8026 Federal Register / Vol. 89, No. 24 / Monday, February 5, 2024 / Proposed Rules 

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. 

2See 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. 

3As 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. 

5The 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 FCAregulated UK nonbank SDs through a separate 

capital comparability determination. 

6 7 U.S.C. 6s(e). 

7The 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 

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. 

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 CFTCregistered 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: 

• 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. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary of the 

Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW, 

Washington, DC 20581. 

• 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

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, aolear@cftc.gov; Thomas Smith, 

Deputy Director, 202–418–5495, 

tsmith@cftc.gov; Rafael Martinez, 

Associate Director, 202–418–5462, 

rmartinez@cftc.gov; Liliya Bozhanova, 

Special Counsel, 202–418–6232, 

lbozhanova@cftc.gov; Joo Hong, Risk 

Analyst, 202–418–6221, jhong@cftc.gov; 

Justin McPhee, Risk Analyst, 202–418– 

6223; jmchpee@cftc.gov, Market 

Participants Division; Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street NW, 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: The 

Commodity Futures Trading 

Commission (‘‘Commission’’ or 

‘‘CFTC’’) is 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 PRAdesignated 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. 

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 


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Credit Administration; and the Federal Housing 

Finance Agency. See 7 U.S.C. 1a(39). 

8Subject 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). 

9 7 U.S.C. 6s(e)(2). 

10 7 U.S.C. 6s(e)(1) and (2). 

11See Margin and Capital Requirements for 

Covered Swap Entities, 80 FR 74840 (Nov. 30, 

2015). 

12See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants, 81 

FR 636 (Jan. 6, 2016). 

13See Capital Requirements of Swap Dealers and 

Major Swap Participants, 85 FR 57462 (Sept. 15, 

2020). 

14 7 U.S.C. 6s(f). 

15 7 U.S.C. 6s(f)(1)(A). 

16See 85 FR 57462. 

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 timelimited 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). 

19See 85 FR 57462 at 57521. 

20 Id. 

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’’). 

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

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

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

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 nonU.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

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 lineby-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 


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21 17 CFR 23.106(a)(2). 

22See 17 CFR 23.106(a)(3) and 85 FR 57520– 

57522. 23Commission 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). 

24See 17 CFR 23.106(a)(5). 

25 17 CFR 23.106(a)(4). 

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. 

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

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

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. 

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. 

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 firmwide 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 


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26Notices must be filed in electronic form to the 

following email address: 

MPDFinancialRequirements@cftc.gov. 27See 17 CFR 140.91(a)(11). 28 17 CFR 23.106(a)(4). 29 Id. 30 Id. 

31The 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. 

32UK 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. 

33Article 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). 

36See 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-ofpolicy/2021/designation-of-investment-firms-forprudential-supervision-by-the-pra-december2021.pdf?la=en&hash=007EB17EDF2FA84

714D372095F9E03627355776F. 

37 Id., at p. 5. 

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. 

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. 

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. 

C. Application for a Capital 

Comparability Determination for PRADesignated 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

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

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: 


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38Regulation (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’’). 40The 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. 41The 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. 

42Consolidated 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. 

44Capital Requirements Regulations 2013, 

Statutory Instrument 2013 No. 3115 (‘‘Capital 

Requirements Regulations 2013’’). 45Capital Requirements (Capital Buffers and 

Macro-prudential Measures) Regulations 2014, 

Statutory Instrument 2014 No. 894 (‘‘Capital 

Requirements (Capital Buffers and Macroprudential Measures) Regulations 2014’’). 

46The PRA’s rules (‘‘PRA Rulebook’’) are 

available here: https://www.prarulebook.co.uk/. 

47See, 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’’). 

48See PRA, Policy Statement 21/21—The UK 

Leverage Framework, October 2021, available here: 

https://www.bankofengland.co.uk/prudentialregulation/publication/2021/june/changes-to-theuk-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-baselstandards. 

