counterparties. In addition, the COREP reports, which 
PRA-designated UK nonbank SDs are required to file with the PRA on a 
quarterly basis, include information regarding the PRA-designated UK 
nonbank SD's risk exposure amounts, including risk-weighted exposure 
amounts for credit risk.\336\
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    \335\ See FSMA, Part XI (indicating that the PRA has broad 
information gathering powers).
    \336\ See PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 
6 Templates and Instructions, Annex I.
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    The Commission invites public comment on its analysis above, 
including comment on the UK Application and relevant UK PRA Financial 
Reporting Rules. The Commission also invites comment on the proposed 
conditions listed above and on the Commission's proposal to exclude 
PRA-designated UK nonbank SDs from certain reporting requirements 
outlined above. Specifically, the Commission requests comment on its 
preliminary determination to not require PRA-designated UK nonbank SDs 
to submit the information set forth in Commission Regulations 23.105(k) 
and (l). Are there specific elements of the data required under 
Commission Regulations 23.105(k) and (l) that the Commission should 
require of PRA-designated UK nonbank SDs for purposes of monitoring 
model performance?
    The Commission requests comment on the proposed filing dates for 
the reports and information specified above. Specifically, do the 
proposed filing dates provide sufficient time for PRA-designated UK 
nonbank SDs to prepare the reports, and, where required, convert 
balances into U.S. dollars? If not, what period of time should the 
Commission consider imposing on one or more of the reports?
    The Commission also requests specific comment regarding the setting 
of compliance dates for any new reporting obligations that the proposed 
Capital Comparability Determination Order would impose on PRA-
designated UK nonbank SDs. In this connection, if the Commission were 
to require PRA-designated UK nonbank SDs to file the Margin Report 
discussed above and included in the proposed Order below, how much time 
would PRA-designated UK nonbank SDs need to develop new systems or 
processes to capture information that is required? Would PRA-designated 
UK nonbank SDs need a period of time to develop any systems or 
processes to meet any other reporting obligations in the proposed 
Capital Comparability Determination Order? If so, what would be an 
appropriate amount of time for a PRA-designated UK nonbank SD to 
develop and implement such systems or processes?

E. Notice Requirements

1. CFTC Nonbank SD Notice Reporting Requirements
    The CFTC Financial Reporting Rules require nonbank SDs to provide 
the Commission and NFA with written notice of certain defined 
events.\337\ The notice provisions are intended to provide the 
Commission and NFA with an opportunity to assess whether the 
information contained in the notices indicates the existence of actual 
or potential financial and/or operational issues at a nonbank SD, and, 
when necessary, allows the Commission and NFA to engage the nonbank SD 
in an effort to minimize potential adverse impacts on swap 
counterparties and the larger swaps market. The notice provisions are 
part of the Commission's overall program for helping to ensure the 
safety and soundness of nonbank SDs and the swaps markets in general.
---------------------------------------------------------------------------

    \337\ 17 CFR 23.105(c).

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[[Page 8054]]

    The CFTC Financial Reporting Rules require a nonbank SD to provide 
written notice within specified timeframes if the firm is: (i) 
undercapitalized; (ii) fails to maintain capital at a level that is in 
excess of 120 percent of its minimum capital requirement; or (iii) 
fails to maintain current books and records.\338\ A nonbank SD is also 
required to provide written notice if the firm experiences a 30 percent 
or more decrease in excess regulatory capital from its most recent 
financial report filed with the Commission.\339\ A nonbank SD also is 
required to provide notice if the firm fails to post or collect initial 
margin for uncleared swap and non-cleared security-based swap 
transactions or exchange variation margin for uncleared swap and non-
cleared security-based swap transactions as required by the 
Commission's uncleared swaps margin rules or the SEC's non-cleared 
security-based swaps margin rules, respectively, if the aggregate is 
equal to or greater than: (i) 25 percent of the nonbank SD's required 
capital under Commission Regulation 23.101 calculated for a single 
counterparty or group of counterparties that are under common ownership 
or control; or (ii) 50 percent of the nonbank SD's required capital 
under Commission Regulation 23.101 calculated for all of the firm's 
counterparties.\340\
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    \338\ 17 CFR 23.105(c)(1), (2), and (3).
    \339\ 17 CFR 23.105(c)(4).
    \340\ 17 CFR 23.105(c)(7).
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    The CFTC Financial Reporting Rules further require a nonbank SD to 
provide notice two business days prior to a withdrawal of capital by an 
equity holder that would exceed 30 percent of the firm's excess 
regulatory capital.\341\ Finally, a nonbank SD that is dually-
registered with the SEC as an SBSD or major security based swap 
participant (``MSBSP'') must file a copy of any notice with the 
Commission and NFA that the SBSD or MSBSP is required to file with the 
SEC under SEC Rule 18a-8 (17 CFR 240.18a-8).\342\ SEC Rule 18a-8 
requires SBSDs and MSBSPs to provide written notice to the SEC for 
comparable reporting events as in the CFTC Capital Rule in Commission 
Regulation 23.105(c), including if a SBSD or MSBSP is undercapitalized 
or fails to maintain current books and records.
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    \341\ 17 CFR 23.105(c)(5).
    \342\ 17 CFR 23.105(c)(6).
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2. PRA-Designated UK Nonbank Swap Dealer Notice Requirements
    The UK capital and resolution frameworks require PRA-designated UK 
nonbank SDs to provide certain notices to the PRA concerning the firm's 
compliance with relevant laws and regulations. Specifically, the UK PRA 
Financial Reporting Rules require a PRA-designated UK nonbank SD to 
provide notice to the PRA within five business days if the firm fails 
to meet its combined buffer requirement, which at a minimum consists of 
a capital conservation buffer of 2.5 percent of the PRA-designated UK 
nonbank SD's total risk exposure amount.\343\ As noted earlier, to meet 
its capital buffer requirements, a PRA-designated UK nonbank SDs must 
hold common equity tier 1 capital in addition to the minimum common 
equity tier 1 ratio requirement of 4.5 percent of the firm's core 
capital requirement of 8 percent of the firm's total risk exposure 
amount. The notice to the PRA must be accompanied by a capital 
conservation plan that sets out how the PRA-designated UK nonbank SD 
will restore its capital levels.\344\ The capital conservation plan is 
required to include: (i) the ``maximum distributable amount'' 
calculated in accordance with the PRA rules; (ii) estimates of income 
and expenditures and a forecast balance sheet; (iii) measures to 
increase the capital ratios of the PRA-designated UK nonbank SD; and 
(iv) a plan and timeframe for the increase in the capital of the PRA-
designated UK nonbank SD with the objective of meeting fully the 
combined buffer requirement.\345\
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    \343\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 4 
Capital Conservation Measures, Rule 4.4. The combined capital buffer 
requirement is the total common equity tier 1 capital required to 
meet the sum of the capital conservation buffer and the institution-
specific countercyclical capital buffer. PRA Rulebook, Capital 
Buffers Part, Chapter 1 Application and Definitions, Rule 1.2.
    \344\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 4 
Capital Conservation Measures, Rules 4.4 and 4.5.
    \345\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 4 
Capital Conservation Measures, Rule 4.5.
---------------------------------------------------------------------------

    The PRA assesses the capital conservation plan and will approve the 
plan only if it considers that the plan would be reasonably likely to 
conserve or raise sufficient capital to enable the PRA-designated UK 
nonbank SD to meet its combined capital buffer requirement within a 
timeframe that the PRA considers to be appropriate.\346\ A PRA-
designated UK nonbank SD is required to notify the PRA as early as 
possible where it has identified a material risk to its ability to meet 
the combined buffer according to the capital conservation plan and 
timeframe approved by the PRA.\347\
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    \346\ Supervisory Statement SS6/14 Implementing Capital Buffers, 
Prudential Regulation Authority, January 2021 (``SS6/14''), 
available here: https://www.bankofengland.co.uk/prudential-regulation/publication/2014/implementing-crdiv-capital-buffers-ss.
    \347\ See id.
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    In addition, a PRA-designated UK nonbank SD must notify the PRA if 
the firm's management considers that the firm is failing or will in the 
near future fail to satisfy one or more of the ``threshold 
conditions,'' which are the minimum requirements that a PRA-designated 
UK nonbank SD must meet in order to be permitted to carry the regulated 
activities in which it engages.\348\ In broad terms, the PRA's 
threshold conditions include, among other things, requirements that the 
firm has appropriate financial resources and capacity to measure, 
monitor and manage risks.\349\
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    \348\ PRA Rulebook, CRR Firms, Notifications Part, Chapter 8 
Specific Notifications, Rule 8.3.
    \349\ FSMA, Part 4A and Schedule 6.
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3. Commission Analysis
    The Commission has reviewed the UK Application and the relevant UK 
laws and regulations, and has preliminarily determined that the UK PRA 
Financial Reporting Rules related to notice provisions, subject to the 
conditions specified below, are comparable to the notice provisions of 
the CFTC Financial Reporting Rules. The Commission is therefore 
proposing to issue a Capital Comparability Determination Order 
providing that a PRA-designated UK nonbank SD may comply with the 
notice provisions required under UK laws and regulations in lieu of 
certain notice provisions required of nonbank SDs under Commission 
Regulation 23.105(c),\350\ subject to the conditions set forth below.
---------------------------------------------------------------------------

