Certain Entity-Level Requirements Notice Posted in Federal Register
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Comparability Determination for
A Notice by the
Action
Notice Of Comparability Determination For Certain Requirements Under The Laws Of Japan.
Summary
The following is the analysis and determination of the
DATES:
Effective Date: This determination will become effective immediately upon publication in the
FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
I. Introduction
On
In addition to the Guidance, on
On
II. Background
On
Section 722(d) of the Dodd-Frank Act amended the CEA by adding section 2(i), which provides that the swap provisions of the CEA (including any CEA rules or regulations) apply to cross-border activities when certain conditions are met, namely, when such activities have a "direct and significant connection with activities in, or effect on, commerce of
To provide guidance as to the Commission's views regarding the scope of the cross-border application of Title VII of the Dodd-Frank Act, the Commission set forth in the Guidance its interpretation of the manner in which it believes that Title VII's swap provisions apply to activities outside the U.S. pursuant to section 2(i) of the CEA. Among other matters, the Guidance generally described the policy and procedural framework under which the Commission would consider a substituted compliance program with respect to Commission regulations applicable to entities located outside the U.S. Specifically, the Commission addressed a recognition program where compliance with a comparable regulatory requirement of a foreign jurisdiction would serve as a reasonable substitute for compliance with the attendant requirements of the CEA and the Commission's regulations. With respect to the standards forming the basis for any determination of comparability ("comparability determination" or "comparability finding"), the Commission stated:
In evaluating whether a particular category of foreign regulatory requirement(s) is comparable and comprehensive to the applicable requirement(s) under the
Upon a comparability finding, consistent with CEA section 2(i) and comity principles, the Commission's policy generally is that eligible entities may comply with a substituted compliance regime, subject to any conditions the Commission places on its finding, and subject to the Commission's retention of its examination authority and its enforcement authority.10
In this regard, the Commission notes that a comparability determination cannot be premised on whether an SD or MSP must disclose comprehensive information to its regulator in its home jurisdiction, but rather on whether information relevant to the Commission's oversight of an SD or MSP would be directly available to the Commission and any U.S. prudential regulator of the SD or MSP.11 The Commission's direct access to the books and records required to be maintained by an SD or MSP registered with the Commission is a core requirement of the CEA [12] and the Commission's regulations, [13] and is a condition to registration. [14]
III. Regulation of SDs and MSPs in
As represented to the Commission by the applicants, swap activities in
These requirements supplement the requirements of the Banking Act and FIEA with a more proscriptive direction as to the particular structural features or responsibilities that internal compliance functions must maintain.
In general, banks are subject to the Banking Act, relevant laws and regulations for banks, Supervisory Guidelines for banks, and Inspection Manual for banks, while FIBOs are subject to the FIEA, relevant laws and regulations for FIBOs, Supervisory Guidelines for FIBOs, and Inspection Manual for FIBOs.
Pursuant to Article 29 of the FIEA, any person that engages in trade activities that constitute "Financial Instruments Business"--which, among other things, includes over-the-counter transactions in derivatives ("OTC derivatives") or intermediary, brokerage (excluding brokerage for clearing of securities) or agency services therefor [19] --must register under the FIEA as a FIBO. Banks that conduct specified activities in the course of trade, including OTC derivatives must register under the FIEA as RFIs pursuant to Article 33-2 of the FIEA. Banks registered as RFIs are required to comply with relevant laws and regulations for FIBOs regarding specified activities. Failure to comply with any relevant laws and regulations, Supervisory Guidelines or Inspection Manuals would subject the applicant to potential sanctions or corrective measures.
