63376 Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Rules and Regulations 

1 7 U.S.C. 1 et. seq. 

2See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for 

which there is a Prudential Regulator must meet the 

margin requirements for uncleared swaps 

established by the applicable Prudential Regulator. 

7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39) 

(defining the term ‘‘Prudential Regulator’’ to 

include the Board of Governors of the Federal 

Reserve System; the Office of the Comptroller of the 

Currency; the Federal Deposit Insurance 

Corporation; the Farm Credit Administration; and 

the Federal Housing Finance Agency). The 

Prudential Regulators published final margin 

requirements in November 2015. See Margin and 

Capital Requirements for Covered Swap Entities, 80 

FR 74840 (Nov. 30, 2015) (‘‘Prudential Regulators’ 

Final Margin Rule’’). 

3See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants, 81 

FR 636 (Jan. 6, 2016). The Margin Rule, which 

became effective April 1, 2016, is codified in part 

23 of the Commission’s regulations. See 17 CFR 

23.150 through 23.159, and 23.161. The 

Commission’s regulations are found in chapter I of 

Title 17 of the Code of Federal Regulations, 17 CFR 

1 et. seq. 

4See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants— 

Cross-Border Application of the Margin 

Requirements, 81 FR 34818 (May 31, 2016). The 

Cross-Border Margin Rule, which became effective 

August 1, 2016, is codified in part 23 of the 

Commission’s regulations. See 17 CFR 23.160. 

5 In 2014, in conjunction with re-proposing its 

margin requirements, the Commission requested 

comment on three alternative approaches to the 

cross-border application of its margin requirements: 

(i) A transaction-level approach consistent with the 

Commission’s guidance on the cross-border 

application of the CEA’s swap provisions, see 

Interpretive Guidance and Policy Statement 

Regarding Compliance with Certain Swap 

Regulations, 78 FR 45292 (July 26, 2013) (the 

‘‘Guidance’’); (ii) an approach consistent with the 

Prudential Regulators’ proposed cross-border 

framework for margin, see Margin and Capital 

Requirements for Covered Swap Entities, 79 FR 

57348 (Sept. 24, 2014); and (iii) an entity-level 

approach that would apply margin rules on a firmwide basis (without any exclusion for swaps with 

non-U.S. counterparties). See Margin Requirements 

for Uncleared Swaps for Swap Dealers and Major 

Swap Participants, 79 FR 59898 (Oct. 3, 2014). 

Following a review of comments received in 

response to this release, the Commission’s Global 

Markets Advisory Committee (‘‘GMAC’’) hosted a 

public panel discussion on the cross-border 

application of margin requirements. See GMAC 

Meeting (May 14, 2015), transcript and webcast 

available at http://www.cftc.gov/PressRoom/Events/ 

opaevent_gmac051415. 

(i) Material Incorporated by Reference 

(1) The Director of the Federal Register 

approved the incorporation by reference of 

the service information listed in this 

paragraph under 5 U.S.C. 552(a) and 1 CFR 

part 51. 

(2) You must use this service information 

as applicable to do the actions required by 

this AD, unless the AD specifies otherwise. 

(i) AgustaWestland Bollettino Tecnico No. 

109–147, dated March 25, 2015. 

(ii) AgustaWestland Bollettino Tecnico No. 

109EP–143, dated March 25, 2015. 

(iii) AgustaWestland Bollettino Tecnico 

No. 109K–68, dated March 25, 2015. 

(iv) AgustaWestland Bollettino Tecnico No. 

109S–067, dated March 25, 2015. 

(v) AgustaWestland Bollettino TecnicoNo. 

109SP–094, dated March 25, 2015. 

(3) For Agusta S.p.A. service information 

identified in this final rule, contact 

AgustaWestland, Product Support 

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Lonate Pozzolo (VA) Italy, ATTN: Maurizio 

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Issued in Fort Worth, Texas, on September 

1, 2016. 

Lance T. Gant, 

Manager, Rotorcraft Directorate, Aircraft 

Certification Service. 

[FR Doc. 2016–21707 Filed 9–14–16; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Chapter I 

Comparability Determination for 

Japan: Margin Requirements for 

Uncleared Swaps for Swap Dealers 

and Major Swap Participants 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of comparability 

determination for margin requirements 

for uncleared swaps under the laws of 

Japan. 

SUMMARY: The following is the analysis 

and determination of the Commodity 

Futures Trading Commission 

(‘‘Commission’’) regarding a request by 

the Japan Financial Services Agency 

(‘‘JFSA’’) that the Commission 

determine that laws and regulations 

applicable in Japan provide a sufficient 

basis for an affirmative finding of 

comparability with respect to margin 

requirements for uncleared swaps 

applicable to certain swap dealers 

(‘‘SDs’’) and major swap participants 

(‘‘MSPs’’) registered with the 

Commission. As discussed in detail 

herein, with one exception, the 

Commission has found the margin 

requirements for uncleared swaps under 

the laws and regulations of Japan 

comparable to those under the 

Commodity Exchange Act (‘‘CEA’’) and 

Commission regulations. 

DATES: This determination is effective 

September 15, 2016. 

FOR FURTHER INFORMATION CONTACT: 

Eileen T. Flaherty, Director, 202–418– 

5326, eflaherty@cftc.gov, or Frank N. 

Fisanich, Chief Counsel, 202–418–5949, 

ffisanich@cftc.gov, Division of Swap 

Dealer and Intermediary Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

Pursuant to section 4s(e) of the CEA,1

the Commission is required to 

promulgate margin requirements for 

uncleared swaps applicable to each SD 

and MSP for which there is no 

Prudential Regulator (collectively, 

‘‘Covered Swap Entities’’ or ‘‘CSEs’’).2

The Commission published final margin 

requirements for such CSEs in January 

2016 (the ‘‘Final Margin Rule’’).3

Subsequently, on May 31, 2016, the 

Commission published in the Federal 

Register its final rule with respect to the 

cross-border application of the 

Commission’s margin requirements for 

uncleared swaps applicable to CSEs 

(hereinafter, the ‘‘Cross-Border Margin 

Rule’’).4 The Cross-Border Margin Rule 

sets out the circumstances under which 

a CSE is allowed to satisfy the 

requirements under the Margin Rule by 

complying with comparable foreign 

margin requirements (‘‘substituted 

compliance’’); offers certain CSEs a 

limited exclusion from the 

Commission’s margin requirements; and 

outlined a framework for assessing 

whether a foreign jurisdiction’s margin 

requirements are comparable to the 

Final Margin Rule (‘‘comparability 

determinations’’). The Commission 

promulgated the Cross-Border Margin 

Rule after close consultation with the 

Prudential Regulators and in light of 

comments from and discussions with 

market participants and foreign 

regulators.5

On June 17, 2016, the JFSA (the 

‘‘applicant’’) submitted a request that 

the Commission determine that laws 

and regulations applicable in Japan 

provide a sufficient basis for an 

affirmative finding of comparability 

with respect to the Final Margin Rule. 

The applicant provided Commission 

staff with an updated submission on 

July 26, 2016. On August 18, 2016, the 

application was further supplemented 

with corrections and additional 

materials. The Commission’s analysis 

and comparability determination for 

Japan regarding the Final Margin Rule is 

detailed below. 


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

7See Capital Requirements for Swap Dealers and 

Major Swap Participants, 76 FR 27802 (May 12, 

2011). 

8 In determining the extent to which the DoddFrank swap provisions apply to activities overseas, 

the Commission strives to protect U.S. interests, as 

determined by Congress in Title VII, and minimize 

conflicts with the laws of other jurisdictions, 

consistent with principles of international comity. 

See Guidance, 78 FR at 45300–45301 (referencing 

the Restatement (Third) of Foreign Relations Law of 

the United States). 

9 In October 2011, the Basel Committee on 

Banking Supervision (‘‘BCBS’’) and the 

International Organization of Securities 

Commissions (‘‘IOSCO’’), in consultation with the 

Committee on Payment and Settlement Systems and 

the Committee on Global Financial Systems, formed 

a Working Group on Margining Requirements to 

develop international standards for margin 

requirements for uncleared swaps. Representatives 

of 26 regulatory authorities participated, including 

the Commission. In September 2013, the WGMR 

published a final report articulating eight key 

principles for non-cleared derivatives margin rules. 

These principles represent the minimum standards 

approved by BCBS and IOSCO and their 

recommendations to the regulatory authorities in 

member jurisdictions. See BCBS/IOSCO, Margin 

requirements for non-centrally cleared derivatives 

(updated March 2015) (‘‘BCBS/IOSCO 

Framework’’), available at http://www.bis.org/bcbs/ 

publ/d317.pdf. 

10See 17 CFR 23.160(c)(1)(i). 

11See 17 CFR 23.160(c)(1)(ii). 

12See 17 CFR 23.160(c)(2)(v). 

13See 17 CFR 23.160(c)(2)(i). 

14See 17 CFR 23.160(c)(2)(iii). See also 17 CFR 

23.160(a)(3) (defining ‘‘international standards’’ as 

based on the BCBS–ISOCO Framework). 

15See 17 CFR 23.160(c)(2)(ii) (identifying the 

elements as: (A) The products subject to the foreign 

jurisdiction’s margin requirements; (B) the entities 

subject to the foreign jurisdiction’s margin 

requirements; (C) the treatment of inter-affiliate 

transactions; (D) the methodologies for calculating 

the amounts of initial and variation margin; (E) the 

process and standards for approving models for 

calculating initial and variation margin models; (F) 

the timing and manner in which initial and 

variation margin must be collected and/or paid; (G) 

any threshold levels or amounts; (H) risk 

management controls for the calculation of initial 

and variation margin; (I) eligible collateral for initial 

and variation margin; (J) the requirements of 

custodial arrangements, including segregation of 

margin and rehypothecation; (K) margin 

documentation requirements; and (L) the crossborder application of the foreign jurisdiction’s 

margin regime). Section 23.160(c)(2)(ii) largely 

tracks the elements of the BCBS–IOSCO Framework 

but breaks them down into their components as 

appropriate to ensure ease of application. 

16See id. 

17See 17 CFR 23.160(c)(3)(i). 

18See 17 CFR 23.160(c)(3)(ii). As discussed 

above, the Commission’s Final Margin Rule is based 

on the BCBS/IOSCO Framework; therefore, the 

Commission expects that the relevant foreign 

margin requirements would conform to such 

Framework at minimum in order to be deemed 

comparable to the Commission’s corresponding 

margin requirements. 

19See 17 CFR 23.160(c)(3)(iii). See also 17 CFR 

23.160(c)(3)(iv) (indicating the Commission would 

also consider any other relevant facts and 

circumstances). 

II. Cross-Border Margin Rule 

A. Regulatory Objective of Margin 

Requirements 

The regulatory objective of the Final 

Margin Rule is to further the 

congressional mandate to ensure the 

safety and soundness of CSEs in order 

to offset the greater risk to CSEs and the 

financial system arising from the use of 

swaps that are not cleared.6 The primary 

function of margin is to protect a CSE 

from counterparty default, allowing it to 

absorb losses and continue to meet its 

obligations using collateral provided by 

the defaulting counterparty. While the 

requirement to post margin protects the 

counterparty in the event of the CSE’s 

default, it also functions as a risk 

management tool, limiting the amount 

of leverage a CSE can incur by requiring 

that it have adequate eligible collateral 

to enter into an uncleared swap. In this 

way, margin serves as a first line of 

defense not only in protecting the CSE 

but in containing the amount of risk in 

the financial system as a whole, 

reducing the potential for contagion 

arising from uncleared swaps.7

However, the global nature of the 

swap market, coupled with the 

interconnectedness of market 

participants, also necessitate that the 

Commission recognize the supervisory 

interests of foreign regulatory 

authorities and consider the impact of 

its choices on market efficiency and 

competition, which the Commission 

believes are vital to a well-functioning 

global swap market.8 Foreign 

jurisdictions are at various stages of 

implementing margin reforms. To the 

extent that other jurisdictions adopt 

requirements with different coverage or 

timelines, the Commission’s margin 

requirements may lead to competitive 

burdens for U.S. entities and deter nonU.S. persons from transacting with U.S. 

CSEs and their affiliates overseas. 

B. Substituted Compliance 

To address these concerns, the CrossBorder Margin Rule provides that, 

subject to certain findings and 

conditions, a CSE is permitted to satisfy 

the requirements of the Final Margin 

Rule by instead complying with the 

margin requirements in the relevant 

foreign jurisdiction. This substituted 

compliance regime is intended to 

address the concerns discussed above 

without compromising the 

congressional mandate to protect the 

safety and soundness of CSEs and the 

stability of the U.S. financial system. 

Substituted compliance helps preserve 

the benefits of an integrated, global 

swap market by reducing the degree to 

which market participants will be 

subject to multiple sets of regulations. 

Further, substituted compliance builds 

on international efforts to develop a 

global margin framework.9

Pursuant to the Cross-Border Margin 

Rule, any CSE that is eligible for 

substituted compliance under 

§ 23.160 10 and any foreign regulatory 

authority that has direct supervisory 

authority over one or more CSEs and 

that is responsible for administering the 

relevant foreign jurisdiction’s margin 

requirements may apply to the 

Commission for a comparability 

determination.11

The Cross-Border Margin Rule 

requires that applicants for a 

comparability determination provide 

copies of the relevant foreign 

jurisdiction’s margin requirements 12

and descriptions of their objectives,13

how they differ from the BCBS/IOSCO 

Framework,14 and how they address the 

elements of the Commission’s margin 

requirements.15 The applicant must 

identify the specific legal and regulatory 

provisions of the foreign jurisdiction’s 

margin requirements that correspond to 

each element and, if necessary, whether 

the relevant foreign jurisdiction’s 

margin requirements do not address a 

particular element.16

C. Standard of Review for Comparability 

Determinations 

The Cross-Border Margin Rule 

identifies certain key factors that the 

Commission will consider in making a 

comparability determination. 

Specifically, the Commission will 

consider the scope and objectives of the 

relevant foreign jurisdiction’s margin 

requirements; 17 whether the relevant 

foreign jurisdiction’s margin 

requirements achieve comparable 

outcomes to the Commission’s 

corresponding margin requirements; 18

and the ability of the relevant regulatory 

authority or authorities to supervise and 

enforce compliance with the relevant 

foreign jurisdiction’s margin 

requirements.19

This process reflects an outcomebased approach to assessing the 

comparability of a foreign jurisdiction’s 

margin requirements. Instead of 

demanding strict uniformity with the 

Commission’s margin requirements, the 

Commission evaluates the objectives 

and outcomes of the foreign margin 

requirements in light of foreign 

regulator(s)’ supervisory and 

enforcement authority. Recognizing that 

jurisdictions may adopt different 

approaches to achieving the same 

outcome, the Commission will focus on 

whether the foreign jurisdiction’s 

margin requirements are comparable to 

the Commission’s in purpose and effect, 

not whether they are comparable in 


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63378 Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Rules and Regulations 

20The Final Margin Rule was modified 

substantially from its proposed form to further align 

the Commission’s margin requirements with the 

BCBS/IOSCO Framework and, as a result, the 

potential for conflict with foreign margin 

requirements should be reduced. For example, the 

Final Margin Rule raised the material swaps 

exposure level from $3 billion to the BCBS/IOSCO 

standard of $8 billion, which reduces the number 

of entities that must collect and post initial margin. 

See Final Margin Rule, 81 FR at 644. In addition, 

the definition of uncleared swaps was broadened to 

include DCOs that are not registered with the 

Commission but pursuant to Commission orders are 

permitted to clear for U.S. persons. See id. at 638. 

The Commission notes, however, that the BCBS– 

IOSCO Framework leaves certain elements open to 

interpretation (e.g., the definition of ‘‘derivative’’) 

and expressly invites regulators to build on certain 

principles as appropriate. See, e.g., Element 4 

(eligible collateral) (national regulators should 

‘‘develop their own list of eligible collateral assets 

based on the key principle, taking into account the 

conditions of their own markets’’); Element 5 

(initial margin) (the degree to which margin should 

be protected would be affected by ‘‘the local 

bankruptcy regime, and would vary across 

jurisdictions’’); Element 6 (transactions with 

affiliates) (‘‘Transactions between a firm and its 

affiliates should be subject to appropriate regulation 

in a manner consistent with each jurisdiction’s legal 

and regulatory framework.’’). 

21See 17 CFR 23.160(c)(5). 

22Under Commission regulations 23.203 and 

23.606, CSEs must maintain all records required by 

the CEA and the Commission’s regulations in 

accordance with Commission regulation 1.31 and 

keep them open for inspection by representatives of 

the Commission, the United States Department of 

Justice, or any applicable prudential regulator. See 

17 CFR 23.203, 23.606. The Commission further 

expects that prompt access to books and records 

and the ability to inspect and examine a non-U.S. 

CSE will be a condition to any comparability 

determination. 

23 ‘‘Swaps activities’’ is defined in Commission 

regulation 23.600(a)(7) to mean, with respect to a 

registrant, such registrant’s activities related to 

swaps and any product used to hedge such swaps, 

including, but not limited to, futures, options, other 

swaps or security-based swaps, debt or equity 

securities, foreign currency, physical commodities, 

and other derivatives. The Commission’s 

regulations under 17 CFR part 23 are limited in 

scope to the swaps activities of CSEs. 

24No CSE that is not legally required to comply 

with a law or regulation determined to be 

comparable may voluntarily comply with such law 

or regulation in lieu of compliance with the CEA 

and the relevant Commission regulation. Each CSE 

that seeks to rely on a comparability determination 

is responsible for determining whether it is subject 

to the laws and regulations found comparable. 