49Pursuant 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. 

50The 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. 

51Commission 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’’). 

52See PRA Rulebook, CRR Firms, Liquidity 

Coverage Requirement—UK Designated Investment 

Firms Part. 

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. 

54Banking 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. 

55Commission 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. 

Citigroup Global Markets Limited, 

Goldman Sachs International, Merrill 

Lynch International, Morgan Stanley & 

Co. International Plc, MUFG Securities 

EMEA Plc, and Nomura International 

Plc. 

The Applicants represent that the 

capital and financial reporting 

framework applicable to PRAdesignated 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 PRAdesignated 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

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 UKspecific 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 PRAdesignated UK nonbank SDs and 

imposes separate liquidity requirements 

to these firms.52

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

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’’) 


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56UK Application, p. 24 and Responses to Staff 

Questions dated October 5, 2023. 

57PRA Rulebook, CRR Firms, Reporting (CRR) 

Part. 

58PRA Rulebook, CRR Firms, Regulatory 

Reporting Part. 

59UK 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. 

60All six of the PRA-designated UK nonbank SDs 

currently registered with the Commission are also 

UK nonbank SBSDs. 

61Section 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. 

62See Order Granting Conditional Substituted 

Compliance in Connection with Certain 

Requirements Applicable to Non-U.S. SecurityBased 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. SecurityBased 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 SecurityBased 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’’). 

63The 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). 

64 17 CFR 23.101. 

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. 

66The 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. 67The 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. 

68The 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. 

69The 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. 

70The 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. 

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

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.’’ 

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

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

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. 

The TNW approach requires a 

nonbank SD to compute its market risk 

exposure requirement and credit risk 


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71 17 CFR 240.18a–1. 72 17 CFR 23.101(a)(2)(ii)(A). 73 Id. 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.’’ 75See 17 CFR 240.18a–1(c) and (d). 76See 17 CFR 23.101(a)(1)(ii). 77See 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. 

79See 17 CFR 23.101(a)(1)(i). 

80The 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). 

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 BankBased Approach. 17 CFR 23.101(a)(1)(i) and 12 CFR 

217.20. 

83See 12 CFR 217.20(b). 

84See 12 CFR 217.20(c). 

85See 12 CFR 217.20(d). 

86The 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. 

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

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. 

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

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

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 BankBased 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. 

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

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 


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87See 17 CFR 23.101(a)(1)(i)(B) and the definition 

of the term BHC risk-weighted assets in 17 CFR 

23.100. 

88See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3– 

1(c)(2). 

89See 17 CFR 23.102. 

90See UK Application, p. 12. 

91See UK Application, pp. 7 and 12. 

92UK 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. 

96UK 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. 

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 PRAdesignated UK nonbank SD itself, and the PRAdesignated UK nonbank SD cannot have either 

directly or indirectly funded their purchase. Id. 

100UK 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. 

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

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 offbalance 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. 

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 riskweighted 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. 

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 bankbased 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 PRAdesignated 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

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 riskweighted 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

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 PRAdesignated 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

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 PRAdesignated 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 PRAdesignated 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 PRAdesignated UK nonbank SD prior to the 

capital instruments’ respective 

maturities.100

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 

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101PRA 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 riskweighted 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 riskweighted assets. The countercyclical capital buffer 

rate is published by the Bank of England, and is 

available at: https://bankofengland.co.uk/financialstability/the-countercyclical-capital-buffer. 

103PRA 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. 

104Total 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 PRAdesignated UK nonbank SD may also be subject to 

a countercyclical leverage ratio buffer of common 

equity tier 1 capital equal to the firm’s institutionspecific 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. 

105With 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. 

106UK CRR, Article 92(3). 

107UK Application, pp. 12–15. 

108UK 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. 

110UK CRR, Article 378. 

