[Federal Register Volume 89, Number 10 (Tuesday, January 16, 2024)]
[Proposed Rules]
[Pages 2554-2581]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-28649]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AF33

Capital and Financial Reporting Requirements for Swap Dealers and 
Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

———————————————————————–

SUMMARY: The Commodity Futures Trading Commission (“Commission” or

[[Page 2555]]

“CFTC”) proposes to amend certain of the Commission’s regulations 
that impose minimum capital requirements and financial reporting 
obligations on swap dealers (“SDs”) and major swap participants 
(“MSPs”). The Commission proposes to do this by codifying parts of 
staff interpretive letter 21-15 to SDs addressing the Tangible Net 
Worth Capital Approach for calculating capital under the applicable 
Commission regulation and no-action letter 21-18 (and its successor no-
action letter 23-11) regarding alternative financial reporting by SDs 
subject to the capital requirements of a prudential regulator 
(together, “CFTC Letters”). The Commission is also proposing to amend 
certain of its regulations applicable to SDs, in areas including the 
required timing of certain notifications, the process for approval of 
subordinated debt for capital, and the revision of financial reporting 
forms to conform to the rules. The proposed amendments are intended to 
make it easier for SDs to comply with the Commission’s financial 
reporting obligations and demonstrate compliance with minimum capital 
requirements.

DATES: Comments must be received on or before February 13, 2024.

ADDRESSES: You may submit comments, which must be in writing and 
identified by RIN 3038-AF33, by any of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the “Submit Comments” link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instruction as for 
Mail, above.
    Please submit your comments using only one of these methods. 
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 only submit 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 in Sec.  145.9 of the Commission’s regulations. The 
Commission reserves the right, but shall have no obligation, to review, 
prescreen, 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 rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act (APA) and other applicable laws and may be accessible 
under the FOIA.

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, [email protected]; Thomas Smith, Deputy Director, 202-418-5495, 
[email protected]; Joshua Beale, Associate Director, 202-418-5446, 
[email protected]; Jennifer Bauer, Special Counsel, 202-418-5472, 
[email protected]; Maria Aguilar-Rocha, Attorney Advisor, 202-418-5840, 
[email protected]; Andrew Pai, Attorney Advisor, 646-746-9893, 
[email protected]; Market Participants Division; Lihong McPhail, Research 
Economist, 202-418-5722, [email protected], Office of the Chief 
Economist; Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: On September 15, 2020, the Commission 
published in the Federal Register final rules adopting capital and 
financial reporting requirements for SDs and MSPs.1 The Final Rules 
accomplished the Congressional mandate 2 directing the Commission to 
adopt rules imposing both capital requirements and initial and 
variation margin requirements on SDs and MSPs that are not subject to a 
prudential regulator (“nonbank SDs” and “nonbank MSPs”, 
respectively).3 The Final Rules included amendments to existing 
capital rules for futures commission merchants (“FCMs”) to provide 
explicit additional capital requirements for proprietary positions in 
swaps and security-based swaps that are not cleared by a clearing 
organization. The Final Rules also included a detailed capital model 
application process whereby eligible nonbank SDs and nonbank MSPs could 
apply to the Commission or a registered futures association (“RFA”) 
of which they are a member for approval. Further, the Final Rules 
adopted a capital comparability determination process for certain 
eligible foreign domiciled nonbank SDs and nonbank MSPs to seek 
substituted compliance for the Commission’s capital and financial 
reporting requirements.4 Finally, the Final Rules adopted detailed 
financial reporting, recordkeeping and notification requirements, 
including limited financial reporting requirements for SDs and MSPs 
subject to the capital requirements of prudential regulators (“bank 
SDs” and “bank MSPs”, respectively).
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    1 Capital Requirements of Swap Dealers and Major Swap 
Participants, 85 FR 57462 (Sept. 15, 2020) (the “Final Rule” or 
the “Final Rules”).
    2 Section 4s(e) of the Commodity Exchange Act (“CEA” or the 
“Act”), 7 U.S.C. 6s(e), which is contained in section 731 of the 
Dodd-Frank Act, requires the Commission to adopt minimum capital and 
margin requirements for SDs and MSPs that are not subject to a 
prudential regulator. Section 731 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 
1376 (2010) (the “Dodd-Frank Act”). The text of the Dodd-Frank Act 
is available at https://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    3 The term “prudential regulator” is defined as the Board of 
Governors of the Federal Reserve System (“Federal Reserve Board”); 
the Office of the Comptroller of the Currency (“OCC”); the Federal 
Deposit Insurance Corporation (“FDIC”); the Farm Credit 
Administration; and the Federal Housing Finance Agency. Section 
1a(39) of the CEA, 7 U.S.C. 1a(39).
    4 To date, the Commission has issued proposals for substituted 
compliance for eligible nonbank SDs domiciled in Japan, Mexico, and 
the European Union for public comment. Notice of Proposed Order and 
Request for Comment on an Application for a Capital Comparability 
Determination From the Financial Services Agency of Japan, 87 FR 
48092 (Aug. 8, 2022); Notice of Proposed Order and Request for 
Comment on an Application for a Capital Comparability Determination 
Submitted on Behalf of Nonbank Swap Dealers Subject to Regulation by 
the Mexican Comision Nacional Bancaria y de Valores, 87 FR 76374 
(Dec. 13, 2022); Notice of Proposed Order and Request for Comment on 
an Application for a Capital Comparability Determination Submitted 
on Behalf of Nonbank Swap Dealers Domiciled in the French Republic 
and Federal Republic of Germany and Subject to Capital and Financial 
Reporting Requirements of the European Union, 88 FR 41774 (June 27, 
2023).
—————————————————————————

    The Commission initially proposed capital and financial reporting 
requirements for nonbank SDs and nonbank MSPs, and financial reporting 
requirements for bank SDs and bank MSPs, in 2011.5 After extensive 
comment, in 2016 the Commission re-proposed the rules for comment.6 
The Commission received numerous comments from a broad spectrum of 
market participants in response to the re-proposal.7 In addition, 
following the 2016 re-proposal, the SEC adopted a final set of capital, 
margin and financial reporting requirements for security-based swap 
dealers and major security-

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based swap participants (“SBSDs” and “MSBSPs,” respectively).8 In 
December 2019, the Commission re-opened the proposed rules for comment 
in light of the SEC’s final rules, and requested commenters to provide 
detailed data and information regarding several critical areas of the 
Commission’s proposed approach.9
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    5 Capital Requirements of Swap Dealers and Major Swap 
Participants, 76 FR 27802 (May 12, 2011).
    6 Capital Requirements of Swap Dealers and Major Swap 
Participants, 81 FR 91252 (Dec. 16, 2016) (the “2016 Capital 
Proposal”).
    7 The comment letters for the 2016 Capital Proposal are 
available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1769 (the public comment file).
    8 Capital, Margin and Segregation Requirements for Security-
Based Swap Dealers and Major Security-Based Swap Participants and 
Capital and Segregation Requirements for Broker-Dealers, 84 FR 43872 
(Aug. 22, 2019) (the “SEC Final Capital Rule”).
    9 Capital Requirements of Swap Dealers and Major Swap 
Participants, 84 FR 69664 (Dec. 19, 2019).
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    The Final Rules became effective November 16, 2020.10 To address 
concerns from commenters that a sufficient period of time would be 
necessary to develop policies, procedures and systems to implement the 
new financial reporting requirements and to develop and obtain approval 
to use capital models, the Commission adopted an extended compliance 
date of October 6, 2021 (“Extended Compliance Date”).11 The 
Extended Compliance Date also corresponded to the SEC’s compliance date 
for SBSDs and MSBSPs, thus permitting better coordination for dually-
registered entities.12
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    10 Final Rules, 85 FR at 57462.
    11 Id. at 57525.
    12 Id.
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    The Commission’s overall capital approach in the Final Rules 
permits nonbank SDs and MSPs to select one of three methods to 
calculate their capital requirements.13 Each method is discussed in 
detail in the Final Rule and determines the frequency and type of 
financial reporting information to be provided to the Commission by 
each nonbank SD and nonbank MSP.14 Bank SDs, which are not subject to 
the capital requirements of the Commission, are required to provide the 
Commission and National Futures Association (“NFA”) with limited 
financial information regarding the capital and swap positions of the 
firms. Bank SDs are required to file the limited financial information 
using CFTC forms that were intended to be comparable with forms 
required by the prudential regulators and consistent with forms adopted 
by the SEC for SBSDs subject to the capital rules of a prudential 
regulator.15 Together, the financial reporting and notice 
requirements included in the Final Rules serve as the mechanism for the 
Commission to monitor capital compliance by nonbank SDs.
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    13 See generally id. at 57467. The three methods discussed in 
detail in the Final Rules include the Bank-Based Capital Approach, 
the Tangible Net Worth Capital Approach, and the Net Liquid Assets 
Capital Approach.
    14 See generally id. at 57480-57502.
    15 See generally id. at 57491-57498. This approach is 
consistent with other Commission rules that permit the acceptance of 
certain filings under the SEC adopted final rules in lieu of the 
Commission’s own rules. See e.g., 17 CFR 1.10(b)(1), 23.105(d)(3), 
and (e)(5).
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    In the Final Rule, the Commission also recognized the role of NFA 
as the only RFA under the CEA. NFA is an integral component of the 
Commission’s registration and oversight program. Specifically, the 
Commission has authorized NFA to administer the registration process 
for SDs and MSPs,16 and to approve the use of capital and initial 
margin models. NFA also conducts examinations of nonbank SDs and 
nonbank MSPs to assess compliance with Commission and NFA rules.17 As 
such, the Final Rules required that financial reports and notices be 
filed with both the Commission and the NFA,18 and explicitly 
recognized NFA’s ability to adopt standardized forms and processes to 
carry out the Commission’s financial reporting and notification 
requirements for SDs.19
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    16 See generally Performance of Registration Functions by 
National Futures Association with Respect to Swap Dealers and Major 
Swap Participants, 77 FR 2708 (Jan. 19, 2012).
    17 Final Rules, 85 FR 57507-57510.
    18 Id. at 57515.
    19 Id. at 57518.
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    During the period leading up to the Extended Compliance Date, 
Commission, NFA, and SEC staff collaborated to develop a process for 
the collection of financial reports and to respond to inquiries from 
industry participants regarding compliance with financial reporting and 
notice obligations. On January 12, 2021, Commission staff approved 
NFA’s capital model application process.20 On December 21, 2021, NFA 
adopted new Financial Requirements Section 18 of its rules, which in 
addition to including capital rules largely modeled after those adopted 
by the Commission in the Final Rules, published newly developed 
standardized financial reporting forms FR-CSE-NLA and FR-CSE-BHC for 
use by nonbank SDs that are not also registered with the SEC.21
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    20 CFTC Letter No. 21-03, Jan. 12, 2021, available at https://www.cftc.gov/csl/21-03/download.
    21 NFA submitted these rules for Commission review under 
section 17(j) of the CEA, 7 U.S.C. 21(j), on November 22, 2021, and 
the rules became effective on December 21, 2021. NFA Notice to 
Members I-21-45, available at https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5437.
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    Prior to the Extended Compliance Date, Commission staff also 
received inquiries from market participants regarding compliance with 
various capital and financial reporting obligations under the Final 
Rule. In response, Commission staff issued eight no-action and 
interpretative letters.22 Two letters, CFTC Letters No. 21-15 and 21-
18,23 are discussed below in detail and inform this proposed 
rulemaking. In addition, the Commission is proposing several other 
amendments that are the result of Commission staff’s experience 
implementing the Final Rule. These amendments are intended to provide 
technical and other clarifying changes necessary to effectuate the 
Final Rule’s purpose.
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    22 CFTC Letter No. 21-15, June 29, 2021, available at https://www.cftc.gov/csl/21-15/download; CFTC Letter No. 21-18, Aug. 31, 
2021, available at https://www.cftc.gov/csl/21-18/download; CFTC 
Letter No. 21-20, Sept. 30, 2021, available at https://www.cftc.gov/csl/21-20/download; CFTC Letter No. 21-21, Sept. 30, 2021, available 
at https://www.cftc.gov/csl/21-21/download; CFTC Letter No. 21-22, 
Sept. 30, 2021, available at https://www.cftc.gov/csl/21-22/download; CFTC Letter No. 21-23, Sept. 30, 2021, available at 
https://www.cftc.gov/csl/21-23/download; CFTC Letter No. 22-01, Jan. 
5, 2022, available at https://www.cftc.gov/csl/22-01/download; CFTC 
Letter No. 22-02, Jan. 5, 2022, available at https://www.cftc.gov/csl/22-02/download.
    23 CFTC Letter No. 21-18 was time-limited and set to expire on 
October 23, 2023. To permit time for the Commission to issue a 
proposed rulemaking and address any comments received, the Market 
Participants Division extended the expiration of the letter to the 
earlier of October 6, 2025, or the adoption of any revised financial 
reporting requirements for bank SDs under regulation Sec.  
23.105(p). CFTC Letter No. 23-11, July 10, 2023, available at 
https://www.cftc.gov/csl/23-11/download.
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II. Proposed Amendments to Commission Regulations

A. Codification of the CFTC Letters and Other Amendments

1. Amendments to Tangible Net Worth Capital Approach–CFTC Letter No. 
21-15
    The Commission is proposing amendments to definitions in Commission 
regulation Sec.  23.100 24 to ensure that the Tangible Net Worth 
Capital Approach may be utilized by eligible nonbank SDs as intended in 
the Final Rule. Prior to the Final Rules’ implementation date, several 
nonbank SDs intending to elect the Tangible Net Worth Capital Approach 
raised concerns regarding the application of the eligibility test to 
different corporate structures. In response to concerns raised, the 
Market Participants Division (the “Division”) issued interpretive 
CFTC Letter No. 21-15 on June 29, 2021.25 In CFTC Letter No. 21-15, 
the Division stated that the asset and revenue tests for 
“predominantly engaged in non-financial activities” could be assessed 
at the nonbank SD’s

