Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 53007-53020 [2018-22531]
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Federal Register / Vol. 83, No. 203 / Friday, October 19, 2018 / Proposed Rules
maturity of grapefruit imported into the
United States. * * *
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Dated: October 15, 2018.
Bruce Summers,
Administrator, Agricultural Marketing
Service.
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/other.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. S7–08–
12 on the subject line.
[FR Doc. 2018–22758 Filed 10–18–18; 8:45 am]
BILLING CODE 3410–02–P
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
17 CFR Part 240
[Release No. 34–84409; File No. S7–08–12]
RIN 3235–AL12
Capital, Margin, and Segregation
Requirements for Security-Based
Swap Dealers and Major SecurityBased Swap Participants and Capital
Requirements for Broker-Dealers
Securities and Exchange
Commission.
ACTION: Proposed rule; reopening of
comment period; request for additional
comment.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
reopening the comment period and
requesting additional comment
(including potential modifications to
proposed rule language) on the
following: Proposed amendments and
new rules that would establish capital
and margin requirements for securitybased swap dealers (‘‘SBSDs’’) and
major security-based swap participants
(‘‘MSBSPs’’) that do not have a
prudential regulator, establish
segregation requirements for SBSDs,
establish notification requirements for
SBSDs and MSBSPs relating to
segregation, and raise minimum net
capital requirements and establish
liquidity requirements for brokerdealers permitted to use internal models
when computing net capital (‘‘ANC
broker-dealers’’). The Commission also
is reopening the comment period and
requesting additional comment on
proposed amendments that would
establish the cross-border treatment of
security-based swap capital, margin,
and segregation requirements; and a
proposed amendment that would
establish an additional capital
requirement for SBSDs that do not have
a prudential regulator.
DATES: The comment periods for
portions of the proposed rules
published Nov. 23, 2012 (77 FR 70213);
May 23, 2013 (78 FR 30967); and May
2, 2014 (79 FR 25193), are reopened.
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Comments should be submitted by
November 19, 2018.
ADDRESSES: Comments may be
submitted by any of the following
methods:
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• Send paper comments to Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number S7–08–12. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method of submission. The
Commission will post all comments on
the Commission’s website (https://
www.sec.gov). Comments are also
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make publicly available.
Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
such materials will be made available
on the Commission’s website. To ensure
direct electronic receipt of such
notifications, sign up through the ‘‘Stay
Connected’’ option at www.sec.gov to
receive notifications by email.
FOR FURTHER INFORMATION CONTACT:
Michael A. Macchiaroli, Associate
Director, at (202) 551–5525; Thomas K.
McGowan, Associate Director, at (202)
551–5521; Randall W. Roy, Deputy
Associate Director, at (202) 551–5522;
Sheila Dombal Swartz, Senior Special
Counsel, at (202) 551–5545; Timothy C.
Fox, Branch Chief, at (202) 551–5687;
Valentina Minak Deng, Special Counsel,
at (202) 551–5778; or Nina
Kostyukovsky, Attorney Advisor, at
(202) 551–8833, Division of Trading and
Markets, Securities and Exchange
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Commission, 100 F Street NE,
Washington, DC 20549–7010.
SUPPLEMENTARY INFORMATION:
I. Background
In October 2012, the Commission
proposed amendments and new rules to:
(1) Establish capital and margin
requirements for SBSDs and MSBSPs
that do not have a prudential regulator 1
(‘‘nonbank SBSDs’’ and ‘‘nonbank
MSBSPs’’, respectively); (2) establish
segregation requirements for SBSDs; (3)
establish notification requirements for
SBSDs and MSBSPs relating to
segregation; and (4) raise minimum net
capital requirements and establish
liquidity requirements for ANC brokerdealers.2 The Commission published the
2012 Proposals largely pursuant to Title
VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(‘‘Title VII of the Dodd-Frank Act’’). The
Commission extended the comment
period once,3 and reopened it once.4
The Commission has received a number
of comment letters in response to the
2012 Proposals.5
In addition, in May 2013, the
Commission proposed provisions to
establish the cross-border treatment of
security-based swap capital, margin,
and segregation requirements.6 The
1 The term ‘‘prudential regulator’’ is defined in
Section 1(a)(39) of the Commodity Exchange Act (7
U.S.C. 1(a)(39)) and that definition is incorporated
by reference in Section 3(a)(74) of the Securities
Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’).
15 U.S.C. 78c(a)(74). Pursuant to the definition, the
Board of Governors of the Federal Reserve System
(‘‘FRB’’), the Office of the Comptroller of the
Currency (‘‘OCC’’), the Federal Deposit Insurance
Corporation (‘‘FDIC’’), the Farm Credit
Administration (‘‘FCA’’), or the Federal Housing
Finance Agency (‘‘FHFA’’) (collectively, the
‘‘prudential regulators’’) is the ‘‘prudential
regulator’’ of an SBSD, MSBSP, swap participant, or
major swap participant if the entity is directly
supervised by that agency.
2 See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants and
Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214
(Nov. 23, 2012) (‘‘2012 Proposals’’).
3 See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants and
Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68660 (Jan. 15. 2013), 78 FR 4365
(Jan. 22, 2013).
4 See Reopening of Comment Periods for Certain
Rulemaking Releases and Policy Statement
Applicable to Security-Based Swaps Proposed
Pursuant to the Securities Exchange Act of 1934
and the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Exchange Act Release No.
69491 (May 1, 2013), 78 FR 30800 (May 23, 2013).
5 The comment letters are available at https://
www.sec.gov/comments/s7-08-12/s70812.shtml.
6 See Cross-Border Security-Based Swap
Activities; Re-Proposal of Regulation SBSR and
Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and
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Commission has received a number of
comment letters in response to the 2013
Proposals.7
Finally, in April 2014, the
Commission proposed an additional
nonbank SBSD capital requirement.8
The Commission has received one
comment letter in response to the 2014
Proposal.9
In the releases publishing the
Proposals, the Commission described
the statutory and regulatory background
for the proposed amendments and rules,
the rationales for each of the proposed
amendments and rules, the potential
economic consequences, including the
baseline against which the proposed
amendments and rules may be
evaluated, the potential costs and
benefits, reasonable alternatives, and the
potential effects on efficiency,
competition, and capital formation.10
Since publication of the 2012
Proposals, the Commission has adopted
other rules relating to the regulation of
the over-the-counter derivatives markets
pursuant to Title VII of the Dodd-Frank
Act.11 In addition, the prudential
Major Security-Based Swap Participants, Exchange
Act Release No. 69490 (May 1, 2013), 78 FR 30968
(May 23, 2013) (‘‘2013 Proposals’’).
7 The comment letters are available at https://
www.sec.gov/comments/s7-02-13/s70213.shtml.
8 See Recordkeeping and Reporting Requirements
for Security-Based Swap Dealers, Major SecurityBased Swap Participants, and Broker-Dealers;
Capital Rule for Certain Security-Based Swap
Dealers, Exchange Act Release No. 71958 (Apr. 17,
2014), 79 FR 25194, 25254 (May 2, 2014) (the ‘‘2014
Proposal’’ and together with the 2012 Proposals and
the 2013 Proposals, the ‘‘Proposals’’).
9 The comment letter is available at: https://
www.sec.gov/comments/s7-05-14/s70514.shtml.
10 See Proposals.
11 See Clearing Agency Standards, Exchange Act
Release No. 68080 (Oct. 22, 2012), 77 FR 66220
(Nov. 11, 2012); Application of ‘‘Security-Based
Swap Dealer’’ and ‘‘Major Security-Based Swap
Participant’’ Definitions to Cross-Border SecurityBased Swap Activities, Exchange Act Release No.
72472 (June 25, 2014), 79 FR 47278 (Aug. 12, 2014);
Regulation SBSR—Reporting and Dissemination of
Security-Based Swap Information, Exchange Act
Release No. 74244 (Feb. 11, 2015), 80 FR 14563
(Mar. 19, 2015); Security-Based Swap Data
Repository Registration, Duties, and Core
Principles, Exchange Act Release No. 74246 (Feb.
11, 2015), 80 FR 14437 (Mar. 19, 2015); Registration
Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act
Release No. 75611 (Aug. 5, 2015), 80 FR 48963
(Aug. 14, 2015); Security-Based Swap Transactions
Connected with a Non-U.S. Person’s Dealing
Activity That Are Arranged, Negotiated, or
Executed By Personnel Located in a U.S. Branch or
Office or in a U.S. Branch or Office of an Agent;
Security-Based Swap Dealer De Minimis Exception,
Exchange Act Release No. 77104 (Feb. 10, 2016), 81
FR 8597 (Feb. 19, 2016); Business Conduct
Standards for Security-Based Swap Dealers and
Major Security-Based Swap Participants, Exchange
Act Release No. 77617 (Apr. 14, 2016), 81 FR 29960
(May 13, 2016); Trade Acknowledgment and
Verification of Security-Based Swap Transactions,
Exchange Act Release No. 78011 (June 8, 2016), 81
FR 39808 (June 17, 2016); Regulation SBSR—
Reporting and Dissemination of Security-Based
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regulators and the Commodity Futures
Trading Commission (‘‘CFTC’’) have
adopted or proposed rules under Title
VII of the Dodd-Frank Act that are
relevant to the Proposals.12
The Commission has carefully
considered the comment letters, and the
Commission believes it is prudent to
reopen the comment period for the
Proposals in light of these comments
and regulatory developments. In
addition, the Commission believes the
public should have the opportunity to
provide comment on the potential
economic effects of the Proposals in
light of regulatory and market
developments since they were
published. Accordingly, the
Commission is reopening the public
comment period for 30 days and seeking
comment on all aspects of the
Proposals. The Commission also is
seeking specific comment on certain
aspects of the Proposals where further
information would be particularly
helpful to the Commission. In
particular, the Commission is seeking
comment on potential rule language that
would modify rule text that was in the
Proposals. This modified rule language
would be included in: (1) Existing rules
17 CFR 240.15c3–1 (‘‘Rule 15c3–1’’), 17
CFR 240.15c3–1a (‘‘Appendix A to Rule
15c3–1’’), 17 CFR 240.15c3–3 (‘‘Rule
15c3–3’’), and 17 CFR 240.3a71–6
(‘‘Rule 3a71–6’’); (2) new rule 17 CFR
240.15c3–3b (‘‘Exhibit B to Rule
15c3–3’’); and (3) in proposed rules 17
CFR 240.18a–1 (‘‘Rule 18a–1’’), 17 CFR
240.18a–1a (‘‘Appendix A to Rule
18a–1’’), 17 CFR 240.18a–3 (‘‘Rule 18a–
3’’), 17 CFR 240.18a–4 (‘‘Rule
18a–4’’), and 17 CFR 240.18a–4a
(‘‘Exhibit A to Rule 18a–4’’). Comment
letters received by the Commission
previously need not be re-submitted as
they will continue to be a part of the
public comment file for this rulemaking
and considered by the Commission.
Swap Information, Exchange Act Release No. 78321
(July 14, 2016), 81 FR 53545 (Aug. 12, 2016); Access
to Data Obtained by Security-Based Swap Data
Repositories, Exchange Act Release No. 78716 (Aug.
29, 2016), 81 FR 60585 (Sept. 2, 2016).
12 See FRB, OCC, FDIC, FCA, FHFA, Margin and
Capital Requirements for Covered Swap Entities, 80
FR 74840 (Nov. 30, 2015) (adopting capital and
margin requirements for bank swap dealers, bank
SBSDs, bank swap participants, and bank MSBSPs);
CFTC, Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 81
FR 636 (Jan. 6, 2016) (adopting margin requirements
for nonbank swap dealers and nonbank major swap
participants); CFTC, Capital Requirements of Swap
Dealers and Major Swap Participants, 81 FR 91252
(Dec. 16, 2016) (proposing capital requirements for
nonbank swap dealers and nonbank major swap
participants).
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II. Request for Comment
The Commission renews its request
for comment on all aspects of the
Proposals and on the specific topics
identified below. Commenters are
requested to provide empirical data in
support of any arguments and analyses.
The Commission notes that comments
are of the greatest assistance to
rulemaking initiatives when
accompanied by supporting data and
analysis, and, if appropriate,
accompanied by alternative approaches
and suggested language.
Capital
1. The 2012 Proposals included a
provision that would establish a
financial ratio-derived minimum net
capital requirement for a nonbank SBSD
equal to eight percent (8%) of the firm’s
risk margin amount.13 The risk margin
amount would be the sum of:
• The greater of the total margin
required to be delivered by the nonbank
SBSD with respect to security-based
swap transactions cleared for securitybased swap customers at a clearing
agency or the amount of the deductions
(haircuts) that would apply to the
cleared security-based swap positions of
the security-based swap customers
pursuant to the proposed capital
requirements; and
• The total margin amount calculated
by the nonbank SBSD with respect to
non-cleared security-based swaps
pursuant to the proposed margin rule.14
The total of these two amounts would
be multiplied by eight percent (8%) to
determine the dollar amount of this
ratio requirement (and the nonbank
SBSD’s minimum net capital
requirement would be the greater of a
13 See 2012 Proposals, 77 FR at 70223–24.
Minimum net capital requirements would be the
greater of a fixed-dollar amount and an amount
derived by applying a financial ratio. See id. at
70221.
14 The ratio-based minimum net capital
calculation shown as an equation would be: MRNC
= [max(IMC, HCC) + IMNC] × 8%. Where MRNC is
the ratio-based minimum net capital requirement,
IMC is the amount of initial margin for cleared
security-based swaps, HCC is the amount of haircuts
applied to the same cleared security-based swaps,
IMNC is the amount of initial margin calculated for
non-cleared security-based swaps, and (max(IMC,
HCC) + IMNC) is the risk margin amount. For
example, assume that IMC is $10, HCC is $15, and
IMNC is $25. In this simple hypothetical example,
the risk margin amount would equal $40 [max($10,
$15) + $25], and the ratio-based minimum net
capital requirement would be $3.20 ($40 × 8%). As
proposed, a stand-alone nonbank SBSD would be
subject to this ratio-based minimum net capital
requirement, whereas a nonbank SBSD dually
registered as a broker-dealer would be subject to the
sum of this ratio-based minimum net capital
requirement plus one of the two existing financial
ratio-based minimum net capital requirements in
Rule 15c3–1.
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fixed-dollar amount and a ratio
amount). The proposal for a ratio
amount relating to security-based swaps
was designed to establish a minimum
net capital requirement that increases in
tandem with an increase in the risks
associated with a nonbank SBSD’s
security-based swap activities. This
scaled ratio amount is separate from the
fixed-dollar amount that sets a floor to
the minimum net capital requirement.15
a. The Commission requests comment
and supporting data on the potential
minimum net capital amounts that
would be required of nonbank SBSDs as
a result of the requirement, as proposed.
How would those potential minimum
net capital amounts compare with the
amounts of capital currently maintained
by entities that may register as nonbank
SBSDs?
b. One commenter suggested that the
Commission modify its proposed
definition of the risk margin amount to
reflect the lower risk associated with
central clearing.16 In light of the
comment and the goals of this
provision, the Commission requests
comment on whether the input to the
risk margin amount for cleared securitybased swaps should be modified.
Should the input to the risk margin
amount for cleared security-based
swaps be determined solely by the total
initial margin required to be delivered
by the nonbank SBSD with respect to
security-based swap transactions
cleared for security-based swap
customers at a clearing agency (i.e., not
be the greater of that amount or the
amount of the deductions (haircuts) that
would apply to the cleared securitybased swap positions)? 17 The purpose
of this potential modification would be
to simplify the calculation, align it with
the clearing agency margin
requirements, and more closely align it
with the CFTC’s existing rules and
proposals.18
15 See
id. at 70223–24.
Letter from Stuart J. Kaswell, Executive
Vice President, Managing Director, and General
Counsel, Managed Funds Association (Feb. 22,
2013).
17 The ratio-based minimum net capital
calculation shown as an equation would be: MRNC
= (IMC + IMNC) × 8%.
18 Eliminating the haircut input to the risk margin
amount for cleared security-based swaps would
more closely align it with the CFTC’s existing rules
and proposals. For example, currently futures
commission merchants (‘‘FCMs’’) registered with
the CFTC must maintain adjusted net capital in
excess of eight percent (8%) of the risk margin on
futures, foreign futures, and cleared swaps positions
carried in customer and noncustomer accounts. See
17 CFR 1.17. The CFTC has proposed a similar
requirement for swap dealers registered as FCMs
that also would generally include in the FCM’s
minimum net capital requirement eight percent
(8%) of the total initial margin an FCM is required
to post to a clearing agency for cleared security-
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Would rule language as described
below effect this potential modification
to the rule text in the 2012 Proposals?
If not, please explain why and suggest
alternative rule language. If the
Commission were to use the language
described below, would it strike an
appropriate balance in terms of
achieving the objectives of the proposed
rule and addressing the commenter’s
concern described above? If not, please
explain why and suggest alternative rule
language that could more effectively and
efficiently strike the balance and
achieve the objective.
The potential modifications to
paragraph (c)(17) of Rule 15c3–1 would
provide that the term risk margin
amount means the sum of: (i) The total
initial margin required to be maintained
by the broker or dealer at each clearing
agency with respect to security-based
swap transactions cleared for securitybased swap customers; and (ii) the total
margin amount calculated by the broker
or dealer with respect to non-cleared
security-based swaps pursuant to
§ 240.18a–3(c)(1)(i)(B).
Similarly, the potential modifications
to paragraph (c)(6) of Rule 18a–1 would
provide that the term risk margin
amount means the sum of: (i) The total
initial margin required to be maintained
by the security-based swap dealer at
each clearing agency with respect to
security-based swap transactions
cleared for security-based swap
customers; and (ii) the total margin
amount calculated by the security-based
swap dealer with respect to non-cleared
security-based swaps pursuant to
§ 240.18a–3(c)(1)(i)(B).
2. The 2012 Proposals included a
capital charge that would apply if a
nonbank SBSD collects an amount of
margin from a counterparty to a cleared
security-based swap that is less than the
deduction that would apply to the
security-based swap if it was a
proprietary position of the firm.19 This
proposed requirement was designed to
account for the risk of the counterparty
defaulting by requiring the nonbank
SBSD to maintain capital in the place of
margin in an amount that is no less than
would be required for a proprietary
position.20 It also was designed to
ensure that there is a standard minimum
coverage for exposure to cleared
security-based swap counterparties
apart from the individual clearing
agency margin requirements, which
based swap positions (as well as the initial margin
on uncleared swap and security-based swap
positions for which the FCM is a counterparty). See
Capital Requirements of Swap Dealers and Major
Swap Participants, 81 FR at 91266.
19 See 2012 Proposals, 77 FR at 70245–46.
20 See id. at 70246.
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could vary among clearing agencies and
over time.21
One commenter opposed this
proposal stating that the requirement
would ‘‘harm customers because it
would provide an incentive for the
collection of margin by nonbank SBSDs
beyond the amount determined by the
clearing agency.’’ 22 In light of the
comment and the goals of this
provision, the Commission requests
comment on whether this proposed
capital charge should be modified to
include a risk-based threshold under
which the proposed capital charge need
not be taken. Should the rule provide
that the deduction need not be taken if
the difference between the clearing
agency margin amount and the haircut
is less than one percent (1%) or some
other percent of the nonbank SBSD’s
tentative net capital 23 and less than ten
percent (10%) or some other percent of
the counterparty’s net worth,24 and the
aggregate difference across all
counterparties is less than twenty-five
percent (25%) or some other percent of
the nonbank SBSD’s tentative net
capital? 25 The purpose of these
thresholds would be to limit the
nonbank SBSD’s exposure to a single
counterparty as well as to establish a
concentration limit across all
counterparties. In addition, these
thresholds would be scalable and have
a more direct relation to the risk to the
nonbank SBSD arising from its securitybased swap activities.
Would rule language as described
below effect this potential modification
21 See
id.
Letter from Kenneth E. Bentsen, Jr.,
Executive Vice President, Securities Industry and
Financial Markets Association (Feb. 22, 2013)
(‘‘SIFMA 2/22/2013 Letter’’).
23 See, e.g., Order Granting Conditional
Exemption Under the Securities Exchange Act of
1934 in Connection with Portfolio Margining of
Swaps and Security-Based Swaps, Exchange Act
Release No. 68433 (Dec. 14, 2012), 77 FR 75211
(Dec. 19, 2012). Pursuant to this order, Commission
staff granted conditional temporary approval to
certain broker-dealers that are also registered as
FCMs to participate in a credit default swap (CDS)
portfolio margining program, subject to specified
conditions. One condition requires a firm to
calculate its net credit exposure to a client and if
the client’s net credit exposure is in excess of one
percent (1%) of the firm’s tentative net capital, the
firm is required to either collect the net credit
exposure above the one percent (1%) threshold in
the form of margin from its client or take a capital
charge equal to that amount. See, e.g., Letter to
Keith Bailey, Barclays Capital Inc. from Michael A.
Macchiaroli, Division of Trading and Markets,
Commission (June 7, 2013).
24 See, e.g., 17 CFR 240.15c3–1(c)(2)(vi)(M)(1)
(using a ten percent (10%) of tentative net capital
threshold for the calculation of undue
concentration charges).
25 See, e.g., 17 CFR 240.15c3–3a, Note E(5) (using
a twenty-five percent (25%) of tentative net capital
threshold for when a broker-dealer must reduce
debits in the customer reserve formula).
22 See
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to the rule text in the 2012 Proposals?
If not, please explain why and suggest
alternative rule language. If the
Commission were to use the language
described below, would it strike an
appropriate balance in terms of
achieving the objectives of the proposed
rule and addressing the commenter’s
concern described above? If not, please
explain why and suggest alternative rule
language that could more effectively and
efficiently strike the balance and
achieve the objective.
