1

6351-01-P

COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

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

Capital Comparability Determination from the Financial Services Agency of Japan

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed order and request for comment.

SUMMARY: The Commodity Futures Trading Commission is soliciting public 

comment on an application submitted by the Financial Services Agency of Japan 

requesting that the Commission determine that registered swap dealers organized and 

domiciled in Japan that are subject to, and comply with, certain capital and financial 

reporting requirements in Japan may comply with certain capital and financial reporting 

requirements under the Commodity Exchange Act via compliance with corresponding 

capital and financial reporting requirements of Japan. The Commission also is soliciting

public comment on a proposed order providing for the conditional availability of 

substituted compliance in connection with the application. 

DATES: Comments must be received on or before [INSERT DATE 60 DAYS AFTER 

DATE OF PUBLICATION IN THE FEDERAL REGISTER].

ADDRESSES: You may submit comments, identified by “Japan Swap Dealer Capital 

Comparability Determination”, by any of the following methods:

 CFTC Comments Portal: https://comments.cftc.gov. Select the “Submit 

Comments” link for this proposed order and follow the instructions on the Public 

Comment Form.
2

 Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity 

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, 

DC 20581.

 Hand Delivery/Courier: Follow the same instructions as for Mail, above.

 Please submit your comments using only one of these methods. To avoid possible 

delays with mail or in-person deliveries, submissions through the CFTC Comments 

Portal are encouraged. 

 All comments must be submitted in English, or if not, accompanied by an English 

translation. Comments will be posted as received to https://comments.cftc.gov. You 

should submit only information that you wish to make available publicly. If you wish the 

Commission to consider information that you believe is exempt from disclosure under the

Freedom of Information Act (“FOIA”), a petition for confidential treatment of the exempt 

information may be submitted according to the procedures established in Regulation

145.9.

1

The Commission reserves the right, but shall have no obligation, to

review, pre-screen, filter, redact, refuse or remove any or all of your submission 

from https://comments.cftc.gov that it may deem to be inappropriate for publication, such 

as obscene language. All submissions that have been redacted or removed that contain 

comments on the merits of the proposed determination and order will be retained in the 

public comment file and will be considered as required under the Administrative

Procedure Act and other applicable laws, and may be accessible under the FOIA.

 1 17 CFR 145.9. Commission regulations referred to in this release are found at 17 CFR chapter I, and are 

accessible on the Commission’s website at 

https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
3

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-

5283, aolear@cftc.gov; Thomas Smith, Deputy Director, 202-418-5495, 

tsmith@cftc.gov; Rafael Martinez, Associate Director, 202-418-5462, 

rmartinez@cftc.gov; Joshua Beale, Associate Director, 202-418-5446, jbeale@cftc.gov; 

Warren Gorlick, Associate Director, 202-418-5195, wgorlick@cftc.gov; Jennifer C. P. 

Bauer, Special Counsel, 202-418-5472, jbauer@cftc.gov; Carmen Moncada-Terry, 

Special Counsel, 202-418-5795, cmoncadaterry@cftc.gov; Liliya Bozhanova, Special 

Counsel, 202-418-6232, lbozhanova@cftc.gov; Joo Hong, Risk Analyst, 202-418-6221, 

jhong@cftc.gov; Justin McPhee, Risk Analyst, 202-418-6223; jmchpee@cftc.gov, Market 

Participants Division; Commodity Futures Trading Commission, Three Lafayette Centre, 

1155 21st Street, NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: The Commodity Futures Trading 

Commission (“Commission” or “CFTC”) is soliciting public comment on an application 

submitted by the Financial Services Agency of Japan (“FSA”), dated September 30, 2021

(“FSA Application”), requesting that the Commission determine that registered nonbank2

swap dealers (“SDs”) organized and domiciled in Japan (“Japanese nonbank SDs”) may 

satisfy certain capital and financial reporting requirements under the Commodity 

Exchange Act (“CEA”)3 by being subject to and complying with comparable capital and 

financial reporting requirements under Japanese laws and regulations.4

 The Commission 

 2 As discussed in Section I.A. immediately below, the Commission has capital jurisdiction over registered 

SDs that are not subject to the regulation of a U.S. banking regulator (i.e., nonbank SDs).

3 7 U.S.C. 1 et seq. The CEA may be accessed through the Commission’s website, www.cftc.gov. 4 See Letter from Yuji Yamashita, Deputy Commissioner for International Affairs, Financial Services 

Agency of Japan, dated September 30, 2021. The FSA Application is available on the Commission’s 

website at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
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also is soliciting public comment on a proposed Commission Comparability 

Determination order that would allow Japanese nonbank SDs, subject to certain 

conditions, to comply with certain CFTC SD capital and financial reporting requirements 

in the manner as set forth in the proposed order.

I. Introduction

A. Regulatory Background – CFTC Capital, Margin, and Financial Reporting 

Requirements for Swap Dealers and Major Swap Participants

Section 4s(e) of the CEA5 directs the Commission and “prudential regulators” 6 to 

impose capital requirements on SDs and major swap participants (“MSPs”) registered 

with the Commission. Section 4s(e) of the CEA also directs the Commission and 

prudential regulators to adopt regulations imposing initial and variation margin 

requirements on swaps entered into by SDs and MSPs that are not cleared by a registered 

derivatives clearing organization (“uncleared swaps”).

Section 4s(e) applies a bifurcated approach with respect to the above 

Congressional directives, requiring each SD and MSP that is subject to the regulation of a 

prudential regulator (“bank SD” and “bank MSP,” respectively) to meet the minimum 

capital requirements and uncleared swaps margin requirements adopted by the applicable 

prudential regulator, and requiring each SD and MSP that is not subject to the regulation 

of a prudential regulator (“nonbank SD” and “nonbank MSP,” respectively) to meet the 

minimum capital requirements and uncleared swaps margin requirements adopted by the 

 5 7 U.S.C. 6s(e). 6 The term “prudential regulators” is defined in the CEA to mean the Board of Governors of the Federal 

Reserve System (“Federal Reserve Board”); the Office of the Comptroller of the Currency; the Federal 

Deposit Insurance Corporation; the Farm Credit Administration; and the Federal Housing Finance Agency.

See 7 U.S.C. 1a(39).
5

Commission.

7

 Therefore, the Commission’s authority to impose capital requirements and 

margin requirements for uncleared swap transactions extends to nonbank SDs and

nonbank MSPs, including nonbanking subsidiaries of bank holding companies regulated 

by the Federal Reserve Board.

The prudential regulators implemented Section 4s(e) in 2015 by amending

existing capital requirements applicable to bank SDs and bank MSPs to incorporate swap 

transactions into their respective bank capital frameworks, and by adopting rules 

imposing initial and variation margin requirements on bank SDs and bank MSPs that 

engage in uncleared swap transactions.

8

 The Commission adopted final rules imposing 

initial and variation margin obligations on nonbank SDs and nonbank MSPs for 

uncleared swap transactions on January 6, 2016.9

 The Commission also approved final 

capital requirements for nonbank SDs and nonbank MSPs on July 24, 2020, which were 

published in the Federal Register on September 15, 2020 with a compliance date of 

October 6, 2021 (“CFTC Capital Rules”).

10

Section 4s(f) of the CEA addresses SD and MSP financial reporting 

requirements.11 Section 4s(f) of the CEA authorizes the Commission to adopt rules 

imposing financial condition reporting obligations on all SDs and MSPs (i.e., nonbank 

SDs, nonbank MSPs, bank SDs, and bank MSPs). Specifically, Section 4s(f)(1)(A) of the 

CEA provides, in relevant part, that each registered SD and MSP must make financial 

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

8 See Margin and Capital Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015). 9 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 

636 (Jan. 6, 2016).

10 See Capital Requirements of Swap Dealers and Major Swap Participants, 85 FR 57462 (Sept. 15, 2020). 11 7 U.S.C. 6s(f).
6 

condition reports as required by regulations adopted by the Commission.12 The 

Commission’s financial reporting obligations were adopted with the Commission’s 

nonbank SD and nonbank MSP capital requirements, and also had a compliance date of 

October 6, 2021 (“CFTC Financial Reporting Rules”).13

B. Commission Capital Comparability Determinations for Non-U.S. Nonbank

Swap Dealers and Non-U.S. Nonbank Major Swap Participants 

Regulation 23.106 establishes a substituted compliance framework whereby the 

Commission may determine that compliance by a non-U.S. domiciled nonbank SD or 

non-U.S. domiciled nonbank MSP with its home country’s capital and financial reporting 

requirements will satisfy all or parts of the CFTC Capital Rules and all or parts of the 

CFTC Financial Reporting Rules (such a determination referred to as a “Capital 

Comparability Determination”).

14 The availability of such substituted compliance is 

conditioned upon the Commission issuing a determination that the relevant foreign 

jurisdiction’s capital adequacy and financial reporting requirements, and related financial 

recordkeeping and reporting requirements, for non-U.S. nonbank SDs and/or non-U.S. 

 

12 7 U.S.C. 6s(f)(1)(A). 13 See 85 FR 57462. 14 17 CFR 23.106. Regulation 23.106(a)(1) provides that a request for a Capital Comparability 

Determination may be submitted by a non-U.S. nonbank SD or non-US nonbank MSP, a trade association 

or other similar group on behalf of its SD or MSP members, or a foreign regulatory authority that has direct 

supervisory authority over one or more non-US nonbank SDs or non-U.S. nonbank MSPs. Commission 

regulations provide that any non-U.S. nonbank SD or non-U.S. nonbank MSP that is dually-registered with 

the Commission as a futures commission merchant (“FCM”) is subject to the capital requirements of 

Regulation 1.17 and may not petition the Commission for a Capital Comparability Determination. See 17 

CFR 23.101(a)(5) and (b)(4), respectively. Furthermore, non-U.S. bank SDs and non-U.S. bank MSPs may 

not petition the Commission for a Capital Comparability Determination with respect to their respective 

financial reporting requirements under Regulation 23.105(p) (17 CFR 23.105(p)). Commission staff has 

issued, however, a time-limited no-action letter stating the Market Participants Division will not 

recommend enforcement action against a non-U.S. bank SD that files with the Commission certain 

financial information that is provided to its home country regulator in lieu of certain financial reports 

required by Regulation 23.105(p). See CFTC Staff Letter 21-18, issued on August 31, 2021.
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nonbank MSPs are comparable to the corresponding CFTC Capital Rules and CFTC 

Financial Reporting Rules. The Commission will issue a Capital Comparability 

Determination in the form of a Commission order (“Capital Comparability Determination 

Order”).

15 

The Commission’s approach for conducting a comparability determination with 

respect to the CFTC Capital Rules and the CFTC Financial Reporting Rules is a 

principles-based, holistic approach that focuses on whether the applicable foreign 

jurisdiction’s capital and financial reporting requirements achieve comparable outcomes 

to the corresponding CFTC requirements.

16 In this regard, the approach is not a line-byline assessment or comparison of a foreign jurisdiction’s regulatory requirements with the 

Commission’s requirements.17 In performing the analysis, the Commission recognizes 

that jurisdictions may adopt differing approaches to achieving comparable outcomes, and 

the Commission will focus on whether the foreign jurisdiction’s capital and financial 

reporting requirements are comparable to the Commission’s in purpose and effect, and 

not whether they are comparable in every aspect or contain identical elements.

A person requesting a Capital Comparability Determination is required to submit 

an application to the Commission containing: (i) a description of the objectives of the 

relevant foreign jurisdiction’s capital adequacy and financial reporting requirements 

applicable to entities that are subject to the CFTC Capital Rules and the CFTC Financial 

Reporting Rules; (ii) a description (including specific legal and regulatory provisions) of 

how the relevant foreign jurisdiction’s capital adequacy and financial reporting 

 

15 17 CFR 23.106(a)(3). 16 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521. 17 See 85 FR 57521. 
8

requirements address the elements of the CFTC Capital Rules and CFTC Financial 

Reporting Rules, including, at a minimum, the methodologies for establishing and 

calculating capital adequacy requirements and whether such methodologies comport with 

any international standards; and (iii) a description of the ability of the relevant foreign 

regulatory authority to supervise and enforce compliance with the relevant foreign 

jurisdiction’s capital adequacy and financial reporting requirements. The applicant must 

also submit, upon request, such other information and documentation as the Commission 

deems necessary to evaluate the comparability of the capital adequacy and financial 

reporting requirements of the foreign jurisdiction.18

The Commission may consider all relevant factors in making a Capital 

Comparability Determination, including: (i) the scope and objectives of the relevant 

foreign jurisdiction’s capital and financial reporting requirements; (ii) whether the 

relevant foreign jurisdiction’s capital and financial reporting requirements achieve 

comparable outcomes to the Commission’s corresponding capital requirements and 

financial reporting requirements; (iii) the ability of the relevant foreign regulatory 

authority or authorities to supervise and enforce compliance with the relevant foreign 

jurisdiction’s capital adequacy and financial reporting requirements; and (iv) any other 

facts or circumstances the Commission deems relevant, including whether the 

Commission and foreign regulatory authority or authorities have a memorandum of 

understanding (“MOU”) or similar arrangement that would facilitate supervisory 

cooperation.

19 

 18 17 CFR 23.106(a)(2). 19 See 17 CFR 23.106(a)(3) and 85 FR 57520-57522.
9

In performing the comparability assessment for foreign nonbank SDs, the 

Commission’s review will include the extent to which the foreign jurisdiction’s 

requirements address: (i) the process of establishing minimum capital requirements for 

nonbank SDs and how such process addresses risk, including market risk and credit risk 

of the nonbank SD’s on-balance sheet and off-balance sheet exposures; (ii) the types of

equity and debt instruments that qualify as regulatory capital in meeting minimum 

requirements; (iii) the financial reports and other financial information submitted by a 

nonbank SD to its relevant regulatory authority and whether such information provides 

the regulatory authority with the means necessary to effectively monitor the financial 

condition of the nonbank SD; and (iv) the regulatory notices and other communications 

between a nonbank SD and its foreign regulatory authority that address potential adverse 

financial or operational issues that may impact the firm. With respect to the ability of the 

relevant foreign regulatory authority to supervise and enforce compliance with the 

foreign jurisdiction’s capital adequacy and financial reporting requirements, the 

Commission’s review will include a review of the foreign jurisdiction’s surveillance 

program for monitoring nonbank SDs’ compliance with such capital adequacy and 

financial reporting requirements, and the disciplinary process imposed on firms that fail 

to comply with such requirements. 

In performing the comparability assessment for foreign nonbank MSPs,

20 the 

Commission’s review will include the extent to which the foreign jurisdiction’s 

requirements address: (1) the process of establishing minimum capital requirements for 

 20 Regulation 23.101(b) requires a nonbank MSP to maintain positive tangible net worth. There are no 

MSPs currently registered with the Commission.
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nonbank MSPs and how such process establishes a minimum level of capital to ensure 

the safety and soundness of the nonbank MSP; (ii) the financial reports and other 

financial information submitted by a nonbank MSP to its relevant regulatory authority 

and whether such information provides the regulatory authority with the means necessary 

to effectively monitor the financial condition of the nonbank MSP; and (iii) the 

regulatory notices and other communications between a nonbank MSP and its foreign 

regulatory authority that address potential adverse financial or operational issues that may 

impact the firm. With respect to the ability of the relevant foreign regulatory authority to 

supervise and enforce compliance with the foreign jurisdiction’s capital adequacy and 

financial reporting requirements, the Commission’s review will include a review of the 

foreign jurisdiction’s surveillance program for monitoring nonbank MSPs’ compliance 

with such capital adequacy and financial reporting requirements, and the disciplinary 

process imposed on firms that fail to comply with such requirements.

Regulation 23.106 further provides that the Commission may impose any terms or 

conditions that it deems appropriate in issuing a Capital Comparability Determination.

21 

Any specific terms or conditions with respect to capital adequacy or financial reporting 

requirements will be set forth in the Commission’s Capital Comparability Determination

Order. As a general condition to all Capital Comparability Determination Orders, the 

Commission expects to require notification from applicants of any material changes to 

information submitted by the applicants in support of a comparability finding, including, 

 21 See 17 CFR 23.106(a)(5).
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but not limited to, changes in the relevant foreign jurisdiction’s supervisory or regulatory 

regime. 

The Commission’s capital adequacy and financial reporting requirements are 

designed to address and manage risks that arise from a firm’s operation as a SD and 

MSP. Given their functions, both sets of requirements and rules must be applied on an 

entity-level basis (meaning that the rules apply on a firm-wide basis, irrespective of the 

type of transactions involved) in order to effectively address risk to the firm as a whole. 

Therefore, in order to rely on a Capital Comparability Determination, a nonbank SD or 

nonbank MSP domiciled in the foreign jurisdiction and subject to supervision by the

relevant regulatory authority (or authorities) in the foreign jurisdiction must file a notice 

with the Commission of its intent to comply with the applicable capital adequacy and 

financial reporting requirements of the foreign jurisdiction set forth in the Capital 

Comparability Determination in lieu of all or parts of the CFTC Capital Rules and/or 

CFTC Financial Reporting Rules.

22 Notices must be filed electronically with the 

Commission’s Market Participants Division (“MPD”).23 The filing of a notice by a nonU.S. nonbank SD or non-U.S. nonbank MSP provides MPD staff, acting pursuant to 

authority delegated by the Commission,24 with the opportunity to engage with the firm 

and to obtain representations that it is subject to, and complies with, the laws and 

regulations cited in the Capital Comparability Determination and that it will comply with 

any listed conditions. MPD will issue a letter under its delegated authority from the 

 22 17 CFR 23.106(a)(4). 23 Notices must be filed in electronic form to the following email address: 

MPDFinancialRequirements@cftc.gov. 24 See 17 CFR 140.91(a)(11).
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Commission confirming that the non-U.S. nonbank SD or non-U.S. nonbank MSP may 

comply with the foreign laws and regulations cited in the Capital Comparability 

Determination in lieu of complying with the CFTC Capital Rules and CFTC Financial 

Reporting Rules upon MPD’s determination that the firm is subject to and complies with 

such foreign laws and regulations, is subject to the jurisdiction of the applicable foreign 

regulatory authority (or authorities), and can meet all of the conditions in the Capital 

Comparability Determination.

Each non-U.S. nonbank SD and/or non-U.S. nonbank MSP that receives, in 

accordance with the applicable Commission Capital Comparability Determination, 

confirmation from the Commission that it may comply with a foreign jurisdiction’s 

capital adequacy and/or financial reporting requirements will be deemed by the 

Commission to be in compliance with the corresponding CFTC Capital Rules and/or 

CFTC Financial Reporting Rules.

25 Accordingly, if a nonbank SD or nonbank MSP fails 

to comply with the foreign jurisdiction’s capital adequacy and/or financial reporting

requirements, the Commission may initiate an action for a violation of the corresponding

CFTC Capital Rules and/or CFTC Financial Reporting Rules.26 In addition, a non-U.S. 

nonbank SD or non-U.S. nonbank MSP that receives confirmation of its ability to use 

substituted compliance remains subject to the Commission’s examination and 

enforcement authority.27

 25 17 CFR 23.106(a)(4)(ii). Confirmation will be issued by MPD under authority delegated by the 

Commission. See Regulation 140.91(a)(11) (17 CFR 140.91(a)(11)). 26 Id. 27 Id.
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The Commission will consider an application for a Capital Comparability 

Determination to be a representation by the applicant that the laws and regulations of the 

foreign jurisdiction that are submitted in support of the application are finalized and in 

force, that the description of such laws and regulations is accurate and complete, and that, 

unless otherwise noted, the scope of such laws and regulations encompasses the relevant 

non-U.S. nonbank SDs and/or non-U.S. nonbank MSPs domiciled in the foreign

jurisdiction.28 A non-U.S. nonbank SD or non-U.S. nonbank MSP that is not legally 

required to comply with a foreign jurisdiction’s laws or regulations determined to be 

comparable in a Capital Comparability Determination may not voluntarily comply with 

such laws or regulations in lieu of compliance with the CFTC Capital Rules or the CFTC 

Financial Reporting Rules. Each non-U.S. nonbank SD or non-U.S. nonbank MSP that 

seeks to rely on a Capital Comparability Determination Order is responsible for 

determining whether it is subject to the foreign laws and regulations found comparable in 

the Order.

C. Japan Financial Services Agency’s Application for a Capital Comparability 

Determination for Japanese-Domiciled Nonbank Swap Dealers

The FSA Application requests that the Commission issue a Capital Comparability 

Determination finding that compliance with certain designated capital requirements of 

Japan (the “Japanese Capital Rules”) and certain designated financial reporting 

requirements of Japan (the “Japanese Financial Reporting Rules”) by a Japanese nonbank 

 28 The Commission has provided the FSA with an opportunity to review for accuracy and completeness,

and comment on, the Commission’s description of relevant Japanese laws and regulations on which this 

proposed Capital Comparability Determination is based. The Commission relies on this review and any 

corrections received from the FSA in making its proposal. A comparability determination based on an 

inaccurate description of foreign laws and regulations may not be valid.
14

SD registered with the FSA as a Type I Financial Instruments Business Operator 

(“FIBO”) satisfies corresponding CFTC Capital Rules and CFTC Financial Reporting 

Rules applicable to a nonbank SD under Sections 4s(e) and (f) of the CEA and 

Regulations 23.101 and 23.105.29 There are currently three Japanese nonbank SDs 

registered with Commission, and the FSA has represented that each of the three Japanese 

nonbank SDs are FSA-registered and regulated FIBOs.

30 The FSA Application requests 

that the Commission’s Capital Comparability Determination cover each of the three 

Japanese nonbank SDs and any future Japanese registered and domiciled FIBOs that 

register with the Commission as nonbank SDs.

