September 30, 2021 

Chris Kirkpatrick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street NW 

Washington, DC 20581 

Re: Substituted Compliance Application for Japanese Swap Dealers from CEA 

Sections 4s(e)–(f) and Rules 23.101 and 23.105(d)–(e) 

Dear Mr. Kirkpatrick: 

We are submitting this application to request that the Commodity Futures Trading 

Commission (“Commission”) make a determination that compliance with the capital, financial 

reporting and related requirements of Japan specified herein (the “Japanese Capital & Reporting 

Framework”) by a nonbank swap dealer (“SD”) registered as a Type I Financial Instruments 

Business Operator (“FIBO”) in Japan (a “Japanese nonbank SD”) may satisfy the capital and 

financial reporting requirements applicable to a nonbank SD under Section 4s(e)–(f) of the 

Commodity Exchange Act (the “CEA”) and Rules 23.101 and 23.105(d)–(e) thereunder (the 

“Commission Capital & Reporting Requirements”).1 As we describe in more detail below, the 

Japanese Capital & Reporting Framework is designed to ensure the safety and soundness of 

Japanese nonbank SDs in a manner comparable to the Commission Capital & Reporting 

Requirements. 

I. Introduction 

In making a substituted compliance determination pursuant to Rule 23.106 in 

regards to the Commission Capital & Reporting Requirements, the Commission will consider 

whether the capital and financial reporting requirements of the foreign regulatory system “are 

comparable to the Commission’s corresponding capital adequacy and financial . . . reporting 

requirements.”2 The Commission has explained that its “approach to substituted compliance is a 

principles-based, holistic approach that focuses on whether the foreign regulations are designed 

with the objective of ensuring overall safety and soundness” in a manner that is comparable with 

the Commission’s capital and financial reporting requirements, rather than a “line-by-line 

assessment or comparison” of the foreign jurisdiction’s and the Commission’s regulatory 

requirements.3 

Rule 23.106 requires an applicant for substituted compliance to provide: 

 

1

 As used herein, a “nonbank” SD refers to an SD that does not have a Prudential Regulator as defined in Section 

1a(39) of the CEA. 

2

 17 C.F.R. § 23.106(a)(3). 

3

 Capital Requirements of Swap Dealers and Major Swap Participants, 85 Fed. Reg. 57462, 57521 (Sept. 15, 2020) 

(“CFTC Capital Final Rule Release”). 
 2 

 “A description of the objectives of the relevant foreign jurisdiction’s capital 

adequacy and financial reporting requirements”; 

 “A description (including specific legal and regulatory provisions) of how the 

relevant foreign jurisdiction’s capital adequacy and financial reporting 

requirements address the elements of the [Commission Capital & Reporting 

Requirements] . . . including, at a minimum, the methodologies for 

establishing and calculating capital adequacy requirements and whether such 

methodologies comport with any international standards, including Baselbased capital requirements”; and 

 “A description of the ability of the relevant foreign regulatory authority . . . to 

supervise and enforce compliance with the relevant foreign jurisdiction’s 

capital adequacy and financial reporting requirements.”4

In accordance with the requirements set forth in Rule 23.106, this application is 

organized as follows: In Section II.A, we provide an overview addressing general comparability 

of the Japanese Capital & Reporting Framework’s requirements and the Commission Capital & 

Reporting Requirements, including any general differences between the two sets of requirements 

and the consistency of the sets’ objectives. In Section III, we address the specific information 

that Rule 23.106 requires. 

II. For the reasons set forth below, the Japanese Capital & Reporting Framework is 

designed to ensure the safety and soundness of Japanese nonbank SDs in a manner 

comparable to the Commission Capital & Reporting Requirements. Overview 

A. Nonbank SD Requirements 

Under the Commission Capital & Reporting Requirements, a standalone, nonbank 

SD may elect the “Bank-Based Approach” or the “Net Liquid Assets Approach” for establishing 

its minimum capital requirements and computing its regulatory capital under Section 4s(e) of the 

CEA and Rule 23.101 thereunder (the “Commission Capital Requirements”).5 The Commission 

sought to provide this flexibility to SDs in order to allow an SD to choose the capital approach 

that best fits its business model and to mitigate competitive disparities that might otherwise arise 

were each SD required to follow the same capital approach.6 

Bank-Based Approach. The “Bank-Based Approach” is based on the capital 

requirements established by the Federal Reserve Board (“FRB”) for bank holding companies, 

 

4

 17 C.F.R. § 23.106(a)(2).F 

5

 Rule 23.101(a)(2) permits a standalone SD that is “predominantly engaged in non-financial activities” to elect a 

third approach to comply with the Commission’s capital requirements based on the tangible net worth of the SD. 

Because no currently registered Japanese SD would be eligible for this approach, we do not address it. 

6

 See CFTC Capital Final Rule Release, 85 Fed. Reg. at 57480. 
 3 

which are codified in the FRB’s Part 217 regulations.7 Under the Bank-Based Approach, an SD 

must maintain: 

 Common equity tier one capital (“Common Equity Tier 1”) of at least $20 

million; 

 Common Equity Tier 1 equal to at least 6.5 percent of the SD’s risk-weighted 

assets (“RWAs”); 

 Common Equity Tier 1, additional tier one capital (“Additional Tier 1”), and 

tier 2 capital (“Tier 2” and collectively, “total capital”) equal to at least 8 

percent of the SD’s RWAs; or 

 Total capital equal to 8 percent of the SD’s uncleared swap margin amount, 

i.e., the aggregate amount of initial margin (“IM”) that the SD would be 

required to collect pursuant to the Commission’s uncleared swap margin rules 

from each counterparty for each outstanding uncleared swap position 

(including exempt and excluded swaps) calculated on a counterparty-bycounterparty basis. 

An SD that follows the Bank-Based Approach will calculate its Common Equity 

Tier 1, Additional Tier 1, Tier 2 and RWAs in accordance with the FRB’s Part 217 requirements. 

Net Liquid Assets Approach. The “Net Liquid Assets Approach” is based on 

the capital requirements adopted by the Securities and Exchange Commission (“SEC”) for a 

security-based swap dealer that does not have a Prudential Regulator. These requirements, 

which are codified in SEC Rule 18a-1 (“Rule 18a-1”), mirror the net liquid assets approach that 

Rule 15c3-1 of the Securities Exchange Act of 1934 applies to securities broker-dealers, 

requiring a nonbank SD to compute its “net capital” requirement by determining its net worth 

according to U.S. generally accepted accounting principles (“GAAP”) and then subtracting 

certain illiquid assets, adding certain subordinated liabilities, and making specified additional 

adjustments. These additional adjustments include certain standardized or model-based market 

and credit risk deductions, as well as penalty charges for operational risks. An SD that elects the 

Net Liquid Assets Approach must maintain net capital at the greater of $20 million or 2 percent 

of its uncleared swap margin amount. An SD permitted to use models to compute market or 

credit risk deductions is also required to maintain tentative net capital, as defined in SEC Rule 

18a-1, of $100 million. 

The Commission Financial Reporting Requirements. Pursuant to Rule 

23.105(d), a nonbank SD must file with the Commission and a registered futures association of 

which it is a member monthly, unaudited financial reports as of the close of business each month. 

