```

[Federal Register Volume 76, Number 92 (Thursday, May 12, 2011)]
[Proposed Rules]
[Pages 27802-27841]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10881]

[[Page 27801]]

Vol. 76

Thursday,

No. 92

May 12, 2011

Part III

Commodity Futures Trading Commission

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17 CFR Parts 1, 23, and 140

 Capital Requirements of Swap Dealers and Major Swap Participants; 
Proposed Rule

Federal Register / Vol. 76 , No. 92 / Thursday, May 12, 2011 / 
Proposed Rules

[[Page 27802]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 23, and 140

RIN 3038-AD54

Capital Requirements of Swap Dealers and Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing regulations that would implement the new statutory 
framework in the Commodity Exchange Act (CEA), added by the Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act). These new 
provisions of the CEA require, among other things, the Commission to 
adopt capital requirements for certain swap dealers (SDs) and major 
swap participants (MSPs). The proposed rules also provide for related 
financial condition reporting and recordkeeping by SDs and MSPs. The 
Commission further proposes to amend existing capital and financial 
reporting regulations for futures commission merchants (FCMs) that also 
register as SDs or MSPs. The proposed regulations also include 
requirements for supplemental FCM financial reporting to reflect 
section 724 of the Dodd-Frank Act. In order to align the comment 
periods for this proposed rule and the Commission's earlier proposed 
rulemaking on margin requirements for uncleared swaps,\1\ the comment 
period for the proposed margin rulemaking is being extended elsewhere 
in the Federal Register today, so that commenters will have the 
opportunity to review the proposed capital and margin rules together 
before the expiration of the comment periods for either proposed rule.
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    \1\ See 76 FR 23732 (April 28, 2011).

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DATES: Comments must be received on or before July 11, 2011.

ADDRESSES: You may submit comments, identified by RIN 3038-AD54, by any 
of the following methods:
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: Send to David A. Stawick, Secretary, Commodity 
Futures Trading Commission, 1155 21st Street, NW., Washington, DC 
20581.
     Hand delivery/Courier: Same as Mail above.
     Federal eRulemaking Portal: http://www.regulations.gov/search/index.jsp. Follow the instructions for submitting comments.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that is exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures set forth in 
Sec.  145.9 of the Commission's regulations.\2\
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    \2\ Commission regulations referred to herein are found at 17 
CFR Ch. 1 (2010). Commission regulations are accessible on the 
Commission's Web site, http://www.cftc.gov.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Thomas Smith, Deputy Director, Thelma 
Diaz, Associate Director, or Jennifer Bauer, Special Counsel, Division 
of Clearing and Intermediary Oversight, 1155 21st Street, NW., 
Washington, DC 20581. Telephone number: 202-418-5137 and electronic 
mail: tsmith@cftc.gov; tdiaz@cftc.gov; or jbauer@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Background

A. Legislation Requiring Rulemaking for Capital Requirements of SDs and 
MSPs

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\3\ 
Title VII of the Dodd-Frank Act amended the CEA \4\ to establish a 
comprehensive regulatory framework to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (1) Providing for the registration and 
comprehensive regulation of SDs and MSPs; (2) imposing clearing and 
trade execution requirements on standardized derivative products; (3) 
creating rigorous recordkeeping and real-time reporting regimes; and 
(4) enhancing the Commission's rulemaking and enforcement authorities 
with respect to all registered entities and intermediaries subject to 
the Commission's oversight.
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    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \4\ 7 U.S.C. 1 et seq.
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    The legislative mandate to establish registration and regulatory 
requirements for SDs and MSPs appears in section 731 of the Dodd-Frank 
Act, which adds a new section 4s to the CEA. Section 4s(e) explicitly 
requires the adoption of rules establishing capital and margin 
requirements for SDs and MSPs, and applies a bifurcated approach that 
requires each SD and MSP for which there is a prudential regulator to 
meet the capital and margin requirements established by the applicable 
prudential regulator, and each SD and MSP for which there is no 
prudential regulator to comply with Commission's capital and margin 
regulations.
    The term ``prudential regulator'' is defined in a new paragraph 39 
of the definitions set forth in section 1a of the CEA, as amended by 
section 721 of the Dodd-Frank Act. This definition includes the Board 
of Governors of the Federal Reserve System (Federal Reserve Board); the 
Office of the Comptroller of the Currency (OCC); the Federal Deposit 
Insurance Corporation (FDIC); the Farm Credit Administration; and the 
Federal Housing Finance Agency (FHFA). The definition also specifies 
the entities for which these agencies act as prudential regulators, and 
these consist generally of federally insured deposit institutions; farm 
credit banks; federal home loan banks; and the Federal Home Loan 
Mortgage Corporation and the Federal National Mortgage Association. In 
the case of the Federal Reserve Board, it is the prudential regulator 
not only for certain banks, but also for bank holding companies and any 
foreign banks treated as bank holding companies. The Federal Reserve 
Board also is the prudential regulator for subsidiaries of these bank 
holding companies and foreign banks, but excluding their nonbank 
subsidiaries that are required to be registered with the Commission as 
SDs or MSPs.
    In general, therefore, the Commission is required to establish 
capital requirements for all registered SDs and MSPs that are not 
banks, including nonbank subsidiaries of bank holding companies 
regulated by the Federal Reserve Board. In addition, certain swap 
activities currently engaged in by banks may be conducted in such 
nonbank subsidiaries and affiliates as a result of the prohibition on 
Federal assistance to swap entities under section 716 of the

[[Page 27803]]

Dodd-Frank Act. Generally, insured depository institutions (IDIs) that 
are required to register as SDs may be required to comply with section 
716 by ``pushing-out'' to an affiliate all swap trading activities with 
the exception of: (1) The IDI's hedging or other similar risk 
mitigating activities directly related to the IDI's activities; and (2) 
the IDI acting as a SD for swaps involving rates or reference assets 
that are permissible for investment under banking law.