111 Id., Article 381. 

112 Id., Article 4(1)(52). 

113 Id., Articles 143 (credit risk), 283 

(counterparty credit risk); 312(2) (operational risk), 

363 (market risk), and 383 (CVA risk). 

114See e.g., UK CRR, Articles 144, 283; 321–322 

and 365–369. 

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

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 PRAdesignated UK nonbank SD’s riskweighted assets. 

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 riskweight its on-balance sheet and offbalance sheet assets and exposures 

using specified standardized weights or, 

if approved for use by the PRA, internal 

model-based methodologies.105 Riskweighting 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, PRAdesignated 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

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 PRAdesignated UK nonbank SD’s on-balance 

sheet and off-balance sheet assets and 

exposures by clearly defined riskweighting 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

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

As noted above, PRA-designated UK 

nonbank SDs may use internal modelbased 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 


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115The UK PRA Capital Rules require PRAdesignated 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 PRAdesignated 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. 

116PRA Rulebook, CRR Firms, Liquidity (CRR) 

Part and PRA Rulebook, CRR Firms, Liquidity 

Coverage Requirement—UK Designated Investment 

Firms Part. 

117PRA Rulebook, CRR Firms, Liquidity (CRR) 

Part, Chapter 4 Liquidity (Part Six CRR), Article 

412(1). 

118PRA Rulebook, CRR Firms, Liquidity (CRR) 

Part, Chapter 4 Liquidity (Part Six CRR), Article 

411(10). 

119PRA Rulebook, CRR Firms, Liquidity (CRR) 

Part, Chapter 4 Liquidity (Part Six CRR), Article 

413(1). 

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. 

121Banking 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. 

122The 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/supervisorystatement/2020/ss1616-update-dec-2020.pdf. 

123Bank Recovery and Resolution (No. 2) Order 

2014, Part 9, Article 123(6). 

124See 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. 

126Bank Recovery and Resolution (No. 2) Order 

2014, Part 9, Article 123(6). 

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. 

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

In addition, Article 413 of UK CRR, 

which has been incorporated into the 

PRA Rulebook, establishes a general 

requirement that firms ensure that longterm 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

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 PRAdesignated 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 PRAdesignated 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

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 


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127See supra note 5. 

128The 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 NearFinal Part 1, December 12, 2023, available here: 

https://www.bankofengland.co.uk/news/2023/ 

december/pra-publishes-first-of-two-policystatements-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. 129See 7 U.S.C. 6s(e)(3)(A). 

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. 

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

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 offbalance sheet exposures; (iii) the 

financial reports and other financial 

information submitted by a PRAdesignated nonbank SD to the PRA to 

effectively monitor the financial 

condition of the firm; and (iv) the 

regulatory notices and other 

communications between the PRAdesignated 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 PRAdesignated 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. 

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 


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130See 17 CFR 23.105. 

131See 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-thebanking-and-insurance-sectors. 

132 Id. 

133PRA 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). 

134PRA 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). 

135See 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-thebanking-and-insurance-sectors. 

136PRA Rulebook, CRR Firms, Reporting (CRR) 

Part. 

137See 17 CFR 23.101(a)(1)(i). 

138The 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. 

swaps market, or impact the firm’s 

solvency.130

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

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. 

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 


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139 12 CFR 217.20. 140 Id. 141 Id. 142 Id. 143The 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). 

144UK CRR, Article 92. 

145 Id. 

146UK 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 PRAdesignated UK nonbank SD; (ii) are paid in full and 

not funded directly or indirectly by the PRAdesignated 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 PRAdesignated 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. 

149UK CRR, Article 63. 

150PRA 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 riskweighted 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 Macroprudential 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 riskweighted assets. 

151PRA Rulebook, CRR Firms, Capital Buffers 

Part, Chapter 2 Capital Conservation Buffer, Rule 

2.1. 

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. 