25The Commission has provided the relevant 

foreign regulator(s) with opportunities to review 

and correct the applicant’s description of such laws 

and regulations on which the Commission will base 

its comparability determination. The Commission 

relies on the accuracy and completeness of such 

review and any corrections received in making its 

comparability determinations. A comparability 

determination based on an inaccurate description of 

foreign laws and regulations may not be valid. 

26 78 FR at 45345. 

27Cabinet Office Ordinance on Financial 

Instruments Business (Cabinet Office Ordinance No. 

52 of August 6, 2007), including supplementary 

provisions (‘‘FIB Ordinance’’). 

28Comprehensive Guideline for Supervision of 

Major Banks, etc., Comprehensive Guidelines for 

Supervision of Regional Financial Institutions, 

Comprehensive Guideline for Supervision of 

Cooperative Financial Institutions, Comprehensive 

Guideline for Supervision of Financial Instruments 

Business Operators, etc., Comprehensive Guidelines 

for Supervision of Insurance Companies, and 

Comprehensive Guidelines for Supervision of Trust 

Companies, etc. (together, ‘‘Supervisory 

Guideline’’). 

29 JFSA Public Notification No. 15 of March 31, 

2016 (‘‘JFSA Public Notice No. 15’’); JFSA Public 

Notification No. 16 of March 31, 2016 (‘‘JFSA 

Public Notice No. 16’’); and JFSA Public 

Notification No. 17 of March 31, 2016 (‘‘JFSA 

Public Notice No. 17’’). 

30Collectively, FIEA, FIB Ordinance, Supervisory 

Guideline, and JFSA Public Notifications are 

referred to herein as the ‘‘JFSA’s margin rules,’’ 

‘‘JFSA’s margin regime,’’ ‘‘JFSA’s margin 

requirements’’ or the ‘‘laws of Japan.’’ 

31See Article 2(8)(iv) of the FIEA. 

every aspect or contain identical 

elements. 

In keeping with the Commission’s 

commitment to international 

coordination on margin requirements 

for uncleared derivatives, the 

Commission believes that the standards 

it has established are fully consistent 

with the BCBS–IOSCO Framework.20

Accordingly, where relevant to the 

Commission’s comparability analysis, 

the BCBS/IOSCO Framework is 

discussed to explain certain 

internationally agreed concepts and, 

where appropriate, used as a baseline to 

compare provisions of the Final Margin 

Rule with those of the foreign 

jurisdiction. 

The Cross-Border Margin Rule 

provided a detailed discussion 

regarding the facts and circumstances 

under which substituted compliance for 

the requirements under the Final 

Margin Rule would be available and 

such discussion is not repeated here. 

CSEs seeking to rely on substituted 

compliance based on the comparability 

determinations contained herein are 

responsible for determining whether 

substituted compliance is available 

under the Cross-Border Margin Rule 

with respect to the CSE’s particular 

status and circumstances. 

D. Conditions to Comparability 

Determinations 

The Cross-Border Margin Rule 

provides that the Commission may 

impose terms and conditions it deems 

appropriate in issuing a comparability 

determination.21 Specific terms and 

conditions with respect to margin 

requirements are discussed in the 

Commission’s determinations detailed 

below. 

As a general condition to all 

determinations, however, the 

Commission requires notification of any 

material changes to information 

submitted to the Commission by the 

applicant in support of a comparability 

finding, including, but not limited to, 

changes in the relevant foreign 

jurisdiction’s supervisory or regulatory 

regime. The Commission also expects 

that the relevant foreign regulator will 

enter into, or will have entered into, an 

appropriate memorandum of 

understanding or similar arrangement 

with the Commission in connection 

with a comparability determination.22

Finally, the Commission will 

generally rely on an applicant’s 

description of the laws and regulations 

of the foreign jurisdiction in making its 

comparability determination. The 

Commission considers an application to 

be a representation by the applicant that 

the laws and regulations submitted are 

in full force and effect, 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 swaps activities 23 of CSEs 24 in the 

relevant jurisdictions.25 Further, the 

Commission expects that an applicant 

would notify the Commission of any 

material changes to information 

submitted in support of a comparability 

determination (including, but not 

limited to, changes in the relevant 

supervisory or regulatory regime) as, 

depending on the nature of the change, 

the Commission’s comparability 

determination may no longer be valid.26

III. Margin Requirements for Swaps 

Activities in Japan 

As represented to the Commission by 

the applicant, margin requirements for 

swap activities in Japan are governed by 

the Financial Instruments and Exchange 

Act, No. 25 of 1948 (‘‘FIEA’’), covering 

Financial Instrument Business 

Operators (‘‘FIBOs’’) and Registered 

Financial Institutions (‘‘RFIs’’), which 

include regulated banks, cooperatives, 

insurance companies, pension funds, 

and investment funds. The Japanese 

Prime Minister delegated broad 

authority to implement these laws to the 

JFSA. Pursuant to this authority, the 

JFSA has promulgated the Cabinet 

Office Ordinance,27 Supervisory 

Guidelines,28 and Public 

Notifications.29

These requirements supplement the 

requirements of FIEA with a more 

proscriptive direction with respect to 

margin requirements.30

Pursuant to Article 29 of the FIEA, 

any person that engages in trade 

activities that constitute ‘‘Financial 

Instruments Business’’—which, among 

other things, includes over-the-counter 

transactions in derivatives (‘‘OTC 

derivatives’’) or intermediary, brokerage 

(excluding brokerage for clearing of 

securities) or agency services 

therefor 31—must register under the 


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Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Rules and Regulations 63379 

32See Cross-Border Margin Rule, 81 FR at 34819. 

33 7 U.S.C. 1a(47). 

34See, e.g., § 1.3(xxx), 17 CFR 1.3(xxx). 

35 17 CFR 23.151. 

36See Cabinet Order No. 321 of 1965; See also 

Article 123(1)(xxi)–5 of the FIB Ordinance. ‘‘OTC 

derivative’’ is defined in Article 2(22) of FIEA to 

mean: 

[T]he following transactions which are conducted 

in neither a Financial Instruments Market nor a 

Foreign Financial Instruments Market (except those 

specified by a Cabinet Order as those for which it 

is found not to hinder the public interest or 

protection of investors when taking into account its 

content and other related factors). 

(i) Transactions wherein the parties thereto 

promise to deliver or receive Financial Instruments 

(excluding those listed in Article 2(24)(v); 

hereinafter the same shall apply in this paragraph) 

or consideration for them at a fixed time in the 

future, and, when the resale or repurchase of the 

underlying Financial Instruments or other acts 

specified by a Cabinet Order is made, settlement 

thereof may be made by paying or receiving the 

differences; 

(ii) transactions wherein the parties thereto 

promise to pay or receive the amount of money 

calculated based on the Agreed Figure and the 

Actual Figure or any other similar transactions; and 

(iii) transactions wherein the parties thereto 

promise that one of the parties grants the other 

party an option to effect a transaction listed in the 

following items between the parties only by 

unilateral manifestation of the other party’s 

intention, and the other party pays consideration 

for such option, or any other similar transactions: 

(a) Sales and purchase of Financial Instruments 

(excluding those specified in item (i)); or 

(b) any transaction listed in the preceding two 

items or items (v) to (vii). 

(iv) transactions wherein the parties thereto 

promise that one of the parties grants the other 

party an option to, only by unilateral manifestation 

of his/her intention, effect a transaction wherein the 

parties promise to pay or receive the amount of 

money calculated based on the difference between 

a figure which the parties have agreed in advance 

to use as the Agreed Figure of the Financial 

Indicator when such manifestation is made and the 

Actual Figure of the Financial Indicator at the time 

of such manifestation, and the other party pays the 

consideration for such option, or any other similar 

transactions; 

(v) transactions wherein the parties mutually 

promise that, using the amount the parties have 

agreed to as the principal, one of the parties will 

pay the amount of money calculated based on the 

rate of change in the agreed period of the interest 

rate, etc. of the Financial Instruments (excluding 

those listed in Article 2(24)(iii)) or of a Financial 

Indicator agreed with the other party, and the other 

party will pay the amount of money calculated 

based on the rate of change in the agreed period of 

the interest rate, etc. of the Financial Instruments 

(excluding those listed in Article 2(24)(iii)) or of a 

Financial Indicator agreed with the former party 

(including transactions wherein the parties promise 

that, in addition to the payment of such amounts, 

they will also pay, deliver or receive the amount of 

money or financial instruments that amounts to the 

agreed principal), or any other similar transactions; 

(vi) transactions wherein one of the parties pays 

money, and the other party, as the consideration 

therefor, promises to pay money in cases where a 

cause agreed by the parties in advance and listed 

in the following items occurs (including those 

wherein one of the parties promises to transfer the 

Financial Instruments, rights pertaining to the 

Financial Instruments or monetary claim (excluding 

claims that are Financial Instruments or rights 

pertaining to the Financial Instruments), but 

excluding those listed in item (ii) to the preceding 

item), or any other similar transactions; or 

(a) a cause pertaining to credit status of a juridical 

person or other similar cause as specified by a 

Cabinet Order; or 

(b) a cause which it is impossible or extremely 

difficult for either party to exert his/her influence 

on the occurrence of and which may have serious 

influence on business activities of the parties or 

other business operators as specified by a Cabinet 

Order (excluding those specified in (a)). 

(vii) in addition to transactions listed in the 

preceding items, transactions which have an 

economic nature similar to these transactions and 

are specified by a Cabinet Order as those for which 

it is found necessary to secure the public interest 

or protection of investors. 

FIEA as a FIBO. Banks that conduct 

specified activities in the course of 

trade, including OTC derivatives must 

register under the FIEA as RFIs pursuant 

to Article 33–2 of the FIEA. Banks 

registered as RFIs are required to 

comply with relevant laws and 

regulations for FIBOs regarding 

specified activities. Failure to comply 

with any relevant laws and regulations, 

Supervisory Guidelines, or Public 

Notifications would subject the 

applicant to potential sanctions or 

corrective measures. 

All current CSEs established under 

the laws of Japan are registered in Japan 

as RFIs or FIBOs under the supervision 

of the JFSA. 

IV. Comparability Analysis 

The following section describes the 

regulatory objective of the Commission’s 

requirements with respect to margin for 

uncleared swaps imposed by the CEA 

and the Final Margin Rule and a 

description of such requirements. 

Immediately following a description of 

the requirement(s) of the Final Margin 

Rule for which a comparability 

determination was requested by the 

applicant, the Commission provides a 

description of the foreign jurisdiction’s 

comparable laws, regulations, or rules. 

The Commission then provides a 

discussion of the comparability of, or 

differences between, the Final Margin 

Rule and the foreign jurisdiction’s laws, 

regulations, or rules. 

A. Objectives of Margin Requirements 

1. Commission Statement of Regulatory 

Objectives 

The regulatory objective of the Final 

Margin Rule is to ensure the safety and 

soundness of CSEs in order to offset the 

greater risk to CSEs and the financial 

system arising from the use of swaps 

that are not cleared. The primary 

function of margin is to protect a CSE 

from counterparty default, allowing it to 

absorb losses and continue to meet its 

obligations using collateral provided by 

the defaulting counterparty. While the 

requirement to post margin protects the 

counterparty in the event of the CSE’s 

default, it also functions as a risk 

management tool, limiting the amount 

of leverage a CSE can incur by requiring 

that it have adequate eligible collateral 

to enter into an uncleared swap. In this 

way, margin serves as a first line of 

defense not only in protecting the CSE 

but in containing the amount of risk in 

the financial system as a whole, 

reducing the potential for contagion 

arising from uncleared swaps.32

2. JFSA Statement of Regulatory 

Objectives 

The JFSA states that the objectives of 

margin requirements are the reduction 

of systemic risk and promotion of 

central clearing, as the BCBS/IOSCO 

Framework defines. To ensure that these 

objectives are achieved, the laws and 

regulations of Japan prescribe that 

financial institutions shall establish an 

appropriate framework for margin 

requirements, in line with the BCBS/ 

IOSCO Framework. In addition, the 

JFSA intends to improve the risk 

management capabilities of financial 

institutions through its margin 

requirements and accordingly, JFSA’s 

Supervisory Guidelines explicitly 

prescribe that financial institutions are 

required to establish a framework for 

margin requirements in order to manage 

counterparty credit risk. 

B. Products Subject to Margin 

Requirements 

The Commission’s Final Margin Rule 

applies only to uncleared swaps. Swaps 

are defined in section 1a(47) of the 

CEA 33 and Commission regulations.34

‘‘Uncleared swap’’ is defined for 

purposes of the Final Margin Rule in 

Commission regulation § 23.151 to mean 

a swap that is not cleared by a registered 

derivatives clearing organization, or by 

a clearing organization that the 

Commission has exempted from 

registration by rule or order pursuant to 

section 5b(h) of the Act.35

In Japan, the JFSA’s margin rules 

apply to ‘‘non-cleared OTC derivatives,’’ 

which are defined to mean: 

OTC derivatives except for those cases 

where Financial Instruments Clearing 

Organizations (including an Interoperable 

Clearing Organization in cases where the 

Financial Instruments Clearing Organization 

conducts Interoperable Financial Instruments 

Obligation Assumption Business; hereinafter 

the same shall apply in paragraph (11), item 

(i)(c)1.) or a Foreign Financial Instruments 

Clearing Organization meets the obligation 

pertaining to OTC derivatives or cases 

designated by Commissioner of the Financial 

Services Agency prescribed in Article 1–18– 

2 of the Order for Enforcement of the 

[FIEA].36


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63380 Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Rules and Regulations 

37 ‘‘OTC Commodity Derivative’’ is defined in 

Article 2, Paragraph 14 of the Commodity 

Derivatives Act (Act No. 239 of August 5, 1950) to 

mean any of the following transactions not executed 

on any Commodity Market, Foreign Commodity 

Market, or Financial Instruments Exchange Market 

(i.e., Financial Instruments Exchange Markets 

prescribed in Article 2, paragraph (17) of the FIEA 

(excluding transactions carried out through the 

facilities listed in each of the items of Article 331 

of the Commodity Derivatives Act): 

(i) Buying and selling transactions where parties 

agree to transfer between them a Commodity and 

the consideration therefor at a certain time in the 

future and where a resale or repurchase of the 

Commodity subject to said buying and selling can 

be settled by exchanging the difference; 

(ii) Transactions where parties agree to transfer 

between them money calculated on the basis of the 

difference between the Contract Price and the 

Actual Price or other transactions similar thereto; 

(iii) Transactions where parties agree to transfer 

between them money calculated on the basis of the 

difference between the Agreed Figure and the 

Actual Figure or other transactions similar thereto; 

(iv) Transactions where parties agree that, on the 

manifestation of intention by one of the parties, the 

counterparty grants said party a right to establish 

any of the following transactions between the 

parties and said party pays the consideration 

therefor or other transactions similar thereto: 

(a) Transactions set forth in item (i); 

(b) Transactions set forth in item (ii); 

(c) Transactions set forth in the previous item; 

(d) Transactions set forth in item (vi); 

(v) Transactions where parties agree that the 

counterparty grants said party a right to establish 

between the parties a transaction where parties 

transfer between them money calculated on the 

basis of the difference between the price agreed 

between the parties in advance as a price of a 

Commodity pertaining to the manifestation of 

intention by one of the parties (including a 

numerical value that expresses the price level of a 

Commodity and a numerical value calculated 

otherwise on the basis of the price of a Commodity; 

hereinafter the same shall apply in this item) or the 

numerical value agreed between the parties in 

advance as a Commodity Index and the actual price 

of said Commodity or the actual numerical value of 

said Commodity Index prevailing at the time of said 

manifestation of intention and said party pays the 

consideration therefor, or other transactions similar 

thereto; 

(vi) Transactions where parties mutually agree, 

with respect to a Commodity for which the volume 

is determined by the parties, that one party will pay 

to the counterparty money calculated on the basis 

of the rate of change in the price of said Commodity 

or a Commodity Index for a period agreed between 

the parties in advance and that the latter will pay 

to the former money calculated on the basis of the 

rate of change in the price of said Commodity or 

a Commodity Index for a period agreed between the 

parties in advance, or other transactions similar 

thereto; 

(vii) In addition to transactions listed in the 

preceding items, transactions with an economic 

nature similar thereto that are specified by Cabinet 

Order as those for which it is considered necessary 

to secure the public interests or protection of parties 

thereto. 

38See Ministry of Agriculture, Forestry and 

Fisheries/Ministry of Economy, Trade and Industry 

Public Notification No. 2 of August 1, 2016; 

Ordinance for Enforcement of the Commodity 

Derivatives Act (Ordinance of the Ministry of 

Agriculture, Forestry and Fisheries and the Ministry 

of Economy, Trade and Industry No. 3 of February 

22, 2005); Supplementary Provisions of Ordinance 

for Enforcement of the Commodity Derivatives Act 

No. 3 of February 22, 2005; and Basic Supervision 

Guidelines of Commodity Derivatives Business 

Operators, etc. 

39See id. 

40Or the METI/MAFF margin rules, as discussed 

above. 

41See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for 

which there is a Prudential Regulator must meet the 

margin requirements for uncleared swaps 

established by the applicable Prudential Regulator. 

7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39) 

(defining the term ‘‘Prudential Regulator’’ to 

include the Board of Governors of the Federal 

Reserve System; the Office of the Comptroller of the 

Currency; the Federal Deposit Insurance 

Corporation; the Farm Credit Administration; and 

the Federal Housing Finance Agency). The 

Prudential Regulators published final margin 

requirements in November 2015. See Prudential 

Regulators’ Final Margin Rule, 80 FR 74840 (Nov. 

30, 2015). 

42See 17 CFR 23.152. 