Rule 23.105(e) requires a nonbank SD to file with the Commission and a registered futures 

association of which it is a member annual, audited financial reports no later than 60 days after 

the close of the nonbank SD’s fiscal year-end. These reports must include statements of 

financial condition, income/loss, changes in liabilities subordinated to the claims of general 

 

7

 See 17 C.F.R. § 23.101(a)(1)(i); 12 C.F.R. Part 217. 
 4 

creditors, changes in ownership equity and compliance with and calculation of the required net 

capital. In addition, the annual, audited financial report must include a reconciliation of any 

material differences between the year-end unaudited financial report and the audited financial 

report. 

The Japanese Capital & Reporting Framework. The Japanese legal 

framework for financial regulation is mainly comprised of Acts, Cabinet Orders, Ministerial 

Orders and Financial Services Agency (“FSA”) Notices. With regard to the Japanese Capital & 

Reporting Framework, Financial Instruments and Exchange Act (Act No. 25 of 1948) (“FIEA”) 

and its related order, Cabinet Office Order on Financial Instruments Business (Cabinet Office 

Order No. 52 of 2007) (“COO”) stipulate the prudential capital and financial reporting 

requirements applicable to Type I FIBOs, including Japanese nonbank SDs.8 FIEA, COO and 

related FSA Notices impose mandatory capital and reporting requirements. Comprehensive 

Guidelines for Supervision of Financial Instruments Business Operators, etc. (“Supervisory 

Guidelines for FIBO”) also supplement the framework.9 The technical requirements for FIBOs to 

calculate capital adequacy ratios are specified in the FSA Notice No.59 of 2007 (“Notice on 

Capital”) in accordance with Article 177 (8) and Article 178 (1) of the COO. 

The Japanese Capital Framework. The capital and related requirements of Japan 

(the “Japanese Capital Framework”) require an FIBO, including a Japanese nonbank SD, to hold 

and maintain a “capital adequacy amount” equal to 120 percent or more of its “risk equivalent 

amount.” 1011 A Japanese nonbank SD’s capital adequacy amount is calculated as the Japanese 

 

8

 Businesses categorized as Type I Financial Instruments Business (Article 28(1) of the FIEA) can only be 

conducted by Type I FIBOs registered under Article 29 of the FIEA. Type I Financial Instruments Business includes 

market transactions of derivatives and foreign market derivatives transactions pertaining to certain highly liquid 

securities and over-the-counter transaction of derivatives. 

9

 In order to implement and reinforce the legal framework, the FSA has developed and published supervisory 

guidelines. They are meant for FSA staff, but are public documents, which are expected to be followed by the 

applicable financial institutions. Financial institutions are consulted in connection with the establishment of, and any 

amendments to, the guidelines. Supervision and enforcement are conducted based on the supervisory guidelines. 

10 Article 46-6 (2) of the FIEA, Article 176 of the COO and Section IV-2-1 (Preciseness of Capital Adequacy Ratio) 

of the Supervisory Guidelines for FIBO 

11 Under the FIEA, there are three types of capital adequacy ratio applicable to FIBOs depending on their size and 

group structure and whether they have subsidiaries. The capital adequacy ratios that may be required to be 

calculated by FIBOs under the FIEA and the parties to which each type of standard applies are as follows: 

(1) The capital adequacy ratio prescribed in Article 46-6 (1) of the FIEA (“Non-consolidated Capital Adequacy 

Ratio”): Applicable to all FIBOs 

(2) Standards for indicating the soundness in the management of a Special Financial Instruments Business 

Operator as set forth in Article 57-5 (1) of the FIEA (“Consolidated Capital Adequacy Ratio”): Applicable 

to an FIBO which is a Special Financial Instruments Business Operator as set forth in Article 57-2 of the 

FIEA and has a Subsidiary Corporation, etc. as set forth in Article 57-2 (9) of the FIEA 

(3) Standards for indicating the soundness in the management of a Highest Designated Parent Company as set 

forth in Article 57-17 (1) of the FIEA: Where an FIBO is a Special Financial Instruments Business 

Operator, and the parent company of the Special Financial Instruments Business Operator or its subsidiary 

corporation, etc. is designated as the Designated Parent Company as set forth in Article 57-12 (3) of the 

FIEA, and the Designated Parent Company is the Highest Designated Parent Company as set forth in 

Article 57-12 (3) of the FIEA, the standards shall apply to the Highest Designated Parent Company. (There 
 5 

nonbank SD’s equity, plus certain subordinated debt instruments issued by the SD (subject to a 

cap),12 less the SD’s fixed assets. The risk equivalent amount is calculated as the sum of (i) the 

credit risk weight charges applicable to the SD’s assets and transactions (the “counterparty risk 

equivalent amount”), (ii) the market risk charges applicable to the SD’s assets and transactions 

(the “market risk equivalent amount”), and (iii) charges to capture operational and similar risks 

arising from the SD’s activities (the “basic risk equivalent amount”). 

The Japanese Financial Reporting Framework. The financial reporting and 

related requirements of Japan (the “Japanese Financial Reporting Framework”) require an FIBO, 

including a Japanese nonbank SD, to submit reports on its business and financial conditions on a 

regular basis. Such reports include the financial status report, including a balance sheet and 

income statement, and a statement of the capital adequacy ratio.

General Comparability. Like the Commission Capital & Reporting 

Requirements, the Japanese Capital & Reporting Framework is designed to ensure the safety, 

soundness and financial strength of nonbank SDs. 

Capital Requirements. In accordance with the capital framework issued by the 

Basel Committee on Banking Supervision (“BCBS”), the Bank-Based Approach and the 

Japanese Capital Framework both require a nonbank SD to maintain a quantity of high quality 

capital that is sufficient, based on the SD’s activities, to absorb potential losses the SD may 

incur. Both the Net Liquid Assets Approach and the Japanese Capital Framework require that a 

nonbank SD maintains sufficiently liquid and high quality assets to meet its obligations to 

customers, counterparties and other creditors if the firm were to experience financial distress. 

Market and Credit Risk Charges. For SDs with approval to calculate market risk 

using internal models, both the Commission Capital Requirements and the Japanese Capital 

Framework permit firms to apply risk-based market charges that are consistent with the value-atrisk (“VaR”) specifications set forth in Basel 2.5 standards.13 In addition, the Commission 

 

are only two holding companies designated as Highest Designated Parent Companies as of the date of this 

letter.) 

All of the Japanese nonbank SDs subject to the Commission Capital & Reporting Requirements fall into the type 

(1) as of the date of this letter and we only refer to the articles related to the Non-consolidated Capital Adequacy 

Ratio in this letter thereafter. 

12 The subordinated debt instrument must satisfy following requirements in order to qualify as part of the capital 

adequacy amount: 

(i) the instrument has special provisions setting forth subordinated conditions on the principal and interest payment; 

(ii) the instrument is not secured; 

(iii) the instrument has a minimum original maturity of more than 5 years (“long-term subordinated debt”) or at least 

2 years (“short-term subordinated debt”); 

(iv) if there are any special provisions on the early redemption, that such early redemption is made voluntarily by the 

FIBO and requires the prior approval of the FSA; and 

(v) the instrument has special provisions setting forth that no interest payment is made if such payment by the FIBO 

would result in a breach of the provisions Article 46-6 (2) of the FIEA (i.e. the capital adequacy ratio falls below 

120 percent). 