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

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

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 PRAdesignated 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 longterm convertible debt instruments; 147

and (iii) tier 2 capital instruments, 

which includes other reserves, hybrid 

capital instruments, and certain 

qualifying subordinated term debt.148

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 nonsubordinated creditors of the PRAdesignated UK nonbank SD; (iii) 

subordinated loans are not secured, or 

subject to a guarantee that enhances the 

seniority of the claim, by the PRAdesignated 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

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 


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152UK CRR, Article 92(1). 

153PRA Rulebook, CRR Firms, Capital Buffers 

Part, Chapter 2 Capital Conservation Buffer, Rule 

2.1. 

154The 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. 

155Compare 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). 

156Compare 17 CFR 240.18a–1d with UK CRR, 

Article 63(d). 

157See 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. 

158Nonbank 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). 

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. 

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

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 PRAdesignated 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

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

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 riskweighted 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

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 


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159See, e.g., 85 FR 57492. 

160See 85 FR 57462. 

161See 17 CFR 23.101(a)(1)(i)(B) and the 

definition of the term BHC equivalent risk-weighted 

assets in 17 CFR 23.100. 

162See paragraph (3) of the definition of the term 

BHC equivalent risk-weighted assets in 17 CFR 

23.100. 

163See 17 CFR 240.18a–1(c)(1). 

164See 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 marketrisk-weighted assets by 12.5. 

165See 17 CFR 23.101(a)(1)(i)(B) and paragraph 

(1) of the definition of the term BHC equivalent riskweighted assets in 17 CFR 23.100. 

166See 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)). 

167See 17 CFR 217.33. 

168See 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. 

169See 12 CFR 217.34. 

170See 12 CFR 217.132(c). 

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

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

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 riskweighted 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 riskweighted 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

With respect to standardized credit 

risk charges for exposures from nonderivatives positions, a nonbank SD 

computes its on-balance sheet and offbalance 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 riskweighted 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. 

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

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 


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171See 17 CFR 23.102(c). 

172See paragraph (4) of the definition of BHC 

equivalent risk-weighted assets in 17 CFR 23.100. 

173Compare 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). 

174The SEC internal model requirements for 

SBSDs are listed in 17 CFR 240.18a–1(d). 

175 12 CFR 217 subpart E. 

176See 85 FR 57462 at 57496. 

177 12 CFR 217.131(e)(1)(iii), 217.131(e)(2)(iv), 

and 217.132(d)(9)(iii). 

178Settlement 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). 

180See 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. 

181The 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. 

182UK 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. 

185PRA Rulebook, CRR Firms, Capital Buffers 

Part, Chapter 2 Capital Conservation Buffer, Rule 

2.1. 

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. 

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. 

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

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 riskweighted 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

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 variancecovariance 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

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: PRADesignated 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 PRAdesignated 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 PRAdesignated UK nonbank SD’s riskweighted 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 PRAdesignated 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 


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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 PRAdesignated 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/thecountercyclical-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 riskweighted assets. 

187UK CRR, Article 92(3). 

188To 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 PRAdesignated UK nonbank SD, excluding riskweighted 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). 

189UK 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). 

192 Id., Article 92(4). 

193 Id., Article 153 et seq. 

194With the permission of the PRA, a PRAdesignated 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). 

195See UK CRR, Articles 382–384 for CVA risk 

calculations; and Article 312(2) for operational risk. 

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. 

200 Id., Article 351. 

201 Id. 

202 Id., Article 360. 

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). 

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) riskweighted 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 riskweighted 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

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

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

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

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

The UK PRA Capital Rules further 

require PRA-designated UK nonbank 

SDs to include exposures to commodity 

positions in calculating the firm’s riskweighted 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 


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203 Id., Articles 359 and 361. 

204 Id., Articles 111 and 113(1). 

205 Id., Articles 114–122. 

206 Id., Articles 121(2) and 122(2). 

207UK 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 offbalance 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. 

209PRA 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). 

