CFTC – Staff Issues Interpretation to Swap Dealers Regarding Calculating Capital Requirements

June 29, 2021 – CFTC issued interpretation regarding entity levels that can be used for net capital obligation. Interpretation also provides guidance related to permissible use, IFRS vs. US GAAP principles. Applies to swap dealers (SD), major swaps participants (MSP) not subject to capital requirements of a prudential regulator defined by Commodity Exchange Act, 7 USC 1a. Clarifies elements of regulations 23.100 and 23.101 (17 CFR 23.100, 17 CFR 23.101).

Interpretation Background
Follows July 2020 final rule re dealer financial and capital requirements. Ruleset the effective date of October 6, 2021, for dealers to comply with the capital requirements.

Entity Level Determination
Non-bank SD may use tangible net worth to calculate net capital requirement if it is predominantly engaged in non-financial activities, as defined by regulation 23.100.
The advisory provides guidance that SD may use its non-bank SD entity level or ultimate consolidated parent entity level to satisfy the 15% revenue and 15% asset tests. Tests serve as a basis to qualify as predominantly engaged in non-financial activities.

Use of IFRS Accounting Principles
Advisory allows non-bank SD and non-bank MSP to use IFRS accounting principles. May be used for tangible net worth, predominantly engaged in non-financial activities. IFRS may be applied to both definitions only if the SD/MSP does not use US GAAP to prepare its financial statements, in alignment with reg 23.105(b), (17 CFR 23.105(b)). Finally, non-bank SDs using tangible net worth for net capital, and non-bank MSPs, may fulfill other reporting requirements under reg 23.105(b) quarterly vs. monthly.

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