The potential modifications to
paragraph (c)(2)(xv)(A) of Rule 15c3–1
would provide the following deduction
from net worth in lieu of collecting
collateral for cleared security-based
swaps and swap transactions: (1)
Deducting the amount of the margin
difference for each account carried by
the broker or dealer for another person
that holds cleared security-based swap
or swap transactions. The margin
difference is the amount of the
deductions to the positions in the
account calculated pursuant to
paragraph (c)(2)(vi) of this section,
§ 240.15c3–1b, or § 240.15c3–1e (as
applicable), less the margin value of
collateral held in the account. (2)
Exception. The deduction required
pursuant to paragraph (c)(2)(xv)(A)(1) of
this section need not be taken to the
extent that: (i) The amount of the margin
difference for the account does not
exceed the lesser of 1 percent (1%) of
the tentative net capital of the broker or
dealer or ten percent (10%) of the net
worth of the counterparty; and (ii) The
amount of the margin difference for all
accounts that hold security-based swaps
or swaps does not exceed twenty-five
percent (25%) of the tentative net
capital of the broker or dealer.
Similarly, the potential modifications
to paragraph (c)(1)(ix)(A) of Rule 18a–1
would provide the following deduction
from net worth in lieu of collecting
collateral for security-based swaps and
swap transactions: (1) Deducting the
amount of the margin difference for
each account carried by the securitybased swap dealer for another person
that holds cleared security-based swap
or swap transactions. The margin
difference is the amount of the
deductions to the positions in the
account calculated pursuant to
paragraph (c)(1)(vi) or (vii) of this
section, § 240.18a–1(d), or § 240.18a–1b
(as applicable), less the margin value of
collateral held in the account. (2)
Exception. The deduction required
pursuant to paragraph (c)(1)(ix)(A)(1) of
this section need not be taken to the
extent that: (i) The amount of the margin
difference for the account does not
exceed the lesser of 1 percent (1%) of
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the tentative net capital of the securitybased swap dealer or ten percent (10%)
of the net worth of the counterparty; and
(ii) The amount of the margin difference
for all accounts that hold security-based
swaps or swaps does not exceed twentyfive percent (25%) of the tentative net
capital of the security-based swap
dealer.
3. The 2012 Proposals included a
provision that a nonbank SBSD would
be required to take a 100 percent (100%)
capital charge when it does not collect
variation or initial margin for noncleared security-based swaps because of
an exception from collecting margin.26
The proposed capital charge was
intended to require a nonbank SBSD to
set aside net capital to address the risks
that would otherwise be mitigated
through the collection of variation and
initial margin.27 The set aside net
capital would serve as an alternative to
obtaining margin.28 As an alternative to
taking the 100 percent (100%) charge,
the Commission proposed that firms
using internal models to calculate net
capital could take a credit risk charge if
the uncollected margin involved a
transaction with a commercial end
user.29
a. Commenters requested that
nonbank SBSDs be permitted to apply
the credit risk charge to other types of
counterparties.30 In light of the
comments and the goals of this
provision, the Commission requests
comment on whether the use of the
credit risk charge should be expanded to
other types of counterparties and
transactions. Should the rule permit a
firm to apply the credit risk charge for
uncollected initial margin for securitybased swaps and swap transactions with
any type of counterparty and for
uncollected variation margin for
transactions with a commercial end user
only? The purpose of limiting the
application of the credit risk charge
with respect to uncollected variation
margin to transactions with commercial
end users would be to reduce the types
of unsecured receivables that qualify as
allowable assets for net capital purposes
and, thereby, promote the liquidity of
the nonbank SBSD.
b. The Commission requests comment
on whether the rule should establish a
threshold for uncollected margin above
which the use of the credit risk charge
would not be permitted. Should there be
26 See
2012 Proposals, 77 FR at 70425–27.
id.
28 See id.
29 See id. at 70240–45.
30 See, e.g., Letter from Anne-Marie Leroy, Senior
Vice President and Group General Counsel, and
David Harris, Acting Vice President and General
Counsel, The World Bank (Feb. 21, 2013).
27 See
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a threshold when the aggregate amount
of uncollected margin across all
counterparties exceeds a level of the
nonbank SBSD’s tentative net capital?
Should the threshold apply to the
aggregate amount of uncollected initial
and variation margin or just to the
aggregate amount of uncollected
variation margin? The latter approach
would focus the threshold on unsecured
receivables that result from not
collecting variation margin and, thereby,
promote the liquidity of the nonbank
SBSD. Should there be a threshold with
respect to uncollected variation margin
for security-based swap and swap
transactions with commercial end users
and should that threshold be ten percent
(10%) or some other percent of the
nonbank SBSD’s tentative net capital? 31
This threshold would be designed to
limit the nonbank SBSD’s aggregate
exposure arising from not collecting
variation margin from commercial end
users and would be scalable to the
nonbank SBSD’s financial condition.
c. The potential modifications to the
rule text in the 2012 Proposals
discussed above in 3.a and 3.b would
include: (1) Changing the proposed rule
to permit a nonbank SBSD to apply the
credit risk charge for uncollected initial
margin for security-based swaps and
swaps from any type of counterparty
and for uncollected variation margin
from a commercial end user; and (2)
establishing a risk-based threshold with
respect to uncollected variation margin
from commercial end users. Would rule
language as described below effect this
potential modification to the rule text in
the 2012 Proposals? If not, please
explain why and suggest alternative rule
language. If the Commission were to use
the language described below, would it
strike an appropriate balance in terms of
achieving the objectives of the proposed
rule and addressing commenters’
requests to apply the credit risk charge
more broadly? If not, please explain
why and suggest alternative rule
language that could more effectively and
efficiently strike the balance and
achieve the objective.
The potential modifications to
paragraph (a)(7) of Rule 15c3–1 would
provide: In accordance with Appendix E
to this section (§ 240.15c3–1e), the
Commission may approve, in whole or
in part, an application or an amendment
to an application by a broker or dealer
to calculate net capital using the market
risk standards of appendix E to compute
a deduction for market risk on some or
31 See, e.g., 17 CFR 240.15c3–1(c)(2)(vi)(M)(1)
(using a ten percent (10%) of tentative net capital
threshold for the calculation of undue
concentration charges).
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all of its positions, instead of the
provisions of paragraphs (c)(2)(vi) and
(c)(2)(vii) of this section, and
§ 240.15c3–1b, and using the credit risk
standards of Appendix E to compute a
deduction for credit risk for certain
security-based swap and swap
transactions, as specified in this
paragraph, instead of the provisions of
paragraphs (c)(2)(iv), (c)(2)(xv)(B)(1),
and (c)(2)(xv)(B)(2) of this section,
subject to any conditions or limitations
on the broker or dealer the Commission
may require as necessary or appropriate
in the public interest or for the
protection of investors. A broker or
dealer may use the credit risk standards
of Appendix E to compute a deduction
for credit risk for security-based swap
transactions with commercial end users
as that term is defined in § 240.18a–
3(b)(2), and swap transactions in which
a counterparty qualifies for an exception
from margin requirements pursuant to
Section 4s(e)(4) of the Commodity
Exchange Act (7 U.S.C. 6s(e)(4)) instead
of the provisions of paragraph (c)(2)(iv)
of this section, provided that the
deductions, in the aggregate, do not
exceed ten percent (10%) of the
tentative net capital of the broker or
dealer. A broker or dealer also may use
the credit risk standards of Appendix E
to compute a deduction for credit risk
for security-based swap transactions
that are subject to an initial margin
exception set forth in § 240.18a–
3(c)(1)(iii) instead of the provisions of
paragraph (c)(2)(xv)(B)(1) of this section,
and for swap transactions instead of the
provisions of paragraph (c)(2)(xv)(B)(2)
of this section.
Similarly, the potential modifications
to paragraph (a)(2) of Rule 18a–1 would
provide: In accordance with paragraph
(d) of this section, the Commission may
approve, in whole or in part, an
application or an amendment to an
application by a security-based swap
dealer to calculate net capital using the
market risk standards of paragraph (d) to
compute a deduction for market risk on
some or all of its positions, instead of
the provisions of paragraphs (c)(1)(iv),
(vi), and (vii) of this section, and
§ 240.18a–1b, and using the credit risk
standards of paragraph (d) to compute a
deduction for certain security-based
swap and swap transactions, as
specified in this paragraph, instead of
the provisions of paragraphs (c)(1)(iii),
(c)(1)(ix)(B)(1), and (c)(1)(ix)(B)(2) of
this section, subject to any conditions or
limitations on the security-based swap
dealer the Commission may require as
necessary or appropriate in the public
interest or for the protection of
investors. A security-based swap dealer
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may use the credit risk standards of
paragraph (d) to compute a deduction
for credit risk for security-based swap
transactions with commercial end users
as that term is defined in § 240.18a–
3(b)(2), and swap transactions in which
a counterparty qualifies for an exception
from margin requirements pursuant to
Section 4s(e)(4) of the Commodity
Exchange Act (7 U.S.C. 6s(e)(4)) instead
of the provisions of paragraph (c)(1)(iii)
of this section, provided that the
deductions, in the aggregate, do not
exceed ten percent (10%) of the
tentative net capital of security-based
swap dealer. A security-based swap
dealer also may use the credit risk
standards of paragraph (d) to compute a
deduction for credit risk for securitybased swap transactions that are subject
to an initial margin exception set forth
in § 240.18a–3(c)(1)(iii) instead of the
provisions of paragraph (c)(1)(ix)(B)(1)
of this section, and for swap
transactions instead of the provisions of
paragraph (c)(1)(ix)(B)(2) of this section.
4. The 2012 Proposals included a
capital charge for nonbank SBSDs when
a counterparty requires initial margin to
be segregated pursuant to Section 3E(f)
of the Act, which among other things,
provides that the collateral must be
carried by an independent third-party
custodian.32 Collateral held in this
manner would not be in the possession
or control of the nonbank SBSD, nor
would it would be capable of being
liquidated promptly by the nonbank
SBSD without the intervention of a third
party.
a. Commenters argued that the charge
would discourage the use of segregation
under Section 3E(f) of the Act,33 that the
charge would create costs to the affected
nonbank SBSD (which would be passed
on to customers),34 and that the parties
could properly structure an agreement
to address the Commission’s concern
about the nonbank SBSD’s lack of
control over the collateral.35 In light of
the comments and the goals of this
provision, the Commission requests
comment on whether there should be an
exception to taking the capital charge
32 See 2012 Proposals, 77 FR at 70246–47; 15
U.S.C. 78c–5(f)(3).
33 See, e.g., Letter from American Benefits
Council, Committee on Investment of Employee
Benefit Assets, European Federation for Retirement
Provision, the European Association of Paritarian
Institutions, the National Coordinating Committee
for Multiemployer Plans, and the Pension
Investment Association of Canada (May 19, 2014).
34 See, e.g., Letter from Douglas M. Hodge,
Managing Director and Chief Operating Officer,
Pacific Investment Management Company LLC
(Feb. 21, 2013).
35 See, e.g., Letter from Karrie McMillan, General
Counsel, Investment Company Institute (Dec. 5,
2013).
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53011
(whether 100 percent (100%) or a credit
risk charge, as applicable) under
conditions that promote the SBSD’s
ability to promptly access the collateral
if needed. Should there be an exception
with the following conditions: (1) The
custodian is a bank; (2) the nonbank
SBSD enters into an agreement with the
custodian and the counterparty that
provides the nonbank SBSD with the
same control over the collateral as
would be the case if the nonbank SBSD
controlled the collateral directly; and (3)
an opinion of counsel deems the
agreement enforceable? The purpose of
these conditions would be to provide
the nonbank SBSD with the unfettered
ability to access the collateral in the
event the counterparty defaults and,
thereby, promote the financial condition
of the nonbank SBSD, particularly in a
time of market distress. Would this be
a practical exception? If not, please
explain why.
b. The Commission is considering
providing guidance on ways a nonbank
SBSD could structure the account
control agreement to meet a requirement
that the nonbank SBSD have the same
control over the collateral as would be
the case if the nonbank SBSD controlled
the collateral directly. In developing the
guidance on ways this requirement
could be met, the Commission asks
commenters to address whether the
agreement between the nonbank SBSD,
counterparty, and the third-party
custodian should: (1) Provide that the
collateral will be released promptly and
directed in accordance with the
instructions of the nonbank SBSD upon
the receipt of an effective notice from
the nonbank SBSD; (2) provide that
when the counterparty provides an
effective notice to access the collateral
the nonbank SBSD will have sufficient
time to challenge the notice in good
faith and that the collateral will not be
released until a prior agreed-upon
condition among the three parties has
occurred; and (3) give priority to an
effective notice from the nonbank SBSD
over an effective notice from the
counterparty, as well as priority to the
nonbank SBSD’s instruction about how
to transfer the collateral in the event the
custodian terminates the account
control agreement? Are there any other
provisions regarding the account control
agreement that the Commission should
address to assist nonbank SBSDs in
structuring the agreements to meet a
requirement in a rule that the nonbank
SBSD have the same control over the
collateral as would be the case if the
nonbank SBSD controlled the collateral
directly?
c. The potential modification to the
rule text in the 2012 Proposals
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discussed above in 4.a would establish
conditions under which a nonbank
SBSD could avoid the capital charge
that applies when a counterparty
requires initial margin to be segregated
pursuant to Section 3E(f) of the Act.
Would rule language as described below
effect this potential modification to the
rule text in the 2012 Proposals? If not,
please explain why and suggest
alternative rule language. If the
Commission were to use the language
described below, would it strike an
appropriate balance in terms of
achieving the objectives of the proposed
rule and addressing the commenters’
concerns about the impact of the capital
charge? If not, please explain why and
suggest alternative rule language that
could more effectively and efficiently
strike the balance and achieve the
objective.
The potential modifications to
paragraph (c)(2)(xv)(B) of Rule 15c3–1
would provide the following deductions
from net worth in lieu of collecting
collateral for security-based swap and
swap transactions: (1) Security-based
swaps. Deducting the amounts
calculated pursuant to § 240.18a–
3(c)(1)(i)(B) for the account of a
counterparty at the broker or dealer that
is subject to an initial margin exception
set forth in § 240.18a–3(c)(1)(iii), less
the margin value of collateral held in
the account of the counterparty at the
broker or dealer. (2) Swaps. Deducting
the initial margin calculated pursuant to
§ 240.18a–3(d)(2) for swaps other than
equity swaps, or § 240.15c3–1b, as
applicable, in the account of a
counterparty at the broker or dealer, less
the margin value of collateral held in
the account of the counterparty at the
broker or dealer. (3) Treatment of
collateral held at a third-party
custodian. For the purposes of the
deductions required pursuant to
paragraphs (c)(2)(xv)(B)(1) and (2) of
this section, collateral held by an
independent third-party custodian as
initial margin pursuant to Section 3E(f)
of the Act or Section 4s(l) of the
Commodity Exchange Act may be
treated as collateral held in the account
of the counterparty at the broker or
dealer if: (a) The independent thirdparty custodian is a bank as defined in
Section 3(a)(6) of the Act that is not
affiliated with the counterparty; (b) The
broker or dealer, the independent thirdparty custodian, and the counterparty
that delivered the collateral to the
custodian have executed an account
control agreement governing the terms
under which the custodian holds and
releases collateral pledged by the
counterparty as initial margin that
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provides the broker or dealer with the
same control over the collateral as
would be the case if the broker or dealer
controlled the collateral directly; and (c)
The broker or dealer obtains a written
opinion from outside counsel that the
account control agreement is legally
valid, binding, and enforceable in all
material respects, including in the event
of bankruptcy, insolvency, or a similar
proceeding.
Similarly, the potential modifications
to paragraph (c)(1)(ix) of Rule 18a–1
would provide the following deductions
from net worth in lieu of collecting
collateral for security-based swap and
swap transactions: (1) Security-based
swaps. Deducting the amounts
calculated pursuant to § 240.18a–
3(c)(1)(i)(B) for the account of a
counterparty at the security-based swap
dealer that is subject to an initial margin
exception set forth in § 240.18a–
3(c)(1)(iii), less the margin value of
collateral held in the account of the
counterparty at the security-based swap
dealer. (2) Swaps. Deducting the initial
margin calculated pursuant to
§ 240.18a–3(d)(2) for swaps other than
equity swaps, or § 240.18a–1b, as
applicable, in the account of a
counterparty at the security-based swap
dealer, less the margin value of
collateral held in the account of the
counterparty at the security-based swap
dealer. (3) Treatment of collateral held
at a third-party custodian. For the
purposes of the deductions required
pursuant to paragraphs (c)(1)(ix)(B)(1)
and (2) of this section, collateral held by
an independent third-party custodian as
initial margin pursuant to Section 3E(f)
of the Act or Section 4s(l) of the
Commodity Exchange Act may be
treated as collateral held in the account
of the counterparty at the security-based
swap dealer if: (a) The independent
third-party custodian is a bank as
defined in Section 3(a)(6) of the Act that
is not affiliated with the counterparty;
(b) The security-based swap dealer, the
independent third-party custodian, and
the counterparty that delivered the
collateral to the custodian have
executed an account control agreement
governing the terms under which the
custodian holds and releases collateral
pledged by the counterparty as initial
margin that provides the security-based
swap dealer with the same control over
the collateral as would be the case if the
security-based swap dealer controlled
the collateral directly; and (c) The
security-based swap dealer obtains a
written opinion from outside counsel
that the account control agreement is
legally valid, binding, and enforceable
in all material respects, including in the
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event of bankruptcy, insolvency, or a
similar proceeding.
5. The 2012 Proposals noted that a
nonbank SBSD would need to deduct
from net worth the value of initial
margin delivered to a counterparty
when computing net capital.36 A
comment letter 37 encouraged the
Commission to provide a means for
nonbank SBSDs to post initial margin to
SBSDs and other types of counterparties
without incurring the capital charge. If
the Commission adopts capital and
margin rules applicable to SBSDs,
should the Commission provide a
means for a nonbank SBSD to avoid this
deduction if the following conditions
are met: (1) The initial margin
requirement is funded by a fully
executed written loan agreement with
an affiliate of the broker-dealer; (2) the
loan agreement provides that the lender
waives re-payment of the loan until the
initial margin is returned to the brokerdealer; and (3) the broker-dealer’s
liability to the lender can be fully
satisfied by delivering the collateral
serving as initial margin to the lender? 38
A Commission action providing this
relief would be styled after the Staff
Letter. Would this approach provide a
practical solution with respect to
avoiding this capital charge? If not,
please explain why. Should the
Commission by rule permit this
approach? Are there alternatives that
would more effectively and efficiently
achieve this objective? If so, what are
they?
Margin
6. The 2012 Proposals included a
provision that would require a nonbank
SBSD to calculate a daily initial margin
amount for each counterparty.39 The
nonbank SBSD could use the
standardized or model-based deductions
36 See
2012 Proposals, 77 FR at 70267.
Letter from Institute of International
Bankers and Securities Industry and Financial
Markets Association (June 21, 2018).
38 In this regard, although not binding, the staff
of the Division of Trading and Markets issued a noaction letter (in the context of margin collateral
posted by a broker-dealer to a swap dealer or other
counterparty for a non-cleared swap) that stated
that the staff would not recommend enforcement
action to the Commission if a broker-dealer did not
take this deduction but met certain conditions. The
conditions include that: (1) The initial margin
requirement is funded by a fully executed written
loan agreement with an affiliate of the brokerdealer; (2) the loan agreement provides that the
lender waives re-payment of the loan until the
initial margin is returned to the broker-dealer; and
(3) the broker-dealer’s liability to the lender can be
fully satisfied by delivering the collateral serving as
initial margin to the lender. See Letter from Michael
A. Macchiaroli, Associate Director, Division of
Trading and Markets, Commission, to Kris Dailey,
Vice President, Risk Oversight and Regulation,
FINRA (Aug. 19, 2016) (‘‘Staff Letter’’).
39 See 2012 Proposals, 77 FR at 70261.
37 See
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prescribed in the proposed capital rule
for nonbank SBSDs to calculate the
initial margin amount, except that
initial margin for equity security-based
swaps would need to be determined
exclusively using the standardized
deductions.
Some commenters argued that the
Commission should approve a uniform
initial margin model because it would
reduce counterparty disputes and
increase efficiency.40 Since the
publication of the 2012 Proposals, the
prudential regulators and the CFTC
adopted final margin rules that permit
the use of a model to calculate initial
margin subject to the approval of the
CFTC or a firm’s prudential regulator.41
The Commission understands that the
firms subject to these final rules have
widely adopted the use of an industrydeveloped uniform model to compute
initial margin.42 In light of the
comments and the goals of this
provision, the Commission requests
comment on whether the margin rule
should permit nonbank SBSDs to apply
to use models other than proprietary
capital models to compute initial
margin, including applying to use a
standard industry model. The purpose
would be to provide flexibility to
nonbank SBSDs to apply to the
Commission for authorization to use a
proprietary or other model to compute
initial margin, and, with respect to an
industry standard model, to increase
transparency and decrease margin
disputes among counterparties.
Would rule language as described
below effect this potential modification
to the rule text in the 2012 Proposals?
If not, please explain why and suggest
alternative rule language. If the
Commission were to use the language
described below, would it strike an
appropriate balance in terms of
achieving the objectives of the proposed
rule and addressing commenters’
requests for more flexibility? If not,
please explain why and suggest
alternative rule language that could
more effectively and efficiently strike
the balance and achieve the objective.
40 See, e.g., Letter from Robert Pickel, Chief
Executive Officer, International Swaps and
Derivatives Association (Feb. 5, 2014) (‘‘ISDA 2/5/
2014 Letter’’).
41 See Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74840; Margin
Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 81 FR 636.
42 See, e.g., ISDA, ISDA SIMMTM Deployed Today;
New Industry Standard for Calculating Initial
Margin Widely Adopted by Market Participants
(Sept. 1, 2016), available at: https://www.isda.org/
2016/09/01/isda-simm-deployed-today-newindustry-standard-for-calculating-initial-marginwidely-adopted-by-market-participants/.