    The Commission is further required to adopt other regulations that 
implement provisions in section 4s related to financial reporting and 
recordkeeping by SDs and MSPs. Section 4s(f)(2) of the CEA specifically 
directs the Commission to adopt rules governing financial condition 
reporting and recordkeeping for SDs and MSPs, and section 4s(f)(1)(A) 
expressly requires each registered SD and MSP to make such reports as 
are required by Commission rule or regulation regarding the SD's or 
MSP's financial condition. The Commission also is authorized to propose 
record retention and inspection requirements consistent with the 
provisions of section 4s(f)(1)(B).\5\
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    \5\ The Commission previously has proposed certain record 
retention requirements for SDs and MSPs regarding their swap 
activities. See 75 FR 76666 (Dec. 9, 2010).
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B. Consultation With U.S. Securities and Exchange Commission and 
Prudential Regulators

    Section 4s(e)(3)(D) of the CEA calls for comparability of the 
capital requirements that the Commission, United States Securities and 
Exchange Commission (SEC) and prudential regulators (together, referred 
to as ``Agencies'') adopt for SDs, MSPs, security-based swap dealers 
(SSDs) and major security-based swap participants (MSSPs) (together, 
referred to as ``swap registrants''). Section 4s further specifies the 
expected scope and frequency of consultation by the Agencies regarding 
the capital requirements of swap registrants. Section 4s(e)(3)(D) 
requires the Agencies to establish and to maintain, to the maximum 
extent practicable, comparable minimum capital requirements. Section 
4s(e)(3)(D) also requires the Agencies to periodically, but not less 
frequently than annually, consult on minimum capital requirements for 
swap registrants.
    As directed by Dodd-Frank, and consistent with precedent for 
harmonizing where practicable the minimum capital and financial 
condition and related reporting requirements of dual registrants, staff 
from each of the Agencies has had the opportunity to provide oral and/
or written comments to the regulations for SDs and MSPs in this 
proposing release, and the proposed regulations incorporate elements of 
the comments provided. The Commission will continue its discussions 
with the Agencies in the development of their respective capital 
regulations to implement the Dodd-Frank Act.
    The Commission is relying to a great extent on existing regulatory 
requirements in proposing capital requirements for SDs and MSPs. 
Specifically, under this proposal, any SD or MSP that is required to 
register as an FCM would be required to comply with the Commission's 
existing capital requirements set forth in Sec.  1.17 for FCMs. 
Furthermore, any SD or MSP that is neither a registered FCM nor a bank, 
but is part of a U.S. bank holding company, would be required to comply 
with the applicable bank capital requirements that are established by 
the Federal Reserve Board for bank holding companies. Lastly, any SD or 
MSP that was not required to register as an FCM and is not part of a 
U.S. bank holding company would compute its capital in accordance with 
proposed regulations summarized in part II of this release.

C. Considerations for SD and MSP Rulemaking Specified in Section 4(s)

    Section 4s(e)(2)(C) of the CEA requires the Commission, in setting 
capital requirements for a person designated as a swap registrant for a 
single type or single class or category of swap or activities, to take 
into account the risks associated with other types/classes/categories 
of swap and other activities conducted by that person that are not 
otherwise subject to regulation by virtue of their status as an SD or 
MSP. Section 4s(e)(3)(A) also refers to the need to offset the greater 
risk that swaps that are not cleared pose to SDs, MSPs, and the 
financial system, and the Commission, SEC, and prudential regulators 
are directed to adopt capital requirements that: (1) Help ensure the 
safety and soundness of the registrant; and (2) are appropriate for the 
risk associated with the uncleared swaps held by the registrants.

D. Other Considerations Under the CEA for FCM Financial Responsibility 
Requirements

    Entities that register as SDs and MSPs may include entities that 
also are registered as FCMs.\6\ FCM registrants are subject to existing 
Commission regulations establishing capital, segregation, and financial 
reporting requirements under the CEA.\7\ Two primary financial 
safeguards under the CEA are: (1) The requirement under section 
4d(a)(2) that FCMs segregate from their own assets all money and 
property belonging to their customers trading on U.S. markets; \8\ and 
(2) the requirement under section 4f(b) for compliance with minimum 
capital requirements for FCMs.\9\ The capital requirements for FCMs are 
set forth in Commission Sec.  1.17, and reporting requirements related 
to capital and the FCM's protection of customer funds are set forth in 
Sec. Sec.  1.10, 1.12, and 1.16 of the Commission's regulations.\10\
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    \6\ An FCM is defined as an individual, association, 
partnership, corporation, or trust that engages in soliciting or in 
accepting orders for: (1) The purchase or sale of a commodity for 
future delivery, (2) a security futures product, (3) a swap, (4) any 
commodity option authorized under Section 4c of the CEA, or (5) any 
leverage transaction authorized under section 19 of the CEA, or that 
is engaged in soliciting or accepting orders to act as a 
counterparty in any agreement, contract, or transaction described in 
sections 2(c)(2)(C)(i) or 2(c)(2)(D)(i) of the CEA, and in 
connection with such activities, accepts any money, securities or 
property (or extends credit) to margin, guarantee, or secure trades 
or contracts.
    \7\ The Commission's regulatory responsibilities include 
monitoring the financial integrity of the commodity futures and 
options markets and intermediaries, such as FCMs, that market 
participants employ in their trading activities. The Commission's 
financial and related recordkeeping and reporting rules are part of 
a system of financial safeguards that also includes exchange and 
clearinghouse risk management and financial surveillance systems, 
exchange and clearinghouse rules and policies on clearing and 
settlements, and financial and operational controls and risk 
management employed by market intermediaries themselves.
    \8\ The requirement that FCMs segregate customer funds is set 
forth in section 4d(a)(2) of the CEA. Section 4d(a)(2) requires, 
among other things, that an FCM segregate from its own assets all 
money, securities, and other property held for customers as margin 
for their commodity futures and option contracts, as well as any 
gains accruing to such customers from open futures and option 
positions. Part 30 of the Commission's regulations also requires 
FCMs to hold ``secured amount'' funds for U.S. customers trading in 
non-U.S. futures markets separate from the firms' proprietary funds.
    \9\ Section 4f(b) of the CEA provides that FCMs must meet the 
minimum financial requirements that the Commission ``may by 
regulation prescribe as necessary to insure'' that FCMs meet their 
obligations as registrants.
