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Voting Draft – As Approved by the Commission on 7/22/2020 (Subject to Technical Corrections) COMMODITY FUTURES TRADING COMMISSION

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Voting Draft – As Approved by the Commission on 7/22/2020 (Subject to Technical Corrections) COMMODITY FUTURES TRADING COMMISSION Complete Voting Draft – As approved by the Commission on 7/22/2020 (subject to technical corrections) COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 23, and 140 RIN 3038 – AD54 Capital Requirements of Swap Dealers and Major Swap Participants AGENCY: Commodity Futures Trading Commission. ACTION: Final Rulemaking. SUMMARY: The Commodity Futures Trading Commission (“Commission” or “CFTC”) is adopting new regulations and amending existing regulations to implement sections 4s(e) and (f) of the Commodity Exchange Act (“CEA”), as added by section 731 of the Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Section 4s(e) requires the Commission to adopt capital requirements for swap dealers (“SDs”) and major swap participants (“MSPs”) that are not subject to a prudential regulator. Section 4s(f) requires the Commission to adopt financial reporting and recordkeeping requirements for SDs and MSPs. The Commission is also amending existing capital requirements for futures commission merchants (“FCMs”) to provide specific capital deductions for market risk and credit risk for swaps and security-based swaps entered into by an FCM. The Commission is further adopting amendments to its regulations to: (i) permit certain entities dually-registered with the Securities and Exchange Commission (“SEC”) to file an SEC Financial and Operational Combined Uniform Single Report in lieu of CFTC financial reports; (ii) require certain Commission registrants to file notices of certain defined events; and (iii) require notices of bulk transfers to be filed with the Commission electronically and within a defined period of time. DATES: Effective date: [60 days after publication in the Federal Register] Compliance date: October 6, 2021 Complete Voting Draft – As approved by the Commission on 7/22/2020 (subject to technical corrections) FOR FURTHER INFORMATION CONTACT: Joshua Sterling, Director, 202-418-6056, [email protected]; Thomas Smith, Deputy Director, 202-418-5495, [email protected]; Joshua Beale, Associate Director, 202-418-5446, [email protected]; Jennifer Bauer, Special Counsel, 202-418-5472, [email protected]; Rafael Martinez, Senior Financial Risk Analyst, 202-418-5462, [email protected], Division of Swap Dealer and Intermediary Oversight; Paul Schlichting, Assistant General Counsel, Office of the General Counsel, 202-418-5884, [email protected]; Lihong McPhail, Research Economist and Head of Academic Outreach, 202-418-5722, [email protected], Office of the Chief Economist; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC 20581; or Mark Bretscher, Special Counsel, 312-596-0598, [email protected]; Division of Swap Dealer and Intermediary Oversight, Commodity Futures Trading Commission, 525 West Monroe Street, Suite 1100, Chicago, IL 60661. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction A. Background and Statutory Authority B. Proposed Rulemakings and Reopening of the Comment Period C. Consultation with U.S. Securities and Exchange Commission and Prudential Regulators II. Final Regulations and Amendments to Existing Regulations A. Capital Framework for FCMs, Covered SDs, and Covered MSPs B. Capital Requirements for Stand-alone FCMs and FCM-SDs 1. Introduction to General Capital Requirements for Stand-alone FCMs and FCM-SDs 2. Minimum Capital Requirement for Stand-alone FCMs and FCM-SDs a. Minimum Fixed-Dollar Amount of Net Capital b. Minimum Capital Requirement Based on 8% Risk Margin Amount 3. Stand-alone FCM and FCM-SD Calculation of Net Capital and Adjusted Net Capital a. Stand-alone FCM and FCM-SD Standardized Market Risk Capital Charges b. FCM and FCM-SD Standardized Counterparty Credit Risk Capital Charges c. Model-Based Market Risk and Counterparty Credit Risk Capital Charges (i) FCMs that are SEC-Registered ANC Firms (ii) Market Risk and Credit Risk Capital Models for FCM-SDs that are not SEC- 2 Complete Voting Draft – As approved by the Commission on 7/22/2020 (subject to technical corrections) Registered BDs C. Capital Requirements for Swap Dealers and Major Swap Participants 1. Introduction to Covered SD and Covered MSP Capital Requirements 2. Capital Requirement for Covered SDs Electing the Net Liquid Assets Capital Approach a. Computation of Minimum Capital Requirement b. Computation of Net Capital to Meet Minimum Capital Requirement (i) Swap Dealers not Approved to use Internal Capital Models (ii) Swap Dealers Approved to use Internal Capital Models 3. Capital Requirement for Covered SDs Electing the Bank-Based Capital Approach a. Computation of Minimum Capital Requirement 4. Capital Requirement for