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The potential modifications to
paragraph (d)(2)(i) of Rule 18a–3 would
provide: For security-based swaps other
than equity security-based swaps, a
security-based swap dealer may apply to
the Commission for authorization to use
a model to compute the margin amount
required by paragraph (c)(1)(i)(B) of this
section and to compute the deductions
required by paragraph § 240.15c3–
1(c)(2)(xv) or § 240.18a–1(c)(1)(ix), as
applicable, subject to the application
process in § 240.15c3–1e or § 240.18a–
1(d), as applicable. The model must use
a ninety-nine percent (99%), one-tailed
confidence level with price changes
equivalent to a ten business-day
movement in rates and prices, and must
use risk factors sufficient to cover all the
material price risks inherent in the
positions for which the margin amount
or deductions are being calculated,
including foreign exchange or interest
rate risk, credit risk, equity risk, and
commodity risk, as appropriate.
Empirical correlations may be
recognized by the model within each
broad risk category, but not across broad
risk categories.
7. The 2012 Proposals included a
requirement that a nonbank SBSD
would need to collect initial and
variation margin from each counterparty
unless an exception applies.43 The
proposed rule contained four exceptions
under which variation and/or initial
margin need not be collected: (1) When
the counterparty is a commercial end
user; (2) when the counterparty is
another SBSD; (3) when the
counterparty requires segregation
pursuant to Section 3E(f) of the Act; and
(4) when the counterparty’s account
holds only legacy transactions.44
Some commenters encouraged the
Commission to adopt a threshold below
which initial margin need not be
collected and noted that the prudential
regulators and the CFTC established a
$50 million threshold (consistent with
the recommendation of an international
standard setting body).45 In light of the
comments and the goals of this
provision, the Commission requests
comment on whether it would be
appropriate to establish a risk-based
threshold. A fixed-dollar threshold,
depending on the size and activities of
the nonbank SBSD, could either be too
large and, therefore, not adequately
address the risk, or too small and,
43 See
2012 Proposals, 77 FR at 70263–69.
id.
45 See, e.g., Letter from Karrie McMillan, General
Counsel, Investment Company Institute (Feb. 4,
2013). See also BCBS, IOSCO, Margin Requirements
for Non-centrally Cleared Derivatives (Mar. 2015),
available at: https://www.bis.org/bcbs/publ/
d317.pdf.
44 See
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therefore, overcompensate for the risk.
Should a risk-based threshold take into
account the financial condition of the
SBSD and the counterparty by providing
that initial margin need not be collected
from a counterparty when the amount is
less than one percent (1%) or some
other percent of a nonbank SBSD’s
tentative net capital 46 and is less than
ten percent (10%) or some other
percent 47 of the counterparty’s net
worth (in which case, only the amount
above the threshold would need to be
collected)? The purpose of these
financial metrics would be to establish
a threshold that is scalable and has a
more direct relation to the risk to the
nonbank SBSD arising from its securitybased swap activities.
Would rule language as described
below effect this potential modification
to the rule text in the 2012 Proposals?
If not, please explain why and suggest
alternative rule language. If the
Commission were to use the language
described below, would it strike an
appropriate balance in terms of
achieving the objectives of the proposed
rule and addressing commenters’
requests for a threshold? If not, please
explain why and suggest alternative rule
language that could more effectively and
efficiently strike the balance and
achieve the objective.
The potential modifications to
paragraph (c)(1)(iii)(E) of Rule 18a-3
would provide that an SBSD may elect
not to collect the amount required under
paragraph (c)(1)(ii)(B) of this section to
the extent that the amount does not
exceed the lesser of: (1) 1 percent (1%)
of the security-based swap dealer’s
tentative net capital; or (2) ten percent
(10%) of the net worth of the
counterparty.
8. As noted above, the 2012 Proposals
included an exception from collecting
margin when the counterparty is
another SBSD.48 In particular, the
Commission proposed two alternatives
with respect to SBSD counterparties.49
Under the first alternative, a nonbank
SBSD would not need to collect initial
margin if the counterparty is another
SBSD (‘‘Alternative A’’). This approach
is consistent with the broker-dealer
margin rules, which generally do not
require a broker-dealer to collect margin
46 See, e.g., 17 CFR 240.15c3–3a, Note E(5) (using
a twenty-five percent (25%) of tentative net capital
threshold for when a broker-dealer must reduce
debits in the customer reserve formula).
47 See, e.g., 17 CFR 240.15c3–1(c)(2)(vi)(M)(1)
(using a ten percent (10%) of tentative net capital
threshold for the calculation of undue
concentration charges).
48 See 2012 Proposals, 77 FR at 70267–68.
49 See id.
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from another broker-dealer.50 Under the
proposed second alternative, a nonbank
SBSD would be required to collect
initial margin from another SBSD and
the initial margin would need to be
segregated pursuant to Section 3E(f) of
the Act (‘‘Alternative B’’).51
A commenter argued that Alternative
A was the preferred approach because
requiring SBSDs to collect initial margin
from other SBSDs would curtail the use
of non-cleared security-based swaps for
hedging, which would disrupt key
financial services, such as those that
facilitate the availability of home loans
and corporate finance.52 This
commenter also argued that the
requirement to collect initial margin
from another SBSD would have
detrimental pro-cyclical effects because
it would increase collateral demands in
times of market stress.53 Other
commenters supported Alternative B
stating that Alternative A would permit
an inappropriate build-up of systemic
risk for transactions within the financial
system.54
a. The Commission requests comment
and supporting data that would assist in
the quantification of the economic
impacts of Alternatives A and B. The
2012 Proposals discussed the potential
for increased use of leverage, the
potential for a nonbank SBSD to fail,
and the potential that a default by a
nonbank SBSD could translate to
defaults of counterparty SBSDs.55 The
2012 Proposals also noted that the
likelihood of these potential events
occurring would be smaller under
Alternative B than under Alternative
A.56 Would the proposed capital
requirements complement Alternative A
to reduce the potential for increased use
of leverage, the potential for a nonbank
SBSD to fail, and the potential that a
default by a nonbank SBSD could
translate to a default of counterparty
SBSDs caused by exposure to credit risk
in inter-dealer positions? Would there
be situations where the proposed capital
requirements and Alternative A would
not prevent a failure of a nonbank SBSD
caused by security-based swap trading
losses? Would there be situations where
the proposed capital requirements and
Alternative A would avoid a failure of
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50 See
id.
id.
52 See Letter from Robert Pickel, Chief Executive
Officer, International Swaps and Derivatives
Association (Jan. 23, 2013) (‘‘ISDA 1/23/2013
Letter’’).
53 See id.
54 See, e.g., Letter from Americans for Financial
Reform (Feb. 22, 2013).
55 See 2012 Proposals, 77 FR at 70267, 70322.
56 See id.
51 See
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a nonbank SBSD by not imposing procyclical collateral demands?
The 2012 Proposals also noted that in
comparison to Alternative A or current
practices, Alternative B could have a
more significant negative impact on the
liquidity of nonbank SBSDs and their
ability to trade in security-based
swaps.57 If Alternative B is adopted,
how much initial margin would be
segregated at third-party custodians and
how would it impact the liquidity of
nonbank SBSDs? If Alternative B is
adopted, would the proposed margin
requirements limit the ability of
nonbank SBSDs to trade in securitybased swaps?
Finally, the 2012 Proposals noted that
depending on whether Alternative A or
B is adopted, the proposed margin
requirements may create the potential
for regulatory arbitrage.58 In particular,
the 2012 Proposals noted that if the
Commission does not require nonbank
SBSDs to collect initial margin in their
inter-dealer transactions (as proposed in
Alternative A), while the prudential
regulators require the collection of
initial margin for the same transactions,
intermediaries could have an incentive
to conduct business through nonbank
entities.59 Would Alternative A create
more opportunities for regulatory
arbitrage than Alternative B, and would
these regulatory arbitrage opportunities
have a significant economic impact? If
so, please explain how. In addition,
Alternative A would differ in some
respects from an international policy
framework establishing recommended
minimum standards for margin
requirements for non-centrally cleared
derivatives.60 Would these or other
differences create opportunities for
regulatory arbitrage, impede
transactions with other market
participants, or have an impact on
substituted compliance determinations?
b. If Alternative A is adopted, should
the exception apply to a broader class of
entities than just other SBSDs? Should
it apply if the nonbank SBSD’s
counterparty is an SBSD, broker-dealer,
bank, futures commission merchant,
foreign bank, or foreign dealer? The
purpose of adopting Alternative A with
a modification to apply the exception to
a broader class of counterparties would
be to promote the liquidity of nonbank
SBSDs and other market participants by
reducing the amount of capital they
must post as initial margin to
counterparties.
id. at 70322.
id. at 70305–06.
59 See id.
60 See BCBS, IOSCO, Margin Requirements for
Non-centrally Cleared Derivatives (Mar. 2015).
Would rule language as described
below effect Alternative A with the
potential modification to expand the
range of entities from which initial
margin need not be collected? If not,
please explain why and suggest
alternative rule language. If the
Commission were to use the language
described below, would it strike an
appropriate balance in terms of
promoting the liquidity of nonbank
SBSDs and other market participants
and addressing commenters’ concerns
about building up systemic risk? If not,
please explain why and suggest
alternative rule language that could
more effectively and efficiently strike
the balance and achieve the objective.
The potential modifications to
paragraph (c)(1)(iii)(B) of Rule 18a–3
would provide that the requirements of
paragraph (c)(1)(ii)(B) of this section do
not apply to an account of a
counterparty that is a security-based
swap dealer, swap dealer, broker or
dealer, futures commission merchant,
bank, foreign bank, or a foreign broker
or dealer.
9. In response to the 2012 Proposals,
commenters argued that the
requirements adopted pursuant to Title
VII of the Dodd-Frank Act should
permit the portfolio margining of
security-based swaps, swaps, and
related positions.61 Portfolio margining
of security-based swaps, swaps, and
related positions can offer benefits to
investors and the markets, including
aligning margin requirements more
closely with the overall risks of a
customer’s portfolio. Further, portfolio
margining may help to improve cash
flows and liquidity, and reduce
volatility.
a. The Commission requests comment
on whether swaps should be permitted
to be held in a security-based swap
account at an entity that is registered as
a broker-dealer, nonbank SBSD, and
swap dealer to provide a means to
portfolio margin security-based swaps
with swaps and related cash market and
listed options positions. The
Commission also requests comment on
whether security-based swaps should be
permitted to be held in a swap account
at an entity that is registered as an FCM,
swap dealer, and nonbank SBSD to
provide a means to portfolio margin
security-based swaps with swaps and
related futures positions.
b. The Commission requests comment
on whether swaps should be permitted
to be held in a security-based swap
57 See
58 See
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61 See, e.g., Letter from Adam Jacobs, Director of
Markets Regulation, Alternative Investment
Management Association (Feb. 22, 2013) (‘‘AIMA 2/
22/2013 Letter’’).
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account at an entity that is registered as
a nonbank SBSD and swap dealer (but
not as a broker-dealer or FCM) to
provide a means to portfolio margin
security-based swaps and swaps in a
security-based swap account. The
Commission also requests comment on
whether security-based swaps should be
permitted to be held in a swap account
at an entity that is registered as a swap
dealer and SBSD (but not as an FCM or
broker-dealer) to provide a means to
portfolio margin security-based swaps
and swaps in a swap account. If so,
should such portfolio margining be
subject to conditions similar to those set
forth in the Commission’s exemptive
order permitting portfolio margining of
credit default swaps (e.g., conditions
regarding subordination agreements and
disclosures)? 62 In either scenario
identified in this paragraph, should the
SBSD dually registered as a swap dealer
be permitted to use a model to
determine portfolio margin
requirements for security-based swaps
and swaps that reference equity
securities, provided the accounts do not
hold cash market equity and listed
options positions?
c. The Commission requests comment
on how security-based swaps, swaps,
cash market and listed options
positions, and collateral held in a
security-based swap account at an entity
registered as a broker-dealer, nonbank
SBSD, and swap dealer would be treated
in a liquidation proceeding. The
Commission requests comment on how
security-based swaps, swaps, futures
positions, and collateral held in a swap
account at an entity registered as an
FCM, swap dealer, and nonbank SBSD
would be treated in a liquidation
proceeding. Would the treatment be
different if the entity was also registered
as a broker-dealer? The Commission
requests comment on how swaps and
security-based swaps held in a securitybased swap account at an entity
registered as an SBSD and swap dealer
would be treated in a liquidation
proceeding and how security-based
swaps and swaps held in a swap
account at such an entity would be
treated in a liquidation proceeding.
For each of the four scenarios
described above, what steps should be
taken to provide protections to the
accountholders? What rights (including
rights under the bankruptcy laws) might
accountholders have to waive? Should
there be limits on the types of
counterparties that would be permitted
62 See Order Granting Conditional Exemptions
Under the Securities Exchange Act of 1934 in
Connection with Portfolio Margining of Swaps and
Security-Based Swaps, Exchange Act Release No.
68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012).
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to waive these rights? Should the rule
require the nonbank SBSD to provide
complete and accurate disclosures about
the treatment of assets in a liquidation,
bankruptcy, or similar proceeding under
each of the scenarios described above so
that accountholders and prospective
accountholders can make informed
decisions about the type of portfolio
margin account they want to use and
about waiving any rights with respect to
the account?
d. The scenarios described above
include permitting: (1) An entity
registered as a broker-dealer, nonbank
SBSD, and swap dealer to hold swaps in
a security-based swap account to
provide a means to portfolio margin
security-based swaps with swaps and
related cash market and listed options
positions; and (2) an entity that is
registered as an SBSD and swap dealer
(but not as an FCM or broker-dealer) to
hold swaps in a security-based swap
account to provide a means to portfolio
margin security-based swaps and swaps
in a security-based swap account and to
use a model to determine portfolio
margin requirements for security-based
swaps and swaps that reference equity
securities, provided the accounts do not
hold cash market equity and listed
options positions.
Would rule language as described
below effect these approaches to
implement portfolio margining of swaps
in a security-based swap account? If not,
please explain why and suggest
alternative rule language. If the
Commission were to use the language
described below, would it strike an
appropriate balance in terms of
achieving the objectives of the proposed
rules and addressing commenters’
requests to permit portfolio margining of
swaps and security-based swaps? If not,
please explain why and suggest
alternative rule language that could
more effectively and efficiently strike
the balance and achieve the objective.
The potential modifications to
paragraph (a)(3) of Appendix A to Rule
15c3–1 would provide: The term related
instrument within an option class or
product group refers to futures
contracts, options on futures contracts,
and swaps covering the same
underlying instrument. In relation to
options on foreign currencies a related
instrument within an option class also
shall include forward contracts on the
same underlying currency.
The potential modifications to
paragraph (a)(4) of Appendix A to Rule
15c3–1 would also provide: The term
underlying instrument refers to long and
short positions, as appropriate, covering
the same foreign currency, the same
security, security future, security-based
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swap, or a security which is
exchangeable for or convertible into the
underlying security within a period of
90 days. If the exchange or conversion
requires the payment of money or
results in a loss upon conversion at the
time when the security is deemed an
underlying instrument for purposes of
this Appendix A, the broker or dealer
will deduct from net worth the full
amount of the conversion loss. The term
underlying instrument shall not be
deemed to include securities options,
futures contracts, options on futures
contracts, qualified stock baskets,
unlisted instruments (other than
security-based swaps), or swaps.
The potential modifications to
paragraph (a)(3) of Appendix A to Rule
18a–1 would provide: The term related
instrument within an option class or
product group refers to futures
contracts, options on futures contracts,
and swaps covering the same
underlying instrument. In relation to
options on foreign currencies, a related
instrument within an option class also
shall include forward contracts on the
same underlying currency.
The potential modifications to
paragraph (a)(4) of Appendix A to Rule
18a–1 would provide: The term
underlying instrument refers to long and
short positions, as appropriate, covering
the same foreign currency, the same
security, security future, security-based
swap, or a security which is
exchangeable for or convertible into the
underlying security within a period of
90 days. If the exchange or conversion
requires the payment of money or
results in a loss upon conversion at the
time when the security is deemed an
underlying instrument for purposes of
this Appendix A, the security-based
swap dealer will deduct from net worth
the full amount of the conversion loss.
The term underlying instrument shall
not be deemed to include securities
options, futures contracts, options on
futures contracts, qualified stock
baskets, unlisted instruments (other
than security-based swaps), or swaps.
The potential modifications to
paragraph (d)(2)(ii) of Rule 18a–3 would
provide: Notwithstanding paragraph
(d)(2)(i) of this section, a security-based
swap dealer that is not registered as a
broker or dealer pursuant to Section
15(b) of the Act (15 U.S.C. 78o(b)) may
apply to the Commission for
authorization to use a model to compute
the margin amount required by
paragraph (c)(1)(i)(B) of this section and
to compute the deductions required by
paragraph § 240.18a–1(c)(1)(ix) for
equity security-based swaps and equity
swaps, subject to the application
process and model requirements of
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paragraph (d)(2)(i) of this section;
provided, however, the account of the
counterparty subject to the requirements
of this paragraph may not hold equity
securities or listed options.
Segregation
10. Section 3E(f) of the Act provides
that a counterparty to a non-cleared
security-based swap with an SBSD can
require that initial margin be segregated
at a third-party custodian or waive
segregation.63 The 2012 Proposals
included a third alternative under
which the initial margin for the noncleared security-based swap could be
held by the SBSD and subject to
requirements modeled on the brokerdealer customer protection rule but
tailored to security-based swaps
(‘‘omnibus segregation
requirements’’).64 The omnibus
segregation requirements would be
mandatory for initial margin held by the
SBSD for cleared security-based swaps.
a. The Commission received a number
of comments asking technical questions
about how the proposed omnibus
segregation requirements would operate
in the context of security-based swap
transactions, including specific
questions about the computation of the
reserve formula, and what types of
hedging would be permitted under the
proposed definition of ‘‘excess
securities collateral.’’ 65 The
Commission requests comment on
whether there are aspects of the
proposed omnibus segregation
requirements where greater clarity
regarding the application of the rule
would be helpful. If so, please identify
them and suggest appropriate
modifications to the proposed rule.
b. The 2013 Proposals would treat
segregation as a transaction-level
requirement, and the Commission
proposed paragraph (e) of Rule 18a–4 to
prescribe the scope of application of the
segregation requirements in Section
3E(f) of the Act and Rule 18a–4.66 The
proposed cross-border application of
these segregation requirements to a
foreign SBSD or foreign MSBSP
depended on whether it is a registered
broker-dealer, a U.S. branch or agency of
a foreign bank, or neither of the above,
and whether the security-based swaps
are cleared or non-cleared.67 The
Commission requests comment on
whether there are aspects of the
proposed cross-border application of the
63 See
15 U.S.C. 78c–5(f)(3).
64 See 2012 Proposals, 77 FR at 70274–88; 17 CFR
240.15c3–3.
65 See, e.g., SIFMA 2/22/2013 Letter.
66 See 2013 Proposals, 78 FR at 31010–11, 31018–
22, 31209–10.
67 See id. at 31018–22.
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segregation requirements where greater
clarity regarding the application of the
rule would be helpful. If so, please
identify them and suggest appropriate
modifications to the proposed rule.
c. The 2013 Proposals provided that
a foreign SBSD that is a U.S. branch or
agency of a foreign bank must comply
with segregation requirements with
respect to security-based swap
transactions with U.S. security-based
swap customers, but not with foreign
security-based swap customers.68
Should the segregation requirements
apply to certain foreign security-based
swap customers? In particular, the
Commission requests comment on
whether a foreign SBSD that is not a
broker-dealer and is a foreign bank
should be required to comply with the
segregation requirements (1) with
respect to U.S. security-based swap
customers (regardless of which branch
or agency the customer’s transactions
arise out of), and (2) with respect to a
foreign security-based swap customer if
the foreign SBSD holds funds or other
property arising out of a transaction had
by such person with a U.S. branch or
agency of the foreign SBSD.
11. The Commission received a
comment that the broker-dealer
customer protection rule (Rule 15c3–3)
should be amended to take into account
margin that is posted at a clearing
agency by broker-dealers not registered
as SBSDs.69 The Commission requests
comment on whether Rule 15c3–3
should be amended to add a new
paragraph (p) and a new Exhibit B that
would contain segregation requirements
and a customer reserve formula that
parallel those in proposed Rule 18a–4.
The security-based swap segregation
requirements that would be added to
Rule 15c3–3 would be substantially the
same as the requirements in each
paragraph of proposed Rule 18a–4.70
The purpose would be to permit brokerdealers that are not registered as SBSDs
but that engage in security-based swap
activities to use segregation
requirements that parallel those in
proposed Rule 18a–4 and which are
tailored to security-based swaps. In
addition, the purpose would be to locate
in Rule 15c3–3 the security-based swap
segregation requirements for entities
registered as a broker-dealer and SBSD.
Proposed Rule 18a–4 would apply to
68 See
id.
Letter from Kathleen M. Cronin, CME
Group Inc. (Feb. 22, 2013).
70 The provisions of paragraph (d) of proposed
Rule 18a–4 would not apply to a broker-dealer that
is not also registered as either an SBSD or MSBSP
because Section 3E(f)(1)(A) of the Act does not
apply to broker-dealers. See 2012 Proposals, 77 FR
at 70287.
69 See
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SBSDs that are not registered as brokerdealers.