13 Compare 17 C.F.R. § 23.100 (providing for an SD that is approved to use internal models to calculate market and 

credit risk to calculate its RWAs using Subparts E and F of 12 C.F.R. Part 217), 12 C.F.R. § 217.205(b), 17 C.F.R. 

§ 23.101(a)(1)(ii) (providing for an SD that elects the Net Liquid Assets Approach to calculate its net capital in 
 6 

Capital Requirements and the Japanese Capital Framework permit firms with credit risk model 

approval to apply model-based credit risk charges to their derivatives counterparties.14 For firms 

without model approval, both the Commission Capital Requirements and the Japanese Capital 

Framework provide for standardized approaches for market and credit risk charges and 

deductions, depending on the asset or exposures. In the case of derivatives transactions in 

particular, both the Commission Capital Requirements and the Japanese Capital Framework 

provide for an SD without model approval to use the current exposure method (“CEM”) to 

calculate its exposure. Both rule sets also impose operational risk capital requirements. 

Minimum Required Capital. The minimum capital levels required by the 

Japanese Capital Framework are robust and comparable to the minimum levels required by the 

Commission Capital Requirements. As noted above, a Japanese nonbank SD is required to 

maintain a capital adequacy amount that is equal to 120 percent of the SD’s risk equivalent 

amount. This is substantially higher than the 8 percent of total RWAs required under the BCBS 

framework and the Bank-Based Approach. In light of this difference, the Japanese Capital 

Framework contains certain adjustments from the BCBS methodology for calculating the risk 

equivalent amount. A number of these adjustments are comparable to those provided for under 

the Net Liquid Assets Approach and in practice frequently yield higher requirements than the 

Bank-Based Approach. 

For example, like the Net Liquid Assets Approach, the Japanese Capital 

Framework does not require a Japanese SD to multiply the market risk equivalent amount by 

12.5 to obtain an RWA number and then maintain capital equal to 6.5 or 8 percent of those 

RWAs; instead, a Japanese nonbank SD must maintain capital equal to 120 percent of the market 

risk equivalent amount, which translates into an effective capital requirement of 9.6 percent of 

RWAs. Stated differently, although the Bank-Based Approach and the Japanese Capital 

Framework set forth substantially similar measures for calculating market risk using models, the 

Japanese Capital Framework requires an SD to hold capital equal to 120 percent of the amount 

the model yields, while the Bank-Based Approach requires capital equal to only 100 percent of 

that amount (i.e., 8 percent of the product of the amount and 12.5). 

With respect to credit risk, the standardized counterparty credit risk weights under 

the Japanese Capital Framework range from 0 percent to 25 percent, while those applicable 

under the BCBS framework and the Bank-Based Approach generally range from 0 percent to 

150 percent. But again due to the different approach taken towards minimum capital, the 

Japanese Capital Framework yields a higher effective capital requirement. For example, for an 

exposure to a counterparty that is subject to the highest counterparty credit risk weight, the 

Japanese Capital Framework requires an SD to hold capital equal to 30 percent of the exposure 

(i.e., 25 percent risk weight multiplied by 120 percent capital requirement). By contrast, the 

 

accordance with Rule 18a-1), 17 C.F.R. § 23.102a(a), (i) and 17 C.F.R. § 240.18a-1(e)(1) with Article 10 through 

14-11 of the Notice on Capital. 

14 Compare 17 C.F.R. § 23.100 (providing for an SD to use internal models to calculate market and credit risk to 

calculate its RWAs using Subparts E and F of 12 C.F.R. Part 217), Subpart E of 12 C.F.R. part 217, 17 C.F.R. 

§ 23.101(a)(1)(ii) (providing for an SD that elects the Net Liquid Assets Approach to calculate its net capital in 

accordance with Rule 18a-1) and 17 C.F.R. § 240.18a-1(e)(2) with Article 15-2 of the Notice on Capital. 
 7 

Bank-Based Approach requires capital equal to only 12 percent of the exposure (i.e., 150 percent 

risk weight multiplied by 8 percent capital requirement). 

The minimum capital levels required by the Japanese Capital Framework may 

also be compared in some respects to the 8 percent of the uncleared swap margin requirement 

under the Bank-Based Approach. As the Commission has noted, the uncleared swap margin 

requirement “provides a floor based on a measure of the risk of the positions, the volume of the 

positions, the number of counterparties and the complexity of the operations of the” SD.15 The 

Commission further explained that the requirement covers “potential operational risk, legal risk, 

and liquidity risk.”16 As noted above, in calculating its risk equivalent amount for purposes of the 

Japanese Capital Framework, a Japanese nonbank SD must incorporate amounts designed to 

capture not only market and credit risk, but also risks which may arise in the course of executing 

ordinary business, such as errors in business handling. Because they cover the full range of a 

firm’s exposures, not just those related to swaps, these exposures amounts will generally yield 

capital requirements that substantially exceed 8 percent of the SD’s uncleared swap margin 

amount.17 In addition, a Japanese nonbank SD is not permitted to count fixed assets toward its 

capital requirement and is subject to liquidity monitoring by the FSA. As a result, although the 

Japanese Capital Framework does not have a direct analogue to the 8 percent uncleared swap 

margin requirement, it has various other measures that achieve the same regulatory objective of 

ensuring that an SD maintains an amount of capital that is sufficient to cover the full suite of 

risks it may face. 

Considering that all Japanese nonbank SDs would be eligible to elect the BankBased Approach, we think that the foregoing comparison to that approach should suffice to 

establish the comparability of the Japanese Capital Framework to the Commission Capital 

Requirements. But in addition, for the reasons discussed above, the minimum capital levels 

required by the Japanese Capital Framework may be compared in some respects to the sum of 

the 2 percent uncleared swap margin amount requirement and market and credit risk charges 

applicable under the Net Liquid Assets Approach. 

Liquidity. Consistent with the approach of CFTC Rule 23.600, the FSA works 

with Japanese nonbank SDs to ensure they have a risk management program in place to manage 

liquidity risk. In addition, the Japanese Capital Framework requires a Japanese nonbank SD to 

deduct from its capital adequacy amount 100 percent of the carrying value of any fixed assets. 

This is similar to the Net Liquid Assets Approach, which, in lieu of a specific liquidity 

requirements, requires nonbank SDs to deduct from their net capital 100 percent of the carrying 

value of unsecured receivables (except that an SD with credit risk model approval may instead 

apply a credit risk weighted charge for receivables to certain derivatives counterparties) and 

other assets that cannot readily be converted into cash, as well as securities that have no ready 

market.18 

 

15 CFTC Capital Final Rule Release, 85 Fed. Reg. at 57485. 

16 Id. 

17 Informal quantitative analysis by industry participants generally confirms this conclusion. 

18 17 C.F.R. § 23.101(a)(ii)(A); 17 C.F.R. § 240.18a-1(a)(1)(iv). 
 8 

In addition, liquidity risks are generally less significant to Japanese nonbank SDs 

than standalone U.S. SDs because, if a Japanese nonbank SD faces severe financial distress, it 

will be subject to an orderly resolution framework that is designed to provide the SD with 

sufficient liquidity to meet customer and counterparty obligations while winding down. Also, a 

Japanese SD will not be subject to liquidation as a commodity broker under the U.S. Bankruptcy 

Code. 