43See definition of ‘‘Financial end user’’ in 17 

CFR 23.150. 

As represented by the applicant, 

however, Japan has separate definitions 

of ‘‘OTC Derivatives’’ and ‘‘OTC 

Commodity Derivatives.’’ 37 Japan also 

has separate margin rules for OTC 

Commodity Derivatives that are 

administered by the Japan Ministry of 

Economy, Trade, and Industry (METI) 

and the Japan Ministry of Agriculture, 

Forestry, and Fisheries (MAFF). METI/ 

MAFF finalized their margin 

requirements for non-cleared OTC 

Commodity Derivatives on August 1, 

2016.38 While the margin rules for noncleared OTC Derivatives and OTC 

Commodity Derivatives are separate, the 

METI/MAFF non-cleared OTC 

Commodity Derivative rules incorporate 

by reference the corresponding JFSA 

margin rules,39 and thus, for all 

purposes material to the determinations 

below, the METI/MAFF rules and JFSA 

margin rules are identical. Accordingly, 

for ease of reference, the discussion 

below refers only to the JFSA and the 

JFSA margin rules, but such discussion 

is equally applicable to METI/MAFF 

and the METI/MAFF non-cleared OTC 

Commodity Derivative margin rules. 

Further, CSEs may rely on the 

determinations set forth below regarding 

non-cleared OTC Derivatives subject to 

the JFSA margin rules equally with 

respect to non-cleared OTC Commodity 

Derivatives subject to the METI/MAFF 

margin rules. 

While it is beyond the scope of this 

comparability determination to 

definitively map any differences 

between the definitions of ‘‘swap’’ and 

‘‘uncleared swap’’ under the CEA and 

Commission regulations and Japan’s 

definitions of ‘‘OTC Derivative,’’ ‘‘OTC 

Commodity Derivative,’’ ‘‘non-cleared 

OTC Derivative,’’ and ‘‘non-cleared OTC 

Commodity Derivative,’’ the 

Commission believes that such 

definitions largely cover the same 

products and instruments. 

However, because the definitions are 

not identical, the Commission 

recognizes the possibility that a CSE 

may enter into a transaction that is an 

uncleared swap as defined in the CEA 

and Commission regulations, but that is 

not a non-cleared OTC Derivative as 

defined under the laws of Japan. In such 

cases, the Final Margin Rule would 

apply to the transaction but the JFSA’s 

margin rules would not apply and thus, 

substituted compliance would not be 

available. The CSE could not choose to 

comply with the JFSA’s margin rules 40

in place of the Final Margin Rule. 

Likewise, if a transaction is a noncleared OTC derivative as defined under 

the laws of Japan but not an uncleared 

swap subject to the Final Margin Rule, 

a CSE could not choose to comply with 

the Final Margin Rule pursuant to this 

determination. CSEs are solely 

responsible for determining whether a 

particular transaction is both an 

uncleared swap and a non-cleared OTC 

derivative before relying on substituted 

compliance under the comparability 

determinations set forth below. 

C. Entities Subject to Margin 

Requirements 

As stated previously, the 

Commission’s Final Margin Rule and 

Cross-Border Margin Rule apply only to 

CSEs, i.e., SDs and MSPs registered with 

the Commission for which there is not 

a Prudential Regulator.41 Thus, only 

such CSEs may rely on the 

determinations herein for substituted 

compliance, while CSEs for which there 

is a Prudential Regulator must look to 

the determinations of the Prudential 

Regulators. The Commission has 

consulted with the Prudential 

Regulators in making these 

determinations. 

CSEs are not required to collect and/ 

or post margin with every uncleared 

swap counterparty. Under the Final 

Margin Rule, the initial margin 

obligations of CSEs apply only to 

uncleared swaps with counterparties 

that meet the definition of ‘‘covered 

counterparty’’ in § 23.151.42 Such 

definition provides that a ‘‘covered 

counterparty’’ is a counterparty that is a 

financial end user 43 with material 


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44See 17 CFR 23.150, which states that ‘‘material 

swaps exposure’’ for an entity means that the entity 

and its margin affiliates have an average daily 

aggregate notional amount of uncleared swaps, 

uncleared security-based swaps, foreign exchange 

forwards, and foreign exchange swaps with all 

counterparties for June, July and August of the 

previous calendar year that exceeds $8 billion, 

where such amount is calculated only for business 

days. An entity shall count the average daily 

aggregate notional amount of an uncleared swap, an 

uncleared security-based swap, a foreign exchange 

forward, or a foreign exchange swap between the 

entity and a margin affiliate only one time. For 

purposes of this calculation, an entity shall not 

count a swap that is exempt pursuant to 17 CFR 

23.150(b) or a security-based swap that qualifies for 

an exemption under section 3C(g)(10) of the 

Securities Exchange Act of 1934 (15 U.S.C. 78c– 

3(g)(4)) and implementing regulations or that 

satisfies the criteria in section 3C(g)(1) of the 

Securities Exchange Act of 1934 (15 U.S.C. 78– 

c3(g)(4)) and implementing regulations. 

45 ‘‘Swap entity’’ is defined in 17 CFR 23.150 as 

a person that is registered with the Commission as 

a swap dealer or major swap participant pursuant 

to the Act. 

46See 17 CFR 23.153. 

47See FIB Ordinance Article 123(10) and (11). 

Specifically, ‘‘covered entities’’ under the JFSA’s 

margin rules include Type 1 FIBOs, RFIs, insurance 

companies that are RFIs and trust accounts that are 

RFIs. Covered entities also include Shoko Chukin 

Bank, the Development Bank of Japan, Shinkin 

Central Bank, and the Norinchukin Bank. Covered 

entities must post and collect initial and variation 

margin to and from other covered entity 

counterparties. 

48See FIB Ordinance, Article 123(10)(iv) and 

(11)(iv). In general, the threshold for variation 

margin is whether the average total amount of the 

notional principal of OTC Derivatives for a one-year 

period from April two years before the year in 

which calculation is required (or one year if 

calculated in December) exceeds JPY 300 bn. In 

general, the threshold for initial margin is whether 

the average month-end aggregate notional amount 

of non-cleared OTC derivatives, non-cleared OTC 

commodity derivatives, and physically-settled FX 

forwards and FX swaps of a consolidated group 

(excluding inter-affiliate transactions) for March, 

April, and May one year before the year in which 

calculation is required exceeds JPY 1.1 trillion. No 

margin is required for OTC Derivatives with noncovered entities (i.e., non-financial end-users). 

However, FIBOs and RFIs that fall below the 

threshold for variation margin are still required by 

the Supervisory Guidelines to establish appropriate 

risk management policies and procedures that 

require exchange of variation margin and 

appropriate documentation. See Supervisory 

Guideline Section IV—2–4(4)(i). 

49Or the METI/MAFF margin rules, as discussed 

above. 

50See BCBS/IOSCO Framework, Element 6: 

Treatment of transactions with affiliates. 

51See 17 CFR 23.151. 

52 ‘‘Initial margin’’ is margin exchanged to protect 

against a potential future exposure and is defined 

in 17 CFR 23.151 to mean the collateral, as 

calculated in accordance with 17 CFR 23.154 that 

is collected or posted in connection with one or 

more uncleared swaps. 

53See 17 CFR 23.159(a). 

54See 17 CFR 23.159(c). 

swaps exposure 44 or a swap entity 45

that enters into a swap with a CSE. The 

variation margin obligations of CSEs 

under the Final Margin Rule apply more 

broadly. Such obligations apply to 

counterparties that are swap entities and 

all financial end users, not just those 

with ‘‘material swaps exposure.’’ 46

As represented by the JFSA, the 

JFSA’s margin rules cover all types of 

financial institutions, such as 

prudentially regulated banks, 

cooperatives, securities companies, 

insurance companies, pension funds, 

and investment funds.47 However, 

similar to the Final Margin Rule’s 

definitions of ‘‘covered counterparty’’ 

and ‘‘financial end-user,’’ the JFSA’s 

margin regime does not apply to nonfinancial institutions nor to financial 

institutions below certain thresholds of 

activity in OTC derivatives.48 As 

discussed above, CSEs are financial 

institutions for purposes of the JFSA’s 

margin rules. 

Given the definitional differences and 

differences in activity thresholds with 

respect to the scope of application of the 

Final Margin Rule and the JFSA’s 

margin requirements, the Commission 

notes the possibility that the Final 

Margin Rule and the JFSA’s margin 

rules may not apply to every uncleared 

swap that a CSE may enter into with a 

Japanese counterparty. For example, it 

appears possible that a financial end 

user with ‘‘material swaps exposure’’ 

would meet the definition of ‘‘covered 

counterparty’’ under the Final Margin 

Rule (and thus the initial and variation 

margin requirements) while at the same 

time fall under the JFSA’s OTC 

Derivative activity threshold and be 

subject only to variation margin 

requirements. It may also be possible 

that the Final Margin Rule’s definition 

of ‘‘financial end-user’’ could capture an 

entity that is a non-financial end-user 

under the JFSA’s margin regime. 

With these differences in scope in 

mind, the Commission reiterates that no 

CSE may rely on substituted compliance 

unless it and its transaction are subject 

to both the Final Margin Rule and the 

JFSA’s margin rules; 49 a CSE may not 

voluntarily comply with the JFSA’s 

margin rules where such law does not 

otherwise apply. Likewise, a CSE that is 

not seeking to rely on substituted 

compliance should understand that the 

JFSA’s margin rules may apply to its 

counterparty irrespective of the CSE’s 

decision to comply with the Final 

Margin Rule. 

D. Treatment of Inter-Affiliate 

Derivative Transactions 

The BCBS/IOSCO Framework 

recognizes that the treatment of interaffiliate derivative transactions will vary 

between jurisdictions. Thus, the BCBS/ 

IOSCO Framework does not set 

standards with respect to the treatment 

of inter-affiliate transactions. Rather, it 

recommends that regulators in each 

jurisdiction review their own legal 

frameworks and market conditions and 

put in place margin requirements 

applicable to inter-affiliate transactions 

as appropriate.50

1. Commission Requirements for 

Treatment of Inter-Affiliate Transactions 

The Commission determined through 

its Final Margin Rule to provide rules 

for swaps between ‘‘margin affiliates.’’ 

The definition of margin affiliates 

provides that a company is a margin 

affiliate of another company if: (1) 

Either company consolidates the other 

on a financial statement prepared in 

accordance with U.S. Generally 

Accepted Accounting Principles, the 

International Financial Reporting 

Standards, or other similar standards; 

(2) both companies are consolidated 

with a third company on a financial 

statement prepared in accordance with 

such principles or standards; or (3) for 

a company that is not subject to such 

principles or standards, if consolidation 

as described in (1) or (2) would have 

occurred if such principles or standards 

had applied.51

With respect to swaps between 

margin affiliates, the Final Margin Rule, 

with one exception explained below, 

provides that a CSE is not required to 

collect initial margin 52 from a margin 

affiliate provided that the CSE meets the 

following conditions: (i) The swaps are 

subject to a centralized risk management 

program that is reasonably designed to 

monitor and to manage the risks 

associated with the inter-affiliate swaps; 

and (ii) the CSE exchanges variation 

margin with the margin affiliate.53

In an exception to the foregoing 

general rule, the Final Margin Rule does 

require CSEs to collect initial margin 

from non-U.S. affiliates that are 

financial end users that are not subject 

to comparable initial margin collection 

requirements on their own outwardfacing swaps with financial end users.54

This provision is an important antievasion measure. It is designed to 

prevent the potential use of affiliates to 

avoid collecting initial margin from 

third parties. For example, suppose that 

an unregistered non-U.S. affiliate of a 

CSE enters into a swap with a financial 

end user and does not collect initial 

margin. Suppose further that the 

affiliate then enters into a swap with the 

CSE. Effectively, the risk of the swap 

with the third party would have been 

passed to the CSE without any initial 

margin. The rule would require this 

affiliate to post initial margin with the 

CSE in such cases. The rule would 


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55See id. 

56See BCBS/IOSCO Framework, Element 6: 

Treatment of transactions with affiliates. 

57See 17 CFR 23.159(b), Prudential Regulators’ 

Final Margin Rule, 80 FR at 74909. 

58See Ordinance of the Ministry of Finance No. 

28 of October 30, 1976. 

further require that the CSE collect 

initial margin even if the affiliate routed 

the trade through one or more other 

affiliates.55

The Commission has stated that its 

inter-affiliate initial margin requirement 

is consistent with its goal of 

harmonizing its margin rules as much as 

possible with the BCBS/IOSCO 

Framework. Such Framework, for 

example, states that the exchange of 

initial and variation margin by affiliated 

parties ‘‘is not customary’’ and that 

initial margin in particular ‘‘would 

likely create additional liquidity 

demands.’’ 56 With an understanding 

that many authorities, such as those in 

Europe and Japan, are not expected to 

require initial margin for inter-affiliate 

swaps, the Commission recognized that 

requiring the posting and collection of 

initial margin for inter- affiliate swaps 

generally would be likely to put CSEs at 

a competitive disadvantage to firms in 

other jurisdictions. 

The Final Margin Rule however, does 

require CSEs to exchange variation 

margin with affiliates that are SDs, 

MSPs, or financial end users (as is also 

required under the Prudential 

Regulators’ rules).57 The Commission 

believes that marking open positions to 

market each day and requiring the 

posting or collection of variation margin 

reduces the risks of inter-affiliate swaps. 

2. Requirement for Treatment of InterAffiliate Derivatives Under the Laws of 

Japan 

Under Article 123(10) and (11) of 

Japan’s FIB Ordinance, the JFSA’s 

margin requirements do not apply to 

OTC derivative transactions between 

counterparties that are ‘‘Consolidated 

Companies’’ as defined in the Ministry 

of Finance of Japan’s Ordinance on 

Terminology, Forms, and Preparation 

Methods of Consolidated Financial 

Statements.58 Such ‘‘Consolidated 

Companies’’ are defined generally in 

keeping with the Commission’s 

definition of ‘‘margin affiliate’’ for 

purposes of the Final Margin Rule, 

discussed above. 

However, in mitigation of not 

requiring margin between Consolidated 

Companies, the JFSA has explained that 

its capital requirements for FIBOs/RFIs 

apply not only on a consolidated basis 

but also on individual, nonconsolidated basis. Thus, a CSE that is 

a FIBO/RFI is required to hold enough 

capital to cover exposures under noncleared OTC derivatives to individual 

entities in the same consolidated group. 

Such capital requirement can be 

reduced if the CSE collects initial and/ 

or variation margin for such interaffiliate transactions. 

In addition to this, the JFSA has 

explained that its supervision of FIBOs/ 

RFIs is a principles-based approach, 

and, in accordance with this approach, 

the JFSA’s ‘‘Guideline for Financial 

Conglomerates Supervision’’ requires 

financial holding companies and parent 

companies to measure, monitor, and 

manage the risks caused by interaffiliate transactions. Further, the JFSA’s 

‘‘Inspection manual for financial 

holding companies’’ requires financial 

holding companies to establish a robust 

governance framework and risk 

management system at a centralized 

group level, that would, in operation, 

require management of the risks caused 

by inter-affiliate transactions. Based on 

the foregoing, the JFSA has emphasized 

that it is not necessary for it to require 

the risk management procedures of 

FIBOs/RFIs applicable to inter-affiliate 

transactions to rely on margin 

requirements only. Rather, taking into 

account capital requirements and the 

JFSA’s supervision and inspection 

programs, JFSA represents that it 

ensures the safety and soundness of 

FIBOs/RFIs as a whole. 

3. Commission Determination 

Having compared the outcomes of the 

JFSA’s margin requirements applicable 

to inter-affiliate derivatives to the 

outcomes of the Commission’s 

corresponding margin requirements 

applicable to inter-affiliate swaps, the 

Commission finds that the treatment of 

inter-affiliate transactions under the 

Final Margin Rule and under the JFSA’s 

margin requirements are not 

comparable. 

A CSE entering into a transaction with 

a consolidated affiliate under the Final 

Margin Rule would be required to 

exchange variation margin in 

accordance with §§ 23.151 through 

23.161, and in certain circumstances, 

collect initial margin in accordance with 

§ 23.159(c). Where such CSE and its 

counterparty are also subject to the 

JFSA’s margin requirements, and qualify 

as ‘‘Consolidated Companies,’’ the 

JFSA’s margin requirements would not 

require the CSE to post or collect any 

form of margin. 

While not disputing the JFSA’s 

explanation that its general oversight of 

the risk management practices of 

Consolidated Companies adequately 

addresses the risk of inter-affiliate 

transactions, the Commission reiterates 

its view that the inter-affiliate margin 

requirements are an important antievasion measure designed to prevent the 

potential use of affiliates to avoid 

collecting initial margin from third 

parties. 

For this reason, the Commission finds 

that the outcome under the JFSA’s 

margin rules is not comparable to the 

outcome under the Final Margin Rule 

and accordingly CSEs must comply with 

the Final Margin Rule with respect to 

inter-affiliate swaps. 

E. Methodologies for Calculating the 

Amounts of Initial and Variation Margin 

As an overview, the methodologies for 

calculating initial and variation margin 

as agreed under the BCBS/IOSCO 

Framework state that the margin 

collected from a counterparty should (i) 

be consistent across entities covered by 

the requirements and reflect the 

potential future exposure (initial 

margin) and current exposure (variation 

margin) associated with the particular 

portfolio of non-centrally cleared 

derivatives, and (ii) ensure that all 

counterparty risk exposures are covered 

fully with a high degree of confidence. 

With respect to the calculation of 

initial margin, as a minimum the BCBS/ 

IOSCO Framework generally provides 

that: 

• Initial margin requirements will not 

apply to counterparties that have less 

than EUR 8 billion of gross notional in 

outstanding derivatives. 