    \10\ Regulation 1.10 includes a requirement for FCMs to file 
annual financial statements that have been certified by an 
independent public accountant in accordance with Sec.  1.16. 
Regulation 1.10 also requires generally that FCMs file with the 
Commission non-certified Form 1-FR-FCM financial reports each month. 
Regulation 1.12 requires FCMs to provide notice of a variety of 
predefined events as or before they occur. Such notice is intended 
to provide the Commission with the opportunity to assess the FCM's 
ability to meet its financial requirements on an ongoing basis.
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1. Background on FCM Capital Requirements in Sec.  1.17
    FCM capital requirements in Sec.  1.17 are designed to require a 
minimum level

[[Page 27804]]

of liquid assets in excess of the FCM's liabilities to provide 
resources for the FCM to meet its financial obligations as a market 
intermediary in the regulated futures and options market. The capital 
requirements also are intended to ensure that an FCM maintains 
sufficient liquid assets to wind-down its operations by transferring 
customer accounts in the event that the FCM decides, or is forced, to 
cease operations as an FCM.
    Paragraph (a) of Sec.  1.17 addresses the first component of the 
FCM capital rule by specifying the minimum amount of adjusted net 
capital that a registered FCM is required to maintain. Specifically, 
Sec.  1.17 sets the minimum adjusted net capital requirement as the 
greatest of: (1) $1,000,000; (2) for an FCM that engages in off-
exchange foreign currency transactions with persons that are not 
eligible contract participants as defined in section 1a(12) of the CEA 
(i.e. retail participants), $20,000,000, plus 5 percent of the FCM's 
liabilities to the retail forex participants that exceeds $10,000,000; 
(3) 8 percent of the risk margin (as defined in Sec.  1.17(b)(8)) of 
customer and non-customer exchange-traded futures positions and over-
the-counter (OTC) swap positions that are cleared by a clearing 
organization and carried by the FCM; (4) the amount of adjusted net 
capital required by a registered futures association of which the FCM 
is a member; and (5) for an FCM that also is registered as securities 
broker or dealer, the amount of net capital required by rules of the 
SEC.
    The requirements for the calculation of the FCM's adjusted net 
capital represent the second component of the FCM capital rule. 
Regulation 1.17(c)(5) generally defines the term ``adjusted net 
capital'' as an FCM's ``current assets'', i.e., generally liquid 
assets, less all of its liabilities (except certain qualifying 
subordinated debt), and further reduced by certain capital charges (or 
haircuts) to reflect potential market and credit risk of the firm's 
current assets.
2. Capital Required for Uncleared Swaps Under Sec.  1.17
    FCMs historically have not engaged in significant OTC derivatives 
transactions. The capital treatment of such transactions under Sec.  
1.17 is one of the factors that has resulted in OTC transactions being 
conducted in affiliated entities. Specifically, an FCM in computing its 
adjusted net capital is required to mark its OTC derivatives position 
to market, and to reflect any unrealized gain or loss in its statement 
of income. If the FCM experiences an unrealized loss on its OTC 
derivatives position, the unrealized loss is recorded as a liability to 
the counterparty and results in a reduction of the firm's adjusted net 
capital. If the FCM experiences an unrealized gain on the OTC 
derivatives position, the FCM would record a receivable from the 
counterparty. If the receivable was not secured through the receipt of 
readily marketable financial collateral, the FCM would be required to 
exclude the receivable from the calculation of its current assets under 
Sec.  1.17(c)(2)(ii).
    An FCM, in computing its adjusted net capital, is further required 
to compute a capital charge to reflect the potential market risk 
associated with its OTC derivatives positions. Regulation 1.17(c)(5) 
establishes specific capital charges for market risk for an FCM's 
proprietary positions in physical inventory, forward contracts, fixed 
price commitments, and securities. Historically, the Commission has 
required an FCM to use the capital charge provisions specified in Sec.  
1.17(c)(5)(ii), or capital charges established by the SEC for 
securities brokers or dealers, for its OTC derivatives positions.
3. Capital and Reporting Requirements for FCMs That Also Are SDs or 
MSPs
    Section 4s(e)(3)(B)(i) of the CEA recognizes that the requirements 
applicable to SDs and MSPs under section 4s do not limit the 
Commission's authority with respect to FCM regulatory requirements. 
Furthermore, with respect to cleared swaps, section 724 of the Dodd-
Frank Act provides that if a SD or MSP accepts any money, securities, 
or property (or extends credit in lieu of money, securities, or 
property) from, or on behalf of, a swaps customer to margin, guarantee, 
or secure a swap position cleared by or through a derivatives clearing 
organization, the SD or MSP must register with the Commission as an 
FCM.\11\ Therefore, the requirement to comply with CFTC FCM capital 
requirements extends to SDs and MSPs that are required to register as 
FCMs as a result of carrying customer accounts containing cleared swap 
positions. This would include SDs and MSPs that are subject to 
regulation by prudential regulators, and are required to register as 
FCMs. In part II.B of this release, the Commission proposes specific 
capital and financial reporting requirements applicable to FCMs that 
also are registered as SDs or MSPs.
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    \11\ Section 724 of the Dodd-Frank Act amends Section 4d of the 
CEA by adding a new provision, Section 4d(f)(1), which provides that 
it is unlawful for any person to accept money, securities, or other 
property from or on behalf of a swap customer to margin, guarantee 
or secure a swap cleared by or through a derivatives clearing 
organization unless the person is registered as an FCM under the 
CEA. See, also, Section 4s(e)(3)(B)(i)(I) of the CEA, as amended by 
Section 731 of the Dodd-Frank Act, which provides the Commission 
with authority to impose capital requirements upon SDs and MSPs that 
are registered as FCMs.
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E. Structure and Approach

    Consistent with the objectives set forth above, part II of this 
release summarizes regulations that the Commission proposes in order to 
establish minimum capital and financial reporting requirements for SDs 
and MSPs that are not banks. As noted in previous proposed rulemaking 
issued by the Commission, the Commission intends, where practicable, to 
consolidate regulations implementing section 4s of the CEA in a new 
part 23.\12\ By this Federal Register release, the Commission is 
proposing to adopt the capital requirements and related financial 
condition reporting requirements of SDs and MSPs under subpart E of 
part 23 of the Commission's regulations.