210UK 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 PRAdesignated 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. 

213UK 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. 

215See 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. 

216UK CRR, Article 312 and PRA Rulebook, CRR 

Firms, Operational Risk (CRR) Part. 

217UK CRR, Articles 143 (credit risk), 283 

(counterparty credit risk), 312 (operational risk), 

363 (market risk) and 383 (CVA risk). PRAdesignated 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. 

to the base charges for matched 

portions.203

With respect to credit risk, the UK 

PRA Capital Rules require a PRAdesignated 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 riskweights 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

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

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

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

A PRA-designated UK nonbank SD’s 

total risk exposure amount also includes 

operational risk charges. Consistent 

with the BCBS framework, PRAdesignated 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, PRAdesignated 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. 

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 


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218UK CRR, Articles 143, 283, 312(2) and 363(1). 

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). 

228Compare UK CRR, Articles 362–377 with 

Revisions to the Basel II Market Risk Framework. 

229UK 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). 

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). 

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. 

239Compare UK CRR, Article 362–377 with 

Revisions to the Basel II Market Risk Framework. 

240UK CRR, Article 272(19), 283–285. 

241UK 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. 

242UK CRR, Article 321. 

243 Id., Article 322. 

244PRA Rulebook, CRR Firms, Leverage Ratio— 

Capital Requirements and Buffers Part, Chapter 1 

Application and Definitions and Chapter 3 

Minimum Leverage Ratio. 

245Total 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 PRAdesignated UK nonbank SD may also be subject to 

a countercyclical leverage ratio buffer of common 

equity tier 1 capital equal to the firm’s institutionspecific 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. 

246PRA Rulebook, CRR Firms, Leverage Ratio— 

Capital Requirements and Buffers Part, Chapter 3 

Minimum Leverage Ratio, Rule 3.2. 

certain conditions for the use of 

models.218

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, onetailed 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

With regulatory permission, PRAdesignated 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 PRAdesignated 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

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. 

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

As an additional element to the 

capital requirements, the UK PRA 

Capital Rules further impose a 3.25 

percent leverage ratio floor on PRAdesignated 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 


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247PRA Rulebook, CRR Firms, Liquidity (CRR) 

Part, Chapter 4 Liquidity (Part Six CRR), Article 

412(1). 

248PRA Rulebook, CRR Firms, Liquidity (CRR) 

Part, Chapter 4 Liquidity (Part Six CRR), Article 

411(10). 

249PRA Rulebook, CRR Firms, Liquidity (CRR) 

Part, Chapter 4 Liquidity (Part Six CRR), Article 

413(1). 

250PRA Rulebook, CRR Firms, Definition of 

Capital Part, Chapter 12 Base Capital Resource 

Requirement, Rule 12.1. 

251The 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. 

252 85 FR 57492. 

253PRA Rulebook, CRR Firms, Definition of 

Capital Part, Chapter 12 Base Capital Resource 

Requirement, Rule 12.1. 

254The 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’’). 

255Each 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. 

UK nonbank SD from engaging in 

excessive leverage, and complements 

the risk-based minimum capital 

requirement that is based on the PRAdesignated UK nonbank SD’s riskweighted assets. 

Furthermore, the UK PRA Capital 

Rules also impose a separate liquidity 

coverage requirement on a PRAdesignated UK nonbank SD to address 

liquidity risk. The liquidity coverage 

requirement provides that PRAdesignated 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

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

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. 

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 CFTCregistered 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

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. 

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 


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

257UK CRR, Article 92(1). 

258PRA Rulebook, CRR Firms, Capital Buffers 

Part, Chapter 2 Capital Conservation Buffer. 

259UK CRR, Article 92(1) and PRA Rulebook, 

CRR Firms, Capital Buffers Part, Chapter 2 Capital 

Conservation Buffer. 

260UK CRR, Article 92(3). 

261Specifically, 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). 

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. 