The FSA has represented that the capital adequacy and financial reporting 

requirements for swap activities in Japan are governed by the Japanese legal framework 

for financial regulation, which is mainly composed of Acts, Cabinet Orders, Ministerial 

Orders, and FSA Notices.31 With regard to the Japanese Capital Rules and the Japanese 

Financial Reporting Rules, the 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 FIBOs, including Japanese nonbank 

SDs.32 FIEA, COO, and related FSA Notices impose mandatory capital and reporting 

 29 The FSA’s application did not request a Capital Comparability Determination with respect to nonbank 

MSPs as currently there are no MSPs registered with the Commission and, accordingly, no nonbank MSPs 

domiciled in Japan and registered with the FSA. Accordingly, the Commission’s Capital Comparability 

Determination and proposed Order does not address nonbank MSPs.

30 FSA Application, pp. 4-5 (footnote 11). 31 Id., p. 4. 32 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 
15

requirements on FIBOs, including Japanese nonbank SDs. Comprehensive Guidelines 

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

Guidelines for FIBO”) also supplement the framework.33 The technical requirements for 

FIBOs, including Japanese nonbank SDs, 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.

II. General Overview of CFTC and Japanese Nonbank Swap Dealer Capital 

Rules

A. General Overview of CFTC Nonbank Swap Dealer Capital Rules

The CFTC Capital Rules provide nonbank SDs with three alternative capital 

approaches: (i) the Tangible Net Worth Capital Approach (“TNW Approach”); (ii) the 

Net Liquid Assets Capital Approach (“NLA Approach”); and (iii) the Bank-Based 

Capital Approach (“Bank-Based Approach”).

34

Nonbank SDs that are “predominantly engaged in non-financial activities” may 

elect the TNW Approach.35 The TNW Approach requires a nonbank SD to maintain a 

 

Business includes market transactions of derivatives and foreign market derivatives transactions pertaining 

to certain highly liquid securities and over-the-counter transactions of derivatives. 33 In order to implement and reinforce the legal framework, the FSA has developed and published 

supervisory guidelines. The supervisory guidelines 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 supervisory guidelines. 

Supervision and enforcement are conducted based on the supervisory guidelines.

34 17 CFR 23.101. 35 17 CFR 23.101(a)(2). The term “predominantly engaged in non-financial activities” is defined in 

Regulation 23.100 (17 CFR 23.100) and generally provides that: (i) the nonbank SD’s, or its parent 

entity’s, annual gross financial revenues for either of the previous two completed fiscal years represents 

less than 15 percent of the nonbank SD’s or the nonbank SD’s parent’s, annual gross revenues for all 

operations (i.e., commercial and financial) for such years, and (ii) the nonbank SD’s, or its parent entity’s, 

total financial assets at the end of its two most recently completed fiscal years represents less than 15 

percent of the nonbank SD’s, or its parent’s, total consolidated financial and nonfinancial assets as of the 

end of such years.
16

level of “tangible net worth”36 equal to or greater than the higher of: (i) $20 million plus 

the amount of the nonbank SD’s “market risk exposure requirement”37 and “credit risk 

exposure requirement”38 associated with the nonbank SD’s swap and related hedge 

positions that are part of the nonbank SD’s swap dealing activities; (ii) eight percent of 

the nonbank SD’s “uncleared swap margin” amount;

39 or (iii) the amount of capital 

required by a registered futures association of which the nonbank SD is a member.40 The 

TNW Approach is intended to ensure the safety and soundness of a qualifying nonbank 

SD by requiring the firm to maintain a minimum level of tangible net worth that is based 

on the nonbank SD’s swap dealing activities to provide a sufficient level of capital to 

absorb losses resulting from its swap dealing and other business activities.

 36 The term “tangible net worth” is defined in Regulation 23.100 and generally means the net worth (i.e., 

assets less liabilities) of a nonbank SD, computed in accordance with applicable accounting principles, with 

assets further reduced by a nonbank SD’s recorded goodwill and other intangible assets.

37 The terms “market risk exposure” and “market risk exposure requirement” are defined in Regulation 

23.100 (17 CFR 23.100) and generally mean the risk of loss in a financial position or portfolio of financial 

positions resulting from movements in market prices and other factors. Market risk exposure is the sum of: 

(i) general market risks including changes in the market value of a particular asset that results from broad 

market movements, which may include an additive for changes in market value under stressed conditions; 

(ii) specific risk, which includes risks that affect the market value of a specific instrument but do not 

materially alter broad market conditions; (iii) incremental risk, which means the risk of loss on a position 

that could result from the failure of an obligor to make timely payments of principal and interest; and (iv) 

comprehensive risk, which is the measure of all material price risks of one or more portfolios of correlation 

trading positions.

38 The term “credit risk exposure requirement” is defined in Regulation 23.100 (17 CFR 23.100) and 

generally reflects the amount at risk if a counterparty defaults before the final settlement of a swap 

transaction’s cash flows.

39 The term “uncleared swap margin” is defined in Regulation 23.100 (17 CFR 23.100) to generally mean 

the amount of initial margin that a nonbank SD would be required to collect from each counterparty for

each outstanding swap position of the nonbank SD. A nonbank SD must include all swap positions in the 

calculation of the uncleared swap margin amount, including swaps that are exempt or excluded from the 

scope of the Commission’s uncleared swap margin regulations. A nonbank SD must compute the 

uncleared swap margin amount in accordance with the Commission’s margin rules for uncleared swaps. 

See 17 CFR 23.154. 40 The National Futures Association (“NFA”) is currently the only entity that is a registered futures 

association. The Commission will refer to NFA in this document when referring to the requirements or 

obligations of a registered futures association.
17

The TNW approach requires a nonbank SD to compute its market risk exposure

requirement and credit risk exposure requirement using standardized capital charges set 

forth in Securities and Exchange Commission (“SEC”) Rule 18a-1 (17 CFR 240.18a-1) 

that are applicable to entities registered with the SEC as security-based swap dealers

(“SBSDs”) or standardized capital charges set forth in CFTC Regulation 1.17 applicable 

to entities registered as FCMs or entities dually-registered as an FCM and nonbank SD.41 

Nonbank SDs that have received Commission or NFA approval pursuant to Regulation 

23.102 may use internal models to compute market risk and/or credit risk capital charges 

in lieu of the SEC or CFTC standardized capital charges.

42

A nonbank SD that elects the NLA Approach is required to maintain “net capital”

in an amount that equals or exceeds the greater of: (i) $20 million; (ii) 2 percent of the 

nonbank SD’s uncleared swap margin amount; or (iii) the amount of capital required by 

NFA.

43 The NLA Approach is intended to ensure the safety and soundness of a nonbank 

SD by requiring the firm to maintain at all times at least one dollar of highly liquid assets 

to cover each dollar of the nonbank SD’s liabilities.

A nonbank SD is required to reduce the value of its highly liquid assets by the 

market risk exposure requirement and/or the credit risk exposure requirement in 

computing its net capital.

44 A nonbank SD that does not have Commission or NFA 

approval to use internal models must compute its market risk exposure requirement 

 41 17 CFR 23.101(a)(2)(ii)(A). 42 Id. 43 17 CFR 23.101(a)(1)(ii)(A). “Net capital” consists of a nonbank SD’s highly liquid assets (subject to 

haircuts) less all of the firm’s liabilities, excluding certain qualified subordinated debt. See 17 CFR 

240.18a-1 for the calculation of “net capital.” 44 See 17 CFR 240.18a-1(c) and (d).
18

and/or credit risk exposure requirement using the standardized capital charges contained 

in SEC Rule 18a-1 (17 CFR 240.18a-1) as modified by the Commission’s rule.45 

A nonbank SD that has obtained Commission or NFA approval, may use internal 

market risk and/or credit risk models to compute market risk and/or credit risk capital 

charges in lieu of the standardized capital charges.

46 A nonbank SD that is approved to 

use internal market risk and/or credit risk models is further required to maintain a 

minimum of $100 million of “tentative net capital.”47 

The Commission’s NLA Approach is consistent with the SEC’s SBSD capital 

rule, and is based on the Commission’s capital rule for FCMs and the SEC’s capital rule 

for securities broker-dealers (“BDs”). The quantitative and qualitative requirements for 

NLA Approach internal market and credit risk models are also consistent with the 

quantitative and qualitative requirements of the Commission’s Bank-Based Approach as 

described below.

The Commission’s Bank-Based Approach for computing regulatory capital for 

nonbank SDs is based on certain capital requirements imposed by the Federal Reserve 

Board for bank holding companies.

48 The Bank-Based Approach also is consistent with 

the Basel Committee on Banking Supervision’s (“BCBS”) international framework for 

bank capital requirements.

49 The Bank-Based Approach requires a nonbank SD to

 45 See 17 CFR 23.101(a)(1)(ii). 46 See 17 CFR 23.102. 47 17 CFR 23.101(a)(1)(ii)(A)(1). The term “tentative net capital” is defined in Regulation 

23.101(a)(1)(ii)(A)(1) by reference to SEC Rule 18a-1 and generally means a nonbank SD’s net capital 

prior to deducting market risk and credit risk capital charges.

48 See 17 CFR 23.101(a)(1)(i). 49 The BCBS is the primary global standard-setter for the prudential regulation of banks and provides a 

forum for cooperation on banking supervisory matters. Institutions represented on the BCBS include the 
19

maintain regulatory capital equal to or in excess of each of the following requirements: (i) 

$20 million of common equity tier 1 capital; (ii) an aggregate of common equity tier 1 

capital, additional tier 1 capital, and tier 2 capital (including qualifying subordinated 

debt) equal to or greater than 8 percent of the nonbank SD’s risk-weighted assets 

(provided that common equity tier 1 capital comprises at least 6.5 percent of the 8 percent

minimum requirement); (iii) an aggregate of common equity tier 1 capital, additional tier 

1 capital, and tier 2 capital equal to or greater than 8 percent of the nonbank SD’s 

uncleared swap margin amount; and (iv) an amount of capital required by NFA.

50 The 

Bank-Based Approach is intended to ensure that the safety and soundness of a nonbank 

SD by requiring the firm to maintain at all times qualifying capital in an amount 

sufficient to absorb unexpected losses, expenses, decrease in firm assets, or increases in 

firm liabilities without the firm becoming insolvent.

The terms used in the Commission’s Bank-Based Approach are defined by 

reference to regulations of the Federal Reserve Board.

51 Specifically, the term “common 

equity tier 1 capital” is defined for purposes of the CFTC Capital Rules to generally mean 

the sum of a nonbank SD’s common stock instruments and any related surpluses, retained 

earnings, and accumulated other comprehensive income.52 The term “additional tier 1 

capital” is defined to include the nonbank SD’s common equity tier 1 capital and further 

 

Federal Reserve Board, the European Central Bank, Deutsche Bundesbank, Bank of England, Bank of 

France, Bank of Japan, Banco de Mexico, and Bank of Canada. 50 17 CFR 23.101(a)(1)(i). 51 Id. Regulation 23.101(a)(1)(i) references Federal Reserve Board Rule 217.20 (12 CFR 217.20) for 

purposes of defining the terms used in establishing the minimum capital requirements under the BankBased Approach. 52 See 12 CFR 217.20(b).
20

includes such additional equity instruments as preferred stock.53 The term “tier 2 capital” 

is defined to include certain types of instruments that include both debt and equity 

characteristics (e.g., certain perpetual preferred stock instruments and subordinated term 

debt instruments).54 Subordinated debt also must meet certain requirements to qualify as 

tier 2 capital, including that the term of the subordinated debt instrument is for a 

minimum of one year (with the exception of approved revolving subordinated debt 

agreements which may have a maturity term that is less than one year), and the debt 

instrument is an effective subordination of the rights of the lender to receive any 

payment, including accrued interest, to other creditors.55 

Common equity tier 1 capital, additional tier 1 capital, and tier 2 capital are 

unencumbered and generally long-term or permanent forms of capital that help ensure 

that a nonbank SD will be able to absorb losses resulting from its operations and maintain 

confidence in the nonbank SD as a going concern. In addition, in setting an equity ratio 

requirement, this limits the amount of asset growth and leverage a nonbank SD can incur, 

as a nonbank SD must fund its asset growth with a certain percentage of regulatory 

capital.

A nonbank SD also must compute its risk-weighted assets using standardized 

capital charges or, if approved, internal models. Risk-weighting assets involves adjusting 

the notional or carrying value of each asset based on the inherent risk of the asset. Less 

risky assets are adjusted to lower values (i.e., have less risk-weight) than more risky 

 53 See 12 CFR 217.20(c). 54 See 12 CFR 217.20(d). 55 The subordinated debt must meet the requirements set forth in SEC Rule 18a-1d (17 CFR 240.18a-1d). 

See 17 CFR 23.101(a)(1)(i)(B).
21

assets. As a result, nonbank SDs are required to hold lower levels of regulatory capital 

for less risky assets and higher levels of regulatory capital for riskier assets.

Nonbank SDs not approved to use internal models to risk-weight their assets must 

compute market risk capital charges using the standardized charges contained in CFTC

Regulation 1.17 and SEC Rule 18a-1, and must compute their credit risk charges using 

the standardized capital charges set forth in regulations of the Federal Reserve Board for 

bank holding companies (Subpart D of 17 CFR Part 217).

56 

Standardized market risk charges are computed under CFTC Regulation 1.17 and 

SEC Rule 18a-1 by multiplying, as appropriate to the specific asset schedule, the notional 

value or market value of the nonbank SD’s proprietary financial positions (such as swaps, 

security-based swaps, futures, equities, and U.S. Treasuries) by fixed percentages set 

forth in the Regulation or Rule.

57 Standardized credit risk charges require the nonbank 

SD to multiply on-balance sheet and off-balance sheet exposures (such as receivables 

from counterparties, debt instruments, and exposures from derivatives) by predefined 

percentages set forth in the applicable Federal Reserve Board regulations contained in 

Subpart D of 17 CFR Part 217.

A nonbank SD also may apply to the Commission or NFA for approval to use 

internal models to compute market risk exposure and/or credit risk exposure for purposes 

of determining its total risk-weighted assets.

58 Nonbank SDs approved to use internal 

models for the calculation of credit risk or market risk, or both, must follow the model 

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

23.100.

57 See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3-1(c)(2). 58 See 17 CFR 23.102.
22

requirements set forth in Federal Reserve Board regulations for bank holding companies 

(Subpart E and F, respectively, of 17 CFR Part 217). Credit risk and market risk capital

charges computed with internal models require the estimation of potential losses, with a 

certain degree of likelihood, within a specified time period, of a portfolio of assets. 

Internal models allow for consideration of potential co-movement of prices across assets 

in the portfolio, leading to offsets of gains and losses. Internal credit risk models can also 

further include estimation of the likelihood of default of counterparties.

B. General Overview of Capital Rules for Japanese Nonbank SDs

The Japanese Capital Rules impose bank-like capital requirements on a Japanese 

nonbank SD that are consistent with the BCBS framework for international bank-based

capital standards.

59 The Japanese Capital Rules are intended to require each Japanese 

nonbank SD to hold a sufficient amount of qualifying equity and subordinated debt to 

absorb decreases in the value of firm assets and to cover losses from its activities, 

including possible counterparty defaults and margin collateral shortfalls associated with 

its swap dealing activities, without the firm becoming insolvent.

The Japanese Capital Rules require each Japanese nonbank SD to hold and 

maintain a “capital adequacy amount” equal to 120 percent or more of the Japanese 

nonbank SD’s “risk equivalent amount.”60 A Japanese nonbank SD’s “capital adequacy 

amount” is composed of the firm’s equity classified as “Basic Items” and “Supplemental 

Items.”61 Basic Items are composed of the firm’s balance sheet capital including: (i) 

 59 FSA Application, p. 9. 60 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.

61 FSA Application, p. 14.
23

issued and outstanding shares; (ii) the payment for an application for new shares; (iii) the 

capital surplus; (iv) the earned surplus; (v) the negative valuation difference on availablefor-sale securities; and (vi) the firm’s own treasury stock.62 Supplemental Items provide 

an additional layer of capital beyond Basic Items and are composed of the positive 

valuation difference on available-for-sale securities and certain subordinated debt 

instruments.

63

A Japanese nonbank SD’s capital adequacy amount must be composed of at least 

50 percent Basic Items, and limits are imposed on the aggregate amount of subordinated 

debt that may be used to meet the capital adequacy amount.64 Subordinated debt also 

must satisfy specified conditions in order to be included in the Japanese nonbank SD’s 

capital. Specifically, the subordinated debt instrument must: (i) contain special 

provisions subordinating the rights of the lender to the payment of principal and interest; 

(ii) not be secured by the Japanese nonbank SD; (iii) have a minimum original maturity 

of more than five years for long term subordinated debt, and at least two years for short 

term subordinated debt; (iv) provide that any early redemption must be done voluntarily 

by the Japanese nonbank SD and must be approved by the FSA; and (v) contain special 

provisions setting forth that no interest payment shall be made to the lender if such 

payment would result in the Japanese nonbank SD capital adequacy ratio falling below 

certain thresholds.65

 62 Article 176(1)(i) through (vi) of the COO. 63 Article 176(1)(vii) of the COO. 64 The Japanese Capital Rules provide that the total amount of Supplemental Items must be less than the 

total amount of the Japanese nonbank SD’s Basic Items. See Article 176(1)(vii) of the COO. 65 Article 176(2) and (3) of the COO.
24

A Japanese nonbank SD’s “risk equivalent amount” is calculated as the sum of 

the firm’s: (i) market risk equivalent amount, which is the amount equivalent to possible 

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

proprietary assets and transactions held;66 (ii) counterparty risk equivalent amount, which 

is 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;

67 and 

(iii) basic risk equivalent amount, which is the amount equivalent to possible risk which 

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

handling.68 The risk equivalent amount is a method of risk-weighting the Japanese 

nonbank SD’s assets by adjusting the notional or carrying value of each asset based on 

the inherent risk of the asset. Less risky assets have a lower risk equivalent amount than 

assets with higher risk. As a result, Japanese nonbank SDs are required to hold lower 

levels of regulatory capital for assets with a lower risk equivalent amount and higher 

levels of regulatory capital for assets with a higher level of risk equivalent amount.

To calculate its risk equivalent amount, a Japanese nonbank SD risk-weights its 

assets and exposures using specified standardized weights or approved internal modelbased methodologies. The Japanese Capital Rules, including various ordinances, 

notices69 and guidelines,

70 set out quantitative and qualitative requirements that internal 

models must meet in order to obtain and maintain approval. Topics addressed by the 

 66 Article 178(1)(i) of the COO and Article 10 through 14 of the Notice on Capital. The “market risk 

equivalent amount” corresponds to “market risk” in the BCBS and Bank-Based Approach frameworks. 67 Article 178(1)(ii) of the COO and Article 15 through 15-7 of the Notice on Capital. The “counterparty 

risk equivalent amount” corresponds to “credit risk” in the BCBS and Bank-Based Approach frameworks. 68 Article 178(1)(iii) of the COO and Article 16 of the Notice on Capital. 69 Article 13 of the Notice on Capital. 70 Principles for Model Risk Management, Financial Services Agency of Japan (November 12, 2021).
25

quantitative and qualitative requirements include model governance, validation, 

monitoring, and review. 

Modeled credit risk and market risk capital charges require the estimation of 

potential losses, with a certain degree of likelihood, within a specified time period, of a 

portfolio of assets.71 Internal models allow for consideration of potential co-movement 

of prices across assets in the portfolio, leading to offsets of gains and losses. Internal 

credit risk models can also further include estimation of the likelihood of default of 

counterparties.

III. Commission Analysis of the Comparability of the Japanese Capital Rules 

and Japanese Financial Reporting Rules with the CFTC Capital Rules and 

CFTC Financial Reporting Rules

The following section provides a description and comparative analysis of the 

regulatory requirements of the Japanese Capital Rules and Japanese Financial Reporting 

Rules to the CFTC Capital Rules and CFTC Financial Reporting Rules. Immediately 

following a description of the requirement(s) of the CFTC Capital Rules or the CFTC

Financial Reporting Rules for which a comparability determination was requested by the 

FSA, the Commission provides a description of Japan’s corresponding laws, regulations, 

or rules. The Commission then provides a comparative analysis of the Japanese Capital 

Rules or the Japanese Financial Reporting Rules with the corresponding CFTC Capital 

 71 The Japanese Capital Rules require Japanese nonbank SDs with model approval for market risk to use a 

VaR model with a 99 percent, one-tailed confidence interval 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. See Article 13(3)(i), (ii), and (iv) of the Notice on Capital. 

Japanese nonbank SDs approved to use credit risk models are required to use specified formulas to 

calculate the expected exposure at default of the counterparty. See Article 15-2 of the Notice on Capital.
26

Rules or CFTC Financial Reporting Rules. The Commission identifies any material 

differences between the respective rules.

The Commission performed this proposed Capital Comparability Determination 

by assessing the comparability of the Japanese Capital Rules for Japanese nonbank SDs

as set forth in the FSA Application and in the English language translation of certain 

Japanese laws and regulations, with the Commission’s Bank-Based Approach. For 

clarity, the Commission did not assess the comparability of the Japanese Capital Rules to 

the Commission’s TNW Approach or NLA Approach as the Commission understands

that all Japanese nonbank SDs, as of the date of the FSA Application, are subject to the 

current bank-based capital approach of the Japanese Capital Rules. Accordingly, for 

clarity, when the Commission makes a preliminary determination herein about the 

comparability of the Japanese Capital Rules with the CFTC Capital Rules, the 

determination pertains to the comparability of the Japanese Capital Rules with the BankBased Approach under the CFTC Capital Rules.