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entity level or ultimate parent level and, further, such tests could be 
computed under International Financial Reporting Standards issued by 
the International Accounting Standards Board (“IFRS”) in lieu of 
generally accepted accounting principles (“GAAP”) as adopted in the 
United States if the entity was permitted to use IFRS for financial 
reporting.26 The Division also confirmed that supplemental position 
reporting for nonbank SDs meeting these qualifications may be filed on 
a quarterly basis along with the financial reports, as opposed to 
monthly.27 In the Commission’s experience over the past two years, 
the interpretation in CFTC Letter No. 21-15 helped eligible nonbank SDs 
better understand their compliance obligations under the Commission’s 
capital and financial reporting requirements at the implementation date 
of the Final Rules by pointing out an obvious but inadvertent mistake 
in the Final Rules. Therefore, the Commission is now proposing to 
modify the relevant Commission regulations to more fully align the 
Tangible Net Worth Capital Approach with the Commission’s intention as 
expressed in the preamble to the Final Rules and consistent with the 
terms of CFTC Letter No. 21-15.
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    24 17 CFR 23.100.
    25 CFTC Letter No. 21-15.
    26 Id. at 3-6.
    27 Id. Compare 17 CFR 23.105(d) with 17 CFR 23.105(l), as the 
former includes monthly or quarterly periodicity as opposed to the 
latter only referring to monthly.
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    The Commission is proposing to amend the definition in Commission 
regulation 23.100 of “predominantly engaged in non-financial 
activities.” 28 This definition is one of the key components, along 
with the definition of “tangible net worth,” 29 in determining the 
eligibility for electing and the application of the Tangible Net Worth 
Capital Approach.30 Eligibility for this approach is conditioned upon 
a nonbank SD meeting both a revenue and asset-based test to determine 
if the nonbank SD is predominantly engaged in non-financial activities. 
The proposed amendment would modify the definition of “predominantly 
engaged in non-financial activities” in Commission regulation Sec.  
23.100 to explicitly permit the satisfaction of both the revenue and 
asset-based tests at the consolidated parent level of the nonbank SD as 
discussed in the preamble to the Final Rules. That is, the proposed 
amendments would clarify that the tests may be satisfied either at the 
level of the nonbank SD or at the level of the nonbank SD’s 
consolidated parent 31 rather than seeming to exclude the 
consolidated parent of the nonbank SD as questioned by some 
commenters.32
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    28 See 17 CFR 23.100 for the definition of the term 
“predominantly engaged in non-financial activities.”
    29 See 17 CFR 23.100 for the definition of the term “tangible 
net worth.”
    30 84 FR 69664 at 69668.
    31 Final Rules, 85 FR 57480.
    32 Id. at 57499.
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    The Commission is also proposing to amend the definition of 
“tangible net worth” in Commission regulation Sec.  23.100.33 
Nonbank SDs electing the Tangible Net Worth Capital Approach are 
currently permitted to use IFRS for their financial reporting 
obligations under Commission regulation Sec.  23.105.34 IFRS is 
permitted as an acceptable reporting standard for all nonbank SDs 
provided that they otherwise do not prepare financial statements in 
accordance with U.S. GAAP.35 The definition of “tangible net worth” 
in Commission regulation Sec.  23.100, however, only references U.S. 
GAAP, despite the permissive use of IFRS as part of financial reporting 
obligations under Commission regulation Sec.  23.105.36 The proposed 
amendments to the definition of “tangible net worth” in Commission 
regulation Sec.  23.100 would clarify that “tangible net worth” may 
be determined under either applicable accounting standard, U.S. GAAP or 
IFRS. This amendment would align and correct the permitted use of IFRS 
in determining eligibility for the approach with the standard permitted 
and utilized by the nonbank SD in preparation of its financial 
statements. As discussed in the Final Rule, the Commission is generally 
comfortable with both U.S. GAAP and IFRS accounting standards in this 
context, especially as both standards continue to move towards greater 
convergence.37 The Commission has preliminarily determined that 
nonbank SDs utilizing the same standard as is permitted for their 
financial reporting comports with the purpose of the eligibility test 
to determine if a SD is predominantly engaged in non-financial 
activities.
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    33 See 17 CFR 23.100 for the definition of the term “tangible 
net worth.”
    34 17 CFR 23.105(d) and (e).
    35 Id.
    36 17 CFR 23.105.
    37 Final Rules, 85 FR 57514.
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    The Commission is also proposing to amend Commission regulation 
Sec.  23.105(l) 38 to require that each nonbank SD and nonbank MSP 
file Appendix B to Subpart E of Part 23 (“Appendix B”),39 which 
contains aggregate securities, commodities, and swap position 
information and certain credit exposure information, with the 
Commission and NFA on a quarterly rather than a monthly basis. This 
proposed amendment would align that filing with the periodicity 
permitted as part of the nonbank SD’s or nonbank MSP’s routine 
financial report filings required by Commission regulation Sec.  
23.105(d) and would clarify that the information provided should be 
consistent with those financial report filings. Currently, Commission 
regulation Sec.  23.105(d) permits nonbank SDs electing the Tangible 
Net Worth Capital Approach to file required financial reports 
quarterly, whereas nonbank SDs electing either the Bank Based Capital 
Approach or the Net Liquid Asset Capital Approach are required to file 
such information on a monthly basis.40 The amendment would make clear 
that all swap position and credit information required in Commission 
regulation Sec.  23.105(l) and Appendix B must be filed at the same 
periodicity as routine financial reporting required of the respective 
nonbank SDs set forth within Commission regulation Sec.  23.105(d), 
which could be either monthly or quarterly depending on the approach 
elected by the SD.
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    38 17 CFR 23.105(l).
    39 Appendix B to subpart E of part 23.
    40 17 CFR 23.105(d).
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    The Commission has already determined that nonbank SDs electing the 
Tangible Net Worth Capital Approach may engage in a wide variety of 
businesses and not be otherwise subject to any financial reporting. 
Thus, the Commission determined in the Final Rule that such SDs need 
only file financial reports quarterly and not monthly and may take a 
longer period of time to file audited financial reports.41 Moreover, 
the Commission intended the swap position and credit information in 
Commission regulation Sec.  23.105(l) and Appendix B to be filed 
together with other financial information required by Commission 
regulation Sec.  23.105(d) as this information is supplementary to the 
financial statements as a whole and completes the routine financial 
reporting package. This approach is also consistent with how dually-
registered SDs with the SEC complete the SEC’s Form X-17A-5 (“FOCUS 
Report”) Part II.42 Thus, the proposed amendment is consistent with 
previous Commission determinations and harmonizes the approach across 
different nonbank SDs.
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    41 Final Rules, 85 FR 57514-57515.
    42 SEC Form X-17A-5 FOCUS Report Part IIC, available at 
https://www.sec.gov/manage-filings/forms-index/form-x-17a-5-2c.

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[[Page 2558]]

Request for Comment
    Question 1. Do the proposed amendments to Commission regulations 
Sec. Sec.  23.100 and 23.105(l) address the compliance matters for 
entities electing the Tangible Net Worth Capital Approach?
2. Amendments to Bank SD Financial Reporting Requirements–CFTC Letter 
No. 21-18
    The Commission is also proposing to amend the financial reporting 
requirements for bank SDs and bank MSPs set forth in Commission 
regulation Sec.  23.105(p).43 The Commission intended the bank SD and 
bank MSP reporting requirements contained in the Final Rules to be 
consistent with the SEC requirements for bank SBSDs and bank MSBSPs, to 
maintain equivalent financial reporting requirements for dually-
registered firms.44 Several bank SDs, however, did not register as 
SBSDs, and therefore are subject only to limited financial reporting 
under the Commission’s rules.45 In certain instances, the financial 
reporting required by the prudential regulators for these bank SDs 
permit a longer period of time and utilize a different format than that 
adopted by the Commission.46 In addition, some of these bank SDs are 
not required to file financial reports with a prudential regulator if 
the bank SDs are domiciled outside the United States, and may instead 
be subject only to financial reporting of a home country supervisor.
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    43 17 CFR 23.105(p).
    44 Final Rules, 85 FR 57463-57465.
    45 17 CFR 23.105(p).
    46 Commission regulation Sec.  23.105(p) requires bank SDs to 
report financial information within 30 calendar days of quarter-end. 
17 CFR 23.105(p)(2). The Instructions for Preparation of 
Consolidated Reports of Condition and Income, Schedule RC-D, 
available at https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_202303_i.pdf, however, permit a bank with more 
than one foreign office to submit its FFIEC 031 forms within 35 
calendar days following quarter-end. Additionally, the SEC extended 
the filing deadline of FOCUS Report Part IIC for non-U.S. SBSDs 
subject to a prudential regulator from 30 to 35 days following 
quarter end, noting that “U.S. prudential regulators permit certain 
U.S. banks to file their financial reports 35 days after the quarter 
end.” Order Specifying the Manner and Format of Filing Unaudited 
Financial and Operational Information by Security-Based Swap Dealers 
and Major Security-Based Swap Participants That Are Not U.S. Persons 
and Are Relying on Substituted Compliance Determinations With 
Respect to Rule 18a-7, 86 FR 59208 (October 26, 2021) at 59210.
—————————————————————————

    Following the adoption of Commission regulation 23.105(p), bank SDs 
requested relief from this provision’s requirements.47 Bank SDs 
indicated that the financial reporting filing deadline adopted by the 
Commission preceded the financial reporting filing deadline imposed by 
prudential regulators.48 In addition, although Appendix C to Subpart 
E of Part 23 (“Appendix C”) 49 was intended to capture line items 
on existing Federal Financial Institutions Examination Council 
(“FFEIC”) 50 Form 031 (“Call Report”) provided to prudential 
regulators, line items on the Call Report had either been removed, 
added or otherwise changed since the Commission adopted Appendix C.51 
As a result, on August 31, 2021, the Division issued a time-limited no-
action letter to bank SDs regarding compliance with financial reporting 
requirements under Commission regulation Sec.  23.105(p).52 On July 
11, 2023, the Division extended the expiration date to the earlier of 
October 6, 2025 or the adoption of any revised financial reporting and 
notification requirements applicable to bank SDs.53
—————————————————————————

    47 ISDA-SIFMA Joint Letter, Aug. 20, 2021, available at 
https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm/.
    48 Id. at 3-4.
    49 Appendix C to subpart E of part 23.
    50 Federal Financial Institutions Examination Council, 
Consolidated Reports of Condition and Income for a Bank with 
Domestic and Foreign Offices–FFIEC 031, available at https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_202203_f.pdf.
    51 ISDA-SIFMA Joint Letter at 3-4.
    52 See generally CFTC Letter No. 21-18.
    53 CFTC Letter No. 23-11.
—————————————————————————

    CFTC Letter No. 21-18, as extended under CFTC Letter No. 23-11,54 
articulates a position by the Division that it would not recommend that 
the Commission engage in an enforcement action against bank SDs 
providing the Commission with copies of financial reports that are 
required by, and filed with, their respective prudential or home 
country regulators, in lieu of complying with the substantive 
requirements of Appendix C, subject to certain conditions.55 CFTC 
Letter No. 21-18 also contains a no-action position with respect to 
bank SDs filing comparable Call Report schedules with the Commission in 
lieu of Appendix C in accordance with and within the timeframe 
permitted by the prudential regulators.56 CFTC Letter No. 21-18 
further provides that the Division would not recommend enforcement 
action against certain foreign-domiciled bank SDs (“Non-U.S. bank 
SDs”) that do not provide financial reports to a prudential regulator 
if they file with the Commission balance sheet and statement of 
regulatory capital information in accordance with applicable home 
country requirements, so long as the financial information is in 
English, with balances converted to U.S. dollars, and the financial 
information is filed within 15 days of the earlier of the date such 
financial information is filed or required to be filed with the Non-
U.S. bank SDs’ applicable home country regulator.57 Finally, the 
Division stated that it would not recommend enforcement action against 
dually-registered foreign bank SDs filing comparable SEC-required 
financial reports and schedules with the Commission.58
—————————————————————————

    54 See supra note 23.
    55 CFTC Letter No. 21-18 at 4-5.
    56 Id. at 4-5, Condition 1.
    57 Id. at 5, Conditions 2-4.
    58 Id., Condition 5. In comparison to the SEC’s approach to 
similarly situated bank SBSDs, the Commission’s capital 
comparability process adopted in Commission regulation Sec.  23.106 
does not extend to bank SDs. See 17 CFR 23.106.
—————————————————————————

    The Commission is proposing to amend Commission regulation Sec.  
23.105(p) to add an exception to the financial reporting requirements 
for Non-U.S. bank SDs that do not submit financial reports to a 
prudential regulator. These Non-U.S. bank SDs would be permitted to 
file with the Commission financial reports that are submitted to their 
respective home country regulator, provided the financial reports 
submitted to the Commission are translated into English with balances 
converted to U.S. dollars. These Non-U.S. bank SDs, however, would 
continue to be required to file specific swap position information set 
forth in Schedule 1 to Appendix C. Finally, these Non-U.S. bank SDs 
would be required to file with the Commission such reports no later 
than 90 calendar days following quarter-end.
    The Commission is not proposing to include the restriction in CFTC 
Letter No. 21-18 that Non-U.S. bank SDs be subject to home country 
capital standards in a G-20 jurisdiction.59 The Commission 
preliminarily believes that such a requirement is moot at this time, as 
to date, all registered Non-U.S. bank SDs have met this criterion. 
Moreover, this approach will provide greater regulatory flexibility and 
permit Commission staff the ability to evaluate on a case-by-case basis 
each bank SD.
—————————————————————————

    59 Letter No. 21-18 is limited to eligible Non-U.S. bank SDs 
subject to home country capital standards in a G-20 jurisdiction or 
to capital standards consistent with the Capital Accord of the Basel 
Committee on Banking Supervision. CFTC Letter No. 21-18 at 3-5.
—————————————————————————

    The Commission preliminary believes that the required information 
in the manner proposed will permit it to assess the Non-U.S. bank SDs’ 
financial position. Extending the time period to 90 days should permit 
these Non-U.S. bank SDs to file financial reports with the Commission 
no earlier than such Non-U.S. bank SDs are required to

[[Page 2559]]

prepare such reports under home country requirements. The Commission 
proposes to adopt this approach because the Commission is collecting 
such reports in order to maintain the ability to monitor the capital 
condition across all SDs, although the Commission does not establish 
the capital or margin requirements of bank SDs.60
—————————————————————————

    60 Section 4s(f) of the CEA requires SDs and MPSs, including 
those for which there is a prudential regulator, to make any reports 
regarding transactions and positions, as well as any reports 
regarding financial condition, that the Commission adopts by rule or 
regulation. 7 U.S.C. 6s(f).
—————————————————————————

    The Commission is further proposing to amend Commission regulation 
Sec.  23.105(p) to permit bank SDs to file the relevant schedules under 
the Call Report (Schedule RC and Schedule RC-R), rather than 
replicating various line items from within those reports on a 
separately constructed balance sheet and statement of regulatory 
capital currently maintained in Appendix C.61 Schedule 1 of Appendix 
C, which contains relevant swap, mixed swap and security-based swaps 
position information, would remain a required schedule to be provided 
by all bank SDs. This approach would permit the Commission to collect 
necessary financial information prepared in accordance with prudential 
regulators’ guidance, while eliminating the necessity that bank SDs 
familiarize themselves with a new reporting form and prevent the 
Commission from having to routinely monitor and update its form when 
prudential regulators amend their schedules. These proposed changes are 
consistent with the terms of CFTC Letter No. 21-18, which have resulted 
in the Commission and its staff receiving the requisite information to 
meaningfully oversee its population of bank SDs since 2021. In 
addition, and as mentioned above, the Commission proposes to adopt this 
approach because the Commission is collecting such reports in order to 
maintain the ability to monitor the capital condition across all SDs.
—————————————————————————