    \350\ 17 CFR 23.105(c).
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    The notice provisions contained in Commission Regulation 23.105(c) 
are intended to provide the Commission and NFA with information in a 
prompt manner regarding actual or potential financial or operational 
issues that may adversely impact the safety and soundness of a nonbank 
SD by impairing the firm's ability to meet its obligations to 
counterparties, creditors, and the general swaps market. Upon the 
receipt of a notice from a nonbank SD under Commission Regulation 
23.105(c), the Commission and NFA initiate reviews of the facts and 
circumstances that resulted in the notice being filed including, as 
appropriate, communicating with personnel of the nonbank SD. The review 
of the facts and the interaction with the personnel of the nonbank SD 
provide the Commission and NFA with information to develop an 
assessment of whether it is necessary for the nonbank SD to take 
remedial

[[Page 8055]]

action to address potential financial or operational issues, and 
whether the remedial actions instituted by the nonbank SD properly 
address the issues that are the root cause of the operational or 
financial issues. Such actions may include the infusion of additional 
capital into the firm, or the development and implementation of 
additional internal controls to address operational issues. The notice 
filings further allow the Commission and NFA to monitor the firm's 
performance after the implementation of remedial actions to assess the 
effectiveness of such actions.
    The UK PRA Financial Reporting Rules require a PRA-designated UK 
nonbank SD to provide notice to the PRA if the firm fails to maintain a 
minimum capital ratio of common equity tier 1 capital to risk-weighted 
assets equal or greater than 7 percent (4.5 percent of the core capital 
requirement plus the 2.5 percent capital conservation buffer 
requirement, assuming no other capital buffer requirements apply). The 
PRA-designated UK nonbank SD is also required to file a capital 
conservation plan with its notice to the PRA. The capital conservation 
plan is required to contain information regarding actions that the PRA-
designated UK nonbank SD will take to ensure proper capital adequacy.
    The Commission has preliminarily determined that the requirement 
for a PRA-designated UK nonbank SD to provide notice of a breach of its 
capital buffer requirements to the PRA is not sufficiently comparable 
in purpose and effect to the CFTC notice provisions contained in 
Commission Regulation 23.105(c)(1) and (2),\351\ which require a 
nonbank SD to provide notice to the Commission and to NFA if the firm 
fails to meet its minimum capital requirement or if the firm's 
regulatory capital falls below 120 percent of its minimum capital 
requirement (``Early Warning Level''). The requirement for a PRA-
designated UK nonbank SD to provide notice of a breach of its capital 
buffer requirements does not achieve a comparable outcome to the CFTC's 
Early Warning Level requirement due to the difference in the thresholds 
triggering a notice requirement in the respective rule sets.
---------------------------------------------------------------------------

    \351\ 17 CFR 23.105(c)(1) and (2).
---------------------------------------------------------------------------

    The requirement for a nonbank SD to file notice with the Commission 
and NFA if the firm becomes undercapitalized or if the firm experiences 
a decrease of excess regulatory capital below defined levels is a 
central component of the Commission's and NFA's oversight program for 
nonbank SDs.\352\ Therefore, the Commission preliminarily believes that 
it is necessary for the Commission and NFA to receive copies of notices 
filed under the Capital Buffers Part of the PRA Rulebook by PRA-
designated UK nonbank SDs alerting the PRA of a breach of the PRA-
designated UK nonbank SD's combined capital buffer. The notice must be 
filed by the PRA-designated UK nonbank SD within 24 hours of the filing 
of the notice with the PRA, and the Commission expects that, upon the 
receipt of a notice, Commission staff and NFA staff will engage with 
staff of the PRA-designated UK nonbank SD to obtain an understanding of 
the facts that led to the filing of the notice and will discuss with 
the PRA-designated UK nonbank SD the firm's capital conservation plan. 
The proposed condition would not require the PRA-designated UK nonbank 
SD to file copies of its capital conservation plan with the Commission 
or NFA. To the extent Commission staff needs further information from 
the PRA-designated UK nonbank SD, the Commission expects to request 
such information as part of its assessment of the notice and its 
communications with the PRA-designated UK nonbank SD.
---------------------------------------------------------------------------

    \352\ See Commission Regulation 23.105(c)(4), which requires a 
nonbank SD to file notice with the Commission and NFA if it 
experiences decrease in excess capital of 30 percent or more from 
the excess capital reported in its last financial filing with the 
Commission. 17 CFR 23.105(c)(4).
---------------------------------------------------------------------------

    In addition, due to the lack of a sufficiently comparable analogue 
to the CFTC Financial Reporting Rules' Early Warning Level requirement, 
the Commission is proposing to condition the Capital Comparability 
Determination Order to require a PRA-designated UK nonbank SD to file a 
notice with the Commission and NFA if the firm's capital ratio does not 
equal or exceed 12.6 percent.\353\ The proposed condition would further 
require the PRA-designated UK nonbank SD to file the notice with the 
Commission and NFA within 24 hours of when the firm knows or should 
have known that its regulatory capital was below 120 percent of its 
minimum capital requirement. The timing requirement for the filing of 
the proposed notice with the Commission and NFA is consistent with the 
Commission's requirements for an FCM or a nonbank SD, which are both 
required to file an Early Warning Level notice with the Commission and 
NFA when the firm knows or should have known that its regulatory 
capital is below specified reporting levels.\354\ The requirement for a 
firm to file a notice with the Commission when it knows or should have 
known that its capital is below the reporting level is designed to 
prevent a situation where a firm's deficient recordkeeping leads to an 
inadequate monitoring of the Early Warning Level threshold. More 
generally, the ``should have known'' part of the timing standard for 
the filing of the proposed notice is intended to cover facts and 
circumstances that should reasonably lead the firm to believe that its 
regulatory capital is below 120 percent of the minimum 
requirement.\355\ In practice, even if the PRA-designated UK nonbank 
SD's books and records do not reflect a decrease of regulatory capital 
below 120 percent of the minimum requirement or if the computations 
that may reveal a decrease of regulatory capital below 120 percent have 
not been made yet, the firm would be expected to provide notice if it 
became aware of deficiencies in its recordkeeping processes that could 
result in inaccurate recording of the firm's capital levels or if it 
had other reasons to believe its regulatory capital is below the Early 
Warning Level threshold.\356\
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    \353\ The Commission's proposed reporting level of 12.6 percent 
reflects the aggregate of the PRA-designated UK nonbank SD's core 
capital requirement of 8 percent and capital conservation buffer 
requirement of 2.5 percent, multiplied by a factor of 1.20. For 
purposes of the calculation, the Commission proposes that the 20 
percent capital increase must be comprised of common equity tier 1 
capital (i.e., common equity tier 1 capital must comprise a minimum 
of 8.4 percent, which reflects the aggregate of the 4.5 percent core 
common equity tier 1 capital requirement and the 2.5 percent capital 
conservation buffer requirement, multiplied by a factor of 1.20).
    \354\ 17 CFR 1.12(b) and 17 CFR 23.105(c)(ii)(2).
    \355\ This interpretation is consistent with the Commission's 
discussion of the timing standard in the preamble to the 1998 final 
rule adopting amendments to Commission Regulation 1.12, where the 
Commission noted that the part of the standard requiring an FCM to 
report when it ``should know'' of a problem may be defined as the 
point at which a party, in the exercise of reasonable diligence, 
should become aware of an event. See 63 FR 45711 at 45713.
    \356\ To that point, in discussing the standard applicable to 
the timing requirement for the filing of a notice by an FCM to 
report an undersegregated or undersecured condition (i.e., situation 
where the FCM has insufficient funds in accounts segregated for the 
benefit of customers trading on U.S. contract markets or has 
insufficient funds set aside for customers trading on non-U.S. 
markets to meet the FCM's obligations to its customers), the 
Commission noted that an obligation to file a notice could arise 
even before the required computations that would reveal deficiencies 
must be made. See id.
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    As noted above, a purpose of the proposed Early Warning Level 
notice provision is to allow the Commission and NFA to initiate 
conversations and fact finding with a registrant that may be 
experiencing operational or financial issues that may adversely impact 
the firm's ability to meet its obligations to