• Initial margin may be subject to a 

EUR 50 million threshold applicable to 

a consolidated group of affiliated 

counterparties. 

• All margin transfers between parties 

may be subject to a de-minimis 

minimum transfer amount not to exceed 

EUR 500,000. 

• The potential future exposure of a 

non-centrally cleared derivative should 

reflect an extreme but plausible estimate 

of an increase in the value of the 

instrument that is consistent with a onetailed 99% confidence interval over a 

10-day horizon, based on historical data 

that incorporates a period of significant 

financial stress. 

• The required amount of initial 

margin may be calculated by reference 

to either (i) a quantitative portfolio 

margin model or (ii) a standardized 

margin schedule. 

• When initial margin is calculated 

by reference to an initial margin model, 

the period of financial stress used for 

calibration should be identified and 

applied separately for each broad asset 

class for which portfolio margining is 

allowed. 

• Models may be either internally 

developed or sourced from the 


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59The BCBS/IOSCO Framework provides 

standardized margin rates, as set out in the table 

accompanying the text. 

60See Final Margin Rule, 81 FR at 683. 

61See 17 CFR 23.154(b)(2)(i). 

62See 17 CFR 23.154(a)(1)(i) and (ii). 

63See 17 CFR 23.154(b)(2)(ii). 

64See 17 CFR 23.154(b)(1)(i). 

65See 17 CFR 23.154(b)(2)(v). 

66See id. 

67See id. 

counterparties or third-party vendors 

but in all such cases, models must be 

approved by the appropriate 

supervisory authority. 

• Quantitative initial margin models 

must be subject to an internal 

governance process that continuously 

assesses the value of the model’s risk 

assessments, tests the model’s 

assessments against realized data and 

experience, and validates the 

applicability of the model to the 

derivatives for which it is being used. 

• An initial margin model may 

consider all of the derivatives that are 

approved for model use that are subject 

to a single legally enforceable netting 

agreement. 

• Initial margin models may account 

for diversification, hedging, and risk 

offsets within well-defined asset classes 

such as currency/rates, equity, credit, or 

commodities, but not across such asset 

classes and provided these instruments 

are covered by the same legally 

enforceable netting agreement and are 

approved by the relevant supervisory 

authority. 

• The total initial margin requirement 

for a portfolio consisting of multiple 

asset classes would be the sum of the 

initial margin amounts calculated for 

each asset class separately. 

• Derivatives for which a firm faces 

zero counterparty risk require no initial 

margin to be collected and may be 

excluded from the initial margin 

calculation. 

• Where a standardized initial margin 

schedule is appropriate, it should be 

computed by multiplying the gross 

notional size of a derivative by the 

standardized margin rates provided 

under the BCBS/IOSCO Framework 59

and adjusting such amount by the ratio 

of the net current replacement cost to 

gross current replacement cost (NGR) 

pertaining to all derivatives in a legally 

enforceable netting set. The BCBS/ 

IOSCO Framework provides the 

following standardized margin rates: 

Asset class 

Initial margin 

requirement 

(% of notional 

exposure) 

Credit: 0–2 year duration ...... 2 

Credit: 2–5 year duration ...... 5 

Credit 5+ year duration ........ 10 

Commodity ............................ 15 

Equity .................................... 15 

Foreign exchange ................. 6 

Interest rate: 0–2 year duration .................................... 1 

Interest rate: 2–5 year duration .................................... 2 

Asset class 

Initial margin 

requirement 

(% of notional 

exposure) 

Interest rate: 5+ year duration .................................... 4 

Other ..................................... 15 

• For a regulated entity that is already 

using a schedule-based margin to satisfy 

requirements under its required capital 

regime, the appropriate supervisory 

authority may permit the use of the 

same schedule for initial margin 

purposes, provided that it is at least as 

conservative. 

• The choice between model- and 

schedule-based initial margin 

calculations should be made 

consistently over time for all 

transactions within the same well 

defined asset class. 

• Initial margin should be collected at 

the outset of a transaction, and collected 

thereafter on a routine and consistent 

basis upon changes in measured 

potential future exposure, such as when 

trades are added to or subtracted from 

the portfolio. 

• In the event that a margin dispute 

arises, both parties should make all 

necessary and appropriate efforts, 

including timely initiation of dispute 

resolution protocols, to resolve the 

dispute and exchange the required 

amount of initial margin in a timely 

fashion. 

With respect to the calculation of 

variation margin, as a minimum the 

BCBS/IOSCO Framework generally 

provides that: 

• The full amount necessary to fully 

collateralize the mark-to-market 

exposure of the non-centrally cleared 

derivatives must be exchanged. 

• Variation margin should be 

calculated and exchanged for 

derivatives subject to a single, legally 

enforceable netting agreement with 

sufficient frequency (e.g., daily). 

• In the event that a margin dispute 

arises, both parties should make all 

necessary and appropriate efforts, 

including timely initiation of dispute 

resolution protocols, to resolve the 

dispute and exchange the required 

amount of variation margin in a timely 

fashion. 

1. Commission Requirement for 

Calculation of Initial Margin 

In keeping with the BCBS/IOSCO 

Framework described above, with 

respect to the calculation of initial 

margin, the Commission’s Final Margin 

Rule generally provides that: 

• Initial margin is intended to address 

potential future exposure, i.e., in the 

event of a counterparty default, initial 

margin protects the non-defaulting party 

from the loss that may result from a 

swap or portfolio of swaps, during the 

period of time needed to close out the 

swap(s).60

• Potential future exposure is to be an 

estimate of the one-tailed 99% 

confidence interval for an increase in 

the value of the uncleared swap or 

netting portfolio of uncleared swaps due 

to an instantaneous price shock that is 

equivalent to a movement in all material 

underlying risk factors, including 

prices, rates, and spreads, over a 

holding period equal to the shorter of 10 

business days or the maturity of the 

swap or netting portfolio.61

• The required amount of initial 

margin may be calculated by reference 

to either (i) a risk-based margin model 

or (ii) a table-based method.62

• All data used to calibrate the initial 

margin model shall incorporate a period 

of significant financial stress for each 

broad asset class that is appropriate to 

the uncleared swaps to which the initial 

margin model is applied.63

• CSEs shall obtain the written 

approval of the Commission or a 

registered futures association to use a 

model to calculate the initial margin 

required.64

• An initial margin model may 

calculate initial margin for a netting 

portfolio of uncleared swaps covered by 

the same eligible master netting 

agreement.65

• An initial margin model may reflect 

offsetting exposures, diversification, and 

other hedging benefits for uncleared 

swaps that are governed by the same 

eligible master netting agreement by 

incorporating empirical correlations 

within the following broad risk 

categories, provided the CSE validates 

and demonstrates the reasonableness of 

its process for modeling and measuring 

hedging benefits: Commodity, credit, 

equity, and foreign exchange or interest 

rate.66

• Empirical correlations under an 

eligible master netting agreement may 

be recognized by the model within each 

broad risk category, but not across broad 

risk categories.67

• If the initial margin model does not 

explicitly reflect offsetting exposures, 

diversification, and hedging benefits 

between subsets of uncleared swaps 

within a broad risk category, the CSE 


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68See 17 CFR 23.154(b)(2)(vi). 

69The standardized margin rates provided in 17 

CFR 23.154(c)(i) are, in all material respects, the 

same as those provided under the BCBS/IOSCO 

Framework. See supra note 59. 

70See 17 CFR 23.154(c). 

71See 17 CFR 23.152(d)(2)(i). 

72See 17 CFR 23.155(a). 

73See id. 

74See 17 CFR 23.153(d)(1). 

75See 17 CFR 23.153(e)(2)(i). 

76FIB Ordinance Article 123(1)(xxi)–6. 

77 JFSA Public Notice No. 15, Article 1(3). 

78 JFSA Public Notice No. 15, Article 3(1). 

79 JFSA Public Notice No. 15, Article 4. 

80 JFSA Public Notice No. 15, Article 5(1). 

81 JFSA Public Notice No. 15, Article 1(2). 82 JFSA Public Notice No. 15, Article 6(1)(iii). 83 JFSA Public Notice No. 15, Article 2(1). 84 JFSA Public Notice No. 15, Article 3(2). 85 JFSA Public Notice No. 15, Article 3(3). 86The standardized margin rates provide in JFSA 

Public Notification No. 15 of March 31, 2016, 

Article 9(2) are, in all material respects, the same 

as those provided under the BCBS/IOSCO 

Framework. See supra note 59. 

87See Article 37–3 of the FIEA and Article 99 of 

the FIB Ordinance. 

shall calculate an amount of initial 

margin separately for each subset of 

uncleared swaps for which such 

relationships are explicitly recognized 

by the model and the sum of the initial 

margin amounts calculated for each 

subset of uncleared swaps within a 

broad risk category will be used to 

determine the aggregate initial margin 

due from the counterparty for the 

portfolio of uncleared swaps within the 

broad risk category.68

• Where a risk-based model is not 

used, initial margin must be computed 

by multiplying the gross notional size of 

a derivative by the standardized margin 

rates provided under § 23.154(c)(i) 69

and adjusting such amount by the ratio 

of the net current replacement cost to 

gross current replacement cost (NGR) 

pertaining to all derivatives under the 

same eligible master netting 

agreement.70

• A CSE shall not be deemed to have 

violated its obligation to collect or post 

initial margin if, inter alia, it makes 

timely initiation of dispute resolution 

mechanisms, including pursuant to 

§ 23.504(b)(4).71

2. Commission Requirements for 

Calculation of Variation Margin 

In keeping with the BCBS/IOSCO 

Framework described above, with 

respect to the calculation of variation 

margin, the Commission’s Final Margin 

Rule generally provides that: 

• Each business day, a CSE must 

calculate variation margin amounts for 

itself and for each counterparty that is 

an SD, MSP, or financial end-user. Such 

variation margin amounts must be equal 

to the cumulative mark-to-market 

change in value to the CSE of each 

uncleared swap, adjusted for any 

variation margin previously collected or 

posted with respect to that uncleared 

swap.72

• Variation margin must be calculated 

using methods, procedures, rules, and 

inputs that to the maximum extent 

practicable rely on recently-executed 

transactions, valuations provided by 

independent third parties, or other 

objective criteria.73

• CSEs may comply with variation 

margin requirements on an aggregate 

basis with respect to uncleared swaps 

that are governed by the same eligible 

master netting agreement.74

• A CSE shall not be deemed to have 

violated its obligation to collect or post 

variation margin if, inter alia, it makes 

timely initiation of dispute resolution 

mechanisms, including pursuant to 

§ 23.504(b)(4).75

3. Japan Requirements for Calculation of 

Initial Margin 

• Potential future exposure is margin 

to be posted as deposits corresponding 

to a reasonable estimate of the amount 

of expenses or losses that may occur in 

the future with regard to non-cleared 

OTC derivatives.76

• In cases where potential future 

exposure cannot be calculated by a 

method of using a quantitative 

calculation model, FIBOs/RFIs are 

required to calculate potential future 

exposure for the non-cleared OTC 

derivatives by a method of using a 

standardized margin schedule.77

• When calculating potential future 

exposure using a quantitative 

calculation model, FIBOs/RFIs shall use 

a one-tailed 99% confidence interval 

and set a margin period of risk for noncleared OTC derivatives of not less than 

10 business days.78

• Where calculating potential future 

exposure by a method of using a 

quantitative calculation model, FIBOs/ 

RFIs must use historical data which 

satisfies the following requirements for 

each category of non-cleared OTC 

derivatives for which any of commodity, 

credit, equity, and foreign exchange or 

interest rate is the major cause of 

changes in mark-to-market: (i) Based on 

an observation period of at least one 

year and not exceeding five years; (ii) to 

contain a stress period; (iii) to contain 

the latest market data; (iv) to be equally 

weighted; and (v) to be updated at least 

once a year.79

• The quantitative calculation models 

of FIBOs/RFIs must capture non-linear 

risks, basis risks, and material risks that 

may have impact on the value of the 

exposure.80

• FIBOs/RFIs must file notice with 

the JFSA of an intention to use a 

quantitative calculation model to 

estimate an amount of potential future 

exposure, including a description of the 

model’s methodology and structure, the 

model’s compliance with JFSA margin 

rules, and the policies and procedures 

of a ‘‘model control unit’’.81

• FIBOs/RFIs must conduct back 

testing of the quantitative calculation 

model against changes in the mark-tomarket value of non-cleared OTC 

derivatives that occurred during a 

period equivalent to a holding period of 

not less than 10 business days.82

• When calculating potential future 

exposure for non-cleared OTC 

derivatives only by a method of using a 

quantitative calculation model, FIBOs/ 

RFIs may conduct a calculation for each 

master netting agreement meeting the 

definition of such as prescribed in 

Article 2, paragraph (5) of the Act on 

Close-out Netting of Specified Financial 

Transaction Conducted by Financial 

Institutions. (Act No. 108 of 1998).83

• Potential future exposure calculated 

by FIBOs/RFIs by a method of using a 

quantitative calculation model shall be 

the sum of amounts calculated for each 

category of transaction for which any of 

the following is the major cause of 

changes in mark-to-market value, with 

regard to all non-cleared OTC 

derivatives conducted by the FIBOs: 

Commodity, credit, equity, and foreign 

exchange or interest rate.84

• FIBOs/RFIs may account for the 

effects of risk offsets, diversification, 

and hedging within each broad category 

of transactions for which commodity, 

credit, equity, and foreign exchange or 

interest rates is the major cause of 

changes in mark-to-market, but not 

across such risk categories.85

• Where a quantitative calculation 

model is not used, FIBOs/RFIs must 

compute potential future exposure by 

multiplying the gross notional size of a 

non-cleared OTC derivative by the 

standardized margin schedule set forth 

in JFSA’s Public Notification No. 15 86

and adjusting such amount by the ratio 

of the net current replacement cost to 

gross current replacement cost (NGR) 

pertaining to all derivatives under the 

same master netting agreement. 

• FIBOs/RFIs are required to have 

documentation with each uncleared 

OTC derivative counterparty that, 

among other things, identifies dispute 

resolution measures applicable to 

margin disputes for uncleared OTC 

derivatives.87


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88FIB Ordinance Article 123(1)(xxi)–5(a). 89See FIB Ordinance Article 123(1)(xxi)–5(a). 90See Supervisory Guideline Section IV–2– 

4(4)(i)(A) and (ii)(A). 

91See BCBS/IOSCO Framework Requirement 3.3. 

92See 17 CFR 23.154(b)(1)(i). 

93See 17 CFR 23.154(b)(4), discussed further 

below. 

94See 17 CFR 23.154(b)(5), discussed further 

below. 

95See 17 CFR 23.154(b)(6), discussed further 

below. 

96See 17 CFR 23.154(b)(7), discussed further 

below. 

97 JFSA Public Notice No. 15, Article 1(2) and 

Article 7. The requirements for a model control unit 

are discussed in Section IV(I) below. 

98See JFSA Public Notice No. 15, Article 8(1). 

99See Supervisory Guideline Section IV–2– 

4(4)(ii)(C). 

4. Japan Requirements for Calculation of 

Variation Margin 

• FIBOs/RFIs must calculate on each 

business day for each counterparty the 

total amount of the mark-to-market for 

non-cleared OTC Derivatives and the 

total amount of the mark-to-market of 

collateral collected or posted as 

variation margin with respect to the 

counterparty.88

• FIBOs/RFIs may comply with 

variation margin requirements on an 

aggregate basis with respect to 

uncleared OTC derivatives that are 

governed by the same master netting 

agreement.89

• FIBOs/RFIs are required to have 

documentation with each uncleared 

OTC derivative counterparty that, 

among other things, identifies dispute 

resolution measures applicable to 

margin disputes for uncleared OTC 

derivatives.90

5. Commission Determination 

Based on the foregoing and the 

representations of the applicant, the 

Commission has determined that the 

amounts of initial and variation margin 

calculated under the methodologies 

required under the JFSA’s margin rules 

would be similar to those calculated 

under the methodologies required under 

the Final Margin Rule. Specifically, 

under the Final Margin Rule and the 

JFSA’s margin rules: 

• The definitions of initial and 

variation margin are similar, including 

the description of potential future 

exposure agreed under the BCBS/IOSCO 

Framework; 

• Margin models and/or a 

standardized margin schedule may be 

used to calculate initial margin; 

• Criteria for historical data to be 

used in initial margin models is similar; 

• Initial margin models must be 

submitted for review by a regulator prior 

to use; 

• Eligibility for netting is similar; 

• Correlations may be recognized 

within broad risk categories, but not 

across such risk categories; 

• The required method of calculating 

initial margin using standardized 

margin rates is essentially identical; and 

• The proscribed standardized margin 

rates are essentially identical. 

Accordingly, the Commission finds 

that the methodologies for calculating 

the amounts of initial and variation 

margin for uncleared OTC derivatives 

under the laws of Japan are comparable 

in outcome to those of the Final Margin 

Rule. 

F. Process and Standards for Approving 

Margin Models 

Pursuant to the BCBS/IOSCO 

Framework, initial margin models may 

be either internally developed or 

sourced from counterparties or thirdparty vendors but in all such cases, 

models must be approved by the 

appropriate supervisory authority.91

1. Commission Requirement for Margin 

Model Approval 

In keeping with the BCBS/IOSCO 

Framework, the Final Margin Rule 

generally requires: 

• CSEs shall obtain the written 

approval of the Commission or a 

registered futures association to use a 

model to calculate the initial margin 

required.92

• The Commission or a registered 

futures association will approve models 

that demonstrate satisfaction of all of 

the requirements for an initial margin 

model set forth above in Section 

IV(E)(2), in addition to the requirements 

for annual review; 93 control, oversight, 

and validation mechanisms; 94

documentation; 95 and escalation 

procedures.96

• CSEs must notify the Commission 

and the registered futures association in 

writing 60 days prior to, extending the 

use of an initial margin model to an 

additional product type; making any 

change to the model that would result 

in a material change in the CSE’s 

assessment of initial margin 

requirements; or making any material 

change to modeling assumptions. 

