The final rule codifies information already contained in CFTC Staff Letters 21-15, 21-18 and 23-11 and is intended to make it easier for swap dealers and major swap participants to comply with both reporting obligations and minimum capital requirements.
Specifically, the CFTC is making changes to ensure that the net-worth-capital approach can be used by eligible nonbank (not subject to a prudential regulator) swap dealers. In order to achieve this objective two definitions in CFTC regulation 23.100 are being modified:
- predominantly engaged in non-financial activities; and
- tangible net worth.
The changes to the first definition permit the satisfaction of the 15% revenue and 15% asset tests at either the nonbank swap dealer entity level or at the level of its ultimate consolidated parent. The regulatory intent here is to eliminate any disincentives that might impede non-financial entities from establishing separate swap dealer subsidiaries to provide financial services for the corporate group.
The amended definition of tangible net worth clarifies that it may be determined under either US GAAP or IFRS standards. This ensures consistency in the accounting standards swap dealers are permitted to use under the rule.
Financial reporting deadlines for US bank swap dealers have been harmonized with the reporting deadlines for these as set by the relevant prudential regulators. The new rule formalizes the option for non-US bank swap dealers to provide financial reports permitted by their home country regulator, with the proviso that such reports must be translated into English with balances converted to US dollars.
Further changes include:
- the addition of a requirement for the submission of supplemental schedules in Appendix B on a monthly or quarterly basis as applicable;
- clarification that subordinated debt for net capital is subject to a qualification determination by the CFTC or NFA;
- an adjustment to notification periods required for swap dealers that are also futures commissions merchants (FCMs);
- the imposition of a requirement for swap dealers to notify of substantial capital reductions within two days;
- clarification on applicable market and credit risk charges;
- a new requirement for swap dealers registered with the SEC as broker dealers or security-based swap dealers (SBSDs) to submit financial reports required by the SEC;
- a new requirement for swap dealers registered as FCMs to submit Form 1-FR-FCM or an equivalent; and
- clarification that the submission of footnote disclosures is required as part of the public disclosure of swap dealer unaudited financial statements.
In her comments on the changes Commissioner Kristin N Johnson said that the amendments “do not change the substantive capital requirements” and “buttress the financial condition reporting requirements.” Commissioner Caroline D Pham was also supportive of the amendments though she suggested that the Commission “should have taken an evergreen approach” to the harmonization of the timing of the targeted reports with the SECs own FOCUS reports.
