CFTC Proposes First Substituted Compliance Determination for Capital Requirements
The CFTC proposed an Order to provide substituted compliance for capital requirements applicable to nonbank swap dealers organized and domiciled in Japan.
The proposal is in response to an application from the Japan Financial Services Agency ("JFSA"), pursuant to CFTC Regulation 23.106 ("Substituted compliance for swap dealer's and major swap participant's capital and financial reporting"). The proposed Order highlights various differences between the JFSA regime and the CFTC capital regime, and relief is subject to a number of conditions, including a variety of reporting requirements.
The CFTC will be accepting comments on the proposed order until 60 days after publication in the Federal Register.
Commentary
The proposal is a positive development for non-U.S. non-bank dealers, and hopefully the sign of more to come.
Commissioner Christy Goldsmith Romero offered some pointed criticism for the proposal. Ms. Romero urged comment on whether the CFTC should impose further conditions on the type of assets that qualify as capital and whether a minimum requirement based on margin for uncleared swaps should be imposed. She also criticized the application of the rule to U.S. overseas affiliates.
This is a tricky aspect of these determinations. While inherently reasonable to recognize comparable regulatory schemes, competitive balances may shift based on rule distinctions across borders. Regulators can take note and determine whether any distinction is so significant as to impose U.S. policy. While Ms. Romero may be right that U.S. bank affiliates in Japan may have received some benefit from substituted compliance, it is also true that those firms have existing competitive imbalances where they operate, given the holding company capital overview from U.S. banking regulation.