The applicants are each registered in
IV. Comparable and Comprehensiveness Standard
The Commission's comparability analysis will be based on a comparison of specific foreign requirements against the specific related CEA provisions and Commission regulations as categorized and described in the Guidance. As explained in the Guidance, within the framework of CEA section 2(i) and principles of international comity, the Commission may make a comparability determination on a requirement-by-requirement basis, rather than on the basis of the foreign regime as a whole. [21] In making its comparability determinations, the Commission may include conditions that take into account timing and other issues related to coordinating the implementation of reform efforts across jurisdictions. [22]
In evaluating whether a particular category of foreign regulatory requirement(s) is comparable and comprehensive to the corollary requirement(s) under the
- The comprehensiveness of those requirement(s),
- The scope and objectives of the relevant regulatory requirement(s),
- The comprehensiveness of the foreign regulator's supervisory compliance program, and
- The home jurisdiction's authority to support and enforce its oversight of the registrant. [23]
In making a comparability determination, the Commission takes an "outcome-based" approach. An "outcome-based" approach means that when evaluating whether a foreign jurisdiction's regulatory requirements are comparable to, and as comprehensive as, the corollary areas of the
In doing its comparability analysis the Commission may determine that no comparability determination can be made [25] and that the non-U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to its foreign branches, or non-registrant, to the extent applicable under the Guidance, may be required to comply with the
The starting point in the Commission's analysis is a consideration of the regulatory objectives of the foreign jurisdiction's regulation of swaps and swap market participants. As stated in the Guidance, jurisdictions may not have swap specific regulations in some areas, and instead have regulatory or supervisory regimes that achieve comparable and comprehensive regulation to the Dodd-Frank Act requirements, but on a more general, entity-wide, or prudential, basis. [26] In addition, portions of a foreign regulatory regime may have similar regulatory objectives, but the means by which these objectives are achieved with respect to swaps market activities may not be clearly defined, or may not expressly include specific regulatory elements that the Commission concludes are critical to achieving the regulatory objectives or outcomes required under the CEA and the Commission's regulations. In these circumstances, the Commission will work with the regulators and registrants in these jurisdictions to consider alternative approaches that may result in a determination that substituted compliance applies. [27]
Finally, the Commission will generally rely on an applicant's description of the laws and regulations of the foreign jurisdiction in making its comparability determination. The Commission considers an application to be a representation by the applicant that the laws and regulations submitted are in full force and effect, that the description of such laws and regulations is accurate and complete, and that, unless otherwise noted, the scope of such laws and regulations encompasses the swaps activities [28] of SDs and MSPs [29] in the relevant jurisdictions. [30] Further, as stated in the Guidance, the Commission expects that an applicant would notify the Commission of any material changes to information submitted in support of a comparability determination (including, but not limited to, changes in the relevant supervisory or regulatory regime) as, depending on the nature of the change, the Commission's comparability determination may no longer be valid. [31]
The Guidance provided a detailed discussion of the Commission's policy regarding the availability of substituted compliance [32] for the Internal Business Conduct Requirements. [33]
V. Supervisory Arrangement
In the Guidance, the Commission stated that, in connection with a determination that substituted compliance is appropriate, it would expect to enter into an appropriate memorandum of understanding ("MOU") or similar arrangement [34] with the relevant foreign regulator(s). Although existing arrangements would indicate a foreign regulator's ability to cooperate and share information, "going forward, the Commission and relevant foreign supervisor(s) would need to establish supervisory MOUs or other arrangements that provide for information sharing and cooperation in the context of supervising [SDs] and MSPs." [35]
The Commission is in the process of developing its registration and supervision regime for provisionally-registered SDs and MSPs. This new initiative includes setting forth supervisory arrangements with authorities that have joint jurisdiction over SDs and MSPs that are registered with the Commission and subject to U.S. law. Given the developing nature of the Commission's regime and the fact that the Commission has not negotiated prior supervisory arrangements with certain authorities, the negotiation of supervisory arrangements presents a unique opportunity to develop close working relationships between and among authorities, as well as highlight any potential issues related to cooperation and information sharing.
Accordingly, the Commission is negotiating such a supervisory arrangement with each applicable foreign regulator of an SD or MSP. The Commission expects that the arrangement will establish expectations for ongoing cooperation, address direct access to information, [36] provide for notification upon the occurrence of specified events, memorialize understandings related to on-site visits, [37] and include protections related to the use and confidentiality of non-public information shared pursuant to the arrangement.
These arrangements will establish a roadmap for how authorities will consult, cooperate, and share information. As with any such arrangement, however, nothing in these arrangements will supersede domestic laws or resolve potential conflicts of law, such as the application of domestic secrecy or blocking laws to regulated entities.
VI. Comparability Determination and Analysis
The following section describes the requirements imposed by specific sections of the CEA and the Commission's regulations for the Internal Business Conduct Requirements that are the subject of this comparability determination, and the Commission's regulatory objectives with respect to such requirements. Immediately following a description of the requirement(s) and regulatory objective(s) of the specific Internal Business Conduct Requirements that the applicants submitted for a comparability determination, the Commission provides a description of the foreign jurisdiction's comparable laws, regulations, or rules and whether such laws, regulations, or rules meet the applicable regulatory objective.