Covered SDs Electing the Tangible Net Worth Capital Approach 5. Capital Requirements for Covered MSP 6. Requirements for Market Risk and Credit Risk Models a. VaR Models b. Stressed VaR Models c. Specific Risk Models d. Incremental Risk Models e. Comprehensive Risk Models f. Credit Risk Models 7. Model Approval Process for Covered SDs and FCM-SDs 8. Liquidity Requirements for Covered SDs and FCM-SDs 9. Equity Withdrawal Restrictions for Covered SDs and Covered MSPs 10. Leverage Ratio Requirements for Covered SDs D. Swap Dealer and Major Swap Participant Financial Recordkeeping, Reporting and Notification Requirements 1. Routine Financial Reporting and Recordkeeping Requirements 2. Timing and Manner of Swap Dealer and Major Swap Participant Financial Reports 3. Swap Dealer and Major Swap Participant Notice Requirements 4. Swap Dealers and Major Swap Participants subject to the Capital Rules of a Prudential Regulator 5. Public Disclosures 6. Electronic Filing Requirements for Financial Reports and Regulatory Notices 7. Swap Dealer and Major Swap Participant Reporting of Position Information 8. Reporting Requirements for Swap Dealers and Major Swap Participants Approved to use Internal Capital Models 9. Weekly Position and Margin Reporting E. Comparability Determinations for Eligible Covered SDs and Covered MSPs F. Additional Amendments to Existing Regulations 1. Financial Reporting Requirements for FCMs or IBs that are also Registered SBSDs 2. Amendments to the FCM and IB Notice Provisions in Regulation 1.12 3. FCM and IB Unsecured Receivables from Swap Transactions 4. Amendments to FCM and IB Notice and Disclosure Requirements for Bulk Transfers 5. Conforming Amendments to Delegated Authority Provisions in Regulation 140.91 G. Effective Date and Compliance Date 3 Complete Voting Draft – As approved by the Commission on 7/22/2020 (subject to technical corrections) III. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act 1. Background 2. New Information Collection Requirements and Related Burden Estimates i. Form SBS ii. Notice of Failure to Maintain Minimum Financial Requirements iii. Requests for Extensions of Time to File Financial Statements iv. Capital Requirements Elections v. Application for Use of Models vi. Liquidity Requirements vii. Financial recordkeeping, reporting and notification requirements for SDs and MSPs viii. Capital Comparability Determinations IV. Cost Benefit Considerations A. Background B. Regulatory Capital C. General Summary of Rulemaking D. Baseline E. Overview of Approaches 1. Bank Based Capital 2. Net Liquid Assets 3. Alternative Net Capital (“ANC”) 4. Tangible Net Worth 5. Substituted Compliance F. Entities 1. Bank Subsidiaries 2. SD/BD (without models) 3. SD/BD/OTC Derivatives Dealers (without models) 4. FCM-SD (without models) 5. ANC Firms (SD/BD and/or FCMs that use models) 6. Stand-Alone SD (with and without models) 7. Non-financial SD (with and without models) 8. MSP 9. Substituted Compliance G. Liquidity and Funding Requirements H. Reporting and Recordkeeping Requirements I. Section 15(a) Factors 1. Protection of Market Participants and the Public 2. Efficiency, Competitiveness, and Financial Integrity of Swaps Markets 3. Price Discovery 4. Sound Risk Management Practices 5. Other Public Interest Considerations V. Statutory Basis and Text of Proposed Amendments 4 Complete Voting Draft – As approved by the Commission on 7/22/2020 (subject to technical corrections) I. Introduction A. Background and Statutory Authority The Commission is adopting capital and financial reporting requirements for SDs and MSPs, and is amending existing capital rules for FCMs to provide explicit capital requirements for proprietary positions in swaps and security-based swaps that are not cleared by a clearing organization. The adoption of the capital requirements for SDs and MSPs completes the Congressional mandate directing the Commission to adopt rules imposing both capital requirements on SDs and MSPs that are not subject to a prudential regulator, and imposing initial and variation margin on uncleared swaps entered into by SDs and MSPs that are not subject to a prudential regulator.1 Title VII of the Dodd-Frank Act established a new regulatory framework for swap and security-based swap transactions.2 The legislation was enacted, among other reasons, to reduce risk, increase transparency, and promote market integrity within the financial system, including by: (i) providing for the registration and comprehensive regulation of SDs, security-based swap dealers (“SBSDs”), MSPs and major security-based swap participants (“MSBSPs”); (ii) imposing clearing and trade execution requirements on swaps and security-based swaps, subject to certain exceptions; (iii) creating rigorous recordkeeping and real-time reporting regimes; and (iv) enhancing the rulemaking and enforcement authorities of the Commissions with respect to,
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