[[Page 8056]]

market participants, including customers or swap counterparties. The 
notice filing is a central component of the Commission's and NFA's 
oversight program, and the Commission believes that a firm that is 
experiencing operational challenges that prevent the firm from 
definitively computing its capital level during a period when it 
recognizes from the facts and circumstances that the firm's capital 
level may be below the reporting threshold should file the notice with 
the Commission and NFA. Therefore, the Commission preliminarily deems 
it appropriate to include a similar early warning notice condition in 
the Capital Comparability Determination Order.
    The UK PRA Financial Reporting Rules also do not contain an 
explicit requirement for a PRA-designated UK nonbank SD to notify the 
PRA if the firm fails to maintain current books and records, 
experiences a decrease in regulatory capital over levels previously 
reported, or fails to collect or post initial margin with uncleared 
swap counterparties that exceed certain threshold levels.\357\ The UK 
PRA Financial Reporting Rules also do not require a PRA-designated UK 
nonbank SD to provide the PRA with advance notice of equity withdrawals 
initiated by equity holders that exceed defined amounts or percentages 
of the firm's excess regulatory capital.\358\
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    \357\ 17 CFR 23.105(c)(3), (4), and (7).
    \358\ Commission Regulation 23.105(c)(5) requires a nonbank SD 
to provide written notice to the Commission and NFA two business 
days prior to the withdrawal of capital by action of the equity 
holders if the amount of the withdrawal exceeds 30 percent of the 
nonbank SD's excess regulatory capital. 17 CFR 23.105(c)(5).
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    To ensure that the Commission and NFA receive prompt information 
concerning potential operational or financial issues that may adversely 
impact the safety and soundness of a PRA-designated UK nonbank SD, the 
Commission is proposing to condition the Capital Comparability 
Determination Order to require PRA-designated UK nonbank SDs to file 
certain notices required under the CFTC Financial Reporting Rules with 
the Commission and NFA. In this connection, the Commission is proposing 
to condition the Capital Comparability Determination Order on a PRA-
designated UK nonbank SD providing the Commission and NFA with notice 
if the firm fails to maintain current books and records with respect to 
its financial condition and financial reporting requirements. For 
avoidance of doubt, in this context the Commission believes that books 
and records would include current ledgers or other similar records 
which show or summarize, with appropriate references to supporting 
documents, each transaction affecting the PRA-designated UK nonbank 
SD's asset, liability, income, expense, and capital accounts in 
accordance with the accounting principles accepted by the relevant 
authorities.\359\ The Commission preliminarily believes that the 
maintenance of current books and records is a fundamental and essential 
component of operating as a registered nonbank SD and that the failure 
to comply with such a requirement may indicate an inability of the firm 
to promptly and accurately record transactions and to ensure compliance 
with regulatory requirements, including regulatory capital 
requirements. Therefore, the proposed Order would require a PRA-
designated UK nonbank SD to provide the Commission and NFA with a 
written notice within 24 hours if the firm fails to maintain books and 
records on a current basis.
---------------------------------------------------------------------------

    \359\ For comparison, see Commission Regulation 23.105(b), which 
similarly defines the term ``current books and records'' as used in 
the context of the Commission's requirements. 17 CFR 23.105(b).
---------------------------------------------------------------------------

    The proposed Capital Comparability Determination Order would also 
require a PRA-designated UK nonbank SD to file notice with the 
Commission and NFA if: (i) a single counterparty, or group of 
counterparties under common ownership or control, fails to post 
required initial margin or pay required variation margin on uncleared 
swap and security-based swap positions that, in the aggregate, exceeds 
25 percent of the PRA-designated UK nonbank SD's minimum capital 
requirement; (ii) counterparties fail to post required initial margin 
or pay required variation margin to the PRA-designated UK nonbank SD 
for uncleared swap and security-based swap positions that, in the 
aggregate, exceeds 50 percent of the PRA-designated UK nonbank SD's 
minimum capital requirement; (iii) a PRA-designated UK nonbank SD fails 
to post required initial margin or pay required variation margin for 
uncleared swap and security-based swap positions to a single 
counterparty or group of counterparties under common ownership and 
control that, in the aggregate, exceeds 25 percent of the PRA-
designated UK nonbank SD's minimum capital requirement; and (iv) a PRA-
designated UK nonbank SD fails to post required initial margin or pay 
required variation margin to counterparties for uncleared swap and 
security-based swap positions that, in the aggregate, exceeds 50 
percent of the PRA-designated UK nonbank SD's minimum capital 
requirement. The Commission is proposing to require this notice so that 
it and the NFA may commence communication with the PRA-designated UK 
nonbank SD and the PRA in order to obtain an understanding of the facts 
that have led to the failure to exchange material amounts of initial 
margin and variation margin in accordance with the applicable margin 
rules, and to assess whether there is a concern regarding the financial 
condition of the firm that may impair its ability to meet its financial 
obligations to customers, counterparties, creditors, and general market 
participants, or otherwise adversely impact the firm's safety and 
soundness.
    The proposed Capital Determination Order would not require a PRA-
designated UK nonbank SD to file notices with the Commission and NFA 
concerning withdrawals of capital or changes in capital levels as such 
information will be reflected in the financial statement reporting 
filed with the Commission and NFA as conditions of the Order, and 
because the PRA-designated UK nonbank SD's capital levels are monitored 
by the PRA, which the Commission preliminarily believes renders the 
separate reporting to the Commission superfluous.
    The proposed Capital Comparability Determination Order would 
require a PRA-designated UK nonbank SD to file any notices required 
under the Order with the Commission and NFA reflecting any balances, 
where applicable, in U.S. dollars. Each notice required by the proposed 
Capital Comparability Determination Order must be filed in accordance 
with instructions issued by the Commission or NFA.\360\
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    \360\ The proposed conditions for PRA-designated UK nonbank SDs 
to file a notice with the Commission and NFA if the firm fails to 
maintain current books and records or fails to collect or post 
margin with uncleared swap counterparties that exceed the above-
referenced threshold levels are consistent with the proposed 
conditions in the proposed Capital Comparability Determination 
Orders for Japan, Mexico, and the EU. See Proposed Japan Order, 
Proposed Mexico Order, and Proposed EU Order.
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    The Commission invites public comment on its analysis above, 
including comment on the UK Application and relevant UK Financial 
Reporting Rules. The Commission also invites comment on the proposed 
conditions to the Capital Comparability Determination Order that are 
listed above.
    The Commission requests comment on the timeframes set forth in the 
proposed conditions for PRA-designated UK nonbank SDs to file notices 
with the Commission and NFA. In this regard,

[[Page 8057]]

the proposed conditions would require PRA-designated UK nonbank SDs to 
file certain written notices with the Commission within 24 hours of the 
occurrence of a reportable event or of being alerted to a reportable 
event by the PRA. The Commission requests comment on the issues PRA-
designated UK nonbank SDs may face meeting the filing requirements 
given time-zone difference or governance issues. The Commission also 
requests specific comment regarding the setting of compliance dates for 
the notice reporting conditions that the proposed Capital Comparability 
Determination Order would impose on PRA-designated UK nonbank SDs.

F. Supervision and Enforcement

1. Commission and NFA Supervision and Enforcement of Nonbank SDs
    The Commission and NFA conduct ongoing supervision of nonbank SDs 
to assess their compliance with the CEA, Commission regulations, and 
NFA rules by reviewing financial reports, notices, risk exposure 
reports, and other filings that nonbank SDs are required to file with 
the Commission and NFA. The Commission and/or NFA also conduct periodic 
examinations as part of the supervision of nonbank SDs, including 
routine onsite examinations of nonbank SDs' books, records, and 
operations to ensure compliance with CFTC and NFA requirements.\361\
---------------------------------------------------------------------------

    \361\ Section 17(p)(2) of the CEA requires NFA as a registered 
futures association to establish minimum capital and financial 
requirements for non-bank SDs and to implement a program to audit 
and enforce compliance with such requirements. 7 U.S.C. 21(p)(2). 
Section 17(p)(2) further provides that NFA's capital and financial 
requirements may not be less stringent than the capital and 
financial requirements imposed by the Commission.
---------------------------------------------------------------------------

    As noted in Section D.1. above, financial reports filed by a 
nonbank SD provide the Commission and NFA with information necessary to 
ensure the firm's compliance with minimum capital requirements and to 
assess the firm's overall safety and soundness and its ability to meet 
its financial obligations to customers, counterparties, and creditors. 
A nonbank SD is also required to provide written notice to the 
Commission and NFA if certain defined events occur, including that the 
firm is undercapitalized or maintains a level of capital that is less 
than 120 percent of the firm's minimum capital requirements.\362\ The 
notice provisions, as stated in Section E.1. above, are intended to 
provide the Commission and NFA with information of potential issues at 
a nonbank SD that may impact the firm's ability to maintain compliance 
with the CEA and Commission regulations. The Commission and NFA also 
have the authority to require a nonbank SD to provide any additional 
financial and/or operational information on a daily basis or at such 
other times as the Commission or NFA may specify to monitor the safety 
and soundness of the firm.\363\
---------------------------------------------------------------------------

    \362\ See 17 CFR 23.105(c).
    \363\ See 17 CFR 23.105(h).
---------------------------------------------------------------------------