12. The 2012 Proposals include a
definition of ‘‘excess securities
collateral’’ to identify securities and
money market instruments received
from security-based swap customers
that must be held in physical possession
or control.71 In particular, securities and
money market instruments that are not
being used to collateralize the SBSD’s
current exposure to the customer (i.e.,
exceed the variation margin
requirement) would need to be in the
physical possession or control of the
SBSD unless one of two exceptions
applied.72 The exceptions are that the
securities and money market
instruments are held in a: (1) Qualified
clearing agency account but only to the
extent they are being used to meet a
margin requirement of the clearing
agency; or (2) qualified SBSD account
but only to the extent they are being
used to meet a margin requirement that
applies to the other SBSD resulting from
entering into a non-cleared securitybased swap transaction with the other
SBSD to offset the risk of a non-cleared
security-based swap transaction
between the SBSD and the customer.73
In addition, the 2012 Proposals
included a requirement for an SBSD to
perform a customer reserve formula
calculation.74 Under the proposal, an
SBSD could include as a debit item in
the formula cash collateral posted to a
clearing agency or another SBSD under
the same circumstances as the
exceptions to the definition of ‘‘excess
securities collateral.’’ 75 The prudential
regulators require initial margin posted
by an SBSD to a bank SBSD to be held
at a third-party custodian (rather than
being held directly by the bank SBSD).76
This means that if an SBSD enters into
a transaction with a bank SBSD to hedge
a non-cleared security-based swap
transaction with a security-based swap
customer, the SBSD may have to post
initial margin to the bank SBSD and that
initial margin would need to be held by
a third-party custodian rather than
directly by the bank SBSD.
The Commission requests comment
on how initial margin posted by an
SBSD to a bank SBSD to hedge a
transaction with a security-based swap
customer should be treated for purposes
of the possession or control and
customer reserve requirements in the
71 See
2012 Proposals, 77 FR at 70278–70282.
id.
73 See id.
74 See id. at 70282–87.
75 See id.
76 See 12 CFR 45.7; 12 CFR 237.7; 12 CFR 624.7;
12 CFR 1221.7; 12 CFR 349.7.
72 See
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proposed SBSD segregation rule. For
purposes of the possession or control
and customer reserve account
requirements, should the initial margin
be treated similarly to how initial
margin an SBSD posts to a nonbank
SBSD is treated if the purpose is to enter
into a transaction that hedges a
transaction with a security-based swap
customer? The purpose would be to
accommodate an SBSD that elects to
enter into a hedging transaction with a
bank SBSD and must post initial margin
that is segregated at a third-party
custodian.
Would rule language as described
below effect this potential modification
to the rule text in the 2012 Proposals?
If not, please explain why and suggest
alternative rule language. If the
Commission were to use the language
described below, would it strike an
appropriate balance in terms of
achieving the objectives of the proposed
rule and accommodating SBSDs that
elect to hedge a non-cleared securitybased swap transaction by entering into
an off-setting transaction with a bank
SBSD? If not, please explain why and
suggest alternative rule language that
could more effectively and efficiently
strike the balance and achieve the
objective.
The potential modifications to
paragraph (p)(1)(ii) of Rule 15c3–3
would provide: The term excess
securities collateral means securities
and money market instruments carried
for the account of a security-based swap
customer that have a market value in
excess of the current exposure of the
broker or dealer (after reducing the
current exposure by the amount of cash
in the account) to the security-based
swap customer, excluding: (A)
Securities and money market
instruments held in a qualified clearing
agency account but only to the extent
the securities and money market
instruments are being used to meet a
margin requirement of the clearing
agency resulting from a security-based
swap transaction of the security-based
swap customer; and (B) securities and
money market instruments held in a
qualified registered security-based swap
dealer account or in a third-party
custodial account but only to the extent
the securities and money market
instruments are being used to meet a
regulatory margin requirement of a
security-based swap dealer resulting
from the broker or dealer entering into
a non-cleared security-based swap
transaction with the security-based
swap dealer to offset the risk of a noncleared security-based swap transaction
between the broker or dealer and the
security-based swap customer.
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The potential modifications to
paragraph (p)(1)(viii) of Rule 15c3–3
would provide: The term third-party
custodial account means an account
carried by an independent third-party
custodian that meets the following
conditions: (A) The account is
established for the purposes of meeting
regulatory margin requirements of
another security-based swap dealer; (B)
The account is carried by a bank; (C)
The account is designated for and on
behalf of the broker or dealer for the
benefit of its security-based swap
customers and the account is subject to
a written acknowledgement by the bank
provided to and retained by the broker
or dealer that the funds and other
property held in the account are being
held by the bank for the exclusive
benefit of the security-based swap
customers of the broker or dealer and
are being kept separate from any other
accounts maintained by the broker or
dealer with the bank; and (D) The
account is subject to a written contract
between the broker or dealer and the
bank which provides that the funds and
other property in the account shall at no
time be used directly or indirectly as
security for a loan or other extension of
credit to the security-based swap dealer
by the bank and, shall be subject to no
right, charge, security interest, lien, or
claim of any kind in favor of the bank
or any person claiming through the
bank.
The potential modifications to Line 16
of Exhibit B to Rule 15c3–3 would
provide: Margin related to non-cleared
security-based swap transactions in
accounts carried for security-based swap
customers required and held in a
qualified registered security-based swap
dealer account at another security-based
swap dealer or at a third-party custodial
account.
The potential modifications to
paragraph (a)(2) of Rule 18a–4 would
provide: The term excess securities
collateral means securities and money
market instruments carried for the
account of a security-based swap
customer that have a market value in
excess of the current exposure of the
security-based swap dealer (after
reducing the current exposure by the
amount of cash in the account) to the
security-based swap customer,
excluding (i) securities and money
market instruments held in a qualified
clearing agency account but only to the
extent the securities and money market
instruments are being used to meet a
margin requirement of the clearing
agency resulting from a security-based
swap transaction of the security-based
swap customer; and (ii) securities and
money market instruments held in a
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qualified registered security-based swap
dealer account or in a third-party
custodial account but only to the extent
the securities and money market
instruments are being used to meet a
regulatory margin requirement of
another security-based swap dealer
resulting from the security-based swap
dealer entering into a non-cleared
security-based swap transaction with
the other security-based swap dealer to
offset the risk of a non-cleared securitybased swap transaction between the
security-based swap dealer and the
security-based swap customer.
The potential modifications to
paragraph (a)(10) of Rule 18a–4 would
also provide: The term third-party
custodial account means an account
carried by an independent third-party
custodian that meets the following
conditions: (i) The account is
established for the purposes of meeting
regulatory margin requirements of
another security-based swap dealer; (ii)
The account is carried by a bank; (iii)
The account is designated for and on
behalf of the security-based swap dealer
for the benefit of its security-based swap
customers and the account is subject to
a written acknowledgement by the bank
provided to and retained by the
security-based swap dealer that the
funds and other property held in the
account are being held by the bank for
the exclusive benefit of the securitybased swap customers of the securitybased swap dealer and are being kept
separate from any other accounts
maintained by the security-based swap
dealer with the bank; and (iv) The
account is subject to a written contract
between the security-based swap dealer
and the bank which provides that the
funds and other property in the account
shall at no time be used directly or
indirectly as security for a loan or other
extension of credit to the security-based
swap dealer by the bank and, shall be
subject to no right, charge, security
interest, lien, or claim of any kind in
favor of the bank or any person claiming
through the bank.
The potential modifications to Line 14
of Exhibit A to Rule 18a–4 would
provide: Margin related to non-cleared
security-based swap transactions in
accounts carried for security-based swap
customers required and held in a
qualified registered security-based swap
dealer account at another security-based
swap dealer or at a third-party custodial
account.
13. The 2012 Proposals required an
SBSD to deduct the amount of funds
held in a security-based swap customer
reserve account at a single bank to the
extent the amount exceeds ten percent
(10%) of the equity capital of the bank
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as reported by the bank in its most
recent Consolidated Report of Condition
and Income (‘‘Call Report’’).77 This
proposal was consistent with
amendments to Rule 15c3–3 that at that
time were still in the proposal stage.78
In 2013, the Commission adopted with
modifications the amendments to Rule
15c3–3.79 The modifications increased
the threshold applicable to brokerdealer customer reserve accounts held at
a bank to fifteen percent (15%) and
excluded cash on deposit at an affiliated
bank.
The Commission requests comment
on whether, for consistency with brokerdealers, the threshold applicable to
SBSD customer reserve accounts held at
a bank should be increased to fifteen
percent (15%) of the bank’s equity
capital and whether any cash deposited
with an affiliated bank should be
excluded. The purpose would be to
more closely align the proposed
segregation requirements for securitybased swaps with the existing customer
reserve requirements in Rule 15c3–3, as
amended in 2013. Should the fifteen
percent (15%) threshold not apply if the
SBSD is a bank and maintains the
security-based swap customer reserve
account itself rather than at an affiliated
or non-affiliated bank? The purpose of
this exception would be to
accommodate a bank SBSD that holds
the customer reserve account directly.
The changes discussed above would
modify paragraph (c)(1) of proposed
Rule 18a–4 and new paragraph (p)(3) of
proposed Rule 15c3–3 to more closely
align them with the 2013 amendments
to Rule 15c3–3 and, with respect to
proposed Rule 18a–4, establish an
exception from the fifteen percent (15%)
threshold for a bank SBSD that
maintains the security-based swap
customer reserve account itself. Would
rule language as described below effect
this potential modification to the rule
text in the 2012 Proposals? If not, please
explain why and suggest alternative rule
language. If the Commission were to use
the language described below, would it
strike an appropriate balance in terms of
achieving the objectives of the proposed
rule and providing sufficient flexibility
to SBSDs in terms of locating their
reserve account deposits? If not, please
explain why and suggest alternative rule
language that could more effectively and
efficiently strike the balance and
achieve the objective.
77 See
2012 Proposals, 77 FR at 70282–86.
Amendments to Financial Responsibility
Rules for Broker-Dealers, Exchange Act Release No.
55431 (Mar. 9, 2007), 72 FR 12862 (Mar. 19, 2007).
79 See Financial Responsibility Rules for BrokerDealers, Exchange Act Release No. 70072 (Jul. 30,
2013), 78 FR 51824, 51832–35 (Aug. 21, 2013).
78 See
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The potential modifications to
paragraph (p)(3)(i) of Rule 15c3–3
would provide: In determining the
amount maintained in a special reserve
account for the exclusive benefit of
security-based swap customers, the
security-based swap dealer must deduct
(A) the amount of cash deposited with
a single non-affiliated bank to the extent
the amount exceeds fifteen percent
(15%) of the equity capital of the bank
as reported by the bank in its most
recent Call Report or any successor form
the bank is required to file by its
appropriate federal banking agency (as
defined by Section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813));
and (B) the total amount of cash
deposited with an affiliated bank.
Similarly, the potential modifications
to paragraph (c)(1)(i) of Rule 18a–4
would provide: In determining the
amount maintained in a special reserve
account for the exclusive benefit of
security-based swap customers, the
security-based swap dealer must deduct
(A) the amount of cash deposited with
a single non-affiliated bank to the extent
the amount exceeds fifteen percent
(15%) of the equity capital of the bank
as reported by the bank in its most
recent Call Report or any successor form
the bank is required to file by its
appropriate federal banking agency (as
defined by Section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813));
and (B) for a security-based swap dealer
for which there is not a prudential
regulator, the total amount of cash
deposited with an affiliated bank.
The potential modifications to
paragraph (c)(1)(ii) of Rule 18a–4 would
provide the following exception: A
security-based swap dealer for which
there is a prudential regulator need not
take the deduction specified in
paragraph (c)(1)(i)(D) of this section if it
maintains the special reserve account
for the exclusive benefit of securitybased swap customers itself rather than
at an affiliated or non-affiliated bank.
Substituted Compliance
14. The 2013 Proposals would make
substituted compliance with respect to
capital and margin requirements
available to foreign nonbank SBSDs that
are not also registered as brokerdealers.80 Upon a Commission
substituted compliance determination,
this type of SBSD would be able to
satisfy relevant capital and margin
requirements by complying with
corresponding requirements under a
foreign regulatory system. The
Commission requests comment on
whether the potential modifications to
80 See
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the rule text in the 2012 Proposals
discussed in this release would have an
impact on substituted compliance
determinations. If so, please explain
how.
A number of commenters requested
that the Commission consider
consistency with the prudential
regulators, international standards, and
foreign regulators when making
substituted compliance determinations
with respect to the proposed nonbank
SBSD capital requirements.81
a. Commenters generally requested
additional guidance regarding the
criteria the Commission would consider
when making substituted compliance
determinations.82 In light of the
comments and the goals of this
provision, the Commission requests
comment on the factors it should
consider in making a substituted
compliance determination with respect
to the proposed nonbank SBSD capital
requirements of Section 15F(e) of the
Act and proposed Rule 18a–1. In
making a substituted compliance
determination, should the Commission
consider whether the capital
requirements of the foreign financial
regulatory system are designed to help
ensure the safety and soundness of
registrants in a manner that is
comparable to the proposed capital
requirements for nonbank SBSDs? 83 In
addition, the proposed nonbank SBSD
capital rule prescribes a net liquid assets
test that requires the firm to have an
amount of highly liquid assets that
exceeds the amount of the firm’s
unsubordinated liabilities.84 In terms of
the conditions that might be included in
an order making an affirmative
substituted compliance determination,
should the Commission consider a
condition that requires foreign nonbank
SBSDs relying on the order to maintain
liquid assets in excess of their
unsubordinated liabilities? 85 Are there
81 See,
e.g., ISDA 1/23/2013 Letter.
e.g., Letter from the Coalition for
Derivatives End-Users (Agricultural Retailers
Association, Business Roundtable, Financial
Executives International, National Association of
Corporate Treasurers, National Association of
Manufacturers, U.S. Chamber of Commerce) (Aug.
21, 2013).
83 See, e.g., 15 U.S.C. 78o–10(e)(3)(A).
84 See 2012 Proposals, 77 FR at 70221–25.
85 See Interpretation Guide to Net Capital
Computation for Brokers and Dealers, Exchange Act
Release No. 8024 (Jan. 18, 1967), 32 FR 856 (Jan.
25, 1967) (‘‘Rule 15c3–1 (17 CFR 240.15c3–1) was
adopted to provide safeguards for public investors
by setting standards of financial responsibility to be
met by brokers and dealers. The basic concept of
the rule is liquidity; its object being to require a
broker-dealer to have at all times sufficient liquid
assets to cover his current indebtedness.’’)
(footnotes omitted); Net Capital Requirements for
Brokers and Dealers, Exchange Act Release No.
15426 (Dec. 21, 1978), 44 FR 1754 (Jan. 8, 1979)
82 See,
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reasonable alternatives to a net liquid
assets test that could be the basis for a
condition that is designed to ensure the
foreign nonbank SBSD maintains
sufficient liquidity to meet its
obligations to security-based swap
customers and other creditors? If so,
describe them and explain how they
would achieve this objective. Would
these alternatives be appropriate for a
domestic nonbank SBSD that is not
registered as a broker-dealer? If so,
explain why. Should the Commission
consider a condition that the foreign
nonbank SBSD not have a
disproportionate number of U.S.
customers? If not, explain why.
b. The Commission requests comment
on the composition of the balance sheets
of entities in foreign jurisdictions that
may register as nonbank SBSDs. Are the
assets and liabilities of these foreign
entities similar to the assets and
liabilities of U.S. broker-dealers that are
subject to the net liquid assets test? If
not, explain the differences.
c. The approach described in 14.a
would modify Rule 3a71–6 (proposed as
Exchange Act Rule 3a71–5 at 78 FR
30967, 31207–08) to describe factors
that the Commission would consider in
making a substituted compliance
determination with respect to the
proposed nonbank SBSD capital
requirements.86 Would rule language as
described below effect this potential
modification to the rule text in the 2012
Proposals? If not, please explain why
and suggest alternative rule language. If
the Commission were to use the
language described below, would it
strike an appropriate balance in terms of
achieving the objectives of the proposed
rule and addressing the commenters’
concerns described above? If not, please
explain why and suggest alternative rule
language that could more effectively and
efficiently strike the balance and
achieve the objective.
The potential modifications to
paragraph (d)(4) of Rule 3a71–6 would
(‘‘The rule requires brokers or dealers to have
sufficient cash or liquid assets to protect the cash
or securities positions carried in their customers’
accounts. The thrust of the rule is to insure that a
broker or dealer has sufficient liquid assets to cover
current indebtedness.’’); Net Capital Requirements
for Brokers and Dealers, Exchange Act Release No.
26402 (Dec. 28, 1989), 54 FR 315 (Jan. 5, 1989)
(‘‘The rule’s design is that broker-dealers maintain
liquid assets in sufficient amounts to enable them
to satisfy promptly their liabilities. The rule
accomplishes this by requiring broker-dealers to
maintain liquid assets in excess of their liabilities
to protect against potential market and credit
risks.’’) (footnote omitted). See also Cross-Border
Security-Based Swap Activities; Re-Proposal of
Regulation SBSR and Certain Rules and Forms
Relating to the Registration of Security-Based Swap
Dealers and Major Security-Based Swap
Participants; Proposed Rule, 78 FR at 31090.
86 See 17 CFR 240.3a71–6.
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provide that substituted compliance is
available with respect to: The capital
requirements of Section 15F(e) of the
Act (15 U.S.C. 78o–10(e)) and
§ 240.18a–1; provided, however, that
prior to making such substituted
compliance determination with respect
to security-based swap dealers, the
Commission intends to consider (in
addition to any conditions imposed)
whether the capital requirements of the
foreign financial regulatory system are
designed to help ensure the safety and
soundness of registrants in a manner
that is comparable to the applicable
provisions arising under the Act and its
rules and regulations.
Compliance Date
15. In the Commission’s release
establishing the registration process for
SBSDs and MSBSPs, the Commission
provided that the compliance date for
the SBSD and MSBSP registration
requirements will be the later of: Six
months after the date of publication in
the Federal Register of final rules
establishing capital, margin, and
segregation requirements for SBSDs and
MSBSPs; the compliance date of final
rules establishing recordkeeping and
reporting requirements for SBSDs and
MSBSPs; the compliance date of final
rules establishing business conduct
requirements under Sections 15F(h) and
15F(k) of the Exchange Act; or the
compliance date for final rules
establishing a process for a registered
SBSD or MSBSP to make an application
to the Commission to allow an
associated person who is subject to a
statutory disqualification to effect or be
involved in effecting security-based
swaps on the SBSD or MSBSP’s behalf
(the ‘‘Registration Compliance Date’’).87
Would this provide enough time for
registrants to take the necessary steps to
come into compliance with applicable
requirements? If not, explain why.
Would a longer period, such as 18
months after the date of publication of
the last of four releases noted above in
the Federal Register, be more
appropriate? If so, explain why. Would
a shorter period be more appropriate? If
so, explain why. Should the
Commission consider the timing of the
phased implementation of initial margin
requirements provided for by other
regulators in making any changes to the
compliance period? 88 If so, explain
why.
87 See Registration Process for Security-Based
Swap Dealers and Major Security-Based Swap
Participants, Exchange Act Release No. 75611 (Aug.
5, 2015), 80 FR 48963 (Aug. 14, 2015).
88 See Margin and Capital Requirements for
Covered Swap Entities, 80 FR at 74849–51 (adopting
compliance dates phasing-in initial margin
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53019
Additional Requests for Comment—
Economic Implications
16. The Proposals contain economic
analyses seeking to identify and
consider the benefits and costs—
including the effects on efficiency,
competition and capital formation—that
would result from the proposed capital,
margin, and segregation requirements.
To assist in the quantification of the
economic effects of the proposed
requirements, the Commission requests
comment and supporting data on the
current risk management practices that
support the trading activity in securitybased swaps. Specifically, what are the
main sources of funding available to
entities that would be registering as
nonbank SBSDs to support their trading
activity? How much of the capital
available to an entity that would be
registering as a nonbank SBSD consists
of liquid capital? What are typical risk
management procedures for dealing
with losses stemming from the market
risk of security-based swap positions?
What are typical risk management
procedures for dealing with losses
stemming from the credit risk of
uncollateralized security-based swap
positions? In the event that losses from
trading activities overcome the available
liquid capital, how are excess losses
dealt with? What are the operational
risks and concerns associated with
maintaining adequate levels of capital?
The Commission also requests
comment and data on how the baseline
of the economic analyses has changed
since the publication of the Proposals.
For example, in 2015, the U.S.
prudential regulators and the CFTC
adopted final rules on minimum margin
requirements for non-cleared swaps that
began to be implemented in September
2016. A June 2017 survey on dealer
financing terms noted that some of the
survey respondents indicated that their
clients’ transaction volume or their own
transaction volume in non-cleared
swaps decreased somewhat over the
period of September 2016 to June
2017.89 However, the respondents
reported no changes in the prices that
requirements beginning September 1, 2016 and
ending September 1, 2020 for bank swap dealers,
bank SBSDs, bank swap participants, and bank
MSBSPs); Margin Requirements for Uncleared
Swaps for Swap Dealers and Major Swap
Participants, 81 FR at 674–677 (adopting
compliance dates phasing-in initial margin
requirements beginning September 1, 2016 and
ending September 1, 2020 for nonbank swap dealers
and nonbank major swap participants).
89 See Yesol Huh, Division of Research and
Statistics, Board of Governors of the Federal
Reserve System, The June 2017 Senior Credit
Officer Opinion Survey on Dealer Financing Terms,
available at https://www.federalreserve.gov/data/
scoos/files/scoos_201706.pdf.
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they quote to their clients in noncleared swaps over this period. Onefifth of the survey respondents also
reported that they would be less likely
to exchange daily variation margin with
mutual funds, exchange-traded funds,
pension plans, endowments, and
separately managed accounts
established with investment advisers
due primarily to lack of operational
readiness (e.g., the need to establish or
update the necessary credit support
annexes to cover daily exchange of
variation margin) over this period. Twofifths of the survey respondents also
reported that the volume of mark and
collateral disputes on variation margin
has increased somewhat over this
period. Furthermore, the survey noted
that there is variation among
respondents with respect to the number
of days it takes to resolve a mark and
collateral dispute on variation margin,
with one-third reporting less than two
days, while three-fifths reporting more
than two days but less than a week, on
average. This type of data could provide
insight regarding how entities that may
register as nonbank SBSDs may respond
to the Commission’s final margin
requirements.
Commenters are asked to describe
changes, if applicable, in: (1) The
trading volumes in the relevant securitybased swap and swap markets; (2) the
regulatory structure of these markets;
and (3) the number and types of entities
that participate in these markets.