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    \12\ See 75 FR 71379, 71383 (November 23, 2010).
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    In addition to the amendments being proposed for subpart E of part 
23, the Commission also is proposing certain other amendments to FCM 
regulations contained in part 1. The proposed regulations for SD and 
MSP capital and financial reporting, as well as capital and financial 
reporting requirements for FCMs, are discussed in part II of this 
release. Additional amendments for part 140 of the Commission's 
regulations are discussed in part III of this release.

II. Proposed Capital and Financial Reporting Regulations Under Part 23 
for SDs and MSPs and Part 1 for FCMs

    Proposed Sec.  23.101 would specify capital requirements applicable 
to SDs and MSPs. Regulation 23.101 includes language specifying 
exemptions from the Commission's proposed SD-MSP capital rules, 
however, for any SD or MSP that is: (1) Subject to regulation by a 
prudential regulator; (2) designated by the Financial Stability 
Oversight Council as a systemically important financial institution 
(SIFI) and subject to supervision by the Federal Reserve Board; or (3) 
registered as an FCM.
    The capital requirements of SDs and MSPs that are subject to 
regulation by a prudential regulator would be established by the 
prudential regulator. As identified by the prudential regulators, 
applicable capital regulations for the entities they regulate include 
the following: (1) In the case of insured depository institutions, the 
capital adequacy guidelines adopted under 12

[[Page 27805]]

U.S.C. 1831o; (2) in the case of a bank holding company or savings and 
loan holding company, the capital adequacy guidelines applicable to 
bank holding companies under 12 CFR part 225; (3) in the case of a 
foreign bank or the U.S. branch or agency of a foreign bank, the 
applicable capital rules pursuant to 12 CFR 225.2(r)(3)(i); (4) in the 
case of ``Edge corporations'' or ``Agreement corporations'', the 
applicable capital adequacy guidelines pursuant to 12 CFR 211.12(c)(2); 
(5) in the case of any regulated entity under the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992 (i.e., Fannie 
Mae and its affiliates, Freddie Mac and its affiliates, and the Federal 
Home Loan Banks), the risk-based capital level or such other amount as 
required by the Director of FHFA pursuant to 12 U.S.C. 4611; (6) in the 
case of the Federal Agricultural Mortgage Corporation, the capital 
adequacy regulations set forth in 12 CFR part 652; and (7) in the case 
of any farm credit institution (other than the Federal Agricultural 
Mortgage Corporation), the capital regulations set forth in 12 CFR part 
615.\13\
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    \13\ See joint proposed rulemaking issued by the prudential 
regulators on April 12, 2011, titled ``Margin and Capital 
Requirements for Covered Swap Entities.''
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    Any SD or MSP that was determined to be a SIFI by the Financial 
Stability Oversight Council would be subject to supervision by the 
Federal Reserve Board.\14\ In this proposal, the Commission is electing 
not to impose an additional capital requirement on a SD or MSP that is 
designated a SIFI and subject to regulation of the Federal Reserve 
Board. As part of the application process (and similar to FCM 
application requirements under Sec.  1.17), proposed Sec.  23.101 would 
require an applicant for registration as an SD or MSP to demonstrate 
its compliance with the applicable Commission-imposed regulatory 
capital requirements, or to demonstrate instead that it is supervised 
by a prudential regulator or is designated as a SIFI.
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    \14\ Section 113 of the Dodd-Frank Act sets forth the process by 
which U.S. nonbank financial companies (as defined in section 
102(a)(4)(B) of the Dodd-Frank Act) may be designated as 
systemically important. Accordingly, a company that is registered as 
a SD or MSP with the Commission may be designated as a SIFI by the 
Financial Stability Oversight Council under a process laid out in 
Title I of the Dodd-Frank Act. Entities that are designated as SIFIs 
under Title I of the Dodd-Frank Act are considered to be supervised 
by the Federal Reserve Board.
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    While the Commission is not proposing to impose capital 
requirements on a registered SD or MSP that is subject to prudential 
regulation or is designated as a SIFI, the Commission is proposing to 
require such an entity to file capital information with the Commission 
upon request. Proposed Sec.  23.105(c)(2) provides that, upon the 
request of the Commission, each SD or MSP subject to prudential 
supervision or designated as a SIFI must provide the Commission with 
copies of its capital computations and accompanying schedules and other 
supporting documentation. The capital computations must be in 
accordance with the regulations of the applicable prudential regulator 
with jurisdiction over the SD or MSP.
    Furthermore, any SD or MSP that is required to register as an FCM, 
including an SD or MSP that is subject to supervision by a prudential 
regulator or is designated a SIFI and subject to regulation by the 
Federal Reserve Board, would be subject to the capital requirements set 
forth in Sec.  1.17 for FCMs. Part II.B.2 of this release discusses the 
applicable requirements for FCMs that also are registered as SDs or 
MSPs.

A. Proposed Minimum Capital Requirements for SDs and MSPs That Are Not 
FCMs

1. Subsidiaries of Bank Holding Companies
    The requirements for SDs and MSPs under proposed Sec.  23.101 
reflect the fact that these firms may include subsidiaries of U.S. bank 
holding companies that are required by section 716 of Dodd-Frank to 
``push out'' to an affiliate certain swap trading activities. The 
prudential regulators for the banks that may be required to comply with 
section 716 include the Federal Reserve Board, the FDIC, and the OCC. 
The capital rules of these banking agencies have addressed OTC 
derivatives since 1989, when the banking agencies implemented their 
risk based capital adequacy standards under the first Basel Accord.\15\ 
As noted by these banking agencies, they have amended and supplemented 
their capital rules over time to take into account developments in the 
derivatives markets, including through the addition of market risk 
amendments which required banks and bank holding companies meeting 
certain thresholds to calculate their capital requirements for trading 
positions through models approved by the appropriate banking regulator. 
The banks affected by the provisions of Section 716 also may include 
certain large, complex banks, which together with certain bank holding 
companies are subject to other requirements for computing credit risk 
requirements under Basel II capital standards that have been 
implemented by these banking agencies.\16\ The Federal Reserve, OCC, 
and FDIC also have stated their intention to implement requirements 
under recent Basel III proposals, which would establish additional 
capital requirements for the banks and bank holding companies for which 
these banking agencies are the prudential regulator.