The Commission's determinations in this regard and the discussion in this section are intended to inform the public of the Commission's views regarding whether the foreign jurisdiction's laws, regulations, or rules may be comparable and comprehensive as those requirements in the Dodd-Frank Act (and Commission regulations promulgated thereunder) and therefore, may form the basis of substituted compliance. In turn, the public (in the foreign jurisdiction, in
As was stated in the Guidance, the Commission recognizes the complex and dynamic nature of the global swap market and the need to take an adaptable approach to cross-border issues, particularly as it continues to work closely with foreign regulators to address potential conflicts with respect to each country's respective regulatory regime. In this regard, the Commission may review, modify, or expand the determinations herein in light of comments received and future developments.
A. Chief Compliance Officer (section 3.3).
Commission Requirement: Implementing section 4s(k) of the CEA, Commission regulation 3.3 generally sets forth the following requirements for SDs and MSPs:
- An SD or MSP must designate an individual as Chief Compliance Officer ("CCO");
- The CCO must have the responsibility and authority to develop the regulatory compliance policies and procedures of the SD or MSP;
- The CCO must report to the board of directors or the senior officer of the SD or MSP;
- Only the board of directors or a senior officer may remove the CCO;
- The CCO and the board of directors must meet at least once per year;
- The CCO must have the background and skills appropriate for the responsibilities of the position;
- The CCO must not be subject to disqualification from registration under sections 8a(2) or (3) of the CEA;
- Each SD and MSP must include a designation of a CCO in its registration application;
- The CCO must administer the regulatory compliance policies of the SD or MSP;
- The CCO must take reasonable steps to ensure compliance with the
- The CCO must establish procedures for detecting and remediating non-compliance issues;
- The CCO must annually prepare and sign an "annual compliance report" containing: (i) A description of policies and procedures reasonably designed to ensure compliance; (ii) an assessment of the effectiveness of such policies and procedures; (iii) a description of material non-compliance issues and the action taken; (iv) recommendations of improvements in compliance policies; and (v) a certification by the CCO or chief executive officer that, to the best of such officer's knowledge and belief, the annual report is accurate and complete under penalty of law; and
- The annual compliance report must be furnished to the CFTC within 90 days after the end of the fiscal year of the SD or MSP, simultaneously with its annual financial condition report.
Regulatory Objective: The Commission believes that compliance by SDs and MSPs with the CEA and the Commission's rules greatly contributes to the protection of customers, orderly and fair markets, and the stability and integrity of the market intermediaries registered with the Commission. The Commission expects SDs and MSPs to strictly comply with the CEA and the Commission's rules and to devote sufficient resources to ensuring such compliance. Thus, through its CCO rule, the Commission seeks to ensure firms have designated a qualified individual as CCO that reports directly to the board of directors or the senior officer of the firm and that has the independence, responsibility, and authority to develop and administer compliance policies and procedures reasonably designed to ensure compliance with the
Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in
The Banking Act, FIEA, Order for Enforcement, Cabinet Office Ordinance, Supervisory Guidelines and Inspection Manuals for banks and FIBOs, collectively, require each bank and FIBO to:
- Designate an individual to serve as a CCO in its registration application as a bank/FIBO;
- Provide the CCO with the responsibility and authority to develop the regulatory compliance policies and procedures of the bank/FIBO;
- Have the CCO report to the board of directors of the bank/FIBO;
- Ensure the CCO has the background and skills appropriate for the position;
- Ensure the CCO is not disqualified from registration; [38]
- Have the CCO administer the regulatory compliance policies of the bank/FIBO;
- Have the CCO take reasonable steps to ensure compliance and resolve conflicts of interest for the bank/FIBO;
- Have the CCO detect and remediate non-compliance issues for the bank/FIBO;
- Report regulatory compliance status to the board of directors as necessary and appropriate on behalf of the bank/FIBO; and
- Submit an annual business report to
Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to section 3.3 by seeking to ensure firms have designated a qualified individual as the compliance officer that reports directly to a sufficiently senior function of the firm and that has the independence, responsibility, and authority to develop and administer compliance policies and procedures reasonably designed to ensure compliance with the
Based on the foregoing and the representations of the applicants, the Commission hereby determines that the CCO requirements of the Japanese standards specified above are comparable to and as comprehensive as section 3.3, with the exception of section 3.3(f) concerning certifying and furnishing an annual compliance report to the Commission.