    The Commission also has authority to take disciplinary actions 
against a nonbank SD for failing to comply with the CEA and Commission 
regulations. Section 4b-1(a) of the CEA \364\ provides the Commission 
with exclusive authority to enforce the capital requirements imposed on 
nonbank SDs adopted under section 4s(e) of the CEA.\365\
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    \364\ 7 U.S.C. 6b-1(a).
    \365\ 7 U.S.C. 6s(e).
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2. PRA's Supervision and Enforcement of PRA-Designated UK Nonbank SDs
    The PRA has supervision, audit, and investigation powers with 
respect to PRA-designated UK nonbank SDs, which include the powers to 
obtain specified information reasonably required in connection with the 
exercise of the PRA's functions, the power to conduct or order 
investigations, and the power to impose sanctions on PRA-designated UK 
nonbank SDs that breach their regulatory obligations, including those 
deriving from the UK PRA Capital Rules and the UK PRA Financial 
Reporting Rules.\366\
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    \366\ FSMA, Parts 4A, XI, and XIV.
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    The PRA also monitors the capital adequacy of PRA-designated UK 
nonbank SDs through supervisory measures on an ongoing basis. The 
monitoring includes assessing the notices and the capital conservation 
plan discussed in Section E.2. above. In addition, the PRA is empowered 
with a variety of measures to address a PRA-designated UK nonbank SD's 
financial deterioration.\367\ Under its general supervisory powers, the 
PRA may impose new requirements to a PRA-designated UK nonbank SD if 
the firm is failing, or likely to fail, to satisfy the threshold 
conditions for which the PRA is responsible.\368\ More specifically, a 
breach in a PRA-designated UK nonbank SD's capital buffers 
automatically triggers restrictions on the firm's ability to make 
certain distributions (e.g., pay certain dividends or employee 
bonuses).\369\ In addition, the PRA may impose administrative penalties 
or other administrative measures, including prudential charges, if a 
PRA-designated nonbank SD's liquidity position falls below the 
liquidity and stable funding requirements.\370\
---------------------------------------------------------------------------

    \367\ See PRA, The Prudential Regulation Authority's approach to 
banking supervision, July 2023, available at: https://www.bankofengland.co.uk/prudential-regulation/publication/pras-approach-to-supervision-of-the-banking-and-insurance-sectors.
    \368\ FSMA, Part 4A, Section 55M.
    \369\ See PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 
4 Capital Conservation Measures, Rule 4.3.
    \370\ See Capital Requirements Regulations 2013, Regulation 35B 
and FSMA, Part XIV Disciplinary Measures (setting forth the PRA's 
disciplinary power with respect to all rules adopted under FSMA). 
The Applicants represented that ``CRR rules'' (i.e., general PRA 
rules applying to CRR firms, including PRA-designated UK nonbank 
SDs) are adopted pursuant to FSMA, Part 9D, and as such the PRA has 
power to impose disciplinary measures in connection with these 
rules. See Response to Staff Questions dated October 5, 2023.
---------------------------------------------------------------------------

    In case of non-compliance with the capital and liquidity 
thresholds, the PRA may also order PRA-designated UK nonbank SDs to 
comply with additional requirements, including: (i) maintaining 
additional capital in excess of the minimum requirements, if certain 
conditions are met; (ii) requiring that the PRA-designated UK nonbank 
SD submit a plan to restore compliance with applicable capital or 
liquidity thresholds; (iii) imposing restrictions on the business or 
operations of the PRA-designated UK nonbank SD; (iv) imposing 
restrictions or prohibitions on distributions or interest payments to 
shareholders or holders of additional tier 1 capital instruments; (v) 
requiring additional or more frequent reporting requirements; and (vi) 
imposing additional specific liquidity requirements.\371\ The PRA may 
also sanction the PRA-designated UK nonbank SD if the firm's capital or 
liquidity fall below the applicable thresholds or the PRA has evidence 
that the firm will breach such thresholds in the next 12 months.\372\ 
The PRA may also withdraw a PRA-designated UK nonbank SD's 
authorization if the firm no longer meets its minimum capital 
requirements.\373\
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    \371\ FSMA, Parts 4A, Sections 55M and 55P, and Capital 
Requirements Regulation 2013, Regulation 35B.
    \372\ FSMA, Parts 4A and XIV.
    \373\ FSMA, Part 4A, Sections 55J-55K.
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    In addition, if the capital and liquidity requirements are 
breached, the PRA may take early measures to intervene, such as 
requiring management to take certain actions, order members of 
management to be removed or replaced, or require changes to the firm's 
business strategy or legal or

[[Page 8058]]

operational structure, among other measures.\374\
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    \374\ Bank Recovery and Resolution (No. 2) Order 2014, Article 2 
(defining ``conditions for early intervention'' in case of breach of 
UK CRR requirements or requirements derived from CRD) and Part 8 
(laying down the procedure to be followed by the PRA to determine 
whether early intervention measures should be taken under FSMA). If 
additional requirements are met, it is also possible that the Bank 
of England, as the resolution authority, may assess the PRA-
designated UK nonbank SD as ``failing or likely to fail,'' 
triggering a resolution action, which could occur even before the 
firm actually breached its minimum capital requirements. Banking Act 
2009, Sections 4 to 83.
---------------------------------------------------------------------------

    Although the PRA generally has broad discretion as to what powers 
it may exercise, the UK PRA Capital Rules and the UK PRA Financial 
Reporting Rules specifically mandate that the PRA require PRA-
designated UK nonbank SDs to hold increased capital when: (i) risks or 
elements of risks are not covered by the capital requirements imposed 
by the UK PRA Capital Rules; (ii) the PRA-designated UK nonbank SD 
lacks robust governance arrangements, appropriate resolution and 
recovery plans, processes to manage large exposures or effective 
processes to maintain on an ongoing basis the amounts, types, and 
distribution of capital needed to cover the nature and level of risks 
to which they might be exposed; or (iii) the sole application of other 
administrative measures would be unlikely to timely and sufficiently 
improve the firm's arrangements and processes.\375\
---------------------------------------------------------------------------

    \375\ Capital Requirements Regulation 2013, Section 34.
---------------------------------------------------------------------------

3. Commission Analysis
    Based on the above, the Commission preliminarily finds that the PRA 
has the necessary powers to supervise, investigate, and discipline PRA-
designated UK nonbank SDs for compliance with the applicable capital, 
financial and reporting requirements, and to detect and deter 
violations of, and ensure compliance with, the applicable capital and 
financial reporting requirements in the UK.
    The Commission would expect to communicate and consult, to the 
fullest extent permissible under applicable law, with the PRA regarding 
the supervision of the financial and operational condition of the PRA-
designated UK nonbank SDs. An appropriate MOU or similar arrangement 
with the PRA would facilitate cooperation and information sharing in 
the context of supervising the PRA-designated UK nonbank SDs. Such an 
arrangement would enhance communication with respect to entities within 
the arrangement's scope (``Covered Firms''), as appropriate, regarding: 
(i) general supervisory issues, including regulatory, oversight, or 
other related developments; (ii) issues relevant to the operations, 
activities, and regulation of Covered Firms; and (iii) any other areas 
of mutual supervisory interest, and would anticipate periodic meetings 
to discuss relevant functions and regulatory oversight programs. The 
arrangement would provide for the Commission and the PRA to inform each 
other of certain events, including any material events that could 
adversely impact the financial or operational stability of a Covered 
Firm, and would provide a procedure for any on-site examinations of 
Covered Firms.
    In the absence of an MOU or similar information sharing 
arrangement, the Commission is proposing to condition the Capital 
Comparability Determination Order on a PRA-designated UK nonbank SD 
providing notice to the Commission and NFA if the PRA has required the 
PRA-designated UK nonbank SD to: (i) maintain additional capital in 
excess of the minimum requirements; (ii) require that the PRA-
designated UK nonbank SD submit a plan to restore compliance with 
applicable capital or liquidity thresholds; (iii) impose restrictions 
on the business or operations of the PRA-designated UK nonbank SD; (iv) 
impose restrictions or prohibitions on distributions or interest 
payments to shareholders or holders of additional tier 1 capital 
instruments; (v) require additional or more frequent reporting 
requirements; or (vi) impose additional specific liquidity 
requirements.\376\ Upon receipt of such notice, the Commission and NFA 
would communicate with the PRA-designated UK nonbank SD to obtain 
further information regarding the underlying issues that prompted the 
PRA to direct the PRA-designated UK nonbank SD to take such actions and 
would obtain information regarding how the PRA-designated UK nonbank SD 
would address the underlying issues.
---------------------------------------------------------------------------

    \376\ PRA's authority to impose such conditions or requirements 
is set forth in FSMA, Part 4A, Sections 55M and 55P, and Capital 
Requirements Regulation 2013, Regulation 35B.
---------------------------------------------------------------------------

    The Commission invites public comment on the UK Application, the UK 
laws and regulations, and the Commission's analysis above regarding its 
preliminary determination that the PRA and the CFTC have supervision 
programs and enforcement authority that are comparable in that the 
purpose of the relevant programs and authority is to ensure that 
nonbank SDs maintain compliance with applicable capital and financial 
reporting requirements.