Moreover, U.S. customer property should be at minimal risk if a Japanese 

nonbank SD were to experience financial distress, as a Japanese nonbank SD is required to 

segregate IM from its assets by either placing it with a third-party holder or custodian or via 

other legally binding arrangements, making the IM remote in the case of the firm’s default or 

insolvency.19

Financial Reporting Requirements. The Commission’s financial reporting 

requirements under Section 4s(f) of the CEA and Rule 23.105(d)–(e) thereunder (the 

“Commission Financial Reporting Requirements”) and the Japanese Financial Reporting 

Framework provide the relevant regulatory authorities with audited information at regular 

intervals about the financial and capital positions of an SD in order to ensure the safety and 

soundness of the SD. Both the Japanese Financial Reporting Framework and the Commission 

Financial Reporting Requirements require a firm to disclose financial statements containing 

information on the firm’s financial condition and compliance with capital requirements. In each 

case, the reporting requirements under the regimes provide a comprehensive view of the 

financial condition of a firm, including the firm’s compliance with applicable capital 

requirements and overall financial health. 

III. Comparability Analysis 

A. Comparability of the Japanese Capital Framework and the Commission 

Capital Requirements 

1. Comparability of Objectives 

The Commission Capital Requirements and the Japanese Capital Framework have 

the same regulatory objectives. Both are aimed at ensuring the safety and soundness of nonbank 

SDs in order to protect counterparties and customers and the derivatives and financial markets 

more generally. The Bank-Based Approach, consistent with the Basel capital framework, 

achieves this goal by requiring a nonbank SD to maintain a sufficient cushion against losses. 

The Net Liquid Assets Approach, meanwhile, furthers safety and soundness by requiring a 

nonbank SD to maintain enough liquid assets to satisfy customer and counterparty claims in the 

event of a distress scenario. 

The Japanese Capital Framework seeks to achieve the objectives of both the 

Bank-Based Approach and the Net Liquid Assets Approach. 

 

19 Article 40 (ii) of the FIEA and Article 123 (1) (xxi)-11 (d) of the COO 
 9 

As with the Bank-Based Approach and the Basel capital framework, the Japanese 

Capital Framework is intended to ensure that a Japanese nonbank SD maintains a financial base 

sufficient to meet the risks to which it is exposed. In addition, as with the Net Liquid Assets 

Approach, the Japanese Capital Framework is also intended to ensure that a Japanese nonbank 

SD maintains sufficient liquid assets to withstand the losses that may arise even when various 

risks materialize and satisfy customer obligations even in the context of financial distress. 

2. Comparability of Methodologies and Outcomes 

i. Measurement of Assets and Total Risk Exposure 

Japanese nonbank SDs are subject to bank-like capital requirements that, 

consistent with the BCBS framework, require a firm to hold sufficient amounts of equity and 

subordinated debt. The principal determinant of the amount of regulatory capital a Japanese 

nonbank SD must maintain is the firm’s risk equivalent amount. To calculate this amount, a 

Japanese SD must risk weight its assets and exposures using specified standardized weights or 

approved internal model-based methodologies. More specifically, the risk equivalent amount 

consists of: 

(i) the market risk equivalent amount, meaning the amount equivalent to possible 

risks which may accrue due to the fluctuations in the prices of the securities and other assets and 

transactions held or other reasons,20 which corresponds to market risk in the BCBS framework; 

(ii) the counterparty risk equivalent amount, meaning the amount equivalent to 

possible risks which may accrue due to the default in performance of contracts by the 

counterparties to transactions or any other reason,21 which corresponds to credit risk in the BCBS 

framework; and 

(iii) the basic risk equivalent amount, meaning the amount equivalent to possible 

risks which may accrue in the course of executing ordinary business, such as errors in business 

handling,22 which corresponds to operational risk in the BCBS framework. 

This approach is comparable to the Bank-Based Approach, which similarly 

subjects a nonbank SD to bank-like capital requirements that require the SD to hold sufficient 

regulatory capital based on the risk of its activities and positions.23 

In addition, the Japanese Capital Framework requires a Japanese nonbank SD to 

deduct from its capital adequacy amount the carrying value of its fixed assets. 24 This approach is 

 

20 Article 178 (1) (i) of the COO and Article 10 through 14 of the Notice on Capital 

21 Article 178 (1) (ii) of the COO and Article 15 through 15-7 of the Notice on Capital. An FIBO is required to 

calculate the market risk equivalent and the counterparty risk equivalent each business day in a reasonable method 

(Article 178 (2) of the COO). 

22 Article 178 (1) (iii) of the COO and Article 16 of the Notice on Capital 

23 17 C.F.R. § 23.101(a)(1)(i). 

24 The breakdown of the fixed assets, etc. to be deducted from the amount of capital are listed in Article 177 of the 

COO. 
 10 

comparable to the Net Liquid Assets Approach, which requires an SD to deduct from net capital 

unsecured receivables and certain other illiquid assets.25 

Additionally, considering the scope of exposures that must be taken into account 

in the risk equivalent amount and the way those exposures are calculated, the minimum capital 

levels required by the Japanese Capital Framework may be compared in some respects to the 

sum of the 2 percent uncleared swap margin amount requirement and market and credit risk 

charges applicable under the Net Liquid Assets Approach, as well as the 8 percent of the 

uncleared swap margin amount requirement under the Bank-Based Approach. 

a. Derivative Instruments and Marketable Securities 

Under the Japanese Capital Framework, as under the Commission Capital 

Requirements, derivative instruments and marketable securities are subject to charges for market 

and credit risk. As under the Bank-Based Approach and the BCBS capital framework more 

generally, these charges are added to the nonbank SD’s risk exposure calculation. Although the 

Net Liquid Assets Approach incorporates market and credit risk by providing for deductions 

from net capital, the ultimate objective, which is to require greater capital to account for market 

and credit risk, is the same as under the Bank-Based Approach and the BCBS framework. 

The comparability between the risk-weighted approach under the Japanese 

Capital Framework and the Commission Capital Requirements can be illustrated by comparing 

their respective approaches to market and credit risk. 

1. Market Risk 

In terms of market risk, the Bank-Based Approach requires a nonbank SD to 

calculate additions to its RWAs for derivatives positions and marketable securities using either 

the Commission’s standardized haircuts or, if approved to use models, market-risk models. In 

either case, the SD must multiply the market risk amount by 12.5. This effectively requires a 

nonbank SD subject to the Bank-Based Approach to hold capital equal to the full amount of the 

market risk amount. The Net Liquid Assets Approach similarly requires a nonbank SD to take 

certain net capital deductions for its derivatives positions and marketable securities using either 

standardized haircuts or, if approved to use internal models, market risk models. The Net Liquid 

Assets Approach, however, does not require the SD to multiply the market risk amount by 12.5, 

since the amount is directly deducted from the SD’s net capital. 

