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October 11, 2022


Better Markets filed a comment letter in response to the Commodity Futures Trading Commission’s proposed order providing for the conditional comparability of substituted compliance for nonbank swap dealers organized and domiciled in Japan.

Why It Matters. The 2008 financial crisis was catastrophic for our financial markets, our economy, and tens of millions of American families. In monetary terms, it destroyed more than $20 trillion in GDP. And the human toll resulting from millions of home foreclosures, deep and prolonged unemployment and underemployment, and massive loss of wealth is incalculable, and it continues to be felt today. In response, Congress passed the Dodd-Frank Act which included comprehensive and critical reforms to the oversight of the derivative markets.  Those reforms included minimum capital requirements to ensure the stability of nonbank swap dealers and financial reporting obligations to ensure transparency and regulatory oversight. The Financial Services Agency of Japan has requested a determination that its capital and financial reporting requirements applicable to nonbank swap dealers domiciled in Japan are comparable to the capital and financial reporting requirements applicable to nonbank swap dealers under the Commodities Exchange Act.  Such a determination would allow those Japanese swap dealers to comply with the capital and reporting requirements under the CEA through compliance with the claimed corresponding requirements under Japanese law. The CFTC proposes to issue the comparability determination order, subject to an extensive array of conditions.

What We Said. The CFTC used a “principles-based, holistic approach that focuses on whether the applicable foreign jurisdiction’s capital and financial reporting requirements achieve comparable outcomes to the corresponding CFTC requirements.” As a threshold matter, this approach is insufficiently rigorous, leaving far too much room for inaccurate and unwarranted comparability determinations. However, even under this vague and inherently speculative test, it is clear that the FSA capital and financial reporting requirements for nonbank SDs do not satisfy the test for an order of substituted compliance because the FSA regulatory framework governing capital and financial reporting is not comparable to U.S. requirements. This conclusion is supported by the CFTC’s proposed imposition of numerous significant conditions that it has deemed necessary to compensate for the acknowledged obvious gaps in the FSA framework.

Notably at issue are the capital requirements applicable to nonbank swap dealers, perhaps the single most important pillar among the financial reforms adopted in the aftermath of the 2008 financial crisis. The adequacy of those capital requirements, both in the U.S. and in other countries, is critical to preventing another crisis like the one that engulfed the U.S. and the world just a decade and a half ago. Moreover, this is the first time the Commission is formally applying its substituted compliance framework to the capital rules. Setting the right precedent, one that ensures the application of robust capital requirements to foreign swap dealers, is essential and vital to the protection of the American people.

Bottom Line. The CFTC’s proposed order does not provide adequate support for an affirmative determination of comparability between the U.S. and Japan capital and financial reporting regimes. In fact, based upon the current record, the capital and financial reporting requirements adopted in Japan do not appear comparable to those under the CEA. Absent further disclosure, specifically relating to the treatment of capital between the two regimes, Better Markets believes the proposed order cannot be granted consistent with the law.

Read our full Comment Letter here or click the button below.


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