    61 As adopted, Appendix C contains three schedules: 1. 
Statement of Financial Condition (balance sheet); 2. Statement of 
Regulatory Capital; and 3. Schedule 1. Both the Statement of 
Financial Condition and Statement of Regulatory Capital schedules 
within Appendix C are modeled off the FOCUS Report Part IIC as 
adopted by the SEC for bank SBSDs and contain specific line item 
references corresponding to the Call Report. See Final Rules, 85 FR 
at 57566-57569. Following adoption of these schedules, changes were 
made to the underlying Call Reports making the schedules obsolete. 
The SEC has since proposed changes to the FOCUS Report Part IIC to 
reflect these changes. See generally Electronic Submission of 
Certain Materials Under the Securities Exchange Act of 1934; 
Amendments Regarding the FOCUS Report, 88 FR 23920 (Apr. 18, 2023).
—————————————————————————

Request for Comment
    Question 2. Do the proposed amendments to Commission regulations in 
Sec.  23.105(p) address compliance matters identified in CFTC Letter 
No. 21-18 for bank SDs?
    Question 3. Do the financial reporting requirements as proposed to 
be amended for Non-U.S. bank SDs permit the Commission to monitor these 
entities at timely intervals?
3. Amendments Regarding Financial Reporting and Computation 
Requirements of Swap Dealers
a. Amendments to Schedules in Financial Reporting and Frequency of 
Filings
    The Commission is proposing to amend the scope of Commission 
regulation Sec.  23.105(k) 62 and the heading and scope of Commission 
regulation Sec.  23.105(l), as well as the titles of certain schedules 
included in Appendix B,63 to further clarify that these reporting 
obligations are applicable to all nonbank SDs and nonbank MSPs. 
Commission regulation Sec.  23.105(k) lists both model-specific 
information that nonbank SDs must report as well as a description of 
the same type of exposure information as reflected in the schedules to 
Appendix B. Commission regulation Sec.  23.105(l), however, requires 
all nonbank SDs, including those not approved to use models, to 
complete the Appendix B schedules on a monthly basis. As a result, 
several nonbank SDs have filed each of the schedules to Appendix B 
without having received capital model approval. Thus, in current form, 
Commission regulations Sec.  23.105(k) and (l), as well as, the titles 
of Schedules 2-4 of Appendix B, could more explicitly indicate that all 
of the information within the schedules included in Appendix B is 
required of all nonbank SDs, including those not authorized to use 
models.64 In addition, as proposed to be amended, nonbank SDs 
electing the Tangible Net Worth Capital Approach and all MSPs must 
submit quarterly rather than monthly financial reporting as Commission 
regulation Sec.  23.105(l) currently requires.
—————————————————————————

    62 17 CFR 23.105(k).
    63 Appendix B is comprised of 4 individual schedules: SCHEDULE 
1–AGGREGATE SECURITIES, COMMODITIES AND SWAPS POSITIONS; SCHEDULE 
2–CREDIT CONCENTRATION REPORT FOR FIFTEEN LARGEST EXPOSURES IN 
DERIVATIVES; SCHEDULE 3–PORTFOLIO SUMMARY OF DERIVATIVES EXPOSURES 
BY INTERNAL CREDIT RATING; and SCHEDULE 4–GEOGRAPHIC DISTRIBUTION 
OF DERIVATIVES EXPOSURES FOR TEN LARGEST COUNTRIES.
    64 To further complicate matters, the heading and first 
paragraph to Commission regulation Sec.  23.105(k) both indicate 
that this provision only applies to SDs approved to use internal 
models to calculate market risk and credit risk for calculating 
capital under Commission regulation Sec.  23.102(d).
—————————————————————————

    Each of the schedules included in Appendix B is identical to 
corresponding schedules found in SEC’s FOCUS Report required to be 
completed by both SBSDs and certain broker dealers (“BDs”).65 To 
the extent practicable, the Commission intends to align financial 
reporting requirements, including those listed in textual form in 
Commission regulation Sec.  23.105(k) and in the finalized schedules 
part of Appendix B, with the reporting requirements finalized by the 
SEC pertaining to SBSDs, MSBSPs, and BDs.66 The information required 
under Appendix B is nearly identical in all material respects to 
corresponding forms found in the SEC Form FOCUS Report Part II and was 
intended to ensure harmonization of the reporting schedules across 
several registrants, including those that are dually-registered.67 
This is also consistent with the Commission’s general approach 
permitting dually-registered BDs and SBSDs to file SEC Form FOCUS 
Report Part II in lieu of their requirements under Commission 
regulations Sec.  23.105(d) and (e), and for those dually-registered 
SBSDs subject to the capital rules of a prudential regulator under 
Commission regulation Sec.  23.105(p).68
—————————————————————————

    65 See SEC Form X-17A-5 FOCUS Report Part IIC, available at 
https://www.sec.gov/manage-filings/forms-index/form-x-17a-5-2c.
    66 See Final Rules, 85 FR 57519.
    67 See 2016 Capital Proposal, 81 FR 91278.
    68 As indicated in the Final Rule, the Commission has a long 
history of permitting SEC registrants to meet their financial 
statement filing obligations with the Commission by submitting 
required SEC forms in lieu of the CFTC’s forms, which reduces the 
burden on dually-registered firms by not requiring two separate 
financial reporting requirements. See Final Rules, 85 FR 57515.
—————————————————————————

    In addition, NFA has adopted nearly identical capital and financial 
reporting requirements for its member nonbank SDs and nonbank MSPs.69 
The finalized NFA rules also mandate the use of comprehensive 
standardized forms for financial reporting by member nonbank SDs and 
nonbank MSPs that are not otherwise able to file an SEC Form FOCUS 
Report Part II.70 These new NFA forms, FR-CSE-NLA and FR-CSE-BHC, 
include each of the required schedules found in Appendix B. Moreover, 
all the information listed in textual form in paragraph (k)(1)(v) of 
Commission regulation Sec.  23.105 can be found in specific schedules 
found in Appendix B.71 As such, the Commission has

[[Page 2560]]

preliminarily determined that the specific schedules found in Appendix 
B, which is now part of NFA’s adopted forms, should be the mechanism 
for firms to provide the required information listed in Commission 
regulation Sec.  23.105(k).72 In this proposal, the Commission hopes 
to eliminate any ambiguity that the Final Rule may have caused. As 
discussed in the Final Rule, the information in Appendix B, which 
includes credit exposure to swap transactions, is vital to the 
Commission’s regulatory oversight of SDs and the financial system.73 
This information provides valuable insight into the risk exposures of 
nonbank SDs, which is essential to performing regulatory oversight of 
SDs. The Commission proposes to make clear that all nonbank SDs must 
complete all schedules in Appendix B.
—————————————————————————

    69 NFA section 18.
    70 NFA section 18(e).
    71 For example, Commission regulation Sec.  23.105(k)(1)(v)(B) 
requires that all model-approved SDs file the current exposure 
(including commitments) listed by counterparty for the 15 largest 
exposures, which is also found in Schedule 2 to Appendix B. 
Similarly, the information listed in textual form in Commission 
regulations Sec.  23.105(k)(1)(i)-(v) corresponds verbatim to the 
textual requirements found in SEC rule 18a-7(a)(3). See 17 CFR 
240.18a-7(a)(3).
    72 As discussed in the Final Rule, the Commission may (and 
subsequently has) approved additional procedures developed by an 
RFA, which could include standard forms or procedures necessary to 
carry out the Commission’s filing requirements. See Final Rules, 85 
FR 57518.
    73 Final Rules, 85 FR 57517.
—————————————————————————

    The Commission is therefore proposing to amend Commission 
regulation Sec.  23.105(k) to require that the information listed in 
Appendix B is completed by all nonbank SDs and nonbank MSPs as was 
intended, and is consistent with that required by the SEC and NFA. The 
Commission is further proposing to amend Commission regulation Sec.  
23.105(l) and the headings of certain schedules in Appendix B to 
further clarify that these schedules must be reported at the same 
periodicity as the financial reporting of each respective nonbank SD, 
either monthly or quarterly as applicable, and that all of the 
schedules are required for all nonbank SDs, not just those authorized 
to use models.
Request for Comment
    Question 4. Will the proposed amendments to Commission regulations 
in Sec.  23.105(k) and (l) and the related changes to the headings of 
the schedules contained in Appendix B facilitate consistent and 
comprehensive swaps positions and counterparty reporting for all 
nonbank SDs under the Final Rules and align with the same reporting 
requirements of the SEC for dual registrants?
b. Changes to Public Disclosure Requirements
    The Commission is proposing to amend Commission regulation Sec.  
23.105(i) 74 to align the public disclosure of unaudited financial 
information with the periodicity permitted by routine financial filings 
in Commission regulation Sec.  23.105(d), and to remove reference to a 
statement in both the unaudited and audited information disclosing the 
amounts of minimum regulatory capital and the amount of its minimum 
regulatory capital requirement computed in accordance with Commission 
regulation Sec.  23.101.75
—————————————————————————

    74 17 CFR 23.105(i).
    75 17 CFR 23.101.
—————————————————————————

    Paragraphs (i)(l)(ii) and (i)(2)(ii) of Commission regulation Sec.  
23.105 currently require a nonbank SD or nonbank MSP to publicly 
disclose on its website a statement of the amount of the nonbank SD’s 
or nonbank MSP’s regulatory capital and its minimum capital 
requirement.76 This information is required to be disclosed as of the 
nonbank SD’s or nonbank MSP’s fiscal year end, and as of six months 
after the firm’s fiscal year end. Following adoption of the Final Rule, 
nonbank SD’s requested clarification as to whether the regulatory 
capital information required by Commission regulations Sec.  
23.105(i)(1)(ii) and (i)(2)(ii) must be a schedule or, if the 
information may be reported in a narrative format, in the footnotes to 
the financial statements.
—————————————————————————

    76 17 CFR 23.105(i)(1)(ii) and (i)(2)(ii).
—————————————————————————

    The Commission is proposing to revise Commission regulation Sec.  
23.105(i)(1)(i) 77 to include the footnotes to the unaudited 
Statement of Financial Condition in the required disclosures. The 
Commission is also proposing to revise Commission regulations Sec.  
23.105(i)(1)(ii) and (i)(2)(ii) to replace the word “statement” with 
“amounts” to indicate that required capital information does not need 
to exist in a standalone statement or form. This is consistent with the 
Commission’s intent, to the extent practicable, to align its 
requirements with those required of BDs and SBSDs by the SEC.78 The 
Commission has preliminarily determined that the information contained 
in the footnotes accompanying the financial statements should 
ordinarily satisfy the requirements for disclosing minimum regulatory 
capital. However, the Commission recognizes that not all accounting 
standards permit, nor do the respective reporting formats utilized by 
firms always provide for, such disclosure in footnote form. Some 
disclosures may be presented in either narrative or graphical formats. 
The Commission’s sole intention is to ensure that the public has the 
requisite information, not to prescribe the format of such disclosures 
made by the firm on its website. Therefore, the Commission is proposing 
to permit nonbank SDs and their auditors to determine the format for 
disclosure of this information.
—————————————————————————

    77 17 CFR 23.105(i)(1)(i).
    78 See 17 CFR 240.18a-7(b).
—————————————————————————

Request for Comment
    Question 5. The Commission requests comment on whether nonbank SDs 
and their auditors should be able to determine the reporting format of 
the requisite information in their public disclosure? Should the 
Commission instead specify a particular format? If yes, which format 
and why?
c. Changes to Form 1-FR-FCM
    The Commission is proposing to amend Form 1-FR-FCM to add new lines 
to the form to include the 2 percent of uncleared swap margin capital 
requirement under Commission regulation Sec.  1.17(a)(1)(i)(B)(2).79 
The proposed capital requirement based on 2 percent of the uncleared 
swaps margin would be added as new lines 22.A.vi through vii. of the 
Statement of the Computation of the Minimum Capital Requirements 
(“CFTC Minimum Net Capital Requirements”) on the Form 1-FR-FCM.
—————————————————————————

    79 17 CFR 1.17(a)(1)(i)(B)(2).
—————————————————————————

    The Commission is also proposing to amend the Form 1-FR-FCM to add 
swaps and security-based swaps haircuts to the computation of net 
capital. The specific market risk charges for swaps and security-based 
swaps would appear as new lines 16.D. of the CFTC Minimum Net Capital 
Requirements.
    Under Commission regulation Sec.  1.10, all FCMs must submit a Form 
1-FR-FCM when they file for registration as an FCM and periodically 
following registration.80 The Form 1-FR-FCM includes, among other 
things, the computation of CFTC Minimum Net Capital Requirements 
supplementary schedule.81 In the Final Rule, the Commission added a 2 
percent of uncleared swap margin capital requirement to the risk-based 
net capital requirement for FCMs which are also registered as SDs 
(“FCM-SDs”), and adopted specific market risk charges for uncleared 
swaps in the FCM net capital requirements in Commission regulation

[[Page 2561]]

Sec.  1.17.82 In addition, FCMs dually-registered as BDs are 
permitted to file the SEC’s FOCUS Report Part II in lieu of the 
Commission’s Form 1-FR-FCM in reporting net capital.83 The SEC has 
recently proposed to amend its FOCUS Report Part II to include the 
Commission’s net capital changes adopted for FCM-SDs, including the 
addition of the 2 percent uncleared swap margin to the risk-based net 
capital requirement of FCM-SDs.84 The Commission is proposing to 
amend its form to more explicitly require disclosure of the 2 percent 
amount and to conform with the SEC’s proposal. This information is 
important to the Commission in monitoring the Final Rules, as reporting 
the 2 percent amount enables the Commission to confirm that the FCM-SD 
is complying with its capital requirement.
—————————————————————————

    80 17 CFR 1.10.
    81 CFTC Form 1-FR-FCM at 6-8.
    82 17 CFR 1.17(a)(1)(i)(B)(2) and (c)(5)(iii). See generally 
Final Rules, 85 FR 57473-57476 and 57562.
    83 17 CFR 1.10(h).
    84 See generally Electronic Filing of Certain Forms and Other 
Filings Under the Securities Exchange Act of 1934; Technical 
Amendments Regarding the FOCUS Report, SEC Proposed Rule (Undated), 
available at https://www.sec.gov/news/press-release/2023-58.
—————————————————————————

Request for Comment
    Question 6. Do the proposed changes to the Form 1-FR-FCM address 
the net capital changes applicable to FCMs that are also registered as 
SDs as were adopted in the Final Rules?
d. Additional Cross References To Clarify Applicable Market and Credit 
Risk Charges
    The Commission is proposing to add new language to Commission 
regulations Sec.  23.103(a)(1) and (c)(1) 85 to clarify that the same 
standardized market and credit risk charges are applicable to nonbank 
SDs electing the Tangible Net Worth Capital Approach as are applicable 
to all other nonbank SDs not approved to use models. Nonbank SDs 
electing the Tangible Net Worth Capital Approach and who have chosen 
not to apply for approval to use models, have questioned what the 
applicable standardized credit risk charges are under Commission 
regulation Sec.  23.103.86 Commission regulation Sec.  23.103(b) 87 
provides that nonbank SDs electing the Tangible Net Worth Capital 
Approach or Net Liquid Assets Capital Approach are required to compute 
standardized market risk charges contained in SEC Rule 18a-1 88 and 
Commission regulation Sec.  1.17, as applicable. Commission regulation 
Sec.  23.103(c) 89 also provides that a nonbank SD electing the Net 
Liquid Assets Capital Approach must compute its standardized credit 
risk charge in accordance with SEC Rule 18a-1 or Commission regulation 
Sec.  1.17, as applicable, but fails to provide a reference for nonbank 
SDs electing the Tangible Net Worth Capital Approach.90 Because 
standardized credit risk charges were intended to be the same for 
nonbank SDs using the Tangible Net Worth Capital Approach or the Net 
Liquid Assets Capital Approach, the Commission is proposing to amend 
Commission regulations Sec.  23.103(a)(1) and (c)(1) to correct this 
omission. Thus, the Commission proposes to amend Commission regulations 
Sec.  23.103(a)(1) and (c)(1) to direct nonbank SDs electing the 
Tangible Net Worth Capital Approach to compute standardized credit risk 
charges in accordance with SEC Rule 18a-1 or Commission regulation 
Sec.  1.17, as applicable.
—————————————————————————