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    \15\ The Basel Committee on Banking Supervision is a committee 
of banking supervisory authorities established in 1974 by the 
central-bank Governors of the Group of Ten countries. In 1988, the 
Basel Committee published a document titled the ``International 
Convergence of Capital Measurement and Capital Standards'' (the 
``Basel Capital Accord''), which set forth an agreed framework for 
measuring capital adequacy and the minimum requirements for capital 
for banking institutions. There have been several amendments to the 
Basel Capital Accord in the intervening years, including, in January 
of 1996, the ``Amendment to the Capital Accord to Incorporate Market 
Risks.'' The Basel Committee issued a revised framework in June of 
2004 (``Basel II''), and has continued to propose additional 
amendments thereafter. In 2010, the Basel Committee issued further 
requirements for internationally active banks that are set forth in 
``Basel III: A Global Regulatory Framework for More Resilient Banks 
and Banking Systems.''
    \16\ The advanced approaches rules are codified at 12 CFR part 
325, appendix D (FDIC); 12 CFR part 3, appendix C (OCC); and 12 CFR 
part 208, appendix F and 12 CFR part 225, appendix G (Federal 
Reserve Board).
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    Described in very general terms, the capital rules adopted by these 
banking agencies establish the required minimum amount of regulatory 
capital in terms of a ``minimum ratio of qualifying total capital to 
weighted risk assets of 8 percent, of which at least 4.0 percentage 
points should be in the form of Tier 1 capital.'' \17\ For purposes of 
this requirement, the assets and off-balance sheet items of the bank or 
bank holding company are weighted relative to their risk (primarily 
credit risk): The greater the risk, the greater the weighting. Large, 
complex banks must make further adjustments to these risk-weighted 
assets for the additional capital they must hold to reflect the market 
risk of their trading assets. The bank or bank holding company's total 
capital must equal or exceed at least 8 percent of its risk-weighted 
assets, and at least half of its total capital must meet the more 
restrictive requirements of the definition of Tier 1 capital. For 
example, a bank's total capital, but not its Tier 1 capital, may 
include certain mandatory convertible debt.\18\
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    \17\ See, 12 CFR part 225, appendix A, Sec.  II.A.
    \18\ Mandatory convertible debt securities are subordinated debt 
instruments that require the issuer to convert such instruments into 
common or perpetual preferred stock by a date at or before the 
maturity of the debt instruments.
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    The terms of proposed Sec.  23.101 have been drafted to maintain 
consistent capital requirements among bank and nonbank subsidiaries 
(other than FCM

[[Page 27806]]

subsidiaries) of a U.S. bank holding company. By meeting requirements 
in the specified banking regulations, the SD or MSP will be subject to 
comparable capital regulations applicable to their parent U.S. bank 
holding companies, including the same credit risk and market risk 
capital requirements. Establishing a regime that imposes consistent 
capital requirements on nonbank subsidiaries, bank holding companies, 
and banks with respect to their swap activities further enhances the 
regulatory regime by attempting to remove incentives for registrants to 
engage in regulatory arbitrage.
    The Commission has determined that it is appropriate to defer to 
the Federal Reserve Board's existing capital requirements for SDs and 
MSPs that are nonbank subsidiaries of a U.S. bank holding company 
because the existing capital requirements encompass the scope of the 
swaps activity and related hedging activity contemplated under the 
Dodd-Frank Act; the existing requirements sufficiently account for 
certain risk exposures, including credit and market risks; and the 
existing requirements meet the statutory requirement of ensuring the 
safety and soundness of the SD or MSP and are appropriate for the risk 
associated with the non-cleared swaps held by the SD or MSP.\19\
---------------------------------------------------------------------------

    \19\ Section 4s(e)(3)(A)(i) and (ii) of the CEA.
---------------------------------------------------------------------------

    The proposed regulation provides that a SD or MSP that is a nonbank 
subsidiary of a U.S. bank holding company would have to comply with a 
regulatory capital requirement specified by the Federal Reserve Board 
as if the subsidiary itself were a U.S. bank holding company. The scope 
of such a regulatory capital requirement would include the swap 
transactions and related hedge positions that are part of the SD's or 
MSP's swap activities. Specifically, the SD or MSP would be required to 
comply with a regulatory capital requirement equal to or in excess of 
the greater of: (1) $20 million of Tier 1 capital as defined in 12 CFR 
part 225, appendix A, Sec.  II.A; \20\ (2) the SD's or MSP's minimum 
risk-based ratio requirements, as if the subsidiary itself were a U.S. 
bank holding company subject to 12 CFR part 225, and any appendices 
thereto; or (3) the capital required by a registered futures 
association of which the SD or MSP is a member.
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    \20\ The Federal Reserve Board regulations governing bank 
holding companies are set forth in at 12 CFR part 225. These 
regulations establish a minimum ratio of qualifying total capital to 
weighted risk assets of 8 percent, of which at least 4.0 percentage 
points should be in the form of Tier 1 capital.
---------------------------------------------------------------------------

    The proposed $20 million minimum Tier 1 capital requirement is 
consistent with the minimum adjusted net capital requirement that 
Congress established for Commission registrants engaging in bilateral 
off-exchange foreign currency transactions with retail 
participants.\21\ The Commission believes that SDs and MSPs that engage 
in bilateral swap transactions should be subject to a minimum capital 
requirement that is at least equal to the minimum level of capital 
Congress established for registrants engaged in retail bilateral off-
exchange foreign currency transactions.
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    \21\ See sections 2(c)(2)(B)(i) and (ii) of the CEA.
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    The additional proposed minimum capital requirement based on 
membership requirements of a registered futures association is similar 
to FCM requirements under Sec.  1.17, and is appropriate in light of 
proposed Commission rules that would require each SD and MSP to be a 
member of a registered futures association. Currently, the National 
Futures Association (NFA) is the only registered futures association. 
The proposal recognizes that NFA may adopt SD and MSP capital rules at 
some later date, and would incorporate such requirements into the 
Commission's regulation.