Commenters also are asked to describe
how those changes in the baseline
would impact the potential benefits and
costs—including the effects on
efficiency, competition and capital
formation—of the Proposals as well as
the potential benefits and costs—
including the effects on efficiency,
competition and capital formation—that
would result from the potential
alternatives described in the questions
above taking the changes in the baseline
into account (if applicable).
Finally, the Commission requests
comment on whether there are
economic considerations apart from
those discussed in the Proposals that
should be considered in the economic
analysis of the capital, margin, and
segregation requirements as well as the
alternatives described in the questions
above.
By the Commission.
Dated: October 11, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–22531 Filed 10–18–18; 8:45 am]
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(available at https://www.esd.whs.mil/
Portals/54/Documents/DD/issuances/
dodd/514501p.pdf), to issue this policy.
Title 10 U.S.C. 1037 authorizes the
payment of counsel and other fees in
certain cases in foreign judicial
tribunals and administrative agencies.
DEPARTMENT OF DEFENSE
Office of the Secretary
32 CFR Part 151
[Docket ID: DOD–2012–OS–0069]
RIN 0790–AI89
Foreign Criminal and Civil Jurisdiction
Department of Defense (DoD).
Proposed rule.
AGENCY:
ACTION:
This rule describes
procedures concerning trial by foreign
criminal courts of, treatment in foreign
prisons of, and the payment of counsel
fees in certain civil cases for individuals
referred to collectively in this rule as
‘‘dependents of DoD personnel.’’
DATES: Comments must be received by
December 18, 2018.
ADDRESSES: You may submit comments,
identified by docket number and or RIN
number and title, by any of the
following methods:
• Federal Rulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail: Department of Defense, Office
of the Chief Management Officer,
Directorate for Oversight and
Compliance, 4800 Mark Center Drive,
Mailbox #24, Suite 08D09, Alexandria,
VA 22350–1700.
Instructions: All submissions received
must include the agency name and
docket number or Regulatory
Information Number (RIN). The general
policy for comments and other
submissions from members of the public
is to make these submissions available
at https://www.regulations.gov as they
are received without change, including
any personal identifiers or contact
information.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Bart
Wager, 703–571–9355.
SUPPLEMENTARY INFORMATION:
Authorities
Taken together, two statutes authorize
the Secretary of Defense to issue legally
binding guidelines on the Department of
Defense. Under 10 U.S.C. 113, the
Secretary has ‘‘authority, direction, and
control’’ over the Department of
Defense. The Department of Defense is
an ‘‘executive department,’’ and the
Secretary, as the head of an ‘‘executive
department,’’ is empowered under 5
U.S.C. 301 to issue departmental
regulations. The General Counsel of the
Department of Defense has been
delegated authority under Department
of Defense Directive 5145.01, ‘‘General
Counsel of the Department of Defense’’
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Revisions Proposed by This Rule
This rule will update 32 CFR part 151,
‘‘Status of Forces Policies and
Information’’ which was last updated on
March 28, 1980. In 1985, Section 681 of
Public Law 99–145 amended 10 U.S.C.
1037 to authorize the payment of
counsel fees for those ‘‘not subject to the
Uniform Code of Military Justice.’’ So
this rule proposes to update and
describe procedures concerning trial by
foreign criminal courts of, treatment in
foreign prisons of, and the payment of
counsel fees in certain civil cases for
command-sponsored and non-command
sponsored dependents of Armed Forces
members, and dependents of nationals
and non-nationals of the United States
who are serving with or accompanying
the Military Services.
Summary of the Major Provisions
For dependents of DoD personnel,
when those dependents are in a foreign
country as a result of accompanying
DoD personnel who are assigned duty in
that country—it is Department of
Defense policy to (a) maximize the
exercise of U.S. jurisdiction to the
extent permissible under applicable
status of forces agreements or other
forms of jurisdiction arrangements; (b)
protect, to the maximum extent
possible, the rights of dependents of
DoD personnel who may be subject to
criminal trial by foreign courts and
imprisonment in foreign prisons; and (c)
secure, where possible, the release of an
accused to the custody of U.S.
authorities pending completion of all
foreign judicial proceedings.
A ‘‘designated commanding officer’’
(DCO) in each geographical area
assigned to a Combatant Command is to
(1) cooperate with the appropriate U.S.
Chief of Mission and to the maximum
extent possible, ensure that dependents
of DoD personnel receive the same
treatment, rights, and support as would
be extended to U.S. Armed Forces
members in comparable situations; (2)
report informally and immediately to
the General Counsel of the Department
of Defense, the applicable geographic
Combatant Commander, and the General
Counsel and the Judge Advocate
General of the respective Military
Department, or, in the case of the
Marine Corps, to the General Counsel of
the Navy and the Staff Judge Advocate
to the Commandant of the Marine
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Agencies
[Federal Register Volume 83, Number 203 (Friday, October 19, 2018)]
[Proposed Rules]
[Pages 53007-53020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22531]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-84409; File No. S7-08-12]
RIN 3235-AL12
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; reopening of comment period; request for
additional comment.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
reopening the comment period and requesting additional comment
(including potential modifications to proposed rule language) on the
following: Proposed amendments and new rules that would establish
capital and margin requirements for security-based swap dealers
(``SBSDs'') and major security-based swap participants (``MSBSPs'')
that do not have a prudential regulator, establish segregation
requirements for SBSDs, establish notification requirements for SBSDs
and MSBSPs relating to segregation, and raise minimum net capital
requirements and establish liquidity requirements for broker-dealers
permitted to use internal models when computing net capital (``ANC
broker-dealers''). The Commission also is reopening the comment period
and requesting additional comment on proposed amendments that would
establish the cross-border treatment of security-based swap capital,
margin, and segregation requirements; and a proposed amendment that
would establish an additional capital requirement for SBSDs that do not
have a prudential regulator.
DATES: The comment periods for portions of the proposed rules published
Nov. 23, 2012 (77 FR 70213); May 23, 2013 (78 FR 30967); and May 2,
2014 (79 FR 25193), are reopened. Comments should be submitted by
November 19, 2018.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/other.shtml); or
Send an email to [email protected]. Please include
File No. S7-08-12 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-08-12. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov). Comments are
also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make publicly available.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202)
551-5522; Sheila Dombal Swartz, Senior Special Counsel, at (202) 551-
5545; Timothy C. Fox, Branch Chief, at (202) 551-5687; Valentina Minak
Deng, Special Counsel, at (202) 551-5778; or Nina Kostyukovsky,
Attorney Advisor, at (202) 551-8833, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-7010.
SUPPLEMENTARY INFORMATION:
I. Background
In October 2012, the Commission proposed amendments and new rules
to: (1) Establish capital and margin requirements for SBSDs and MSBSPs
that do not have a prudential regulator \1\ (``nonbank SBSDs'' and
``nonbank MSBSPs'', respectively); (2) establish segregation
requirements for SBSDs; (3) establish notification requirements for
SBSDs and MSBSPs relating to segregation; and (4) raise minimum net
capital requirements and establish liquidity requirements for ANC
broker-dealers.\2\ The Commission published the 2012 Proposals largely
pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Title VII of the Dodd-Frank Act''). The Commission
extended the comment period once,\3\ and reopened it once.\4\ The
Commission has received a number of comment letters in response to the
2012 Proposals.\5\
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\1\ The term ``prudential regulator'' is defined in Section
1(a)(39) of the Commodity Exchange Act (7 U.S.C. 1(a)(39)) and that
definition is incorporated by reference in Section 3(a)(74) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act''). 15
U.S.C. 78c(a)(74). Pursuant to the definition, the Board of
Governors of the Federal Reserve System (``FRB''), the Office of the
Comptroller of the Currency (``OCC''), the Federal Deposit Insurance
Corporation (``FDIC''), the Farm Credit Administration (``FCA''), or
the Federal Housing Finance Agency (``FHFA'') (collectively, the
``prudential regulators'') is the ``prudential regulator'' of an
SBSD, MSBSP, swap participant, or major swap participant if the
entity is directly supervised by that agency.
\2\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214 (Nov. 23, 2012)
(``2012 Proposals'').
\3\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68660 (Jan. 15. 2013), 78 FR 4365 (Jan. 22, 2013).
\4\ See Reopening of Comment Periods for Certain Rulemaking
Releases and Policy Statement Applicable to Security-Based Swaps
Proposed Pursuant to the Securities Exchange Act of 1934 and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange
Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013).
\5\ The comment letters are available at https://www.sec.gov/comments/s7-08-12/s70812.shtml.
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In addition, in May 2013, the Commission proposed provisions to
establish the cross-border treatment of security-based swap capital,
margin, and segregation requirements.\6\ The
[[Page 53008]]
Commission has received a number of comment letters in response to the
2013 Proposals.\7\
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\6\ See Cross-Border Security-Based Swap Activities; Re-Proposal
of Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78
FR 30968 (May 23, 2013) (``2013 Proposals'').
\7\ The comment letters are available at https://www.sec.gov/comments/s7-02-13/s70213.shtml.
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Finally, in April 2014, the Commission proposed an additional
nonbank SBSD capital requirement.\8\ The Commission has received one
comment letter in response to the 2014 Proposal.\9\
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\8\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and
Broker-Dealers; Capital Rule for Certain Security-Based Swap
Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR
25194, 25254 (May 2, 2014) (the ``2014 Proposal'' and together with
the 2012 Proposals and the 2013 Proposals, the ``Proposals'').
\9\ The comment letter is available at: https://www.sec.gov/comments/s7-05-14/s70514.shtml.
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In the releases publishing the Proposals, the Commission described
the statutory and regulatory background for the proposed amendments and
rules, the rationales for each of the proposed amendments and rules,
the potential economic consequences, including the baseline against
which the proposed amendments and rules may be evaluated, the potential
costs and benefits, reasonable alternatives, and the potential effects
on efficiency, competition, and capital formation.\10\
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\10\ See Proposals.
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Since publication of the 2012 Proposals, the Commission has adopted
other rules relating to the regulation of the over-the-counter
derivatives markets pursuant to Title VII of the Dodd-Frank Act.\11\ In
addition, the prudential regulators and the Commodity Futures Trading
Commission (``CFTC'') have adopted or proposed rules under Title VII of
the Dodd-Frank Act that are relevant to the Proposals.\12\
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\11\ See Clearing Agency Standards, Exchange Act Release No.
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 11, 2012); Application of
``Security-Based Swap Dealer'' and ``Major Security-Based Swap
Participant'' Definitions to Cross-Border Security-Based Swap
Activities, Exchange Act Release No. 72472 (June 25, 2014), 79 FR
47278 (Aug. 12, 2014); Regulation SBSR--Reporting and Dissemination
of Security-Based Swap Information, Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015); Security-Based Swap
Data Repository Registration, Duties, and Core Principles, Exchange
Act Release No. 74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015);
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 75611
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015); Security-Based Swap
Transactions Connected with a Non-U.S. Person's Dealing Activity
That Are Arranged, Negotiated, or Executed By Personnel Located in a
U.S. Branch or Office or in a U.S. Branch or Office of an Agent;
Security-Based Swap Dealer De Minimis Exception, Exchange Act
Release No. 77104 (Feb. 10, 2016), 81 FR 8597 (Feb. 19, 2016);
Business Conduct Standards for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 77617
(Apr. 14, 2016), 81 FR 29960 (May 13, 2016); Trade Acknowledgment
and Verification of Security-Based Swap Transactions, Exchange Act
Release No. 78011 (June 8, 2016), 81 FR 39808 (June 17, 2016);
Regulation SBSR--Reporting and Dissemination of Security-Based Swap
Information, Exchange Act Release No. 78321 (July 14, 2016), 81 FR
53545 (Aug. 12, 2016); Access to Data Obtained by Security-Based
Swap Data Repositories, Exchange Act Release No. 78716 (Aug. 29,
2016), 81 FR 60585 (Sept. 2, 2016).
\12\ See FRB, OCC, FDIC, FCA, FHFA, Margin and Capital
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015)
(adopting capital and margin requirements for bank swap dealers,
bank SBSDs, bank swap participants, and bank MSBSPs); CFTC, Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants, 81 FR 636 (Jan. 6, 2016) (adopting margin requirements
for nonbank swap dealers and nonbank major swap participants); CFTC,
Capital Requirements of Swap Dealers and Major Swap Participants, 81
FR 91252 (Dec. 16, 2016) (proposing capital requirements for nonbank
swap dealers and nonbank major swap participants).
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The Commission has carefully considered the comment letters, and
the Commission believes it is prudent to reopen the comment period for
the Proposals in light of these comments and regulatory developments.
In addition, the Commission believes the public should have the
opportunity to provide comment on the potential economic effects of the
Proposals in light of regulatory and market developments since they
were published. Accordingly, the Commission is reopening the public
comment period for 30 days and seeking comment on all aspects of the
Proposals. The Commission also is seeking specific comment on certain
aspects of the Proposals where further information would be
particularly helpful to the Commission. In particular, the Commission
is seeking comment on potential rule language that would modify rule
text that was in the Proposals. This modified rule language would be
included in: (1) Existing rules 17 CFR 240.15c3-1 (``Rule 15c3-1''), 17
CFR 240.15c3-1a (``Appendix A to Rule 15c3-1''), 17 CFR 240.15c3-3
(``Rule 15c3-3''), and 17 CFR 240.3a71-6 (``Rule 3a71-6''); (2) new
rule 17 CFR 240.15c3-3b (``Exhibit B to Rule 15c3-3''); and (3) in
proposed rules 17 CFR 240.18a-1 (``Rule 18a-1''), 17 CFR 240.18a-1a
(``Appendix A to Rule 18a-1''), 17 CFR 240.18a-3 (``Rule 18a-3''), 17
CFR 240.18a-4 (``Rule 18a-4''), and 17 CFR 240.18a-4a (``Exhibit A to
Rule 18a-4''). Comment letters received by the Commission previously
need not be re-submitted as they will continue to be a part of the
public comment file for this rulemaking and considered by the
Commission.
II. Request for Comment
The Commission renews its request for comment on all aspects of the
Proposals and on the specific topics identified below. Commenters are
requested to provide empirical data in support of any arguments and
analyses. The Commission notes that comments are of the greatest
assistance to rulemaking initiatives when accompanied by supporting
data and analysis, and, if appropriate, accompanied by alternative
approaches and suggested language.
Capital
1. The 2012 Proposals included a provision that would establish a
financial ratio-derived minimum net capital requirement for a nonbank
SBSD equal to eight percent (8%) of the firm's risk margin amount.\13\
The risk margin amount would be the sum of:
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\13\ See 2012 Proposals, 77 FR at 70223-24. Minimum net capital
requirements would be the greater of a fixed-dollar amount and an
amount derived by applying a financial ratio. See id. at 70221.
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The greater of the total margin required to be delivered
by the nonbank SBSD with respect to security-based swap transactions
cleared for security-based swap customers at a clearing agency or the
amount of the deductions (haircuts) that would apply to the cleared
security-based swap positions of the security-based swap customers
pursuant to the proposed capital requirements; and
The total margin amount calculated by the nonbank SBSD
with respect to non-cleared security-based swaps pursuant to the
proposed margin rule.\14\
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\14\ The ratio-based minimum net capital calculation shown as an
equation would be: MRNC = [max(IM\C\, HC\C\) + IM\NC\] x 8%. Where
MRNC is the ratio-based minimum net capital requirement, IM\C\ is
the amount of initial margin for cleared security-based swaps, HC\C\
is the amount of haircuts applied to the same cleared security-based
swaps, IM\NC\ is the amount of initial margin calculated for non-
cleared security-based swaps, and (max(IM\C\, HC\C\) + IM\NC\) is
the risk margin amount. For example, assume that IM\C\ is $10, HC\C\
is $15, and IM\NC\ is $25. In this simple hypothetical example, the
risk margin amount would equal $40 [max($10, $15) + $25], and the
ratio-based minimum net capital requirement would be $3.20 ($40 x
8%). As proposed, a stand-alone nonbank SBSD would be subject to
this ratio-based minimum net capital requirement, whereas a nonbank
SBSD dually registered as a broker-dealer would be subject to the
sum of this ratio-based minimum net capital requirement plus one of
the two existing financial ratio-based minimum net capital
requirements in Rule 15c3-1.
The total of these two amounts would be multiplied by eight percent
(8%) to determine the dollar amount of this ratio requirement (and the
nonbank SBSD's minimum net capital requirement would be the greater of
a
[[Page 53009]]
fixed-dollar amount and a ratio amount). The proposal for a ratio
amount relating to security-based swaps was designed to establish a
minimum net capital requirement that increases in tandem with an
increase in the risks associated with a nonbank SBSD's security-based
swap activities. This scaled ratio amount is separate from the fixed-
dollar amount that sets a floor to the minimum net capital
requirement.\15\
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\15\ See id. at 70223-24.
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a. The Commission requests comment and supporting data on the
potential minimum net capital amounts that would be required of nonbank
SBSDs as a result of the requirement, as proposed. How would those
potential minimum net capital amounts compare with the amounts of
capital currently maintained by entities that may register as nonbank
SBSDs?
b. One commenter suggested that the Commission modify its proposed
definition of the risk margin amount to reflect the lower risk
associated with central clearing.\16\ In light of the comment and the
goals of this provision, the Commission requests comment on whether the
input to the risk margin amount for cleared security-based swaps should
be modified. Should the input to the risk margin amount for cleared
security-based swaps be determined solely by the total initial margin
required to be delivered by the nonbank SBSD with respect to security-
based swap transactions cleared for security-based swap customers at a
clearing agency (i.e., not be the greater of that amount or the amount
of the deductions (haircuts) that would apply to the cleared security-
based swap positions)? \17\ The purpose of this potential modification
would be to simplify the calculation, align it with the clearing agency
margin requirements, and more closely align it with the CFTC's existing
rules and proposals.\18\
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\16\ See Letter from Stuart J. Kaswell, Executive Vice
President, Managing Director, and General Counsel, Managed Funds
Association (Feb. 22, 2013).
\17\ The ratio-based minimum net capital calculation shown as an
equation would be: MRNC = (IM\C\ + IM\NC\) x 8%.
\18\ Eliminating the haircut input to the risk margin amount for
cleared security-based swaps would more closely align it with the
CFTC's existing rules and proposals. For example, currently futures
commission merchants (``FCMs'') registered with the CFTC must
maintain adjusted net capital in excess of eight percent (8%) of the
risk margin on futures, foreign futures, and cleared swaps positions
carried in customer and noncustomer accounts. See 17 CFR 1.17. The
CFTC has proposed a similar requirement for swap dealers registered
as FCMs that also would generally include in the FCM's minimum net
capital requirement eight percent (8%) of the total initial margin
an FCM is required to post to a clearing agency for cleared
security-based swap positions (as well as the initial margin on
uncleared swap and security-based swap positions for which the FCM
is a counterparty). See Capital Requirements of Swap Dealers and
Major Swap Participants, 81 FR at 91266.
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Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing the commenter's concern described above?
If not, please explain why and suggest alternative rule language that
could more effectively and efficiently strike the balance and achieve
the objective.
The potential modifications to paragraph (c)(17) of Rule 15c3-1
would provide that the term risk margin amount means the sum of: (i)
The total initial margin required to be maintained by the broker or
dealer at each clearing agency with respect to security-based swap
transactions cleared for security-based swap customers; and (ii) the
total margin amount calculated by the broker or dealer with respect to
non-cleared security-based swaps pursuant to Sec. 240.18a-
3(c)(1)(i)(B).
Similarly, the potential modifications to paragraph (c)(6) of Rule
18a-1 would provide that the term risk margin amount means the sum of:
(i) The total initial margin required to be maintained by the security-
based swap dealer at each clearing agency with respect to security-
based swap transactions cleared for security-based swap customers; and
(ii) the total margin amount calculated by the security-based swap
dealer with respect to non-cleared security-based swaps pursuant to
Sec. 240.18a-3(c)(1)(i)(B).
2. The 2012 Proposals included a capital charge that would apply if
a nonbank SBSD collects an amount of margin from a counterparty to a
cleared security-based swap that is less than the deduction that would
apply to the security-based swap if it was a proprietary position of
the firm.\19\ This proposed requirement was designed to account for the
risk of the counterparty defaulting by requiring the nonbank SBSD to
maintain capital in the place of margin in an amount that is no less
than would be required for a proprietary position.\20\ It also was
designed to ensure that there is a standard minimum coverage for
exposure to cleared security-based swap counterparties apart from the
individual clearing agency margin requirements, which could vary among
clearing agencies and over time.\21\
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\19\ See 2012 Proposals, 77 FR at 70245-46.
\20\ See id. at 70246.
\21\ See id.
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One commenter opposed this proposal stating that the requirement
would ``harm customers because it would provide an incentive for the
collection of margin by nonbank SBSDs beyond the amount determined by
the clearing agency.'' \22\ In light of the comment and the goals of
this provision, the Commission requests comment on whether this
proposed capital charge should be modified to include a risk-based
threshold under which the proposed capital charge need not be taken.
Should the rule provide that the deduction need not be taken if the
difference between the clearing agency margin amount and the haircut is
less than one percent (1%) or some other percent of the nonbank SBSD's
tentative net capital \23\ and less than ten percent (10%) or some
other percent of the counterparty's net worth,\24\ and the aggregate
difference across all counterparties is less than twenty-five percent
(25%) or some other percent of the nonbank SBSD's tentative net
capital? \25\ The purpose of these thresholds would be to limit the
nonbank SBSD's exposure to a single counterparty as well as to
establish a concentration limit across all counterparties. In addition,
these thresholds would be scalable and have a more direct relation to
the risk to the nonbank SBSD arising from its security-based swap
activities.
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\22\ See Letter from Kenneth E. Bentsen, Jr., Executive Vice
President, Securities Industry and Financial Markets Association
(Feb. 22, 2013) (``SIFMA 2/22/2013 Letter'').