IV. Proposed Capital Comparability Determination Order

A. Commission's Proposed Comparability Determination

    The Commission's preliminary view, based on the UK Application and 
the Commission's review of applicable UK laws and regulations, is that 
the UK PRA Capital Rules and the UK PRA Financial Reporting Rules, 
subject to the conditions set forth in the proposed Capital 
Comparability Determination Order below, achieve comparable outcomes 
and are comparable in purpose and effect to the CFTC Capital Rules and 
CFTC Financial Reporting Rules. In reaching this preliminary 
conclusion, the Commission recognizes that there are 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. The proposed Capital Comparability 
Determination Order is subject to proposed conditions that are 
preliminarily deemed necessary to promote consistency in regulatory 
outcomes, or to reflect the scope of substituted compliance that would 
be available notwithstanding certain differences. In the Commission's 
preliminary view, the differences between the two rules sets would not 
be inconsistent with providing a substituted compliance framework for 
PRA-designated UK nonbank SDs subject to the conditions specified in 
the proposed Order below.
    Furthermore, the proposed Capital Comparability Determination Order 
is limited to the comparison of the UK PRA Capital Rules to the Bank-
Based Approach contained within the CFTC Capital Rules. As noted 
previously, the Applicants have not requested, and the Commission has 
not performed, a comparison of the UK PRA Capital Rules to the 
Commission's NAL Approach or TNW Approach. In addition, as discussed in 
Section I.C. above, 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 capital comparability determination.

[[Page 8059]]

B. Proposed Capital Comparability Determination Order

    The Commission invites comments on all aspects of the UK 
Application, relevant UK laws and regulations, the Commission's 
preliminary views expressed above, the question of whether requirements 
under the UK PRA Capital Rules are comparable in purpose and effect to 
the Commission's requirement for a nonbank SD to hold regulatory 
capital equal to or greater than 8 percent of its uncleared swap margin 
amount, and the Commission's proposed Capital Comparability 
Determination Order, including the proposed conditions included in the 
proposed Order, set forth below.

C. Proposed Order Providing Conditional Capital Comparability 
Determination for PRA-Designated UK Nonbank Swap Dealers

    It is hereby determined and ordered, pursuant to Commodity Futures 
Trading Commission (``CFTC'' or ``Commission'') Regulation 23.106 (17 
CFR 23.106) under the Commodity Exchange Act (``CEA'') (7 U.S.C. 1 et 
seq.) that a swap dealer (``SD'') subject to the Commission's capital 
and financial reporting requirements under sections 4s(e) and (f) of 
the CEA (7 U.S.C. 6s(e) and (f)), that is organized and domiciled in 
the United Kingdom (``UK'') and designated for prudential supervision 
by the UK Prudential Regulation Authority (``PRA''), may satisfy the 
capital requirements under section 4s(e) of the CEA and Commission 
Regulation 23.101(a)(1)(i) (17 CFR 23.101(a)(1)(i)) (``CFTC Capital 
Rules''), and the financial reporting rules under section 4s(f) of the 
CEA and Commission Regulation 23.105 (17 CFR 23.105) (``CFTC Financial 
Reporting Rules''), by complying with certain specified requirements of 
the UK laws and regulations cited below and otherwise complying with 
the following conditions, as amended or superseded from time to time:
    (1) The SD is not subject to regulation by a prudential regulator 
defined in section 1a(39) of the CEA (7 U.S.C. 1a(39));
    (2) The SD is organized under the laws of the UK and is domiciled 
in the UK;
    (3) The SD is licensed as an investment firm in the UK and is 
designated for prudential supervision by the PRA (``PRA-designated UK 
nonbank SD'');
    (4) The PRA-designated UK nonbank SD is subject to and complies 
with: 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 as restated and 
applicable in the UK (``UK CRR''), the provisions implementing the 
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 (``CRD''), 
including Capital Requirements Regulations 2013 and Capital 
Requirements (Capital Buffers and Macro-prudential Measures) 
Regulations 2014, 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''), the Banking Act 2009 and its secondary legislation, and 
the rules of the PRA as reflected in the PRA Rulebook (collectively the 
``UK PRA Capital Rules'');
    (5) The PRA-designated UK nonbank SD satisfies at all times 
applicable capital ratio and leverage ratio requirements set forth in 
Article 92 of UK CRR and the rules in PRA Rulebook, CRR Firms, Leverage 
Ratio--Capital Requirements and Buffers Part, Chapter 3 Minimum 
Leverage Ratio, the capital conservation buffer requirements set forth 
in PRA Rulebook, CRR Firms, Capital Buffers Part, and applicable 
liquidity requirements set forth in PRA Rulebook, CRR Firms, Liquidity 
Coverage Requirement--UK Designated Investment Firms Part and PRA 
Rulebook, CRR Firms, Liquidity (CRR) Part, and otherwise complies with 
the requirements to maintain a liquidity risk management program as 
required under PRA Rulebook, CRR Firms, Internal Liquidity Adequacy 
Assessment Part;
    (6) The PRA-designated UK nonbank SD is subject to and complies 
with: Reporting (CRR) and Regulatory Reporting parts of the PRA 
Rulebook and the Companies Act 2006, Parts 15 and 16 (collectively and 
together with UK CRR, the ``UK PRA Financial Reporting Rules'');
    (7) The PRA-designated UK nonbank SD maintains at all times an 
amount of regulatory capital in the form of common equity tier 1 
capital as defined in Article 26 of UK CRR, equal to or in excess of 
the equivalent of $20 million in United States dollars (``U.S. 
dollars''). The PRA-designated UK nonbank SD shall use a commercially 
reasonable and observable British pound/U.S. dollar exchange rate to 
convert the value of the pound-denominated common equity tier 1 capital 
to U.S. dollars;
    (8) The PRA-designated UK nonbank SD has filed with the Commission 
a notice stating its intention to comply with the UK PRA Capital Rules 
and the UK PRA Financial Reporting Rules in lieu of the CFTC Capital 
Rules and the CFTC Financial Reporting Rules. The notice of intent 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 UK PRA Financial 
Reporting Rules. A PRA-designated UK nonbank SD may not rely on this 
Capital Comparability Determination Order until it receives 
confirmation from Commission staff, acting pursuant to authority 
delegated by the Commission, that the PRA-designated UK nonbank SD may 
comply with the applicable UK PRA Capital Rules and UK PRA Financial 
Reporting Rules in lieu of the CFTC Capital Rules and CFTC Reporting 
Rules. Each notice filed pursuant to this condition must be submitted 
to the Commission via email to the following address: 
<a href="/cdn-cgi/l/email-protection#8bc6dbcfcde2e5eae5e8e2eae7d9eefafee2f9eee6eee5fff8cbb7eaabe3f9eeedb6" http: cftc.gov">cftc.gov</a>">MPDFinancialRequirements@cftc.gov</a>;
    (9) The PRA-designated UK nonbank SD prepares and keeps current 
ledgers and other similar records in accordance with the PRA Rulebook, 
General Organisational Requirements Part, Rule 2.2 and Record Keeping 
Part, Rule 2.1 and 2.2, and conforming with the applicable accounting 
principles;
    (10) The PRA-designated UK nonbank SD files with the Commission and 
with the National Futures Association (``NFA'') a copy of templates 1.1 
(Balance Sheet Statement: assets), 1.2 (Balance Sheet Statement: 
liabilities), 1.3 (Balance Sheet Statement: equity), and 2 (Statement 
of profit or loss) of the financial reports (``FINREP'') that PRA-
designated UK nonbank SDs are required to submit pursuant to PRA 
Rulebook, CRR Firms, Regulatory Reporting Part, Chapter 9 Regulatory 
Activity Group 3, Rule 9.2, and templates 1 (Own Funds), 2 (Own Funds 
Requirements) and 3 (Capital Ratios) of the common reports (``COREP'') 
that PRA-designated UK nonbank SDs are required to submit pursuant to 
PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 4 Reporting 
(Part Seven A CRR), Article 430 Reporting on Prudential Requirements 
and Financial Information, Rule 1. The FINREP and COREP templates must 
be provided with balances converted to U.S. dollars and must be filed 
with the Commission

[[Page 8060]]