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 PRAdesignated 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 PRAdesignated UK nonbank SD to maintain 

an additional capital conservation buffer 

equal to 2.5 percent of the PRAdesignated 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 riskweighted 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

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 PRAdesignated 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 PRAdesignated 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 riskweighted assets via internal models.262

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 


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263UK CRR, Article 92(3). 

264More 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. 

265Specifically, 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. 266See 85 FR 57462 at 57485. 

267 17 CFR 23.105(b). 

268 Id. 

269 17 CFR 23.105(d) and (e). 

270 17 CFR 23.105(d)(1) and (e)(1). 

271 Id. 

272 17 CFR 23.105(d)(2). 

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

As such, the Commission 

preliminarily believes the inclusion of 

an operational risk charge in the PRAdesignated 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

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

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

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 


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273 17 CFR 23.105(e)(4). 

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. 

277 17 CFR 23.105(f). 

278 Id. 

279 17 CFR 23.105(i). 

280 Id. 

281 Id. 

282 17 CFR 23.105(g). 

283 17 CFR 23.105(m). 

284 Id. 

285PRA Rulebook, CRR Firms, Reporting (CRR) 

Part, Chapter 4 Reporting (Part Seven A CRR), Rule 

1. 

286PRA Rulebook, CRR Firms, Reporting (CRR) 

Part, Chapter 6 Templates and Instructions. 

287PRA Rulebook, CRR Firms, Reporting (CRR) 

Part, 5 Reporting Requirements, Chapter 3 Format 

and Frequency of Reporting on Own Funds, Own 

Funds Requirements. 

288PRA Rulebook, CRR Firms, Reporting (CRR) 

Part, Chapter 6 Templates and Instructions, Annex 

I, Templates C 01.00 and C 02.00. 

289PRA Rulebook, CRR Firms, Reporting (CRR) 

Part, Chapter 6 Templates and Instructions, Annex 

I, Template C 03.00. 

290PRA Rulebook, CRR Firms, Reporting (CRR) 

Part, Chapter 6 Templates and Instructions, Annex 

I, Template C 02.00. 

291A parent company (i.e., ‘‘parent undertaking’’) 

is defined in Companies Act 2006, Section 1162. 

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

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

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

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

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. 

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. 

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 

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292PRA Rulebook, CRR Firms, Reporting (CRR) 

Part, Chapter 4 Reporting (Part Seven A CRR), 

Article 430, Rule 3. 

293PRA 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). 

294PRA 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). 

295PRA 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). 

296PRA 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). 

297PRA 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). 

298PRA 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). 

299PRA 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). 

300PRA 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). 

301As 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. 

302PRA 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. 

303PRA 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. 

304PRA Rulebook, CRR Firms, Regulatory 

Reporting Part, Chapter 9 Regulated Activity Group 

3, Rule 9.2 and Rule 9.3. 

305See 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. 

306Companies 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. 

307Companies Act 2006, Section 485 et seq.; see 

also PRA Rulebook, CRR Firms, Auditors Part, Rule 

3 Auditors’ Qualifications, and Rule 4 Auditors’ 

Independence. 

308PRA 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. 

309See 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’’). 

310See 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. 

311Companies Act 2006, Section 396. 

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 PRAdesignated 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

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

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 PRAdesignated 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 PRAdesignated nonbank SDs currently 

registered with the Commission are 

designated as RAG 3 firms and are 

required to provide the aforementioned 

documents.305

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 PRAdesignated 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

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 


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312 Id., Section 495. 

313 Id., Section 414C. 

314 Id., Section 496. 

315 Id. 

316See, UK Order. See also, SEC Order on 

Manner and Format of Filing Unaudited Financial 

and Operational Information. 

317See, SEC Order on Manner and Format of 

Filing Unaudited Financial and Operational 

Information. 

318 Id. 319Companies Act 2006, Section 396. 

320A 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. 