• The Commission or the registered 

futures association may rescind its 

approval, or may impose additional 

conditions or requirements if the 

Commission or the registered futures 

association determines, in its discretion, 

that a model no longer complies with 

the requirements for an initial margin 

model summarized above in Section 

IV(E)(2). 

2. Japan Requirements for Approval of 

Margin Models 

In keeping with the BCBS/IOSCO 

Framework, the JFSA’s margin rules 

generally require: 

• FIBOs/RFIs must file notice with 

the JFSA of an intention to use a 

quantitative calculation model to 

estimate an amount of potential future 

exposure, including a description of the 

model’s methodology and structure, the 

model’s compliance with JFSA rules for 

use of quantitative calculation models 

summarized above in Section IV(E)(4), 

and the policies and procedures of a 

‘‘model control unit’’.97

• FIBOs/RFIs must notify the JFSA 

without delay of a change in any matters 

set out in the notice of an intention to 

use a quantitative calculation model, 

and any failure to comply with the JFSA 

rules for use of a quantitative 

calculation model summarized above in 

Section IV(E)(4).98

• FIBOs/RFIs must establish a proper 

management framework to use a 

quantitative calculation model and the 

JFSA supervises compliance with the 

model requirements.99

3. Commission Determination 

Based on the foregoing and the 

representations of the applicant, the 

Commission has determined that the 

requirements for submission of margin 

models to the JFSA, in the case of 

FIBOs/RFIs, are comparable to and as 

comprehensive as the regulatory 

approval requirements of the Final 

Margin Rule. Specifically, the notice of 

an intent to use a quantitative 

calculation model required under the 

JFSA’s margin rules, prior to its use, 

must contain a comprehensive 

explanation and evaluation of the 

proposed model that is comparable in 

all material respects to the approval 

procedures required under the Final 

Margin Rule. While the Commission 

recognizes that a notice of intent to the 

JFSA is not the same as requiring a 

specific approval from a regulator, the 

JFSA has represented that it would use 

its supervisory powers to prohibit the 

use of an inadequate quantitative 

calculation model. In light of this 

representation by the JFSA, the 

Commission finds that such 

requirements under the laws of Japan 

are comparable to those of the Final 

Margin Rule. 

G. Timing and Manner for Collection or 

Payment of Initial and Variation Margin 

1. Commission Requirement for Timing 

and Manner for Collection or Payment 

of Initial and Variation Margin 

With respect to the timing and 

manner for collection or posting of 


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100See 17 CFR 23.153(a). 

101See 17 CFR 23.153(b). 

102See 17 CFR 23.153(e)(2)(i). 

103See FIB Ordinance Article 123(1)(xxi)–6(a). As 

represented by the JFSA, this requirement is 

interpreted to mean that IM shall be recalculated in 

any of the following circumstances: 

(a) A new contract is executed with a 

counterparty; 

(b) An existing contract with a counterparty 

expires; 

(c) A relationship of rights pertaining to noncleared OTC derivatives is changed; 

(d) Recalibration is deemed necessary due to 

fluctuations of markets or other grounds or 

(e) One month has elapsed since the latest 

recalculation. 

104See id. 

105See id. 

106See FIB Ordinance Article 123(1)(xxi)–6(b) 

and (c). 

107See FIB Ordinance Article 123(1)(xxi)–6(f). 

108See FIB Ordinance Article 123(1)(xxi)–5(a). 

109See FIB Ordinance Article 123(1)(xxi)–5(b) 

and (c). 

110See FIB Ordinance Article 123(1)(xxi)–5(d). 

initial margin, the Final Margin Rule 

generally provides that: 

• Where a CSE is required to collect 

initial margin, it must be collected on or 

before the business day after execution 

of an uncleared swap, and thereafter the 

CSE must continue to hold initial 

margin in an amount equal to or greater 

than the required initial margin amount 

as re-calculated each business day until 

such uncleared swap is terminated or 

expires. 

• Where a CSE is required to post 

initial margin, it must be posted on or 

before the business day after execution 

of an uncleared swap, and thereafter the 

CSE must continue to post initial 

margin in an amount equal to or greater 

than the required initial margin amount 

as re-calculated each business day until 

such uncleared swap is terminated or 

expires. 

• Required initial margin amounts 

must be posted and collected by CSEs 

on a gross basis (i.e., amounts to be 

posted may not be set-off against 

amounts to be collected from the same 

counterparty). 

With respect to the timing and 

manner for collection or posting of 

variation margin, the Final Margin Rule 

generally provides that: 

• Where a CSE is required to collect 

variation margin, it must be collected on 

or before the business day after 

execution of an uncleared swap, and 

thereafter the CSE must continue to 

collect the required variation margin 

amount, if any, each business day as recalculated each business day until such 

uncleared swap is terminated or 

expires.100

• Where a CSE is required to post 

variation margin, it must be posted on 

or before the business day after 

execution of an uncleared swap, and 

thereafter the CSE must continue to post 

the required variation margin amount, if 

any, each business day as re-calculated 

each business day until such uncleared 

swap is terminated or expires.101

With respect to both initial and 

variation margin, a CSE shall not be 

deemed to have violated its obligation to 

collect or post margin if, inter alia, it 

makes timely initiation of dispute 

resolution mechanisms, including 

pursuant to § 23.504(b)(4).102

2. Japan Requirements for Timing and 

Manner for Collection of Initial and 

Variation Margin 

With respect to the timing and 

manner for collection or posting of 

initial margin, the JFSA’s margin rules 

generally provide that: 

• Initial margin must be calculated 

upon execution, termination, or 

modification of a non-cleared OTC 

derivative.103

• Initial margin must be calculated 

when necessary based on market 

changes.104

• In any event, initial margin must be 

calculated no later than one month after 

the last calculation of initial margin.105

• Where FIBOs/RFIs are required to 

collect initial margin, it must call for the 

initial margin amount immediately after 

calculation and collect such amount as 

soon as practicable.106

• Where FIBOs/RFIs are required to 

post initial margin, it must be posted as 

soon as practicable after it receives a 

call for an initial margin amount.107

• Required initial margin amounts 

must be posted and collected by FIBOs/ 

RFIs on a gross basis (i.e., amounts to be 

posted may not be set-off against 

amounts to be collected from the same 

counterparty). 

With respect to the timing and 

manner for collection or posting of 

variation margin, the JFSA’s margin 

rules generally provide that: 

• FIBOs/RFIs are required to calculate 

the variation margin amount each 

business day.108

• Where FIBOs/RFIs are required to 

collect a variation margin amount, it 

must be called for immediately and 

collected as soon as practicable.109

• Where FIBOs/RFIs are required to 

post a variation margin amount, it must 

be posted as soon as practicable.110

3. Commission Determination 

Having compared the JFSA’s margin 

requirements applicable to the timing 

and manner of collection and payment 

of initial and variation margin to the 

Commission’s corresponding margin 

requirements, the Commission finds 

that the JFSA’s margin requirements are, 

despite apparent differences in certain 

respects, comparable in outcome. 

Under the Final Margin Rule, where 

initial margin is required, a CSE must 

calculate the amount of initial margin 

each business day. The JFSA’s margin 

rules allow a maximum of one month 

between initial margin calculations 

under some circumstances. However, 

the JFSA has explained that FIBOs/RFIs 

that are subject to the first phase of 

implementation of the JFSA’s margin 

rules for non-cleared OTC Derivatives 

(i.e., those with the largest notional 

amounts of outstanding non-cleared 

OTC Derivatives) regularly trade noncleared OTC Derivatives. Accordingly, 

because JFSA margin rules on 

calculation of initial margin require 

FIBOs/RFIs to recalculate initial margin 

whenever transactions are entered, 

expire, or are modified, and whenever 

fluctuations occur in markets or other 

factors affecting the amount of initial 

margin, such FIBOs/RFIs are likely to be 

required to recalculate initial margin 

each business day. Only FIBOs/RFIs 

subject to the later phase of 

implementation that do not regularly 

trade non-cleared OTC Derivatives 

would not be required to recalculate 

initial margin each business day. 

With respect to the timing of 

collecting/posting margin, the Final 

Margin Rule requires CSEs to collect/ 

post any required margin amount 

(whether initial or variation) within one 

business day. The JFSA’s margin rules 

specify only that margin be collected or 

posted ‘‘as soon as practicable,’’ which 

presumably could be longer than one 

business day. However, the JFSA has 

represented that, as a supervisory 

matter, it would expect FIBOs/RFIs that 

are subject to the first phase of 

implementation of the JFSA’s margin 

rules for non-cleared OTC Derivatives 

(i.e., those with the largest notional 

amounts of outstanding non-cleared 

OTC Derivatives) to collect or post 

margin, as applicable, within one 

business day, with some flexibility for 

cross-border transactions. FIBOs/RFIs 

subject to the later phase of 

implementation would be expected to 

collect or post margin, as applicable, 

within two business days, again with 

some flexibility for cross-border 

transactions. 

In addition, the JFSA has represented 

that the timing of margin collection and 

posting will naturally shorten over a 

relatively brief period of time because 

the industry in Japan has committed to 

move toward T+1 settlement of financial 

instruments by 2018. 


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111See 17 CFR 23.154(a)(3) and definition of 

‘‘initial margin threshold’’ in 17 CFR 23.151. 

112See 17 CFR 23.152(b)(3). 

113 JFSA Public Notice No. 17, Article 3(2). 

114See FIB Ordinance Article 123(1)(xxi)–5(b) 

and (xxi)–6(b). 

115See 17 CFR 23.154(b)(5). 

116See 17 CFR 23.154(b)(5)(iv). 

117See 17 CFR 23.154(b)(5)(iv). 

Finally, the Commission understands 

that transactions in Japanese 

Government Bonds (‘‘JGBs’’) currently 

settle in 2 or 3 business days. The JFSA 

believes this will shorten to T+1 by 

2018. However, the Commission is 

cognizant that if it does not find 

comparability on this element, JGB’s 

may become ineligible for use as 

collateral whenever the Final Margin 

Rule is applicable and thus the market 

will lose a safe and highly liquid form 

of eligible collateral, perhaps increasing 

certain types of risk. 

Given the representations of the JFSA 

with respect to its expectations on 

compliance with its margin rules in 

practice, and the current settlement 

cycle for JGBs, the Commission finds 

that the requirements of the JFSA’s rules 

with respect to the timing and manner 

for collection or payment of initial and 

variation margin are comparable. 

H. Margin Threshold Levels or Amounts 

The BCBS/IOSCO Framework 

provides that initial margin could be 

subject to a threshold not to exceed EUR 

50 million. The threshold is applied at 

the level of the consolidated group to 

which the threshold is being extended 

and is based on all non-centrally cleared 

derivatives between the two 

consolidated groups. 

Similarly, to alleviate operational 

burdens associated with the transfer of 

small amounts of margin, the BCBS/ 

IOSCO Framework provides that all 

margin transfers between parties may be 

subject to a de-minimis minimum 

transfer amount not to exceed EUR 

500,000. 

1. Commission Requirement for Margin 

Threshold Levels or Amounts 

In keeping with the BCBS/IOSCO 

Framework, with respect to margin 

threshold levels or amounts the Final 

Margin Rule generally provides that: 

• CSEs may agree with their 

counterparties that initial margin may 

be subject to a threshold of no more 

than $50 million applicable to a 

consolidated group of affiliated 

counterparties.111

• CSEs are not required to collect or 

to post initial or variation margin with 

a counterparty until the combined 

amount of initial margin and variation 

margin to be collected or posted is 

greater than $500,000 (i.e., a minimum 

transfer amount).112

2. Japan Requirements for Margin 

Threshold Levels or Amounts 

Also in keeping with the BCBS/ 

IOSCO Framework, with respect to 

margin threshold levels or amounts, the 

JFSA’s margin requirements generally 

provide that: 

• FIBOs/RFIs may agree with their 

counterparties that initial margin may 

be subject to a threshold of no more 

than JPY 7 billion applicable to a 

consolidated group of affiliated 

counterparties.113

• FIBOs/RFIs are not required to 

collect or to post initial or variation 

margin with a counterparty until the 

combined amount of initial margin and 

variation margin to be collected or 

posted is greater than JPY 70 million 

(i.e., a minimum transfer amount).114

3. Commission Determination 

Based on the foregoing and the 

representations of the applicant, the 

Commission has determined that the 

JFSA requirements for margin threshold 

levels or amounts, in the case of FIBOs/ 

RFIs, are comparable to those required 

by the Final Margin Rule, in the case of 

CSEs. 

The Commission notes that at current 

exchange rates, JPY 7 billion is 

approximately $68 million, while JPY 

70 million is approximately $680,000. 

Although these amounts are greater than 

those permitted by the Final Margin 

Rule, the Commission recognizes that 

exchange rates will fluctuate over time 

and thus the Commission finds that 

such requirements under the laws of 

Japan are comparable in outcome to 

those of the Final Margin Rule. 

I. Risk Management Controls for the 

Calculation of Initial and Variation 

Margin 

1. Commission Requirement for Risk 

Management Controls for the 

Calculation of Initial and Variation 

Margin 

With respect to risk management 

controls for the calculation of initial 

margin, the Final Margin Rule generally 

provides that: 

• CSEs are required to have a risk 

management unit pursuant to 

§ 23.600(c)(4). Such risk management 

unit must include a risk control unit 

tasked with validation of a CSEs initial 

margin model prior to implementation 

and on an ongoing basis, including an 

evaluation of the conceptual soundness 

of the initial margin model, an ongoing 

monitoring process that includes 

verification of processes and 

benchmarking by comparing the CSE’s 

initial margin model outputs (estimation 

of initial margin) with relevant 

alternative internal and external data 

sources or estimation techniques, and 

an outcomes analysis process that 

includes back testing the model.115

• In accordance with § 23.600(e)(2), 

CSEs must have an internal audit 

function independent of the business 

trading unit and the risk management 

unit that at least annually assesses the 

effectiveness of the controls supporting 

the initial margin model measurement 

systems, including the activities of the 

business trading units and risk control 

unit, compliance with policies and 

procedures, and calculation of the CSE’s 

initial margin requirements under this 

part.116

• At least annually, such internal 

audit function shall report its findings 

to the CSE’s governing body, senior 

management, and chief compliance 

officer.117

With respect to risk management 

controls for the calculation of variation 

margin, the Final Margin Rule generally 

provides that: 

• CSEs must maintain documentation 

setting forth the variation methodology 

with sufficient specificity to allow a 

counterparty, the Commission, a 

registered futures association, and any 

applicable prudential regulator to 

calculate a reasonable approximation of 

the margin requirement independently. 

• CSEs must evaluate the reliability of 

its data sources at least annually, and 

make adjustments, as appropriate. 

• CSEs, upon request of the 

Commission or a registered futures 

association, must provide further data or 

analysis concerning the variation 

methodology or a data source, 

including: The manner in which the 

methodology meets the requirements of 

the Final Margin Rule; a description of 

the mechanics of the methodology; the 

conceptual basis of the methodology; 

the empirical support for the 

methodology; and the empirical support 

for the assessment of the data sources. 

2. Japan Requirements for Risk 

Management Controls for the 

Calculation of Initial and Variation 

Margin 

With respect to risk management 

controls for the calculation of initial 

margin, the JFSA’s margin requirements 

generally provide that: 

• Where FIBOs/RFIs use a 

quantitative calculation model to 


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118See JFSA Public Notice No. 15, Article 6(1)(i). 

119See JFSA Public Notice No. 15, Article 6(1)(ii). 

120See JFSA Public Notice No. 15, Article 

6(1)(iii). 

121See JFSA Public Notice No. 15, Article 

6(1)(iv). 

122See JFSA Public Notice No. 15, Article 6(1)(v). 

123See JFSA Public Notice No. 15, Article 

6(1)(vi). 124See 17 CFR 23.156(a)(1). 

calculate initial margin, it must 

establish a model control unit, 

independent from units that execute 

non-cleared OTC derivatives, 

responsible for the design and operation 

of a system for managing such model.118

• The model control unit must 

document policies, control, and 

procedures for an operation of the 

quantitative calculation model 

(including the criteria for assessment of 

the quantitative calculation model and 

measures to be taken in cases where the 

results of the assessment conflict with 

the criteria set in advance).119

• The model control unit shall 

document procedures and results of 

back testing against changes in the 

mark-to-market value of non-cleared 

OTC derivatives that occurred during a 

period equivalent to a holding period of 

not less than 10 business days.120

• The model control unit shall 

establish procedures for validating a 

quantitative calculation model and 

properly revising the quantitative 

calculation model at the time of the 

development thereof and periodically 

thereafter, as well as in the risk event 

where the accuracy of the quantitative 

calculation model is impaired due to a 

material modification to the quantitative 

calculation model or a structural change 

in the market.121

• The model control unit shall 

confirm that a quantitative calculation 

model can be properly operated with 

major counterparties by testing the 

quantitative calculation model in an 

appropriate simulated portfolio.122

• An internal audit shall be 

conducted in principle at least once a 

year with regard to a calculation process 

of potential future exposure.123

3. Commission Determination 

Based on the foregoing and the 

representations of the applicant, the 

Commission has determined that the 

JFSA requirements applicable to FIBOs/ 

RFIs pertaining to risk management 

controls for the calculation of initial and 

variation margin are substantially the 

same as the corresponding requirements 

under the Final Margin Rule. 