Notwithstanding that the Commission has not determined that the requirements of
B. Risk Management Duties (sections 23.600--23.609)
Section 4s(j) of the CEA requires each SD and MSP to establish internal policies and procedures designed to, among other things, address risk management, monitor compliance with position limits, prevent conflicts of interest, and promote diligent supervision, as well as maintain business continuity and disaster recovery programs. [39] The Commission adopted regulations 23.600, 23.601, 23.602, 23.603, 23.605, and 23.606 to implement the statute. [40] The Commission also adopted regulation 23.609, which requires certain risk management procedures for SDs or MSPs that are clearing members of a derivatives clearing organization ("DCO"). [41] Collectively, these requirements help to establish a robust and comprehensive internal risk management program for SDs and MSPs with respect to their swaps activities, [42] which is critical to effective systemic risk management for the overall swaps market. In making its comparability determination with regard to these risk management duties, the Commission will consider each regulation individually. [43]
1.
Commission Requirement: Implementing section 4s(j)(2) of the CEA, Commission regulation 23.600 generally requires that:
- Each SD or MSP must establish and enforce a risk management program consisting of a system of written risk management policies and procedures designed to monitor and manage the risks associated with the swap activities of the firm, including without limitation, market, credit, liquidity, foreign currency, legal, operational, and settlement risks, and furnish a copy of such policies and procedures to the CFTC upon application for registration and upon request;
- The SD or MSP must establish a risk management unit independent from the business trading unit;
- The risk management policies and procedures of the SD or MSP must be approved by the firm's governing body;
- Risk tolerance limits and exceptions therefrom must be reviewed and approved quarterly by senior management and annually by the governing body;
- The risk management program must have a system for detecting breaches of risk tolerance limits and alerting supervisors and senior management, as appropriate;
- The risk management program must account for risks posed by affiliates and be integrated at the consolidated entity level;
- The risk management unit must provide senior management and the governing body with quarterly risk exposure reports and upon detection of any material change in the risk exposure of the SD or MSP;
- Risk exposure reports must be furnished to the CFTC within five business days following provision to senior management;
- The risk management program must have a new product policy for assessing the risks of new products prior to engaging in such transactions;
- The risk management program must have policies and procedures providing for trading limits, monitoring of trading, processing of trades, and separation of personnel in the trading unit from personnel in the risk management unit; and
- The risk management program must be reviewed and tested at least annually and upon any material change in the business of the SD or MSP.
Regulatory Objective: Through the required system of risk management, the Commission seeks to ensure that firms are adequately managing the risks of their swaps activities to prevent failure of the SD or MSP, which could result in losses to counterparties doing business with the SD or MSP, and systemic risk more generally. To this end, the Commission believes the risk management program of an SD or MSP must contain at least the following critical elements:
- Identification of risk categories;
- Establishment of risk tolerance limits for each category of risk and approval of such limits by senior management and the governing body;
- An independent risk management unit to administer a risk management program; and
- Periodic oversight of risk exposures by senior management and the governing body.
Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in
III-2-3-1-3(1) and III-3-7-1-2(1)(ii) of the Supervisory Guidelines and Inspection Manuals for banks and III-1(1)(ii) of the Supervisory Guideline for FIBOs generally require the board of directors of a bank/FIBO to establish a comprehensive risk management program aligned with the bank's/FIBO's strategic target. The risk management program required by the Supervisory Guidelines and Inspectional Manuals must be designed to monitor and manage risk, including without limitation, market (including foreign currency), credit, liquidity, legal, operational, and settlement risks. [44]
The review of a bank's/FIBO's overall risk management program must take into account how frequently the risk management division reports to the board of directors and whether reports are also filed on an as-needed basis. Pursuant to Article 19 of the Banking Act and Article 46-3 of the FIEA, a bank/FIBO must submit to the
Pursuant to the above Supervisory Guidelines and Inspection Manuals, a bank/FIBO must arrange for the approval of new products in a manner befitting the scale and nature of its business. III-1(1)(iv) of the Supervisory Guidelines for FIBOs and III-2-3-1-3(5)(6) of the Supervisory Guidelines for banks require JSFA to evaluate whether a bank's/FIBO's risk management program established a sufficient internal audit system. As part of this oversight, a bank/FIBO must receive an external audit by corporate auditors at least once a year.
Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to section 23.600 by requiring a system of risk management that seeks to ensure that firms are adequately managing the risks of their swaps activities to prevent failure of the SD or MSP, which could result in losses to counterparties doing business with the SD or MSP, and systemic risk more generally. Specifically, the Commission finds that the Japanese standards specified above comprehensively require SDs and MSPs to establish risk management programs containing the following critical elements:
- Identification of risk categories;
- Establishment of risk tolerance limits for each category of risk and approval of such limits by senior management and the governing body;
- An independent risk management unit to administer a risk management program; and
- Periodic oversight of risk exposures by senior management and the governing body.
Based on the foregoing and the representations of the applicants, the Commission hereby determines that the risk management program requirements of
Notwithstanding that the Commission has not determined that the requirements of
2. Monitoring of Position Limits (section 23.601)
Commission Requirement: Implementing section 4s(j)(1) of the CEA, Commission regulation 23.601 requires each SD or MSP to establish and enforce written policies and procedures that are reasonably designed to monitor for, and prevent violations of, applicable position limits established by the Commission, a designated contract market ("DCM"), or a swap execution facility ("SEF"). [45] The policies and procedures must include an early warning system and provide for escalation of violations to senior management (including the firm's governing body).
Regulatory Objective: Generally, position limits are implemented to ensure market integrity, fairness, orderliness, and accurate pricing in the commodity markets. Commission regulation 23.601 thus seeks to ensure that SDs and MSPs have established the necessary policies and procedures to monitor the trading of the firm to prevent violations of applicable position limits established by the Commission, a DCM, or a SEF. As part of its Risk Management Program, section 23.601 is intended to ensure that established position limits are not breached by the SD or MSP.
Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in
IV-2-3 of the Supervisory Guidelines for FIBOs and III-2-3-3-2(2)(vii) and (viii) of the Supervisory Guideline for banks of the Inspection Manuals generally require a bank/FIBO to establish internal position limits, risk limits, and loss limits for all financial products, including derivatives. The policies established by the bank/FIBO must provide a system to provide "alarm points" to the board of directors. Moreover, in accordance with Article 29-2 of the Business Rules of
The applicants represent that the position limits set internally by banks and FIBOs may not exceed position limits set by applicable law, including position limits set by the Commission, SEFs, or DCMs. [46]
Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to section 23.601 by requiring SDs and MSPs to establish necessary policies and procedures to monitor the trading of the firm to prevent violations of applicable position limits established by applicable laws and regulations, including those of the Commission, a DCM, or a SEF. Specifically, the Commission finds that the Japanese standards specified above, while not specific to the issue of position limit compliance, nevertheless comprehensively require SDs and MSPs to monitor for regulatory compliance generally, which includes monitoring for compliance with position limits set pursuant to applicable law and the responsibility of senior management (including the board of directors) for such compliance.
Based on the foregoing and the representations of the applicants, the Commission hereby determines that the compliance monitoring requirements of the Japanese standards, as specified above, are comparable to and as comprehensive as section 23.601. For the avoidance of doubt, the Commission notes that this determination may not be relied on to relieve an SD or MSP from its obligation to strictly comply with any applicable position limit established by the Commission, a DCM, or a SEF.
3. Diligent Supervision (section 23.602)
Commission Requirement: Commission regulation 23.602 implements section 4s(h)(1)(B) of the CEA and requires each SD and MSP to establish a system to diligently supervise all activities relating to its business performed by its partners, members, officers, employees, and agents. The system must be reasonably designed to achieve compliance with the CEA and CFTC regulations. Commission regulation 23.602 requires that the supervisory system must specifically designate qualified persons with authority to carry out the supervisory responsibilities of the SD or MSP for all activities relating to its business as an SD or MSP.
Regulatory Objective: The Commission's diligent supervision rule seeks to ensure that SDs and MSPs strictly comply with the CEA and the Commission's rules. To this end, through section 23.602, the Commission seeks to ensure that each SD and MSP not only establishes the necessary policies and procedures that would lead to compliance with the
Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in
III-1-2-1-(2)(xi) and III-1-2-1-(2)(xiii) of the Supervisory Guideline for banks, the Checklist for Business Management (Governance) of the Bank Inspection Manual, III-1(1)(ii)C and IV-1-2-(1)(i) of the Supervisory Guideline for FIBOs, and II-1-1-3(3) and II-2-1 of the FIBO Inspection Manual generally require a bank/FIBO to ensure appropriate officers and employees are in place in order to properly conduct business, and to establish legal compliance and internal control systems.
Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to section 23.602 because such standards seek to ensure that SDs and MSPs strictly comply with applicable law, which would include the CEA and the Commission's regulations. [47]
Through the Supervisory Guidelines and Inspection Manuals,
Based on the foregoing and the representations of the applicants, the Commission hereby determines that the internal supervision requirements set forth in the Japanese standards, as specified above, are comparable to and as comprehensive as section 23.602.
4. Business Continuity and Disaster Recovery (section 23.603)
Commission Requirement: To ensure the proper functioning of the swaps markets and the prevention of systemic risk more generally, Commission regulation 23.603 requires each SD and MSP, as part of its risk management program, to establish a business continuity and disaster recovery plan that includes procedures for, and the maintenance of, back-up facilities, systems, infrastructure, personnel, and other resources to achieve the timely recovery of data and documentation and to resume operations generally within the next business day after the disruption.
Regulatory Objective: Commission regulation 23.603 is intended to ensure that any market disruption affecting SDs and MSPs, whether caused by natural disaster or otherwise, is minimized in length and severity. To that end, this requirement seeks to ensure that entities adequately plan for disruptions and devote sufficient resources capable of carrying out an appropriate plan within one business day, if necessary.
Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in
IV-3-1-6 of the Supervisory Guideline for FIBOs and sections III-6-1 and III-6-2(2)(i)(iii)-(v) of the Supervisory Guideline for banks require a bank/FIBO to establish a crisis management manual and a business continuity and disaster recovery plan that include procedures for, and the maintenance of, back-up facilities, systems, infrastructure, personnel, and other resources to achieve the timely recovery of data and documentation and to resume operations.
Pursuant to III-8-2-(2)-(v) of the Supervisory Guideline for banks,
Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to section 23.603 because such standards seek to ensure that any market disruption affecting SDs and MSPs, whether caused by natural disaster or otherwise, is minimized in length and severity. To that end, the Commission finds that the Japanese standards specified above seek to ensure that entities adequately plan for disruptions and devote sufficient resources capable of carrying out an appropriate plan in a timely manner.
Based on the foregoing and the representations of the applicants, the Commission hereby determines that the business continuity and disaster recovery requirements of the Japanese standards, as specified above, are comparable to and as comprehensive as section 23.603.
5. Conflicts of Interest (section 23.605)
Commission Requirement: Section 4s(j)(5) of the
In addition, section 4s(j)(5) of the
- Whether to offer clearing services to a particular customer;
- Whether to accept a particular customer for clearing derivatives;
- Whether to submit a customer's transaction to a particular DCO;
- Whether to set or adjust risk tolerance levels for a particular customer; or
- Whether to set a customer's fees based on criteria other than those generally available and applicable to other customers.
Commission regulation 23.605(d)(2) generally requires each SD or MSP to create and maintain an appropriate informational partition between business trading units of the SD or MSP and clearing units of any affiliated clearing member of a DCO to reasonably ensure compliance with the Act and the prohibitions set forth in section 23.605(d)(1) outlined above.
The Commission observes that section 23.605(d) works in tandem with Commission regulation 1.71, which requires FCMs that are clearing members of a DCO and affiliated with an SD or MSP to create and maintain an appropriate informational partition between business trading units of the SD or MSP and clearing units of the FCM to reasonably ensure compliance with the Act and the prohibitions set forth in section 1.71(d)(1), which are the same as the prohibitions set forth in section 23.605(d)(1) outlined above.
Finally, section 23.605(e) requires that each SD or MSP have policies and procedures that mandate the disclosure to counterparties of material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a swap execution facility or designated contract market (DCM) or to clear a derivative through a DCO.
Regulatory Objective: Commission regulation 23.605(c) seeks to ensure that research provided to the general public by an SD or MSP is unbiased and free from the influence of the interests of an SD or MSP arising from the SD's or MSP's trading business.
In addition, the section 23.605(d) (working in tandem with section 1.71) seeks to ensure open access to the clearing of swaps by requiring that access to and the provision of clearing services provided by an affiliate of an SD or MSP are not influenced by the interests of an SD's or MSP's trading business.
Finally, section 23.605(e) seeks to ensure equal access to trading venues and clearinghouses, as well as orderly and fair markets, by requiring that each SD and MSP disclose to counterparties any material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a SEF or DCM, or to clear a derivative through a DCO.
Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in
Regulations Concerning the Handling of Analysts Reports have been developed by the JSDA to require JSDA members to appropriately manage the content of any unpublished analyst report that is considered to have a material impact on investors (to include the presentation of any conflicts) and to establish an appropriate compensation system to ensure the independence of the opinions of analysts.
More generally, FIEA and the Financial Instruments Business Ordinance require a FIBO/
The
Commission Determination: The Commission finds that the Japanese standards specified above with respect to conflicts of interest that may arise in producing or distributing research are generally identical in intent to section 23.605(c) because such standards seek to ensure that research provided to the general public by an SD is unbiased and free from the influence of the interests of an SD arising from the SD's trading business.
With respect to conflicts of interest that may arise in the provision of clearing services by an affiliate of an SD or MSP, the Commission further finds that although the general conflicts of interest prevention requirements under the Japanese standards specified above do not require with specificity that access to and the provision of clearing services provided by an affiliate of an SD or MSP not be improperly influenced by the interests of an SD's or MSP's trading business, such general requirements would require prevention and remediation of such improper influence when recognized or discovered. Thus such standards would ensure open access to clearing.
Finally, although not as specific as the requirements of section 23.605(e) (Undue influence on counterparties), the Commission finds that the general disclosure requirements of the Japanese standards specified above would ensure equal access to trading venues and clearinghouses by requiring that each SD and MSP disclose to counterparties any material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a SEF or DCM, or to clear a derivative through a DCO.
Based on the foregoing and the representations of the applicants, the Commission hereby determines that the requirements found in
Commission Requirement: Commission regulation 23.606 implements sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to disclose to the Commission, and an SD's or MSP's U.S. prudential regulator (if any) comprehensive information about its swap activities, and to establish and maintain reliable internal data capture, processing, storage, and other operational systems sufficient to capture, process, record, store, and produce all information necessary to satisfy its duties under the
Regulatory Objective: Commission regulation 23.606 seeks to ensure that each SD and MSP captures and maintains comprehensive information about their swap activities, and is able to retrieve and disclose such information to the Commission and its U.S. prudential regulator, if any, as necessary for compliance with the CEA and the Commission's regulations and for purposes of Commission oversight, as well as oversight by the SD's or MSP's U.S. prudential regulator, if any.
The Commission observes that it would be impossible to meet the regulatory objective of section 23.606 unless the required information is available to the Commission and any U.S. prudential regulator under the foreign legal regime. Thus, a comparability determination with respect to the information access provisions of section 23.606 would be premised on whether the relevant information would be available to the Commission and any U.S. prudential regulator of the SD or MSP, not on whether an SD or MSP must disclose comprehensive information to its regulator in its home jurisdiction.
Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in
Under the
III-3-3(6) of Supervisory Guideline for FIBOs states that each FIBO must maintain electronic media storage systems that can accommodate internal audits and be responsive to client referrals and questions. Moreover, III.1.(6) of the Checklist for Market Risk Management of the Bank Inspection Manual requires that records be readily available for reconciliation with trade tickets, etc.
III-3-10-2(3) (iv) of Supervisory Guideline for banks specifically requires banks to have the personnel and systems to respond in a timely and appropriate manner to inspections and supervision provided by overseas regulatory authorities. In view of maintaining direct dialog and smooth communications with the relevant overseas regulatory authorities, this provision ensures the establishment of a reporting system which enables timely and appropriate reporting.
Similarly, IV-5-2(i) of Supervisory Guideline for FIBOs would ensure the availability of information to a regulator promptly upon request. Under this provision, the
Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to section 23.606 because such standards seek to ensure that each SD and MSP captures and stores comprehensive information about their swap activities, and are able to retrieve and disclose such information as necessary for compliance with applicable law and for purposes of regulatory oversight.
In addition, the Commission finds that the Japanese standards specified above would ensure Commission access to the required books and records of SDs and MSPs by requiring personnel and systems necessary to respond in a timely and appropriate manner to inspections and supervision provided by overseas regulatory authorities.
Based on the foregoing and the representations of the applicants, the Commission hereby determines that the requirements of the Japanese standards with respect to the availability of information for inspection and disclosure, as specified above, are comparable to, and as comprehensive as, section 23.606.
