Public Statements & Remarks

Statement of Commissioner Kristin N. Johnson: Combatting Systemic Risk and Fostering Integrity of the Global Financial System Through Rigorous Standards and International Comity

January 24, 2024

I support the Commodity Futures Trading Commission’s (Commission or CFTC) issuance of the proposed conditional capital comparability determination order for comment (Proposed Comparability Determination) pursuant to Commission Regulation 23.106.[1] The Proposed Comparability Determination, if approved, will allow registered nonbank swap dealers (SDs) organized and domiciled in the United Kingdom (UK) and designated for prudential supervision by the UK Prudential Regulation Authority (PRA-designated non-bank SDs) to satisfy certain capital and financial reporting requirements under the Commodity Exchange Act (CEA) by complying with comparable capital and financial reporting requirements under UK laws and regulations.

It is imperative that we carefully review the capital and financial reporting requirements for PRA-designated non-bank SDs in a manner consistent with the Commission’s mandate under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to ensure that foreign swap activities that have a “direct and significant” effect on U.S. markets are subject to regulatory requirements as sufficiently robust as our own.[2]

In 2010, the Dodd-Frank Act amended the CEA to create a new regulatory framework for swaps, including adding Section 2(i) to address the cross-border application of the CEA’s swap provisions. In recognition of the value of global regulatory coordination in the swaps markets and international comity, the Commission in 2020 set out a framework for substituted compliance and comparability determinations for a given foreign jurisdiction that afforded “due consideration [to] international comity principles” while being “consistent with … the Commission’s interest in focusing its authority on potential significant risks to the U.S. financial system.”[3]

Sections 4s(e) and 4s(f) of the CEA instruct the Commission to impose capital requirements on non-bank SDs and financial condition reporting obligations on all registered SDs, which have been codified by the Commission.[4] These requirements aim to ensure the integrity of domestic and foreign entities operating in our markets, to facilitate the rapid identification and remediation of liquidity crises, and to mitigate the threat of systemic risks that may threaten the stability of domestic and global financial markets. As I previously stated:

The Commission’s capital and financial reporting requirements adopted pursuant to these sections of the CEA are critical to ensuring the safety and soundness of our markets by addressing and managing risks that arise from a firm’s operation as an SD. Ensuring necessary levels of capital, as well as accurate and timely reporting about financial conditions, helps to protect swap dealers and the broader financial markets ecosystem from shocks, thereby ensuring solvency and resiliency. This, in turn, protects the financial system as a whole, reducing the risk of contagion that could arise from uncleared swaps.  Financial reporting requirements work with the capital requirements by allowing the Commission to monitor and assess an SD’s financial condition, including compliance with minimum capital requirements. The Commission uses the information it receives pursuant to these requirements to detect potential risks before they materialize.

Capital adequacy and financial reporting are pillars of risk management oversight for any business, and, for firms operating in our markets, it is of the utmost importance that rules governing these risk management tools are effectively calibrated, continuously assessed, and fit for purpose.[5]

Systemic risks transcend national borders. Successful mitigation of systemic risks, therefore, requires careful, engaged collaboration.

I support acknowledging market participants’ compliance with the laws and regulations of their UK regulator when the requirements lead to an outcome that is comparable to the outcome of complying with the CFTC’s corresponding requirements. Mutual understanding and respect for partner regulators in other countries advances the Commission’s goal of setting a global standard for sound derivatives regulation, enhances market stability, and is also deeply rigorous, reflecting the Commission’s commitment to safe swaps markets.