and NFA within 35 calendar days of the end of each month. PRA-
designated UK nonbank SDs that are registered as security-based swap 
dealers (``SBSDs'') with the U.S. Securities and Exchange Commission 
(``SEC'') may comply with this condition by filing with the Commission 
and NFA a copy of Form X-17A-5 (``FOCUS Report'') that the PRA-
designated UK nonbank SD is required to file with the SEC or its 
designee pursuant to an order granting conditional substituted 
compliance with respect to Securities Exchange Act of 1934 Rule 18a-7. 
The copy of the FOCUS Report must be filed with the Commission and NFA 
within 35 calendar days after the end of each month in the manner, 
format and conditions specified by the SEC in 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);
    (11) The PRA-designated UK nonbank SD files with the Commission and 
with NFA a copy of its annual audited accounts and strategic report 
(together, ``annual audited financial report'') that are required to be 
prepared and published pursuant to Parts 15 and 16 of Companies Act 
2006. The annual audited financial report may be reported in British 
pound. The annual audited financial report must be filed with the 
Commission and NFA on the earlier of the date the report is filed with 
the PRA or the date the report is required to be filed with the PRA 
pursuant to the UK PRA Financial Reporting Rules;
    (12) The PRA-designated UK nonbank SD files Schedule 1 of appendix 
B to subpart E of part 23 of the CFTC's regulations (17 CFR 23 subpart 
E--appendix B) with the Commission and NFA on a monthly basis. Schedule 
1 must be prepared with balances reported in U.S. dollars and must be 
filed with the Commission and NFA within 35 calendar days of the end of 
each month;
    (13) The PRA-designated UK nonbank SD submits with each set of 
FINREP and COREP templates, annual audited financial report, and 
Schedule 1 of appendix B to subpart E of part 23 of the CFTC's 
regulations, a statement by an authorized representative or 
representatives of the PRA-designated UK nonbank SD that to the best 
knowledge and belief of the representative or representatives, the 
information contained in the reports, including the conversion of 
balances in the reports to U.S. dollars, is true and correct;
    (14) The PRA-designated UK nonbank SD files a margin report 
containing the information specified in Commission Regulation 23.105(m) 
(17 CFR 23.105(m)) with the Commission and with NFA within 35 calendar 
days of the end of each month. The margin report balances must be 
reported in U.S. dollars;
    (15) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA within 24 hours of being informed by the PRA that 
the firm is not in compliance with any component of the UK PRA Capital 
Rules or the UK PRA Financial Reporting Rules;
    (16) The PRA-designated UK nonbank SD files a notice within 24 
hours with the Commission and NFA if it fails to maintain regulatory 
capital in the form of common equity tier 1 capital as defined in 
Article 26 of UK CRR, equal to or in excess of the U.S. dollar 
equivalent of $20 million using a commercially reasonable and 
observable British pound/U.S. dollar exchange rate;
    (17) The PRA-designated UK nonbank SD provides the Commission and 
NFA with notice within 24 hours of filing a capital conservation plan 
with the PRA pursuant to PRA Rulebook, CRR Firms, Capital Buffers Part, 
Chapter 4 Capital Conservation Measures, Rule 4.4, indicating that the 
firm has breached its combined capital buffer requirement;
    (18) The PRA-designated UK nonbank SD provides the Commission and 
NFA with notice within 24 hours if it is required by the PRA to 
maintain additional capital or additional liquidity requirements, or to 
restrict its business operations, or to comply with other requirements 
pursuant to Financial Services and Markets Act 2000, Part 4A or the 
Capital Requirements Regulation 2013, Regulation 35B;
    (19) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA within 24 hours if it fails to maintain its minimum 
requirement for own funds and eligible liabilities (``MREL''), if the 
PRA-designated UK nonbank SD is subject to such requirement as set 
forth by the Bank of England pursuant to the Banking Act 2009, Section 
3A and the Bank Recovery and Resolution (No. 2) Order 2014, Part 9;
    (20) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA within 24 hours of when the firm knew or should have 
known that its regulatory capital fell below 120 percent of its minimum 
capital requirement, comprised of the firm's core capital requirements 
and any applicable capital buffer requirements. For purposes of the 
calculation, the 20 percent excess capital must be in the form of 
common equity tier 1 capital;
    (21) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA within 24 hours if it fails to make or keep current 
the financial books and records;
    (22) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA within 24 hours of the occurrence of any of the 
following:
    (i) A single counterparty, or group of counterparties under common 
ownership or control, fails to post required initial margin or pay 
required variation margin on uncleared swap and non-cleared security-
based swap positions that, in the aggregate, exceeds 25 percent of the 
PRA-designated UK nonbank SD's minimum capital requirement;
    (ii) Counterparties fail to post required initial margin or pay 
required variation margin to the PRA-designated UK nonbank SD for 
uncleared swap and non-cleared security-based swap positions that, in 
the aggregate, exceeds 50 percent of the PRA-designated UK nonbank SD's 
minimum capital requirement;
    (iii) The PRA-designated UK nonbank SD fails to post required 
initial margin or pay required variation margin for uncleared swap and 
non-cleared security-based swap positions to a single counterparty or 
group of counterparties under common ownership and control that, in the 
aggregate, exceeds 25 percent of the PRA-designated UK nonbank SD's 
minimum capital requirement; or
    (iv) The PRA-designated UK nonbank SD fails to post required 
initial margin or pay required variation margin to counterparties for 
uncleared swap and non-cleared security-based swap positions that, in 
the aggregate, exceeds 50 percent of the PRA-designated UK nonbank SD's 
minimum capital requirement;
    (23) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA of a change in its fiscal year-end approved or 
permitted to go into effect by the PRA. The notice required by this 
paragraph will satisfy the requirement for a nonbank SD to obtain the 
approval of NFA for a change in fiscal year-end under Commission 
Regulation 23.105(g) (17 CFR 23.105(g)). The notice of change in fiscal 
year-end must be filed with the Commission and NFA at least 15 business 
days prior to the effective date of the PRA-designated UK nonbank SD's 
change in fiscal year-end;
    (24) The PRA-designated UK nonbank SD or an entity acting on its 
behalf

[[Page 8061]]

notifies the Commission of any material changes to the information 
submitted in the application for capital comparability determination, 
including, but not limited to, material changes to the UK PRA Capital 
Rules or UK PRA Financial Reporting Rules imposed on PRA-designated UK 
nonbank SDs, the PRA's supervisory authority or supervisory regime over 
PRA-designated UK nonbank SDs, and proposed or final material changes 
to the UK PRA Capital Rules or UK PRA Financial Reporting Rules as they 
apply to PRA-designated UK nonbank SDs; and
    (25) Unless otherwise noted in the conditions above, the reports, 
notices, and other statements required to be filed by the PRA-
designated UK nonbank SD with the Commission and NFA pursuant to the 
conditions of this Capital Comparability Determination Order must be 
submitted electronically to the Commission and NFA in accordance with 
instructions provided by the Commission or NFA.

    Issued in Washington, DC, on January 29, 2024, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Notice of Proposed Order and Request for Comment on an 
Application for a 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--Commission Voting 
Summary, Chairman's Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Behnam and Commissioners Johnson, 
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    I support the Commission's proposed order and request for 
comment on an application for a preliminary capital comparability 
determination on behalf of six nonbank swap dealers that are 
domiciled in the United Kingdom (UK) and registered with the CFTC. 
All six of these UK nonbank SDs are subject to, and comply with, the 
UK capital and financial reporting rules as implemented by the UK 
Prudential Regulation Authority, which the Commission has 
preliminarily determined are comparable to certain capital and 
financial reporting requirements under the Commodity Exchange Act 
and the Commission's regulations, subject to certain conditions. 
This preliminary capital comparability determination for these UK 
nonbank SDs is the fourth proposed order and request for comment to 
come before the Commission since it adopted its substituted 
compliance framework for non-U.S. domiciled nonbank swap dealers in 
July 2020.
    I greatly appreciate the work of staff in the Market Participant 
Division, the Office of the General Counsel, and the Office of 
International Affairs on this matter.
    I look forward to reviewing the public's comments on the 
proposed rule. The 60-day comment period will begin upon the 
Commission's publication of the proposed rule on its website.

Appendix 3--Statement of Support of Commissioner Kristin N. Johnson

    I support the Commodity Futures Trading Commission's (Commission 
or CFTC) issuance of the proposed conditional capital comparability 
determination order for comment (Proposed Comparability 
Determination) pursuant to Commission Regulation 23.106.\1\ The 
Proposed Comparability Determination, if approved, will allow 
registered nonbank swap dealers (SDs) organized and domiciled in the 
United Kingdom (UK) and designated for prudential supervision by the 
UK Prudential Regulation Authority (PRA-designated non-bank SDs) to 
satisfy certain capital and financial reporting requirements under 
the Commodity Exchange Act (CEA) by complying with comparable 
capital and financial reporting requirements under UK laws and 
regulations.
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    \1\ The application here is by three trade associations (the 
Institute of International Bankers, the International Swaps and 
Derivatives Association, and the Securities Industry and Financial 
Markets Association). There are currently six PRA-designated non-
bank SDs eligible to take advantage of a comparability 
determination, if the Commission approves the Proposed Comparability 
Determination. These six PRA-designated non-bank SDs include 
Citigroup Global Markets Limited, Goldman Sachs International, 
Merrill Lynch International, Morgan Stanley & Co. International Plc, 
MUFG Securities EMEA Plc, and Nomura International Plc.
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    It is imperative that we carefully review the capital and 
financial reporting requirements for PRA-designated non-bank SDs in 
a manner consistent with the Commission's mandate under the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) to ensure that foreign swap activities that have a ``direct and 
significant'' effect on U.S. markets are subject to regulatory 
requirements as sufficiently robust as our own.\2\
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    \2\ 7 U.S.C. 2(i). Section 2(i)(1) of the CEA applies the swaps 
provisions of both the Dodd-Frank Act and Commission regulations 
promulgated under those provisions to activities outside the United 
States that have a direct and significant connection with activities 
in, or effect on, commerce of the United States.
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    In 2010, the Dodd-Frank Act amended the CEA to create a new 
regulatory framework for swaps, including adding Section 2(i) to 
address the cross-border application of the CEA's swap provisions. 
In recognition of the value of global regulatory coordination in the 
swaps markets and international comity, the Commission in 2020 set 
out a framework for substituted compliance and comparability 
determinations for a given foreign jurisdiction that afforded ``due 
consideration [to] international comity principles'' while being 
``consistent with . . . the Commission's interest in focusing its 
authority on potential significant risks to the U.S. financial 
system.'' \3\
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    \3\ Cross-Border Application of the Registration Thresholds and 
Certain Requirements Applicable to Swap Dealers and Major Swap 
Participants, 85 FR 56924, 56924 (Sept. 14, 2020); see Capital 
Requirements of Swap Dealers and Major Swap Participants, 85 FR 
57462 (Sept. 15, 2020).
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    Sections 4s(e) and 4s(f) of the CEA instruct the Commission to 
impose capital requirements on non-bank SDs and financial condition 
reporting obligations on all registered SDs, which have been 
codified by the Commission.\4\ These requirements aim to ensure the 
integrity of domestic and foreign entities operating in our markets, 
to facilitate the rapid identification and remediation of liquidity 
crises, and to mitigate the threat of systemic risks that may 
threaten the stability of domestic and global financial markets. As 
I previously stated:
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    \4\ 7 U.S.C. 6s(e), (f); 17 CFR part 23, subpart E.