Consistent with the Commission Capital Requirements, the Japanese Capital 

Framework requires Japanese nonbank SDs to calculate a market risk equivalent amount using 

either a standardized approach or, if approved to use models, market risk models. In view of the 

requirement that Japanese nonbank SDs maintain a capital adequacy amount of 120 percent of 

the risk equivalent amount, the market risk equivalent amount is directly added to the risk 

equivalent amount (without any multiplier). This effectively requires that a Japanese nonbank 

SD hold regulatory capital equal to no less than 120 percent of its market risk equivalent amount, 

instead of 100 percent as under the Bank-Based Approach. This translates into an effective 

 

25 See CFTC Capital Final Rule Release, 85 Fed. Reg. at 57572. 
 11 

capital requirement of 9.6 percent of RWAs in relation to market risk, as compared to the 8 

percent RWA requirement under the Bank-Based Approach. 

The Bank-Based Approach requires that a nonbank SD that is approved to use 

models to calculate market risk do so in accordance with Subpart F of the FRB’s Part 217 

regulations (“Subpart F”), while Appendix A to Rule 23.102 specifies the model requirements 

for an SD that elects the Net Liquid Assets Approach. Both Subpart F and Appendix A to Rule 

23.102 are based on the internal model approach under Basel 2.5.26 The Commission will 

provisionally permit the use of models approved by a foreign regulator whose capital 

requirements are consistent with the Basel framework.27 

Similarly, the Japanese Capital Framework’s model-based methodology is based 

on the Basel 2.5 standard.28 The Japanese Capital Framework, Subpart F and Appendix A to 

Rule 23.102 all incorporate relevant aspects of Basel 2.5 in terms of requiring firms with model 

approval to use a VaR model with a 99 percent, one-tailed confidence level with (i) price 

changes equivalent to a ten business-day movement in rates and prices, (ii) effective historical 

observation periods of at least one year and (iii) at least monthly data set updates.29 All three 

also implement aspects of Basel 2.5, such as requirements to calculate a “stressed” VaR.30 All 

three also permit firms to calculate specific risk, incremental risk and comprehensive risk of 

correlation trading using a model-based approach, subject to approval.31

2. Credit Risk 

In terms of credit risk, the Bank-Based Approach provides for the credit risk of a 

nonbank SD’s positions to be incorporated into the calculation of its RWAs. Under the BankBased Approach, a nonbank SD that is not approved to use internal models to calculate credit 

 

26 Compare 17 C.F.R. § 23.100 (providing for an SD that is approved to use internal models to calculate market and 

credit risk to calculate its RWAs using Subparts E and F of 12 C.F.R. Part 217), Subpart F of 12 C.F.R., 

§ 23.101(a)(1)(ii) (providing for an SD that elects the Net Liquid Assets Approach to calculate its net capital in 

accordance with Rule 18a-1) and 17 C.F.R. § 23.102a, with Basel Committee on Banking Supervision, Revisions to 

the Basel II Market Risk Framework (2011), https://www.bis.org/publ/bcbs193.pdf (describing the revised internal 

model approach under Basel 2.5). 

27 17 C.F.R. § 23.102(f). 

28 Compare Article 10 through 14-11 of the Notice on Capital with Revisions to the Basel II Market Risk 

Framework. 

29 Compare 17 C.F.R. § 23.100 (providing for an SD that is approved to use internal models to calculate market and 

credit risk to calculate its RWAs using Subparts E and F of 12 C.F.R. Part 217), 12 C.F.R. § 217.205(b), 17 C.F.R. 

§ 23.101(a)(1)(ii) (providing for an SD that elects the Net Liquid Assets Approach to calculate its net capital in 

accordance with Rule 18a-1), 17 C.F.R. § 23.102a(a), (i) and 17 C.F.R. § 240.18a-1(e)(1) with Article 13 (3) (i), (ii) 

and (iv) of the Notice on Capital. 

30 17 C.F.R. § 23.100 (providing for an SD that is approved to use internal models to calculate market and credit risk 

to calculate its RWAs using Subparts E and F of 12 C.F.R. Part 217); 12 C.F.R. § 217.206, 17 C.F.R. 

§ 23.101(a)(1)(ii) (providing for an SD that elects the Net Liquid Assets Approach to calculate its net capital in 

accordance with Rule 18a-1); 17 C.F.R. § 23.102a(j); Article 10-2 of the Notice on Capital. See also CFTC Capital 

Final Rule Release, 85 Fed. Reg. at n.332 (citing the BCBS’ Revisions to the Basel II Market Risk Framework for 

an explanation of the implementation of the stressed VaR requirement). 

31 Article 13-2 and 14-9 of the Notice on Capital 
 12 

risk will compute its RWAs in accordance with Subpart D of the FRB’s Part 217 regulations, 

which sets forth a standardized methodology for calculating the risk weights applicable to a bank 

holding company’s assets. A nonbank SD approved to use internal models will calculate its 

RWAs in accordance with Subpart E of the FRB’s Part 217 regulations, which sets forth a 

models-based methodology for calculating risk weights applicable to a bank holding company’s 

assets. The Net Liquid Assets Approach, in turn, requires a nonbank SD to take a net capital 

deduction for unsecured current exposure and uncollected IM, but a firm with model approval 

may instead multiply that deduction by 8 percent and further by a credit risk weight. 

Consistent with these approaches, the Japanese Capital Framework requires a 

Japanese nonbank SD to calculate its counterparty risk equivalent amount by multiplying its 

exposure under a given transaction by the specific risk weight applicable to the counterparty. 

Non-governmental financial institutions, general corporations and individuals carry risk weights 

between 1.2 and 25 percent depending, in the case of financial institutions and corporations, on 

the credit rating of the entity. If no credit rating is available for a general corporate counterparty 

(e.g., one not subject to derivatives margin requirements), the SD must generally apply a 25 

percent risk weight.32 This effectively results in a capital requirement equal to 30% of the 

exposure to the counterparty, as compared to an 8% capital requirement that would apply to a 

general corporate counterparty under the Bank-Based Approach.33 

With respect to calculating the amount of the exposure arising under a derivative 

transaction, the Japanese Capital Framework requires a Japanese nonbank SD that is not 

approved to use credit risk models to calculate its exposure using the CEM, which is one of the 

standardized methods that a nonbank SD may use to calculate its credit exposure under a 

derivative transaction pursuant to the Bank-Based Approach. If a Japanese nonbank SD is 

permitted to use models for calculating credit risk, the SD may, as under the Bank-Based 

Approach, use its internal model to calculate the credit exposure amount.34 

Accordingly, the Japanese Capital Framework prescribes an approach for 

calculating credit risk charges that is largely comparable to (and in many instances will result in 

higher capital requirements than) the approaches set forth in the Commission Capital 

Requirements. 

3. Additional Measures and Supervision 

Although the FSA does not impose liquidity requirements on Japanese nonbank 

SDs, it closely assesses and monitors whether they are properly managing their liquidity risk. 