Specifically, the Commission finds that 

under both the JFSA’s requirements and 

the Final Margin Rule, a CSE is required 

to establish a unit independent of the 

trading desk that is tasked with 

comprehensively managing the entity’s 

use of an initial margin model, 

including establishing controls and 

testing procedures. Accordingly, the 

Commission finds that the JFSA’s 

requirements pertaining to risk 

management controls over the use of 

initial margin models are comparable in 

outcome to the controls required by the 

Final Margin Rule. 

J. Eligible Collateral for Initial and 

Variation Margin 

As explained in the BCBS/IOSCO 

Framework, to ensure that 

counterparties can liquidate assets held 

as initial and variation margin in a 

reasonable amount of time to generate 

proceeds that could sufficiently protect 

collecting entities from losses on noncentrally cleared derivatives in the 

event of a counterparty default, assets 

collected as collateral for initial and 

variation margin purposes should be 

highly liquid and should, after 

accounting for an appropriate haircut, 

be able to hold their value in a time of 

financial stress. Such a set of eligible 

collateral should take into account that 

assets which are liquid in normal 

market conditions may rapidly become 

illiquid in times of financial stress. In 

addition to having good liquidity, 

eligible collateral should not be exposed 

to excessive credit, market and FX risk 

(including through differences between 

the currency of the collateral asset and 

the currency of settlement). To the 

extent that the value of the collateral is 

exposed to these risks, appropriately 

risk-sensitive haircuts should be 

applied. More importantly, the value of 

the collateral should not exhibit a 

significant correlation with the 

creditworthiness of the counterparty or 

the value of the underlying noncentrally cleared derivatives portfolio in 

such a way that would undermine the 

effectiveness of the protection offered by 

the margin collected. Accordingly, 

securities issued by the counterparty or 

its related entities should not be 

accepted as collateral. Accepted 

collateral should also be reasonably 

diversified. 

1. Commission Requirement for Eligible 

Collateral for Initial and Variation 

Margin 

With respect to eligible collateral that 

may be collected or posted to satisfy an 

initial margin obligation, the Final 

Margin Rule generally provides that 

CSEs may collect or post: 124

• Cash denominated in a major 

currency, being United States Dollar 

(USD); Canadian Dollar (CAD); Euro 

(EUR); United Kingdom Pound (GBP); 

Japanese Yen (JPY); Swiss Franc (CHF); 

New Zealand Dollar (NZD); Australian 

Dollar (AUD); Swedish Kronor (SEK); 

Danish Kroner (DKK); Norwegian Krone 

(NOK); any other currency designated 

by the Commission; or any currency of 

settlement for a particular uncleared 

swap. 

• A security that is issued by, or 

unconditionally guaranteed as to the 

timely payment of principal and interest 

by, the U.S. Department of Treasury. 

• A security that is issued by, or 

unconditionally guaranteed as to the 

timely payment of principal and interest 

by, a U.S. government agency (other 

than the U.S. Department of Treasury) 

whose obligations are fully guaranteed 

by the full faith and credit of the U.S. 

government. 

• A security that is issued by, or fully 

guaranteed as to the payment of 

principal and interest by, the European 

Central Bank or a sovereign entity that 

is assigned no higher than a 20 percent 

risk weight under the capital rules 

applicable to SDs subject to regulation 

by a prudential regulator. 

• A publicly traded debt security 

issued by, or an asset-backed security 

fully guaranteed as to the timely 

payment of principal and interest by, a 

U.S. Government-sponsored enterprise 

that is operating with capital support or 

another form of direct financial 

assistance received from the U.S. 

government that enables the repayments 

of the U.S. Government-sponsored 

enterprise’s eligible securities. 

• A security that is issued by, or fully 

guaranteed as to the payment of 

principal and interest by, the Bank for 

International Settlements, the 

International Monetary Fund, or a 

multilateral development bank as 

defined in § 23.151. 

• Other publicly-traded debt that has 

been deemed acceptable as initial 

margin by a prudential regulator as 

defined in § 23.151. 

• A publicly traded common equity 

security that is included in: The 

Standard & Poor’s Composite 1500 

Index or any other similar index of 

liquid and readily marketable equity 

securities as determined by the 

Commission, or an index that a CSE’s 

supervisor in a foreign jurisdiction 

recognizes for purposes of including 

publicly traded common equity as 

initial margin under applicable 

regulatory policy, if held in that foreign 

jurisdiction. 

• Securities in the form of redeemable 

securities in a pooled investment fund 

representing the security-holder’s 

proportional interest in the fund’s net 

assets and that are issued and redeemed 


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125See 17 CFR 23.156(a)(2). 

126See 17 CFR 23.156(a)(3). 

127See 17 CFR 23.156(b)(1). 

128See 17 CFR 23.156(b)(2). 

129See 17 CFR 23.156(c). 

130See FIB Ordinance, Article 123(8) and JFSA 

Public Notice No. 16, Article 1(1). 

131As listed in JFSA Public Notice No. 16, these 

are generally: Bank for International Settlements, 

International Monetary Fund, European Central 

Bank, European Community, International 

Development Banks (limited to International Bank 

for Reconstruction and Development, International 

Finance Corporation, Multilateral Investment 

Guarantee Agency, Asian Development Bank, 

African Development Bank, European Bank for 

Reconstruction and Development, Inter-American 

Continued 

only on the basis of the market value of 

the fund’s net assets prepared each 

business day after the security-holder 

makes its investment commitment or 

redemption request to the fund, if the 

fund’s investments are limited to 

securities that are issued by, or 

unconditionally guaranteed as to the 

timely payment of principal and interest 

by, the U.S. Department of the Treasury, 

and immediately-available cash funds 

denominated in U.S. dollars; or 

securities denominated in a common 

currency and issued by, or fully 

guaranteed as to the payment of 

principal and interest by, the European 

Central Bank or a sovereign entity that 

is assigned no higher than a 20% risk 

weight under the capital rules 

applicable to SDs subject to regulation 

by a prudential regulator, and 

immediately-available cash funds 

denominated in the same currency; and 

assets of the fund may not be transferred 

through securities lending, securities 

borrowing, repurchase agreements, 

reverse repurchase agreements, or other 

means that involve the fund having 

rights to acquire the same or similar 

assets from the transferee. 

• Gold. 

• A CSE may not collect or post as 

initial margin any asset that is a security 

issued by: The CSE or a margin affiliate 

of the CSE (in the case of posting) or the 

counterparty or any margin affiliate of 

the counterparty (in the case of 

collection); a bank holding company, a 

savings and loan holding company, a 

U.S. intermediate holding company 

established or designated for purposes 

of compliance with 12 CFR 252.153, a 

foreign bank, a depository institution, a 

market intermediary, a company that 

would be any of the foregoing if it were 

organized under the laws of the United 

States or any State, or a margin affiliate 

of any of the foregoing institutions; or a 

nonbank financial institution 

supervised by the Board of Governors of 

the Federal Reserve System under Title 

I of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (12 U.S.C. 

5323).125

• The value of any eligible collateral 

collected or posted to satisfy initial 

margin requirements must be reduced 

by the following haircuts: An 8% 

discount for initial margin collateral 

denominated in a currency that is not 

the currency of settlement for the 

uncleared swap, except for eligible 

types of collateral denominated in a 

single termination currency designated 

as payable to the non-posting 

counterparty as part of an eligible 

master netting agreement; and the 

discounts set forth in the following 

table: 126

STANDARDIZED HAIRCUT SCHEDULE

Cash in same currency as swap obligation ........................................................................................................................................ 0.0 

Eligible government and related debt (e.g., central bank, multilateral development bank, GSE securities identified in 17 CFR 

23.156(a)(1)(iv)): Residual maturity less than one-year .................................................................................................................. 0.5 

Eligible government and related debt (e.g., central bank, multilateral development bank, GSE securities identified in 17 CFR 

23.156(a)(1)(iv)): Residual maturity between one and five years ................................................................................................... 2.0 

Eligible government and related debt (e.g., central bank, multilateral development bank, GSE securities identified in 17 CFR 

23.156(a)(1)(iv)): Residual maturity greater than five years ............................................................................................................ 4.0 

Eligible corporate debt (including eligible GSE debt securities not identified in 17 CFR 23.156(a)(1)(iv)): Residual maturity less 

than one-year ................................................................................................................................................................................... 1.0 

Eligible corporate debt (including eligible GSE debt securities not identified in 17 CFR 23.156(a)(1)(iv)): Residual maturity between one and five years ................................................................................................................................................................. 4.0 

Eligible corporate debt (including eligible GSE debt securities not identified in 17 CFR 23.156(a)(1)(iv)): Residual maturity greater than five years ............................................................................................................................................................................. 8.0 

Equities included in S&P 500 or related index .................................................................................................................................... 15.0 

Equities included in S&P 1500 Composite or related index but not S&P 500 or related index ......................................................... 25.0 

Gold ..................................................................................................................................................................................................... 15.0 

With respect to eligible collateral that 

may be collected or posted to satisfy a 

variation margin obligation, the Final 

Margin Rule generally provides that 

CSEs may collect or post: 127

• With respect to uncleared swaps 

with an SD or MSP, only immediately 

available cash funds that are 

denominated in: U.S. dollars, another 

major currency (as defined in § 23.151), 

or the currency of settlement of the 

uncleared swap. 

• With respect to any other uncleared 

swaps for which a CSE is required to 

collect or post variation margin, any 

asset that is eligible to be posted or 

collected as initial margin, as described 

above. 

• The value of any eligible collateral 

collected or posted to satisfy variation 

margin requirements must be reduced 

by the same haircuts applicable to 

initial margin described above.128

Finally, CSEs must monitor the value 

and eligibility of collateral collected and 

posted: 129

• CSEs must monitor the market 

value and eligibility of all collateral 

collected and posted, and, to the extent 

that the market value of such collateral 

has declined, the CSE must promptly 

collect or post such additional eligible 

collateral as is necessary to maintain 

compliance with the margin 

requirements of §§ 23.150 through 

23.161. 

• To the extent that collateral is no 

longer eligible, CSEs must promptly 

collect or post sufficient eligible 

replacement collateral to comply with 

the margin requirements of §§ 23.150 

through 23.161. 

2. Japan Requirements for Eligible 

Collateral for Initial and Variation 

Margin 

With respect to eligible collateral that 

may be collected or posted to satisfy an 

initial or variation margin obligation, 

the JFSA’s margin requirements 

generally provide that RFIs/FIBOS may 

collect or post: 130

• Cash. 

• Debt that is issued by a central 

government, a central bank, or an 

international financial institution.131


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Development Bank, European Investment Bank, 

European Investment Fund, Nordic Investment 

Bank, Caribbean Development Bank, Islamic 

Development Bank, International Finance Facility 

for Immunisation and Council of Europe 

Development Bank), or a regional government, 

Japan Finance Organization for Municipalities or a 

government agency in Japan. 

132See FIB Ordinance, Article 123(8) and JFSA 

Public Notification No. 16 of March 31, 2016, 

Article 2. 

133See Bank Capital Adequacy Notice (JFSA 

Notice No. 19 of 2006, as amended). 

134See FIB Ordinance, Article 123(9) and JFSA 

Public Notice No. 16, Article 2(2). 

135See JFSA Public Notice No. 16, Article 1(1)(iv) 

and Article 2. 

136See 17 CFR 23.156(a)(2). 

137See 17 CFR 23.156(c). 

138See BCBS/IOSCO Framework, Key principle 5. 

• Debt that is issued by any other 

entity (excluding securitizations) with 

certain high level credit risk ratings, but 

excluding debt issued by a counterparty 

or any of its consolidated affiliates. 

• Equity securities of issuers included 

in the major equity index of certain 

designated countries, but excluding 

equity securities issued by a 

counterparty or any of its consolidated 

affiliates. 

• Investment trust securities 

(excluding securities of the counterparty 

or any of its consolidated affiliates) 

where the trust invests in any of the 

foregoing items and its mark-to-market 

is published each business day. 

The value of any eligible collateral 

collected or posted to satisfy initial 

margin requirements must be reduced 

by the following haircuts: 132

Cash ......................................................................................................... 0%. 

Equities included in major stock indices .................................................. 15%. 

Government and central bank debt; residual maturity of 1 year or less 0.5%, 1%, or 15%, depending on class of credit rating assigned by eligible credit rating firms.133

Government and central bank debt; residual maturity between 1 and 5 

years.

2%, 3%, or 15%, depending on class of credit rating assigned by eligible credit rating firms. 

Government and central bank debt; residual maturity of more than 5 

years.

4%, 6%, or 15% depending on class of credit rating assigned by eligible credit rating firms. 

Corporate bonds; residual maturity of 1 year or less .............................. 1% or 2% depending on class of credit rating assigned by eligible credit rating firms. 

Corporate bonds; residual maturity of between 1 and 5 years ............... 4% or 6%, depending on class of credit rating assigned by eligible 

credit rating firms. 

Corporate bonds; residual maturity of more than 5 years ....................... 8% or 12%, depending on class of credit rating assigned by eligible 

credit rating firms. 

Investment trust securities ........................................................................ The highest of the above ratios applicable to investments of the trust. 

In addition to the foregoing, under the 

JFSA’s margin requirements, if the 

currency of a collateral asset posted for 

the purposes of initial margin is not the 

same as a currency specified in respect 

of the transactions, an additional 8% 

haircut must be applied.134

3. Commission Determination 

Based on the foregoing and the 

representations of the applicant, the 

Commission observes that the JFSA’s 

requirements pertaining to assets 

eligible for posting or collecting by 

FIBOs/RFIs as collateral for uncleared 

OTC derivatives are similar to the 

requirements of the Final Margin Rule, 

but are more stringent in some respects 

and less stringent in others. 

Specifically, the JFSA’s requirements 

are more stringent where they require a 

larger haircut than the Final Margin 

Rule on government, central bank, and 

corporate debt where an issuer’s credit 

risk ratings are less than the highest 

levels provided by credit rating firms 

regulated by the JFSA. However, the 

JFSA’s requirements are less stringent 

where they permit the same haircut for 

all equities (15%) included in major 

equity indices of certain designated 

countries 135 while the Final Margin 

Rule applies a 25% haircut for certain 

equities not included in the S&P 500. 

The JFSA’s requirements are also less 

stringent with respect to the eligible 

collateral for variation margin for noncleared OTC Derivatives between 

FIBOs/RFIs that are CSEs and FIBOs/ 

RFIs that are SDs and MSPs (including 

other CSEs). The Final Margin Rule only 

permits immediately available cash 

funds that are denominated in U.S. 

dollars, another major currency (as 

defined in § 23.151), or the currency of 

settlement of the uncleared swap, while 

the JFSA’s requirements would permit 

any form of eligible collateral (as 

described above). 

In addition, the JFSA’s margin rules 

allow eligible collateral in the form of 

securities issued by bank holding 

companies, savings and loan holding 

companies, certain intermediary 

holding companies, foreign banks, 

depository institutions, market 

intermediaries, and margin affiliates of 

the foregoing, all of which are 

prohibited by the Final Margin Rule.136

Finally, the JFSA’s margin rules also 

do not specifically address requirements 

to monitor the eligibility of posted 

collateral.137

While not identical, the Commission 

finds that the forms of eligible collateral 

for initial and variation margin under 

the laws of Japan provide comparable 

protections to the forms of eligible 

collateral mandated by the Final Margin 

Rule. Specifically, the Commission 

finds that the JFSA’s margin regime 

ensures that assets collected as 

collateral for initial and variation 

margin purposes are highly liquid and 

able to hold their value in a time of 

financial stress. Because under JFSA’s 

margin regime, a non-defaulting party 

would be able to liquidate assets held as 

initial and variation margin in a 

reasonable amount of time to generate 

proceeds that could sufficiently protect 

collecting entities from losses on 

uncleared swaps in the event of a 

counterparty default, the Commission 

finds the JFSA’s margin regime with 

respect to the forms of eligible collateral 

for initial and variation margin for 

uncleared swaps is comparable to the 

Final Margin Rule. 

K. Requirements for Custodial 

Arrangements, Segregation, and 

Rehypothecation 

As explained in the BCBS/IOSCO 

Framework, the exchange of initial 

margin on a net basis may be 

insufficient to protect two market 

participants with large gross derivatives 

exposures to each other in the case of 

one firm’s failure. Thus, the gross initial 

margin between such firms should be 

exchanged.138

Further, initial margin collected 

should be held in such a way as to 

ensure that (i) the margin collected is 

immediately available to the collecting 

party in the event of the counterparty’s 

default, and (ii) the collected margin 

must be subject to arrangements that 

protect the posting party to the extent 

possible under applicable law in the 


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139See id. 

140See 17 CFR 23.157(a) and (b). 

141See 17 CFR 23.157(c)(1) and (2). 

142See 17 CFR 23.157(c)(3). 

143See id. 

144See Final Margin Rule, 81 FR at 672. 

145See FIB Ordinance, Article 123(1)(xxi)–6(d). 

146See id. 

147See FIB Ordinance Article 123(1)(xxi)–6(e). 

148See FIB Ordinance Article 123(1)(xxi)–6(d). 

149See 17 CFR 23.157(a) and (b). 

150Act No. 108 of 2006 (the ‘‘Trust Act of Japan’’). 

151See Trust Act of Japan, Article 23(1) stating: 

Except where based on a claim pertaining to an 

Obligation Covered by the Trust Property . . . 

compulsory execution, provisional seizure, 

provisional disposition or exercise of a security 

interest, or an auction . . ., or collection 

proceedings for delinquent national tax . . . is not 

allowed to be enforced against property that comes 

under Trust Property. 