\23\ See, e.g., Order Granting Conditional Exemption Under the
Securities Exchange Act of 1934 in Connection with Portfolio
Margining of Swaps and Security-Based Swaps, Exchange Act Release
No. 68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012). Pursuant to
this order, Commission staff granted conditional temporary approval
to certain broker-dealers that are also registered as FCMs to
participate in a credit default swap (CDS) portfolio margining
program, subject to specified conditions. One condition requires a
firm to calculate its net credit exposure to a client and if the
client's net credit exposure is in excess of one percent (1%) of the
firm's tentative net capital, the firm is required to either collect
the net credit exposure above the one percent (1%) threshold in the
form of margin from its client or take a capital charge equal to
that amount. See, e.g., Letter to Keith Bailey, Barclays Capital
Inc. from Michael A. Macchiaroli, Division of Trading and Markets,
Commission (June 7, 2013).
\24\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten
percent (10%) of tentative net capital threshold for the calculation
of undue concentration charges).
\25\ See, e.g., 17 CFR 240.15c3-3a, Note E(5) (using a twenty-
five percent (25%) of tentative net capital threshold for when a
broker-dealer must reduce debits in the customer reserve formula).
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Would rule language as described below effect this potential
modification
[[Page 53010]]
to the rule text in the 2012 Proposals? If not, please explain why and
suggest alternative rule language. If the Commission were to use the
language described below, would it strike an appropriate balance in
terms of achieving the objectives of the proposed rule and addressing
the commenter's concern described above? If not, please explain why and
suggest alternative rule language that could more effectively and
efficiently strike the balance and achieve the objective.
The potential modifications to paragraph (c)(2)(xv)(A) of Rule
15c3-1 would provide the following deduction from net worth in lieu of
collecting collateral for cleared security-based swaps and swap
transactions: (1) Deducting the amount of the margin difference for
each account carried by the broker or dealer for another person that
holds cleared security-based swap or swap transactions. The margin
difference is the amount of the deductions to the positions in the
account calculated pursuant to paragraph (c)(2)(vi) of this section,
Sec. 240.15c3-1b, or Sec. 240.15c3-1e (as applicable), less the
margin value of collateral held in the account. (2) Exception. The
deduction required pursuant to paragraph (c)(2)(xv)(A)(1) of this
section need not be taken to the extent that: (i) The amount of the
margin difference for the account does not exceed the lesser of 1
percent (1%) of the tentative net capital of the broker or dealer or
ten percent (10%) of the net worth of the counterparty; and (ii) The
amount of the margin difference for all accounts that hold security-
based swaps or swaps does not exceed twenty-five percent (25%) of the
tentative net capital of the broker or dealer.
Similarly, the potential modifications to paragraph (c)(1)(ix)(A)
of Rule 18a-1 would provide the following deduction from net worth in
lieu of collecting collateral for security-based swaps and swap
transactions: (1) Deducting the amount of the margin difference for
each account carried by the security-based swap dealer for another
person that holds cleared security-based swap or swap transactions. The
margin difference is the amount of the deductions to the positions in
the account calculated pursuant to paragraph (c)(1)(vi) or (vii) of
this section, Sec. 240.18a-1(d), or Sec. 240.18a-1b (as applicable),
less the margin value of collateral held in the account. (2) Exception.
The deduction required pursuant to paragraph (c)(1)(ix)(A)(1) of this
section need not be taken to the extent that: (i) The amount of the
margin difference for the account does not exceed the lesser of 1
percent (1%) of the tentative net capital of the security-based swap
dealer or ten percent (10%) of the net worth of the counterparty; and
(ii) The amount of the margin difference for all accounts that hold
security-based swaps or swaps does not exceed twenty-five percent (25%)
of the tentative net capital of the security-based swap dealer.
3. The 2012 Proposals included a provision that a nonbank SBSD
would be required to take a 100 percent (100%) capital charge when it
does not collect variation or initial margin for non-cleared security-
based swaps because of an exception from collecting margin.\26\ The
proposed capital charge was intended to require a nonbank SBSD to set
aside net capital to address the risks that would otherwise be
mitigated through the collection of variation and initial margin.\27\
The set aside net capital would serve as an alternative to obtaining
margin.\28\ As an alternative to taking the 100 percent (100%) charge,
the Commission proposed that firms using internal models to calculate
net capital could take a credit risk charge if the uncollected margin
involved a transaction with a commercial end user.\29\
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\26\ See 2012 Proposals, 77 FR at 70425-27.
\27\ See id.
\28\ See id.
\29\ See id. at 70240-45.
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a. Commenters requested that nonbank SBSDs be permitted to apply
the credit risk charge to other types of counterparties.\30\ In light
of the comments and the goals of this provision, the Commission
requests comment on whether the use of the credit risk charge should be
expanded to other types of counterparties and transactions. Should the
rule permit a firm to apply the credit risk charge for uncollected
initial margin for security-based swaps and swap transactions with any
type of counterparty and for uncollected variation margin for
transactions with a commercial end user only? The purpose of limiting
the application of the credit risk charge with respect to uncollected
variation margin to transactions with commercial end users would be to
reduce the types of unsecured receivables that qualify as allowable
assets for net capital purposes and, thereby, promote the liquidity of
the nonbank SBSD.
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\30\ See, e.g., Letter from Anne-Marie Leroy, Senior Vice
President and Group General Counsel, and David Harris, Acting Vice
President and General Counsel, The World Bank (Feb. 21, 2013).
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b. The Commission requests comment on whether the rule should
establish a threshold for uncollected margin above which the use of the
credit risk charge would not be permitted. Should there be a threshold
when the aggregate amount of uncollected margin across all
counterparties exceeds a level of the nonbank SBSD's tentative net
capital? Should the threshold apply to the aggregate amount of
uncollected initial and variation margin or just to the aggregate
amount of uncollected variation margin? The latter approach would focus
the threshold on unsecured receivables that result from not collecting
variation margin and, thereby, promote the liquidity of the nonbank
SBSD. Should there be a threshold with respect to uncollected variation
margin for security-based swap and swap transactions with commercial
end users and should that threshold be ten percent (10%) or some other
percent of the nonbank SBSD's tentative net capital? \31\ This
threshold would be designed to limit the nonbank SBSD's aggregate
exposure arising from not collecting variation margin from commercial
end users and would be scalable to the nonbank SBSD's financial
condition.
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\31\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten
percent (10%) of tentative net capital threshold for the calculation
of undue concentration charges).
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c. The potential modifications to the rule text in the 2012
Proposals discussed above in 3.a and 3.b would include: (1) Changing
the proposed rule to permit a nonbank SBSD to apply the credit risk
charge for uncollected initial margin for security-based swaps and
swaps from any type of counterparty and for uncollected variation
margin from a commercial end user; and (2) establishing a risk-based
threshold with respect to uncollected variation margin from commercial
end users. Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing commenters' requests to apply the credit
risk charge more broadly? If not, please explain why and suggest
alternative rule language that could more effectively and efficiently
strike the balance and achieve the objective.
The potential modifications to paragraph (a)(7) of Rule 15c3-1
would provide: In accordance with Appendix E to this section (Sec.
240.15c3-1e), the Commission may approve, in whole or in part, an
application or an amendment to an application by a broker or dealer to
calculate net capital using the market risk standards of appendix E to
compute a deduction for market risk on some or
[[Page 53011]]
all of its positions, instead of the provisions of paragraphs
(c)(2)(vi) and (c)(2)(vii) of this section, and Sec. 240.15c3-1b, and
using the credit risk standards of Appendix E to compute a deduction
for credit risk for certain security-based swap and swap transactions,
as specified in this paragraph, instead of the provisions of paragraphs
(c)(2)(iv), (c)(2)(xv)(B)(1), and (c)(2)(xv)(B)(2) of this section,
subject to any conditions or limitations on the broker or dealer the
Commission may require as necessary or appropriate in the public
interest or for the protection of investors. A broker or dealer may use
the credit risk standards of Appendix E to compute a deduction for
credit risk for security-based swap transactions with commercial end
users as that term is defined in Sec. 240.18a-3(b)(2), and swap
transactions in which a counterparty qualifies for an exception from
margin requirements pursuant to Section 4s(e)(4) of the Commodity
Exchange Act (7 U.S.C. 6s(e)(4)) instead of the provisions of paragraph
(c)(2)(iv) of this section, provided that the deductions, in the
aggregate, do not exceed ten percent (10%) of the tentative net capital
of the broker or dealer. A broker or dealer also may use the credit
risk standards of Appendix E to compute a deduction for credit risk for
security-based swap transactions that are subject to an initial margin
exception set forth in Sec. 240.18a-3(c)(1)(iii) instead of the
provisions of paragraph (c)(2)(xv)(B)(1) of this section, and for swap
transactions instead of the provisions of paragraph (c)(2)(xv)(B)(2) of
this section.
Similarly, the potential modifications to paragraph (a)(2) of Rule
18a-1 would provide: In accordance with paragraph (d) of this section,
the Commission may approve, in whole or in part, an application or an
amendment to an application by a security-based swap dealer to
calculate net capital using the market risk standards of paragraph (d)
to compute a deduction for market risk on some or all of its positions,
instead of the provisions of paragraphs (c)(1)(iv), (vi), and (vii) of
this section, and Sec. 240.18a-1b, and using the credit risk standards
of paragraph (d) to compute a deduction for certain security-based swap
and swap transactions, as specified in this paragraph, instead of the
provisions of paragraphs (c)(1)(iii), (c)(1)(ix)(B)(1), and
(c)(1)(ix)(B)(2) of this section, subject to any conditions or
limitations on the security-based swap dealer the Commission may
require as necessary or appropriate in the public interest or for the
protection of investors. A security-based swap dealer may use the
credit risk standards of paragraph (d) to compute a deduction for
credit risk for security-based swap transactions with commercial end
users as that term is defined in Sec. 240.18a-3(b)(2), and swap
transactions in which a counterparty qualifies for an exception from
margin requirements pursuant to Section 4s(e)(4) of the Commodity
Exchange Act (7 U.S.C. 6s(e)(4)) instead of the provisions of paragraph
(c)(1)(iii) of this section, provided that the deductions, in the
aggregate, do not exceed ten percent (10%) of the tentative net capital
of security-based swap dealer. A security-based swap dealer also may
use the credit risk standards of paragraph (d) to compute a deduction
for credit risk for security-based swap transactions that are subject
to an initial margin exception set forth in Sec. 240.18a-3(c)(1)(iii)
instead of the provisions of paragraph (c)(1)(ix)(B)(1) of this
section, and for swap transactions instead of the provisions of
paragraph (c)(1)(ix)(B)(2) of this section.
4. The 2012 Proposals included a capital charge for nonbank SBSDs
when a counterparty requires initial margin to be segregated pursuant
to Section 3E(f) of the Act, which among other things, provides that
the collateral must be carried by an independent third-party
custodian.\32\ Collateral held in this manner would not be in the
possession or control of the nonbank SBSD, nor would it would be
capable of being liquidated promptly by the nonbank SBSD without the
intervention of a third party.
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\32\ See 2012 Proposals, 77 FR at 70246-47; 15 U.S.C. 78c-
5(f)(3).
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a. Commenters argued that the charge would discourage the use of
segregation under Section 3E(f) of the Act,\33\ that the charge would
create costs to the affected nonbank SBSD (which would be passed on to
customers),\34\ and that the parties could properly structure an
agreement to address the Commission's concern about the nonbank SBSD's
lack of control over the collateral.\35\ In light of the comments and
the goals of this provision, the Commission requests comment on whether
there should be an exception to taking the capital charge (whether 100
percent (100%) or a credit risk charge, as applicable) under conditions
that promote the SBSD's ability to promptly access the collateral if
needed. Should there be an exception with the following conditions: (1)
The custodian is a bank; (2) the nonbank SBSD enters into an agreement
with the custodian and the counterparty that provides the nonbank SBSD
with the same control over the collateral as would be the case if the
nonbank SBSD controlled the collateral directly; and (3) an opinion of
counsel deems the agreement enforceable? The purpose of these
conditions would be to provide the nonbank SBSD with the unfettered
ability to access the collateral in the event the counterparty defaults
and, thereby, promote the financial condition of the nonbank SBSD,
particularly in a time of market distress. Would this be a practical
exception? If not, please explain why.
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\33\ See, e.g., Letter from American Benefits Council, Committee
on Investment of Employee Benefit Assets, European Federation for
Retirement Provision, the European Association of Paritarian
Institutions, the National Coordinating Committee for Multiemployer
Plans, and the Pension Investment Association of Canada (May 19,
2014).
\34\ See, e.g., Letter from Douglas M. Hodge, Managing Director
and Chief Operating Officer, Pacific Investment Management Company
LLC (Feb. 21, 2013).
\35\ See, e.g., Letter from Karrie McMillan, General Counsel,
Investment Company Institute (Dec. 5, 2013).
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b. The Commission is considering providing guidance on ways a
nonbank SBSD could structure the account control agreement to meet a
requirement that the nonbank SBSD have the same control over the
collateral as would be the case if the nonbank SBSD controlled the
collateral directly. In developing the guidance on ways this
requirement could be met, the Commission asks commenters to address
whether the agreement between the nonbank SBSD, counterparty, and the
third-party custodian should: (1) Provide that the collateral will be
released promptly and directed in accordance with the instructions of
the nonbank SBSD upon the receipt of an effective notice from the
nonbank SBSD; (2) provide that when the counterparty provides an
effective notice to access the collateral the nonbank SBSD will have
sufficient time to challenge the notice in good faith and that the
collateral will not be released until a prior agreed-upon condition
among the three parties has occurred; and (3) give priority to an
effective notice from the nonbank SBSD over an effective notice from
the counterparty, as well as priority to the nonbank SBSD's instruction
about how to transfer the collateral in the event the custodian
terminates the account control agreement? Are there any other
provisions regarding the account control agreement that the Commission
should address to assist nonbank SBSDs in structuring the agreements to
meet a requirement in a rule that the nonbank SBSD have the same
control over the collateral as would be the case if the nonbank SBSD
controlled the collateral directly?
c. The potential modification to the rule text in the 2012
Proposals
[[Page 53012]]
discussed above in 4.a would establish conditions under which a nonbank
SBSD could avoid the capital charge that applies when a counterparty
requires initial margin to be segregated pursuant to Section 3E(f) of
the Act. Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing the commenters' concerns about the impact
of the capital charge? If not, please explain why and suggest
alternative rule language that could more effectively and efficiently
strike the balance and achieve the objective.
The potential modifications to paragraph (c)(2)(xv)(B) of Rule
15c3-1 would provide the following deductions from net worth in lieu of
collecting collateral for security-based swap and swap transactions:
(1) Security-based swaps. Deducting the amounts calculated pursuant to
Sec. 240.18a-3(c)(1)(i)(B) for the account of a counterparty at the
broker or dealer that is subject to an initial margin exception set
forth in Sec. 240.18a-3(c)(1)(iii), less the margin value of
collateral held in the account of the counterparty at the broker or
dealer. (2) Swaps. Deducting the initial margin calculated pursuant to
Sec. 240.18a-3(d)(2) for swaps other than equity swaps, or Sec.
240.15c3-1b, as applicable, in the account of a counterparty at the
broker or dealer, less the margin value of collateral held in the
account of the counterparty at the broker or dealer. (3) Treatment of
collateral held at a third-party custodian. For the purposes of the
deductions required pursuant to paragraphs (c)(2)(xv)(B)(1) and (2) of
this section, collateral held by an independent third-party custodian
as initial margin pursuant to Section 3E(f) of the Act or Section 4s(l)
of the Commodity Exchange Act may be treated as collateral held in the
account of the counterparty at the broker or dealer if: (a) The
independent third-party custodian is a bank as defined in Section
3(a)(6) of the Act that is not affiliated with the counterparty; (b)
The broker or dealer, the independent third-party custodian, and the
counterparty that delivered the collateral to the custodian have
executed an account control agreement governing the terms under which
the custodian holds and releases collateral pledged by the counterparty
as initial margin that provides the broker or dealer with the same
control over the collateral as would be the case if the broker or
dealer controlled the collateral directly; and (c) The broker or dealer
obtains a written opinion from outside counsel that the account control
agreement is legally valid, binding, and enforceable in all material
respects, including in the event of bankruptcy, insolvency, or a
similar proceeding.
Similarly, the potential modifications to paragraph (c)(1)(ix) of
Rule 18a-1 would provide the following deductions from net worth in
lieu of collecting collateral for security-based swap and swap
transactions: (1) Security-based swaps. Deducting the amounts
calculated pursuant to Sec. 240.18a-3(c)(1)(i)(B) for the account of a
counterparty at the security-based swap dealer that is subject to an
initial margin exception set forth in Sec. 240.18a-3(c)(1)(iii), less
the margin value of collateral held in the account of the counterparty
at the security-based swap dealer. (2) Swaps. Deducting the initial
margin calculated pursuant to Sec. 240.18a-3(d)(2) for swaps other
than equity swaps, or Sec. 240.18a-1b, as applicable, in the account
of a counterparty at the security-based swap dealer, less the margin
value of collateral held in the account of the counterparty at the
security-based swap dealer. (3) Treatment of collateral held at a
third-party custodian. For the purposes of the deductions required
pursuant to paragraphs (c)(1)(ix)(B)(1) and (2) of this section,
collateral held by an independent third-party custodian as initial
margin pursuant to Section 3E(f) of the Act or Section 4s(l) of the
Commodity Exchange Act may be treated as collateral held in the account
of the counterparty at the security-based swap dealer if: (a) The
independent third-party custodian is a bank as defined in Section
3(a)(6) of the Act that is not affiliated with the counterparty; (b)
The security-based swap dealer, the independent third-party custodian,
and the counterparty that delivered the collateral to the custodian
have executed an account control agreement governing the terms under
which the custodian holds and releases collateral pledged by the
counterparty as initial margin that provides the security-based swap
dealer with the same control over the collateral as would be the case
if the security-based swap dealer controlled the collateral directly;
and (c) The security-based swap dealer obtains a written opinion from
outside counsel that the account control agreement is legally valid,
binding, and enforceable in all material respects, including in the
event of bankruptcy, insolvency, or a similar proceeding.
5. The 2012 Proposals noted that a nonbank SBSD would need to
deduct from net worth the value of initial margin delivered to a
counterparty when computing net capital.\36\ A comment letter \37\
encouraged the Commission to provide a means for nonbank SBSDs to post
initial margin to SBSDs and other types of counterparties without
incurring the capital charge. If the Commission adopts capital and
margin rules applicable to SBSDs, should the Commission provide a means
for a nonbank SBSD to avoid this deduction if the following conditions
are met: (1) The initial margin requirement is funded by a fully
executed written loan agreement with an affiliate of the broker-dealer;
(2) the loan agreement provides that the lender waives re-payment of
the loan until the initial margin is returned to the broker-dealer; and
(3) the broker-dealer's liability to the lender can be fully satisfied
by delivering the collateral serving as initial margin to the lender?
\38\ A Commission action providing this relief would be styled after
the Staff Letter. Would this approach provide a practical solution with
respect to avoiding this capital charge? If not, please explain why.
Should the Commission by rule permit this approach? Are there
alternatives that would more effectively and efficiently achieve this
objective? If so, what are they?
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\36\ See 2012 Proposals, 77 FR at 70267.
\37\ See Letter from Institute of International Bankers and
Securities Industry and Financial Markets Association (June 21,
2018).
\38\ In this regard, although not binding, the staff of the
Division of Trading and Markets issued a no-action letter (in the
context of margin collateral posted by a broker-dealer to a swap
dealer or other counterparty for a non-cleared swap) that stated
that the staff would not recommend enforcement action to the
Commission if a broker-dealer did not take this deduction but met
certain conditions. The conditions include that: (1) The initial
margin requirement is funded by a fully executed written loan
agreement with an affiliate of the broker-dealer; (2) the loan
agreement provides that the lender waives re-payment of the loan
until the initial margin is returned to the broker-dealer; and (3)
the broker-dealer's liability to the lender can be fully satisfied
by delivering the collateral serving as initial margin to the
lender. See Letter from Michael A. Macchiaroli, Associate Director,
Division of Trading and Markets, Commission, to Kris Dailey, Vice
President, Risk Oversight and Regulation, FINRA (Aug. 19, 2016)
(``Staff Letter'').
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Margin
6. The 2012 Proposals included a provision that would require a
nonbank SBSD to calculate a daily initial margin amount for each
counterparty.\39\ The nonbank SBSD could use the standardized or model-
based deductions
[[Page 53013]]
prescribed in the proposed capital rule for nonbank SBSDs to calculate
the initial margin amount, except that initial margin for equity
security-based swaps would need to be determined exclusively using the
standardized deductions.
---------------------------------------------------------------------------
\39\ See 2012 Proposals, 77 FR at 70261.
---------------------------------------------------------------------------
Some commenters argued that the Commission should approve a uniform
initial margin model because it would reduce counterparty disputes and
increase efficiency.\40\ Since the publication of the 2012 Proposals,
the prudential regulators and the CFTC adopted final margin rules that
permit the use of a model to calculate initial margin subject to the
approval of the CFTC or a firm's prudential regulator.\41\ The
Commission understands that the firms subject to these final rules have
widely adopted the use of an industry-developed uniform model to
compute initial margin.\42\ In light of the comments and the goals of
this provision, the Commission requests comment on whether the margin
rule should permit nonbank SBSDs to apply to use models other than
proprietary capital models to compute initial margin, including
applying to use a standard industry model. The purpose would be to
provide flexibility to nonbank SBSDs to apply to the Commission for
authorization to use a proprietary or other model to compute initial
margin, and, with respect to an industry standard model, to increase
transparency and decrease margin disputes among counterparties.
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\40\ See, e.g., Letter from Robert Pickel, Chief Executive
Officer, International Swaps and Derivatives Association (Feb. 5,
2014) (``ISDA 2/5/2014 Letter'').
\41\ See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74840; Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants, 81 FR 636.