321Commission 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). 

reference to any matters emphasized by 

the auditor that did not qualify the audit 

opinion.312

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

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

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 PRAdesignated 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 PRAdesignated 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

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 PRAdesignated 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

The Commission is proposing to 

condition the Capital Comparability 

Determination Order on a PRAdesignated 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 PRAdesignated 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

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. 


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322Commission Regulation 23.105(d) (17 CFR 

23.105(d)). 323The 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. 

324See, SEC Order on Manner and Format of 

Filing Unaudited Financial and Operational 

Information. 

325Commission 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 duallyregistered 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. 

326Companies Act 2006, Parts 15 and 16. 

327PRA-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. 

328The 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 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

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

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 PRAdesignated 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 PRAdesignated 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

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

The Commission is also proposing to 

condition the Capital Comparability 

Determination Order on the PRAdesignated 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. 

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 PRAdesignated 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 


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329Schedule 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. 330 17 CFR 23.105(m). 

331See Proposed Japan Order, Proposed Mexico 

Order, and Proposed EU Order. 

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. 

The Commission is also proposing to 

condition the Capital Comparability 

Determination Order on a PRAdesignated 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 PRAdesignated 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

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 nonU.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. 

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 


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332Commission 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). 

333Commission 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). 

334See 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). 

335See FSMA, Part XI (indicating that the PRA 

has broad information gathering powers). 

336See PRA Rulebook, CRR Firms, Reporting 

(CRR) Part, Chapter 6 Templates and Instructions, 

Annex I. 337 17 CFR 23.105(c). 

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

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 PRAdesignated 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

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 PRAdesignated 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 PRAdesignated 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 PRAdesignated UK nonbank SD’s risk 

exposure amounts, including riskweighted exposure amounts for credit 

risk.336

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 PRAdesignated 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 PRAdesignated 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 PRAdesignated 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. 


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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). 

341 17 CFR 23.105(c)(5). 

342 17 CFR 23.105(c)(6). 

343PRA 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. 

344PRA Rulebook, CRR Firms, Capital Buffers 

Part, Chapter 4 Capital Conservation Measures, 

Rules 4.4 and 4.5. 

345PRA Rulebook, CRR Firms, Capital Buffers 

Part, Chapter 4 Capital Conservation Measures, Rule 

4.5. 

346Supervisory 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-capitalbuffers-ss. 

347See id. 

348PRA Rulebook, CRR Firms, Notifications Part, 

Chapter 8 Specific Notifications, Rule 8.3. 

349FSMA, Part 4A and Schedule 6. 

350 17 CFR 23.105(c). 

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 noncleared security-based swap 

transactions as required by the 

Commission’s uncleared swaps margin 

rules or the SEC’s non-cleared securitybased 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

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 duallyregistered 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. 

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 PRAdesignated 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

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 PRAdesignated 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

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 PRAdesignated 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

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. 

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 


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

352See 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). 

353The Commission’s proposed reporting level of 

12.6 percent reflects the aggregate of the PRAdesignated 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). 

355This 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. 

356To 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. 

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 PRAdesignated 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. 

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 PRAdesignated 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 PRAdesignated 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. 

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 PRAdesignated 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

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 


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357 17 CFR 23.105(c)(3), (4), and (7). 

358Commission 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). 

359For 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). 

360The 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. 

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

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 PRAdesignated 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. 

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 PRAdesignated 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 PRAdesignated 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

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, 


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361Section 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. 

362See 17 CFR 23.105(c). 

363See 17 CFR 23.105(h). 

364 7 U.S.C. 6b–1(a). 

365 7 U.S.C. 6s(e). 

366FSMA, Parts 4A, XI, and XIV. 

367See 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-thebanking-and-insurance-sectors. 

368FSMA, Part 4A, Section 55M. 

369See PRA Rulebook, CRR Firms, Capital Buffers 

Part, Chapter 4 Capital Conservation Measures, Rule 

4.3. 