    85 17 CFR 23.103(a)(1) and (c)(1).
    86 17 CFR 23.103.
    87 17 CFR 23.103(b).
    88 17 CFR 240.18a-1.
    89 17 CFR 23.103(c).
    90 SDs electing to use the Tangible Net Worth Capital Approach 
are required to meet a minimum capital requirement which includes, 
among other things, $20 million plus the amount of the SD’s market 
risk exposure requirement and its credit risk exposure requirement 
associated with the SD’s swap and related hedge positions that are 
part of the SD’s swap dealing activities. 17 CFR 
23.101(a)(2)(ii)(A).
—————————————————————————

    Similarly, nonbank SDs electing the Bank-Based Capital Approach 
indicated after the adoption of the Final Rules that a cross reference 
in Commission regulation Sec.  23.102(d) 91 to the calculation of 
market risk exposure and credit risk exposure using internal models, 
seems to be intended to reflect the requirements applicable to such 
nonbank SDs in the application to use models in Commission regulation 
Sec.  23.102(c).92 The Commission agrees that this was the intention, 
and thus is proposing to amend Commission regulation Sec.  23.102(d) to 
correct the applicable cross reference in order to make it clearer that 
either 12 CFR part 217 or Appendix A to Subpart E of Part 23 
(“Appendix A”) 93 should be utilized as applicable by the nonbank 
SD depending on the respective capital approach elected.94
—————————————————————————

    91 17 CFR 23.102(d).
    92 17 CFR 23.102(c).
    93 Appendix A to subpart E of part 23.
    94 Final Rules, 85 FR 57506.
—————————————————————————

Request for Comment
    Question 7. Do the proposed amendments to Commission regulations 
Sec.  23.103(a)(1) and (c)(1) clarify the applicable standardized 
credit risk charge to be added to the $20 million minimum requirement 
under Commission regulation Sec.  23.103(c)(3)? 95
—————————————————————————

    95 17 CFR 23.103(c)(3).
—————————————————————————

    Question 8. Does the proposed amendment to Commission regulation 
Sec.  23.102(d) clarify the applicable model-based market and credit 
risk charges applicable to nonbank SDs which have applied to use such 
models under the Bank-Based Capital Approach?

B. Other Amendments

1. Notice of Substantial Reduction in Capital
    The Commission adopted specific notice requirements for nonbank SDs 
and MSPs related to capital compliance in the Final Rules. However, one 
of the notice requirements contained in Commission regulation Sec.  
23.105(c)(4), which requires notice of a substantial reduction in 
capital as compared to the last reported in a financial report, did not 
specify a timeframe for the notice filing.96 The Commission has 
preliminarily determined that registrants should be able to file such a 
notice within two business days after the date of occurrence. Further, 
such an approach is also consistent with that applied to FCMs, which 
must notify the Commission within two business days following a 
substantial reduction in capital.97 The Commission is proposing to 
amend Commission regulation Sec.  23.105(c)(4) to add a two-business 
day reporting timeframe to the requirement for a nonbank SD to file 
notice of a substantial reduction in capital. The Commission has 
preliminarily determined that adding a reporting timeframe to the 
notice requirement will enhance compliance by providing regulatory 
certainty to nonbank SDs regarding when such a filing is due.
—————————————————————————

    96 17 CFR 23.105(c)(4).
    97 17 CFR 1.12(g)(1).
—————————————————————————

2. Subordinated Debt Approval
    The nonbank SD capital requirements for both the Bank-Based Capital 
Approach and the Net Liquid Assets Capital Approach permit the use of 
subordinated debt as capital in order to align with the permitted use 
of subordinated debt under the FCM net capital requirements.98 The 
requirements for qualifying subordinated debt were adopted by the SEC 
in its capital rule for SBSDs and were included by reference by the 
Commission for other nonbank SDs in the Bank-Based Capital 
Approach.99 Commission staff received questions regarding the process 
for approving subordinated debt for nonbank SDs not

[[Page 2562]]

also registered with the SEC because the Final Rule did not articulate 
a process. To address this omission, NFA adopted Financial Requirements 
Rule Section 18(d).100 Under the existing framework, NFA already 
approves subordinated loan agreements for net capital agreements for 
nonbank SDs that are not dually-registered with the SEC. Similarly, 
although nonbank SDs that are dually-registered with the SEC are able 
to obtain SEC approval on subordinated debt,101 nonbank SDs that 
elect either the Bank-Based Capital Approach or the Net Liquid Assets 
Capital Approach but are not registered with the SEC, do not have an 
approval process for the use of subordinated debt under the 
Commission’s rules. As discussed in the Final Rule,102 when adopting 
the permissive use of subordinated debt in establishing minimum 
regulatory capital, the Commission has long approved a process for FCMs 
to obtain subordinated debt approval from their Designated Self-
Regulatory Organizations (“DSROs”), including the NFA.103
—————————————————————————

    98 17 CFR 1.17(h).
    99 17 CFR 23.101(a)(1).
    100 See generally NFA Interpretative Notice 9078 (Feb. 18, 
2021), available at https://www.nfa.futures.org/rulebooksql/
rules.aspx?Section=9&RuleID=9078#:~:text=In%20order%20to%20permit%20t
hese%20non-SEC%20registered%20SD,NFA%27s%20pre-
approval%20of%20the%20subordinated%20debt%20loan%20agreement.
    101 Nonbanks SDs that are duly-registered as SBSDs typically 
elect under Commission regulation Sec.  23.101(a)(1)(ii) to maintain 
net capital by complying with Sec.  240.18a-1d, and are 
independently subject to such requirements, including the 
subordinated-debt approval process, by their registration as a SBSD 
with the SEC. 17 CFR 240.18a-1d.
    102 Final Rules, 85 FR 57495.
    103 See Miscellaneous Rule Deletions, Amendments or 
Clarifications, 57 FR 20633, 20634 (May 14, 1992). The subordinated 
debt approval program for FCMs administered by NFA has been in place 
for over 30 years. In addition, the NFA, as the only registered 
futures association under the CEA, is specifically required to adopt 
capital requirements on its members, including SDs, and to implement 
a program to audit and enforce the compliance with such requirements 
in accordance with section 17(p)(2) of the CEA, 7 U.S.C. 21(p)(2).
—————————————————————————

    The Commission has preliminarily determined to permit NFA to 
administer the approval process for nonbank SDs because of the NFA’s 
extensive history and experience as a DSRO administering a subordinated 
debt approval program for FCMs. This would also make the subordinated 
debt approval process for nonbank SDs consistent with the subordinated 
debt approval process for FCMs. In addition, NFA has already devoted 
substantial efforts to obtain the personnel and other resources 
necessary to perform the review, approval and ongoing assessment of 
nonbank SDs’ permitted use of subordinated debt following the adoption 
by NFA of Financial Requirements Rule Section 18(d).104 Codifying 
that subordinated debt will be approved for net capital requirements 
either through the Commission or by an RFA should remedy this omission 
from the Final Rules and will sanction a process that is consistent 
with the current practice. The Commission proposes to amend Commission 
regulations Sec.  23.101(a)(1)(i)(B) and (a)(1)(ii)(C) 105 to 
establish that using subordinated debt as regulatory capital is subject 
to the approval of either an RFA of which the nonbank SD is a member or 
the Commission.
—————————————————————————

    104 NFA section 18(d).
    105 17 CFR 23.101(a)(1)(i)(B) and (a)(1)(ii)(C).
—————————————————————————

3. Statement of No Material Difference
    The Commission proposes to amend Commission regulation Sec.  
23.105(e)(4)(v) 106 for nonbank SDs and nonbank MSPs to explicitly 
require a statement, if applicable, that there are no material 
differences between the audited annual report and the unaudited annual 
report of the same date. Commission regulation Sec.  23.105(e) requires 
nonbank SDs and nonbank MSPs to submit an annual audited financial 
report with the Commission and with NFA.107 Included with the 
financial report is, among other things, a reconciliation of any 
material differences from the unaudited financial reports prepared as 
of the nonbank SD’s or nonbank MSP’s year-end date.108
—————————————————————————

    106 17 CFR 23.105(e)(4)(v).
    107 17 CFR 23.105(e).
    108 17 CFR 23.105(e)(4)(v).
—————————————————————————

    For instances in which no material differences exist between the 
unaudited and audited year-end financial statements, however, 
Commission regulation Sec.  1.10(d)(2)(vi) 109 requires FCMs to 
include a statement indicating that no such differences exist. 
Commission regulation Sec.  23.105(e) does not currently provide for 
such a statement in this parallel provision for audits of nonbank SDs 
or nonbank MSPs. The Commission is proposing to amend Commission 
regulation Sec.  23.105(e)(4)(v) so that when nonbank SDs and nonbank 
MSPs file their audited annual report, a statement that there are no 
material differences between the audited annual report and the 
unaudited annual report is included, if no such differences exist. This 
will align the filing approach for auditors of nonbank SDs and nonbank 
MSPs with that of FCMs. Requiring an affirmative statement that no 
material differences exist when none are otherwise reported should 
enhance the reliability of the annual reports filed by nonbank SDs and 
nonbank MSPs and should encourage auditors to more rigorously assess 
the materiality of reporting any discovered audit findings.
—————————————————————————

    109 17 CFR 1.10(d)(2)(vi).
—————————————————————————

Request for Comment
    Question 9. Are the regulations as proposed to be amended fit for 
purpose? If not, what changes would be necessary to achieve the 
Commission’s objective in obtaining timely financial reporting of the 
capital position of nonbank SDs and MSPs?

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (“RF Act”) requires that Federal 
agencies consider whether the regulations they propose will have a 
significant economic impact on a substantial number of small entities, 
and if so, provide a regulatory flexibility analysis respecting the 
impact.110 Whenever an agency publishes a general notice of proposed 
rulemaking for any rule, pursuant to the notice-and-comment provisions 
of the Administrative Procedure Act,111 a regulatory flexibility 
analysis or certification typically is required.112 This proposed 
rulemaking would affect the obligations of SDs, MSPs, and FCMs. The 
Commission has previously determined that SDs, MSPs, and FCMs are not 
small entities for purposes of the RF Act.113 Therefore, the 
requirements of the RF Act do not apply to those entities.
—————————————————————————

    110 5 U.S.C. 601 et seq.
    111 5 U.S.C. 553. The Administrative Procedure Act is found at 
5 U.S.C. 500 et seq.
    112 See 5 U.S.C. 601(2), 603, 604 and 605.
    113 Policy Statement and Establishment of Definitions of 
“Small Entities” for Purposes of the Regulatory Flexibility Act, 
47 FR 18618 (Apr. 30, 1982) (FCMs) and Registration of Swap Dealers 
and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs 
and MSPs).
—————————————————————————

    Accordingly, for the reasons stated above, the Commission has 
preliminarily determined that this proposed rulemaking will not have a 
significant economic impact on a substantial number of small entities. 
Therefore, the Chairman, on behalf of the Commission, hereby certifies, 
pursuant to 5 U.S.C. 605(b), that the proposed Commission regulations 
being published today by this Federal Register release will not have a 
significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

1. Background
    The Paperwork Reduction Act of 1995 (“PRA”) 114 imposes certain

[[Page 2563]]

requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. These proposed rule amendments would 
result in an amendment to existing collection of information 
“Regulations and Forms Pertaining to Financial Integrity of the Market 
Place; Margin Requirements for SDs/MSPs” 115 as discussed below. The 
Commission, therefore, is submitting this proposed amendment to the 
Office of Management and Budget (“OMB”) for review and approval in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The responses to 
this collection of information are mandatory. An agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number issued 
by OMB.
—————————————————————————

    114 44 U.S.C. 3501 et seq.
    115 OMB Control No. 3038-0024, available at http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0024.
—————————————————————————

    The Commission has preliminarily determined that the rule 
amendments as proposed do not impose any other new collections of 
information that require approval of OMB under the PRA.
2. Amended Information Collection Requirements and Related Burden 
Estimates 116
—————————————————————————

    116 This discussion does not include information collection 
requirements that are included under other Commission regulations 
and related OMB control numbers.
—————————————————————————

    Currently, there are approximately 106 SDs and no MSPs registered 
with the Commission that may be impacted by this proposed rulemaking 
and, in particular, the collection of information discussed below.
    Commission regulation Sec.  23.105 requires that each SD and MSP 
maintain certain specified records, report certain financial 
information and notify or request permission from the Commission under 
certain specified circumstances, in each case, as provided in the 
Commission regulation. For example, the Commission regulation requires 
generally that SDs and MSPs maintain current books and records, provide 
notice to the Commission of regulatory capital deficiencies and related 
documentation, provide notice of certain other events specified in the 
rule, and file financial reports and related materials with the 
Commission (including the information in Appendices B and C, as 
applicable). Commission regulation Sec.  23.105 also requires the SD or 
MSP to furnish information about its custodians that hold margin for 
uncleared swap transactions and the amounts of margin so held, and for 
SDs approved to use models (as discussed above), provide additional 
information regarding such models, as further described in Commission 
regulation Sec.  23.105(k).
    The Commission estimates that there are 31 SD firms which are 
required to fulfill their financial reporting, recordkeeping and 
notification obligations under Commission regulations Sec.  23.105(a)-
(n) 117 because they are not subject to a prudential regulator, not 
already registered as an FCM, and not dually-registered as a SBSD. The 
Commission does not anticipate that its estimates of burden associated 
with these obligations will change as a result of any the amendments to 
Commission regulation Sec.  23.105 proposed herein.
—————————————————————————

    117 17 CFR 23.105(a) through (n).
—————————————————————————

    Commission regulation Sec.  23.105(p) and its accompanying Appendix 
C impose quarterly financial reporting and notification obligations on 
SDs subject to a prudential regulator. Approximately 55 of the 106 
registered SDs are subject to a prudential regulator. The Commission 
has previously estimated that these reporting and notification 
requirements impose an on-going burden of 33 hours annually. This 
results in a total aggregate burden of 1,815 hours annually. The 
Commission estimates this burden will remain unchanged by the proposed 
amendments to Commission regulation Sec.  23.105(p), as the burden 
associated with requirements to file quarterly financial reporting and 
notifications previously were based on these entities filing their 
existing information contained in Call Reports along with Schedule 1 
information, and under the proposed amendments those remain the 
obligations for bank SDs, except for Non-U.S. bank SDs who will also 
still file existing financial reporting information as reported to 
their home country supervisor, along with Appendix C Schedule 1 
information.

