Public Statements & Remarks

Statement of Commissioner Kristin N. Johnson in Support of Proposed Order on Japanese Capital Comparability Determination

July 27, 2022

I support the Commission’s issuance of the proposed capital comparability order for comment (Proposed Order).  I commend staff’s hard work on this matter and their meticulous review of the capital and financial reporting requirements in Japan, as well as their outstanding cooperation with the Financial Services Agency of Japan (JFSA).  I also appreciate the JFSA’s sustained and meaningful engagement of Commission staff during the entirety of the review process. 

The Commission’s capital and financial reporting requirements are critical to ensuring the safety and soundness of our regulated swap dealers.[1]  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 resiliency. 

Prior to the adoption of the CFTC’s final rules regarding swap dealer capital which published in the Federal Register on September 15, 2020,[2] with a compliance date of October 6, 2021,[3] the Commission had issued interpretive guidance allowing for substituted compliance determinations to be made with respect to other components of the Commission’s swap dealer requirements.  Under that guidance, the Commission has issued comparability determinations relating to market participants operating in several jurisdictions including the EU, Australia, Canada, Hong Kong, Switzerland, and, notably, Japan.[4]  The Proposed Order before the Commission is, however, the first capital comparability determination.

When the Commission initially issued interpretive guidance, many jurisdictions had not yet implemented swaps reforms addressing risk management failures that precipitated the 2008 financial crisis.  Today, many jurisdictions have made great strides to adopt effective regulatory regimes, mitigating the systemic risks that previously pervaded global markets.  The current procedure for regulatory capital and financial reporting requirements set forth in regulation 23.106 permits foreign nonbank swap dealers, a trade association on behalf of one or more foreign nonbank swap dealers, or a foreign regulatory authority with jurisdiction over a foreign nonbank swap dealer (as the JFSA has done) to file an application for substituted compliance.  The Proposed Order, if approved, will allow registered nonbank swap dealers organized and domiciled in Japan to satisfy certain capital and financial reporting requirements under the Commodity Exchange Act[5] by being subject to and complying with comparable capital and financial reporting requirements under Japanese laws and regulations.

I support acknowledging market participants’ compliance with the regulations of foreign jurisdictions when the requirements lead to an outcome that is comparable to the outcome of complying with the CFTC’s corresponding requirements. Substituted compliance must not, however, be confused with deference.  To the contrary, the swap dealers that qualify for substituted compliance under regulation 23.106 must be Commission registrants.  The Proposed Order, if approved, would continue to ensure that relevant Japan-based swap dealers are subject to the Commission’s examination and enforcement authority over the firms. 

Capital requirements play a critical role in fostering the safety and soundness of financial markets.  As indicated in the Commodity Exchange Act, capital requirements protect market participants against risks such as counterparty default.[6]  Robust capital requirements enable individual market participants to absorb losses, meet their obligations, and successfully navigate challenges that may threaten their integrity or trigger systemic risk concerns.  As a result, the Commission must be measured in applying its framework for capital comparability determinations.  I look forward to reviewing the public comments on this proposed determination.  

[1] See 7 U.S.C. 6s(e); 17 CFR subpt. E. 

[2] See Capital Requirements of Swap Dealers and Major Swap Participants, 85 FR 57462 (Sept. 15, 2020) (CFTC Capital Rules). 

[3] Id. at 57462.

[4] The Commission has issued comparability determinations for certain entity-level requirements (Australia, Canada, EU, Hong Kong, Japan, Switzerland), certain transaction-level requirements (EU, Japan), and margin requirements for uncleared swaps (EU, Japan).  See CFTC, Comparability Determinations for Substituted Compliance Purposes,

[5] 7 U.S.C. 1 et seq.

[6] 7 U.S.C. 6s(e).