Through monthly off-site monitoring reports and hearings based on these reports, the FSA strives 

to identify and keep track of the status of a Japanese nonbank SD’s liquidity risk and its risk 

 

32 Article 15 (3) of the Notice on Capital 

33 See 12 C.F.R. § 217.32(f). 

34 Article 15-2 of the Notice on Capital 
 13 

management, and when necessary, request submission of reports pursuant to Article 56-2 (1) of 

the FIEA and encourage efforts for improvement.35

In addition to that, an Early Warning System based on Pillar II of the BCBS 

framework has been introduced by the FSA. The Early Warning System is a framework whereby 

remedial actions are prompted to Japanese nonbank SDs with capital adequacy ratios that are 

above the required minimum as well as the thresholds for prompt corrective action (described 

below), but that meet specified criteria, such as a significant change in capital adequacy. For 

such SDs, the FSA will look to quickly identify risks to which the SD is exposed and order steps 

to mitigate those risks.36 

b. Other Types of Assets and Exposures 

Under the Net Liquid Assets Approach, other types of proprietary assets and 

exposures are generally subject to a 100 percent deduction to net capital in order to address 

liquidity risk. Conversely, the Bank-Based Approach subjects each asset to the risk weight 

approach described above. 

As noted above, considering that all Japanese nonbank SDs would be eligible to 

elect the Bank-Based Approach, we think that a comparison to that approach should suffice to 

establish the comparability of the Japanese Capital Framework to the Commission Capital 

Requirements. But, to the extent that a comparison to the Net Liquid Assets Approach is 

relevant, we note that the Japanese Capital Framework requires fixed assets to be deducted from 

the capital adequacy amount. This requirement, like the 100 percent deduction for illiquid assets 

under the Net Liquid Assets Approach, is designed to ensure that a Japanese nonbank SD has 

sufficient liquid assets to withstand the losses that may arise even when various risks materialize 

and is not forced into insolvency or other default by engaging in a fire sale of fixed assets 

necessary for operations. In addition, as noted above, the FSA closely monitors such SDs’ 

liquidity risks and works with them to ensure that they are property managing that risk. This 

approach is consistent with the Commission’s approach under Regulation 23.600.37

Furthermore, Japan has implemented margin requirements38 that require a 

Japanese nonbank SD to segregate IM posted by counterparties by way of trust or other similar 

methods so that the posting party will be able to recover the IM without delay if the receiving 

 

35 IV-2-5 (Control Environment for Managing Liquidity Risk) of the Supervisory Guidelines for FIBO 

36 IV-2-6 (Early Warning System) of the Supervisory Guidelines for FIBO and “Implementation Framework of the 

Second Pillar of Basel II” published by the FSA on November 22, 2005. 

<https://www.fsa.go.jp/news/newse/e20051122/01.pdf> 

37 Moreover, the resolution framework in Japan is distinguishable from that in the U.S. Specifically, a Japanese 

nonbank SD that is in deterioration will be subject to an orderly resolution arrangement that contemplates the 

provision of liquidity while the Japanese nonbank SD winds down its operations. Article 126-2(3) of the Deposit 

Insurance Act. We consider this distinction to be relevant because a key rationale for the 100 percent deduction for 

unsecured receivables and certain other assets under the Net Liquid Assets Approach is the absence of a similar 

liquidity facility for U.S. nonbank SDs. 

38 Article 40 (ii) of the FIEA and Article 123 (1) (xxi)-11 (d) of the COO 
 14 

party becomes insolvent. This may help to ensure a counterparty is able to recover its IM in the 

event of the SD’s failure. 

ii. Qualifying Components of Capital 

1. Minimum Capital Requirements 

The Net Liquid Assets Approach permits a nonbank SD to include both equity 

capital and satisfactory subordinated debt as net capital by permitting the SD to exclude 

subordinated liabilities from the net worth calculation, with satisfactory subordinated debt 

allowed to comprise up to 70 percent of the sum of the SD’s subordinated debt and equity.39

Under the Bank-Based Approach, an SD must maintain the following components 

of regulatory capital:40 

 Common Equity Tier 1, which is generally limited to retained earnings and 

common equity; and 

 Additional Tier 1 and Tier 2 capital, which include certain preferred stock and 

subordinated debt instruments.41

Under the Japanese Capital Framework, the components of capital are similar to 

the components of regulatory capital required under the Bank-Based Approach, as they include: 

 Basic items, which are composed of the stated capital, the payment for an 

application for new shares, the capital surplus, the earned surplus, the negative 

valuation difference on available-for-sale securities,42 and own treasury 

stocks;43 and 

 Supplemental items, which provide an additional layer of supplementary 

capital that includes the positive valuation difference on available-for-sale 

securities44 and certain subordinated debt instruments.45

Furthermore, consistent with both the Bank-Based Approach, the Japanese 

Capital Framework requires that no less than half of the capital adequacy amount consist of 

 

39 17 C.F.R. § 240.18a-1(c)(1), (g). 

40 See 17 C.F.R. § 23.101(a)(1)(i); 12 C.F.R. §§ 217.20(b) (Common Equity Tier 1), 217.20(c) (Additional Tier 1), 

217.20(d) (Tier 2). 

41 See generally 12 C.F.R. § 217.20. An SD that follows the Bank-Based Approach can only include subordinated 

debt in its regulatory capital if such subordinated debt would be eligible to be treated as net capital under the Net 

Liquid Assets Approach. 17 C.F.R. § 23.101(a)(1)(i)(B). 

42 i.e. unrealized holding loss on securities 

43 Article 176 (1) (i) through (vi) of the COO 

44 i.e. unrealized holding gains on securities 

45 Article 176 (1) (vii) of the COO 
 15 

equity (i.e., the basic items) and further puts caps46 on the aggregate amount of subordinated debt 

instruments that a Japanese nonbank SD may count towards its capital adequacy amount. 

Accordingly, each approach permits firms to count both equity and certain 

subordinated debt towards their capital requirements, with the Japanese Capital Framework and 

the Bank-Based Approach requiring firms to maintain a larger portion of their required capital as 

high-quality equity, as compared to the Net Liquid Assets Approach. 

iii. Required Minimum Amounts of Capital 

As noted above, the Bank-Based Approach requires nonbank SDs to maintain: 

 Common Equity Tier 1 of at least $20 million; 

 Common Equity Tier 1 equal to at least 6.5 percent of the SD’s RWAs; 

 Total capital equal to at least 8 percent of the nonbank SD’s RWAs; or 

 Total capital equal to 8 percent of its uncleared swap margin.47 

The Net Liquid Assets Approach requires a nonbank SD without model approval 

to maintain net capital, subject to the adjustments described above, at the higher of $20 million 

or 2 percent of its uncleared swap margin amount.48 Under the Net Liquid Assets Approach, a 

nonbank SD with model approval is also required to maintain tentative net capital, which is the 

net capital before taking certain market and credit risk deductions, of at least $100 million.49

 The Japanese Capital Framework stipulates a minimum capital adequacy ratio of 

120 percent for Japanese nonbank SDs, calculated by the sum of basic items and supplement 

items less the amount of fixed assets and other assets divided by the risk equivalent amount.50

Although the FIEA sets a minimum required capital adequacy ratio of 120 percent or higher as 

stated above, both of the current account holding eligibility criteria at the Bank of Japan 

(“BOJ”)51 and the requirements for clearing qualification of the Japan Securities Clearing 

 

46 For long-term subordinated debt, the cap equals 50 percent of the amount of the Japanese nonbank SD’s basic 

items; for short-term subordinated debt, the cap equals 200 percent of the amount of the Japanese nonbank SD’s 

basic items after deduction of the amount of fixed assets (Article 176 (1) (vii) of the COO). 

