August 24, 2023

Mr. Christopher Kirkpatrick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581

Re: Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Domiciled in the French Republic and Federal Republic of Germany and Subject to Capital and Financial Reporting Requirements of the European Union

Dear Mr. Kirkpatrick:

The Institute of International Bankers (“IIB”), International Swaps and Derivatives Association (“ISDA”) and Securities Industry and Financial Markets Association (“SIFMA”, and together with IIB and ISDA, the “Associations”)1 appreciate the opportunity to comment on the above-captioned notice by the Commodity Futures Trading Commission (“CFTC” or “Commission”) regarding an application submitted by the Associations on behalf of registered nonbank swap dealers2 (“nonbank SDs”) domiciled in the French Republic (“France”) and Federal Republic of Germany (“Germany”) and subject to capital and financial reporting requirements of the European Union (“EU”) (“EU nonbank SDs”) requesting that the CFTC determine that EU nonbank SDs may comply with certain capital and financial reporting requirements under the Commodity Exchange Act (“CEA”) and Rules 23.101 and 23.105(d)–(e) thereunder (the “Commission Capital & Reporting Requirements”)3 via compliance with corresponding capital and financial reporting requirements in the EU (the “EU Capital & Reporting Requirements”), and the proposed order (the “EU Order”) providing for the conditional substituted compliance in connection with the application (together, the “Proposal”).4

The Associations support the Proposal and agree with the Commission’s overall analysis of and determination of comparability of the Commission’s Capital & Reporting Requirements and the EU Capital & Reporting Requirements. The Proposal reflects a thoughtful, holistic approach to substituted compliance. The Proposal includes requests for comment on several specific questions, which the Associations address below.

I. The EU Capital & Reporting Requirements’ Minimum Capital Levels Reflect Similar Regulatory Concerns & Lead to Comparable Regulatory Outcomes as the Commission’s Capital & Reporting Requirements

The Commission seeks public comment on whether the minimum capital requirements under the EU Capital & Financial Reporting Requirements are comparable in purpose and effect to those under the Commission’s requirements. Specifically, the Commission seeks comment on whether the requirements under the EU Capital & Reporting Requirements that EU nonbank SDs calculate an operational risk exposure as part of the firm’s total risk exposure amount and meet separate liquidity requirements are sufficiently comparable in purpose and effect to the CFTC’s requirement for a nonbank SD to hold regulatory capital equal to or greater than 8 percent of its uncleared swap margin amount.5

The Commission notes that “[t]he intent of the minimum capital requirement based on a percentage of the nonbank SD’s uncleared 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.”6 The Associations believe the EU Capital & Reporting Requirements’ minimum capital levels are sound, reflect similar regulatory concerns and lead to comparable regulatory outcomes as the Commission Capital & Reporting Requirements.

The EU’s capital framework imposes bank-like capital requirements that, consistent with the Basel Committee on Banking Supervision (“BCBS”) international framework for bank capital requirements, requires an EU nonbank SD to calculate the firm’s total risk exposure amount comprised of risk weighted on-balance sheet and offbalance sheet assets and exposures. The categories of risk charges include those reflecting market risk, credit risk, settlement risk, credit value adjustment (“CVA”) risk of OTC derivatives, and operational risk. EU nonbank SDs are required to hold and maintain regulatory capital in the form of qualifying common equity tier 1 capital, additional tier 1 capital, and tier 2 capital that in aggregate totals or exceeds 8 percent of the total risk exposure amount. In addition, EU nonbank SDs are required to maintain a capital conservation buffer of common equity tier 1 capital equal to 2.5 percent on the firm’s total risk- weighted assets, separate and independent of the common equity tier 1 capital sued to meet the requirement within the 8 percent core capital requirement.

EU nonbank SDs are also subject to a leverage ratio floor, which requires each firm to maintain tier 1 capital (aggregate common equity tier 1 capital and additional tier 1 capital) of at least 3 percent of total on-balance sheet and off-balance sheet exposure without regard to risk weighting. This requirement is intended to prevent excessive leverage and complements the risk-based minimum capital requirements.

EU capital requirements also include liquidity requirements that are designed to ensure that an SD has sufficient liquidity to fund their operations over various time horizons, including making timely payments to customers and counterparties. There are three types of requirements: (1) hold sufficiently liquid assets to meet expected obligations under stress for 30 days; (2) a stable funding requirement under which firms must hold diverse stable instruments sufficient to meet long-term obligations under normal and stressed conditions; and (3) maintain robust strategies, policies, processes, and systems for identification of liquidity risk over appropriate time horizons, including intra-day.