The UK capital requirements for PRA-designated non-bank SDs are based on the same international standards as the Commission’s bank-based capital approach—the capital standards adopted by the Basel Committee on Banking Supervision (Basel Committee).[6] Members of the Basel Committee commit to follow, voluntarily, international regulatory standards or principles for banking regulation to achieve consistency and consensus across various jurisdictions. The Basel Committee finalized Basel III, an internationally agreed set of measures in response to the financial crisis of 2007-09, to strengthen the regulation, supervision, and risk management of banks.[7]

The concern with capital adequacy is well founded. During the financial crisis of 2007-09, we saw failures or near-failures of major banks and non-banks, which contributed to market turmoil and a recession in the real economy. Within a short period of time, a cascade of liquidity crises quickly followed the collapse or failure of Bear Stearns, Lehman Brothers, and Merrill Lynch and the conversion of Goldman Sachs’ and Morgan Stanley’s investments banks into bank holding companies to access funding from the Federal Reserve.

As the more recent banking failures indicate, weak or inadequate prudential regulations, including capital standards, can have catastrophic systemic risk implications. The Federal Reserve’s post-failure report found that SVB “failed its own internal liquidity stress tests and did not have workable plans to access liquidity in times of stress.”[8] These shortcomings ultimately proved fatal: SVB invested its uninsured deposits in long-term securities. As interest rates rose in 2022, the value of SVB’s investments fell. As SVB’s depositors learned of its increasingly fragile balance sheet, withdrawals increased, culminating in a run on the bank in March 2023. As Federal Reserve Vice Chair for Supervision Michael Barr has explained, SVB “failed because of a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk.”[9] He further noted that “this experience has emphasized why strong bank capital matters. While the proximate cause of SVB’s failure was a liquidity run, the underlying issue was concern about its solvency.”[10]

Just two days after the failure of SVB, the New York State bank regulator closed Signature Bank and placed it into receivership. Like SVB, Signature had experienced a run on deposits and was ultimately unable to meet its obligations, and also like SVB, over ninety percent of its deposits were uninsured.[11] The risk of contagion had become apparent, and there was clear evidence that the failure of a regional bank in which uninsured depositors faced losses could cause systemic disruption.

Revealing fractures, blindspots, and weaknesses in existing prudential regulatory frameworks designed to monitor and ensure the safety and soundness of banks and the banking system as a whole, SVB’s and Signature’s failures are timely reminders of the importance of bank capital. As I have previously noted in the context of other proposed capital comparability determinations made by the Commission, capital requirements play a critical role in fostering the safety and soundness of financial markets.[12] Strong bank capital ensures that banks have the financial resources to absorb unforeseen losses and that bank failures do not drain the deposit insurance funds or lead to bank runs, which protects taxpayers, protects the average American, and ensures the resilience and stability of our financial system.[13]

As global standard setting authorities and federal prudential regulators refine and reinforce the regulatory framework for capital requirements globally, it will be important to ensure continued alignment among jurisdictions.

Recently proposed changes to implement the Basel III framework (Basel III Framework or Basel III) in the United States set out in the proposed rule issued last summer by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (Basel III Proposal or Proposal) exemplify efforts to revisit and refine regulatory standards.

If adopted as proposed, the Basel III Proposal would, among other things, standardize aspects of the capital framework related to credit risk, market risk, operational risk, and financial derivative risk, including the standardization of models.[14] Basel III aims to adjust the manner in which covered banks account for unrealized gains and losses in their securities when calculating certain capital metrics.

With respect to lending, banks argue that any increase in capital requirements will reduce their capacity to provide lending services, including residential mortgage and small business lending.[15] Banks also posit that there will be increased costs that may create spillover effects that could impact access to clearing.

Public interest advocates point to data that they believe refutes the banks' claims that requiring more capital will reduce a banks’ ability to lend by suggesting that as capital at banks has increased materially since 2008, bank lending to the nonfinancial sector has also increased.[16] Further, they argue, community banks provide majority of lending to small businesses and low and medium-income households and smaller, less complex, banking organizations are unlikely to be subject to the $100 billion asset threshold that triggers the new requirements.[17] Additionally, while there is an increased cost in executing derivatives transactions, the limited increase is justified because of the likelihood that imposed reforms may remarkably contribute to and enhance risk management, potentially mitigating losses associated with unrealized risks.[18]

While prudential regulators continue to debate the implementation of a final set of regulations under Basel III, the Commission’s capital comparability determinations close a gap in our regulatory framework. Today’s successful adoption of a comparability determination enables the Commission to deploy an enforceable regime immediately in the context of our UK-based registrants and is reflective of a desire to engage and harmonize regulation globally.

