March 22, 2024
Mr. Christopher Kirkpatrick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581

Re: Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Subject to Capital and Financial Reporting Requirements of the United Kingdom and Regulated by the United Kingdom Prudential Regulation Authority

Dear Mr. Kirkpatrick:

The Institute of International Bankers (“IIB”), International Swaps and Derivatives Association (“ISDA”) and Securities Industry and Financial Markets Association (“SIFMA”, and together with IIB and ISDA, the “Associations”)1 appreciate the opportunity to comment on the above-captioned notice by the Commodity Futures Trading Commission (“CFTC” or “Commission”) regarding an application submitted by the Associations on behalf of registered nonbank swap dealers2 (“nonbank SDs”) subject to capital and financial reporting requirements of the United Kingdom (“UK”), which are licensed as investment firms and designated for prudential supervision by the UK Prudential Regulation Authority (“PRA”) (“PRA-designated UK nonbank SDs”) requesting that the CFTC determine that they may comply with certain capital and financial reporting requirements under the Commodity Exchange Act (“CEA”) and Rules 23.101 and 23.105(d)–(e) thereunder (the “Commission Capital & Reporting Requirements”)3 via compliance with corresponding capital and financial reporting requirements of the UK PRA (the “UK PRA Capital & Reporting Requirements”), and the proposed order (the “UK PRA Order”) providing for the conditional substituted compliance in connection with the application (together, the “Proposal”).4

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

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

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

The Commission notes that “[t]he intent of the minimum capital requirement based on a percentage of the nonbank SD’s uncleared margin was to establish a minimum capital requirement that would help ensure that the nonbank SD meets all of its obligations as a SD to market participants, and to cover potential operational risk, legal risk, and liquidity risk in addition to the risks associated with its trading portfolio.”6 The Associations believe the UK PRA Capital & Reporting Requirements’ minimum capital levels are sound, reflect similar regulatory concerns and lead to comparable regulatory outcomes as the Commission Capital & Reporting Requirements.

The UK PRA’s capital framework imposes bank-like capital requirements that, consistent with the Basel Committee on Banking Supervision international framework for bank capital requirements, requires a PRA-designated UK nonbank SD to calculate the firm’s total risk exposure amount comprised of risk weighted on-balance sheet and offbalance sheet assets and exposures. The categories of risk charges include those reflecting market risk, credit risk, settlement risk, credit valuation adjustment risk of OTC derivatives, and operational risk. PRA-designated UK nonbank SDs are required to hold and maintain regulatory capital ratios expressed as a percentage of total risk exposure amount: (1) a common equity tier 1 capital equal to 2.5 percent of the firm’s total risk exposure, separate and independent of the common equity tier 1 capital used to meet the requirement within the 8 percent core capital requirement. Further, a PRA-designated nonbank SD may also be subject to firm specific countercyclical capital buffer requiring an additional amount of common equity tier 1 capital.

PRA-designated UK nonbank SDs that hold significant amounts of non-UK assets are also subject to a leverage ratio floor, which requires each firm to maintain tier 1 capital (aggregate common equity tier 1 capital and additional tier 1 capital) of at least 3.25 percent of on-balance sheet and off-balance sheet exposures without regard to risk weighting. In addition to the minimum leverage ratio of 3.25%, there are two buffers in the leverage ratio framework: the countercyclical leverage ratio buffer and the additional leverage ratio buffer to reflect systemic importance. These requirements are intended to prevent excessive leverage and complement the risk-based minimum capital requirements.

UK PRA capital requirements also impose separate liquidity requirements that are designed to ensure that each PRA-designated UK nonbank SD has sufficient liquidity to fund their operations over various time horizons, including making timely payments to customers and counterparties. Firms are required to hold sufficient liquidity to meet expected obligations under gravely stressed conditions for 30 days and to hold diverse stable instruments sufficient to meet long-term obligations under normal and stressed conditions. Further, they are required to maintain robust strategies, policies, processes, and systems for the identification of liquidity risk over appropriate time horizons, including intra-day.

In addition, the Bank of England, in its role as resolution authority, requires certain investment firms, including PRA-designated UK nonbank SDs to satisfy a firmspecific minimum requirement for own funds and eligible liabilities (“MREL”) if they meet certain requirements. The MREL requirement is separate from the minimum capital requirements imposed on PRA-designated UK nonbank SDs described above and is designed to ensure that firms subject to the requirement, maintain, at all times, sufficient eligible instruments to facilitate the implementation of the preferred resolution strategy. The MREL is intended to permit loss absorption, where appropriate, such that the PRAdesignated UK nonbank SD’s capital ratio could be restored to the level necessary for compliance with its capital requirement. The MREL is expressed as the sum of two components: the loss absorption amount, which is equal to a firm’s capital requirement plus its capital buffers and the recapitalization amount.

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

The Associations believe a similar analysis leads to the same answer in reference to the currently pending capital substituted applications for Japan, Mexico and the European Union (“EU”). As we noted in our responses to the Commission’s proposed orders and requests for comment in regard to those three capital frameworks, although they are not identical to the Commission’s and do not include an 8% of swap margin requirement, we support the finding that taken as a whole, they all achieve the same regulatory objective of ensuring nonbank SDs maintain sufficient capital to cover the full range of risks.7

II. Technical Comments on Notice Filing Conditions

In its proposed order, the Commission requires a PRA-designated UK nonbank SD to comply with certain specified UK laws and regulations, as well as enumerated conditions, to be able to rely on substituted compliance. Below, the Associations provide technical comments and recommendations regarding several of those conditions.

Condition 4 requires PRA-designated UK SDs to comply with the Banking Act 2009. As SIFMA highlighted in its October 5, 2023 letter, internal MREL requirements are set by the Bank of England under its MREL “policy for exercising its power to direct relevant persons to maintain a minimum requirement for own funds and eligible liabilities (MREL)under section 3A(4) and (4B) of the Banking Act 2009.”8 Because the reference to the Banking Act 2009 is included solely because it imposes MREL on the PRAdesignated nonbank SDs and, not in its entirety, we recommend refining the requirement to this specific point by adding as below “with regard to the minimum requirements for own funds and eligible liabilities.”

 

1 See Appendix for more information on the Associations.

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

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

4 See Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Subject to Capital and Financial Reporting Requirements of the United Kingdom and Regulated by the United Kingdom Prudential Regulation Authority, 89 Fed. Reg. 8026 (Feb 5, 2024).

5 See Id. At 8047.

6 See Id. At 8040.

7 See IIB, ISDA and SIFMA letter dated Oct. 7, 2022 in response to the Commission’s Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination From the Financial Services Agency of Japan, 87 Fed. Reg. 48092, (Aug. 8, 2022) (“Proposed Japan Order”); ISDA and SIFMA letter dated Feb. 13, 2023 in response to the Commission’s Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican Comision Nacional Bancaria y de Valores, 87 Fed. Reg. 76374 (Dec. 13, 2022) (“Proposed Mexico Order”); and IIB, ISDA and SIFMA letter dated Aug. 24, 2023 (“EU Capital Sub Comp Letter”) in response to the Commission’s Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Domiciled in the French Republic and Federal Republic of Germany and Subject to Capital and Financial Reporting Requirements of the European Union, 88 Fed. Reg. 41774 (June 27, 2023) (“Proposed EU Order”).