152See 17 CFR 23.158(a). 

event that the collecting party enters 

bankruptcy.139

1. Commission Requirement for 

Custodial Arrangements, Segregation, 

and Rehypothecation 

In keeping with the principles set 

forth in the BCBS/IOSCO Framework, 

with respect to custodial arrangements, 

segregation, and rehypothecation, the 

Final Margin Rule generally requires 

that: 

• All assets posted by or collected by 

CSEs as initial margin must be held by 

one or more custodians that are not the 

CSE, the counterparty, or margin 

affiliates of the CSE or the 

counterparty.140

• CSEs must enter into an agreement 

with each custodian holding initial 

margin collateral that: 

D Prohibits the custodian from 

rehypothecating, repledging, reusing, or 

otherwise transferring (through 

securities lending, securities borrowing, 

repurchase agreement, reverse 

repurchase agreement or other means) 

the collateral held by the custodian; 

D May permit the custodian to hold 

cash collateral in a general deposit 

account with the custodian if the funds 

in the account are used to purchase an 

asset that qualifies as eligible collateral 

(other than equities, investment vehicle 

securities, or gold), such asset is held in 

compliance with this section, and such 

purchase takes place within a time 

period reasonably necessary to 

consummate such purchase after the 

cash collateral is posted as initial 

margin; and 

D Is a legal, valid, binding, and 

enforceable agreement under the laws of 

all relevant jurisdictions including in 

the event of bankruptcy, insolvency, or 

a similar proceeding.141

• A posting party may substitute any 

form of eligible collateral for posted 

collateral held as initial margin.142

• A posting party may direct 

reinvestment of posted collateral held as 

initial margin in any form of eligible 

collateral.143

• Collateral that is collected or posted 

as variation margin is not required to be 

held by a third party custodian and is 

not subject to restrictions on 

rehypothecation, repledging, or 

reuse.144

2. Japan Requirements for Custodial 

Arrangements, Segregation, and 

Rehypothecation 

In keeping with the principles set 

forth in the BCBS/IOSCO Framework, 

with respect to custodial arrangements, 

segregation, and rehypothecation, the 

JFSA’s margin rules generally require 

that: 

• All assets posted by or collected by 

FIBOs/RFIs as initial margin collateral 

must be held in a trust or other similar 

structure (e.g., a custodial arrangement) 

that constitutes legal segregation or its 

equivalent.145

• The segregation structure must 

ensure that the collateral will be 

immediately available to the collecting 

party in the event of the posting party’s 

default, and that the collateral will be 

immediately returned to the posting 

party in the event of the collecting 

party’s bankruptcy.146

• Rehypothecation, re-pledge, or reuse of collateral posted as initial margin 

is prohibited, provided that cash can be 

re-used where conducted by a safe 

method and managed in accordance 

with the initial margin management 

requirements of the FIB Ordinance, 

Article 123(1)(xxi)–6(d).147

• Collateral that is collected or posted 

as variation margin is not required to be 

held by a third party custodian and is 

not subject to restrictions on 

rehypothecation, repledging, or 

reuse.148

3. Commission Determination 

The Commission notes that the JFSA’s 

margin requirements with respect to 

custodial arrangements are less stringent 

than those of the Final Margin Rule in 

one material respect. Under the Final 

Margin Rule, all assets posted by or 

collected by CSEs as initial margin must 

be held by one or more custodians that 

are not the CSE, the counterparty, or 

margin affiliates of the CSE or the 

counterparty.149 The JFSA’s margin 

rules do not prohibit a FIBO/RFI from 

using an affiliated entity as custodian to 

hold initial margin collected from 

counterparties. 

However, the JFSA has explained that 

because the JFSA’s margin rules require 

initial margin to be held in a trust 

structure under the Trust Act of 

Japan,150 the risk of use of an affiliated 

entity as custodian may be mitigated. A 

trust account under the Trust Act of 

Japan is commonly utilized when 

segregation of assets is required because 

property deposited to such a trust 

account (‘‘trust property’’) is legally 

recognized as segregated from the 

property of the trustor, the property of 

the trust bank, and other trust property 

in the trust account. Thus trust property 

in such a trust account is bankruptcy 

remote from the trustor and the trust 

bank.151 Therefore, the JFSA represents 

that initial margin held in a trust 

account with an affiliate of a FIBO/RFI 

mitigates any risk that such initial 

margin would be found part of the 

FIBO/RFI’s estate or its affiliated trust 

bank’s estate in the event of the 

bankruptcy of either. 

Accordingly, despite the differences 

in required custodial arrangements, the 

Commission has determined that the 

JFSA’s margin requirements applicable 

to FIBOs/RFIs pertaining to custodial 

arrangements, segregation, and 

rehypothecation are comparable to the 

corresponding requirements under the 

Final Margin Rule. Specifically, the 

Commission finds that under both the 

JFSA’s requirements and the Final 

Margin Rule, a CSE/FIBO/RFI is 

required to segregate the initial margin 

posted by its counterparties with a 

third-party custodian under terms that 

constitute legal segregation, and such 

initial margin may not be 

rehypothecated. Accordingly, the 

Commission finds that the JFSA’s 

requirements pertaining to custodial 

arrangements, segregation, and 

rehypothecation are comparable in 

outcome to those required by the Final 

Margin Rule. 

L. Requirements for Margin 

Documentation 

1. Commission Requirement for Margin 

Documentation 

With respect to requirements for 

documentation of margin arrangements, 

the Final Margin Rule generally 

provides that: 

• CSEs must execute documentation 

with each counterparty that provides 

the CSE with the contractual right and 

obligation to exchange initial margin 

and variation margin in such amounts, 

in such form, and under such 

circumstances as are required by the 

Final Margin Rule.152


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153See 17 CFR 23.158(b). 

154See Supervisory Guidelines, Section IV–2– 

4(4)(i)(A) and (4)(ii)(A). 

155See Article 37–3 of the FIEA and Article 99 

of the FIB Ordinance. 

156See 17 CFR 23.157 and Section IV(K) above. 

157See 17 CFR 23.160(d) and (e). 

158See id. 

159See 17 CFR 23.160(e) and 23.157(b). 

160See FIB Ordinance, Article 123(10)(v) and 

(11)(v). 

161See FIB Ordinance, Article 123(10)(i) and 

(11)(i). 

162See Supervisory Guideline, IV–2–4(4)(iii)(C). 

163See FIB Ordinance 123(1)(xxi)–6(d), (e), and 

(f). 

• The margin documentation must 

specify the methods, procedures, rules, 

inputs, and data sources to be used for 

determining the value of uncleared 

swaps for purposes of calculating 

variation margin; describe the methods, 

procedures, rules, inputs, and data 

sources to be used to calculate initial 

margin for uncleared swaps entered into 

between the CSE and the counterparty; 

and specify the procedures by which 

any disputes concerning the valuation 

of uncleared swaps, or the valuation of 

assets collected or posted as initial 

margin or variation margin may be 

resolved.153

2. Japan Requirements for Margin 

Documentation 

With respect to requirements for 

documentation of margin arrangements, 

the JFSA’s margin rules generally 

provide that: 

• FIBOs/RFIs must establish an 

appropriate agreement with each OTC 

derivative counterparty (such as an 

ISDA Master Agreement and Credit 

Support Annex) documenting the 

calculation and transfer of initial and 

variation margin.154

• FIBOs/RFIs are required to have 

documentation with each uncleared 

OTC derivative counterparty that, 

among other things, identifies dispute 

resolution measures applicable to 

margin disputes for uncleared OTC 

derivatives.155

3. Commission Determination 

Based on the foregoing and the 

representations of the applicant, the 

Commission has determined that the 

JFSA’s margin requirements applicable 

to FIBOs/RFIs pertaining to margin 

documentation are substantially the 

same as the margin documentation 

requirements under the Final Margin 

Rule. Specifically, the Commission 

finds that under both the JFSA’s 

requirements and the Final Margin Rule, 

a CSE/FIBO/RFI is required to enter into 

documentation with each OTC 

derivative/swap counterparty that sets 

forth the method for calculating and 

transferring initial and variation margin, 

as well dispute resolution procedures. 

Accordingly, the Commission finds that 

the JFSA’s requirements pertaining to 

margin documentation are comparable 

to those required by the Final Margin 

Rule. 

M. Cross-Border Application of the 

Margin Regime 

1. Cross-Border Application of the Final 

Margin Rule 

The general cross-border application 

of the Final Margin Rule, as set forth in 

the Cross-Border Margin Rule, is 

discussed in detail in Section II above. 

However, § 23.160(d) and (e) of the 

Cross-Border Margin Rule also provide 

certain alternative requirements for 

uncleared swaps subject to the laws of 

a jurisdiction that does not reliably 

recognize close-out netting under a 

master netting agreement governing a 

swap trading relationship, or that has 

inherent limitations on the ability of a 

CSE to post initial margin in compliance 

with the custodial arrangement 

requirements 156 of the Final Margin 

Rule.157

Section 23.160(d) generally provides 

that where a jurisdiction does not 

reliably recognize close-out netting, the 

CSE must treat the uncleared swaps 

covered by a master netting agreement 

on a gross basis with respect to 

collecting initial and variation margin, 

but may treat such swaps on a net basis 

with respect to posting initial and 

variation margin.158

Section 23.160(e) generally provides 

that where certain CSEs are required to 

transact with certain counterparties in 

uncleared swaps through an 

establishment in a jurisdiction where, 

due to inherent limitations in legal or 

operational infrastructure, it is 

impracticable to require posted initial 

margin to be held by an independent 

custodian pursuant to § 23.157, the CSE 

is required to collect initial margin in 

cash (as described in § 23.156(a)(1)(i)) 

and post and collect variation margin in 

cash, but is not required to post initial 

margin. In addition, the CSE is not 

required to hold the initial margin 

collected with an unaffiliated 

custodian.159 Finally, the CSE may only 

enter into such affected transactions up 

to 5% of its total uncleared swap 

notional outstanding for each broad 

category of swaps described in 

§ 23.154(b)(2)(v). 

2. Cross-Border Application of JFSA’s 

Margin Regime 

With respect to cross-border 

transactions, JFSA’s margin 

requirements generally provide that, 

where the JFSA’s margin regime would 

apply to a transaction that also would 

require compliance with the margin 

regime of a foreign state, the 

Commissioner of the JFSA may exempt 

such transactions from compliance with 

the JFSA’s margin rules if the 

Commissioner finds that such 

exemption is unlikely to be contrary to 

the public interest or hinder protection 

of investors due to a FIBO/RFI’s 

compliance with the margin regime of 

the foreign state that is recognized by 

the JFSA to be equivalent to the JFSA’s 

margin regime.160

With respect to non-cleared OTC 

Derivatives subject to the laws of a 

jurisdiction that does not reliably 

recognize close-out netting under a 

master netting agreement, the JFSA’s 

margin regime generally provides that 

an FIBO/RFI is exempt from the 

requirements to post or collect either 

initial or variation margin.161 However, 

as represented by the JFSA, the JFSA’s 

margin regime also requires that, with 

respect to such transactions, the FIBO/ 

RFI must establish an appropriate risk 

management framework for the risks of 

such transactions that may include 

collecting margin on a gross basis.162

With respect to non-cleared OTC 

Derivatives subject to the laws of a 

jurisdiction that has inherent limitations 

on the ability of a FIBO/RFI to post 

initial margin in compliance with the 

custodial arrangement requirements 

under the JFSA’s margin rules, as 

represented by the JFSA, the JFSA’s 

margin rules provide that the FIBO/RFI 

is exempt only from the requirement to 

post initial margin, but must still 

comply with the requirement to collect 

initial margin and post/collect variation 

margin.163

3. Commission Determination 

Based on the foregoing and the 

representations of the applicant, the 

Commission finds that the JFSA’s 

margin regime with respect to its crossborder application is comparable in 

outcome to that of the Final Margin Rule 

as set forth in the Cross-Border Margin 

Rule. 

First, the Commission recognizes that 

the JFSA’s margin regime permits 

substituted compliance to substantially 

the same extent as the Cross-Border 

Margin Rule. For example, a CSE subject 

to the JFSA’s margin regime entering 

into a transaction with a counterparty in 

the U.S., and thus subject to the Final 

Margin Rule, could request the 

Commissioner of the JFSA to exempt 


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164See 17 CFR 23.160(e) and 23.157(b). 

165See FIB Ordinance 123(1)(xxi)–6(d), (e), and 

(f). 

166See 17 CFR 23.160(c)(3)(i). 

167See 17 CFR 23.160(c)(3)(ii). As discussed 

above, the Commission’s Final Margin Rule is based 

on the BCBS/IOSCO Framework; therefore, the 

Commission expects that the relevant foreign 

margin requirements would conform to such 

Framework at minimum in order to be deemed 

comparable to the Commission’s corresponding 

margin requirements. 

168See 17 CFR 23.160(c)(3)(iii). See also 17 CFR 

23.160(c)(3)(iv) (indicating the Commission would 

also consider any other relevant facts and 

circumstances). 169See Section IV(D) supra. 

such transaction from compliance with 

the JFSA’s margin regime upon a 

finding that the Final Margin Rule is 

equivalent to the JFSA’s margin regime. 

Thus, where a CSE finds itself subject to 

both the Final Margin Rule and JFSA’s 

margin regime, but not in a situation 

where substituted compliance is 

available under the Cross-Border Margin 

Regime, it could apply to the JFSA for 

a finding of equivalence. 

Second, with respect to transactions 

subject to the laws of a non-netting 

jurisdiction, although the JFSA’s margin 

regime exempts FIBOs/RFIs from the 

otherwise applicable requirements to 

collect and post margin, the JFSA’s 

Supervisory Guidelines still require 

such entities to establish an appropriate 

risk management framework to protect 

against the risks of such transactions. 

The Commission notes that a CSE is also 

required to have a risk management 

program pursuant § 23.600, and thus the 

Commission has the authority to inquire 

as to the adequacy of the risk 

management covering uncleared swaps 

in non-netting jurisdictions. 

Finally, with respect to non-cleared 

OTC Derivatives subject to the laws of 

a jurisdiction that has inherent 

limitations on the ability of a CSE/FIBO/ 

RFI to post initial margin in compliance 

with the custodial arrangement 

requirements of the JFSA’s margin rules 

and the Final Margin Rule, the CrossBorder Margin Rule would only require 

the CSE to collect (but not post) initial 

margin in cash (but not hold such initial 

margin with an unaffiliated 

custodian) 164 and to post and collect 

variation margin in cash. The CrossBorder Margin Rule would also limit the 

CSE’s ability to enter into such 

transactions to 5% of its total uncleared 

swap notional outstanding for each 

broad category of swap asset classes. 

Meanwhile, the JFSA’s margin rules also 

exempt a FIBO/RFI from the 

requirement to post initial margin, 

while still requiring compliance with 

the requirement to collect initial margin 

and post/collect variation margin.165

The JFSA margin rule does not have the 

cash-only requirement, nor does it limit 

transactions to 5% of a FIBO/RFI’s total 

notional of uncleared swaps. 

Having considered the similarities 

and differences described above, the 

Commission finds that: (1) The 

availability of reciprocity of substituted 

compliance available from the JFSA 

makes the JFSA margin regime 

comparable in this respect to that of the 

Final Margin Rule and the Cross-Border 

Margin Rule; (2) the representations of 

the JFSA regarding the extensive risk 

management requirements applicable to 

transactions in non-netting jurisdictions 

makes the JFSA margin regime 

comparable in this respect to that of the 

Final Margin Rule and the Cross-Border 

Margin Rule; and (3) the generally 

similar requirements for collection of 

initial margin and collection/posting of 

variation margin for transactions in 

jurisdictions where compliance with 

custodial arrangements is impracticable 

makes the JFSA margin regime 

comparable in this respect to that of the 

Final Margin Rule and the Cross-Border 

Margin Rule. Accordingly, the 

Commission finds the cross-border 

aspects of the JFSA’s margin regime 

comparable to that of the Commission. 

N. Supervision and Enforcement 

The Commission has a long history of 

regulatory cooperation with the JFSA, 

including cooperation in the regulation 

of registrants of the Commission that are 

also FIBOs. Thus, the Commission finds 

that the JFSA has the necessary powers 

to supervise, investigate, and discipline 

entities for compliance with its margin 

requirements and recognizes the JFSA’s 

ongoing efforts to detect and deter 

violations of, and ensure compliance 

with, the margin requirements 

applicable in Japan. 

V. Conclusion 

As detailed above, the Commission 

has considered the scope and objectives 

of the margin requirements for 

uncleared swaps under the laws of 

Japan,166 whether such margin 

requirements achieve comparable 

outcomes to the Commission’s 

corresponding margin requirements; 167

and the ability of the JFSA to supervise 

and enforce compliance with the margin 

requirements for non-cleared OTC 

Derivatives under the laws of Japan.168

Pursuant to the foregoing process, the 

Commission has noted several 

differences in the margin regimes. 

However, the only difference for which 

the Commission has found the JFSA’s 

margin regime to be not comparable is 

that the Final Margin Rule requires 

collection and posting of variation 

margin, and in a limited circumstance, 

collection of initial margin, for 

uncleared swaps between consolidated 

affiliates, while the JFSA’s margin rules 

do not require any margin to be posted 

or collected on such transactions.169

Accordingly, a CSE that is subject to 

both the Final Margin Rule and the 

JFSA’s margin rules with respect to an 

uncleared swap that is also a noncleared OTC Derivative may rely on 

substituted compliance for all aspects of 

the Final Margin Rule and the CrossBorder Margin Rule except that such 

CSE must comply with the inter-affiliate 

margin requirements of § 23.159 of the 

Final Margin Rule. 