2. Commercial and Other Firms That Are Not Part of Bank Holding 
Companies
    Certain SDs and MSPs subject to proposed regulation Sec.  23.101 
may be commercial firms or other entities with no affiliations to U.S. 
bank holding companies. For such SDs and MSPs, the proposed rule would 
require that their regulatory capital requirement as measured by 
``tangible net equity'' meet or exceed: (1) $20 million of ``tangible 
net equity,'' plus the amount of the SD's or MSP's over-the-counter 
derivatives credit risk requirement and additional market risk exposure 
requirement (as defined below), or (2) the capital required by a 
registered futures association of which the SD or MSP is a member.
    For purposes of the proposed capital requirement, the term 
``tangible net equity'' is defined in proposed Sec.  23.102 as a SD's 
or MSP's equity as computed under generally accepted accounting 
principles as established in the United States, less goodwill and other 
intangible assets.\22\ The proposal would further require an SD or MSP 
in computing its tangible net equity to consolidate the assets and 
liabilities of any subsidiary or affiliate for which the SD or MSP 
guarantees the obligations or liabilities. In accordance with similar 
provisions in existing capital rules for FCMs, the proposal further 
provides that the SD or MSP may consolidate the assets and liabilities 
of a subsidiary or affiliate of which the SD or MSP has not guaranteed 
the obligations or liabilities, provided that the SD or MSP has 
obtained an opinion of counsel stating that the net asset value of the 
subsidiary or affiliate, or the portion of the net asset value 
attributable to the SD or MSP, may be distributed to the SD or MSP 
within 30 calendar days. Lastly, the proposal would further require 
that each SD or MSP included within the consolidation shall at all 
times be in compliance with its respective minimum regulatory capital 
requirements. The requirement for the SD or MSP to calculate its 
tangible net equity on a consolidated basis is consistent with the 
requirements in Sec.  1.17 for FCMs, and ensures that the SD's or MSP's 
tangible net equity reflects any liabilities and other obligations for 
which the SD or MSP may be directly or indirectly responsible.
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    \22\ The Commission is explicitly requesting comment on whether 
certain intangible assets, such as royalties, should be permitted in 
the SD's or MSP's calculation of tangible net equity.
---------------------------------------------------------------------------

    The term ``over-the-counter derivatives credit risk requirement'' 
is defined in proposed Sec.  23.100 and refers to the capital that the 
SD or MSP must maintain to cover potential counterparty credit 
exposures for receivables arising from OTC swap positions that are not 
cleared by or through a clearing organization. The term ``additional 
market risk exposure requirement'' is defined in proposed Sec.  23.100 
and refers to the additional amount of capital the SD or MSP must 
maintain for the total potential market risk associated with such swaps 
and any product used to hedge such swaps, including futures, options, 
other swaps or security-based swaps, debt or equity securities, foreign 
currency, physical commodities, and other derivatives. The Commission 
is proposing to include swap transactions and related hedge positions 
that are part of the SD's swap activities in the over-the-counter 
derivatives credit risk requirement and market risk exposure 
requirement, and not swap positions or related hedges that are part of 
the SD's commercial operations.\23\ MSPs would

[[Page 27807]]

include all swap positions in the market risk and over-the-counter 
derivatives credit exposure requirement. A discussion of the 
methodology for computing the over-the-counter derivatives credit risk 
requirement and the market risk exposure requirement is set forth in 
part II.C. of this release.
---------------------------------------------------------------------------

    \23\ For example, if an SD entered into a swap transaction with 
a counterparty as part of its swap dealing activities, the over-the-
counter derivatives credit risk requirement and market risk exposure 
requirement associated with the swap position and any positions 
hedging or otherwise related to the swap position would be included 
in the SD's calculation of its minimum capital requirement. If, 
however, an SD entered into a swap transaction to mitigate risk 
associated with its commercial activities, the swap position and any 
related positions would not be included in the SD's calculation of 
its minimum capital requirement.
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    The computation of regulatory capital based upon an SD's or MSP's 
tangible net equity is a significant, but necessary, departure from the 
Commission's traditional adjusted net capital rule for FCMs. A primary 
distinction between the tangible net equity and adjusted net capital 
methods is that the tangible net equity approach does not require that 
a registrant maintain the same degree of highly liquid assets as the 
traditional FCM adjusted net capital computation. The proposed tangible 
net equity computation would allow SDs and MSPs to include in their 
minimum capital computation assets that would not qualify as current 
assets under FCM adjusted net capital requirements, such as property, 
plant and equipment, and other potentially-illiquid assets.
    The Commission is proposing a capital requirement based upon a SD's 
or MSP's tangible net equity based upon its understanding that 
potential SD and MSP registrants do not conduct their business 
operations in a manner comparable to traditional FCMs. For example, 
certain entities that are extensively or primarily engaged in the 
energy or agricultural business may be required to register as SDs or 
MSPs. Although these SDs and MSPs may have significant amounts of 
balance sheet equity, it may also be the case that significant portions 
of their equity is comprised of physical and other non-current assets, 
which would preclude the firms from meeting FCM capital requirements 
without engaging in significant corporate restructuring and incurring 
potentially undue costs.
    The Commission believes that setting a capital requirement that is 
different from the traditional FCM adjusted net capital approach is 
acceptable for SDs and MSPs that are not acting as market 
intermediaries in the same manner as FCMs. Readily available liquid 
assets are essential for FCMs to meet their key financial obligations. 
FCMs have core obligations for the funds they hold for and on behalf of 
their customers, and FCMs further guarantee their customers' financial 
obligations with derivatives clearing organizations, including 
obligations to make appropriate initial and variation margin payments 
to derivatives clearing organizations. SDs and MSPs, however, do not 
interact with derivatives clearing organizations to clear customer 
transactions and cannot engage in transactions with customers trading 
on designated contract markets without registering as FCMs.