\42\ See, e.g., ISDA, ISDA SIMM\TM\ Deployed Today; New Industry
Standard for Calculating Initial Margin Widely Adopted by Market
Participants (Sept. 1, 2016), available at: https://www.isda.org/2016/09/01/isda-simm-deployed-today-new-industry-standard-for-calculating-initial-margin-widely-adopted-by-market-participants/.
---------------------------------------------------------------------------
Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing commenters' requests for more flexibility?
If not, please explain why and suggest alternative rule language that
could more effectively and efficiently strike the balance and achieve
the objective.
The potential modifications to paragraph (d)(2)(i) of Rule 18a-3
would provide: For security-based swaps other than equity security-
based swaps, a security-based swap dealer may apply to the Commission
for authorization to use a model to compute the margin amount required
by paragraph (c)(1)(i)(B) of this section and to compute the deductions
required by paragraph Sec. 240.15c3-1(c)(2)(xv) or Sec. 240.18a-
1(c)(1)(ix), as applicable, subject to the application process in Sec.
240.15c3-1e or Sec. 240.18a-1(d), as applicable. The model must use a
ninety-nine percent (99%), one-tailed confidence level with price
changes equivalent to a ten business-day movement in rates and prices,
and must use risk factors sufficient to cover all the material price
risks inherent in the positions for which the margin amount or
deductions are being calculated, including foreign exchange or interest
rate risk, credit risk, equity risk, and commodity risk, as
appropriate. Empirical correlations may be recognized by the model
within each broad risk category, but not across broad risk categories.
7. The 2012 Proposals included a requirement that a nonbank SBSD
would need to collect initial and variation margin from each
counterparty unless an exception applies.\43\ The proposed rule
contained four exceptions under which variation and/or initial margin
need not be collected: (1) When the counterparty is a commercial end
user; (2) when the counterparty is another SBSD; (3) when the
counterparty requires segregation pursuant to Section 3E(f) of the Act;
and (4) when the counterparty's account holds only legacy
transactions.\44\
---------------------------------------------------------------------------
\43\ See 2012 Proposals, 77 FR at 70263-69.
\44\ See id.
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Some commenters encouraged the Commission to adopt a threshold
below which initial margin need not be collected and noted that the
prudential regulators and the CFTC established a $50 million threshold
(consistent with the recommendation of an international standard
setting body).\45\ In light of the comments and the goals of this
provision, the Commission requests comment on whether it would be
appropriate to establish a risk-based threshold. A fixed-dollar
threshold, depending on the size and activities of the nonbank SBSD,
could either be too large and, therefore, not adequately address the
risk, or too small and, therefore, overcompensate for the risk. Should
a risk-based threshold take into account the financial condition of the
SBSD and the counterparty by providing that initial margin need not be
collected from a counterparty when the amount is less than one percent
(1%) or some other percent of a nonbank SBSD's tentative net capital
\46\ and is less than ten percent (10%) or some other percent \47\ of
the counterparty's net worth (in which case, only the amount above the
threshold would need to be collected)? The purpose of these financial
metrics would be to establish a threshold that is scalable and has a
more direct relation to the risk to the nonbank SBSD arising from its
security-based swap activities.
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\45\ See, e.g., Letter from Karrie McMillan, General Counsel,
Investment Company Institute (Feb. 4, 2013). See also BCBS, IOSCO,
Margin Requirements for Non-centrally Cleared Derivatives (Mar.
2015), available at: https://www.bis.org/bcbs/publ/d317.pdf.
\46\ See, e.g., 17 CFR 240.15c3-3a, Note E(5) (using a twenty-
five percent (25%) of tentative net capital threshold for when a
broker-dealer must reduce debits in the customer reserve formula).
\47\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten
percent (10%) of tentative net capital threshold for the calculation
of undue concentration charges).
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Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing commenters' requests for a threshold? If
not, please explain why and suggest alternative rule language that
could more effectively and efficiently strike the balance and achieve
the objective.
The potential modifications to paragraph (c)(1)(iii)(E) of Rule
18a-3 would provide that an SBSD may elect not to collect the amount
required under paragraph (c)(1)(ii)(B) of this section to the extent
that the amount does not exceed the lesser of: (1) 1 percent (1%) of
the security-based swap dealer's tentative net capital; or (2) ten
percent (10%) of the net worth of the counterparty.
8. As noted above, the 2012 Proposals included an exception from
collecting margin when the counterparty is another SBSD.\48\ In
particular, the Commission proposed two alternatives with respect to
SBSD counterparties.\49\ Under the first alternative, a nonbank SBSD
would not need to collect initial margin if the counterparty is another
SBSD (``Alternative A''). This approach is consistent with the broker-
dealer margin rules, which generally do not require a broker-dealer to
collect margin
[[Page 53014]]
from another broker-dealer.\50\ Under the proposed second alternative,
a nonbank SBSD would be required to collect initial margin from another
SBSD and the initial margin would need to be segregated pursuant to
Section 3E(f) of the Act (``Alternative B'').\51\
---------------------------------------------------------------------------
\48\ See 2012 Proposals, 77 FR at 70267-68.
\49\ See id.
\50\ See id.
\51\ See id.
---------------------------------------------------------------------------
A commenter argued that Alternative A was the preferred approach
because requiring SBSDs to collect initial margin from other SBSDs
would curtail the use of non-cleared security-based swaps for hedging,
which would disrupt key financial services, such as those that
facilitate the availability of home loans and corporate finance.\52\
This commenter also argued that the requirement to collect initial
margin from another SBSD would have detrimental pro-cyclical effects
because it would increase collateral demands in times of market
stress.\53\ Other commenters supported Alternative B stating that
Alternative A would permit an inappropriate build-up of systemic risk
for transactions within the financial system.\54\
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\52\ See Letter from Robert Pickel, Chief Executive Officer,
International Swaps and Derivatives Association (Jan. 23, 2013)
(``ISDA 1/23/2013 Letter'').
\53\ See id.
\54\ See, e.g., Letter from Americans for Financial Reform (Feb.
22, 2013).
---------------------------------------------------------------------------
a. The Commission requests comment and supporting data that would
assist in the quantification of the economic impacts of Alternatives A
and B. The 2012 Proposals discussed the potential for increased use of
leverage, the potential for a nonbank SBSD to fail, and the potential
that a default by a nonbank SBSD could translate to defaults of
counterparty SBSDs.\55\ The 2012 Proposals also noted that the
likelihood of these potential events occurring would be smaller under
Alternative B than under Alternative A.\56\ Would the proposed capital
requirements complement Alternative A to reduce the potential for
increased use of leverage, the potential for a nonbank SBSD to fail,
and the potential that a default by a nonbank SBSD could translate to a
default of counterparty SBSDs caused by exposure to credit risk in
inter-dealer positions? Would there be situations where the proposed
capital requirements and Alternative A would not prevent a failure of a
nonbank SBSD caused by security-based swap trading losses? Would there
be situations where the proposed capital requirements and Alternative A
would avoid a failure of a nonbank SBSD by not imposing pro-cyclical
collateral demands?
---------------------------------------------------------------------------
\55\ See 2012 Proposals, 77 FR at 70267, 70322.
\56\ See id.
---------------------------------------------------------------------------
The 2012 Proposals also noted that in comparison to Alternative A
or current practices, Alternative B could have a more significant
negative impact on the liquidity of nonbank SBSDs and their ability to
trade in security-based swaps.\57\ If Alternative B is adopted, how
much initial margin would be segregated at third-party custodians and
how would it impact the liquidity of nonbank SBSDs? If Alternative B is
adopted, would the proposed margin requirements limit the ability of
nonbank SBSDs to trade in security-based swaps?
---------------------------------------------------------------------------
\57\ See id. at 70322.
---------------------------------------------------------------------------
Finally, the 2012 Proposals noted that depending on whether
Alternative A or B is adopted, the proposed margin requirements may
create the potential for regulatory arbitrage.\58\ In particular, the
2012 Proposals noted that if the Commission does not require nonbank
SBSDs to collect initial margin in their inter-dealer transactions (as
proposed in Alternative A), while the prudential regulators require the
collection of initial margin for the same transactions, intermediaries
could have an incentive to conduct business through nonbank
entities.\59\ Would Alternative A create more opportunities for
regulatory arbitrage than Alternative B, and would these regulatory
arbitrage opportunities have a significant economic impact? If so,
please explain how. In addition, Alternative A would differ in some
respects from an international policy framework establishing
recommended minimum standards for margin requirements for non-centrally
cleared derivatives.\60\ Would these or other differences create
opportunities for regulatory arbitrage, impede transactions with other
market participants, or have an impact on substituted compliance
determinations?
---------------------------------------------------------------------------
\58\ See id. at 70305-06.
\59\ See id.
\60\ See BCBS, IOSCO, Margin Requirements for Non-centrally
Cleared Derivatives (Mar. 2015).
---------------------------------------------------------------------------
b. If Alternative A is adopted, should the exception apply to a
broader class of entities than just other SBSDs? Should it apply if the
nonbank SBSD's counterparty is an SBSD, broker-dealer, bank, futures
commission merchant, foreign bank, or foreign dealer? The purpose of
adopting Alternative A with a modification to apply the exception to a
broader class of counterparties would be to promote the liquidity of
nonbank SBSDs and other market participants by reducing the amount of
capital they must post as initial margin to counterparties.
Would rule language as described below effect Alternative A with
the potential modification to expand the range of entities from which
initial margin need not be collected? If not, please explain why and
suggest alternative rule language. If the Commission were to use the
language described below, would it strike an appropriate balance in
terms of promoting the liquidity of nonbank SBSDs and other market
participants and addressing commenters' concerns about building up
systemic risk? If not, please explain why and suggest alternative rule
language that could more effectively and efficiently strike the balance
and achieve the objective.
The potential modifications to paragraph (c)(1)(iii)(B) of Rule
18a-3 would provide that the requirements of paragraph (c)(1)(ii)(B) of
this section do not apply to an account of a counterparty that is a
security-based swap dealer, swap dealer, broker or dealer, futures
commission merchant, bank, foreign bank, or a foreign broker or dealer.
9. In response to the 2012 Proposals, commenters argued that the
requirements adopted pursuant to Title VII of the Dodd-Frank Act should
permit the portfolio margining of security-based swaps, swaps, and
related positions.\61\ Portfolio margining of security-based swaps,
swaps, and related positions can offer benefits to investors and the
markets, including aligning margin requirements more closely with the
overall risks of a customer's portfolio. Further, portfolio margining
may help to improve cash flows and liquidity, and reduce volatility.
---------------------------------------------------------------------------
\61\ See, e.g., Letter from Adam Jacobs, Director of Markets
Regulation, Alternative Investment Management Association (Feb. 22,
2013) (``AIMA 2/22/2013 Letter'').
---------------------------------------------------------------------------
a. The Commission requests comment on whether swaps should be
permitted to be held in a security-based swap account at an entity that
is registered as a broker-dealer, nonbank SBSD, and swap dealer to
provide a means to portfolio margin security-based swaps with swaps and
related cash market and listed options positions. The Commission also
requests comment on whether security-based swaps should be permitted to
be held in a swap account at an entity that is registered as an FCM,
swap dealer, and nonbank SBSD to provide a means to portfolio margin
security-based swaps with swaps and related futures positions.
b. The Commission requests comment on whether swaps should be
permitted to be held in a security-based swap
[[Page 53015]]
account at an entity that is registered as a nonbank SBSD and swap
dealer (but not as a broker-dealer or FCM) to provide a means to
portfolio margin security-based swaps and swaps in a security-based
swap account. The Commission also requests comment on whether security-
based swaps should be permitted to be held in a swap account at an
entity that is registered as a swap dealer and SBSD (but not as an FCM
or broker-dealer) to provide a means to portfolio margin security-based
swaps and swaps in a swap account. If so, should such portfolio
margining be subject to conditions similar to those set forth in the
Commission's exemptive order permitting portfolio margining of credit
default swaps (e.g., conditions regarding subordination agreements and
disclosures)? \62\ In either scenario identified in this paragraph,
should the SBSD dually registered as a swap dealer be permitted to use
a model to determine portfolio margin requirements for security-based
swaps and swaps that reference equity securities, provided the accounts
do not hold cash market equity and listed options positions?
---------------------------------------------------------------------------
\62\ See Order Granting Conditional Exemptions Under the
Securities Exchange Act of 1934 in Connection with Portfolio
Margining of Swaps and Security-Based Swaps, Exchange Act Release
No. 68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012).
---------------------------------------------------------------------------
c. The Commission requests comment on how security-based swaps,
swaps, cash market and listed options positions, and collateral held in
a security-based swap account at an entity registered as a broker-
dealer, nonbank SBSD, and swap dealer would be treated in a liquidation
proceeding. The Commission requests comment on how security-based
swaps, swaps, futures positions, and collateral held in a swap account
at an entity registered as an FCM, swap dealer, and nonbank SBSD would
be treated in a liquidation proceeding. Would the treatment be
different if the entity was also registered as a broker-dealer? The
Commission requests comment on how swaps and security-based swaps held
in a security-based swap account at an entity registered as an SBSD and
swap dealer would be treated in a liquidation proceeding and how
security-based swaps and swaps held in a swap account at such an entity
would be treated in a liquidation proceeding.
For each of the four scenarios described above, what steps should
be taken to provide protections to the accountholders? What rights
(including rights under the bankruptcy laws) might accountholders have
to waive? Should there be limits on the types of counterparties that
would be permitted to waive these rights? Should the rule require the
nonbank SBSD to provide complete and accurate disclosures about the
treatment of assets in a liquidation, bankruptcy, or similar proceeding
under each of the scenarios described above so that accountholders and
prospective accountholders can make informed decisions about the type
of portfolio margin account they want to use and about waiving any
rights with respect to the account?
d. The scenarios described above include permitting: (1) An entity
registered as a broker-dealer, nonbank SBSD, and swap dealer to hold
swaps in a security-based swap account to provide a means to portfolio
margin security-based swaps with swaps and related cash market and
listed options positions; and (2) an entity that is registered as an
SBSD and swap dealer (but not as an FCM or broker-dealer) to hold swaps
in a security-based swap account to provide a means to portfolio margin
security-based swaps and swaps in a security-based swap account and to
use a model to determine portfolio margin requirements for security-
based swaps and swaps that reference equity securities, provided the
accounts do not hold cash market equity and listed options positions.
Would rule language as described below effect these approaches to
implement portfolio margining of swaps in a security-based swap
account? If not, please explain why and suggest alternative rule
language. If the Commission were to use the language described below,
would it strike an appropriate balance in terms of achieving the
objectives of the proposed rules and addressing commenters' requests to
permit portfolio margining of swaps and security-based swaps? If not,
please explain why and suggest alternative rule language that could
more effectively and efficiently strike the balance and achieve the
objective.
The potential modifications to paragraph (a)(3) of Appendix A to
Rule 15c3-1 would provide: The term related instrument within an option
class or product group refers to futures contracts, options on futures
contracts, and swaps covering the same underlying instrument. In
relation to options on foreign currencies a related instrument within
an option class also shall include forward contracts on the same
underlying currency.
The potential modifications to paragraph (a)(4) of Appendix A to
Rule 15c3-1 would also provide: The term underlying instrument refers
to long and short positions, as appropriate, covering the same foreign
currency, the same security, security future, security-based swap, or a
security which is exchangeable for or convertible into the underlying
security within a period of 90 days. If the exchange or conversion
requires the payment of money or results in a loss upon conversion at
the time when the security is deemed an underlying instrument for
purposes of this Appendix A, the broker or dealer will deduct from net
worth the full amount of the conversion loss. The term underlying
instrument shall not be deemed to include securities options, futures
contracts, options on futures contracts, qualified stock baskets,
unlisted instruments (other than security-based swaps), or swaps.
The potential modifications to paragraph (a)(3) of Appendix A to
Rule 18a-1 would provide: The term related instrument within an option
class or product group refers to futures contracts, options on futures
contracts, and swaps covering the same underlying instrument. In
relation to options on foreign currencies, a related instrument within
an option class also shall include forward contracts on the same
underlying currency.
The potential modifications to paragraph (a)(4) of Appendix A to
Rule 18a-1 would provide: The term underlying instrument refers to long
and short positions, as appropriate, covering the same foreign
currency, the same security, security future, security-based swap, or a
security which is exchangeable for or convertible into the underlying
security within a period of 90 days. If the exchange or conversion
requires the payment of money or results in a loss upon conversion at
the time when the security is deemed an underlying instrument for
purposes of this Appendix A, the security-based swap dealer will deduct
from net worth the full amount of the conversion loss. The term
underlying instrument shall not be deemed to include securities
options, futures contracts, options on futures contracts, qualified
stock baskets, unlisted instruments (other than security-based swaps),
or swaps.
The potential modifications to paragraph (d)(2)(ii) of Rule 18a-3
would provide: Notwithstanding paragraph (d)(2)(i) of this section, a
security-based swap dealer that is not registered as a broker or dealer
pursuant to Section 15(b) of the Act (15 U.S.C. 78o(b)) may apply to
the Commission for authorization to use a model to compute the margin
amount required by paragraph (c)(1)(i)(B) of this section and to
compute the deductions required by paragraph Sec. 240.18a-1(c)(1)(ix)
for equity security-based swaps and equity swaps, subject to the
application process and model requirements of
[[Page 53016]]
paragraph (d)(2)(i) of this section; provided, however, the account of
the counterparty subject to the requirements of this paragraph may not
hold equity securities or listed options.
Segregation
10. Section 3E(f) of the Act provides that a counterparty to a non-
cleared security-based swap with an SBSD can require that initial
margin be segregated at a third-party custodian or waive
segregation.\63\ The 2012 Proposals included a third alternative under
which the initial margin for the non-cleared security-based swap could
be held by the SBSD and subject to requirements modeled on the broker-
dealer customer protection rule but tailored to security-based swaps
(``omnibus segregation requirements'').\64\ The omnibus segregation
requirements would be mandatory for initial margin held by the SBSD for
cleared security-based swaps.
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\63\ See 15 U.S.C. 78c-5(f)(3).
\64\ See 2012 Proposals, 77 FR at 70274-88; 17 CFR 240.15c3-3.
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a. The Commission received a number of comments asking technical
questions about how the proposed omnibus segregation requirements would
operate in the context of security-based swap transactions, including
specific questions about the computation of the reserve formula, and
what types of hedging would be permitted under the proposed definition
of ``excess securities collateral.'' \65\ The Commission requests
comment on whether there are aspects of the proposed omnibus
segregation requirements where greater clarity regarding the
application of the rule would be helpful. If so, please identify them
and suggest appropriate modifications to the proposed rule.
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\65\ See, e.g., SIFMA 2/22/2013 Letter.
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b. The 2013 Proposals would treat segregation as a transaction-
level requirement, and the Commission proposed paragraph (e) of Rule
18a-4 to prescribe the scope of application of the segregation
requirements in Section 3E(f) of the Act and Rule 18a-4.\66\ The
proposed cross-border application of these segregation requirements to
a foreign SBSD or foreign MSBSP depended on whether it is a registered
broker-dealer, a U.S. branch or agency of a foreign bank, or neither of
the above, and whether the security-based swaps are cleared or non-
cleared.\67\ The Commission requests comment on whether there are
aspects of the proposed cross-border application of the segregation
requirements where greater clarity regarding the application of the
rule would be helpful. If so, please identify them and suggest
appropriate modifications to the proposed rule.
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\66\ See 2013 Proposals, 78 FR at 31010-11, 31018-22, 31209-10.
\67\ See id. at 31018-22.
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c. The 2013 Proposals provided that a foreign SBSD that is a U.S.
branch or agency of a foreign bank must comply with segregation
requirements with respect to security-based swap transactions with U.S.
security-based swap customers, but not with foreign security-based swap
customers.\68\ Should the segregation requirements apply to certain
foreign security-based swap customers? In particular, the Commission
requests comment on whether a foreign SBSD that is not a broker-dealer
and is a foreign bank should be required to comply with the segregation
requirements (1) with respect to U.S. security-based swap customers
(regardless of which branch or agency the customer's transactions arise
out of), and (2) with respect to a foreign security-based swap customer
if the foreign SBSD holds funds or other property arising out of a
transaction had by such person with a U.S. branch or agency of the
foreign SBSD.
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\68\ See id.
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11. The Commission received a comment that the broker-dealer
customer protection rule (Rule 15c3-3) should be amended to take into
account margin that is posted at a clearing agency by broker-dealers
not registered as SBSDs.\69\ The Commission requests comment on whether
Rule 15c3-3 should be amended to add a new paragraph (p) and a new
Exhibit B that would contain segregation requirements and a customer
reserve formula that parallel those in proposed Rule 18a-4. The
security-based swap segregation requirements that would be added to
Rule 15c3-3 would be substantially the same as the requirements in each
paragraph of proposed Rule 18a-4.\70\ The purpose would be to permit
broker-dealers that are not registered as SBSDs but that engage in
security-based swap activities to use segregation requirements that
parallel those in proposed Rule 18a-4 and which are tailored to
security-based swaps. In addition, the purpose would be to locate in
Rule 15c3-3 the security-based swap segregation requirements for
entities registered as a broker-dealer and SBSD. Proposed Rule 18a-4
would apply to SBSDs that are not registered as broker-dealers.
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\69\ See Letter from Kathleen M. Cronin, CME Group Inc. (Feb.
22, 2013).
\70\ The provisions of paragraph (d) of proposed Rule 18a-4
would not apply to a broker-dealer that is not also registered as
either an SBSD or MSBSP because Section 3E(f)(1)(A) of the Act does
not apply to broker-dealers. See 2012 Proposals, 77 FR at 70287.
