SPEECHES & TESTIMONY

Statement of CFTC Chairman Timothy Massad Regarding Comparability Determination for Japan

September 8, 2016

Today, the CFTC has furthered its commitment to international cooperation and harmonization.

By issuing this comparability determination with respect to Japan’s rules on margin for uncleared swaps, the Commission has ensured that a Japanese swap dealer or major swap participant registered with the CFTC can comply with many aspects of our margin rules by meeting the corresponding Japan Financial Services Agency (JFSA) requirements. This is an important and necessary step toward building a strong international regulatory framework for the over-the-counter swaps market, which is critical to ensuring the safety and soundness of our own financial markets.

It’s important to remember that we are still at the early stages of developing this new global framework. Shortly after I took office two years ago, there were significant differences between our rules, Japan’s rules, and the rules of other jurisdictions. We made tremendous progress bringing those rules together since that time. And today, we all share the same goal of a strong, international framework. But there are still going to be differences, and we understand our laws and the laws of other jurisdictions will never be identical.

Our comparability determination reflects this understanding. In this instance, as in other decisions, the Commission compared our margin rule with each element of Japan’s rules, carefully considering the objectives and outcomes of its specific provisions.

We concluded that while there are differences in our margin regimes, Japan’s margin requirements achieve comparable outcomes. The Commission identified only one area where we must make an exception to that conclusion. Our margin rule requires the collection and posting of variation margin and, in certain circumstances, the collection of initial margin for uncleared swaps between consolidated affiliates. However, the JFSA’s margin rules do not require any margin to be posted or collected on such transactions.

As a result, the Commission has determined that certain entities subject to both the CFTC’s and the JFSA’s margin rules with respect to an uncleared swap may rely on the substituted compliance made available under the CFTC’s Cross-Border Margin Rule– with the exception that these entities must comply with the CFTC’s inter-affiliate margin requirements. I believe this exception is necessary, to help address the risk that can flow back into the United States from offshore activity, even when the subsidiary is not explicitly guaranteed by the U.S. parent. In addition, it will prevent the potential buildup of current exposure among affiliates.

Let me also comment on the concerns regarding differences in our rules with respect to the treatment of collateral, custodial requirements, and swaps with counterparties in so-called “non-netting” jurisdictions. I believe we should allow reliance on Japanese rules in these areas. That is because our goal is comparability in outcomes, and that goal is achieved in both cases.

First, on the treatment of collateral, it has been noted that there is a difference in our rules on haircuts for equities. But it is relatively small. We require a haircut of 15 percent on equities included in the S&P 500, and 25 percent on the S&P 1500. Japan’s rules say 15 percent on major equity indices. But we should also note that Japan imposes a larger discount than we do on government bonds and corporate debt. Our comparability process should therefore not insist on line-by-line identity, but rather decide what differences are truly significant to overall outcomes.

Similarly, with respect to custodial requirements, I recognize the importance of the protection of margin deposits, especially in the event of the bankruptcy of a counterparty. The means that we require in our rule—segregation with an independent custodian—are not commonly used in Japan. But the Japan rules require the use of trust structures which achieve the same goal under Japanese law, and are recognized under Japanese law in bankruptcy.

With respect to treatment of non-netting jurisdictions, our rule requires a swap dealer to collect initial margin on a gross basis from a counterparty in a jurisdiction that doesn’t clearly recognize netting, while the JFSA rule says that the dealer must establish an appropriate risk management framework that may, but is not required to, include collection of margin. To measure outcomes, we must look not only at the specifics but at how the rules work in different scenarios. For example, Japanese swap dealers whose trades are guaranteed by a U.S. person must follow our rules on this issue and collect margin, regardless of what we decide as a matter of substituted compliance. And Japanese swap dealers whose trades are not guaranteed by a U.S. person, and who are not foreign consolidated subsidiaries, would not be required to follow our rule on this issue, regardless of what we decide as a matter of substituted compliance. That is because such trades are excluded from our rules. Japanese swap dealers who are foreign consolidated subsidiaries (and whose trades are not guaranteed by a U.S. person) would be entitled to substituted compliance, but if they engage in trades with counterparties in non-netting jurisdictions they would still be subject to the JFSA risk management requirements, and any parent entity swap dealer would be subject to our consolidated risk management requirements

For these reasons, I believe it is appropriate to grant substituted compliance without an exception on these issues.

In making these determinations, staff also considers another jurisdiction’s supervisory and enforcement authority in assessing outcomes. And here, I agree with staff’s conclusion, and want to underscore the fact that we have a very strong and good relationship with the JFSA. In fact, I met with Commissioner Mori and members of his staff just a few months ago. There is mutual respect, and good communication and cooperation between our agencies. We have worked well together on a number of issues, including the formulation of margin requirements. And this determination will strengthen that relationship further.

Today’s decision will contribute significantly to that international framework and help make sure our derivatives markets continue to be dynamic, competitive, and drivers of economic growth. I want to particularly thank our staff in the Division of Swap Dealer and Intermediary Oversight and in the Office of the General Counsel for their work on this and the implementation of our margin rules generally. I also thank Commissioners Bowen and Giancarlo for their input and consideration of this determination.

Last Updated: September 8, 2016