Issued in Washington, DC, on September 8, 

2016, by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Appendices to Comparability 

Determination for Japan: Margin 

Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap 

Participants—Commission Voting 

Summary, Chairman’s Statement, and 

Commissioners’ Statements 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Massad and 

Commissioner Giancarlo voted in the 

affirmative. Commissioner Bowen voted in 

the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

Today, the CFTC has furthered its 

commitment to international cooperation and 

harmonization. 

By issuing this comparability 

determination with respect to Japan’s rules 

on margin for uncleared swaps, the 

Commission has ensured that a Japanese 

swap dealer or major swap participant 

registered with the CFTC can comply with 

many aspects of our margin rules by meeting 

the corresponding Japan Financial Services 

Agency (JFSA) requirements. This is an 

important and necessary step toward 

building a strong international regulatory 

framework for the over-the-counter swaps 

market, which is critical to ensuring the 

safety and soundness of our own financial 

markets. 

It’s important to remember that we are still 

at the early stages of developing this new 

global framework. Shortly after I took office 

two years ago, there were significant 

differences between our rules, Japan’s rules, 

and the rules of other jurisdictions. We made 

tremendous progress bringing those rules 

together since that time. And today, we all 

share the same goal of a strong, international 

framework. But there are still going to be 

differences, and we understand our laws and 

the laws of other jurisdictions will never be 

identical. 


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1Though, as noted in my dissent, this rule was 

far weaker than it should have been due to how it 

dealt with inter-affiliate margin. See Dissenting 

Statement of Commissioner Sharon Y. Bowen 

Regarding Final Rule on Margin for Uncleared 

Swaps (Dec. 16, 2015), available at http://

www.cftc.gov/PressRoom/SpeechesTestimony/ 

bowenstatement121615a. 

2Working Group on Margin Requirements of the 

Basel Committee on Banking Supervision and the 

International Organization of Securities 

Commissions. 

Our comparability determination reflects 

this understanding. In this instance, as in 

other decisions, the Commission compared 

our margin rule with each element of Japan’s 

rules, carefully considering the objectives 

and outcomes of its specific provisions. 

We concluded that while there are 

differences in our margin regimes, Japan’s 

margin requirements achieve comparable 

outcomes. The Commission identified only 

one area where we must make an exception 

to that conclusion. Our margin rule requires 

the collection and posting of variation margin 

and, in certain circumstances, the collection 

of initial margin for uncleared swaps 

between consolidated affiliates. However, the 

JFSA’s margin rules do not require any 

margin to be posted or collected on such 

transactions. 

As a result, the Commission has 

determined that certain entities subject to 

both the CFTC’s and the JFSA’s margin rules 

with respect to an uncleared swap may rely 

on the substituted compliance made 

available under the CFTC’s Cross-Border 

Margin Rule—with the exception that these 

entities must comply with the CFTC’s interaffiliate margin requirements. I believe this 

exception is necessary, to help address the 

risk that can flow back into the United States 

from offshore activity, even when the 

subsidiary is not explicitly guaranteed by the 

U.S. parent. In addition, it will prevent the 

potential buildup of current exposure among 

affiliates. 

Let me also comment on the concerns 

regarding differences in our rules with 

respect to the treatment of collateral, 

custodial requirements, and swaps with 

counterparties in so-called ‘‘non-netting’’ 

jurisdictions. I believe we should allow 

reliance on Japanese rules in these areas. 

That is because our goal is comparability in 

outcomes, and that goal is achieved in both 

cases. 

First, on the treatment of collateral, it has 

been noted that there is a difference in our 

rules on haircuts for equities. But it is 

relatively small. We require a haircut of 15 

percent on equities included in the S&P 500, 

and 25 percent on the S&P 1500. Japan’s 

rules say 15 percent on major equity indices. 

But we should also note that Japan imposes 

a larger discount than we do on government 

bonds and corporate debt. Our comparability 

process should therefore not insist on lineby-line identity, but rather decide what 

differences are truly significant to overall 

outcomes. 

Similarly, with respect to custodial 

requirements, I recognize the importance of 

the protection of margin deposits, especially 

in the event of the bankruptcy of a 

counterparty. The means that we require in 

our rule—segregation with an independent 

custodian—are not commonly used in Japan. 

But the Japan rules require the use of trust 

structures which achieve the same goal under 

Japanese law, and are recognized under 

Japanese law in bankruptcy. 

With respect to treatment of non-netting 

jurisdictions, our rule requires a swap dealer 

to collect initial margin on a gross basis from 

a counterparty in a jurisdiction that doesn’t 

clearly recognize netting, while the JFSA rule 

says that the dealer must establish an 

appropriate risk management framework that 

may, but is not required to, include 

collection of margin. To measure outcomes, 

we must look not only at the specifics but at 

how the rules work in different scenarios. For 

example, Japanese swap dealers whose trades 

are guaranteed by a U.S. person must follow 

our rules on this issue and collect margin, 

regardless of what we decide as a matter of 

substituted compliance. And Japanese swap 

dealers whose trades are not guaranteed by 

a U.S. person, and who are not foreign 

consolidated subsidiaries, would not be 

required to follow our rule on this issue, 

regardless of what we decide as a matter of 

substituted compliance. That is because such 

trades are excluded from our rules. Japanese 

swap dealers who are foreign consolidated 

subsidiaries (and whose trades are not 

guaranteed by a U.S. person) would be 

entitled to substituted compliance, but if they 

engage in trades with counterparties in nonnetting jurisdictions they would still be 

subject to the JFSA risk management 

requirements, and any parent entity swap 

dealer would be subject to our consolidated 

risk management requirements. 

For these reasons, I believe it is appropriate 

to grant substituted compliance without an 

exception on these issues. 

In making these determinations, staff also 

considers another jurisdiction’s supervisory 

and enforcement authority in assessing 

outcomes. And here, I agree with staff’s 

conclusion, and want to underscore the fact 

that we have a very strong and good 

relationship with the JFSA. In fact, I met with 

Commissioner Mori and members of his staff 

just a few months ago. There is mutual 

respect, and good communication and 

cooperation between our agencies. We have 

worked well together on a number of issues, 

including the formulation of margin 

requirements. And this determination will 

strengthen that relationship further. 

Today’s decision will contribute 

significantly to that international framework 

and help make sure our derivatives markets 

continue to be dynamic, competitive, and 

drivers of economic growth. I want to 

particularly thank our staff in the Division of 

Swap Dealer and Intermediary Oversight and 

in the Office of the General Counsel for their 

work on this and the implementation of our 

margin rules generally. I also thank 

Commissioners Bowen and Giancarlo for 

their input and consideration of this 

determination. 

Appendix 3—Dissenting Statement of 

Commissioner Sharon Y. Bowen 

I thank the staff for all of its hard work on 

this margin comparability determination. 

However, I cannot support it. I will be voting 

no as I think it would introduce greater risk 

into the derivatives markets—the very thing 

that we were sent here by the American 

people to prevent. 

There are just three questions I will answer 

in my remarks today: 

1. What is a margin comparability 

determination and why does it matter? 

2. What are the problems with this 

particular comparability determination? 

3. How can we fix it? 

First, what is a margin comparability 

determination and why does it matter? 

For many Americans, a margin 

comparability determination is truly a foreign 

concept. But it actually has great significance 

to our economy. Margin is collateral. The 

2008 derivatives market was undercollateralized, and that is what caused it to 

explode and take our economy with it. The 

American people expected us, as regulators, 

to fix that by requiring sufficient collateral to 

address the risk. We have done that with our 

margin rule.1

In a margin comparability determination, 

we are defining when our U.S. dealers that 

are operating in the other jurisdiction, can 

ignore our margin rule and follow the other 

jurisdiction’s margin rule. Allowing 

American companies to just follow one set of 

rules—that of the jurisdiction they are in— 

makes sense when the rules are basically 

accomplishing the same thing. I am in favor 

of that. International comity, harmonization 

across jurisdictions, and having an outcomesbased approach to comparability all make 

sense. 

Unfortunately, that is not the scenario that 

we have here. While Japanese law has some 

strong similarities to our own, there are some 

areas of divergence that are significant and 

would allow American companies to do 

overseas what they would never be allowed 

to do here. And make no mistake; though 

these companies are physically located in 

Japan, their cash line runs right back to the 

United States. That risk could be borne again 

by American households. A comparability 

determination should not be the back door 

way of undoing or weakening our regulations 

and thereby incentivizing our companies to 

send their risky business to their affiliates 

located in Japan. That would not be good for 

our economy, Japan’s economy, or global 

financial stability overall. 

This determination is doubly important 

because this is the first one and thus sets the 

stage for others. By adopting a weak standard 

today, we pave the way for even weaker 

determinations in the future. Moreover, we 

are not establishing this determination in 

conjunction with the Prudential Regulators, 

who oversee roughly half of U.S. swap 

dealers and are our counterparts on these 

issues. We have worked effectively with our 

Prudential counterparts on the international 

Working Group on Margin Requirements 

(WGMR) 2 thus far; making this 

determination without harmonization 

amongst U.S. regulators is ill-advised. 

Differences in requirements would only open 

the door to regulatory arbitrage domestically. 


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3See ‘‘Comparability Determination for Japan: 

Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants,’’ pp. 

63–65. (‘‘The Commission notes that the JFSA’s 

[Japan Financial Services Agency] margin 

requirements with respect to custodial 

arrangements are less stringent than those of the 

Final Margin Rule in one material respect. Under 

the Final Margin Rule, all assets posted by or 

collected by CSEs as initial margin must be held by 

one or more custodians that are not the CSE, the 

counterparty, or margin affiliates of the CSE or the 

counterparty. The JFSA’s margin rules do not 

prohibit a FIBO/RFI from using an affiliated entity 

as custodian to hold initial margin collected from 

counterparties.’’). 

4 Id. at pp. 69–70. (‘‘[W]ith respect to transactions 

subject to the laws of a non-netting jurisdiction 

JFSA’s margin regime exempts FIBOs/RFIs from the 

otherwise applicable requirements to collect and 

post margin. . . . [W]ith respect to non-cleared OTC 

Derivatives subject to the laws of a jurisdiction that 

has inherent limitations on the ability of a CSE/ 

FIBO/RFI to post initial margin in compliance with 

the custodial arrangement requirements of the 

JFSA’s margin rules and the Final Margin Rule . . . 

[t]he JFSA margin rule does not have the cash-only 

requirement, nor does it limit transactions to 5% of 

a FIBO/RFI’s total notional of uncleared swaps.’’). 

5 Id. at pp. 58–59. (‘‘[T]he JFSA’s requirements are 

less stringent where they permit the same haircut 

for all equities (15%) included in major equity 

indices of certain designated countries while the 

Final Margin Rule applies a 25% haircut for certain 

equities not included in the S&P 500. The JFSA’s 

requirements are also less stringent with respect to 

the eligible collateral for variation margin for noncleared OTC Derivatives between FIBOs/RFIs that 

are CSEs and FIBOs/RFIs that are SDs and MSPs 

(including other CSEs). The Final Margin Rule only 

permits immediately available cash funds that are 

denominated in U.S. dollars, another major 

currency (as defined in § 23.151), or the currency 

of settlement of the uncleared swap, while the 

JFSA’s requirements would permit any form of 

eligible collateral (as described above). In addition, 

the JFSA’s margin rules allow eligible collateral in 

the form of securities issued by bank holding 

companies, savings and loan holding companies, 

certain intermediary holding companies, foreign 

banks, depository institutions, market 

intermediaries, and margin affiliates of the 

foregoing, all of which are prohibited by the Final 

Margin Rule. Finally, the JFSA’s margin rules also 

do not specifically address requirements to monitor 

the eligibility of posted collateral.’’). 

1See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants— 

Cross-Border Application of the Margin 

Requirements, 81 FR 34818, May 31, 2016. 

2 Id. at 34853–54. 

3As I noted in my dissent, the Commission 

employs a principles-based, holistic approach for 

substituted compliance determinations under 

Commission Regulation 30.10 and for purposes of 

permitting direct access by U.S. customers to 

foreign boards of trade. Id. at 34853 n.5. 

4 Id. at 34853–54. 

Second, what is the problem with this 

particular comparability determination? 

The answer: Bankruptcy. Bankruptcy is 

something that we do not like to think about, 

but in finance, it is something that we must 

always consider when designing deals. We 

know the old adage: Hope for the best, but 

plan for the worst. In my work as a law firm 

partner and Acting Chair of the Securities 

Investor Protection Corporation (SIPC), I have 

seen too many bankruptcies. And there are 

three key differences in our margin rule and 

the Japanese margin rule that would leave 

our American companies operating under 

Japanese law vulnerable. The key differences 

are: 

1. Where the customer money is kept. Our 

rules require customer collateral to be held 

by a third party—not by either one of the 

counterparties. This is a safeguard for 

bankruptcy. If the money is held by one of 

the counterparties, then a bankruptcy court 

may use that money to meet the 

counterparty’s debts. Or in a stress event, the 

counterparty could potentially take the 

customer money to meet its obligation. If, 

however, the money is at a third party, it is 

far more likely that it will get back to the 

customers that provided it. Japanese law does 

not have a comparable rule. Thus, in a 

bankruptcy situation, U.S. customers may be 

unable to receive back their customer funds. 

This discrepancy is noted in the 

determination,3 but the staff states that the 

fact that the funds are segregated sufficiently 

mitigates against the risk. I disagree. In my 

experience with bankruptcies, I have learned 

that access to customer funds largely 

depends on the location of those funds. 

Third-party custodianship is an important 

safeguard. 

2. Transacting with counterparties in 

bankruptcy-risky jurisdictions. There are 

certain developing countries where there is 

little certainty that collateral will be there if 

there is a bankruptcy (non-netting 

jurisdictions), and/or where they do not 

adequately protect customer funds from that 

of the dealer (‘‘non-segregation 

jurisdictions’’). Under our rules, our U.S. 

dealers have to limit the way they trade with 

counterparties in these bankruptcyvulnerable jurisdictions because we are not 

confident that our American investors will 

get their money back in a bankruptcy 

scenario.4 These safeguards vary depending 

on the circumstances and include limiting 

the amount of business that our dealers can 

do with these counterparties, and limiting 

the type of acceptable collateral. Japan does 

not have these kinds of limits on their dealers 

who deal in these bankruptcy-vulnerable 

jurisdictions. Thus, the American companies 

operating in Japan could potentially have an 

unlimited number of deals with 

counterparties in these developing countries. 

This could put some of our major American 

financial firms, and thus our economy, at 

risk. 

3. Types of collateral allowed. There are 

significant differences in the treatment of 

collateral between our margin rule and the 

Japanese rule. First, while our rules limit 

daily variation margin to cash for dealer-todealer swaps, under Japanese law, variation 

margin could be in a number of much less 

liquid instruments. And second, while we 

require a 25% haircut for certain equities not 

included in the S&P 500, under Japanese law, 

equities included in major equity indices of 

certain designated countries just have a 15% 

blanket haircut.5 That means that we require 

our companies to value equities much more 

conservatively than under Japanese law. That 

means that in a crisis, American companies 

in Japan could be exchanging instruments 

that are virtually worthless since they cannot 

be readily converted to cash, thereby putting 

them in jeopardy. 

If these were insignificant differences, I 

would happily brush them aside and accept 

this comparability determination as is. But 

these issues could mean the difference 

between an orderly bankruptcy, and a 

disaster overseas that pulls down a 

significant American financial company, and 

potentially our economy. 

And last, how could we have fixed it? 

Fixing this is actually rather simple. We 

could provide a partial comparability 

determination—our American businesses 

could follow the Japanese margin rule except 

in the areas above where they would have to 

follow our rule. We have already done this 

in the current draft in the area of interaffiliate margin. We would simply extend the 

same treatment to these three areas as well. 

Unfortunately, that common sense 

approach was not followed here. And that is 

why I am unable to vote for it. While our two 

jurisdictions are partly comparable, there are 

significant areas in which there are material 

divergences. A partial comparability 

determination, as described above, would be 

the best way to strike the balance between 

international harmonization and protection 

of American financial companies that are 

located elsewhere but still directly linked to 

our economy. 

Appendix 4—Statement of 

Commissioner J. Christopher Giancarlo 

When the Commission issued its rule 

addressing the cross-border application of 

margin requirements for uncleared swaps in 

May of this year 1 I expressed my 

disagreement with the approach the 

Commission established as overly complex 

and unduly narrow.2 I also expressed my 

concern that the Commission’s ‘‘element-byelement’’ methodology for determining when 

substituted compliance with a foreign 

regulator’s margin regime would be 

permitted is contrary to the principles-based, 

holistic analysis the Commission has used in 

the past in certain circumstances 3 and could 

result in an impracticable patchwork of U.S. 

and foreign regulations for cross-border 

transactions.4

My concerns were realized last week when 

Asian swaps markets ground to a halt amidst 

confusion about the application of new 

margin rules to major market participants. 

Once again, there were reports of 

counterparties avoiding trading with U.S. 

persons. I believe this rule’s subjectivity and 

complexity will continue to be a source of 

regulatory uncertainty at the expense of U.S. 

financial firms, their employees and the 

American businesses they serve. 

I nevertheless support the comparability 

determination for Japan. In this instance, the 

Commission has appropriately recognized 

that certain differences between the U.S. 

margin regime and Japan’s margin regime 

achieve comparable outcomes. Wrong 

approach; right outcome. I therefore vote in 

favor of the determination. 

[FR Doc. 2016–22045 Filed 9–14–16; 8:45 am] 

BILLING CODE 6351–01–P 


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