As described below, it is proposed that any material changes to the Japanese 

Capital Rules will require notification to the Commission. Therefore, if there are 

subsequent material changes to the Japanese Capital Rules to include, for example, 

another capital approach, - the Commission will review and assess the impact of such 

changes on the Capital Comparability Determination Order as it is then in effect, and may 

amend or supplement the Order.

72 

 72 The Commission also may amend or supplement the Order to address any material changes to the CFTC 

Capital Rules and CFTC Financial Reporting Rules that are adopted after a final Order is issued. 
27

In addition, although the BCBS bank capital standards establish minimum capital 

standards that are consistent with the requirements of the Commission’s Bank-Based 

Approach, the Commission notes that consistency with the BCBS standards is not 

determinative of a finding of comparability with the CFTC Capital Rules. In the 

Commission’s view, a foreign jurisdiction’s consistency with the BCBS international 

bank standards is an element in the Commission’s comparability assessment, but, in and 

of itself, it may not be sufficient to demonstrate comparability with the CFTC Capital 

Rules without an assessment of the individual elements of the foreign jurisdiction’s 

capital framework.

Capital and financial reporting regimes are complex structures comprised of a 

number of interrelated regulatory components. Differences in how jurisdictions approach 

and implement these regimes are expected, even among jurisdictions that base their 

requirements on the principles and standards set forth in the BCBS international 

framework. Therefore, the Commission’s comparability determination involves a 

detailed assessment of the relevant requirements of the foreign jurisdiction and whether

those requirements, viewed in the aggregate, lead to an outcome that is comparable to the 

outcome of the CFTC’s corresponding requirements. Consistent with this approach, the 

Commission has grouped the CFTC Capital Rules and the CFTC Financial Reporting 

Rules into key categories that focus the analysis on whether the Japanese capital and 

financial reporting requirements are comparable to the Commission’s requirements in 

purpose and effect, and not whether the Japanese requirements meet every aspect or 

contain identical elements as the Commission’s requirements. 
28

Specifically, as discussed in detail below, the Commission used the following key 

categories in its review: (i) the quality of the equity and debt instruments that qualify as 

regulatory capital, and the extent to which the regulatory capital represents committed 

and permanent capital that would be available to absorb unexpected losses or 

counterparty defaults; (ii) the process of establishing minimum capital requirements for a 

Japanese nonbank SD and how such process addresses market risk and credit risk of the 

firm’s on-balance sheet and off-balance sheet exposures; (iii) the financial reports and 

other financial information submitted by a Japanese nonbank SD to its relevant regulatory 

authorities to effectively monitor the financial condition of the firm; and (iv) the 

regulatory notices and other communications between the Japanese nonbank SD and its 

relevant regulatory authorities that detail potential adverse financial or operational issues 

that may impact the firm. The Commission also reviewed the manner in which

compliance by a Japanese nonbank SD with the Japanese Capital Rules and Japanese 

Financial Reporting Rules is monitored and enforced. The Commission invites public 

comment on all aspects of the FSA Application and on the Commission’s proposed 

Capital Comparability Determination discussed below.

A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial 

Reporting Rules and Japanese Capital Rules and Japanese Financial 

Reporting Rules

1. Regulatory Objectives of CFTC Capital Rules and CFTC Financial Reporting 

Rules

The regulatory objectives of the CFTC Capital Rules and the CFTC Financial 

Reporting Rules are to further the Congressional mandate to ensure the safety and 
29

soundness of nonbank SDs to mitigate the greater risk to nonbank SDs and the financial 

system arising from the use of swaps that are not cleared.73 A primary function of the 

nonbank SD’s capital is to protect the solvency of the firm from decreases in the value of 

firm assets and from losses, including losses resulting from counterparty defaults and 

margin collateral failures, by requiring the firm to maintain an appropriate level of 

capital, including qualifying subordinated debt, to absorb such losses without becoming 

insolvent. With respect to swap positions, capital and margin perform complementary 

risk mitigation functions by protecting nonbank SDs, containing the amount of risk in the 

financial system as a whole, and reducing the potential for contagion arising from 

uncleared swaps.

The objective of the CFTC Financial Reporting Rules is to provide the 

Commission with the means to monitor and assess a nonbank SD’s financial condition, 

including the nonbank SD’s compliance with minimum capital requirements. The CFTC 

Financial Reporting Rules are designed to provide the Commission and NFA, which 

along with the Commission oversees nonbank SDs’ compliance with Commission 

regulations, with a comprehensive view of the financial health and activities of the 

nonbank SD. The Commission’s rules require nonbank SDs to file financial information,

including periodic unaudited and annual audited financial statements, specific financial

position information, and notices of certain events that may indicate a potential financial 

or operational issue that may adversely impact the nonbank SD’s ability to meet its 

 73 See 7 U.S.C. 6s(e)(3)(A).
30

obligations to counterparties and other creditors in the swaps market, or impact the firm’s 

solvency.

2. Regulatory Objective of Japanese Capital Rules and Japanese Financial 

Reporting Rules

The regulatory objective of the Japanese Capital Rules is to ensure the safety and 

soundness of FIBOs, including Japanese nonbank SDs. The Japanese Capital Rules are

designed to preserve the financial stability and solvency of a Japanese nonbank SD by 

requiring the firm to maintain a sufficient amount of qualifying equity and subordinated 

debt to absorb decreases in the value of firm assets and to cover losses from business 

activities, including counterparty defaults and margin collateral shortfalls associated with 

the firm’s swap dealing activities. The Japanese Capital Rules also place an emphasis on 

high quality equity, as a Japanese nonbank SD must maintain at least 50 percent of its 

minimum capital requirement in the form of Basic Items.74 The Japanese Capital Rules 

further enhance a Japanese nonbank SD’s capital available to meet its minimum capital 

requirements by requiring the firm to subtract the balance sheet carrying value of its fixed 

assets from the firm’s Basic Items in computing its minimum capital.75

The objective of the Japanese Financial Reporting Rules is to enable the FSA to 

assess the financial condition and safety and soundness of Japanese nonbank SDs. The 

Japanese Financial Reporting Rules aim to achieve this objective by requiring each 

 74 The Japanese Capital Rules provide that the total amount of Supplemental Items must be less than the 

total amount of the Japanese nonbank SD’s Basic Items. See Article 176(1)(vii) of the COO. 75 Article 177 of the COO. The Japanese Capital Rules require a Japanese nonbank SD to deduct fixed 

assets from the firm’s Basic Items to better ensure that the Japanese nonbank’s regulatory capital represents 

more liquid assets that may be promptly liquidated at values comparable to carrying value to meet 

obligations to creditors and to cover losses.
31

Japanese nonbank SD to provide financial reports and other financial position and capital 

information to the FSA on a regular basis. The financial reporting by a Japanese nonbank 

SD provides the FSA with information necessary to effectively monitor the Japanese 

nonbank SD’s overall financial condition and its ability to meet its regulatory obligations 

as a FIBO.

3. Commission Analysis

The Commission has reviewed the FSA Application and the relevant Japanese 

laws and regulations, and has preliminarily determined that the overall objectives of

Japanese Capital Rules and CFTC Capital Rules are comparable in that both sets of rules 

are intended to ensure the safety and soundness of nonbank SDs by establishing a 

regulatory regime that requires nonbank SDs to maintain a sufficient amount of

qualifying regulatory capital to absorb losses, including losses from swaps and other 

trading activities, and to absorb decreases in the value of firm assets without the nonbank 

SDs becoming insolvent. The Japanese Capital Rules and CFTC Capital Rules are also 

based on, and consistent with, the BCBS international bank capital framework, which 

was designed to ensure that banking entities hold sufficient levels of capital to absorb 

losses and decreases in the value of assets without the banks becoming insolvent. 

The Japanese Capital Rules are comparable in purpose and effect to the CFTC 

Capital Rules in that both regulatory approaches compute the minimum capital 

requirements based on the level of a nonbank SD’s on-balance sheet and off-balance 

sheet exposures, with the objective and purpose of ensuring that the nonbank SD’s capital 

is adequate to absorb losses resulting from such exposures. The Japanese Capital Rules 

and CFTC Capital Rules also provide for a comparable approach to the calculation of on-
32

balance sheet and off-balance sheet risk exposures using standardized or internal modelbased approaches that result in comparable risk exposure amounts. The Japanese Capital 

Rules’ and CFTC Capital Rules’ requirements for identifying and measuring on-balance 

sheet and off-balance sheet exposures under standardized or internal model-based 

approaches are also consistent with the requirements set forth under the BCBS 

international bank capital framework for identifying and measuring on-balance sheet and 

off-balance sheet exposures.

The Japanese Capital Rules and CFTC Capital Rules further achieve comparable 

outcomes and are comparable in purpose and effect in that both limit the types of capital 

instruments that may qualify as regulatory capital to cover the on-balance sheet and offbalance sheet risk exposures to high quality equity capital and qualifying subordinated 

debt instruments that meet conditions designed to ensure that the holders of the debt have 

effectively subordinated their claims to other creditors of the nonbank SD. Both the 

Japanese Capital Rules and the CFTC Capital Rules define high quality capital by the 

degree to which the capital represents permanent capital that is contributed, or readily 

available to a nonbank SD, on an unrestricted basis to absorb unexpected losses, 

including losses from swaps trading and other activities, without the nonbank SD 

becoming insolvent.

The Japanese Financial Reporting Rules are also comparable in purpose and 

effect with the CFTC Financial Reporting Rules as both the FSA and CFTC require 

nonbank SDs to file periodic financial reports, including unaudited financial reports and 

an annual audited financial report, detailing their financial operations and demonstrating 

their compliance with minimum capital requirements. In addition to providing the CFTC 
33

and FSA with information necessary to comprehensively assess the financial condition of 

a nonbank SD on an ongoing basis, the financial reports further provide the CFTC and 

FSA with information regarding potential changes in a nonbank SD’s risk profile by 

disclosing changes in account balances reported over a period of time. Such changes in 

account balances may indicate that the nonbank SD has entered into new lines of 

business, has increased its activity in an existing line of business relative to other 

activities, or has terminated a previous line of business. 

The prompt and effective monitoring of the financial condition of nonbank SDs 

through the receipt and review of periodic financial reports supports the Commission and 

FSA in meeting their respective objectives of ensuring the safety and soundness of 

nonbank SDs. In this connection, the early identification of potential financial issues 

provides the Commission and FSA with an opportunity to address such issues with the 

nonbank SD before they develop to a state where the financial condition of the firm is 

impaired such that it may no longer hold a sufficient amount of qualifying regulatory 

capital to absorb decreases in the value of firm assets or cover losses from its business 

activities, including the firm’s swap dealing activities and obligations to swap 

counterparties.

The Commission invites public comment on its analysis above, including 

comment on the FSA Application and relevant Japanese laws and regulations.

B. Nonbank Swap Dealer Qualifying Capital

1. CFTC Capital Rules: Qualifying Capital Under Bank-Based Approach 

The CFTC Capital Rules require a nonbank SD electing the Bank-Based 

Approach to maintain regulatory capital in the form of common equity tier 1 capital, 
34

additional tier 1 capital, and tier 2 capital in amounts that meet certain stated minimum 

requirements set forth in Regulation 23.101.76 Common equity tier 1 capital, additional 

tier 1 capital, and tier 2 capital are composed of certain defined forms of equity of the 

nonbank SD, including common stock, retained earnings, and qualifying subordinated 

debt.

77 The Commission’s requirement for a nonbank SD to maintain a minimum 

amount of defined qualifying capital and subordinated debt is intended to ensure that the

firm maintains a sufficient amount of regulatory capital to absorb decreases in the value 

of the firm’s assets and to cover losses resulting from the firm’s swap dealing and other 

activities, without the firm becoming insolvent.

Common equity tier 1 capital is generally composed of an entity’s common stock 

instruments and any related surpluses, retained earnings, and accumulated other 

comprehensive income, and is a more conservative or permanent form of capital than

additional tier 1 and tier 2 capital.78 Additional tier 1 capital is generally composed of 

equity instruments such as preferred stock and certain hybrid securities that may be 

converted to common stock if triggering events occur.

79 Total tier 1 capital is composed 

of common equity tier 1 capital and further includes additional tier 1 capital.

80 Tier 2 

capital includes certain types of instruments that include both debt and equity 

characteristics such as qualifying subordinated debt.81

 76 See 17 CFR 23.101(a)(1)(i). 77 The terms “common equity tier 1 capital,” “additional tier 1 capital,” and “tier 2 capital” are defined in 

the bank holding company regulations of the Federal Reserve Board. See 12 CFR 217.20. 78 12 CFR 217.20. 79 Id. 80 Id. 81 Id.
35

Subordinated debt must meet certain conditions to qualify as tier 2 capital under

the CFTC Capital Rules. Specifically, subordinated debt instruments must have a term of 

at least one year (with the exception of approved revolving subordinated debt agreements 

which may have a maturity term that is less than one year), and contain terms that 

effectively subordinate the rights of lenders to receive any payments, including accrued 

interest, to other creditors of the firm.82

Common equity tier 1 capital, additional tier 1 capital, and tier 2 capital are 

permitted to be included in a nonbank SD’s regulatory capital and used to meet the firm’s 

minimum capital requirement due to their characteristics of being permanent forms of 

capital that are subordinate to the claims of other creditors, which ensures that a nonbank 

SD will have this regulatory capital to absorb decreases in the value of the firm’s assets

and losses from business activities, including swap dealing activities, without the firm 

becoming insolvent.

2. Japanese Capital Rules: Qualifying Capital

The Japanese Capital Rules require each Japanese nonbank SD to maintain a 

“capital adequacy amount” (i.e., Basic Items and Supplemental Items) that equals or 

exceeds 120 percent of the firm’s “risk equivalent amount,” which is the sum of the 

firm’s market risk, credit risk, and basic risk.83 Basic Items are composed of the 

Japanese nonbank SD’s balance sheet capital including: issued and outstanding shares; 

(ii) the payment for an application for new shares; (iii) the capital surplus; (iv) the earned 

 82 The subordinated debt must meet the requirements set forth in SEC Rule 18a-1d (17 CFR 240.18a-1d). 

See 17 CFR 23.101(a)(1)(i)(B). 83 See 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.
36

surplus; (v) the negative valuation difference on available-for-sale securities; and (vi) the 

firm’s own treasury stock.84 Supplemental Items include the positive valuation 

difference on available-for-sale securities and certain subordinated debt instruments.85

Subordinated debt instruments also must meet certain conditions to qualify as 

Supplemental Items under the Japanese Capital Rules, including containing appropriate 

provisions subordinating the rights of the lender to the payment of principal and interest

to other creditors of the Japanese nonbank SD.

86 The Japanese Capital Rules also

provide that a minimum of 50 percent of a Japanese nonbank SD’s capital adequacy 

amount must be composed of Basic Items.87

The Japanese Capital Rules further require a Japanese nonbank SD, in computing 

its capital adequacy amount, to deduct the balance sheet carrying value of fixed assets

from its Basic Items.

88 The deduction of the carrying value of fixed assets is a

conservative approach to the computation of a Japanese nonbank SD’s capital adequacy 

amount as it excludes the value of non-liquid fixed assets from the firm’s total Basic 

Items. The deduction of the carrying value of fixed assets from a Japanese nonbank SD’s 

Basic Items reduces the amount of regulatory capital that the firm may recognize in 

meeting its capital requirements, and places an emphasis on the Japanese nonbank SD

maintaining liquid assets to meet its minimum capital requirement to absorb business 

 84 See Article 176(1)(i) through (vi) of the COO. 85 See Article 176(1)(vii) of the COO. 86 Article 176(2) and (3) of the COO. 87 FSA Application, pp. 14-15. 88 See Article 177 of the COO for a breakdown of the fixed assets to be deducted from the Basic Items.
37

losses and decreases in the value of firm assets, and to satisfy financial obligations to 

counterparties and creditors.

89

3. Commission Analysis

The Commission has reviewed the FSA Application and the relevant Japanese 

laws and regulations, and has preliminarily determined that the Japanese Capital Rules 

are comparable in purpose and effect to CFTC Capital Rules with regard to the types and 

characteristics of a nonbank SD’s equity that qualifies as regulatory capital in meeting its 

minimum requirements. The Japanese Capital Rules and the CFTC Capital Rules for 

nonbank SDs both require a nonbank SD to maintain a quantity of high-quality and 

permanent capital that, based on the firm’s activities and on-balance sheet and offbalance sheet exposures, is sufficient to absorb losses and decreases in the value of the 

firm’s assets without resulting in the firm becoming insolvent.

The Japanese Capital Rules and the CFTC Capital Rules permit nonbank SDs to 

recognize comparable forms of equity capital and qualifying subordinated debt 

instruments toward meeting minimum capital requirements, with both the Japanese 

Capital Rules and the CFTC Capital Rules placing an emphasis on high quality equity 

capital instruments. In this regard, the types and characteristics of the equity instruments 

included in Basic Items under the Japanese Capital Rules are comparable to the types and 

characteristics of equity instruments comprising common equity tier 1 capital and 

additional tier 1 capital under the CFTC Capital Rules. Specifically, the Japanese Capital 

 89 The Japanese Capital Rules require a Japanese nonbank SD to deduct illiquid fixed assets from its 

regulatory capital to better ensure that the firm’s regulatory capital reflects assets that may be more 

promptly liquidated at values comparable to carrying values to meet losses. As discussed infra, under the 

CFTC Capital Rules, fixed assets are not deducted from regulatory capital, and are included in the nonbank 

SD’s risk weighted assets. 
38

Rules’ Basic Items and the CFTC Capital Rules’ common equity tier 1 capital and 

additional tier 1 capital are comparable in that these forms of equity capital have similar 

characteristics (e.g., the equity must be in the form of high-quality, committed, and 

permanent capital) and these forms of capital represent contributed equity capital that 

generally has no priority to the distribution of firm assets or income with respect to other 

shareholders or creditors of the firm, which allows a nonbank SD to use this equity to 

absorb decreases in the value of firm assets and cover losses from business activities, 

including the firm’s swap dealing activities. 

Supplemental Items under the Japanese Capital Rules are also comparable to tier 

2 capital under the CFTC Capital Rules. Specifically, the qualifying conditions imposed 

on subordinated debt instruments are comparable under the Japanese Capital Rules and 

the CFTC Capital Rules and ensure that the debt has qualities that support its recognition 

by a nonbank SD as equity for capital purposes, including that the debt lenders have

effectively subordinated their claims for repayment on the debt to other creditors of the 

nonbank SD. Qualifying subordinated debt under the Japanese Capital Rules and CFTC 

Capital Rules also must contain provisions limiting or restricting repayment of the 

subordinated loans if such repayments result in the nonbank SD’s equity falling below 

certain defined thresholds. These terms and conditions provide assurances that the 

subordinated debt is appropriate to be recognized as regulatory capital available to a 

nonbank SD to meet its obligations and to absorb business losses and decreases in the 

value of firm assets.

The Japanese Capital Rules differ from the CFTC Capital Rules, however, in that 

the Japanese Capital Rules require Japanese nonbank SDs to exclude the carrying value 
39

of fixed assets from the sum of the Basic Items in computing the capital adequacy 

amount. The CFTC Capital Rules do not require a nonbank SD to exclude fixed assets 

from the firm’s common equity tier 1 capital or additional tier 1 capital. The deduction 

of the carrying value of fixed assets is a stricter capital standard as it imposes an 

obligation on Japanese nonbank SDs to meet minimum regulatory capital requirements 

with assets that are more liquid than fixed assets.

Having reviewed the FSA Application and the relevant Japanese laws and 

regulations, the Commission has made a preliminary determination that the Japanese 

Capital Rules and CFTC Capital Rules impose comparable requirements on Japanese 

nonbank SDs with respect to the types and characteristics of equity capital that must be 

used to meet minimum regulatory capital requirements. The Commission invites public 

comment on its analysis above, including comment on the FSA Application and relevant 

Japanese laws and regulations.

C. Nonbank Swap Dealer Minimum Capital Requirement

1. CFTC Capital Rules: Nonbank SD Minimum Capital Requirement

The CFTC Capital Rules require a nonbank SD electing the Bank-Based 

Approach to maintain regulatory capital that satisfies each of the following criteria: (i) an 

amount of common equity tier 1 capital of at least $20 million; (ii) an aggregate of 

common equity tier 1 capital, additional tier 1 capital, and tier 2 capital in an amount 

equal to or in excess of 8 percent of the nonbank SD’s uncleared swap margin amount:

(iii) an aggregate amount of common equity tier 1 capital, additional tier 1 capital, and 

tier 2 capital equal to or greater than 8 percent of the nonbank SD’s total risk-weighted 
40

assets, provided that common equity tier 1 capital comprises at least 6.5 percent of the 8

percent; and (iv) the amount of capital required by the NFA.

90

Prong (i) above requires each nonbank SD electing the Bank-Based Approach to 

maintain a minimum of $20 million of common equity tier 1 capital in order to operate as 

a nonbank SD. The requirement that each nonbank SD electing the CFTC Bank-Based

Approach maintain a minimum of $20 million of common equity tier 1 capital is also 

consistent with the minimum capital requirement for nonbank SDs electing the NLA 

Approach and the TNW Approach.91 The Commission adopted this minimum 

requirement as it believed that the role a nonbank SD performs in the financial markets 

by engaging in swap dealing activities warranted a minimum level of capital, stated as a 

fixed dollar amount that does not fluctuate with the level of the firm’s dealing activities, 

to help ensure that the firm meets its financial commitments to swap counterparties and 

creditors without the firm becoming insolvent.