C. 15(b) Antitrust Laws

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of the CEA.118
—————————————————————————

    118 7 U.S.C. 19(b).
—————————————————————————

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the proposed rule implicates any other 
specific public interest to be protected by the antitrust laws.
    The Commission has considered the proposed rule to determine 
whether it is anticompetitive and has preliminarily identified no 
anticompetitive effects. The Commission requests comment on whether the 
proposed rule is anticompetitive and, if it is, what the 
anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
proposed rule is not anticompetitive and has no anticompetitive 
effects, the Commission has not identified any less anticompetitive 
means of achieving the purposes of the Act. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the Act that would otherwise be served by 
adopting the proposed rule.

IV. Cost Benefit Considerations

A. Background

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its discretionary actions before promulgating a 
regulation under the CEA or issuing certain orders.119 Section 15(a) 
further specifies that the costs and benefits shall be evaluated in 
light of five broad areas of market and public concern: (1) protection 
of market participants and the public; (2) efficiency, competitiveness, 
and financial integrity of futures markets; (3) price discovery; (4) 
sound risk management practices; and (5) other public interest 
considerations (collectively, the “Section 15(a) Factors”). In this 
cost benefit section, the Commission discusses the costs and benefits 
resulting from its discretionary determinations with respect to the 
Section 15(a) Factors.120
—————————————————————————

    119 7 U.S.C. 19(a).
    120 The Commission notes that the costs and benefits 
considered in this proposed rulemaking, and highlighted below, have 
informed the policy choices described throughout this release.
—————————————————————————

    Section 4s(e) of the CEA, added by section 731 of the Dodd-Frank 
Act, provides the Commission with mandatory and discretionary 
rulemaking authority to adopt capital requirements for nonbank SDs and

[[Page 2564]]

nonbank MSPs,121 as well as financial reporting requirements for SDs 
and MSPs.122 Section 4s(e) of the CEA requires the Commission to 
adopt minimum capital requirements for nonbank SDs and nonbank MSPs 
that are designed to help ensure their safety and soundness and are 
appropriate for the risk associated with the uncleared swaps held by 
such nonbank SD or nonbank MSP. In addition, section 4s(e)(2)(C) of the 
CEA, requires the Commission to establish capital requirements for 
nonbank SDs or nonbank MSPs that account for the risks associated with 
their entire swaps portfolio and all other activities conducted. 
Lastly, section 4s(e)(3)(D) of the CEA provides that the Commission, 
the prudential regulators, and the SEC, must “to the maximum extent 
practicable” establish and maintain comparable capital rules. 
Accordingly, this proposed rulemaking includes certain capital and 
financial reporting requirements related to SDs and MSPs.
—————————————————————————

    121 Section 4s(e)(2)(B) of the CEA, 7 U.S.C. 6s(e)(2)(B).
    122 Section 4s(f) of the CEA, 7 U.S.C. 6s(f).
—————————————————————————

    The baseline for the Commission’s consideration of the costs and 
benefits of this proposed rulemaking is the existing statutory and 
regulatory framework applicable to SDs and MSPs, including the capital 
and margin requirements for SDs and MSPs under subpart E of part 23. 
The Commission recognizes, however, that to the extent that SDs 123 
have arranged their business in reliance on Division interpretations 
and no-action positions in CFTC Letters No. 21-15 and 21-18, as 
extended under CFTC Letter No. 23-11, the actual costs and benefits of 
this proposed rulemaking may be mitigated.
—————————————————————————

    123 Currently, there are no MSPs registered with the 
Commission and there have not been any MSPs registered with the 
Commission for several years. Thus, this section regarding the 
Commission’s consideration of the costs and benefits of this 
proposed rulemaking will only refer to SDs that may have relied on 
CFTC Letters No. 21-15 and 21-18 and may benefit from the compliance 
exceptions set forth herein.
—————————————————————————

    The Commission recognizes that the proposed amendments may impose 
costs. The Commission has endeavored to assess the expected costs and 
benefits of the proposed amendments in quantitative terms, including 
PRA-related costs, where possible. In situations where the Commission 
is unable to quantify the costs and benefits, the Commission identifies 
and considers the costs and benefits of the proposed rules in 
qualitative terms. The lack of data and information to estimate those 
costs and benefits is attributable in part to the nature of the 
proposed amendments, which are tailored financial reporting 
requirements based on the specific businesses and types of SDs 
registered with the Commission. Further, SDs represent a wide diversity 
of business models catering towards different swap counterparties, from 
financial end users to commercial enterprises. As a result, the 
Commission expects each SD to have developed its corporate entity in a 
unique manner by employing different corporate cost structures, making 
it particularly difficult to estimate the quantitative impacts of both 
costs and benefits on each SD.

B. Codification of the CFTC Letters and Other Amendments

    The Commission is proposing technical amendments to its definitions 
in Commission regulation Sec.  23.100 for “predominantly engaged in 
non-financial activities” and “tangible net worth.” Further, the 
Commission is proposing to amend Commission regulation Sec.  23.105(p) 
to add exceptions to the financial reporting requirements for Non-U.S. 
bank SDs, and permitting bank SDs to file the relevant schedules under 
the Call Report (Schedule RC and Schedule RC-R) instead of as required 
by Appendix C. In addition, the Commission is making a number of 
clarifying amendments including: (1) amending the heading and scope 
provisions of Commission regulation Sec.  23.105(k) and the titles of 
certain schedules included in Appendix B; (2) changing public 
disclosure requirements under Commission regulation Sec.  23.105(i); 
(3) amending Form 1-FR-FCM to more accurately address net capital 
changes; (4) adding language to Commission regulation Sec.  23.103(a) 
and (c)(1) to clarify that standardized charges are the same as 
applicable to all SDs not using the Bank-Based Capital Approach; and 
(5) amending the cross reference in Commission regulation Sec.  
23.102(d) to make clear that either 12 CFR part 217 or Appendix A 
should be utilized as applicable by the nonbank SD depending on the 
respective capital approach elected.
1. Benefits
a. Amendments to Tangible Net Worth Capital Approach–CFTC Letter No. 
21-15
    The amendments to definitions of “predominantly engaged in non-
financial activities” and “tangible net worth” codifying CFTC Letter 
No. 21-15 are intended to ensure that the Tangible Net Worth Capital 
Approach can be utilized by certain nonbank SDs as was originally 
intended in the Final Rule. These amendments are expected to benefit 
certain nonbank SDs by ensuring clear and effective compliance with 
regulatory requirements under the Tangible Net Worth Capital Approach 
as amended, ultimately reducing operational costs for such nonbank SDs. 
In particular, nonbank SDs would no longer be required to calculate 
asset and revenue tests separately between the entity and the ultimate 
parent level or compute such tests under U.S. GAAP even if such entity 
was permitted to use IFRS. Further, these amendments would allow 
nonbank SDs meeting such qualifications to file their supplemental 
position reports at the same time as routine financial reporting for 
all nonbank SDs set forth within Commission regulation Sec.  23.105(d).
b. Amendments to Bank SD Financial Reporting Requirements–CFTC Letter 
No. 21-18
    Similarly, the amendments to Commission regulation Sec.  23.105(p) 
codifying CFTC Letter No. 21-18, as extended under CFTC Letter No. 23-
11, are expected to benefit bank SDs by permitting: (1) Non-U.S. bank 
SDs to file reports by their home country regulators subject to certain 
conditions; (2) bank SDs to file comparable Call Report schedules in 
accordance with, and within the timeframe permitted by, the prudential 
regulators; (3) Non-U.S. bank SDs to file balance sheet and statement 
of regulatory capital information in accordance with home country 
requirements provided they are in English, converted to U.S. dollars 
and filed within 90 calendar days following quarter-end; and (4) 
dually-registered Non-U.S. bank SDs to file comparable SEC-approved 
financial reports and schedules. The Commission anticipates that these 
amendments will eliminate duplicative and superfluous reporting and 
streamline financial reporting for both Non-U.S. and dually-registered 
bank SDs.
c. Amendments Regarding Financial Reporting and Computation 
Requirements of Swap Dealers
    Lastly, the amendments regarding financial reporting and 
computation include: (1) amendments to the heading and scope provision 
of Commission regulation Sec.  23.105(k) and (l); (2) titles of certain 
schedules included in Appendix B; (3) alignment of the public 
disclosure of unaudited financial information with the periodicity 
permitted by routine financial filings in Commission regulation Sec.  
23.105(d), and to remove reference to a statement disclosing the 
amounts of minimum regulatory capital; (4) amending Form

[[Page 2565]]

1-FR-FCM to add the 2 percent of uncleared swap margin capital 
requirement and swaps and security-based swaps haircuts; and (5) 
addition of clarifying language to Commission regulations Sec.  
23.103(a)(1) and (c)(1) to provide additional clarity to registrants 
that the same standardized market and credit risk charges are 
applicable to nonbank SDs utilizing the Tangible Net Worth Capital 
Approach as are applicable to all other nonbank SDs if not approved to 
use models. These amendments are meant to clarify what was originally 
intended in the Final Rule or what is already included within the 
existing Commission regulations, as well as align the schedules as 
currently required by the SEC and the NFA. The Commission anticipates 
that these amendments will remove uncertainty amongst SDs about the 
type of form and the extent of detail that they should be reporting.
2. Costs
    The Commission generally does not anticipate any costs associated 
with the above amendments as they are intended to streamline and 
clarify existing financial reporting and capital requirements. Of the 
above, only the amendments to Commission regulation Sec.  23.105(l) 
would impose additional financial reporting requirements on nonbank SDs 
and nonbank MSPs not approved to use models to file Schedules 2-4 of 
Appendix B.
    Currently, there are 8 nonbank SDs not approved to use models that 
are not currently filing Schedules 2-4 of Appendix B but would be 
required to do so under the amendments to Commission regulation Sec.  
23.105(l). The information required under Appendix B is nearly 
identical in all material respects to corresponding forms found in the 
SEC Form FOCUS Report Part II, as well as the capital and financial 
reporting requirements by the NFA for its member nonbank SDs and 
nonbank MSPs. Thus, the Commission has preliminarily determined that 
these nonbank SDs already have developed policies, procedures and 
systems to aggregate, monitor, and track their swap activities and 
risks as is required under Schedules 2-4 of Appendix B. This should 
mitigate some of the burdens of the additional reporting and 
recordkeeping requirements. Finally, the amendments to Commission 
regulation Sec.  23.105(k) clarify that nonbank SDs and nonbank MSPs 
approved to use models may comply with the requirements to provide 
specific financial information required by Commission regulation Sec.  
23.105(k) by filing Appendix B. Such nonbank SDs and nonbank MSPs have 
already been filing Appendix B with the Commission, and thus the 
Commission has preliminarily determined that the amendments to 
Commission regulation Sec.  23.105(k) would not impose any additional 
burden for such nonbank SDs and nonbank MSPs.
3. Section 15(a) Factors
    The following is a discussion of the cost and benefit 
considerations of this proposed rulemaking, as it relates to the five 
broad areas of market and public concern identified in section 15(a) of 
the CEA: (1) protection of market participants and the public; (2) 
efficiency, competitiveness, and financial integrity of swaps markets; 
(3) price discovery; (4) sound risk management practices; and (5) other 
public interest considerations.
a. Protection of Market Participants and the Public
    The proposed rules are intended to enhance the clarity of financial 
reporting and computation requirements by revising the language of the 
regulations with respect to the type of forms and the tests that SDs 
should be using as part of their financial reporting process. The 
changes to the computation of Tangible Net Worth are anticipated to 
benefit the public by allowing investors to monitor tangible net worth 
at the consolidated parent’s level, and the financial reporting 
requirements for both bank SDs and nonbank SDs set out in this proposed 
rulemaking should help the Commission and market participants monitor 
and assess the financial condition of such SDs more accurately and as 
was intended in the Final Rule. These amendments are also intended to 
harmonize financial reporting requirements with those of the prudential 
regulators, and the SEC, through which market participants and the 
Commission can gain a clearer and more directly comparable 
understanding of the financial reports received. Clarifying rules 
should safeguard both market participants and the public by improving 
transparency and reducing ambiguity.
Request for Comment
    Question 10. Do the proposed financial reporting and computation 
requirements protect market participants and the public? Please 
explain.
b. Efficiency, Competitiveness, and Financial Integrity of Swaps 
Markets
    In this proposed rulemaking, the Commission seeks to promote 
efficiency and financial integrity of the swaps market by streamlining 
many of the financial reporting requirements. For example, the 
amendments to Commission regulation Sec.  23.105(p) permit certain bank 
SDs to file with the Commission comparable Call Report schedules in 
accordance with, and within the timeframe permitted by, the prudential 
regulators that they currently file with the prudential regulators, or 
comparable SEC-approved financial reports and schedules, as applicable. 
The proposed amendments to Commission regulation Sec.  23.105(p) would 
also allow certain Non-U.S. bank SDs to file with the Commission what 
they currently file with their respective home country regulators, 
subject to certain conditions. In addition, the amendments to 
Commission regulation Sec.  23.105(k) are meant to ensure that the 
information listed in Appendix B is completed by all nonbank SDs and 
nonbank MSPs as was intended, and is consistent with that required by 
the SEC and NFA, and the amendments to Form 1-FR-FCM are meant to 
harmonize with the SEC’s requirements in its FOCUS Report Part II. 
Harmonizing requirements should foster a more level playing field, 
ultimately promoting trust and integrity within the market.
    The Commission anticipates that these amendments will promote 
greater operational efficiencies for both bank and nonbank SDs that are 
already regulated, either prudentially or through comparable foreign 
regulators, as they may be able to avoid creating duplicative 
compliance and operational infrastructures. The proposed amendments 
should allow the Commission to monitor the financial integrity of swaps 
markets more clearly and efficiently, including in the case of any 
default or financial contagion.
Request for Comment
    Question 11. How might this proposal affect market integrity? Is 
market integrity adversely affected by the proposed rules? If so, how 
might the Commission mitigate any harmful impact?
c. Price Discovery
    The Commission anticipates that the proposed amendments may enhance 
price discovery. By clarifying financial reporting and computation 
requirements and harmonizing reporting practices, a more efficient 
operating environment would be created for SDs, which are important 
intermediaries within the swaps markets. This improved data quality 
reported to regulators has the potential to enhance supervision, 
leading to improved market quality.

[[Page 2566]]

Consequently, this could lead to a more effective and accurate price 
discovery process.
Request for Comment
    Question 12. How might this proposed rulemaking affect price 
discovery? Please explain.
d. Sound Risk Management Practices
    The Commission has preliminarily determined that, as a result of 
the proposed reporting and recordkeeping requirements, SDs may more 
effectively track their trading and risk exposure in swaps and other 
financial activities. To the extent that these SDs can better monitor 
and track their risks, the Commission anticipates that this should help 
them better manage risk within the entity.
Request for Comment
    Question 13. How might this proposal affect SD’s risk management 
practices? Please explain.
e. Other Public Interest Considerations
    The Commission has not identified any additional public interest 
considerations related to the costs and benefits of the proposed rule.
Request for Comment
    Question 14. Are there other public interest considerations that 
the Commission should consider? Please explain.