The Commission's capital and financial reporting requirements 
adopted pursuant to these sections of the CEA are critical to 
ensuring the safety and soundness of our markets by addressing and 
managing risks that arise from a firm's operation as an SD. Ensuring 
necessary levels of capital, as well as accurate and timely 
reporting about financial conditions, helps to protect [SDs] and the 
broader financial markets ecosystem from shocks, thereby ensuring 
solvency and resiliency. This, in turn, protects the financial 
system as a whole, reducing the risk of contagion that could arise 
from uncleared swaps. Financial reporting requirements work with the 
capital requirements by allowing the Commission to monitor and 
assess an SD's financial condition, including compliance with 
minimum capital requirements. The Commission uses the information it 
receives pursuant to these requirements to detect potential risks 
before they materialize. Capital adequacy and financial reporting 
are pillars of risk management oversight for any business, and, for 
firms operating in our markets, it is of the utmost importance that 
rules governing these risk management tools are effectively 
calibrated, continuously assessed, and fit for purpose.\5\
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    \5\ Kristin N. Johnson, Commissioner, CFTC, Statement in Support 
of Notice and Order on EU Capital Comparability Determination (June 
7, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement060723c.

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[[Page 8062]]

    Systemic risks transcend national borders. Successful mitigation 
of systemic risks, therefore, requires careful, engaged 
collaboration.
    I support acknowledging market participants' compliance with the 
laws and regulations of their UK regulator when the requirements 
lead to an outcome that is comparable to the outcome of complying 
with the CFTC's corresponding requirements. Mutual understanding and 
respect for partner regulators in other countries advances the 
Commission's goal of setting a global standard for sound derivatives 
regulation that both enhances market stability and is also deeply 
rigorous, reflecting the Commission's commitment to safe swaps 
markets.
    As global standard setting authorities and federal prudential 
regulators refine and reinforce the regulatory framework for capital 
requirements globally, it will be important to ensure continued 
alignment among jurisdictions, as with the ongoing implementation of 
the Basel III capital framework (Basel III).
    While prudential regulators continue to debate the 
implementation of a final set of regulations under Basel III, the 
Commission's capital comparability determinations closes a gap in 
our regulatory framework. Today's successful adoption of the 
Proposed Comparability Determination enables the Commission to 
deploy an enforceable regime immediately in the context of our UK-
based registrants and is reflective of a desire to engage and 
harmonize regulation globally.
    I commend the work of the staff of the Market Participants 
Division--Amanda Olear, Tom Smith, Rafael Martinez, Liliya 
Bozhanova, Joo Hong, and Justin McPhee, as well as the members of 
the Office of International Affairs--for their careful consideration 
of this application.
    The Commission's efforts in considering the Proposed 
Comparability Determination reflect thoughtful evaluation of the 
comparability of relevant standards and an attempt to coordinate our 
efforts to bring transparency to the swaps market and reduce its 
risks to the public. I look forward to reviewing the comments that 
the Commission will receive in response to the Proposed 
Comparability Determination.

Appendix 4--Statement of Commissioner Christy Goldsmith Romero

    Today [January 23, 2024], the Commission considers a proposal 
intended to safeguard the resilience of six swap dealers in the 
United Kingdom (``UK'') supervised by the Prudential Regulation 
Authority (``PRA'').\1\ The proposal is part of the Commission's 
``substituted compliance'' framework.
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    \1\ The six swap dealers are Citigroup Global Markets Limited, 
Goldman Sachs International, Merrill Lynch International, Morgan 
Stanley & Co. International Plc, MUFG Securities EMEA Plc, and 
Nomura International Plc. The determination does not cover other UK 
nonbank swap dealers supervised by the Financial Conduct Authority.
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    Substituted compliance must leave U.S. markets at no greater 
risk than full compliance with our rules. It is a framework that 
promotes global harmonization with like-minded foreign regulators 
that have rules, supervision, and enforcement that are comparable in 
purpose and effect to the CFTC. Our capital rules are a critical 
pillar of the Dodd-Frank Act reforms, ones that continue to evolve 
with the risks that our financial system faces. We must ensure that 
our comparability assessments are sound and do not increase risk to 
U.S. markets.
    The CFTC's capital framework for swap dealers heeds the lessons 
of the 2008 financial crisis.
    The 2008 financial crisis precipitated the failure or near-
failure of almost every major investment bank and a number of 
systemically important banks. It demonstrated all too clearly the 
financial stability risks presented by undercapitalized financial 
institutions, including a sprawling network of globally 
interconnected derivatives dealers. That is why Congress mandated 
that the Commission establish capital requirements for non-bank swap 
dealers. The Dodd-Frank Act provided that swap dealer capital 
requirements should ``offset the greater risk to the swap dealer. . 
. and the financial system arising from the use of swaps that are 
not cleared'' \2\ and ``help ensure the safety and soundness of the 
swap dealer.'' \3\ The Commission's capital requirements, adopted in 
2020,\4\ are intended to do exactly that.
---------------------------------------------------------------------------

    \2\ 7 U.S.C. 6s(e)(3)(A).
    \3\ 7 U.S.C. 6s(e)(3)(A)(i). The capital requirements also must 
``be appropriate to the risk associated with non-cleared swaps.'' 7 
U.S.C. 6s(e)(3)(A)(ii).
    \4\ See Commodity Futures Trading Commission, Capital 
Requirements of Swap Dealers and Major Swap Participants, 85 FR 
57462 (Sept. 15, 2020).
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    Our capital requirements promote the resilience of swap dealers 
and protect the U.S. financial system. They ensure that swap dealers 
can weather economic downturns, and remain resilient during periods 
of stress to continue their critical market functions. Our capital 
requirements also help prevent contagion of losses spreading to 
other financial institutions.
    The CFTC must ensure that capital requirements eligible for 
substituted compliance are comparable in outcomes, supervision, and 
enforcement.
    The Commission has to proceed cautiously in making a substituted 
compliance determination given the importance of capital to 
financial stability and the complexity of capital frameworks. The 
Commission also has to consider the interconnected nature of global 
derivatives markets, and the speed of contagion in the global 
financial system.
    Four of the swap dealers who would be able to avail themselves 
of our determination today are affiliated with the largest Troubled 
Asset Relief Program recipients. That fact alone is a good reminder 
of what is at stake in terms of risk. It is not just danger to 
financial institutions, but also American families and businesses. 
Under this proposal in addition to the Commission's three prior 
capital comparability proposals,\5\ 16 of 106 registered swap 
dealers would be eligible to rely on substituted compliance.\6\ We 
have a responsibility to ensure that our substituted compliance 
framework recognizes only those frameworks that are legitimately a 
substitute for the capital protections provided by U.S. law.
---------------------------------------------------------------------------

    \5\ See Commodity Futures Trading Commission, 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 (Aug. 8, 2022); see also Commodity Futures 
Trading Commission, Notice of Proposed Order and Request for Comment 
on an Application for a Capital Comparability Determination 
Submitted on behalf of Nonbank Swap dealers subject to Regulation by 
the Mexican Comision Nacional Bancaria y de Valores, 87 FR 76374 
(Dec. 13, 2022); see also 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).
    \6\ 55 of the 107 swap dealers are subject to U.S. prudential 
regulatory capital requirements.
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    The fact that a foreign regulator may have comparable capital 
rules will not be enough on its own. We have to look beyond the four 
corners of rules. Substituted compliance requires a like-minded 
foreign regulator with comparable supervision and enforcement to the 
CFTC. The CFTC and the Prudential Regulation Authority (PRA) are 
already cooperating on supervision and oversight of 
clearinghouses.\7\ The PRA also has a long history of regulatory and 
supervisory coordination with the U.S. banking regulators. I am 
cognizant that the PRA recently received a secondary mandate to 
promote the UK economy's international competitiveness and growth. 
The PRA issued a statement that it will only advance this mandate 
when it does not conflict with safety and soundness of regulated 
entities.\8\ I expect our staff will continue to work closely with 
the PRA to understand how it will implement this mandate, and work 
with the PRA to safeguard the safety and soundness of non-bank swap 
dealers and the stability of our global financial system.
---------------------------------------------------------------------------

    \7\ See CFTC, CFTC and BoE Sign New MOU for Supervision of 
Cross-Border Clearing Organizations, https://www.cftc.gov/PressRoom/PressReleases/8289-20 (Oct. 20, 2020).
    \8\ Prudential Regulation Authority, The Prudential Regulation 
Authority's Approach to Policy, DP4/22, https://www.bankofengland.co.uk/prudential-regulation/publication/2022/september/pra-approach-to-policy (Sept. 2022).
---------------------------------------------------------------------------

    Our substituted compliance decisions should not allow for 
regulatory arbitrage for swap dealers to escape strong U.S. capital 
rules--a situation that could erode Dodd-Frank Act post-crisis 
reforms. Today's determination is grounded in the PRA's capital 
rules being comparable to the CFTC's ``Bank-Based Capital Approach'' 
to swap dealer capital requirements, which reflects requirements the 
Federal Reserve imposes for bank holding companies.
    The Federal Reserve and other U.S. prudential banking regulators 
have proposed updates to the U.S. capital rules to implement 
international standards known as ``Basel Endgame'' or Basel 3.1.\9\ 
The U.S.