92 

Prong (ii) above is a minimum capital requirement that is based on the amount of 

uncleared margin for swap transactions entered into by the nonbank SD and is computed 

on a counterparty by counterparty basis. The requirement for a nonbank SD to maintain 

minimum capital equal to 8 percent of the firm’s uncleared swap margin provides a 

capital floor based on a measure of the risk and volume of the swap positions, and the 

number of counterparties and the complexity of operations, of the nonbank SD. The 

 90 See 17 CFR 23.101(a)(1)(i). NFA has not adopted a separate capital requirement for a nonbank SD. 91 Nonbank SDs electing the NLA Approach are subject to a minimum capital requirement that includes a 

fixed minimum dollar amount of net capital of $20 million. See 17 CFR 23.101(a)(1)(ii)(A)(1). Nonbank 

SDs electing the TNW Approach are required to maintain levels of tangible net worth that equals or 

exceeds $20 million plus the amount of the nonbank SDs’ market risk and credit risk associated with the 

firms’ dealing activities. See 17 CFR 23.101(a)(2)(ii)(A). 92 See, e.g., 85 FR 57492.
41

intent of the minimum capital requirement based on a percentage of the nonbank SD’s 

uncleared swap margin was to establish a minimum capital requirement that would help 

ensure that the nonbank SD meets all of its obligations as a SD to market participants, 

and to cover potential operational risk, legal risk and liquidity risk in addition to the risks 

associated with its trading portfolio.93

Prong (iii) above is a minimum capital requirement that is based on the Federal 

Reserve Board’s capital requirements for bank holding companies and is consistent with 

the BCBS international capital adequacy framework for banking institutions. As noted 

above, a nonbank SD under prong (iii) must maintain an aggregate of common equity tier 

1 capital, additional tier 1 capital, and tier 2 capital in an amount equal to or greater than 

8 percent of the nonbank SD’s total risk-weighted assets, with common equity tier 1 

capital comprising at least 6.5 percent of the 8 percent. Risk-weighted assets are a 

nonbank SD’s on-balance sheet and off-balance sheet exposures, including proprietary 

swap, security-based swap, equity, and futures positions, weighted according to risk. The

Bank-Based Approach requires each nonbank SD to maintain regulatory capital in an 

amount that equals or exceeds 8 percent of the firm’s total risk-weighted assets to help 

ensure that the nonbank SD’s level of capital is sufficient to absorb decreases in the value 

of the firm’s assets and unexpected losses resulting from business activities, including 

uncollateralized defaults from swap counterparties, without the nonbank SD becoming 

insolvent.

 93 See, 85 FR 57462.
42

A nonbank SD must compute its risk-weighted assets using standardized market 

risk and/or credit risk charges, unless the nonbank SD has been approved by the 

Commission or NFA to use internal models.94 For standardized market risk charges, the 

Commission incorporates by reference the standardized market risk charges set forth in 

Regulation 1.17 for FCMs and SEC Rule 18a-1 for nonbank SBSDs.

95 The standardized 

market risk charges under Regulation 1.17 and SEC Rule 18a-1 are calculated as a 

percentage of the market value or notional value of the nonbank SD’s marketable 

securities and derivatives positions, with the percentages applied to the market value or 

notional value increasing as the expected or anticipated risk of the positions increases.

96

As stated above, the nonbank SD must maintain qualifying capital in an amount that 

equals or exceeds 8 percent of the firm’s total market risk-weighted assets.97

With respect to standardized credit risk charges for exposures from nonderivatives positions, a nonbank SD computes its on-balance sheet and off-balance sheet 

exposures in accordance with the standardized credit risk charges adopted by the Federal 

Reserve Board and set forth in Subpart D of 12 CFR 217.98 Standardized credit risk 

charges are computed by multiplying the amount of the exposure by defined counterparty 

 94 See 17 CFR 23.101(a)(1)(i)(B) and the definition of the term BHC equivalent risk-weighted assets in 17 

CFR 23.100.

95 See paragraph (3) of the definition of the term BHC equivalent risk-weighted assets in 17 CFR 23.100. 96 See 17 CFR 1.17(c)(5) and 17 CFR 240.18a-1(c)(1). 97 See 17 CFR 23.100 (definition of BHC equivalent risk-weighted assets). As noted, a nonbank SD is 

required to maintain qualifying capital (i.e., an aggregate of common equity tier 1 capital, additional tier 1 

capital, and tier 2 capital) in an amount that exceeds 8 percent of its market risk-weighted assets and creditrisk-weighted assets. The regulations, however, require the nonbank SD to effectively maintain qualifying 

capital in excess of 100 percent of is market risk-weighted assets by requiring the nonbank SD to multiply 

its market-risk weighted assets by a factor of 12.5. 98 See 23.101(a)(1)(i)(B) and paragraph (1) of the definition of the term BHC equivalent risk-weighted 

assets in 17 CFR 23.100.
43

credit risk factors that range from 0 percent to 150 percent.

99 A nonbank SD with offbalance sheet exposures is required to calculate a credit risk charge by multiplying each 

exposure by a credit conversion factor that ranges from 0 percent to 100 percent, 

depending on the type of exposure.100 

A nonbank SD may compute standardized credit risk charges for derivatives

positions, including uncleared swaps and non-cleared security-based swaps, using either 

the current exposure method (“CEM”) or the standardized approach for measuring 

counterparty credit risk (“SA-CCR”).101 Both CEM and SA-CCR are non-model, rulesbased, approaches to calculating counterparty credit risk for derivatives positions. Credit 

risk under CEM is the sum of: (i) the current exposure (i.e., the positive mark-to-market) 

of the derivatives contract; and (ii) the potential future exposure, which is calculated as 

the product of the notional principal amount of the derivatives contract multiplied by a 

standard credit risk conversion factor set forth in the rules of the Federal Reserve 

Board.102 Credit risk under SA-CCR is defined as the exposure at default amount of a 

derivatives contract, which is computed as the sum of: (i) the replacement costs of the 

 99 See 17 CFR 217.32. Lower credit risk factors are assigned to entities with lower credit risk and higher 

credit risk factors are assigned to entities with higher credit risk. For example, a credit risk factor of 0% is 

applied to exposures to the U.S. government, the Federal Reserve Bank, and U.S. government agencies (see

12 CFR 217.32 (a)(1)), and a credit risk factor of 100% is assigned to an exposure to foreign sovereigns 

that are not members of the Organization of Economic Co-operation and Development (see 12 CFR 

217.32(a)(2)). 

100 See 17 CFR 217.33. 101 See 17 CFR 217.34. See also, Regulation 23.100 (17 CFR 23.100) defining the term BHC risk-weighted 

assets, which provides that a nonbank SD that does not have model approval may use either CEM or SACCR to compute its exposures for over-the-counter derivative contracts without regard to the status of its 

affiliate entities to use CEM or SA-CCR under the Federal Reserve Board’s capital rules. 102 See 12 CFR 217.34.
44

contract (i.e., the positive mark-to market); and (ii) the potential future exposure of the

contract multiplied by a factor of 1.4.103

A nonbank SD also may obtain approval from the Commission or NFA to use 

internal models to compute market risk and/or credit risk charges in lieu of the 

standardized charges. A nonbank SD seeking approval to use an internal model is 

required to submit an application to the Commission or NFA.

104 The application is 

required to include, among other things, a list of categories of positions that the nonbank 

SD holds in its proprietary accounts and a brief description of the methods that the 

nonbank SD will use to calculate deductions for market risk and/or credit risk charges for 

such positions, as well as a description of the mathematical models used to compute 

market risk and credit risk charges.

A nonbank SD approved by the Commission or NFA to use internal models to 

compute market risk is required to comply with Subpart F of the Federal Reserve Board’s 

Part 217 regulations (“Subpart F”).105 Subpart F is based on models that are consistent 

with the BCBS Basel 2.5 capital framework.

106 The Commission’s qualitative and 

quantitative requirements for internal capital models also are comparable to the SEC’s 

 103 See 12 CFR 217.132(c). 104 See 17 CFR 23.102(c). 105 See paragraph (4) of the definition of BHC equivalent risk-weighted assets in 17 CFR 23.100. 106 Compare 17 CFR 23.100 (providing for a nonbank SD that is approved to use internal models to 

calculate market and credit risk to calculate its RWAs using Subparts E and F of 12 CFR Part 217), Subpart 

F of 12 CFR, 17 CFR 23.101(a)(1)(ii) (providing for an SD that elects the Net Liquid Assets Approach to 

calculate its net capital in accordance with Rule 18a-1), and 17 CFR § 23.102(a), with Basel Committee on 

Banking Supervision, Revisions to the Basel II Market Risk Framework (2011), 

https://www.bis.org/publ/bcbs193.pdf (describing the revised internal model approach under Basel 2.5).
45

existing internal capital model requirements for broker-dealers in securities and 

SBSDs,

107 which are also broadly based on the BCBS Basel 2.5 capital framework. 

A nonbank SD approved to use internal models to compute credit risk is required 

to perform such computation in accordance with Subpart E of the Federal Reserve 

Board’s Part 217 regulations.

108 These internal credit risk modeling requirements are 

also based on the Basel 2.5 capital framework and the Basel 3 capital framework.

Under the Basel 2.5 capital framework, nonbank SDs have flexibility in 

developing their internal models, but must follow certain minimum standards. Internal 

market risk and credit risk models must follow a Value at Risk (“VaR”) structure to 

compute, on a daily basis, a 99th percentile, one-tailed confidence interval for the 

potential losses resulting from an instantaneous price shock equivalent to a 10-day 

movement in prices (unless a different time-frame is specifically indicated). The 

simulation of this price shock must be based on a historical observation period of 

minimum length of one year, but there is flexibility on the method used to render 

simulations, such as variance-covariance matrices, historical simulations, or Monte Carlo.

The Commission and the Basel standards for internal models also have 

requirements on the selection of appropriate risk factors as well as on data quality and 

update frequency.109 One specific concern is that internal models must capture the non-

 107 The SEC internal model requirements for SBSDs are listed in 17 CFR 240.18a-1(d). See also SEC 

FOCUS Report Part II, Computation of Net Capital (Filer Authorized to Use Models) (providing for 

inclusion of a market risk exposure section for Basel 2.5 firms).

108 12 CFR 217 Subpart E. 109 See 17 CFR Appendix A to Subpart E of Part 23(i)(2)(iii), and Basel Committee on Banking 

Supervision, Revisions to the Basel II Market Risk Framework (2011), paragraph 718(Lxxvi)(e), available 

at: https://www.bis.org/publ/bcbs193.pdf.
46

linear price characteristics of options positions, including but not limited to, relevant 

volatilities at different maturities.110

In addition, BCBS standards for market risk models include a series of additive 

components for risks for which the broad VaR is ill-suited or that may need targeted 

calculation. These include the calculation of a Stressed VaR measure (with the same 

specifications as the VaR, but calibrated to historical data from a continuous 12-month 

period of significant financial stress relevant to the firm’s portfolio); a Specific Risk 

measure (which includes the effect of a specific instrument); an Incremental Risk 

measure (which addresses changes in the credit rating of a specific obligor which may 

appear as a reference in an asset); and a Comprehensive Risk measure (which addresses 

risk of correlation trading positions).

2. Japanese Capital Rules: Japanese Nonbank Swap Dealer Minimum Capital 

Requirements

The Japanese Capital Rules impose bank-like capital requirements on a Japanese 

nonbank SD that, consistent with the BCBS international bank capital framework, require 

the Japanese nonbank SD to hold a sufficient amount of qualifying equity capital and 

subordinated debt to absorb decreases in the value of a firm assets and to cover losses 

from its business activities, including the firm’s swap dealing activities, without the firm 

becoming insolvent. Specifically, the Japanese Capital Rules require each Japanese 

nonbank SD to maintain a “capital adequacy amount” that equals or exceeds 120 percent

 110 The Commission’s requirement is set forth in paragraph (i)(2)(iv)(A) of Appendix A to Subpart E of 17 

CFR Part 23. See also, Basel Committee on Banking Supervision, Revisions to the Basel II Market Risk 

Framework (2011), paragraph 718(Lxxvi)(h), available at: https://www.bis.org/publ/bcbs193.pdf
47

of the firm’s “risk equivalent amount.”111 The “capital adequacy amount” is calculated 

as the Japanese nonbank SD’s qualifying balance sheet equity capital in the form of Basic 

Items and Supplemental Items. The Japanese Capital Rules further require that at least 

50 percent of the Japanese nonbank SD’s capital used to meet the 120 percent minimum 

requirement must be composed of Basic Items, and any subordinated debt included in

Supplemental Items must meet regulatory requirements designed to ensure that the debt is 

adequately subordinated to claims of other potential creditors of the firm.

112

The Japanese nonbank SD’s “risk equivalent amount” is calculated as the sum of

the: (i) market risk equivalent amount; (ii) counterparty risk equivalent amount; and (iii) 

basic risk equivalent amount.113 Comparable to nonbank SDs under the CFTC BankBased Approach, the Japanese Capital Rules require Japanese nonbank SDs to compute 

market risk and/or credit risk using a standardized approach or, if approved to use 

internal models, market risk and/or credit risk models. The basic risk equivalent amount 

is computed as an amount equal to 25 percent of the Japanese nonbank SD’s defined 

annual operating expenses, and is intended to provide a capital cushion to cover risks that 

may accrue in the course of executing ordinary business operations, such as error in 

business transactions.

114

For standardized market risk charges, the Japanese Capital Rules require a 

Japanese nonbank SD to calculate a market risk equivalent amount to reflect possible 

 111 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.

112 Article 176(1)(vii) of the COO. 113 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. 114 Article 178(1)(iii) of the COO and Article 16 of the Notice on Capital.
48

decreases in value of the firm’s financial positions including equity risk, interest rate risk, 

foreign exchange risk, commodity risk, crypto asset risk, and option risk.115 The market 

risk equivalent amount is calculated by the Japanese nonbank SD by multiplying

specified market risk charges set forth in the Japanese Capital Rules by the notional or 

market value of the relevant assets and positions. A Japanese nonbank SD is further 

required to include the full value of its market risk equivalent amount in its aggregate risk 

equivalent amount, which effectively requires the Japanese nonbank SD to hold

qualifying equity capital and subordinated debt in an amount that equals or exceeds 120 

percent of the market risk equivalent amount.

With respect to credit risk for non-derivatives positions, the Japanese Capital 

Rules require a Japanese nonbank SD to calculate its standardized counterparty risk 

equivalent amount by multiplying its exposure under a given transaction by the specific 

risk weight applicable to the counterparty under the provisions of the Japanese Capital 

Rules. In this regard, the Japanese Capital Rules impose risk-weights ranging from 0 

percent to 25 percent on exposures to governmental financial institutions, nongovernmental financial institutions, general corporations, and individuals.116 For certain 

exposures, credit ratings are used to determine the percentage of the counterparty credit 

risk exposure and, if no credit ratings are available, the Japanese nonbank SD generally 

applies a 25 percent risk-weight.

A Japanese nonbank SD is required to include the full amount of the counterparty 

risk equivalent in its aggregate risk equivalent amount. Therefore, a Japanese nonbank 

 115 FSA Notice No. 59 of 2007, Chapter III, Section 2, Article 4. 116 Article 15(3) of the Notice on Capital.
49

SD is effectively required to maintain a capital adequacy amount that is equal to or in 

excess of 120 percent of its credit risk equivalent amount.

With respect to credit risk for derivatives positions, the Japanese Capital Rules

require 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 risk exposure under a derivatives transaction pursuant to 

the Commission’s Bank-Based Approach.117 Under the CEM, a Japanese nonbank SD 

calculates its exposures for over-the-counter derivatives using a standardized rules-based 

approach, and is required to hold an amount of qualifying capital that equals or exceeds 

120 percent of the aggregate derivatives exposures.

Japanese nonbank SDs may use internal models approved by the FSA to calculate 

their market risk equivalent amount and/or counterparty risk equivalent amount in lieu of 

the standardized charges. Japanese Capital Rules set out qualitative and quantitative 

requirements118 that internal models must meet in order to be approved for use. The 

Japanese Capital Rules also require Japanese nonbank SDs to satisfy qualitative and 

quantitative requirements in order to continue to use models after obtaining the initial 

approval. These qualitative and quantitative requirements address: the effective review 

and assessment of models during development, validation, and periodic examinations; 

identification of key assumptions and limitations; and management of model risk. In this 

regard, Japanese nonbank SDs approved to use internal models for capital purposes are 

 117 See 17 CFR 23.101(a)(1)(i) and supra, note 78. 118 Article 13 of the Notice on Capital.
50

subject to principles for model risk management.119 The principles lay out practices for 

nonbank SDs, covering model governance, model risk rating, documentation, testing, 

monitoring, independent validation, controls of vendor products and external resources, 

and internal audit. The ongoing monitoring includes frequent tests, such as stress testing, 

backtesting and benchmarking. The FSA periodically confirms that firms using models 

are adhering to the conditions set.

The internal market risk model-based methodology contained in the Japanese 

Capital Rules is based on the Basel 2.5 standard,

120 and requires a Japanese nonbank SD 

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

equivalent to a 10 business-day movement in rates and prices; (ii) effective historical 

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

121 The 

Japanese Capital Rules require a Japanese nonbank SD using approved internal models 

for market risk to calculate a stressed VaR, specific risk, incremental risk, and 

comprehensive risk of correlation trading.122

The Japanese Capital Rules’ internal credit risk model-based methodology is also 

based on the Basel 2.5 standard. The Japanese Capital Rules allow for the estimation of 

expected exposure, as a measure of potential future exposure, based on VaR techniques 

as well, with adjustments to the period of risk, as appropriate to the asset and 

 119 Principles for Model Risk Management, Financial Services Agency (November 12, 2021). The 

principles are available at: https://www.fsa.go.jp/en/news/2021/2021112en.html. 120 Compare Article 1 through 14-11 of the Notice on Capital with Revisions to the Basel II Market Risk 

Framework.

121 Article 13(3)(i), (ii) and (iv) of the Notice on Capital. 122 Article 13-2 and 14-9 of the Notice on Capital.
51

counterparty.123 Credit risk models may include internal ratings based on the estimation 

of default probabilities, consistent with the Basel framework and subject to the same 

model risk management guidelines.

3. Commission Analysis 

The Commission has reviewed the FSA Application and the relevant Japanese 

laws and regulations, and has preliminarily determined that the Japanese Capital Rules 

are comparable in purpose and effect to CFTC Capital Rules with regard to the 

establishment of a nonbank SD’s minimum capital requirement and the calculation of the 

nonbank SD’s amount of regulatory capital. Although there are differences in the 

minimum capital requirements and calculation of regulatory capital between the Japanese 

Capital Rules and the CFTC Capital Rules, as discussed below, the Commission 

preliminarily believes that the Japanese Capital Rules and CFTC Capital Rules are 

designed to ensure the safety and soundness of a nonbank SD and, subject to the 

proposed condition discussed below, will achieve comparable outcomes by requiring the 

firm to maintain a minimum level of qualifying regulatory capital and subordinated debt

to absorb losses from the firm’s business activities, including its swap dealing activities, 

and decreases in the value of the firm’s assets, without the nonbank SD becoming 

insolvent.

The CFTC Capital Rules require a nonbank SD electing the Bank-Based 

Approach to maintain regulatory capital in an amount that meets or exceeds each of the 

following requirements: (i) $20 million of common equity tier 1 capital; (ii) 8 percent of 

 123 FSA Notice 15.2-2.
52

the nonbank SD’s uncleared swap margin amount; (iii) 8 percent of the nonbank SD’s 

risk-weighted assets (with common equity tier 1 capital comprising at least 6.5 percent of 

the 8 percent);and (iv) the amount of capital required by NFA.124 The Japanese Capital 

Rules require a Japanese nonbank SD to maintain regulatory capital in an amount equal 

to or in excess of 9.6 percent of the market risk, credit risk, and operational risk of the 

firm.125

The Japanese Capital Rules differ from the CFTC Capital Rules in that the

Japanese Capital Rules do not impose a capital requirement on Japanese nonbank SDs 

based on a minimum dollar amount or based on a percentage of the margin for uncleared 

swap transactions. However, the approach for conducting a Capital Comparability

Determination is a principles-based, holistic approach that focuses on whether the 

applicable foreign jurisdiction’s capital requirements achieve comparable outcomes to the 

corresponding CFTC requirements for nonbank SDs.126 The focus of the comparability 

determination is on whether the foreign jurisdiction’s capital requirements are 

comparable to the Commission’s in purpose and effect, and not on whether the foreign 

jurisdiction’s capital requirements are comparable in every aspect or contain identical 

elements based on a line-by-line assessment or comparison of the foreign jurisdiction’s 

regulatory requirements with the Commission’s regulatory requirements.127 

 124 17 CFR 23.101(a)(1)(i). NFA has not adopted additional capital requirements for nonbank SDs and, 

therefore, an analysis of the comparability of this element of the CFTC Capital Rules with the Japanese 

Capital Rules is not applicable.

125 The Japanese Capital Rules require a Japanese nonbank SD to maintain a capital adequacy amount that 

equals or exceeds 120 percent of its risk-weighted assets. Adjusting the Japanese Capital Rules approach to 

be consistent with the CFTC Capital Rules approach results in a Japanese nonbank SD having an effective 

minimum capital requirement of 9.6 percent of its risk weighted assets.

126 17 CFR 23.106(a)(3)(ii). See also 85 FR 57520 at 57521. 127 Id.
53

Based on a principles-based assessment, the Commission preliminarily believes, 

subject to the proposed condition below, and further subject to its consideration of public 

comments to the proposed Capital Comparability Determination and Order, that the 

purpose and effect of the Japanese Capital Rules and the CFTC Capital Rules are 

comparable. In this connection, the Japanese Capital Rules and CFTC Capital rules are 

both designed to require a nonbank SD to maintain a sufficient amount of qualifying

regulatory capital and subordinated debt to absorb losses resulting from the firm’s 

business activities, and decreases in the value of firm assets, without the nonbank SD 

becoming insolvent. As discussed below, the Commission specifically seeks public

comment on the question of whether requirements under the Japanese Capital Rules are 

comparable in purpose and effect to the Commission’s requirement for a nonbank SD to 

hold regulatory capital equal to or greater than 8 percent of its uncleared swap margin 

amount. 