I commend the work of staff of the Market Participants Division:  Amanda Olear, Tom Smith, Rafael Martinez, Liliya Bozhanova, Joo Hong, and Justin McPhee, as well as the members of the Office of International Affairs for their careful consideration of this application.

The Commission’s efforts in considering the Proposed Comparability Determination reflect thoughtful evaluation of the comparability of relevant standards and an attempt to coordinate our efforts to bring transparency to the swaps market and reduce its risks to the public.  I look forward to reviewing the comments that the Commission will receive in response to the Proposed Comparability Determination.

[1] The application here is by three trade associations (the Institute of International Bankers, the International Swaps and Derivatives Association, and the Securities Industry and Financial Markets Association).There are currently six PRA-designated non-bank SDs eligible to take advantage of a comparability determination, if the Commission approves the Proposed Order. These six PRA-designated non-bank SDs include Citigroup Global Markets Limited, Goldman Sachs International, Merrill Lynch International, Morgan Stanley & Co. International Plc, MUFG Securities EMEA Plc, and Nomura International Plc.

[2] 7 U.S.C. 2(i). Section 2(i)(1) of the CEA applies the swaps provisions of both the Dodd-Frank Act and Commission regulations promulgated under those provisions to activities outside the United States that have a direct and significant connection with activities in, or effect on, commerce of the United States.

[3] Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 Fed. Reg. 56924, 56924 (Sept. 14, 2020).

[4] 7 U.S.C. § 6s(e), (f); 17 C.F.R. Part 23, subpart E.

[5] Kristin N. Johnson, Commissioner, CFTC, Statement in Support of Notice and Order on EU Capital Comparability Determination (June 7, 2023),

[6] 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; the bank-based capital requirements; or the tangible net worth capital approach.

[7] Bank for International Settlements, Basel III: international regulatory framework for banks, (last visited Jan. 24, 2023).

[8] Michael S. Barr, Vice Chair for Supervision, Board of Governors of the Federal Reserve System, Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank, at i, (Apr. 28, 2023),

[9] Id. at 1.

[10] Id. at 2.

[11] Martin J. Gruenberg, Remarks by Chairman Martin J. Gruenberg on Recent Bank Failures and the Federal Regulatory Response before the Committee on Banking, Housing, and Urban Affairs, United States Senate (Mar. 27, 2023),

[12] Id.; Kristin N. Johnson, Commissioner, CFTC, Statement in Support of Proposed Order and Request for Comment on Mexican Capital Comparability Determination (Nov. 10, 2022),; Kristin N. Johnson, Commissioner, CFTC, Statement in Support of Proposed Order on Japanese Capital Comparability Determination (July 27, 2022),

[13] See Marc Labonte, Cong. Rsch. Serv., R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework (2013).

[14] Regulatory Capital Rule: Large Banking Organizations and Banking Organizations With Significant Trading Activity, 88 Fed. Reg. 64028 (Sept. 18, 2023).

[15] Marc Labonte and Andrew P. Scott, Cong. Rsch. Serv., R47855, Bank Capital Requirements: Basel III Endgame (2023).

[16] Better Markets, Inc. (Better Markets), Comment Letter on Proposed Regulatory Capital Rule: Large Banking Organizations and Banking Organizations With Significant Trading Activity (Jan. 16, 2024),

[17] See Better Markets, supra note 13; see also Americans for Financial Reform (AFR), Housing and Urban Affairs Hearing before S. Comm. on Banking, 118th Cong., Statement of the Record, Oversight of Prudential Regulators: Protecting Main Street, Not Wall Street (Nov. 14, 2023),

[18] See AFR, supra note 14.