[[Page 8063]]

updates are also informed by the failure of several banks in early 
2023.\10\ The current proposal includes proposed changes that could 
affect capital requirements for swap dealers subject to prudential 
regulation. I would expect the Commission to monitor these changes 
and update its own capital rules for swap dealers to remain 
harmonized with the U.S. prudential regulators. The PRA is also 
updating its capital requirements to implement the Basel 
standards.\11\ As updates are finalized in the U.S. and globally, 
the Commission should review whether capital requirements imposed by 
jurisdictions with comparability determinations remain aligned with 
capital requirements imposed by other U.S. financial regulators and 
with the changes that the Commission makes to align its own capital 
requirements.
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    \9\ Federal Reserve System, Federal Deposit Insurance 
Corporation, and Comptroller of the Currency, Regulatory Capital 
Rule: Large Banking Organizations and Banking Organizations with 
Significant Trading Activity, 88 FR 64028 (Sept. 18, 2023).
    \10\ See Statement by Vice Chair for Supervision Michael S. 
Barr, https://www.federalreserve.gov/newsevents/pressreleases/barr-statement-20230727.htm (July 27, 2023) (``Additionally, following 
the banking turmoil in March 2023, the proposal seeks to further 
strengthen the banking system by applying a broader set of capital 
requirements to more large banks.'').
    \11\ Prudential Regulation Authority, PS17/23--Implementation of 
the Basel 3.1 standards near-final part 1, https://www.bankofengland.co.uk/prudential-regulation/publication/2023/december/implementation-of-the-basel-3-1-standards-near-final-policy-statement-part-1 (Dec. 12, 2023).
---------------------------------------------------------------------------

    Strong capital requirements and areas where the Commission would 
particularly benefit from public comment.
    All six of the UK swap dealers are dual-registered with the U.S. 
Securities and Exchange Commission (``SEC''). The SEC has issued 
final comparability determination orders permitting them to satisfy 
certain SEC capital requirements through substituted compliance with 
applicable UK requirements.\12\
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    \12\ See 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); 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); 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).
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    In conducting the CFTC's own analysis, it is important to 
remember that substituted compliance is not an all-or-nothing 
proposition. The Commission retains examinations and enforcement 
authority and it can, should, and will, impose any conditions and 
take all actions appropriate to protect the safety and soundness of 
swap dealers and the U.S. financial system. Today, the Commission 
proposes 25 conditions, including conditions requiring capital 
reporting and Commission notification that are essential to 
monitoring the financial condition and capital adequacy of swap 
dealers.
    Just as with swap dealers in Japan, Mexico and the European 
Union,\13\ one of the most important conditions is that the 
Commission will continue to require compliance with the CFTC's 
minimum capital requirement of $20 million in common equity tier 1 
capital.\14\ This is one of the most critical components of the 
CFTC's capital requirements. It helps to ensure that each nonbank 
swap dealer, whether current or a future new entrant, maintains at 
all times, $20 million of the highest quality capital to meet its 
financial obligations without becoming insolvent.
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    \13\ See CFTC Commissioner Christy Goldsmith Romero, Proposal 
for Strong Capital Requirements and Financial Reporting for Swap 
Dealers in Japan, https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement072722b (July 27, 2022); See also CFTC Commissioner 
Christy Goldsmith Romero, Promoting the Resilience of Swap Dealers 
in Mexico Through Strong Capital Requirements and Financial 
Reporting, https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatment111022b (Nov. 10, 2022); CFTC Commissioner Christy 
Goldsmith Romero, Promoting the Resilience of Swap Dealers in Europe 
Through Strong Capital Requirements and Financial Reporting, https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement060723e 
(June 7, 2023).
    \14\ This CFTC capital rule substantially exceeds the EUR 5 
million minimum capital required under EU capital rules.
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    Today, the Commission preliminarily finds that UK capital rules 
requiring 8 percent of risk-weighted assets and an additional 2.5 
percent buffer, for a total of 10.5 percent, are higher than the 
CFTC's requirement of 8 percent of risk-weighted assets. This 
capital requirement helps ensure that the swap dealer has sufficient 
capital levels to cover for example, unexpected losses from business 
activities.
    There are proposed deviations from the Commission's bank-based 
capital requirements that should be closely scrutinized. Some of 
these deviations are similar to those raised by commenters to other 
proposed determinations.\15\ For example, the Commission proposes to 
permit compliance with UK capital rules that are not necessarily 
anchored by a threshold percentage of uncleared swap margin as the 
CFTC requires. The proposed determination discusses that UK capital 
rules address liquidity, operational risks, as well as other risks 
arising from derivatives exposures, through other mechanisms. I look 
forward to public comment on the comparability of the approaches and 
expect the Commission to publish additional analysis to address 
concerns raised by commenters as part of any final determination.
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    \15\ See 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) (Comment of Better Markets).
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    In these areas, and others, public comments will be tremendously 
beneficial. I approve.

Appendix 5--Statement of Support of Commissioner Caroline D. Pham

    I support the Commission's proposed order and request for 
comment on a comparability determination for nonbank swap dealers 
subject to capital and financial reporting requirements of the 
United Kingdom and regulated by the United Kingdom Prudential 
Regulation Authority (PRA). I would like to thank Justin McPhee, Joo 
Hong, Liliya Bozhanova, Rafael Martinez, Tom Smith, and Amanda Olear 
in the Market Participants Division (MPD) for their hard work on 
these technical and detailed requirements.
    This proposal is the staff's fourth proposed capital adequacy 
and financial reporting comparability determination.\1\ Each 
involves significant engagement with the corresponding authority, in 
this case the UK Prudential Regulation Authority, as well as CFTC 
registrants. As I have previously said, the Commission, its staff, 
and our regulatory counterparts around the world need to adhere to 
the recommendations in IOSCO's 2020 report on Good Practices on 
Processes for Deference, which was developed to provide solutions to 
the challenges and drivers of market fragmentation.\2\ As set forth 
in the IOSCO 2020 report, such processes for deference \3\ are 
typically outcomes-based; risk sensitive; transparent; cooperative; 
and sufficiently flexible.
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    \1\ The prior three were for Japan, Mexico, and the EU. The 
Commission maintains its list of comparability determinations for 
substituted compliance purposes at https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
    \2\ Statement of Commissioner Caroline D. Pham in Support of 
Proposed Order and Request for Comment on Comparability 
Determination for EU Nonbank Swap Dealer Capital and Financial 
Reporting Requirements (June 9, 2023); IOSCO Report, ``Good 
Practices on Processes for Deference'' (June 2020).
    \3\ IOSCO uses ``deference'' as an ``overarching concept to 
describe the reliance that authorities place on one another when 
carrying out regulation or supervision of participants operating 
cross-border.'' Id. at 1. The CFTC's use of substituted compliance 
for swaps regulation is an example of regulatory deference 
mechanisms.
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    I continue to stress that this work by CFTC staff creates the 
underpinnings of global markets that enable governments, central 
banks and commercial banks, asset managers and investors, and 
companies to manage the risks inherent in international flows of 
capital that fuel economic growth and prosperity in both developed 
and developing economies.\4\ I am pleased to continue to support 
this work, and also encourage staff to finalize these proposals in 
2024.
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    \4\ Statement of Commissioner Caroline D. Pham in Support of 
Proposed Order and Request for Comment on Comparability 
Determination for EU Nonbank Swap Dealer Capital and Financial 
Reporting Requirements (June 9, 2023); see also Concurring Statement 
of Commissioner Caroline D. Pham Regarding Proposed Swap Dealer 
Capital and Financial Reporting Comparability Determination (July 
27, 2022); Concurring Statement of Commissioner Caroline D. Pham 
Regarding Proposed Order and Request for Comment on an Application 
for a Capital Comparability Determination (Nov. 10, 2022).

[FR Doc. 2024-02070 Filed 2-2-24; 8:45 am]
BILLING CODE 6351-01-P


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