47 17 C.F.R. § 23.101(a)(1)(i). 

48 17 C.F.R. § 23.101(a)(1)(ii). 

49 Id. 

50 Article 46-6 (2) of the FIEA 

51 The eligibility criteria stipulates that in case that an applicant who has requested the BOJ to commence a current 

account transaction is a FIBO, its capital adequacy ratio at the end of the latest interim fiscal year or the latest fiscal 

year calculated in accordance with the FIEA shall be 200% or more. In practice, this requirement is considered as 

not only a requirement for commencing transactions with BOJ, but also a requirement for continuing transactions 

with BOJ through on-site examinations and off-site monitoring by the BOJ. 
 16 

Corporation (“JSCC”)5253 require such SDs to have a capital adequacy ratio of 200 percent or 

higher in principle. Therefore, capital adequacy ratio of 200 percent is recognized as the de facto

minimum required level for Japanese nonbank SDs and other FIBOs. 

Although the Japanese Capital Framework does not articulate different ratios for 

the various components of capital, it does provide that the total amount of supplemental items 

shall be less than the total amount of basic items.54 Thus, as under the Bank-Based Approach, the 

Japanese Capital Framework effectively requires that approximately half of an SD’s capital 

adequacy amount consist of high-quality equity. Furthermore, Article 176 (1) (vii) of the COO 

puts caps on the subordinated debt that a Japanese nonbank SD may count towards its capital 

adequacy amount. 

Although the Japanese Capital Framework does not contain a capital ratio that is 

expressly tied to the IM required for a Japanese nonbank SD’s uncleared swap transactions, the 

capital adequacy ratio under the Japanese Capital Framework incorporates many of the same 

risks that the uncleared swap margin requirement is designed to address. For example, the 

exposure calculation incorporates the potential future exposure arising from the SD’s OTC 

derivatives transactions. Although the methodology for calculating this potential future exposure 

may differ from the methodology for calculating the IM required under the Commission’s 

margin rules, in many instances the former will lead to greater capital requirements, for example 

in instances where a Japanese nonbank SD does not have counterparty credit risk models for all 

OTC derivatives and accordingly must apply a standardized approach. Moreover, unlike the 

uncleared swap margin requirement, the capital adequacy incorporates market, operational and 

other risks. As a result, the capital adequacy ratio under the Japanese Capital Framework 

generally yields substantially higher capital requirements than the uncleared swap margin 

requirement. 

B. Comparability of the Japanese Financial Reporting Framework and the 

Commission Financial Reporting Requirements 

1. Comparability of Objectives 

The Japanese Financial Reporting Framework and the Commission Financial 

Reporting Requirements are intended to enable the relevant regulatory authorities to assess the 

financial condition and safety and soundness of firms subject to their respective regulation. 

Specifically, as discussed below, both regimes require firms to report their compliance with 

applicable capital requirements and their financial position. These disclosures serve to provide 

regulatory authorities with a comprehensive view of the financial health and activities of the 

firms. 

 

52 JSCC is a central counterparty for the Japanese securities market. Its clearing businesses include exchange-traded 

products, OTC Japanese government bonds, credit default swaps and interest rate swaps. JSCC operates its 

businesses in Japan under the supervision and regulation of the FSA in accordance with the FIEA. 

53 See JSCC’s Criteria for Clearing Qualification, 

https://www.jpx.co.jp/jscc/en/participant/participant/participant.html

54 Article 176 (1) (vii) of the COO 
 17 

2. Comparability of Methodologies and Outcomes 

The Commission Financial Reporting Requirements require that a nonbank SD 

file with the Commission and with a registered futures association of which it is a member 

monthly, unaudited financial reports as of the close of business of each month and annual, 

audited financial reports as of the close of its fiscal year.55 The monthly financial reports must 

be filed no later than 17 business days after the date for which the report is made, and the annual 

financial reports must be filed no later than 60 days after the close of the nonbank SD’s fiscal 

year.56 The annual financial report must be audited and accompanied by an opinion of an 

independent certified public accountant or independent licensed accountant in good standing.57 

A nonbank SD must prepare its monthly and annual financial reports in the 

English language, denominated in U.S. dollars and in accordance with U.S. GAAP.58 If the 

nonbank SD is not otherwise required to prepare financial statements in accordance with U.S. 

GAAP, it may prepare its monthly and annual financial reports in accordance with the 

International Financial Reporting Standards. The financial reports must include the following 

statements: 

 Financial condition; 

 Income/loss; 

 Changes in liabilities subordinated to the claims of general creditors; 

 Changes in ownership equity; and 

 Compliance with and calculation of the nonbank SD’s applicable regulatory 

capital requirements under Rule 23.101.59

In addition to the above elements, the annual financial report must also contain: 

 A statement of cash flows; 

 Appropriate footnote disclosures; and 

 A reconciliation of any material differences from the SD’s unaudited financial 

report prepared as of its year-end date and its annual financial report. 

The Japanese Financial Reporting Framework imposes similar requirements on a 

Japanese nonbank SD. Specifically, Article 46-3 (1) of the FIEA and Article 172 of the COO 

 

55 17 C.F.R. §§ 23.105(d), (e). 

56 17 C.F.R. §§ 23.105(d)(1), (e)(1) . 

57 17 C.F.R. § 23.105(e)(2). 

58 17 C.F.R. §§ 23.105(d)(2), (e)(3) . 

59 17 C.F.R. §§ 23.105(d)(2), (e)(4) . 
 18 

require a Japanese nonbank SD to submit a business report to the Commissioner of the FSA 

within three months after the end of each fiscal year. The business report must include a balance 

sheet, profit and loss statement, statement of changes in shareholders’ equity, balance of 

subordinated debt and statement of capital adequacy ratio.60 In addition, the FSA has, pursuant to 

Article 56-2 (1) of the FIEA, ordered Japanese nonbank SDs to submit monthly monitoring 

reports on the SD’s balance sheet, profit and loss statement, capital adequacy ratio, market risk, 

counterparty risk and liquidity risk.61 

Furthermore, Article 435 (2) of the Companies Act (Act No. 86 of 2005) requires 

a Japanese nonbank SD to prepare financial statements and business reports every business year. 

The financial statements include a balance sheet, profit and loss statement, and statement of 

changes in shareholders’ equity and, if the Japanese nonbank SD is a Large Company,62 the 

reports must be audited by an accounting auditor.63 

As a result, a Japanese nonbank SD is required to provide substantially similar 

information to the FSA as that required by the Commission Financial Reporting Requirements. 