C. Other Amendments

    The Commission is proposing a number of clarifying amendments 
intended to align with existing Commission regulations, including: (1) 
amending Commission regulation Sec.  23.105(c)(4) to add a two business 
days reporting timeframe to the requirement for nonbank SD notice 
filing of a substantial reduction in capital; (2) amending Commission 
regulations Sec.  23.101(a)(1)(i)(B) and (a)(1)(ii)(C) to establish 
that the use of subordinated debt as regulatory capital is subject to 
the approval of either an RFA of which the nonbank SD is a member, or 
the Commission; and (3) amending Commission regulation Sec.  
23.105(e)(4)(v) for SDs and MSPs to include an explicit statement, if 
applicable, that there are no material differences between the audited 
annual report and the unaudited annual report of the same date.
1. Benefits
a. Notice of Substantial Reduction in Capital
    The amendments to the notice requirements in Commission regulation 
Sec.  23.105(c)(4) would add a two-business days requirement for 
nonbank SDs for notice of substantial reduction in capital. The 
Commission has preliminarily determined that adding a reporting 
timeframe to the notice requirement will enhance compliance by 
providing regulatory certainty to nonbank SDs of when such a filing is 
due.
b. Subordinated Debt Approval
    The amendments to Commission regulation Sec.  23.101(a)(1)(i)(B) 
would establish that the use of subordinated debt as regulatory capital 
is subject to the approval of either an RFA of which the nonbank SD is 
a member, or the Commission. The amendments should further provide 
regulatory clarity by establishing the process for approving 
subordinated debt for nonbank SDs, which was not explicitly articulated 
in the Final Rule and had led to uncertainty among nonbank SDs.
c. Statement of No Material Difference
    Lastly, the amendments to Commission regulation Sec.  
23.105(e)(4)(v) would require that the SDs and MSPs include an explicit 
statement, if applicable, of no material differences between the 
audited and the unaudited annual report of the same date. Doing so 
should not only align the filing approach for auditors of SDs with that 
of FCMs, but also enhance the reliability of such annual reports by 
encouraging auditors to more rigorously assess the materiality of 
reporting any discovered audit findings.
2. Costs
    The Commission does not anticipate that compliance with the above 
amendments will lead to any significant costs. The amendments to 
Commission regulations Sec.  23.105(c)(4) and (e)(4)(v) are meant to 
align the financial reporting requirements of SDs with that of FCMs, 
and based on the Commission’s experience with existing filings and 
discussions with registered SDs, the Commission has preliminarily 
determined that the registrants will be able to file necessary 
information within the timeframe provided. The amendments to Commission 
regulation Sec.  23.101(a)(1)(i)(B) are meant to establish a process of 
approving subordinated debt for nonbank SDs, and as such they would not 
levy any additional costs to the nonbank SDs.
3. Section 15(a) Factors
    The following is a discussion of the cost and benefit 
considerations of the proposed rulemaking, as it relates to the five 
broad areas of market and public concern identified in section 15(a) of 
the CEA: (1) protection of market participants and the public; (2) 
efficiency, competitiveness, and financial integrity of swaps markets; 
(3) price discovery; (4) sound risk management practices; and (5) other 
public interest considerations.
a. Protection of Market Participants and the Public
    The Commission anticipates that the proposed amendment to 
Commission regulation Sec.  23.105(c)(4) should protect market 
participants and the public against possible market disruption by 
requiring that all SDs file a notice of a substantial reduction in 
capital within two business days after such an incident has occurred. 
Similarly, the amendments to Commission regulation Sec.  
23.101(a)(1)(i)(B) should provide market clarity on how subordinated 
debt is approved for consideration as capital, and the amendments to 
Commission regulation Sec.  23.105(e)(4)(v) should allow the Commission 
and the public to effectively monitor cases where there are no material 
differences between the audited and unaudited annual report of the same 
date filed by nonbank SDs and nonbank MSPs. These amendments should 
enable market participants to have better insights into SD’s capital 
and financial positions. This, in turn, should enhance the protection 
of both market participants and the public.
Request for Comment
    Question 15. Do the proposed financial reporting requirements 
protect market participants and the public? Please explain.
b. Efficiency, Competitiveness, and Financial Integrity of Swaps 
Markets
    The proposed amendments should improve the accuracy and 
completeness of nonbank SDs’ and nonbank MSPs’ financial reporting by 
imposing a two-business day deadline for notice of substantial 
reduction in capital, and an affirmative statement of no material 
differences between the audited and unaudited annual financial 
statement, as applicable. The establishment of a process for approving 
subordinated debt should lead to increased efficiency in how such 
subordinated debt is monitored. Further, these amendments are also 
intended to harmonize financial reporting requirements with those of 
the prudential regulators, as well as the Commission’s existing 
framework regarding FCMs. Harmonizing requirements should foster a more 
level playing field, ultimately promoting trust and integrity within 
the market.

[[Page 2567]]

Request for Comment
    Question 16. Is market integrity adversely affected by the proposed 
rules? If so, how might the Commission mitigate any harmful impact?
c. Price Discovery
    The Commission anticipates that the proposed amendments may enhance 
price discovery. By improving financial reporting requirements for 
nonbank SDs and nonbank MSPs, a more efficient operating environment 
should be created for SDs, which are important intermediaries within 
the swaps markets. This improved data quality reported to regulators 
has the potential to enhance supervision, leading to improved market 
quality. Consequently, this could lead to a more effective and accurate 
price discovery process.
Request for Comment
    Question 17. How might this proposed rulemaking affect price 
discovery? Please explain.
d. Sound Risk Management Practices
    The Commission anticipates that the above amendments will lead to 
better risk management practices among SDs and MSPs, particularly by 
requiring them to monitor for potential reduction in capital and 
material differences between the audited and the unaudited annual 
financial statements.
Request for Comment
    Question 18. How might this proposed rulemaking affect risk 
management practices of nonbank SDs and nonbank MSPs? Please explain.
e. Other Public Interest Considerations
    The Commission has not identified any additional public interest 
considerations related to the costs and benefits of the proposed rule.
Request for Comment
    Question 19. Are there other public interest considerations that 
the Commission should consider? Please explain.

    Note:  The following appendix to this preamble pertains to a 
form that does not appear in the Code of Federal Regulations.

BILLING CODE 6351-01-P

[[Page 2568]]

Appendix to the Preamble–Proposed Revisions to Selected Section of 
Form 1-FR-FCM: Statement of the Computation of the Minimum Capital 
Requirements
[GRAPHIC] [TIFF OMITTED] TP16JA24.046

[[Page 2569]]

[GRAPHIC] [TIFF OMITTED] TP16JA24.047

[[Page 2570]]

[GRAPHIC] [TIFF OMITTED] TP16JA24.048

BILLING CODE 6351-01-C

List of Subjects in 17 CFR Part 23

    Reporting and recordkeeping requirements, Swaps.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 23 as follows:

PART 23–SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
1. The authority citation for part 23 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t, 
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
    Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b), 
Pub. L. 111-203, 124 Stat. 1641 (2010).

0
2. Amend Sec.  23.100 by adding, in alphabetical order, a definition of 
the term “Call Report” and revising the definitions of the terms 
“Predominantly engaged in non-financial activities” and “Tangible 
net worth” to read as follows:

Sec.  23.100  Definitions applicable to capital requirements.

* * * * *
    Call Report. This term means the Federal Financial Institutions 
Examination Council Form 031 that a swap dealer or major swap 
participant for which there is a prudential regulator is required to 
file with its applicable prudential regulator.
* * * * *
    Predominantly engaged in non-financial activities. A swap dealer is 
predominantly engaged in non-financial activities if:
    (1) The swap dealer’s consolidated annual gross financial revenues, 
or if the swap dealer is a wholly owned subsidiary, then the swap 
dealer’s consolidated parent’s annual gross financial revenues, in 
either of its two most recently completed fiscal years represents less 
than 15 percent of the swap dealer’s or the swap dealer’s

[[Page 2571]]

consolidated parent’s consolidated gross revenue in that fiscal year 
(“15% revenue test”), and
    (2) The consolidated total financial assets of the swap dealer, or 
if the swap dealer is wholly owned subsidiary, then the consolidated 
total financial assets of the swap dealer’s parent, at the end of its 
two most recently completed fiscal years represents less than 15 
percent of the swap dealer’s or the swap dealer’s consolidated parent’s 
consolidated total assets as of the end of the fiscal year (“15% asset 
test”).
    (3) For purpose of computing the 15% revenue test or the 15% asset 
test, a swap dealer’s activities or swap dealer’s parent’s activities 
shall be deemed financial activities if such activities are defined as 
financial activities under 12 CFR 242.3 and Appendix A to 12 CFR 242, 
including lending, investing for others, safeguarding money or 
securities for others, providing financial or investment advisory 
services, underwriting or making markets in securities, providing 
securities brokerage services, and engaging as principal in investing 
and trading activities; Provided, however, a swap dealer or a swap 
dealer’s consolidated parent may exclude from its financial activities 
accounts receivable resulting from non-financial activities.
* * * * *
    Tangible net worth. This term means the net worth of a swap dealer 
or major swap participant as determined in accordance with U.S. 
generally accepted accounting principles, or International Financial 
Reporting Standards issued by the International Accounting Standards 
Board if the swap dealer or major swap participant is permitted under 
Sec.  23.105(b) to prepare and maintain books and records in accordance 
with such standards, but in either case, excluding goodwill and other 
intangible assets. In determining net worth, all long and short 
positions in swaps, security-based swaps and related positions must be 
marked to their market value. A swap dealer or major swap participant 
must include in its computation of tangible net worth all liabilities 
or obligations of a subsidiary or affiliate that the swap dealer or 
major swap participant guarantees, endorses, or assumes either directly 
or indirectly.
* * * * *
0
3. Amend Sec.  23.101 by revising paragraphs (a)(1)(i)(B), 
(a)(1)(ii)(B), and (a)(1)(ii)(C), and adding paragraph (a)(1)(ii)(D) to 
read as follows:

Sec.  23.101  Minimum financial requirements for swap dealers and major 
swap participants.

    (a)(1) * * *
    (i) * * *
    (B) An aggregate of common equity tier 1 capital, additional tier 1 
capital, and tier 2 capital, all as defined under the bank holding 
company regulations in 12 CFR 217.20, equal to or greater than eight 
percent of the swap dealer’s BHC equivalent risk-weighted assets; 
provided, however, that the swap dealer must maintain a minimum of 
common equity tier 1 capital equal to six point five percent of its BHC 
equivalent risk-weighted assets; provided further, that any capital 
that is subordinated debt under 12 CFR 217.20 and that is included in 
the swap dealer’s capital for purposes of this paragraph (a)(1)(i)(B) 
must qualify as subordinated debt under Sec.  240.18a-1d of this title 
in accordance with a qualification determination of the Commission or a 
registered futures association of which the swap dealer is a member;
* * * * *
    (ii) * * *
    (B) A swap dealer that uses internal models to compute market risk 
for its proprietary positions under Sec.  240.18a-1(d) of this title 
must calculate the total market risk as the sum of the VaR measure, 
stressed VaR measure, specific risk measure, comprehensive risk 
measure, and incremental risk measure of the portfolio of proprietary 
positions in accordance with Sec.  23.102 and Appendix A to subpart E 
of this part;
    (C) A swap dealer may recognize as a current asset, receivables 
from third-party custodians that maintain the swap dealer’s initial 
margin deposits associated with uncleared swap and security-based swap 
transactions pursuant to the margin rules of the Commission, the 
Securities and Exchange Commission, a prudential regulator, as defined 
in section 1a(39) of the Act, or a foreign jurisdiction that has 
received a margin Comparability Determination under Sec.  23.160; and
    (D) The qualification of any subordinated debt used to meet any 
capital requirements shall be as determined by the Commission or a 
registered futures association of which the swap dealer is a member.
* * * * *
0
4. In Sec.  23.102, revise paragraph (d) to read as follows:

Sec.  23.102  Calculation of market risk exposure requirement and 
credit risk exposure requirement using internal models.

* * * * *
    (d) The Commission, or registered futures association upon 
obtaining the Commission’s determination that its requirements and 
model approval process are comparable to the Commission’s requirements 
and process, may approve or deny the application, or approve or deny an 
amendment to the application, in whole or in part, subject to any 
conditions or limitations the Commission or registered futures 
association may require, if the Commission or registered futures 
association finds the approval to be appropriate in the public 
interest, after determining, among other things, whether the applicant 
has met the requirements of this section. A swap dealer that has 
received Commission or registered futures association approval to 
compute market risk exposure requirements and credit risk exposure 
requirements pursuant to internal models must compute such charges in 
accordance with paragraph (c) of this section.
* * * * *
0
5. In Sec.  23.103, revise paragraphs (a)(1) and (c)(1) to read as 
follows:

Sec.  23.103  Calculation of market risk exposure requirement and 
credit risk requirement when models are not approved.

    (a) * * *
    (1) Computes its regulatory capital requirements under Sec.  
23.101(a)(1)(ii) or (a)(2), and
* * * * *
    (c) * * *
    (1) A swap dealer that computes regulatory capital under Sec.  
23.101(a)(1)(ii) or (a)(2) shall compute counterparty credit risk 
charges using the applicable standardized credit risk charges set forth 
in Sec.  240.18a-1 of this title and Sec.  1.17 of this chapter for 
such positions.
* * * * *
0
6. In Sec.  23.105, revise paragraphs (c)(2) and (c)(4), (d)(2) through 
(d)(4), (e)(4)(v), (e)(6), (i)(1)(i) and (ii), (i)(2)(ii), the 
introductory text to (k)(1), (l), (p)(2), and (p)(7) to read as 
follows:

Sec.  23.105  Financial recordkeeping, reporting and notification 
requirements for swap dealers and major swap participants.