In addition, EU member states may require EU nonbank SDs to satisfy a firm-specific minimum requirement for own funds and eligible liabilities (“MREL”) if they meet certain requirements. The MREL requirement is separate from the minimum capital requirements imposed on EU nonbank SDs described above and is designed to ensure that firms, including the EU nonbank SDs subject to the requirement, maintain, at all times, sufficient eligible instruments to facilitate the implementation of the preferred resolution strategy. The MREL is expressed as two ratios that have to be met in parallel: (i) a percentage of the entity’s total risk exposure amount, and (ii) a percentage of the entity’s total leverage ratio exposure measure.

Further, EU capital requirements impose an additional supplemental standard of total loss absorbing capacity (‘‘TLAC’’) for global systemically important institution (“G–SII”) entities identified as resolution entities globally and require such entities to maintain a risk-based capital and eligible liabilities ratio of 18 percent of the entity’s total risk exposure amount and a non-risk- based capital and eligible liabilities ratio of 6.75 percent of the firm’s total leverage ratio exposure measure. In addition, ‘‘material subsidiaries’’ of non-EU G–SIIs, including subsidiaries of U.S. global systemically important banks, that are not resolution entities are required to maintain MREL equal to 90 percent of the foregoing as applied to their parent entity at all times.

Considering all of the above, although the EU capital framework does not have a direct analogue to the 8 percent uncleared swap margin requirement, it has various other measures that achieve the same regulatory objective of ensuring that an SD maintains an amount of capital that is sufficient to cover the full range of risks an EU nonbank SD may face.

A. Similar Analysis Applies to Pending Substituted Compliance Applications for Japan, Mexico and the UK

The Associations believe a similar analysis leads to the same answer in reference to the currently pending capital substituted applications for Japan, Mexico and the United Kingdom (“UK”). As we noted in our responses to the Commission’s proposed orders and requests for comment in regard to the capital frameworks for Japan and Mexico, although those two regimes are not identical to the Commission’s and do not include an 8% of swap margin requirement, we support the finding that taken as a whole, they both ensure the same regulatory objective of ensuring nonbank SDs maintain sufficient capital to cover the full range of risks7.

Further, as noted in our submitted application on the UK capital regime, in calculating its risk weighted assets for purposes of the framework’s risk-based ratios, a UK nonbank SD must incorporate risk exposure amounts composed of market, credit, settlement, CVA, and operational risk. Because they cover the full range of a firm’s exposures, not just those related to swaps, these exposure amounts will generally yield capital requirements that substantially exceed 8 percent of the SD’s uncleared swap margin amount. In addition, the UK framework mandates a leverage ratio floor that, similar to the uncleared swap margin requirement, is based principally on volume and counterparties without regard to risk-weighting. UK SDs are also subject to comprehensive liquidity requirements that are designed to ensure that a SD has sufficient liquid assets to meet its ongoing obligations. As a result, although the UK capital framework does not have a direct analogue to the 8 percent uncleared swap margin requirement, it has various other measures that achieve the same regulatory objectives.8

II. Technical Comments on Notice Filing Conditions: Current Language Might Require Regulatory Filing Prior to Discovery of Triggering Event

In its proposed order, the Commission requires an EU nonbank SD to comply with certain specified EU laws and regulations, as well as enumerated conditions, to be able to rely on substituted compliance. Below, the Associations provide technical comments on two of those conditions, numbers 21 and 22, addressing practical challenges of the current wording, which could require notification prior to the discovery of the relevant failure. Condition 15 of the proposed Mexico order already contains our suggested language, “when it knows” to address that practical challenge.9

1 See Appendix for more information on the Associations.

2 As used herein, a “nonbank” SD refers to an SD that does not have a Prudential Regulator as defined in Section 1a(39) of the CEA.

3 See Capital Requirements for Swap Dealers and Major Swap Participants, 85 FR 57462 (Sept. 15, 2020).

4 See Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Domiciled in the French Republic and Federal Republic of Germany and Subject to Capital and Financial Reporting Requirements of the European Union, 88 Fed. Reg. 41774 (June 27, 2023).

5 See Id. at 41795.

6 See Id. at 41788.

7 See IIB, ISDA and SIFMA letter in response to the Commission’s proposal regarding Japan dated Oct. 7, 2022, and ISDA and SIFMA letter in response to the Commission’s proposal regarding Mexico dated Feb. 13, 2023.

8 See IIB, ISDA and SIFMA Substituted Compliance Application for UK Swap Dealers from CEA Sections 4s(e)–(f) and Rules 23.101 and 23.105(d)–(e), (p)(2).

9 See Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican Comision Nacional Bancaria y de Valores, 87 Fed. Reg. 76374 (Dec. 13, 2022). Similar comments were made by the International Bankers Association of Japan in its letter commenting on the proposed Japan Order dated Oct. 6, 2022 (p.7).