B. Proposed Minimum Capital Requirements for SDs and MSPs That Are FCMs

    The Commission is proposing to essentially impose the current FCM 
capital regime on SDs and MSPs that also are registered as FCMs. FCMs 
currently are required, pursuant to Sec.  1.17, to maintain a minimum 
level of adjusted net capital that is equal to or greater than the 
greatest of: (1) $1,000,000; (2) $20,000,000 for an FCM engaged in off-
exchange foreign currency transactions with retail participants, plus 
an additional 5 percent of the total liabilities to the retail foreign 
currency customers that exceeds $10,000,000; (3) the sum of 8 percent 
of the risk margin on cleared futures and cleared swap positions 
carried in customer and non-customer accounts; (4) the amount of 
adjusted net capital required by a registered futures association of 
which the FCM is a member; and (5) for an FCM that also is registered 
as a securities broker-dealer, the amount of net capital required by 
rules of the SEC.\24\
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    \24\ FCMs that register as security-based swap dealers also will 
be subject to minimum capital requirements established by the SEC 
for security-based swap dealers.
---------------------------------------------------------------------------

    The Commission is proposing amendments to Sec.  1.17 that would 
impose a minimum $20 million adjusted net capital requirement if the 
FCM also is an SD or MSP. The $20 million minimum requirement is 
consistent with the Commission's proposal to adopt a $20 million 
minimum capital requirement for SDs and MSPs that are not FCMs, and is 
further consistent with the Commission's recent adoption of a $20 
million minimum capital requirement for FCMs that engage in off-
exchange foreign currency transactions with retail participants.
    Furthermore, the Commission notes that the current capital 
regulations would impose a risk-based capital requirement on SDs and 
MSPs that are required to register as FCMs as a result of their 
carrying and clearing of customer swap or futures transactions with a 
clearing organization. As noted above, the current regulation requires 
an FCM to maintain adjusted net capital that is equal to or greater 
than 8 percent of the risk margin associated with cleared futures and 
swap transactions carried by the FCM in customer and non-customer 
accounts. The 8 percent of margin, or risk-based capital rule, is 
intended to require FCMs to maintain a minimum level of capital that is 
associated with the level of risk associated with the customer 
positions that the FCM carries.

C. Required Calculations for Credit Risk and Market Risk Requirements

    The proposed regulations include an application process by which 
certain SDs and MSPs may apply to the Commission for approval to use 
proprietary internal models for their capital calculations required by 
part 23. For those SDs and MSPs whose calculations are not permitted to 
be based upon such models, the proposed regulations sets forth other 
specified requirements for the SD's or MSP's required market and credit 
risk calculations.
1. Request for Approval of Calculations Using Internal Models
    The Commission recognizes that internal models, including value-at-
risk (VaR) models, can provide a more effective means of recognizing 
the potential economic risks or exposures from complex trading 
strategies involving OTC derivatives and other investment instruments. 
In this connection, the Commission has previously adopted Sec.  
1.17(c)(6), which allows certain FCMs that are dually-registered with 
the SEC to elect to use internally developed models to compute market 
risk deductions for proprietary positions in securities, forward 
contracts, foreign currency, and futures contracts, and credit risk 
deductions for unsecured receivables from counterparties in OTC 
transactions (the ``Alternative Capital Computation'') in lieu of the 
standard deductions set forth in Sec.  1.17(c). A precondition of using 
the Alternative Capital Computation is the SEC's review and written 
approval of the firm's application to use internal models in computing 
its capital under SEC regulations, and the requirement that the model 
and the firm's risk management meet certain qualitative and 
quantitative requirements set forth in SEC Rule 15c3-1e. The firm also 
was required to maintain at least $1 billion of tentative net capital 
and $500 million in net capital.\25\ The firm further was obligated to 
report to the SEC and to the

[[Page 27808]]

CFTC if its tentative net capital fell below $5 billion.\26\
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    \25\ See 17 CFR 15c3-1(a)(7).
    \26\ See 17 CFR 15c3-1e(e)(1).
---------------------------------------------------------------------------

    Significant resources, however, are necessary for regulators to 
effectively assess and to periodically review proprietary internal 
models. Absent concerns regarding future Commission resources to 
implement an adequate program for the effective direct supervision of 
internal models used by SDs and MSPs, the Commission would propose 
regulations to establish a framework by which FCMs that are registered 
as SDs or MSPs could submit internal models to the Commission for 
review and approval for use in their required capital calculations. 
Such a program would include the continuous and direct review by 
Commission staff of the policies and procedures applicable to, and 
output of, such proprietary models.
    In view, however, of current Commission resources which does not 
support the development of a program to conduct the initial review and 
ongoing assessment of internal models, and the uncertainty of future 
funding levels for the necessary staffing resources, this release 
provides for an application process for approval of SD and MSP capital 
calculations using internal models, but limits the initial pool of 
applicants to those whose internal models are subject to review by the 
Federal Reserve Board or the SEC. Specifically, proposed Sec.  23.103 
would permit a nonbank SD or MSP that also is part of a U.S. bank 
holding company subject to oversight by the Federal Reserve Board to 
apply to the Commission for approval by written order to use 
proprietary internal models to compute market risk and credit risk 
capital requirements under the applicable U.S. bank holding company 
regulations. The SD or MSP also may apply for such approval if it also 
is registered as an SSD or MSSP, and the internal models for which it 
seeks approval have been reviewed and are subject to the regular 
assessment by the SEC.
a. Application Process and Requirements for Internal Models
    As set forth in the proposed regulation, the application must 
address several factors including: (1) Identifying the categories of 
positions that the SD or MSP holds in its proprietary accounts; (2) 
describing the methods that the SD or MSP will use to calculate its 
market risk and credit risk capital requirements; (3) describing the 
internal models; and (4) describing how the SD or MSP will calculate 
current exposure and potential future exposure. The SD or MSP also must 
explain the extent to which the internal models have been reviewed and 
approved by the Federal Reserve Board, or, as applicable, the SEC.
    The proposal would further provide that the internal models must 
meet such requirements as are adopted by U.S. regulators under the 
Basel Accord, including requirements implemented as part of Basel III. 
In particular, the internal models must meet the requirements that are 
set forth in regulations of the Federal Reserve Board at 12 CFR part 
225, appendix E and appendix G applicable to market risk and OTC 
counterparty credit risk; or, as applicable to SSDs or MSSPs, the 
requirements set forth in SEC regulations. Such requirements include, 
but are not limited to, the requirements in these regulations to assess 
the effectiveness of such models by conducting appropriate backtesting 
and for the application of multipliers to the model outputs that would 
be based on the results of such backtesting.