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12. The 2012 Proposals include a definition of ``excess securities
collateral'' to identify securities and money market instruments
received from security-based swap customers that must be held in
physical possession or control.\71\ In particular, securities and money
market instruments that are not being used to collateralize the SBSD's
current exposure to the customer (i.e., exceed the variation margin
requirement) would need to be in the physical possession or control of
the SBSD unless one of two exceptions applied.\72\ The exceptions are
that the securities and money market instruments are held in a: (1)
Qualified clearing agency account but only to the extent they are being
used to meet a margin requirement of the clearing agency; or (2)
qualified SBSD account but only to the extent they are being used to
meet a margin requirement that applies to the other SBSD resulting from
entering into a non-cleared security-based swap transaction with the
other SBSD to offset the risk of a non-cleared security-based swap
transaction between the SBSD and the customer.\73\ In addition, the
2012 Proposals included a requirement for an SBSD to perform a customer
reserve formula calculation.\74\ Under the proposal, an SBSD could
include as a debit item in the formula cash collateral posted to a
clearing agency or another SBSD under the same circumstances as the
exceptions to the definition of ``excess securities collateral.'' \75\
The prudential regulators require initial margin posted by an SBSD to a
bank SBSD to be held at a third-party custodian (rather than being held
directly by the bank SBSD).\76\ This means that if an SBSD enters into
a transaction with a bank SBSD to hedge a non-cleared security-based
swap transaction with a security-based swap customer, the SBSD may have
to post initial margin to the bank SBSD and that initial margin would
need to be held by a third-party custodian rather than directly by the
bank SBSD.
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\71\ See 2012 Proposals, 77 FR at 70278-70282.
\72\ See id.
\73\ See id.
\74\ See id. at 70282-87.
\75\ See id.
\76\ See 12 CFR 45.7; 12 CFR 237.7; 12 CFR 624.7; 12 CFR 1221.7;
12 CFR 349.7.
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The Commission requests comment on how initial margin posted by an
SBSD to a bank SBSD to hedge a transaction with a security-based swap
customer should be treated for purposes of the possession or control
and customer reserve requirements in the
[[Page 53017]]
proposed SBSD segregation rule. For purposes of the possession or
control and customer reserve account requirements, should the initial
margin be treated similarly to how initial margin an SBSD posts to a
nonbank SBSD is treated if the purpose is to enter into a transaction
that hedges a transaction with a security-based swap customer? The
purpose would be to accommodate an SBSD that elects to enter into a
hedging transaction with a bank SBSD and must post initial margin that
is segregated at a third-party custodian.
Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and accommodating SBSDs that elect to hedge a non-cleared
security-based swap transaction by entering into an off-setting
transaction with a bank SBSD? If not, please explain why and suggest
alternative rule language that could more effectively and efficiently
strike the balance and achieve the objective.
The potential modifications to paragraph (p)(1)(ii) of Rule 15c3-3
would provide: The term excess securities collateral means securities
and money market instruments carried for the account of a security-
based swap customer that have a market value in excess of the current
exposure of the broker or dealer (after reducing the current exposure
by the amount of cash in the account) to the security-based swap
customer, excluding: (A) Securities and money market instruments held
in a qualified clearing agency account but only to the extent the
securities and money market instruments are being used to meet a margin
requirement of the clearing agency resulting from a security-based swap
transaction of the security-based swap customer; and (B) securities and
money market instruments held in a qualified registered security-based
swap dealer account or in a third-party custodial account but only to
the extent the securities and money market instruments are being used
to meet a regulatory margin requirement of a security-based swap dealer
resulting from the broker or dealer entering into a non-cleared
security-based swap transaction with the security-based swap dealer to
offset the risk of a non-cleared security-based swap transaction
between the broker or dealer and the security-based swap customer.
The potential modifications to paragraph (p)(1)(viii) of Rule 15c3-
3 would provide: The term third-party custodial account means an
account carried by an independent third-party custodian that meets the
following conditions: (A) The account is established for the purposes
of meeting regulatory margin requirements of another security-based
swap dealer; (B) The account is carried by a bank; (C) The account is
designated for and on behalf of the broker or dealer for the benefit of
its security-based swap customers and the account is subject to a
written acknowledgement by the bank provided to and retained by the
broker or dealer that the funds and other property held in the account
are being held by the bank for the exclusive benefit of the security-
based swap customers of the broker or dealer and are being kept
separate from any other accounts maintained by the broker or dealer
with the bank; and (D) The account is subject to a written contract
between the broker or dealer and the bank which provides that the funds
and other property in the account shall at no time be used directly or
indirectly as security for a loan or other extension of credit to the
security-based swap dealer by the bank and, shall be subject to no
right, charge, security interest, lien, or claim of any kind in favor
of the bank or any person claiming through the bank.
The potential modifications to Line 16 of Exhibit B to Rule 15c3-3
would provide: Margin related to non-cleared security-based swap
transactions in accounts carried for security-based swap customers
required and held in a qualified registered security-based swap dealer
account at another security-based swap dealer or at a third-party
custodial account.
The potential modifications to paragraph (a)(2) of Rule 18a-4 would
provide: The term excess securities collateral means securities and
money market instruments carried for the account of a security-based
swap customer that have a market value in excess of the current
exposure of the security-based swap dealer (after reducing the current
exposure by the amount of cash in the account) to the security-based
swap customer, excluding (i) securities and money market instruments
held in a qualified clearing agency account but only to the extent the
securities and money market instruments are being used to meet a margin
requirement of the clearing agency resulting from a security-based swap
transaction of the security-based swap customer; and (ii) securities
and money market instruments held in a qualified registered security-
based swap dealer account or in a third-party custodial account but
only to the extent the securities and money market instruments are
being used to meet a regulatory margin requirement of another security-
based swap dealer resulting from the security-based swap dealer
entering into a non-cleared security-based swap transaction with the
other security-based swap dealer to offset the risk of a non-cleared
security-based swap transaction between the security-based swap dealer
and the security-based swap customer.
The potential modifications to paragraph (a)(10) of Rule 18a-4
would also provide: The term third-party custodial account means an
account carried by an independent third-party custodian that meets the
following conditions: (i) The account is established for the purposes
of meeting regulatory margin requirements of another security-based
swap dealer; (ii) The account is carried by a bank; (iii) The account
is designated for and on behalf of the security-based swap dealer for
the benefit of its security-based swap customers and the account is
subject to a written acknowledgement by the bank provided to and
retained by the security-based swap dealer that the funds and other
property held in the account are being held by the bank for the
exclusive benefit of the security-based swap customers of the security-
based swap dealer and are being kept separate from any other accounts
maintained by the security-based swap dealer with the bank; and (iv)
The account is subject to a written contract between the security-based
swap dealer and the bank which provides that the funds and other
property in the account shall at no time be used directly or indirectly
as security for a loan or other extension of credit to the security-
based swap dealer by the bank and, shall be subject to no right,
charge, security interest, lien, or claim of any kind in favor of the
bank or any person claiming through the bank.
The potential modifications to Line 14 of Exhibit A to Rule 18a-4
would provide: Margin related to non-cleared security-based swap
transactions in accounts carried for security-based swap customers
required and held in a qualified registered security-based swap dealer
account at another security-based swap dealer or at a third-party
custodial account.
13. The 2012 Proposals required an SBSD to deduct the amount of
funds held in a security-based swap customer reserve account at a
single bank to the extent the amount exceeds ten percent (10%) of the
equity capital of the bank
[[Page 53018]]
as reported by the bank in its most recent Consolidated Report of
Condition and Income (``Call Report'').\77\ This proposal was
consistent with amendments to Rule 15c3-3 that at that time were still
in the proposal stage.\78\ In 2013, the Commission adopted with
modifications the amendments to Rule 15c3-3.\79\ The modifications
increased the threshold applicable to broker-dealer customer reserve
accounts held at a bank to fifteen percent (15%) and excluded cash on
deposit at an affiliated bank.
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\77\ See 2012 Proposals, 77 FR at 70282-86.
\78\ See Amendments to Financial Responsibility Rules for
Broker-Dealers, Exchange Act Release No. 55431 (Mar. 9, 2007), 72 FR
12862 (Mar. 19, 2007).
\79\ See Financial Responsibility Rules for Broker-Dealers,
Exchange Act Release No. 70072 (Jul. 30, 2013), 78 FR 51824, 51832-
35 (Aug. 21, 2013).
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The Commission requests comment on whether, for consistency with
broker-dealers, the threshold applicable to SBSD customer reserve
accounts held at a bank should be increased to fifteen percent (15%) of
the bank's equity capital and whether any cash deposited with an
affiliated bank should be excluded. The purpose would be to more
closely align the proposed segregation requirements for security-based
swaps with the existing customer reserve requirements in Rule 15c3-3,
as amended in 2013. Should the fifteen percent (15%) threshold not
apply if the SBSD is a bank and maintains the security-based swap
customer reserve account itself rather than at an affiliated or non-
affiliated bank? The purpose of this exception would be to accommodate
a bank SBSD that holds the customer reserve account directly.
The changes discussed above would modify paragraph (c)(1) of
proposed Rule 18a-4 and new paragraph (p)(3) of proposed Rule 15c3-3 to
more closely align them with the 2013 amendments to Rule 15c3-3 and,
with respect to proposed Rule 18a-4, establish an exception from the
fifteen percent (15%) threshold for a bank SBSD that maintains the
security-based swap customer reserve account itself. Would rule
language as described below effect this potential modification to the
rule text in the 2012 Proposals? If not, please explain why and suggest
alternative rule language. If the Commission were to use the language
described below, would it strike an appropriate balance in terms of
achieving the objectives of the proposed rule and providing sufficient
flexibility to SBSDs in terms of locating their reserve account
deposits? If not, please explain why and suggest alternative rule
language that could more effectively and efficiently strike the balance
and achieve the objective.
The potential modifications to paragraph (p)(3)(i) of Rule 15c3-3
would provide: In determining the amount maintained in a special
reserve account for the exclusive benefit of security-based swap
customers, the security-based swap dealer must deduct (A) the amount of
cash deposited with a single non-affiliated bank to the extent the
amount exceeds fifteen percent (15%) of the equity capital of the bank
as reported by the bank in its most recent Call Report or any successor
form the bank is required to file by its appropriate federal banking
agency (as defined by Section 3 of the Federal Deposit Insurance Act
(12 U.S.C. 1813)); and (B) the total amount of cash deposited with an
affiliated bank.
Similarly, the potential modifications to paragraph (c)(1)(i) of
Rule 18a-4 would provide: In determining the amount maintained in a
special reserve account for the exclusive benefit of security-based
swap customers, the security-based swap dealer must deduct (A) the
amount of cash deposited with a single non-affiliated bank to the
extent the amount exceeds fifteen percent (15%) of the equity capital
of the bank as reported by the bank in its most recent Call Report or
any successor form the bank is required to file by its appropriate
federal banking agency (as defined by Section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813)); and (B) for a security-based swap
dealer for which there is not a prudential regulator, the total amount
of cash deposited with an affiliated bank.
The potential modifications to paragraph (c)(1)(ii) of Rule 18a-4
would provide the following exception: A security-based swap dealer for
which there is a prudential regulator need not take the deduction
specified in paragraph (c)(1)(i)(D) of this section if it maintains the
special reserve account for the exclusive benefit of security-based
swap customers itself rather than at an affiliated or non-affiliated
bank.
Substituted Compliance
14. The 2013 Proposals would make substituted compliance with
respect to capital and margin requirements available to foreign nonbank
SBSDs that are not also registered as broker-dealers.\80\ Upon a
Commission substituted compliance determination, this type of SBSD
would be able to satisfy relevant capital and margin requirements by
complying with corresponding requirements under a foreign regulatory
system. The Commission requests comment on whether the potential
modifications to the rule text in the 2012 Proposals discussed in this
release would have an impact on substituted compliance determinations.
If so, please explain how.
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\80\ See 2013 Proposals, 78 FR at 31207-08.
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A number of commenters requested that the Commission consider
consistency with the prudential regulators, international standards,
and foreign regulators when making substituted compliance
determinations with respect to the proposed nonbank SBSD capital
requirements.\81\
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\81\ See, e.g., ISDA 1/23/2013 Letter.
---------------------------------------------------------------------------
a. Commenters generally requested additional guidance regarding the
criteria the Commission would consider when making substituted
compliance determinations.\82\ In light of the comments and the goals
of this provision, the Commission requests comment on the factors it
should consider in making a substituted compliance determination with
respect to the proposed nonbank SBSD capital requirements of Section
15F(e) of the Act and proposed Rule 18a-1. In making a substituted
compliance determination, should the Commission consider whether the
capital requirements of the foreign financial regulatory system are
designed to help ensure the safety and soundness of registrants in a
manner that is comparable to the proposed capital requirements for
nonbank SBSDs? \83\ In addition, the proposed nonbank SBSD capital rule
prescribes a net liquid assets test that requires the firm to have an
amount of highly liquid assets that exceeds the amount of the firm's
unsubordinated liabilities.\84\ In terms of the conditions that might
be included in an order making an affirmative substituted compliance
determination, should the Commission consider a condition that requires
foreign nonbank SBSDs relying on the order to maintain liquid assets in
excess of their unsubordinated liabilities? \85\ Are there
[[Page 53019]]
reasonable alternatives to a net liquid assets test that could be the
basis for a condition that is designed to ensure the foreign nonbank
SBSD maintains sufficient liquidity to meet its obligations to
security-based swap customers and other creditors? If so, describe them
and explain how they would achieve this objective. Would these
alternatives be appropriate for a domestic nonbank SBSD that is not
registered as a broker-dealer? If so, explain why. Should the
Commission consider a condition that the foreign nonbank SBSD not have
a disproportionate number of U.S. customers? If not, explain why.
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\82\ See, e.g., Letter from the Coalition for Derivatives End-
Users (Agricultural Retailers Association, Business Roundtable,
Financial Executives International, National Association of
Corporate Treasurers, National Association of Manufacturers, U.S.
Chamber of Commerce) (Aug. 21, 2013).
\83\ See, e.g., 15 U.S.C. 78o-10(e)(3)(A).
\84\ See 2012 Proposals, 77 FR at 70221-25.
\85\ See Interpretation Guide to Net Capital Computation for
Brokers and Dealers, Exchange Act Release No. 8024 (Jan. 18, 1967),
32 FR 856 (Jan. 25, 1967) (``Rule 15c3-1 (17 CFR 240.15c3-1) was
adopted to provide safeguards for public investors by setting
standards of financial responsibility to be met by brokers and
dealers. The basic concept of the rule is liquidity; its object
being to require a broker-dealer to have at all times sufficient
liquid assets to cover his current indebtedness.'') (footnotes
omitted); Net Capital Requirements for Brokers and Dealers, Exchange
Act Release No. 15426 (Dec. 21, 1978), 44 FR 1754 (Jan. 8, 1979)
(``The rule requires brokers or dealers to have sufficient cash or
liquid assets to protect the cash or securities positions carried in
their customers' accounts. The thrust of the rule is to insure that
a broker or dealer has sufficient liquid assets to cover current
indebtedness.''); Net Capital Requirements for Brokers and Dealers,
Exchange Act Release No. 26402 (Dec. 28, 1989), 54 FR 315 (Jan. 5,
1989) (``The rule's design is that broker-dealers maintain liquid
assets in sufficient amounts to enable them to satisfy promptly
their liabilities. The rule accomplishes this by requiring broker-
dealers to maintain liquid assets in excess of their liabilities to
protect against potential market and credit risks.'') (footnote
omitted). See also Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants; Proposed Rule, 78 FR at 31090.
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b. The Commission requests comment on the composition of the
balance sheets of entities in foreign jurisdictions that may register
as nonbank SBSDs. Are the assets and liabilities of these foreign
entities similar to the assets and liabilities of U.S. broker-dealers
that are subject to the net liquid assets test? If not, explain the
differences.
c. The approach described in 14.a would modify Rule 3a71-6
(proposed as Exchange Act Rule 3a71-5 at 78 FR 30967, 31207-08) to
describe factors that the Commission would consider in making a
substituted compliance determination with respect to the proposed
nonbank SBSD capital requirements.\86\ Would rule language as described
below effect this potential modification to the rule text in the 2012
Proposals? If not, please explain why and suggest alternative rule
language. If the Commission were to use the language described below,
would it strike an appropriate balance in terms of achieving the
objectives of the proposed rule and addressing the commenters' concerns
described above? If not, please explain why and suggest alternative
rule language that could more effectively and efficiently strike the
balance and achieve the objective.
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\86\ See 17 CFR 240.3a71-6.
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The potential modifications to paragraph (d)(4) of Rule 3a71-6
would provide that substituted compliance is available with respect to:
The capital requirements of Section 15F(e) of the Act (15 U.S.C. 78o-
10(e)) and Sec. 240.18a-1; provided, however, that prior to making
such substituted compliance determination with respect to security-
based swap dealers, the Commission intends to consider (in addition to
any conditions imposed) whether the capital requirements of the foreign
financial regulatory system are designed to help ensure the safety and
soundness of registrants in a manner that is comparable to the
applicable provisions arising under the Act and its rules and
regulations.
Compliance Date
15. In the Commission's release establishing the registration
process for SBSDs and MSBSPs, the Commission provided that the
compliance date for the SBSD and MSBSP registration requirements will
be the later of: Six months after the date of publication in the
Federal Register of final rules establishing capital, margin, and
segregation requirements for SBSDs and MSBSPs; the compliance date of
final rules establishing recordkeeping and reporting requirements for
SBSDs and MSBSPs; the compliance date of final rules establishing
business conduct requirements under Sections 15F(h) and 15F(k) of the
Exchange Act; or the compliance date for final rules establishing a
process for a registered SBSD or MSBSP to make an application to the
Commission to allow an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on the SBSD or MSBSP's behalf (the ``Registration Compliance
Date'').\87\ Would this provide enough time for registrants to take the
necessary steps to come into compliance with applicable requirements?
If not, explain why. Would a longer period, such as 18 months after the
date of publication of the last of four releases noted above in the
Federal Register, be more appropriate? If so, explain why. Would a
shorter period be more appropriate? If so, explain why. Should the
Commission consider the timing of the phased implementation of initial
margin requirements provided for by other regulators in making any
changes to the compliance period? \88\ If so, explain why.
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\87\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, Exchange Act Release No.
75611 (Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015).
\88\ See Margin and Capital Requirements for Covered Swap
Entities, 80 FR at 74849-51 (adopting compliance dates phasing-in
initial margin requirements beginning September 1, 2016 and ending
September 1, 2020 for bank swap dealers, bank SBSDs, bank swap
participants, and bank MSBSPs); Margin Requirements for Uncleared
Swaps for Swap Dealers and Major Swap Participants, 81 FR at 674-677
(adopting compliance dates phasing-in initial margin requirements
beginning September 1, 2016 and ending September 1, 2020 for nonbank
swap dealers and nonbank major swap participants).
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Additional Requests for Comment--Economic Implications
16. The Proposals contain economic analyses seeking to identify and
consider the benefits and costs--including the effects on efficiency,
competition and capital formation--that would result from the proposed
capital, margin, and segregation requirements. To assist in the
quantification of the economic effects of the proposed requirements,
the Commission requests comment and supporting data on the current risk
management practices that support the trading activity in security-
based swaps. Specifically, what are the main sources of funding
available to entities that would be registering as nonbank SBSDs to
support their trading activity? How much of the capital available to an
entity that would be registering as a nonbank SBSD consists of liquid
capital? What are typical risk management procedures for dealing with
losses stemming from the market risk of security-based swap positions?
What are typical risk management procedures for dealing with losses
stemming from the credit risk of uncollateralized security-based swap
positions? In the event that losses from trading activities overcome
the available liquid capital, how are excess losses dealt with? What
are the operational risks and concerns associated with maintaining
adequate levels of capital?
The Commission also requests comment and data on how the baseline
of the economic analyses has changed since the publication of the
Proposals. For example, in 2015, the U.S. prudential regulators and the
CFTC adopted final rules on minimum margin requirements for non-cleared
swaps that began to be implemented in September 2016. A June 2017
survey on dealer financing terms noted that some of the survey
respondents indicated that their clients' transaction volume or their
own transaction volume in non-cleared swaps decreased somewhat over the
period of September 2016 to June 2017.\89\ However, the respondents
reported no changes in the prices that
[[Page 53020]]
they quote to their clients in non-cleared swaps over this period. One-
fifth of the survey respondents also reported that they would be less
likely to exchange daily variation margin with mutual funds, exchange-
traded funds, pension plans, endowments, and separately managed
accounts established with investment advisers due primarily to lack of
operational readiness (e.g., the need to establish or update the
necessary credit support annexes to cover daily exchange of variation
margin) over this period. Two-fifths of the survey respondents also
reported that the volume of mark and collateral disputes on variation
margin has increased somewhat over this period. Furthermore, the survey
noted that there is variation among respondents with respect to the
number of days it takes to resolve a mark and collateral dispute on
variation margin, with one-third reporting less than two days, while
three-fifths reporting more than two days but less than a week, on
average. This type of data could provide insight regarding how entities
that may register as nonbank SBSDs may respond to the Commission's
final margin requirements.
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\89\ See Yesol Huh, Division of Research and Statistics, Board
of Governors of the Federal Reserve System, The June 2017 Senior
Credit Officer Opinion Survey on Dealer Financing Terms, available
at https://www.federalreserve.gov/data/scoos/files/scoos_201706.pdf.
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Commenters are asked to describe changes, if applicable, in: (1)
The trading volumes in the relevant security-based swap and swap
markets; (2) the regulatory structure of these markets; and (3) the
number and types of entities that participate in these markets.
Commenters also are asked to describe how those changes in the baseline
would impact the potential benefits and costs--including the effects on
efficiency, competition and capital formation--of the Proposals as well
as the potential benefits and costs--including the effects on
efficiency, competition and capital formation--that would result from
the potential alternatives described in the questions above taking the
changes in the baseline into account (if applicable).
Finally, the Commission requests comment on whether there are
economic considerations apart from those discussed in the Proposals
that should be considered in the economic analysis of the capital,
margin, and segregation requirements as well as the alternatives
described in the questions above.
By the Commission.
Dated: October 11, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22531 Filed 10-18-18; 8:45 am]
BILLING CODE 8011-01-P