C. Enforcement and Supervision of the Japanese Capital & Reporting 

Framework and Japanese Bank Financial Reporting Requirements 

Japanese prudential regulators (i.e., the FSA and BOJ)64 have ample supervision, 

audit, and investigation powers, which include the power to require Japanese SDs to provide all 

necessary information in order to carry out their supervisory tasks, require submission of 

documents, examine, conduct all necessary inspections at the business premises of Japanese SDs 

and other group entities. 65

 

60 Appended Forms No.12 of the COO. 

61 According to II-1-4 (General Supervisory Processes) of the Supervisory Guidelines for FIBO, as part of offsite 

monitoring, supervisors shall require FIBOs to submit a monitoring survey report regarding the following matters: 

Capital Adequacy Ratio, Status of business operations and accounting (including a balance sheet and profit and loss 

statement), Status of segregated management of customer assets, Market risk, Counterparty risk, Operational risk, 

and Liquidity risk. 

62 ”Large Company” means any stock company which satisfies any of the following requirements: (a) that the 

amount of the stated capital in the balance sheet as of the end of its most recent business year is JPY 500 million or 

more; or (b) that the total sum of the amounts in the liabilities section of the balance sheet as of the end of its most 

recent business year is JPY 20 billion or more. (Article 2 (vi) of the Companies Act). Each Japanese nonbank SD 

subject to the Commission’s reporting requirements qualifies as a Large Company. 

63 Article 328 (1) and (2) and Article 435 (2) and 436 (2) (i) of the Companies Act, and Article 59 of Rules of 

Corporate Accounting (Ordinance of the Ministry of Justice No. 13 of 2006) 

64 Both the BOJ and the FSA conduct day to day supervision of financial institutions using both onsite inspections 

and off-site monitoring, and regular interactions with officials of the supervised entities. Formally, and based upon 

Article 44 of the Bank of Japan Act, the FSA may request BOJ to submit the inspections reports describing the 

results of the onsite examinations and other related materials with respect to concerned financial institutions. With 

regard to off-site analyses and at senior management level, there exists more regular information exchange between 

the FSA and BOJ. 

65 For the Japanese nonbank SDs, Article 56-2 of the FIEA and for the Japanese bank SDs, Article 24 and 25 of the 

BA. 
 19 

Under the Japanese Capital Framework, the FSA monitors the capital adequacy 

ratios of Japanese nonbank SDs through supervisory measures even before they fall below the 

minimum level, and has a variety of measures in place to deal with actual cases where an SD’s 

capital adequacy ratio falls below the minimum level. 

 Before a Japanese nonbank SD breaches minimum capital requirements, the 

FSA will react under the Early Warning System. 

 When a Japanese nonbank SD’s capital adequacy ratio falls below 140 

percent, the SD must submit a notification to the FSA pursuant to Article 179 

(3) of the COO. The notification must include a Plan Regarding Specific 

Voluntary Measures to Be Taken in Order to Maintain the Capital Adequacy 

Ratio, which the FSA will review. In addition, the FSA will examine the 

future outlook on the business operator’s capital adequacy ratio through 

hearings and urge it to make voluntary improvement efforts.66

 When a Japanese nonbank SD’s capital adequacy ratio falls below 120 

percent, the SD must submit a notification to the FSA, including a Plan 

Regarding Specific Voluntary Measures to Be Taken in Order to Improve the 

Capital Adequacy Ratio. The FSA will review the plan and, when necessary, 

identify the specific method by which to bring the capital adequacy ratio back 

above the prescribed level and the estimated date of the recovery. The FSA 

will also examine the status of segregated management of customer assets 

and fund-raising. If the FSA finds it to be necessary and appropriate in the 

public interest or for the protection of investors, the Commissioner of the 

FSA may order a change of business methods, order assets to be deposited, or 

issue orders with respect to matters that are otherwise necessary from a 

supervisory perspective (Article 53 (1) of the FIEA).67

 When an Japanese nonbank SD’s capital adequacy ratio falls below 100 

percent, if the FSA finds it to be necessary and appropriate in the public 

interest or for the protection of investors, the Commissioner of the FSA, 

 

66 IV-2-2 (Supervisory Response to Cases of Financial Instruments Business Operators’ Capital Adequacy Ratio 

Falling Below Prescribed Level) (1) of the Supervisory Guidelines for FIBO 

67 IV-2-2 (Supervisory Response to Cases of Financial Instruments Business Operators’ Capital Adequacy Ratio 

Falling Below Prescribed Level) (3) of the Supervisory Guidelines for FIBO indicates four examples of the order: 

(i) To draft and implement measures (including the drafting of specifics and the implementation schedule) to bring 

the capital adequacy ratio back above the legally prescribed level and maintain the ratio above that level on a 

permanent basis; 

(ii) To implement measures to ensure the protection of investors in preparation for an unexpected event, through 

appropriate management of securities and cash and careful management of fund-raising; 

(iii) To avoid activities that could lead to wasteful use of corporate assets; and 

(iv) To compile the projections of the balance sheet and fund-raising status on a daily basis and the projection of 

capital adequacy ratio in ways to reflect the specific measures to be implemented, in order to bring the capital 

adequacy ratio back above the legally prescribed level. 
 20 

within the scope of this necessity, may order the suspension of all or a part of 

business activities during a fixed period of no longer than three months.68 If 

the FSA finds that the capital adequacy ratio of the SD as of the day on which 

three months have elapsed since the day of the order continues to be less than 

100 percent and that the SD’s capital adequacy ratio status is not likely to 

recover, the Commissioner of the FSA may rescind the Article 29 registration 

of that SD.69

 In addition to these measures, if the FSA finds it to be necessary and 

appropriate in the public interest or for the protection of investors as concerns 

a Japanese nonbank SD’s business operations or the state of its assets, the 

Commissioner of the FSA, within the scope of this necessity, may order the 

SD to change its business methods or to otherwise take measures that are 

necessary for improving its business operations or the state of its assets.70 

If a Japanese nonbank SD falls under one of the following items, the Prime 

Minister may rescind its Article 29 registration or order the suspension of all or a part of business 

activities during a fixed period of no longer than six months: 

 it violates a disposition by a government agency;71 or 

 in light of the state of its business or assets, it is likely to become insolvent.72

With regard to Japanese Financial Reporting Framework, a person that fails to 

submit documents that are required by law to be submitted is subject to punishment by 

imprisonment for not more than one year, a fine of not more than three million yen, or both.73 

IV. Conclusion 

Taken together, the Japanese Capital & Reporting Framework reflects similar 

regulatory concerns and leads to comparable regulatory outcomes as the Commission Capital & 

Reporting Requirements. Rather than require Japanese nonbank SDs to comply with two 

different approaches to capital and liquidity, the Commission should grant this application for the 

Japanese nonbank SDs to satisfy their requirements under the Commission Capital & Reporting 

Requirements by continuing to comply with the Japanese Capital & Reporting Framework. 

 

68 Article 53 (2) of the FIEA 

69 Article 53 (3) of the FIEA 

70 Article 51 of the FIEA 

71 Article 52 (1) (vii) of the FIEA 

72 Article 52 (1) (viii) of the FIEA 

73 Article 198-6 of the FIEA