370See 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. 

371FSMA, Parts 4A, Sections 55M and 55P, and 

Capital Requirements Regulation 2013, Regulation 

35B. 

372FSMA, Parts 4A and XIV. 

373FSMA, Part 4A, Sections 55J–55K. 

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

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

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

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 PRAdesignated 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

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 PRAdesignated UK nonbank SD’s financial 

deterioration.367 Under its general 

supervisory powers, the PRA may 

impose new requirements to a PRAdesignated 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

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 PRAdesignated 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

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 


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374Bank 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. 

375Capital Requirements Regulation 2013, 

Section 34. 

376PRA’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. 

operational structure, among other 

measures.374

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

3. Commission Analysis 

Based on the above, the Commission 

preliminarily finds that the PRA has the 

necessary powers to supervise, 

investigate, and discipline PRAdesignated 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 PRAdesignated 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 PRAdesignated UK nonbank SD providing 

notice to the Commission and NFA if 

the PRA has required the PRAdesignated 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 PRAdesignated 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. 

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. 


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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 PRAdesignated 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 PRAdesignated 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 PRAdesignated 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: 

MPDFinancialRequirements@cftc.gov; 

(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 PRAdesignated 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 


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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 yearend 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 yearend; 

(24) The PRA-designated UK nonbank 

SD or an entity acting on its behalf 


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Federal Register / Vol. 89, No. 24 / Monday, February 5, 2024 / Proposed Rules 8061 

1The 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. 

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. 

3Cross-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). 

4 7 U.S.C. 6s(e), (f); 17 CFR part 23, subpart E. 

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. 

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 PRAdesignated 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. 

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 DoddFrank 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

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

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: 

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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1The 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. 

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). 

4See Commodity Futures Trading Commission, 

Capital Requirements of Swap Dealers and Major 

Swap Participants, 85 FR 57462 (Sept. 15, 2020). 

5See 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. 

7See 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). 

8Prudential Regulation Authority, The Prudential 

Regulation Authority’s Approach to Policy, DP4/22, 

https://www.bankofengland.co.uk/prudentialregulation/publication/2022/september/praapproach-to-policy (Sept. 2022). 

9Federal 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). 

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. 

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. 

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. 

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. 

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 DoddFrank 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. 


lotter on DSK11XQN23PROD with PROPOSALS3
Federal Register / Vol. 89, No. 24 / Monday, February 5, 2024 / Proposed Rules 8063 

10See Statement by Vice Chair for Supervision 

Michael S. Barr, https://www.federalreserve.gov/ 

newsevents/pressreleases/barr-statement20230727.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.’’). 

11Prudential Regulation Authority, PS17/23— 

Implementation of the Basel 3.1 standards nearfinal part 1, https://www.bankofengland.co.uk/ 

prudential-regulation/publication/2023/december/ 

implementation-of-the-basel-3-1-standards-nearfinal-policy-statement-part-1 (Dec. 12, 2023). 

12See Order Granting Conditional Substituted 

Compliance in Connection with Certain 

Requirements Applicable to Non-U.S. SecurityBased 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. SecurityBased 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). 

13See 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/romerostatement

060723e (June 7, 2023). 

14This CFTC capital rule substantially exceeds 

the EUR 5 million minimum capital required under 

EU capital rules. 

15See 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). 

1The 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. 

2Statement 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 crossborder.’’ Id. at 1. The CFTC’s use of substituted 

compliance for swaps regulation is an example of 

regulatory deference mechanisms. 

4Statement 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). 

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. 

Strong capital requirements and areas 

where the Commission would particularly 

benefit from public comment. 

All six of the UK swap dealers are dualregistered 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

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. 

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. 

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. 

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. 

[FR Doc. 2024–02070 Filed 2–2–24; 8:45 am] 

BILLING CODE 6351–01–P 


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