* * * * *
    (c) * * *
    (2) A swap dealer or major swap participant who knows or should 
have known that its regulatory capital at any time is less than 120 
percent of its minimum regulatory capital requirement as determined 
under Sec.  23.101, or less than the amounts identified in Sec.  
1.12(b) of this chapter for a swap dealer or major swap participant 
that is also a futures commission merchant, must provide written notice 
to the Commission and to the registered futures association of which it 
is a

[[Page 2572]]

member to that effect within 24 hours of such event.
* * * * *
    (4) A swap dealer or major swap participant must provide written 
notice within two business days to the Commission and to the registered 
futures association of which it is a member of a substantial reduction 
in capital as compared to that last reported in a financial report 
filed with the Commission pursuant to this section. The notice shall be 
provided if the swap dealer or major swap participant experiences a 30 
percent or more decrease in the amount of capital that the swap dealer 
or major swap participant holds in excess of its regulatory capital 
requirement as computed under Sec.  23.101.
* * * * *
    (d) * * *
    (2) The financial reports required by this section must be prepared 
in the English language and be denominated in United States dollars. 
The financial reports shall include a statement of financial condition, 
a statement of income/loss, a statement of changes in liabilities 
subordinated to the claims of general creditors, a statement of changes 
in ownership equity, a statement demonstrating compliance with and 
calculation of the applicable regulatory capital requirement under 
Sec.  23.101, and such further material information as may be necessary 
to make the required statements not misleading. The monthly or 
quarterly report and schedules must be prepared in accordance with 
generally accepted accounting principles as established in the United 
States; Provided, however, that a swap dealer or major swap participant 
that is not otherwise required to prepare financial statements in 
accordance with U.S. generally accepted accounting principles, may 
prepare the monthly or quarterly report and schedules required by this 
section in accordance with International Financial Reporting Standards 
issued by the International Accounting Standards Board.
    (3) A swap dealer or major swap participant that is also registered 
with the Securities and Exchange Commission as a broker or dealer, 
security-based swap dealer, or a major security-based swap participant 
and files a monthly Form X-17A-5 FOCUS Report Part II with the 
Securities and Exchange Commission pursuant to Sec.  240.18a-7 or 
240.17a-5 of this title, as applicable, must file such Form X-17A-5 
FOCUS Report Part II with the Commission and with the registered 
futures association in lieu of the financial reports required under 
paragraphs (d)(1) and (2) of the section. The swap dealer or major swap 
participant must file the form with the Commission and registered 
futures association when it files the Form X-17A-5 FOCUS Report Part II 
with the Securities and Exchange Commission, provided, however, that 
the swap dealer or major swap participant must file the Form X-17A-5 
FOCUS Report Part II with the Commission and registered futures 
association no later than 17 business days after the end of each month.
    (4) A swap dealer or major swap participant that is also registered 
with the Commission as a futures commission merchant must file a Form 
1-FR-FCM or such other form as the futures commission merchant is 
permitted to file under Sec.  1.10 of this chapter, in lieu of the 
monthly financial reports required under paragraphs (d)(1) and (2) of 
the section.
    (e) * * *
    (4) * * *
    (v) A reconciliation of any material differences from the unaudited 
financial report prepared as of the swap dealer’s or major swap 
participant’s year-end date under paragraph (d) of this section and the 
swap dealer’s or major swap participant’s annual financial report 
prepared under this paragraph (e) or, if no material differences exist, 
a statement so indicating; and
* * * * *
    (6) A swap dealer or major swap participant that is also registered 
with the Commission as a futures commission merchant must file an 
audited Form 1-FR-FCM or such other form as the futures commission 
merchant is permitted to file under Sec.  1.10 of this chapter, and 
must comply with the requirements of Sec.  1.16 of this chapter, 
including filing a supplemental accountant’s report on material 
inadequacies concurrently with the audited annual report, in lieu of 
the annual financial report required under this paragraph (e).
* * * * *
    (i) * * *
    (1) * * *
    (i) The statement of financial condition including applicable 
footnotes; and
    (ii) The amounts of the swap dealer’s or major swap participant’s 
regulatory capital and minimum regulatory capital requirement, computed 
in accordance with Sec.  23.101.
    (2) * * *
    (ii) The amounts of the swap dealer’s or major swap participant’s 
regulatory capital as of the fiscal year end and its minimum regulatory 
capital requirement, computed in accordance with Sec.  23.101.
* * * * *
    (k) * * *
    (1) A swap dealer that has received approval or filed an 
application for provisional approval under Sec.  23.102(d) from the 
Commission, or from a registered futures association of which the swap 
dealer is a member, to use internal models to compute its market risk 
exposure requirement and credit risk exposure requirement in computing 
its regulatory capital under Sec.  23.101 must file with the Commission 
and with the registered futures association of which the swap dealer is 
a member the specific information contained in Appendix B to subpart E 
of this part and the following information within 17 business days of 
the end of each month or quarter as applicable:
* * * * *
    (l) Additional position and counterparty reporting requirements for 
swap dealers and major swap participants not approved to use models. A 
swap dealer or major swap participant which is not subject to paragraph 
(k) of this section must provide the Commission and the registered 
futures association of which the swap dealer or major swap participant 
is a member, the additional specific information contained in Appendix 
B to subpart E of this part on a monthly or quarterly basis as 
applicable to its required frequency of financial reporting under 
paragraph (d) of this section.
* * * * *
    (p) * * *
    (2) Financial report and position information. (i) A swap dealer or 
major swap participant that files a Call Report with its applicable 
prudential regulator shall file Schedule RC–Balance Sheet and Schedule 
RC–R Regulatory Capital from its Call Report filed with the prudential 
regulator, and Schedule 1 of Appendix C to subpart E of this part, with 
the Commission on a quarterly basis. The swap dealer or major swap 
participant shall file the schedules with the Commission on the date 
the Call Report is due to be filed with the swap dealer’s or major swap 
participant’s prudential regulator.
    (ii) A swap dealer or major swap participant domiciled in a non-
U.S. jurisdiction that is not required to file a Call Report by its 
applicable prudential regulator shall file a statement of financial 
condition and regulatory capital information containing comparable 
financial information as required by Schedule RC–Balance Sheet and 
Schedule RC–R Regulatory

[[Page 2573]]

Capital of the Call Report, and shall file Schedule 1 of Appendix C to 
subpart E of this part, with the Commission on a quarterly basis. The 
statement of financial condition, regulatory capital information, and 
Schedule 1 of Appendix C to subpart E of this part shall be prepared 
and presented in accordance with the accounting standards approved by 
the swap dealer’s or major swap participant’s home country regulatory 
authorities, provided, however, that the schedules and information must 
be in the English language with balances converted to U.S. dollars. The 
swap dealer or major swap participant shall file the statement of 
financial condition, regulatory capital information, and Schedule 1 of 
Appendix C to subpart E of this part with the Commission no later than 
90 calendar days after the end of the swap dealer’s or major swap 
participant’s fiscal quarter.
* * * * *
    (7) A swap dealer or major swap participant that is subject to the 
capital requirements of a prudential regulator and is also registered 
with the Securities and Exchange Commission as a security-based swap 
dealer or a major security-based swap participant and files a quarterly 
Form X-17A-5 FOCUS Report Part IIC with the Securities and Exchange 
Commission pursuant to Sec.  240.18a-7 of this title, must file such 
Form X-17A-5 FOCUS Report Part IIC with the Commission in lieu of the 
financial reports required under paragraphs (p)(2) of this section. The 
swap dealer or major swap participant must file the form with the 
Commission when it files the Form X-17A-5 FOCUS Report Part IIC with 
the Securities and Exchange Commission, provided, however, that the 
swap dealer or major swap participant must file the Form X-17A-5 FOCUS 
Report Part IIC with the Commission no later than 30 calendar days from 
the date the report is made.
0
7. In Appendix B to subpart E of part 23, revise the schedule headings 
of Schedules 1, 2, 3, and 4, and republish the schedules, to read as 
follows:

Appendix B to Subpart E of Part 23–Swap Dealer and Major Swap 
Participant Position Information

BILLING CODE 6351-01-P

[[Page 2574]]

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[[Page 2575]]

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[[Page 2576]]

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0
8. Amend Appendix C to subpart E of part 23 by removing the Balance 
Sheet and Regulatory Capital forms and revising the Schedule 1–
Aggregate Security-Based Swap and Swap Positions form to read as 
follows:

Appendix C to Subpart E of Part 23–Specific Position Information for 
Swap Dealers and Major Swap Participants Subject to the Capital 
Requirements of a Prudential Regulator

[[Page 2578]]

[GRAPHIC] [TIFF OMITTED] TP16JA24.053

BILLING CODE 6351-01-C

    Issued in Washington, DC, on December 22, 2023, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Capital and Financial Reporting Requirements for Swap 
Dealers and Major Swap Participants–Commission Voting Summary, 
Chairman’s Statement, and Commissioners’ Statements

Appendix 1–Commission Voting Summary

    On this matter, Chairman Behnam and Commissioners Johnson, 
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2–Statement of Support of Chairman Rostin Behnam

    I support the proposed rule to amend certain requirements in 
part 23 of the Commission’s regulations to address specific issues 
identified during the implementation of the Commission’s 2020 final 
rule on capital and financial reporting requirements for swap 
dealers (SDs) and major swap participants (MSPs).1 The proposed 
rule would codify interpretive CFTC Letter No. 21-15 2 regarding 
capital and financial reporting requirements for nonbank SDs and 
nonbank MSPs electing the tangible net worth capital approach; 3 
codify the time-limited no-action position in CFTC Letter No. 21-18 
4 regarding financial reporting requirements for bank SDs; clarify 
technical aspects of the reporting requirements; and update an FCM 
reporting form consistent with net capital requirements previously 
adopted by the Commission for FCMs. The proposed amendments are not 
intended to change the Commission’s capital approach.
—————————————————————————

    1 Capital Requirements of Swap Dealers and Major Swap 
Participants, 85 FR 57462 (Sept. 15, 2020).
    2 CFTC Letter No. 21-15, Jun. 29, 2021, available at https://www.cftc.gov/csl/21-15/download.
    3 See 17 CFR 23.101.
    4 CFTC Letter No. 21-18, Aug. 31, 2021, available at https://www.cftc.gov/csl/21-18/download.
—————————————————————————

    This proposal is a testament to the commitment I previously made 
for the Commission to consider the codification of various forms of 
relief previously provided by CFTC Division staff through no-action 
position letters.5 As staff letters only bind the staff of the 
issuing Division with respect to the specific facts, situations, and 
persons addressed by the respective staff letters,6 it is good 
government for the Commission to clean-up its rule set where the 
Commission determines that compliance with certain regulations is 
impossible. Such Commission action not only provides regulatory 
certainty and clarity to our registrants with the benefit of notice 
and public comment, but also ensures the efficient use of staff 
resources to fix an issue once instead of allocating time to a 
series of no-action positions for the same matter.
—————————————————————————

    5 Keynote Address of Chairman Rostin Behnam at the ABA 
Business Law Section Derivatives & Futures Law Committee Winter 
Meeting, (Feb. 3. 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam31.
    6 See, e.g., 17 CFR 140.99.
—————————————————————————

    I look forward to hearing the public’s comments on the proposed 
amendments to the regulations and the relevant appendices in part 23 
of the Commission’s regulations. I thank staff in the Market 
Participants Division, Office of the General Counsel, and the Office 
of the Chief Economist for all of their work on the proposal.

[[Page 2579]]

Appendix 3–Statement of Commissioner Kristin N. Johnson

    The Commodity Futures Trading Commission (Commission or CFTC) 
adopted a proposal to amend certain of the Commission’s part 23 
regulations that impose minimum capital requirements and financial 
reporting obligations on swap dealers (SDs) and major swap 
participants (MSPs) (Proposed Amendments).1 I support the 
amendments advanced by the Market Participants Division (MPD).
—————————————————————————

    1 Since no MSP is currently registered with the Commission, in 
this statement, I will refer to SDs only.
—————————————————————————

    Minimum capital requirements serve as a cushion during times of 
severe market stress to ensure our registrants’ safety and 
soundness, protect the financial stability of our financial system, 
and prevent a run on our financial institutions. Financial condition 
reporting provides the Commission with visibility and insight into 
the business and financial health of our registrants and enables us 
to require corrective action and prevent a failure of a single 
entity or group of entities or segment of the derivatives market, 
which could raise system risk concerns.

Dodd-Frank Act Reforms

    The Commission introduced new capital and financial reporting 
requirements for SDs in 2020, as mandated by the Dodd-Frank Act 
(2020 Capital Rule).2 Title VII of the Dodd-Frank Act amended the 
Commodity Exchange Act (CEA) to establish a new regulatory framework 
for swaps, regulated by the Commission, and security-based swaps, 
regulated by the Securities and Exchange Commission (SEC), to reduce 
risk, increase transparency, and promote market integrity within the 
financial system. Section 4s(e) of the CEA introduced minimum 
capital requirements for SDs,3 and section 4s(f) of the CEA 
created financial reporting and recordkeeping requirements for all 
SDs.4
—————————————————————————

    2 Capital Requirements of Swap Dealers and Major Swap 
Participants (Capital Requirements), 85 FR 57462 (Sept. 15, 2020); 
Dodd-Frank Wall Street Reform and Consumer Protection Act, Public 
Law 111-203, 124 Stat. 1376 (2010).
    3 7 U.S.C. 6s(e).
    4 7 U.S.C. 6s(f).
—————————————————————————

    In the United States, the capital framework is divided into 
three parallel regimes. SDs subject to regulation by a prudential 
regulator are required to comply with the minimum capital 
requirements adopted by the applicable prudential regulator,5 
while SDs not subject to regulation by a prudential regulator are 
required to meet the minimum capital requirements of the Commission, 
and security-based swap dealers (SBSDs) and major security-based 
swap participants (MSBSPs) that do not have a prudential regulator 
are required to comply with the minimum capital requirements of the 
SEC.6 The prudential regulators or banking agencies and the SEC 
have adopted capital rules for swaps and security-based swaps.
—————————————————————————

    5 7 U.S.C. 6s(e)(1)(A).
    6 Section 15F of the Exchange Act addresses capital 
requirements for SBSDs/MSBSPs.
—————————————————————————

    In the adopting release for the 2020 Capital Rule, the 
Commission indicated that it would consult with the prudential 
regulators and the SEC to assess the capital adequacy of SDs, MSPs, 
SBSDs, and MSBSPs, monitor the implementation of the rule and data, 
and consider modifications to the capital and financial reporting 
requirements.7
—————————————————————————

    7 Capital Requirements, 85 FR at 57465.
—————————————————————————

    With the Proposed Amendments, the Commission seeks to make 
surgical changes to the 2020 Capital Rule, including a number of 
technical corrections, based on consultation with the prudential 
regulators and SEC, and based on market feedback on the adoption and 
implementation of the 2020 Capital Rule. While the Proposed 
Amendments are not adjusting the capital components of the 2020 
Capital Rule, all regulations designed to mitigate known systemic 
risk concerns in the swaps market must be subject to careful 
evaluation.
    I commend the Commission for taking formal steps to engage in a 
rulemaking process that invites Commission discussion and public 
notice and comment on these regulations, which ensure compliance 
with the Dodd-Frank Act while remaining practical and solutions-
oriented. I strongly encourage the Commission, however, to begin a 
formal rulemaking process to address several unresolved issues 
necessary to ensure compliance with the Dodd-Frank Act and these 
requirements.

Clarifying Capital Requirements for Commercials

    The Proposed Amendments codify Interpretive Letter 21-15, which 
applies to commercial non-bank SDs–typically entities that 
primarily engage in agricultural and energy swaps and provide 
services that are important to the U.S. economy. The Commission’s 
overall capital approach permits non-bank SDs to select one of three 
methods to calculate their capital requirements, as permitted under 
the rule: the net liquid assets capital approach; 8 the bank-based 
capital requirements; 9 or the tangible net worth capital 
approach.10
—————————————————————————

    8 A capital requirement that is consistent with the SEC’s 
final capital regulations for SBSDs, as well as the existing CFTC’s 
capital rules for FCMs, and the existing SEC’s capital rules for 
broker-dealers.
    9 A capital requirement that is consistent with the prudential 
regulators’ capital requirements for bank SDs and that is based on 
the existing Federal Reserve Board capital requirements for bank 
holding companies.
    10 A capital requirement that is based on the SD’s tangible 
net worth, if the SD or parent is predominantly engaged in non-
financial activities.
—————————————————————————

    The Commission proposes to revise the 2020 Capital Rule so that 
the test to determine tangible net worth may be applied at the 
entity level or ultimate consolidated parent level; so that 
International Financial Reporting Standards (IFRS) accounting 
standards or GAAP may be used; and so that position and financial 
exposure reporting occur at the same frequency as financial 
reporting, which for SDs is quarterly.
    The Proposed Rule minimizes disruption, and clarifies the 
interpretation and implementation of the tangible net worth test for 
commercial non-bank SDs.