The Commission preliminarily believes that the Japanese Capital Rules and CFTC 

Capital Rules impose a comparable approach by requiring a nonbank SD to maintain 

qualifying equity capital and qualifying subordinated debt in an amount that equals or 

exceeds the nonbank SD’s risk-weighted assets, which are composed of the aggregate of 

the firm’s market risk and credit risk charges. The Japanese Capital Rules, however, 

require a Japanese nonbank SD to maintain a higher percentage of regulatory capital 

relative to the firm’s risk-weighted assets than the CFTC Capital Rules require. 

Specifically, the Japanese Capital Rules require a Japanese nonbank SD to maintain 
54

regulatory capital equal to or greater than 9.6 percent of the firm’s risk-weighted 

assets.128

Furthermore, the Japanese Capital Rules add operational risk to the market risk 

and credit risk charges in setting the minimum capital requirements whereas the CFTC 

Capital Rules sets operational risk as a separate minimum capital requirement from the 

market risk and credit risk calculation of the risk weighted assets.129 Specifically, as 

noted above, under the Japanese Capital Rules the basic risk equivalent amount is 

computed as an amount equal to 25 percent of the Japanese nonbank SD’s defined annual 

operating expenses, and is intended to provide a capital cushion to cover risks that may 

accrue in the course of executing ordinary business operations, such as error in business 

transactions.130 In addition, the Japanese Capital Rules require a Japanese nonbank SD to 

deduct the carrying value of fixed assets from its Basic Items in computing its regulatory 

capital, which promotes a degree of liquidity into the Japanese nonbank SD’s regulatory 

capital. The Commission preliminarily believes the inclusion of an operational risk 

charge with the market risk and credit risk charges, and the deduction of the carrying 

value of fixed assets from regulatory capital, will achieve a comparable outcome to the 

 128 As previously noted, the Japanese Capital Rules require a Japanese nonbank SD to maintain a capital 

adequacy amount that equals or exceeds 120 percent of its risk-weighted assets. For purposes of 

comparison of the two rules, the Japanese Capital Rules effectively require a Japanese nonbank SD to 

maintain an effective minimum capital ratio of 9.6 percent of the firm’s risk-weighted assets and the CFTC 

Capital Rules require a nonbank SD to maintain a minimum capital ratio of 8 percent of the firm’s riskweighted assets.

129 In establishing the requirement that a nonbank SD must maintain a level of regulatory capital in excess 

of 8 percent of the uncleared swap margin amount associated with the firm’s swap transactions, the 

Commission stated that the intent of the uncleared swap margin amount was to establish a method of 

developing a minimum amount of capital for a nonbank SD to meet all of its obligations as a SD to market 

participants, and to cover potential operational risk, legal risk and liquidity risk, and not just the risks of its 

trading portfolio. See, 85 FR 57462 at 57485. 130 Article 178(1)(iii) of the COO and Article 16 of the Notice on Capital. The basic risk equivalent amount 

is calculated as 25 percent of certain defined operating expenses incurred by the Japanese nonbank SD over 

a 12-month period, and includes general expenses, selling expenses, and financial expenses.
55

Commission’s requirement for nonbank SDs to hold regulatory capital in excess of 8 

percent of its uncleared swap margin amount. The Commission specifically seeks public 

comment below on the comparability of this Commission requirement with the Japanese 

requirements designed to address operational risk. 

The calculation of market risk charges and credit risk charges is also comparable 

under the Japanese Capital Rules and the CFTC Capital Rules. Both regimes require a 

nonbank SD to use standardized approaches to compute market and credit risk, unless the 

firms are approved to use internal models. The standardized approaches follow the same 

structure that is now the common global standard: allocating assets to categories 

according to risk and assigning each a risk weight; allocating counterparties to categories 

according to risk assessments and assigning each a risk factor; calculating gross 

exposures based on the valuation of assets; calculating a net exposure allowing offsets 

following well defined procedures and subject to clear limitations; adjusting the net 

exposure by the market risk weights; and finally, for credit risk exposures, multiplying

the sum of net exposures to each counterparty by the corresponding risk factor. After 

reviewing the standardized risk weights contained in the Japanese Capital Rules and the 

CFTC Capital Rules, the Commission preliminarily believes that the resulting risk 

charges are comparable for corresponding categories of instruments and credit exposures. 

Internal market risk and credit risk models under the Japanese Capital Rules and 

the CFTC Capital Rules are based on the BCBS framework and contain comparable 

quantitative and qualitative requirements covering the same risks, including comparable 

model risk management requirements. As both rule sets address the same types of risk, 

with similar allowed methodologies, calibrated to similar risk levels and under similar 
56

controls, the Commission preliminarily believes that these requirements are comparable, 

as they produce similar market and credit risk charges for comparable exposures. Market 

risk charges increase capital requirements, or conversely are deducted from available 

capital, in full amount. Credit risk charges increase capital requirements, or conversely 

are deducted from available capital, with an adjustment. This adjustment to credit risk 

charges is applied in the CFTC Capital Rules as a final multiplication of credit risk 

weights by 8 percent, while the Japanese Capital Rules apply a comparable adjustment 

directly via the counterparty risk weights. The Japanese Capital Rules and the CFTC 

Capital Rules contain comparable requirements for the management of model risk, which 

depend on a series of controls, including the independence of validation, ongoing 

monitoring and audit. The ongoing monitoring includes frequent tests, such as stress 

testing, backtesting and benchmarking.

The Japanese Capital Rules differ from the CFTC Capital Rules in that the 

Japanese Capital Rules do not contain a requirement that each Japanese nonbank SD 

maintain a fixed amount of regulatory capital. As noted previously, the requirement in 

the CFTC Capital Rules for a non-bank SD to maintain a minimum of $20 million of 

common equity tier 1 capital is intended to ensure that each nonbank SD maintains a

level of capital, without regard to the firm’s level of dealing activities, sufficient to meet 

its obligations to swap market participants given the firm’s status as a registered SD.

The Commission preliminarily believes that each CFTC-registered nonbank SD 

should maintain a minimum level of regulatory capital to help ensure that it satisfies its 

regulatory obligations and meets is financial commitments to swap counterparties and 

creditors without the firm becoming insolvent. Therefore, the Commission is proposing 
57

to condition the proposed Capital Comparability Determination Order to require each 

Japanese nonbank SD to maintain a minimum level of regulatory capital in the form of 

Basic Items, as defined in Article 176 of the COO. Specifically, the proposed condition 

would require each Japanese nonbank SD to maintain at all times regulatory capital in the 

form of Basic Items in an amount denominated in yen that is equivalent to or greater than

$20 million in U.S. dollars. The Commission is also proposing that a Japanese nonbank 

SD may convert the yen-denominated amount of its Basic Items to the U.S. dollar

equivalent based on a commercially reasonable and observed exchange rate.

Having compared the minimum capital requirements and the calculation of 

regulatory capital under the Japanese Capital Rules for Japanese nonbank SDs with the 

corresponding minimum capital requirements and calculation of regulatory capital under 

the CFTC’s Capital Rules for nonbank SDs, the Commission preliminarily finds that, 

subject to the proposed condition discussed above, the minimum capital requirements and 

calculation of regulatory capital are comparable. The Commission invites public 

comment on its analysis above, including comment on the FSA Application and Japanese 

laws and regulations, and the Commission’s preliminary determination that the Japanese 

Capital Rules and the CFTC Capital Rules are comparable in purpose and effect and 

achieve comparable outcomes with respect to the minimum regulatory capital 

requirements and the calculation of regulatory capital for nonbank SDs.

The Commission also specifically seeks public comment on the question of 

whether the requirement under the Japanese Capital Rules for a Japanese nonbank SD to 

hold qualifying capital in an amount equal to 25 percent of its defined annual operating 

expenses is sufficiently comparable in purpose and effect to the CFTC’s requirement for 
58

a nonbank SD to hold qualifying capital in amount equal to at least 8 percent of the 

nonbank SD’s uncleared swap margin amount.

The Commission further requests comment on the proposed condition that each 

Japanese nonbank SD maintains a minimum level of regulatory capital in the form of 

yen-denominated Basic Items (as defined in Article 176 of the COO) that equals or 

exceeds the equivalent of $20 million U.S. dollars. Lastly, the Commission requests

comment on the proposed requirement that a Japanese nonbank SD determine the amount 

of yen-denominated Basic Items it holds in U.S. dollars by using a commercially 

reasonable and observed yen/U.S. dollar exchange rate. 

D. Nonbank Swap Dealer Financial Reporting Requirements

1. CFTC Financial Recordkeeping and Reporting Rules for Nonbank Swap 

Dealers

The CFTC Financial Reporting Rules impose financial recordkeeping and 

reporting requirements on nonbank SDs. In this regard, the CFTC Financial Reporting 

Rules require each nonbank SD to prepare and keep current ledgers or similar records 

summarizing each transaction affecting the nonbank SD’s asset, liability, income, 

expense, and capital accounts.

131 The nonbank SD’s ledgers and similar records must be 

prepared in accordance with generally accepted accounting principles as adopted in the 

United States (“U.S. GAAP”), except that if the nonbank SD is not otherwise required to 

prepare financial statements in accordance with U.S. GAAP, the nonbank SD may 

prepare and maintain its accounting records in accordance with International Financial 

 131 17 CFR 23.105(b).
59

Reporting Standards (“IFRS”) issued by the International Accounting Standards 

Board.132

The CFTC Financial Reporting Rules also require each nonbank SD to prepare 

and file with the Commission and NFA periodic unaudited and annual audited financial 

statements.133 A nonbank SD that elects the TNW Approach is required to file unaudited 

financial statements within 17 business days of the close of each fiscal quarter, and its 

annual audited financial statements within 90 days of its fiscal year-end.

134 A nonbank 

SD that elects either the NLA Approach or the Bank-Based Approach is required to file 

unaudited financial statements within 17 business days of the end of each month, and its 

annual audited financial statements within 60 days of the end of its fiscal year.

135 

The CFTC Financial Reporting Rules further provide that a nonbank SD’s 

unaudited financial statements must include: (i) a statement of financial condition; (ii) a 

statement of income/loss; (iii) a statement of changes in liabilities subordinated to claims 

of general creditors; (iv) a statement of changes in ownership equity; (v) a statement 

demonstrating compliance with, and calculation of, the applicable regulatory minimum 

capital requirement; and (vi) such further material information necessary to make the 

required statements not misleading.136 The annual audited financial statements must 

include: (i) a statement of financial condition; (ii) a statement of income/loss; (iii) a 

statement of cash flows; (iv) a statement of changes in liabilities subordinated to claims 

of general creditors; (v) a statement of changes in ownership equity; (vi) a statement 

 132 Id. 133 17 CFR 23.105(d) and (e). 134 17 CFR 23.105(d)(1) and (e)(1). 135 Id. 136 17 CFR 23.105(d)(2).
60

demonstrating the calculation of, and compliance with, the applicable regulatory 

minimum capital requirement; (vii) appropriate footnote disclosures; and (vii) a 

reconciliation of any material differences between the annual audited financial statements 

and the unaudited financial statements prepared as of the nonbank SD’s year-end date.137 

A nonbank SD that has obtained approval from the Commission or NFA to use 

internal capital models also must submit certain model metrics, such as aggregate VaR 

and counterparty credit risk information, each month to the Commission and NFA.138 A 

nonbank SD also is required to provide the Commission and NFA with a detailed list of 

financial positions reported at fair market value as part of its monthly unaudited financial 

statements.139 Each nonbank SD is also required to provide information to the 

Commission and NFA regarding its counterparty credit concentration for the 15 largest 

exposures in derivatives, a summary of its derivatives exposures by internal credit 

ratings, and the geographic distribution of derivatives exposures for the 10 largest 

countries.140

The CFTC Financial Reporting Rules also require a nonbank SD to attach to each 

unaudited and audited financial report an oath or affirmation that to the best knowledge 

and belief of the individual making the affirmation the information contained in the 

financial report is true and correct.141 The individual making the oath or affirmation must 

 137 17 CFR 23.105(e)(4). 138 17 CFR 23.105(k) and (l) and Appendix B to Subpart E of Part 23. 139 17 CFR 23.105(l) and Appendix B to Subpart E of Part 23. 140 17 CFR 23.105(l) in Schedules 2, 3, and 4, respectively. 141 17 CFR 23.105(f).
61

be a duly authorized officer if the nonbank SD is a corporation, or one of the persons 

specified in the regulation for business organizations that are not corporations.

142

The CFTC Financial Reporting Rules further require a nonbank SD to make 

certain financial information publicly available by posting the information on its public 

website.143 Specifically, a nonbank SD must post on its website a statement of financial 

condition and a statement detailing the amount of the nonbank SD’s regulatory capital 

and the minimum regulatory capital requirement based on its audited financial statements

and based on its unaudited financial statements that are as of a date that is six months 

after the nonbank SD’s audited financial statements.

144 Such public disclosure is 

required to be made within 10 business days of the filing of the audited financial 

statements with the Commission, and within 30 calendar days of the filing of the 

unaudited financial statements required with the Commission.

145 A nonbank SD also 

must obtain written approval from NFA to change the date of its fiscal year-end for 

financial reporting.146

The CFTC Financial Reporting Rules also require a nonbank SD to provide the 

Commission and NFA with information regarding the custodianship of margin for 

uncleared swap transactions (“Margin Report”).

147 The Margin Report must contain: (i) 

the name and address of each custodian holding initial margin or variation margin that is 

required for uncleared swaps subject to the CFTC margin rules (“uncleared margin 

 142 Id. 143 17 CFR 23.105(i). 144 Id. 145 Id. 146 17 CFR 23.105(g). 147 17 CFR 23.105(m).
62

rules”), on behalf of the nonbank SD or its swap counterparties; (ii) the amount of initial 

and variation margin required by the uncleared margin rules held by each custodian on 

behalf of the nonbank SD and on behalf its swap counterparties; and (iii) the aggregate 

amount of initial margin that the nonbank SD is required to collect from, or post with, 

swap counterparties for uncleared swap transactions subject to the uncleared margin 

rules.

148 The Commission requires this information in order to monitor the use of 

custodians by nonbank SDs and their swap counterparties. Such information assists the 

Commission in monitoring the safety and soundness of a nonbank SD by monitoring 

whether the firm is current with its swap counterparties with respect to the posting and 

collecting of margin required by the uncleared margin rules. By requiring the nonbank 

SD to report the required amount of margin to be posted and collected, and the amount of 

margin that is actually posted and collected, the Commission could identify potential 

issues with the margin practices and compliance by nonbank SDs that may hinder the 

ability of the firm to meet its obligations to market participants. The Margin Report also 

allows the Commission to identify custodians used by nonbank SDs and their 

counterparties, which may permit the Commission to assess potential market issues, 

including a concentration of custodial services by a limited number of banks.

2. Japanese Nonbank Swap Dealer Financial Reporting Requirements

The Japanese Financial Reporting Rules impose financial reporting requirements 

on FIBOs, including Japanese nonbank SDs. Specifically, the Japanese Financial 

Reporting Rules require each of the Japanese nonbank SDs to submit monthly monitoring 

 148 Id.
63

survey reports (“Monthly Monitoring Reports”) to the FSA.

149 The Monthly Monitoring 

Reports are required to report on the Japanese nonbank SD’s balance sheet, profit and 

loss statement, capital adequacy ratio, market risk, counterparty risk and liquidity risk.150 

The Monthly Monitoring Reports are typically submitted by the Japanese nonbank SDs 

within 2-3 weeks of the end of each month.151

Each Japanese nonbank SD is also required to submit a business report to the 

Commissioner of the FSA within three months of the end of the firm’s fiscal year

(“Annual Business Report”).

152 The Annual 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.153 

Furthermore, each Japanese nonbank SD is required to prepare financial 

statements and business reports every business year pursuant to the Japanese Companies 

Act (Act No. 86 of 2005). The financial statements include a balance sheet, profit and 

loss statement, and statement of changes in shareholders’ equity, and are required to be 

 149 See II-1-4 (General Supervisory Processes) of the Supervisory Guidelines for FIBO, which directs the 

FSA (and other supervisors) as part of its offsite monitoring to require FIBOs (including the Japanese 

nonbank SDs) 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. The FSA has, pursuant to Article 56-2(1) of the FIEA, ordered the Japanese nonbank SDs to 

submit monthly monitoring reports to the FSA.

150 Id. 151 There are various types of reports which are required of the Japanese nonbank SDs under “Reporting 

orders” issued by the FSA in accordance with Article 56-2(1) of the FIEA. Some reports are required to be 

submitted on monthly basis, whereas other reports are required to be submitted on a quarterly basis, semiannual basis, or annual basis. In terms of the filing due dates of those reports, the FSA typically does not 

set a specific deadline and instead requests all reports to be submitted “without delay.” In case of monthly 

reports, the normal practice is for firms to submit such reports within 2 to 3 weeks from the prior monthend.

152 Article 46-3(1) of the FIEA and Article 172 of the COO. 153 Appended Forms No.12 of the COO.
64

audited by an accounting auditor (“Annual Audited Financial Report”).

154 The Annual 

Audited Financial Report must be submitted to and approved by the shareholders’ 

meeting within 3 months of the Japanese nonbank SD’s fiscal year-end.155

3. Commission Analysis 

The Commission has reviewed the FSA Application and the relevant Japanese 

laws and regulations, and has preliminarily determined that the financial reporting 

requirements of the Japanese Financial Reporting Rules, subject to the conditions 

specified below, are comparable to CFTC Financial Reporting Rules in purpose and 

effect as they are intended to provide the FSA and Commission, respectively, with 

financial information to monitor and assess the financial condition of nonbank SDs and 

their ongoing ability to absorb decreases in the value of firm assets and to cover losses 

from business activities, including swap dealing activities, without the firm becoming 

insolvent.

The Japanese Financial Reporting Rules require Japanese nonbank SDs to file 

financial reports with the FSA that are comparable with respect to the content of the 

financial reporting and the frequency of the submission of the financial reports with the

requirements for nonbank SDs under the CFTC Financial Reporting Rules. In this 

regard, the Japanese Financial Reporting Rules require Japanese nonbank SDs to prepare 

 154 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). The audit requirement 

applies to a “Large Company,” which is defined by Article 2(vi) of the Companies Act as a stock company 

that satisfies any of the following requirements: (a) that the amount of stated capital in the balance sheet as 

of the end of the firm’s most recent business year is JPY 500 million or more; or (b) that the total sum of 

the liabilities section of the balance sheet as of the end of the firm’s most recent business year is JPY 20 

billion or more. The FSA has represented that each of the Japanese nonbank SDs is a Large Company 

under the Companies Act, and is subject to the audit requirement for its financial statements. See FSA 

Application p. 18. 

155 Id. 
65

and submit reports that include statements of financial condition, statements of profit and 

loss, and statements of capital adequacy that are comparable to the statements required of 

nonbank SDs under Regulation 23.105 of the CFTC Financial Reporting Rules. 

Accordingly, the Commission has preliminarily determined that a Japanese nonbank SD 

may comply with the financial reporting requirements contained in Commission 

Regulation 23.105 by complying with the corresponding Japanese Financial Reporting

Rules, subject to the conditions set forth below.156 

Such substituted compliance is proposed to be conditioned upon a Japanese 

nonbank SD providing the Commission and NFA with copies of its Monthly Monitoring 

Report and Annual Business Report filed with the FSA pursuant to Article 56-2(1) and 

Article 46-3(1), respectively, of the FIEA. It is proposed that a Japanese nonbank SD 

also must provide the Commission and NFA with a copy of its Annual Audited Financial 

Report that is required to be prepared pursuant to Article 453(2) of the Companies Act. 

The Monthly Monitoring Report, Annual Business Report, and Annual Audited Financial 

Report must be translated into the English language.

157 The Monthly Monitoring Report 

and the Annual Business Report must have balances converted from yen to U.S. dollars. 

The Commission, however, recognizes that the requirement to translate accounts 

denominated in yen to U.S. dollars on the audited financial statements may impact the 

opinion provided by the public accountant. The Commission is therefore proposing to 

 156 A Japanese nonbank SD that qualifies and elects to seek substituted compliance with Japanese Capital 

Rules must also seek substituted compliance with the Japanese Financial Reporting Rules. 157 The translation of audited financial statements into the English language is not required to be subject to 

the audit of the public accountants. The Monthly Monitoring Report and Annual Business Report must 

convert balances into U.S. dollars. A Japanese nonbank SD must report the exchange rate that it used to 

convert balances from yen to U.S. dollars to the Commission and NFA as part of the financial reporting.
66

accept the Annual Audited Financial Report denominated in yen, provided that the report 

is translated into the English language.

The Commission also is proposing to condition the Capital Comparability 

Determination Order below on the Japanese nonbank SD filing (i) its Annual Business 

Report with the Commission and NFA within 15 business days of the earlier of the date 

the report is filed with the FSA or the date that the report is required to be filed with the 

FSA; (ii) its Annual Audited Financial Statement with the Commission and NFA within 

15 business days of the approval of the report at the Japanese nonbank SD’s shareholder 

meeting; and (iii) its Monthly Monitoring Report within 15 business days of the earlier of 

the date the report is filed with the FSA or 35 calendar days after the month-end reporting 

date.

158 The Commission preliminarily believes that these proposed filing dates provide 

sufficient time for the respective reports to be translated into the English language and 

balances converted from yen to U.S. dollars, where applicable.