7. Clearing Member Risk Management (section 23.609)
Commission Requirement: Commission regulation 23.609 generally requires each SD or MSP that is a clearing member of a DCO to:
- Establish risk-based limits based on position size, order size, margin requirements, or similar factors;
- Screen orders for compliance with the risk-based limits;
- Monitor for adherence to the risk-based limits intra-day and overnight;
- Conduct stress tests under extreme but plausible conditions of all positions at least once per week;
- Evaluate its ability to meet initial margin requirements at least once per week;
- Evaluate its ability to meet variation margin requirements in cash at least once per week;
- Evaluate its ability to liquidate positions it clears in an orderly manner, and estimate the cost of liquidation; and
- Test all lines of credit at least once per year.
Regulatory Objective: Through Commission regulation section 23.609, the Commission seeks to ensure the financial integrity of the markets and the clearing system, to avoid systemic risk, and to protect customer funds. Effective risk management by SDs and MSPs that are clearing members is essential to achieving these objectives. A failure of risk management can cause a clearing member to become insolvent and default to a DCO. Such default can disrupt the markets and the clearing system and harm customers.
Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in
III-2-3-2-1-2 (9) and (10)(i) of the Supervisory Guideline for banks and III.(8) and (9)(i) of the Checklist for Credit Risk Management of the Inspection Manual for banks generally require a bank to properly manage the credit risks of major counterparties to derivatives transactions, as well as the risks associated with the clearing of derivatives transactions with a central counterparty. More specifically, the Supervisory Guidelines for banks require a bank to properly manage the risks associated with cleared derivative transactions with central counterparties ("CCPs"), including the inherent risk of transactions with a CCP, the risk associated with material defects of regulations or supervisory schemes to which a CCP is subject, and the risk of loss of the bank's contribution to the default fund of a CCP.
IV-2-4 of the Supervisory Guideline for FIBOs and
The
The
The foregoing requirements apply to bank and FIBO risk management as clearing members.
In addition, if FIBOs/RFIs are clearing members of the JSCC, in accordance with the business rules of the JSCC, they are required to develop an appropriate structure for management of the risk of loss.
Finally, the
Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to section 23.609 because such standards seek to ensure the financial integrity of the markets and the clearing system, to avoid systemic risk, and to protect customer funds.
The Commission notes that the Japanese standards specified above are not as specific as section 23.609 with respect to ensuring that SDs and MSPs that are clearing members of a DCO establish detailed procedures and limits for clearing member risk management purposes. Nevertheless, the Commission finds that the general requirements under the Japanese standards, implemented in the context of clearing member risk management and pursuant to the representations of the
Based on the foregoing and the representations above, the Commission hereby determines that the clearing member risk management requirements of the Japanese standards specified above are comparable to and as comprehensive as section 23.609. C. Swap Data Recordkeeping (sections 23.201 and 23.203)
Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the CEA, and Commission regulation 23.201 generally require SDs and MSPs to retain records of each transaction, each position held, general business records (including records related to complaints and sales and marketing materials), records related to governance, financial records, records of data reported to SDRs, and records of real-time reporting data along with a record of the date and time the SD or MSP made such reports. Transaction records must be kept in a form and manner identifiable and searchable by transaction and counterparty.
Commission regulation 23.203, requires SDs and MSPs to maintain records of a swap transaction until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, and for a period of five years after such date. Records must be "readily accessible" for the first 2 years of the 5 year retention period (consistent with section 1.31).
The Commission notes that the comparability determination below with respect to sections 23.201 and 23.203 encompasses both swap data recordkeeping generally and swap data recordkeeping relating to complaints and marketing and sales materials in accordance with section 23.201(b)(3) and (4). [48]
Regulatory Objective: Through the Commission's regulations requiring SDs and MSPs to keep comprehensive records of their swap transactions and related data, the Commission seeks to ensure the effectiveness of the internal controls of SDs and MSPs, and transparency in the swaps market for regulators and market participants.
The Commission's regulations require SDs and MSPs to keep swap data in a level of detail sufficient to enable regulatory authorities to understand an SD's or MSP's swaps business and to assess its swaps exposure.
By requiring comprehensive records of swap data, the Commission seeks to ensure that SDs and MSPs employ effective risk management, and strictly comply with Commission regulations. Further, such records facilitate effective regulatory oversight.
The Commission observes that it would be impossible to meet the regulatory objective of sections 23.201 and 23.203 unless the required information is available
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