Refining Financial Reporting Requirements

    The Proposed Amendments address issues presented in No-Action 
Letter (NAL) 21-18, which was extended under NAL 23-11 and applies 
to bank SDs, including non-U.S. bank SDs. Non-U.S. bank SDs can file 
the applicable financial reporting within 90 days of the end of the 
financial reporting period and the same forms (e.g., relating to 
balance sheet and regulatory capital schedules) in the same format 
as provided to home country regulators (but in English and U.S. 
dollars). Additionally, U.S. bank SDs can file the same forms (e.g., 
relating to balance sheet and regulatory capital schedules) under 
bank regulators’ Call Report and within the same timeframe as when 
filing with their prudential regulator.
    The Proposed Amendments allow the Commission to collect 
information from bank SDs as a comparative tool. Also, all SDs must 
use Schedule 1 for position information, which is similar to the 
SEC’s FOCUS report–duplicative forms are eliminated.
    MPD has demonstrated collaboration working with the prudential 
regulators and SEC in developing and harmonizing processes, 
procedures, and forms for financial reports and notifications–some 
of which are adopted the Proposed Amendments. Further, the 2020 
Capital Rule was an important initiative that demonstrated the 
Commission’s recognition of the complexity and interconnectedness of 
the derivatives markets.

Technical Corrections

SD Exposure Reporting

    The Proposed Amendments amend Commission regulation to clarify 
that certain supplemental schedules used to report SD exposure are 
intended to be provided by all non-bank SDs. These amendments are 
necessary to align the reporting of similar information collected by 
the SEC from SBSDs and to provide the Commission and National 
Futures Association with important information regarding SD exposure 
across several geographical locations and counterparties. This 
information provides valuable insight into the risk exposure of non-
bank SDs, which is essential to performing the regulatory oversight 
of SDs.

Notice Requirements for Substantial Reduction in Capital

    The Commission should begin to review notice requirements 
comprehensively in light of greater, faster capabilities to comply, 
notwithstanding the potential existence of challenges for non-U.S. 
SDs in light of time zone differences. The Proposed Amendments 
require notification of a substantial reduction of capital within 
two business days. The 2020 Capital Rule did not specify a 
timeframe, and the Proposed Amendments are consistent with the 
timeframe applicable to FCMs.

Conclusion

    In order to prevent the market instability witnessed during the 
period when swaps traded in bespoke, bilateral markets, the 
Commission imposes capital requirements on non-bank SDs, and imposes 
financial reporting requirements on bank SDs as well

[[Page 2580]]

as non-bank SDs. These regulations are critical to the oversight of 
the swaps market.
    I want to thank MPD and the Office of the Chief Economist (OCE) 
for their excellent work bringing forth this proposed rulemaking, in 
particular Jennifer Bauer, Maria Aguilar-Rocha, Andrew Pai, Joshua 
Beale, Thomas Smith, and Amanda L. Olear of MPD, and Lihong McPhail 
of OCE.

Appendix 4–Statement of Support of Commissioner Caroline D. Pham

    I support the Notice of Proposed Rulemaking on Capital and 
Financial Reporting Requirements for Swap Dealers and Major Swap 
Participants (Proposal) because it addresses issues left outstanding 
from implementing a rule by offering pragmatic solutions that not 
only rectify the problem at hand, but do so without imposing 
unnecessary burdens or complications. I would like to thank Andrew 
Pai, Maria Aguilar-Rocha, Josh Beale, Tom Smith, and Amanda Olear in 
the Market Participants Division for their work on the Proposal. I 
greatly appreciate the time staff took to discuss my questions and 
concerns.
    It is important to remember that most of the CFTC’s 
provisionally-registered swap dealers are subject to three or more 
regulatory regimes.1 Of the CFTC’s 106 currently provisionally 
registered swap dealers, most are also registered with and 
supervised by another agency or authority, such as a prudential, 
functional, or market regulator. This awareness must inform the 
Commission’s approach when considering any rule impacting swap 
dealers.2 Otherwise, we risk missing the nuances associated with 
the complex interplay or conflict that arises between the various 
regulations.
—————————————————————————

    1 Statement of Commissioner Caroline D. Pham on Risk 
Management Program for Swap Dealers and Futures Commission Merchants 
Advance Notice of Proposed Rulemaking (June 1, 2023).
    2 See Concurring Statement of Commissioner Caroline D. Pham 
Regarding Proposed Order and Request for Comment on an Application 
for a Capital Comparability Determination (June 2, 2022).
—————————————————————————

    Capital, the subject of today’s Proposal, is one area in which 
the CFTC’s provisionally-registered swap dealers are subject to 
multiple regulatory regimes. By this point, we know that the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) mandated the Commission establish capital requirements for swap 
dealers and major swap participants,3 and that the Commission 
adopted capital requirements for nonbank swap dealers and major swap 
participants,4 as well as financial reporting requirements for 
bank swap dealers and major swap participants, together with nonbank 
swap dealers and major swap participants.5
—————————————————————————

    3 Section 731 of the Dodd-Frank Act added a new section 4s to 
the Commodity Exchange Act (CEA) to require the CFTC adopt rules 
establishing minimum initial margin, variation margin and capital 
requirements for swap dealers and major swap participants. Under CEA 
section 4s(e), the CFTC is required to adopt capital requirements 
for swap dealers and major swap participants that are not subject to 
the capital rules of the prudential regulators, which include 
nonbank subsidiaries of bank holding companies.
    4 I.e., swap dealers and major swap participants that are not 
subject to the capital requirements of a prudential regulator, as 
opposed to swap dealers and major swap participants for which there 
is a prudential regulator.
    5 I.e., swap dealers and major swap participants that are not 
subject to the capital requirements of a prudential regulator, along 
with the swap dealers and major swap participants for which there is 
a prudential regulator. See Capital Requirements of Swap Dealers and 
Major Swap Participants, 85 FR 57462 (Sept. 15, 2020).
—————————————————————————

    Therefore, when considering solutions to challenges that have 
arisen while implementing the capital rules, we must remember that 
we are not a prudential banking regulator like the Fed, OCC, or 
FDIC, nor are we a primarily disclosures-based market regulator like 
the SEC.6 Today’s proposal offers a pragmatic solution to 
challenges faced by our market participants that respects the 
differences among the financial regulators.
—————————————————————————

    6 Concurring Statement of Commissioner Caroline D. Pham 
Regarding the CFTC Request for Information on Climate-Related 
Financial Risk (June 2, 2022). I reiterate the importance of keeping 
our focus on our markets, products, and purpose to avoid the risk of 
diluting our limited resources and potentially straying from our 
core expertise and responsibilities into areas already tasked to 
others.
—————————————————————————

    The extent of capitalization and reach of financial reporting 
were decided years ago and are not the subject of today’s Proposal. 
Rather, today we consider, primarily, fixing issues that arose when 
implementing the capital and financial reporting rules,7 and 
secondarily, miscellaneous technical changes to make the rules more 
workable.
—————————————————————————

    7 During that time, staff worked to develop processes, 
procedures, and forms to accept the financial reports and 
notifications required by the capital and financial reporting rules. 
In so doing, CFTC staff received several compliance related 
questions, and as a result, issued eight staff letters, all 
available at the Commission’s website, www.cftc.gov: CFTC Letter 
Numbers 21-15 (June 29, 2021); 21-18 (Aug. 31, 2021); 21-20 (Sept. 
30, 2021); 21-21 (Sept. 30, 2021); 21-22 (Sept. 30, 2021); 21-23 
(Sept. 30, 2021); 22-01 (Jan. 5, 2022); 22-02 (Jan. 5, 2022).
—————————————————————————

    I support the entire Proposal, but will focus my comments on the 
codification of: (1) CFTC Staff Interpretative Letter No. 21-15 for 
commercial swap dealers and major swap participants electing the 
Tangible Net Worth Capital Approach; 8 and (2) the time-limited, 
no-action relief in CFTC Letter No. 21-18 9 regarding financial 
reporting requirements for bank swap dealers and major swap 
participants.10
—————————————————————————

    8 CFTC Letter No. 21-15 (June 29, 2021), https://www.cftc.gov/csl/21-15/download.
    9 Staff extended the relief in CFTC Letter No. 21-18 until the 
earlier of October 6, 2025 or the adoption of any revised financial 
reporting requirements for bank swap dealers and major swap 
participants under Regulation 23.105(p). CFTC Letter No. 23-11 (July 
10, 2023), available at https://www.cftc.gov/csl/23-11/download.
    10 CFTC Letter No. 21-18 (Aug. 31, 2021), https://www.cftc.gov/csl/21-18/download. Bank swap dealers and major swap 
participants have limited financial reporting obligations, 
recognizing that prudential regulators have an obligation to impose 
their capital requirements and are primarily responsible for 
monitoring bank swap dealer and major swap participant capital under 
the CEA. 7 U.S.C. 6s(e)(2)(i).
—————————————————————————

    Before I begin, I want to draw attention to a bigger issue 
relating to capital for the coming year. The broad impacts of the 
Basel III Endgame are being widely reported and discussed,11 
including impact to CFTC swap dealers and major swap 
participants.12 I am deeply concerned about this issue for our 
markets, which is why I expect that under my sponsorship, the Global 
Markets Advisory Committee (GMAC) will work on offering actionable 
recommendations for the Commission in this area. I encourage 
everyone to watch the presentation made on the subject at the recent 
November 6th meeting via the meeting’s archived webcast,13 and 
look forward to working with the GMAC and all of you on the issue in 
2024.
—————————————————————————

    11 Recent coverage has focused on what the Federal Reserve 
Board supports and could look to do. Victoria Guida, “Fed’s Waller: 
Support for Final Basel Rule `a Possibility’ ” PoliticoPro (Nov. 
28, 2023).
    12 Luke Clancy, “US Basel Endgame Hits Clearing with Op Risk 
Capital Charges” Risk.net (Sept. 25, 2023), https://www.risk.net/regulation/7957815/us-basel-endgame-hits-clearing-with-op-risk-capital-charges.
    13 The CFTC maintains the archived webcast at: https://www.cftc.gov/PressRoom/Events/opaeventgmac110623.
—————————————————————————

A. Codifying CFTC Letter No. 21-15

    Nonbank swap dealers and major swap participants can elect one 
of three approaches to calculating their regulatory capital.14 One 
option allows certain qualifying nonbank swap dealers and major swap 
participants to use a regulatory capital approach that is based on 
the firm’s tangible net worth.15 Generally, these nonbank swap 
dealers and major swap participants have to be “predominantly 
engaged in non-financial activities” and maintain positive tangible 
net worth according to U.S. generally accepted accounting practices 
(GAAP) at all times.16
—————————————————————————

    14 17 CFR 23.101.
    15 17 CFR 23.101(a)(2).
    16 Id.
—————————————————————————

    When the rules were being implemented, nonbank swap dealers 
identified three problems: (1) the rule’s preamble expanded the 
definition of “predominantly engaged in financial activities” to 
permit these nonbank swap dealers and major swap participants to 
meet the regulation’s tangible net worth test directly or through 
its ultimate consolidated parent entity, but the text of regulation 
Sec.  23.100 was unclear about it; (2) regulation Sec.  23.105(b) 
allowed books and records to be maintained in accordance with 
International Financial Reporting Standards (IFRS) but the 
“tangible net worth” definition in regulation Sec.  23.100 only 
referenced U.S. GAAP; and (3) there was an inconsistency in the 
timelines of certain financial reports required by regulation Sec.  
23.105(l).17
—————————————————————————

    17 CFTC Letter No. 21-15.
—————————————————————————

    To fix these issues, the Commission is proposing to adopt the 
remedies provided in Letter No. 21-15: revise the definitions of 
“tangible net worth” and “predominantly engaged in non-financial 
activities” and regulation Sec.  23.105 to clarify the test can be 
applied at the parent or entity level, as well as using U.S. GAAP or 
IFRS; and amend regulation Sec.  23.105(l) to clarify that position 
and other related exposure reporting must be

[[Page 2581]]

made at the same frequency as financial reporting, which in this 
instance is quarterly.

B. Codifying CFTC Letter No. 21-18

    Bank swap dealers and major swap participants must file 
unaudited quarterly financial information with the CFTC within 30 
calendar days of the end of their fiscal quarter.18 The 
information should be submitted via the specific forms in Appendix C 
to subpart E of part 23. The Commission intended that these forms 
would be identical to those filed by banks with their prudential 
regulator. However, when the capital and financial reporting rules 
were being implemented, it became evident that there were some 
differences in the forms, as well as with the timelines for filing.
—————————————————————————

    18 17 CFR 23.105(p)(2). The required financial information 
consists of a statement of financial condition, a statement of 
regulatory capital, and a schedule of the aggregate positions in 
security-based swaps, mixed swaps, swaps, and other derivatives.
—————————————————————————

    Therefore, CFTC Letter No. 21-18 let bank swap dealers and major 
swap participants provide home country regulator reports and 
comparable schedules on the prudential regulators’ timeline; foreign 
bank swap dealers and major swap participants provide home country 
regulator balance sheets and statements of regulatory capital 
information as long as they are in English, USD, and within 15 days 
of filing with home country regulator; and SEC dually-registered 
foreign bank swap dealers and major swap participants file 
comparable SEC approved financial reports and schedules.
    To fix these issues, the Commission is proposing to adopt the 
remedies provided in CFTC Letter No. 21-18: amend regulation Sec.  
23.105(p) to allow foreign bank swap dealers and major swap 
participants to file the applicable financial reporting within 90 
days of the end of the financial reporting period; accept balance 
sheet and regulatory capital schedules under prudential regulator 
reports for U.S. bank swap dealers and major swap participants; and 
to accept the filing of such schedules at the same time as filed 
with prudential regulators. For foreign swap dealers, the Commission 
is proposing to permit the filing of a balance sheet and statement 
of regulatory capital schedules in the format provided to their home 
country regulator, as long as they are in English and converted to 
USD, and filed no later than 90 days following the reporting period 
end date.
    I support this rule because codifying well-tailored relief helps 
provide market certainty while avoiding imposing unnecessary burdens 
and creating compliance complications. I also support this rule 
because the Commission does so while also continuing to respect the 
differences between our rules and those of the other regulators 
overseeing swap dealers on capital. It is a laudable achievement. I 
again commend staff in the Market Participants Division for their 
hard work on this rule, and look forward to reviewing the comments.

[FR Doc. 2023-28649 Filed 1-11-24; 8:45 am]
BILLING CODE 6351-01-P