The filing of English language financial reports by a Japanese nonbank SD with 

the Commission and NFA is necessary as financial reporting is a critical and central 

component of the Commission’s and NFA’s ability to assess the safety and soundness of 

registered nonbank SDs as required under Section 4s(e) of the CEA. Although the 

Commission is proposing to permit Japanese nonbank SDs to comply with the form and 

content requirements for the financial reports set forth in the Japanese Financial 

Reporting Rules, the receipt of English language financial reports that have balances

 158 As previously noted, the FSA does not set a specific filing date for Monthly Monitoring Reports, 

electing to instead require firms to file such reports “without delay.” The Commission proposes to 

establish a due that that is no later than 35 calendar days from the reporting date in order to set a definitive 

filing date that also provides Japanese nonbank SDs with sufficient time to translate the reports into English 

and convert balances to U.S. dollars. 
67

converted to U.S. dollars (with the exception of the Annual Audited Financial Report) is 

necessary for the Commission to effectively monitor the ongoing financial condition of 

all nonbank SDs, including Japanese nonbank SDs, to help ensure their safety and 

soundness and ability to meet their financial obligations to customers, counterparties, and 

general market participants.

The Commission preliminarily believes that its proposed approach of requiring 

Japanese nonbank SDs to provide the Commission and NFA with copies of the Monthly 

Monitoring Reports, Annual Business Reports, and Annual Audited Financial Reports 

that the firms currently file with the FSA or otherwise prepare strikes an appropriate 

balance of ensuring that the Commission and NFA receive the financial reporting 

necessary for the effective monitoring of the financial condition of the nonbank SDs, 

while also recognizing the appropriateness of providing substituted compliance based on 

the existing FSA financial reporting requirements and regulatory structure.

The Commission is also proposing to condition the Capital Comparability 

Determination Order on Japanese nonbank SDs filing the aggregate securities, 

commodities, and swap positions information set forth in Schedule 1 of Appendix B to 

Subpart E of Part 23 on a monthly basis with the Commission and NFA.

159 Schedule 1 

provides the Commission and NFA with detailed information regarding the financial 

positions that a nonbank SD holds as of the end of each month, including the firm’s 

swaps positions, which will allow the Commission and NFA to monitor the types of 

 159 Schedule 1 of Appendix B to Subpart E of Part 23 includes a nonbank SD’s holding of U.S Treasury 

securities, U.S. government agency debt securities, foreign debt and equity securities, money market 

instruments, corporate obligations, spot commodities, and cleared and uncleared swaps, security-based 

swaps, and mixed swaps in addition to other position information.
68

investments and other activities that the firm engages in and will enhance the 

Commission’s and NFA’s ability to monitor the safety and soundness of the firm.

The Commission is also proposing to condition the Capital Comparability 

Determination Order on a Japanese nonbank SD submitting with each Monthly 

Monitoring Report, Annual Business Report, and Annual Audited Financial Report, as 

well as the applicable Schedule 1, a statement by an authorized representative or 

representatives of the Japanese nonbank SD that to the best knowledge and belief of the 

person(s) the information contained in the respective report is true and correct, including 

the translation of the report into the English language and conversion of balances in the 

reports to U.S. dollars. The statement by the authorized representative or representatives 

of the Japanese nonbank SD is in lieu of the oath or affirmation required of nonbank SDs 

under Regulation 23.105(f),

160 and is intended to ensure that reports filed with the 

Commission and NFA are prepared and submitted by firm personnel with knowledge of 

the financial reporting of the firm who can attest to the accuracy of the reporting and 

translation. 

The Commission is further proposing to condition the Capital Comparability 

Determination Order on a Japanese nonbank SD filing the Margin Report specified in 

Regulation 23.105(m) with the Commission and NFA. The Margin Report contains: (i) 

the name and address of each custodian holding initial margin or variation margin 

required by the uncleared margin rules on behalf of the nonbank SD or its swap 

counterparties; (ii) the amount of initial and variation margin required by the uncleared 

 160 17 CFR 23.105(f).
69

margin rules held by each custodian on behalf of the nonbank SD and on behalf its swap 

counterparties; and (iii) the aggregate amount of initial margin required by the uncleared 

margin rules that the nonbank SD is required to collect from, or post to, swap 

counterparties for uncleared swap transactions.161

The Commission believes that receiving this margin information from Japanese 

nonbank SDs will assist in the Commission’s assessment of the safety and soundness of 

the Japanese nonbank SDs. Specifically, the Margin Report will provide the Commission 

with information regarding a Japanese nonbank SD’s swap book, the extent to which it 

has uncollateralized exposures to counterparties or has not met its financial obligations to 

counterparties. This information, along with the list of custodians holding both the firm’s 

and counterparties’ swaps collateral, will assist the Commission in assessing and 

monitoring potential financial impacts to the nonbank SD resulting from defaults on its 

swap transactions. The Commission is further proposing to require a Japanese nonbank 

SD to file its Margin Report at the same time that the Japanese nonbank SD files its 

Monthly Monitoring Report, and to require the Margin Report to be prepared in the 

English language with balances reported in U.S. dollars.

The Commission is not proposing to require a Japanese nonbank SD that has been 

approved by FSA to use capital models to file the monthly model metric information 

contained in Regulation 23.105(k) with the Commission or NFA.

162 Regulation 

23.105(k) requires a nonbank SD that has obtained approval from the Commission or 

NFA to use internal capital models to submit to the Commission and NFA each month 

 161 17 CFR 23.105(m). 162 17 CFR 23.105(k).
70

information regarding its risk exposures, including VaR and credit risk exposure

information when applicable. The model metrics are intended to provide the 

Commission and NFA with information that would assist with the ongoing oversight and 

assessment of internal market risk and credit risk models that have been approved for use 

by a nonbank SD. The Commission preliminarily believes, however, that the receipt by 

the Commission and NFA of model metrics set forth in Regulation 23.105(k) from 

Japanese nonbank SDs is not necessary as the initial approval and the ongoing

assessment of the performance of a Japanese nonbank SD’s models will be performed by 

the FSA as part of its oversight function. 

The Commission also is proposing not to require a Japanese nonbank SD to file 

the monthly counterparty credit exposure information specified in Regulation 23.105(l) 

and Schedules 2, 3, and 4 of Appendix B to Subpart E of Part 23 with the Commission or 

NFA. Regulation 23.105(l) requires each nonbank SD to provide information to the 

Commission and NFA regarding its counterparty credit concentration for the 15 largest 

exposures in derivatives, a summary of its derivatives exposures by internal credit 

ratings, and the geographic distribution of derivatives exposures for the 10 largest 

countries in Schedules 2, 3, and 4, respectively. The Commission preliminarily believes 

that, under a substituted compliance regime, the FSA is best positioned to monitor a

Japanese nonbank SD’s credit exposures, which may be comprised of credit exposures to 

primarily other Japanese counterparties, as part of the FSA’s overall monitoring of the 

financial condition of the firm.

Furthermore, the Commission, in making the preliminary determination to not 

require a Japanese nonbank SD to file the model metrics and counterparty exposures 
71

required by Regulations 23.105(k) and (l), respectively, recognizes that NFA’s current 

risk monitoring program requires each bank SD and each nonbank SD, including each 

Japanese nonbank SD, to file risk metrics addressing market risk and credit risk with 

NFA on a monthly basis. This information includes: (i) monthly VaR for interest rates, 

credit, foreign exchange, equities, commodities, and total VaR; (ii) total stressed VaR; 

(iii) interest rate, credit spread, foreign exchange market, and commodity sensitivities; 

(iv) total swaps current exposure both before and after offsetting against collateral held 

by the firm; and (v) a list of the 15 largest swaps counterparty current exposures.163 

While there are differences between the information filed with the NFA and the 

information required under Regulations 23.105(k) and (l), the NFA risk metrics provide a 

level of information that allows NFA to identify SDs that may pose heightened risk and 

to allocate appropriate NFA regulatory oversight resources. The Commission 

preliminarily believes that the proposed financial reporting set forth as conditions in the 

proposed Capital Comparability Determination Order, and the risk metric and 

counterparty exposure information required to be reported by nonbank SDs (including 

Japanese nonbank SDs) under NFA rules, provide the appropriate balance of recognizing 

the comparability of the Japanese Financial Reporting Rules to the CFTC Financial 

Reporting Rules while also ensuring that the Commission and NFA receive sufficient 

data to monitor and assess the overall financial condition of nonbank Japanese SDs.

The Commission invites public comment on its analysis above, including 

comment on the FSA Application and relevant Japanese Financial Reporting Rules. The 

 163 See NFA Financial Requirements, Section 17 - Swap Dealer and Major Swap Participant Reporting 

Requirements, and Notice to Members – Monthly Risk Data Reporting for Swap Dealers (May 30, 2017).
72

Commission also invites comment on the proposed conditions listed above. The 

Commission recognizes that while the Monthly Monitoring Reports, Annual Business 

Reports, and Annual Audited Financial Reports contain financial information regarding a 

Japanese nonbank SD that is comparable to the financial information required of nonbank 

SDs under Regulation 23.105 (such as statements of financial condition, statements of 

income, and statements demonstrating compliance with capital requirements), the reports 

also contain financial information that exceeds the requirements of regulation 23.105 

(such as information regarding the holding of customer funds under Japanese laws). The 

Commission requests comment on the scope of the financial information that Japanese 

nonbank SDs should be required to file with the Commission and NFA. Should the 

Commission limit the financial information required of Japanese nonbank SDs to the 

types of financial information required of nonbank SDs under regulation 23.105? 

The Commission also invites comment on its proposal not to require Japanese 

nonbank SDs to submit to the Commission and NFA the information set forth in 

Regulations 23.105(k) and (l). Are there specific elements of the data required under 

Regulations 23.105(k) and (l) that the Commission should require of Japanese nonbank 

SDs for purposes of monitoring model performance?

The Commission requests comment on the proposed filing dates for the reports 

and information specified above. Specifically, do the proposed filing dates provide 

sufficient time for Japanese nonbank SDs to prepare the reports, translate the reports into 

English, and, where required, convert balances into U.S. dollars? If not, what period of 

time should the Commission consider imposing on one or more of the reports?
73

The Commission also specifically requests comment regarding the setting of 

compliance dates for the reporting conditions that the proposed Capital Comparability 

Determination Order would impose on Japanese nonbank SDs. In this connection, if the 

Commission were to require Japanese nonbank SDs to file the Margin Report as set forth 

in the proposed Order below, how much time would Japanese nonbank SDs need to 

develop new systems or processes to capture information that is required? Would 

Japanese nonbank SDs need a period of time to develop any systems or processes to meet 

any other reporting conditions in the proposed Capital Comparability Determination 

Order? If so, what would be an appropriate amount of time for a Japanese nonbank SD to 

develop and implement such systems or processes?

E. Notice Requirements

1. CFTC Nonbank SD Notice Reporting Requirements

The CFTC Financial Reporting Rules require nonbank SDs to provide the 

Commission and NFA with written notice of certain defined events.164 The notice 

provisions are intended to provide the Commission and NFA with an opportunity to 

assess whether the information contained in the written notices indicates the existence of 

actual or potential financial and/or operational issues at a nonbank SD, and, when 

necessary, allows the Commission and NFA to engage the nonbank SD in an effort to 

minimize potential adverse impacts on swap counterparties and the larger swaps market. 

The notice provisions are part of the Commission’s overall program for helping to ensure 

the safety and soundness of nonbank SDs and the swaps markets in general. 

 164 17 CFR 23.105(c).
74

The CFTC Financial Reporting Rules require a nonbank SD to provide written 

notice within specified timeframes if the firm is: (i) undercapitalized; (ii) fails to maintain 

capital at a level that is in excess of 120 percent of its minimum capital requirement; or 

(iii) fails to maintain current books and records.165 A nonbank SD is also required to 

provide written notice if the firm experiences a 30 percent or more decrease in excess 

regulatory capital from its most recent financial report filed with the Commission.166 A 

nonbank SD also is required to provide notice if the firm fails to post or collect initial 

margin for uncleared swap and non-cleared security-based swap transactions or exchange 

variation margin for uncleared swap or non-cleared security-based swap transactions as 

required by the Commission’s uncleared swaps margin rules or the SEC’s non-cleared

security-based swaps margin rules, respectively, if the aggregate is equal to or greater 

than: (i) 25 percent of the nonbank SD’s required capital under Regulation 23.101 

calculated for a single counterparty or group of counterparties that are under common 

ownership or control; or (ii) 50 percent of the nonbank SD’s required capital under 

Regulation 23.101 calculated for all of the firm’s counterparties.167

The CFTC Financial Reporting Rules further require a nonbank SD to provide 

advance notice of an intention to withdraw capital by an equity holder that would exceed 

30 percent of the firm’s excess regulatory capital.168 Finally, a nonbank SD that is 

dually-registered with the SEC as an SBSD or major security-based swap participant 

(“MSBSP”) must file a copy of any notice with the Commission and NFA that the SBSD 

 165 17 CFR 23.105(c)(1), (2), and (3). 166 17 CFR 23.105(c)(4). 167 17 CFR 23.105(c)(7). 168 17 CFR 23.105(c)(5).
75

or MSBSP is required to file with the SEC under SEC Rule 18a-8 (17 CFR 240.18a-8).169 

SEC Rule 18a-8 requires SBSDs and MSBSPs to provide written notice to the SEC for 

comparable reporting events as the CFTC Capital Rules in Regulation 23.105(c), 

including if a SBSD or MSBSP is undercapitalized or fails to maintain current books and 

records.

2. Japanese Nonbank Swap Dealer Notice Requirements

The FSA maintains a system of notice reporting requirements (“Early Warning 

System”) that is designed to provide the FSA with notice of, and an opportunity to react

to, potential financial and/or operational issues with a Japanese nonbank SD prior to the 

firm falling below the FSA’s minimum capital requirements. Specifically, each Japanese 

nonbank SD is required to submit an immediate notification to the FSA if its capital 

adequacy ratio falls below 140 percent.170 The Japanese nonbank SD’s notification 

submitted to the FSA must be accompanied by a Plan Regarding Specific Voluntary 

Measures to Be Taken in Order to Maintain the Capital Adequacy Ratio, which is 

expected to include concrete measures that the firm will take to maintain a capital 

adequacy ratio above 140 percent.

171 The FSA also has the authority to examine the 

future outlook on the Japanese nonbank SD’s capital adequacy ratio through hearings and 

to urge the firm to make voluntary improvement efforts. 172

 169 17 CFR 23.105(c)(6). 170 The notification is required to be filed pursuant to Article 179 of the COO. As noted in section C.2 

above, each Japanese nonbank SD is required to maintain a minimum capital adequacy ratio of 120 percent. 171 Id. 172 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.
76

A Japanese nonbank SD also must submit an immediate notification and a Plan 

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

Adequacy Ratio (the “Plan”) to the FSA if the firm’s capital adequacy ratio falls below 

the minimum capital adequacy ratio of 120 percent.173 The FSA reviews the Plan and, 

when necessary, identifies the specific method by which a Japanese nonbank SD must 

bring its capital adequacy ratio back above the prescribed minimum level and the 

estimated date of the recovery. In situations where the Japanese nonbank SD fails to 

maintain the minimum level of regulatory capital, the FSA will also examine other 

aspects of the firm’s operations, including 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.174

If a Japanese nonbank SD’s capital adequacy ratio falls below 100 percent, the 

Commissioner of the FSA may order the suspension of all or part of the firm’s business 

activities for a period not to exceed three months if the FSA deems such action to be 

 173 Article 179 of the COO. 174 Article 53(1) of the FIEA. 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 the 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.
77

necessary and appropriate for the public interest or for the protection of investors.175 If 

the Japanese nonbank SDs capital adequacy ratio does not exceed 100 percent, and the 

FSA determines that the firm’s capital adequacy ratio status is not likely to recover, the 

Commissioner of the FSA may rescind the registration of the firm.176

In addition to the above measures, the FSA may order a Japanese nonbank 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 if the FSA finds such action 

necessary and appropriate in the public interest or for the protection of investors.177 

Finally, the Prime Minister of Japan may rescind the registration of a Japanese nonbank 

SD, or order the suspension of all or a part of its business activities for a period of no 

longer than six months, if the Japanese nonbank SD violates a disposition by a 

government agency,178 or is likely to become insolvent due to the state of its business and 

assets.

179

3. Commission Analysis 

The Commission has reviewed the FSA Application and the relevant Japanese 

laws and regulations, and has preliminarily determined that the Japanese Financial 

Reporting Rules related to notice provisions, subject to the conditions specified below,

are comparable to the notice provisions of the CFTC Financial Reporting Rules in 

purpose and effect as each regulator’s requirements are intended to provide the FSA and 

Commission with prompt notice of potential or actual financial or operational issues at a 

 175 Article 53(2) of the FIEA. 176 Article 53(3) of the FIEA. 177 Article 51 of the FIEA. 178 Article 52(1)(vii) of the FIEA. 179 Article 52(1)(viii) of the FIEA.
78

nonbank SD that may impact its ability to continue to meet its financial obligations to 

swap counterparties and other creditors, or otherwise impair its safety and soundness. 

The Commission is therefore proposing to issue a Capital Comparability Determination 

Order providing that a Japanese nonbank SD may comply with the notice provisions 

required under Japanese laws and regulations in lieu of certain notice provisions required 

of nonbank SDs under Regulation 23.105(c), subject to the conditions set forth below.

The Japanese Financial Reporting Rules require a Japanese nonbank SD to 

provide notice to the FSA if the firm experiences a reduction of its regulatory capital that 

exceeds certain predefined limits (“Japanese Early Warning Notices”). As noted above, 

pursuant to the Japanese Early Warning Notices, a Japanese nonbank SD is required to 

provide the FSA with notices if its regulatory capital falls below: (i) 140 percent; or (ii) 

120 percent of its minimum capital requirement. The Japanese Early Warning Notices

are also required to contain information regarding actions that the Japanese nonbank SD 

will take to ensure that the firm is properly capitalized.

The Commission has preliminarily determined that these Japanese Early Warning 

Notices achieve comparable outcomes to CFTC notice provisions contained in 

Regulation 23.105(c)(1) and (2) that require a nonbank SD to provide notice to the 

Commission and to NFA if a nonbank SD fails to meet its minimum capital requirement 

or if the firm’s regulatory capital falls below 120 percent of its minimum capital 

requirement. These notice provisions set forth in the Japanese Financial Reporting Rules 

and the CFTC Financial Reporting Rules are further comparable in purpose and effect in 

that the provisions are intended to alert the FSA and Commission/NFA, respectively, of 

potential financial or operational issues that could have an adverse impact on the safety 
79

and soundness of a nonbank SD, including the nonbank SD’s ability to meet its financial 

obligations to customers, counterparties, creditors, and general market participants. The 

notices are also intended to provide an opportunity for the applicable regulator to monitor 

a nonbank SD’s financial condition and operations to ensure that the firm takes

appropriate actions to maintain, or to regain, compliance with its minimum capital 

requirements.

The Japanese Financial Reporting Rules differ from the CFTC Financial 

Reporting Rules in certain respects. Specifically, unlike the CFTC Financial Reporting 

Rules, the Japanese Financial Reporting Rules do not contain explicit requirements for a 

Japanese nonbank SD to notify the FSA if the firm fails to maintain current books and 

records, experiences a decrease in capital over levels previously reported, or fails to 

collect or post initial margin or variation margin for uncleared swap transactions with 

swap counterparties that exceed certain threshold levels.180 The Japanese Financial 

Reporting Rules also do not require a Japanese nonbank SD to provide the FSA with 

advance notice of capital withdrawals initiated by equity holders that exceed defined 

amounts or percentages of the firm’s excess regulatory capital.

181 

The Commission is proposing to condition the Capital Comparability 

Determination Order on a Japanese nonbank SD providing the Commission and NFA 

with notice if the firm fails to make or to keep current books and records required by the 

FSA. For avoidance of doubt, in this context the Commission believes that books and 

 180 See 17 CFR 23.105(c)(3), (4), and (7). 181 See 17 CFR 23.105(c)(5), which requires a nonbank SD to provide written notice to the Commission 

and NFA two business days prior to the withdrawal of capital by action of the equity holders if the amount 

of the withdrawal exceeds 30 percent of the nonbank SD’s excess regulatory capital. 
80

records would include current ledgers or other similar records which show or summarize, 

with appropriate references to supporting documents, each transaction affecting the 

Japanese nonbank SD’s asset, liability, income, expense and capital accounts in 

accordance with the accounting principles accepted by the FSA.

182 The Commission 

preliminarily believes that the maintenance of current books and records is a fundamental 

and essential component of operating as a registered nonbank SD and that the failure to 

comply with such a requirement may indicate an inability of the firm to promptly and 

accurately record transactions and to ensure compliance with regulatory requirements, 

including regulatory capital requirements. Therefore, the proposed Order below is 

conditioned on a Japanese nonbank SD providing the Commission and NFA with a 

written notice within 24 hours if the firm fails to maintain on a current basis the books 

and records required by the FSA.

The Commission is also proposing to condition the Capital Comparability 

Determination Order on a Japanese nonbank SD providing the Commission and NFA 

with a written notice within 24 hours of the firm filing a notice with the FSA pursuant to 

Article 179(3) of the COO that the firm’s regulatory capital has fallen below 140 percent 

of its minimum requirement. It is proposed that a Japanese nonbank SD also must

provide the Commission and NFA with written notice within 24 hours of filing a notice 

with the FSA that the firm’s regulatory capital has fallen below 120 percent of its 

minimum requirement. 

 182 For comparison, see 17 CFR 23.105(b), which similarly defines the term ‘Current books and records’ as 

used in the context of Commission’s requirements. 
81

The requirement for a nonbank SD to file notice with the Commission and NFA 

of a decrease of excess regulatory capital below defined levels is a central component of 

the Commission’s and NFA’s oversight program for nonbank SDs.183 Therefore, the 

Commission preliminarily believes that it is necessary for the Commission and NFA to 

receive notice from a Japanese nonbank SD that the firm has filed a regulatory notice 

with the FSA that its capital level has decreased below 140 percent or 120 percent of its 

minimum regulatory capital requirement. The notice must be filed by the Japanese 

nonbank SD within 24 hours of the filing of the notice with the FSA, and the 

Commission expects that, upon the receipt of a notice, Commission staff and NFA staff

will engage with staff of the FSA to obtain an understanding of the facts that led to the 

filing of the notice and will discuss with the FSA its plan for any ongoing monitoring of 

the Japanese nonbank SD. Therefore, the Commission’s proposal would not require the 

Japanese nonbank SD to file copies of its recovery plan that is filed with the FSA with 

the Commission or NFA. To the extent the Commission needs further information from 

the Japanese nonbank SD, the Commission expects to request such information as part of 

its assessment of the notice and its discussions with the FSA.

The proposed Capital Comparability Determination Order also requires a 

Japanese nonbank SD to file notice with the Commission and NFA if: (i) a single 

counterparty, or group of counterparties under common ownership or control, fails to post 

required initial margin or pay required variation margin on uncleared swap and noncleared security-based swap positions that, in the aggregate, exceeds 25 percent of the 

 183 See Regulation 23.105(c)(4) which requires a nonbank SD to file notice with the Commission and NFA 

if it experiences a decrease in excess capital of 30 percent or more from the excess capital reported in its 

last financial filing with the Commission.
82

Japanese nonbank SD’s minimum capital requirement; (ii) counterparties fail to post

required initial margin or pay required variation margin to the Japanese nonbank SD for 

uncleared swap and non-cleared security-based swap positions that, in the aggregate, 

exceed 50 percent of the Japanese nonbank SD’s minimum capital requirement; (iii) a

Japanese nonbank SD fails to post required initial margin or pay required variation 

margin for uncleared swap and non-cleared security-based swap positions to a single 

counterparty or group of counterparties under common ownership and control that, in the 

aggregate, exceeds 25 percent of the Japanese nonbank SD’s minimum capital 

requirement; and (iv) a Japanese nonbank SD fails to post required initial margin or pay 

required variation margin to counterparties for uncleared swap and non-cleared securitybased swap positions that, in the aggregate, exceeds 50 percent of the Japanese nonbank 

SD’s minimum capital requirement. The Commission is proposing to require this notice 

so that, in the event that such a notice is filed, it and NFA may commence 

communication with the Japanese nonbank SD and the FSA in order to obtain an 

understanding of the facts that led to the failure to exchange material amounts of initial 

margin or variation margin in accordance with the applicable margin rules, and to assess 

whether there is a concern regarding the financial condition of the firm that may impair 

its ability to meet its financial obligations to customers, counterparties, creditors, and 

general market participants, or otherwise adversely impact the firm’s safety and 

soundness.

The proposed Capital Comparability Determination Order does not require a 

Japanese nonbank SD to file notices with the Commission concerning withdrawals of 

capital or changes in capital levels as such information will be reflected in the financial 
83

statement reporting filed with the Commission and NFA as conditions of the order, and 

because the Japanese nonbank SD’s capital levels are monitored by the FSA, which the 

Commission preliminarily believes renders the separate reporting to the Commission 

superfluous.

The proposed Capital Comparability Determination Order requires a Japanese 

nonbank SD to file any notices required under the Order with the Commission and NFA 

in English and, where applicable, with any balances reported in U.S. dollars. Each notice 

required by the proposed Capital Comparability Determination Order must be filed in 

accordance with instructions issued by the Commission or NFA.

The Commission invites public comment on its analysis above, including 

comment on the FSA Application and relevant Japanese Financial Reporting Rules. The 

Commission also invites comment on the proposed conditions to the Capital 

Comparability Determination Order that are listed above.

The Commission requests comment on the timeframes set forth in the proposed 

conditions for Japanese nonbank SDs to file notices with the Commission and NFA. In 

this regard, the proposed conditions would require Japanese nonbank SDs to file certain 

written notices with the Commission within 24 hours of the occurrence of a reportable 

event or of being alerted to a reportable event by the FSA. These notices would have to 

be translated into English prior to being filed with the Commission and NFA. The 

Commission request comment on the issues Japanese nonbank SDs may face meeting the 

filing requirements given time-zone difference and translation issues. The Commission 

also requests specific comment regarding the setting of compliance dates for the notice 
84

reporting conditions that the proposed Capital Comparability Determination Order would 

impose on Japanese nonbank SDs.

F. Supervision and Enforcement

1. Commission and NFA Supervision and Enforcement of Nonbank SDs

The Commission and NFA conduct ongoing supervision of nonbank SDs to 

assess their compliance with the CEA, Commission regulations, and NFA rules by 

reviewing financial reports, notices, risk exposure reports, and other filings that nonbank 

SDs are required to file with the Commission and NFA. The Commission and NFA also 

conduct periodic examinations as part of their supervision of nonbank SDs, including 

routine onsite examinations of nonbank SDs’ books, records, and operations to ensure 

compliance with CFTC and NFA requirements.

184

As noted in section D.1 above, financial reports filed by a nonbank SD provide 

the Commission and NFA with information necessary to ensure the firm’s compliance 

with minimum capital requirements and to assess the firm’s overall safety and soundness 

and its ability to meet its financial obligations to customers, counterparties, creditors, and 

general market participants. A nonbank SD is also required to provide written notice to 

the Commission and NFA if certain defined events occur, including that the firm is 

undercapitalized or maintains a level of capital that is less than 120 percent of the firm’s 

minimum capital requirements.185 The notice provisions, as stated in section E.1 above,

 184 Section 17(p)(2) of the CEA (7 U.S.C. 21(p)(2)) requires NFA as a registered futures association to 

establish minimum capital and financial requirements for nonbank SDs and to implement a program to 

audit and enforce compliance with such requirements. Section 17(p)(2) further provides that NFA’s capital 

and financial requirements may not be less stringent than the capital and financial requirements imposed by 

the Commission.

185 See 17 CFR 23.105(c).
85

are intended to provide the Commission and NFA with information of potential issues at 

a nonbank SD that may impact the firm’s ability to maintain compliance with the CEA 

and Commission regulations. The Commission and NFA also have the authority to 

require a nonbank SD to provide any additional financial and/or operational information 

on a daily basis or at such other times as the Commission or NFA may specify to monitor 

the safety and soundness of the firm.186 

The Commission also has authority to take disciplinary actions against a nonbank 

SD for failing to comply with the CEA and Commission regulations. Section 4b-1(a) of 

the CEA provides the Commission with exclusive authority to enforce the capital 

requirements imposed on nonbank SDs adopted under Section 4s(e) of the CEA. 

2. FSA Supervision and Enforcement of Japanese Nonbank SDs

The FSA has supervision, audit, and investigation authority with respect to 

Japanese nonbank SDs, including the authority to require such firms to provide all 

necessary information for FSA to carry out its supervisory responsibilities.187 

Specifically, the FSA has the authority to require Japanese nonbank SDs to submit 

documents to the FSA and to conduct onsite inspections at the business offices of the 

Japanese nonbank SDs.188 

The FSA also monitors the capital adequacy ratios of Japanese nonbank SDs 

through supervisory measures on an ongoing basis. The monitoring includes a system of 

notice requirements, discussed in section E.2 above, that obligate Japanese nonbank SDs 

to provide notice to the FSA if certain triggering conditions are met. The FSA also has a 

 186 See 17 CFR 23.105(h). 187 FSA Application, p. 16. 188 Article 56-2 of the FIEA.
86

variety of measures in place to address actual cases of a Japanese nonbank SD’s failure to 

maintain its required level of minimum capital. Specifically, a Japanese nonbank SD is 

required to submit a notification and an action plan to the FSA if the Japanese nonbank 

SD’s capital adequacy ratio falls below 120 percent.189 The FSA will review the plan 

and, when necessary, identify the specific method by which the Japanese nonbank SD is 

required to bring its capital adequacy ratio back above the prescribed minimum level. 

The FSA also may order a Japanese nonbank SD to change its business methods, order 

assets to be deposited, or issue orders with respect to matters that are otherwise necessary 

from a supervisory perspective, if the FSA finds it in the public interest or for the 

protection of customers to take such actions.190 Furthermore, a Japanese nonbank SD 

may have all or parts of its business suspended for a period of no more than six months or 

have its registration revoked if the firm violates certain laws or regulations in connection 

with the financial instruments business or services,

191 or if the firm is likely to become 

insolvent.192 Finally, a Japanese nonbank SD is subject to fines and other possible 

actions if it fails to submit documents that are required by law to be filed with the FSA.193

3. Commission Analysis

The Commission has a long history of regulatory cooperation with the FSA. In 

this connection, the Commission and FSA entered into a Memorandum of Cooperation

(“MOC”) with regard to the cooperation and the exchange of information in the 

supervision and oversight of regulated entities that operate on a cross-border basis in both 

 189 Article 53(2) of the FIEA. 190 Id. 191 Article 52(1)(vii) of the FIEA. 192 Article 52(1)(viii) of the FIEA. 193 Article 198-6 of the FIEA.
87

the U.S. and Japan (“Cross-Border Covered Entities”), including nonbank SDs registered 

with the Commission and FIBOs registered with the FSA.

194 Pursuant to the MOC, the 

Commission and FSA expressed an intent to consult regularly, as appropriate, regarding: 

(i) general supervisory issues, including regulatory, oversight, or other related 

developments; (ii) issues relevant to the operations, activities, and regulation of CrossBorder Covered Entities; and (iii) any other areas of mutual supervisory interest, and to 

meet periodically to discuss their respective functions and regulatory oversight 

programs.

195 The MOC further provides for the Commission and FSA to inform each 

other of certain events, including any material events that could adversely impact the 

financial or operational stability of a Cross-Border Covered Entity, and provides a 

procedure for the Commission or FSA to conduct on-site examinations in, respectively, 

Japan or the U.S.196 Pursuant to the terms of the MOC, the Commission intends to 

communicate and consult with the FSA regarding the supervision of the financial and 

operational condition of Japanese nonbank SDs.

In addition, as discussed above, as part of FSA’s ongoing prudential regulation 

and supervision of FSA regulated entities, it is able to take all measures necessary to 

ensure that FSA’s capital, financial and reporting rules are implemented.

197 Thus, the 

Commission preliminarily finds that FSA has the necessary powers and ability to 

 194 Memorandum of Cooperation Related to the Supervision of Cross-Border Covered Entities (Mar. 10, 

2014). See the Commission’s website at 

https://www.cftc.gov/International/MemorandaofUnderstanding/index.htm. 195 MOC, paragraphs 19 and 26. 196 MOC, paragraph 22 and 29. Event-triggered notification in paragraph 22 of the MOC includes any 

known adverse material change in the ownership, operating environment, operations, financial resources, 

management, or systems and controls of a Cross-Border Covered Entity, and the failure of a Cross-Border 

Covered Entity to satisfy any of its requirements for continued authorization or registration where that 

failure could have a material adverse effect in the jurisdiction of Commission or FSA. 197 FSA Application, pp 19-20.
88

supervise and enforce Japanese nonbank SDs’ compliance with Japanese capital 

adequacy and financial reporting requirements.198

The Commission invites public comment on its analysis above, including 

comment on the FSA Application and relevant Japanese laws and regulations.

IV. Proposed Capital Comparability Determination Order

A. Commission’s Proposed Comparability Determination

The Commission’s preliminary view, based on the FSA’s Application and the 

Commission’s review of applicable Japanese laws and regulations, is that the Japanese 

Capital Rules and the Japanese Financial Reporting Rules, subject to the conditions set 

forth in the proposed Capital Comparability Determination Order below, achieve 

comparable outcomes and are comparable in purpose and effect to the CFTC Capital 

Rules and CFTC Financial Reporting Rules. In reaching this preliminary conclusion, the 

Commission recognizes that there are certain differences between the Japanese Capital 

Rules and CFTC Capital Rules and certain differences between the Japanese Financial 

Reporting Rules and the CFTC Financial Reporting Rules. The proposed Capital 

Comparability Determination Order is subject to proposed conditions that are

preliminarily deemed necessary to promote consistency in regulatory outcomes, or to 

reflect the scope of substituted compliance that would be available notwithstanding 

certain differences. In the Commission’s preliminary view, the differences between the 

two rule sets would not be inconsistent with providing a substituted compliance 

 198 In addition, both the Commission and the FSA are signatories to the IOSCO Multilateral Memorandum 

of Understanding Concerning Consultation and Cooperation and the Exchange of Information (revised 

May 2012), which covers primarily information sharing in the context of enforcement matters.
89

framework for Japanese nonbank SDs subject to the conditions specified in the proposed 

Order below. 

Furthermore, the proposed Capital Comparability Determination Order is limited 

to the comparison of the Japanese Capital Rules to the Bank-Based Approach under the 

CFTC Capital Rules. As noted previously, the FSA has not requested, and the 

Commission has not performed, a comparison of the Japanese Capital Rules to the 

Commission’s NAL Approach or TNW Approach.

B. Proposed Capital Comparability Determination Order

The Commission invites comments on all aspects of the FSA Application,

relevant Japanese laws and regulations, the Commission’s preliminary views expressed 

above, the question of whether requirements under the Japanese Capital Rules are 

comparable in purpose and effect to the Commission’s requirement for a nonbank SD to 

hold regulatory capital equal to or greater than 8 percent of its uncleared swap margin 

amount, and the Commission’s proposed Capital Comparability Determination Order, 

including the proposed conditions included in the proposed Order, set forth below.

Proposed Order Providing Conditional Capital Comparability Determination for 

Japanese Nonbank Swap Dealers 

IT IS HEREBY DETERMINED AND ORDERED, pursuant to Commodity 

Futures Trading Commission (“CFTC” or “Commission”) Regulation 23.106 (17 CFR 

23.106) under the Commodity Exchange Act (“CEA”) (7 U.S.C. 1 et seq.) that a swap 

dealer (“SD”) organized and domiciled in Japan and subject to the Commission’s capital

and financial reporting requirements under Sections 4s(e) and (f) of the CEA (7 U.S.C. 
90

6s(e) and (f)) may satisfy the capital requirements under Section 4s(e) of the CEA and 

CFTC Regulation 23.101(a)(1)(i) (17 CFR 23.101(a)(1)(i)) (“CFTC Capital Rules”), and 

the financial reporting rules under Section 4s(f) of the CEA and Commission Regulation 

23.105 (17 CFR 23.105) (“CFTC Financial Reporting Rules”), by complying with certain 

specified Japanese laws and regulations cited below and otherwise complying with the 

following conditions, as amended or superseded from time to time:

(1) The SD is not subject to regulation by a prudential regulator defined in 

section 1a(39) of the CEA (7 U.S.C. 1a(39));

(2) The SD is organized under the laws of Japan and is domiciled in Japan (a 

“Japanese nonbank SD”);

(3) The Japanese nonbank SD is registered as a Type I Financial Instruments 

Business Operator (“FIBO”) with the Japan Financial Services Agency;

(4) The Japanese nonbank SD is subject to and complies with: Articles 28(1), 

29, 46-3, 46-6(2), 52(1), 53(1) through (3), 56-2, and 198-6 of the 

Financial Instruments and Exchange Act (Act No. 25 of 1948); Section II1-4 (General Supervisory Processes), Section IV-2-1 (Preciseness of 

Capital Adequacy Ratio), and Section IV-2-2 (Supervisory Response to 

Cases of Financial Instruments Business Operators’ Capital Adequacy 

Ratio Falling Below Prescribed Level) of the Comprehensive Guidelines 

for Supervision of Financial Instruments Business Operators; Articles 172, 

176, 177(8), 178(1), 179(3), and Appended Forms No. 12 of the Cabinet 

Office Order on Financial Instruments Business (Cabinet Office Order No. 

52 of 2007); Articles 1 through 17 of the Financial Services Agency
91

Notice No. 59 of 2007; Articles 2(vi), 328(1) and (2), 435(2), and 

436(2)(i) of the Japanese Companies Act (Act No. 86 of 2005); and 

Article 59 of the Rules of Corporate Accounting (Ordinance of the 

Ministry of Justice No. 13 of 2006) (collectively, the “Japanese Capital 

Rules and Japanese Financial Reporting Rules”);

(5) The Japanese nonbank SD maintains at all times an amount of regulatory 

capital in the form of Basic Items, as defined in Article 176 of the Cabinet 

Office Order No. 52 of 2007, equal to or in excess of the equivalent of $20 

million in United States dollars (“U.S. dollars”). The Japanese nonbank 

SD shall use a commercially reasonable and observed yen/U.S. dollar

exchange rate to convert the value of the yen-denominated Basic Items to 

U.S. dollars;

(6) The Japanese nonbank SD has filed with the Commission a notice stating 

its intention to comply with the applicable Japanese Capital Rules and 

Japanese Financial Reporting Rules in lieu of the CFTC Capital Rules and 

the CFTC Financial Reporting Rules. The notice of intent must include 

the Japanese nonbank SD’s representation that the firm is organized and 

domiciled in Japan; is a registered FIBO; and is subject to, and complies 

with, the Japanese Capital Rules and Japanese Financial Reporting Rules. 

The Japanese nonbank SD may not rely on this Capital Comparability 

Determination Order until it receives confirmation from Commission staff, 

acting pursuant to authority delegated by the Commission, that the 

Japanese nonbank SD may comply with the applicable Japanese Capital 
92

Rules and Japanese Financial Reporting Rules in lieu of the CFTC Capital 

Rules and CFTC Financial Reporting Rules. Each notice filed pursuant to 

this condition must be prepared in the English language and submitted to 

the Commission via email to the following address:

MPDFinancialRequirements@cftc.gov;

(7) The Japanese nonbank SD prepares and keeps current ledgers and other 

similar records in accordance with accounting principles required by the 

Financial Services Agency;

(8) The Japanese nonbank SD files with the Commission and with the 

National Futures Association (“NFA”) a copy of its Monthly Monitoring 

Report that is required to be filed with the Financial Services Agency

pursuant to Article 56-2(1) of the Financial Instruments and Exchange 

Act. The Monthly Monitoring Report must be translated into the English 

language and balances must be converted to U.S. dollars. The Monthly 

Monitoring Report must be filed with the Commission and NFA within 15 

business days of the date the Monthly Monitoring Report is filed with the 

Financial Services Agency or 35 days after the month-end reporting date, 

whichever is earlier;

(9) The Japanese nonbank SD files with the Commission and with NFA a 

copy of its Annual Business Report that is required to be filed with the 

Financial Services Agency in accordance with Article 46-3(1) of the 

Financial Instruments and Exchange Act and Article 172 of the Cabinet 

Office Order on Financial Instruments Business. The Annual Business 
93

Report must be translated into the English language and balances must be 

converted to U.S. dollars. The Annual Business Report must be filed with 

the Commission and NFA within 15 business days of the earlier of the 

date the Annual Business Report is filed with the Financial Services 

Agency or the date that the Annual Business Report is required to be filed 

with the Financial Services Agency.

(10) The Japanese nonbank SD files with the Commission and with NFA a 

copy of its Annual Audited Financial Report that is required to be 

prepared pursuant to Article 435(2) of the Japanese Companies Act (Act 

No. 86 of 2005). The Annual Audited Financial Report must be translated 

into the English language and balances may be reported in yen. The 

Annual Audited Financial Report must be filed with the Commission and 

NFA within 15 business days of approval of the report at the shareholders’ 

meeting of the Japanese nonbank SD;

(11) The Japanese nonbank SD files Schedule 1 of Appendix B to Subpart E of 

Part 23 of the CFTC’s regulations (17 CFR 23 Subpart E – Appendix B) 

with the Commission and NFA on a monthly basis. Schedule 1 must be 

prepared in the English language with balances reported in U.S. dollars 

and must be filed with the Commission and NFA with the Japanese 

nonbank SD’s Monthly Monitoring Report;

(12) The Japanese nonbank SD submits with each Monthly Monitoring Report,

Schedule 1, Margin Report, Annual Business Report, and Annual Audited 

Financial Report a statement by an authorized representative or 
94

representatives of the Japanese nonbank SD that to the best knowledge 

and belief of the representative or representatives the information 

contained in the report, including as applicable the translation of the report 

into the English language and conversion of balances in the report to U.S. 

dollars, is true and correct. The statement must be prepared in the English 

language;

(13) The Japanese nonbank SD files a margin report containing the information 

specified in CFTC Regulation 23.105(m) (17 CFR 23.105(m)) with the 

Commission and with NFA on a monthly basis. The margin report must 

be prepared in the English language with balances reported in U.S. dollars

and must be filed with the Commission and NFA with the Japanese 

nonbank SD’s Monthly Monitoring Report;

(14) The Japanese nonbank SD files a notice with the Commission and NFA 

within 24 hours of being informed by the Financial Services Agency that 

the firm is not in compliance with any component of the Japanese Capital 

Rules or Japanese Financial Reporting Rules. The notice must be 

prepared in the English language;

(15) The Japanese nonbank SD files a notice within 24 hours with the 

Commission and NFA if it fails to maintain regulatory capital in the form 

of Basic Items, as defined in Article 176 of the Cabinet Office Order No. 

52 of 2007, equal to or in excess of the U.S. dollar equivalent of $20 

million using a commercially reasonable and observed yen/U.S. dollar

exchange rate. The notice must be prepared in the English language;
95

(16) The Japanese nonbank SD provides the Commission and NFA with notice 

within 24 hours of filing a notice with the Financial Services Agency

pursuant to Article 179 of the Cabinet Office Order on Financial 

Instruments Business that the firm’s capital adequacy ratio has fallen 

below the early warning level of 140 percent. The notice filed with the 

Commission and NFA must be prepared in the English language;

(17) The Japanese nonbank SD provides the Commission and NFA with notice 

within 24 hours of filing a notice with the Financial Services Agency

pursuant to Article 179 of the Cabinet Office Order on Financial 

Instruments Business that the firm’s capital adequacy ratio has fallen 

below 120 percent. The notice filed with the Commission and NFA must 

be prepared in the English language;

(18) The Japanese nonbank SD files a notice with the Commission and NFA 

within 24 hours if it fails to make or keep current the financial books and 

records required by the Financial Services Agency. The notice must be 

prepared in the English language;

(19) The Japanese nonbank SD files a notice with the Commission and NFA 

within 24 hours of the occurrence of any of the following: (i) a single 

counterparty, or group of counterparties under common ownership or 

control, fails to post required initial margin or pay required variation 

margin on uncleared swap and non-cleared security-based swap positions 

that, in the aggregate, exceeds 25 percent of the Japanese nonbank SD’s 

minimum capital requirement; (ii) counterparties fail to post required 
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initial margin or pay required variation margin to the Japanese nonbank 

SD for uncleared swap and non-cleared security-based swap positions that, 

in the aggregate, exceeds 50 percent of the Japanese nonbank SD’s 

minimum capital requirement; (iii) the Japanese nonbank SD fails to post 

required initial margin or pay required variation margin for uncleared 

swap and non-cleared security-based swap positions to a single 

counterparty or group of counterparties under common ownership and 

control that, in the aggregate, exceeds 25 percent of the Japanese nonbank

SD’s minimum capital requirement; or (iv) the Japanese nonbank SD fails 

to post required initial margin or pay required variation margin to 

counterparties for uncleared swap and non-cleared security-based swap 

positions that, in the aggregate, exceeds 50 percent of the Japanese 

nonbank SD’s minimum capital requirement. The notice must be prepared 

in the English language;

(20) The Japanese nonbank SD files a notice with the Commission and NFA of 

a change in its fiscal year-end approved or permitted to go into effect by 

the Financial Services Agency. The notice required by this paragraph will 

satisfy the requirement for a nonbank SD to obtain the approval of NFA 

for a change in fiscal year-end under CFTC Regulation 23.105(g) (17 CFR 

23.105(g)). The notice of change in fiscal year-end must be prepared in 

the English language and filed with the Commission and NFA at least 15 

business days prior to the effective date of the Japanese nonbank SD’s 

change in fiscal year-end; 
97

(21) The Financial Services Agency notifies the Commission of any material 

changes to the information submitted in its application, including, but not 

limited to, material changes to the Japanese Capital Rules or Japanese 

Financial Reporting Rules imposed on Japanese nonbank SDs, the 

Financial Services Agency’s supervisory authority or supervisory regime 

over Japanese nonbank SDs, and proposed or final material changes to the 

Japanese Capital Rules or Japanese Financial Reporting Rules as they 

apply to Japanese nonbank SDs; and

(22) Unless otherwise noted in the conditions above, the reports, notices, and 

other statements required to be filed by the Japanese nonbank SD with the 

Commission and NFA pursuant to the conditions of this Capital 

Comparability Determination Order must be submitted electronically to 

the Commission and NFA in accordance with instructions provided by the 

Commission or NFA.

Issued in Washington, DC, on July 29, 2022, by the Commission.

Robert Sidman,

Deputy Secretary of the Commission.

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

Appendices to Notice of Proposed Order and Request for Comment on an 

Application for a Capital Comparability Determination from the Financial Services 
98 

Agency of Japan – Commission Voting Summary, Chairman’s Statement, and 

Commissioners’ Statements

Appendix 1 – Commission Voting Summary 

On this matter, Chairman Behnam and Commissioners Johnson, Goldsmith 

Romero, and Mersinger voted in the affirmative. Commissioner Pham voted to concur. 

No Commissioner voted in the negative. 

Appendix 2 – Statement of Support of Chairman Rostin Behnam

As CFTC provisionally-registered swap dealers (SDs) operate and manage risk

globally, the Commission’s supervisory framework must acknowledge the realities of 

multi-jurisdictional operations. I support the Commission’s proposed order and request

for comment on its preliminary determination that nonbank1 swap dealers (SDs)

organized and domiciled in Japan are subject to, and comply with, capital and financial

reporting requirements in Japan that are comparable to certain capital and financial

reporting requirements under the Commodity Exchange Act and the Commission’s

regulations (Capital Comparability Determination), subject to certain conditions. 

Today’s preliminary Capital Comparability Determination is the first such order 

proposed by the Commission since adopting its regulatory substituted compliance

framework for non-U.S. domiciled nonbank SDs in July 2020.2 The Commission is

proposing this order in response to an application submitted by the Financial Services

 

1 The Commission has capital jurisdiction over registered SDs that are not subject to the regulation of a 

U.S. banking regulator (i.e., nonbank SDs). 7 U.S.C. 6s(e)(1). 2 See 85 FR 57462, 57520 (Sept. 15, 2020). Regulation 23.106 also sets forth the Commission’s substituted 

compliance requirements for major swap participants; however, there are not any registered with the 

Commission.
99 

Agency of Japan (FSA), which has direct supervisory authority over the three Japanese

nonbank SDs that are provisionally-registered with the Commission.

The Commission’s principles-based approach to the proposed determination

focuses on whether the FSA’s capital and financial reporting requirements achieve

comparable outcomes to the corresponding CFTC requirements.3 Specifically, the 

Commission has also considered the scope and objectives of FSA’s capital adequacy and

financial reporting requirements; the ability of FSA to supervise and enforce compliance 

with its capital and financial reporting requirements; and other facts or circumstances the 

Commission has deemed relevant for this application. 

Throughout its analysis, the Commission recognized that jurisdictions may adopt 

unique approaches to achieving comparable outcomes, and the Commission has focused

on how the FSA’s capital and financial reporting requirements are comparable to its own

in purpose and effect, rather than whether each are comparable in every particular aspect

or contain identical elements. In this regard, the approach was not a line-by-line

assessment or comparison of FSA’s regulatory requirements with the Commission’s

requirements.4 

Consistent with the Commission’s authority to issue a Capital Comparability 

Determination with terms and conditions it deems appropriate, today’s proposed order 

contains 22 conditions. These conditions aim to ensure that the proposed order, if

finalized, would only apply to Japanese nonbank SDs that are eligible for substituted

compliance and that these Japanese nonbank SDs comply with FSA’s capital and

 

3

 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521. 4 See 85 FR 57462, 57521.
100 

financial reporting requirements as well as certain additional capital, margin, position, 

financial reporting, required recordkeeping, and regulatory notice requirements.

If the Commission, upon consideration of the comments received, determines to

issue a favorable comparability determination, an eligible Japanese nonbank SD would be 

required to file a notice of its intent to comply with FSA’s capital adequacy and financial

reporting rules in lieu of the Commission’s requirements.5 The Commission (or the 

Market Participants Division through delegated authority) would then be obligated to

confirm to the Japanese nonbank SD that it may comply with the foreign jurisdiction’s

rules as well as any conditions that would be adopted as part of the final determination, 

and that, by doing so, it would be deemed to be in compliance with the Commission’s

corresponding capital adequacy and financial reporting requirements.

I believe it is important to note that today’s proposed Capital Comparability

Determination, if finalized, would not compromise the Commission’s capital and

financial reporting requirements. Instead, it recognizes the global nature of the swap

markets with dually-registered SDs that operate in multiple jurisdictions that mandate

prudent capital and financial reporting requirements. A capital and financial reporting 

comparability determination order of this kind is not a compromise or deference to a 

foreign regulatory authority. The Commission would retain its enforcement authority and

examinations authority as well as obtain all financial and event specific reporting to

maintain direct oversight of nonbank SDs located in Japan.

 

5 See 17 CFR 23.106(a)(4).
101 

While the CFTC and the FSA have a pre-existing memorandum of understanding 

(MOU) in place, it is important to note that an MOU or a similar agreement is not 

necessary for the Commission and the National Futures Association to monitor these

firms’ compliance with the conditions of a capital comparability determination.

I look forward to the public’s submission of comments and feedback on this

proposed determination and order.

I wish to again thank the hardworking staff in the Market Participants Division for

all of their efforts towards bringing us here today. 

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

I support the Commission’s issuance of the proposed capital comparability order 

for comment (Proposed Order). I commend staff’s hard work on this matter and their 

meticulous review of the capital and financial reporting requirements in Japan, as well as 

their outstanding cooperation with the Financial Services Agency of Japan (JFSA). I also 

appreciate the JFSA’s sustained and meaningful engagement of Commission staff during 

the entirety of the review process. 

The Commission’s capital and financial reporting requirements are critical to 

ensuring the safety and soundness of our regulated swap dealers.1

 Ensuring necessary 

levels of capital, as well as accurate and timely reporting about financial conditions, helps 

to protect swap dealers and the broader financial markets ecosystem from shocks, thereby 

ensuring resiliency. 

 

1 See 7 U.S.C. 6s(e); 17 CFR subpart E. 
102

Prior to the adoption of the CFTC’s final rules regarding swap dealer capital 

which published in the Federal Register on September 15, 2020,2 with a compliance date 

of October 6, 2021,3 the Commission had issued interpretive guidance allowing for 

substituted compliance determinations to be made with respect to other components of 

the Commission’s swap dealer requirements. Under that guidance, the Commission has 

issued comparability determinations relating to market participants operating in several 

jurisdictions including the EU, Australia, Canada, Hong Kong, Switzerland, and, notably, 

Japan.4 The Proposed Order before the Commission is, however, the first capital 

comparability determination. 

When the Commission initially issued interpretive guidance, many jurisdictions 

had not yet implemented swaps reforms addressing risk management failures that 

precipitated the 2008 financial crisis. Today, many jurisdictions have made great strides 

to adopt effective regulatory regimes, mitigating the systemic risks that previously 

pervaded global markets. The current procedure for regulatory capital and financial 

reporting requirements set forth in regulation 23.106 permits foreign nonbank swap 

dealers, a trade association on behalf of one or more foreign nonbank swap dealers, or a 

foreign regulatory authority with jurisdiction over a foreign nonbank swap dealer (as the 

JFSA has done) to file an application for substituted compliance. The Proposed Order, if 

approved, will allow registered nonbank swap dealers organized and domiciled in Japan 

 2 See Capital Requirements of Swap Dealers and Major Swap Participants, 85 FR 57462 (Sept. 15, 2020) 

(CFTC Capital Rules). 3 Id. at 57462. 4 The Commission has issued comparability determinations for certain entity-level requirements (Australia,

Canada, EU, Hong Kong, Japan, Switzerland), certain transaction-level requirements (EU, Japan), and 

margin requirements for uncleared swaps (EU, Japan). See CFTC, Comparability Determinations for 

Substituted Compliance Purposes, https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm. 
103

to satisfy certain capital and financial reporting requirements under the Commodity 

Exchange Act5 by being subject to and complying with comparable capital and financial 

reporting requirements under Japanese laws and regulations.

I support acknowledging market participants’ compliance with the regulations of 

foreign jurisdictions when the requirements lead to an outcome that is comparable to the 

outcome of complying with the CFTC’s corresponding requirements. Substituted 

compliance must not, however, be confused with deference. To the contrary, the swap 

dealers that qualify for substituted compliance under regulation 23.106 must be 

Commission registrants. The Proposed Order, if approved, would continue to ensure that 

relevant Japan-based swap dealers are subject to the Commission’s examination and 

enforcement authority over the firms. 

Capital requirements play a critical role in fostering the safety and soundness of 

financial markets. As indicated in the Commodity Exchange Act, capital requirements 

protect market participants against risks such as counterparty default.6

 Robust capital 

requirements enable individual market participants to absorb losses, meet their 

obligations, and successfully navigate challenges that may threaten their integrity or 

trigger systemic risk concerns. As a result, the Commission must be measured in 

applying its framework for capital comparability determinations. I look forward to 

reviewing the public comments on this proposed determination.

 5 7 U.S.C. 1 et seq. 6 7 U.S.C. 6s(e). 
104 

Appendix 4 – Statement of Support of Commissioner Christy Goldsmith Romero

I support the Commission’s efforts for strong capital requirements and financial 

reporting to help ensure the safety and soundness of swap dealers whose activities could 

affect U.S. markets, including through this proposed Capital Comparability 

Determination for Japan. The proposal promotes financial stability, and the benefits of 

global harmonization with a like-minded regulator for the global swaps markets. Thank 

you to the staff for their hard work, and for their thoughtful engagement with me and my 

office on changes to improve the proposal. 

The 2008 Financial Crisis and TARP Capital Injections 

A key cause of the financial crisis was the failure of bank regulators to require 

financial institutions to have high quality capital in a sufficient amount to serve as a 

buffer against risk. This included the lack of capital requirements that would ensure that 

financial institutions that were swap dealers, and other major participants in swaps 

markets, had adequate capital to absorb losses. The devastating result of this 

undercapitalization swept rapidly through the highly interconnected financial system. 

The default or margin failure of one counterparty triggered another, and then another – 

which led to a short-term liquidity crisis. Risk and losses also cascaded from subsidiaries 

and affiliates to bank parent companies and/or bank holding companies, including across 

borders. 

The financial contagion was not limited to major players in the markets. The 

entire economy suffered, with Main Street bearing the consequences of Wall Street. The 

federal government made unprecedented capital injections of hundreds of billions of 

taxpayer dollars into more than 700 financial institutions through the Troubled Asset 
105 

Relief Program (“TARP”). For the last decade, I served as the Special Inspector General 

for TARP (“SIGTARP”), providing oversight over TARP programs. I have testified 

before Congress and reported publicly on lessons learned from inadequate capital 

requirements pre-crisis, and the need for strong levels of high-quality capital to lower 

systemic risk in the financial system. 

The Dodd Frank Act’s Capital Requirements for Swap Dealers 

Swap dealer capital requirements are one of the most critical reforms in the DoddFrank Act for derivatives markets. These reforms led the CFTC to allow nonbank swap 

dealers to use a capital framework similar to what prudential banking regulators apply to 

banks.1 

Capital protects the solvency of the swap dealer from unexpected losses such as 

counterparty defaults and margin collateral failures. Capital requirements are aimed at 

ensuring a swap dealer has the ability to absorb losses and they prevent market disruption 

by helping to ensure that swap dealers continue to perform their critical function to 

provide liquidity and market making. Capital along with margin requirements for 

uncleared swaps reduces the potential for contagion, thereby lowering systemic risk in 

the financial system, and promoting financial stability.

The CFTC’s First Substituted Compliance Determination for Capital Requirements

 

1 This bank-based approach is consistent with the Basel Committee on Banking Supervision’s international 

framework for bank capital requirements.
106 

The global nature of the financial crisis also highlighted the need for the CFTC to 

coordinate with foreign regulators as swap activities in a foreign jurisdiction may have an 

impact here in the United States. For example, risk of a foreign subsidiary can flow to 

their U.S. parent company. 

The CFTC’s “substituted compliance” framework leverages a second regulator, a 

like-minded foreign regulator that has rules, supervision and enforcement that are 

comparable in purpose and effect to the CFTC’s. Under this global harmonization, the 

CFTC would allow a non-U.S. entity to be deemed in compliance with CFTC 

requirements if the non-U.S. entity complied with the foreign regulator’s comparable 

rules. 

I am mindful that this proposal is the first of its kind – the first substituted 

compliance determination for the CFTC’s capital rules. Therefore, we should proceed 

carefully, as we are establishing precedent.

The proposal today is for nonbank swap dealers that are domiciled in Japan, 

where we have a Memorandum of Cooperation and a long history of cooperation with the 

Japanese Financial Services Agency.2 Currently, this proposal would apply to Japanese 

affiliates of Bank of America, Morgan Stanley and Goldman Sachs – three systemically 

important institutions and three of the largest TARP recipients having collectively 

received $60 billion in TARP capital injections. Therefore, it is vital that the CFTC 

ensures that these swap dealers have adequate amounts of high-quality capital. Public 

 

2 As noted in the proposal, in making a Capital Comparability Determination the Commission may consider 

any facts or circumstances it deems relevant, including whether the relevant foreign regulatory authority 

has a memorandum of understanding or similar arrangement with the Commission that would facilitate 

supervisory cooperation. See 17 CFR 23.106(a)(3)(iv). 
107 

comment will be helpful on whether the CFTC is correct in its preliminary 

determinations of comparability.

I highlight, and express my appreciation for, the involvement of the Japanese 

Financial Services Agency in this process. CFTC staff’s engagement with our regulatory 

counterparts in Japan has helped to ensure the accuracy of the staff’s assessment of 

Japanese capital and financial reporting requirements, along with supervisory and 

enforcement programs.3 

Substituted compliance does not require an all or nothing determination. The 

CFTC may continue to require compliance with certain of its rules, and impose any terms 

or conditions that it deems appropriate.4 

The CFTC proposes to continue to require that Japanese nonbank swap dealers 

comply with the CFTC’s $20 million capital requirement, as Japan has no minimum 

requirement.5 I strongly support retaining the $20 million capital requirement. However, 

the CFTC is not requiring compliance with our requirement that the $20 million be in the 

form of common equity tier 1 capital –one of the strongest forms of capital. Instead, the 

proposal would allow the $20 million requirement to be satisfied with types of capital 

defined in a category called “Basic Items” under Japanese regulation. I look forward to 

commenters’ response on whether allowing the $20 million capital requirement to be 

satisfied with this category of “Basic Items” is comparable in purpose and effect to the 

 

3 The Commission may consider all relevant factors in making a Capital Comparability Determination, 

including the ability of the relevant foreign regulatory authority to supervise and enforce compliance with 

the foreign jurisdiction’s capital adequacy and financial reporting requirements. See 17 CFR 

23.106(a)(3)(iii). The proposal also makes a preliminary determination that the Japanese financial 

reporting rules are conditionally comparable in purpose and effect with the CFTC’s financial reporting 

rules.

4 See 17 CFR 23.106(a)(5). 5 Japanese capital requirements are consistent with Basel bank capital standards, similar to the CFTC.
108 

CFTC’s requirement that only common equity tier 1 capital be included in the $20 

million.

Japan also does not have a minimum requirement for capital that is tied to the 

margin for uncleared swaps entered into by the nonbank swap dealer. The CFTC 

requires an aggregate of common equity tier 1 capital, additional tier 1 capital and tier 2 

capital equal to or greater than 8 percent of the nonbank swap dealer’s uncleared swap 

margin amount. I look forward to commenters’ response on the question as to whether 

Japan’s capital requirement in an amount equal to 25% of operating expenses is 

comparable in purpose and effect to the CFTC’s capital requirement equal to 8% of the 

uncleared swap margin amount. 

It is a priority for me to ensure that the CFTC guards against complacency with 

post-crisis reforms, particularly after market stresses from the pandemic and geopolitical 

events. We should remember that our capital rules serve as critical pillars of Dodd-Frank 

reforms to help ensure the safety and soundness of financial institutions, and to protect 

the market from serious risks and contagion. The CFTC has a duty to ensure that our 

comparability assessment is sound, and that the foreign regulator is like-minded in not 

only rules but in their approach, supervision and enforcement. Substituted compliance 

must leave U.S. markets and our economy at no greater risk than full compliance with 

our rules. 

Appendix 5 – Concurring Statement of Commissioner Caroline D. Pham 

I respectfully concur with the notice of proposed order and request for comment 

on an application for a capital comparability determination submitted by the Financial 

Services Agency (FSA) of Japan.
109

First, I want to recognize the staff’s work as each of my fellow Commissioners 

has done because this is not easy—not only for this rulemaking, but also, generally 

speaking, swap dealer oversight is an incredibly complex regulatory regime. I also 

appreciate your commitment to providing substituted compliance. 

In addition, in my past work in Japan and with their financial sector, I have 

enjoyed working with the FSA for many years, and I appreciate their thoughtful and 

robust oversight of their regulated firms. I also want to say that my thoughts and heart are 

with the people of Japan regarding the tragic loss of Prime Minister Shinzo Abe. 

As I mentioned in my opening statement, the CFTC should take an outcomesbased approach to substituted compliance that appropriately balances and recognizes the 

nature of cross-border regulation of global markets and firms that preserves access for 

U.S. persons to other markets.1

 I appreciate the Chairman's remarks and I welcome 

comments, particularly on operational issues with additional reporting requirements given 

the time difference, language translation, conversion to USD, local governance and 

regulatory requirements, and differences in financial reporting. 

I urge a pragmatic approach with sufficient time to implement conditions before 

any compliance date, and I appreciate the thought that the staff have been putting into 

that. I speak from my past experience as a global head of swap dealer compliance who 

had to implement global regulatory reforms. I'll also note that in a crisis, such as during 

the early days of the COVID-19 pandemic, there was timely and effective engagement 

between and amongst CFTC registrants and U.S. regulators. I have been on many calls 

 1 See Statement of Dissent by Commissioner Scott D. O’Malia on Comparability Determinations for 

Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland: Certain Entity and 

Transaction-Level Requirements (Dec. 20, 2013).
110

and spoken to many regulators all over the world, not only during COVID-19, but also 

during times of market disruption or potentially material events. 

There is a difference between a phone call and a formal written notice, and that’s 

just one example of the conditions in this proposal. So, I appreciate receiving comments 

on this and any other operational issues and the careful consideration by the staff and the 

Commission of how to take a practical approach to achieving appropriate oversight and 

mitigation of risk to the United States and to our markets.