    The proposed regulation further specifies that the application 
shall be in writing and filed with the regional office of the 
Commission having jurisdiction over the SD or MSP as set forth in Sec.  
140.2 of the Commission's regulations. The application may be filed 
electronically in accordance with instructions approved by the 
Commission and specified on the Commission's Web site. A petition for 
confidential treatment of information within the application may be 
submitted according to procedures set forth in Sec.  145.9. The 
proposed rule further provides that the SD or MSP must promptly, upon 
the request of the Commission at any time, provide any other 
explanatory information as the Commission may require at its discretion 
regarding the SD's or MSP's internal models and related capital 
computations.
    As set forth in proposed Sec.  23.103, upon recommendation by 
Commission staff, the Commission may approve the application, or 
approve an amendment to the application, in whole or in part, subject 
to any conditions or limitations the Commission may require, if the 
Commission finds the approval to be necessary or appropriate in the 
public interest or for the protection of investors, after determining, 
among other things, whether the applicant has met the requirements of 
this section and is in compliance with other applicable rules 
promulgated under the Act and by self-regulatory organizations. The 
proposed rule also specifies the following conditions under which such 
Commission approval may be terminated: (1) Internal models that were 
previously approved are no longer approved or periodically reviewed by 
the Federal Reserve Board or the SEC; (2) the SD or MSP has changed 
materially a mathematical model described in the application or changed 
materially its internal risk management control system without first 
submitting amendments identifying such changes and obtaining Commission 
approval for such changes; (3) the Commission in its own discretion 
determines that as a result of changes in the operations of the SD or 
MSP the internal models are no longer sufficient for purposes of the 
capital calculations of the SD or MSP; (4) the SD or MSP fails to come 
into compliance with its requirements under the terms of the 
Commission's approval under Sec.  23.103, after having received from 
the Commission's designee written notification that the firm is not in 
compliance with its requirements, and must come into compliance by a 
date specified in the notice; or (5) upon any other condition specified 
in the Commission approval order.
b. Approval Criteria if SD or MSP Also Is an FCM
    If the application made under proposed part 23 is from an SD or MSP 
that also is an FCM, proposed Sec.  23.103 provides that the 
application shall specify that the firm requests approval to calculate 
its adjusted net capital (not tangible net equity or other regulatory 
capital) using proprietary internal models. The Commission also is 
proposing to provide in Sec.  1.17(c)(7) that any FCM that also is 
registered as an SD or MSP, or also is registered as an SSD or MSSP, 
and which has received approval of its application to the Commission 
under Sec.  23.103 for capital computations using the firm's internal 
models, shall calculate its adjusted net capital in accordance with the 
terms and conditions of such Commission approval. The Commission 
further is proposing to amend Sec.  1.17(c)(6)(i) to recognize the 
possibility that FCMs that have been authorized to elect to use the 
Alternative Capital Computation may be SDs or MSPs and required to 
register as such with the Commission. The amended Sec.  1.17(c)(6)(i) 
would permit these FCMs to continue to apply the Alternative Capital 
Computation pending the Commission's determination of the application 
that such FCMs must file under proposed part 23.

[[Page 27809]]

2. Calculations by SDs and MSPs That Are Not Using Internal Models and 
Are Not FCMs
    As noted earlier, the internal models that may be approved for use 
in the capital calculations of SDs and MSPs must meet qualifying 
standards under the Basel Accord. In addition to specifying qualifying 
criteria for internal models, the Basel Accord also includes other 
requirements for capital calculations that do not incorporate 
measurements from the firm's internal models.
a. OTC Derivatives Credit Risk
    Proposed Sec.  23.104 sets forth capital calculations for OTC 
derivatives credit risk that are based on Basel requirements that do 
not incorporate internal models. The proposed required credit risk 
deduction also includes a concentration charge specified in SEC Rule 
15c3-1e. The charge as proposed would equal the sum of (1) a 
counterparty exposure charge (summarized below) and (2) a counterparty 
concentration charge, which would equal 50 percent of the amount of the 
current exposure to any counterparty in excess of 5 percent of the SD's 
or MSP's applicable minimum capital requirement, plus a portfolio 
concentration charge of 100 percent of the amount of the SD's or MSP's 
aggregate current exposure for all counterparties in excess of 50 
percent of the SD's or MSP's applicable minimum capital requirement.
    The counterparty exposure charge would equal the sum of the net 
replacement values in the accounts of insolvent or bankrupt 
counterparties plus the ``credit equivalent amount'' of the SD's or 
MSP's exposure to its other counterparties. The SD or MSP would be 
permitted to offset the net replacement value and the credit equivalent 
amount by the value of collateral submitted by the counterparty, as 
specified and subject to certain haircuts in the proposed rule. The 
resultant calculation would be multiplied by a credit risk factor of 8 
percent.
    For purposes of this computation, the credit equivalent amount 
would equal the sum of the SD's or MSP's current exposure and potential 
future exposure to each of its counterparties that is not insolvent or 
bankrupt. The current exposure for multiple OTC positions would equal 
the greater of (i) the net sum of all positive and negative mark-to-
market values of the individual OTC positions, subject to permitted 
netting pursuant to a qualifying master netting agreement; or (ii) 
zero.\27\ The potential future exposure for multiple OTC positions that 
are subject to a qualifying master netting agreement is calculated in 
accordance with the following formula: Anet = (0.4 x Agross) + (0.6 x 
NGR x Agross), where: (i) Agross equals the sum of the potential future 
exposure for each individual OTC position \28\ subject to the swap 
trading relationship documentation that permits netting; \29\ and (ii) 
NGR equals the ratio of the net current credit exposure to the gross 
current credit exposure. In calculating the NGR, the gross current 
credit exposure equals the sum of the positive current credit exposures 
of all individual OTC derivative contracts subject to any netting 
provisions of the swap trading relationship documentation, which must 
be legally enforceable in each relevant jurisdiction, including in 
insolvency proceedings. The proposed rule also requires that the gross 
receivables and gross payables subject to the netting agreement can be 
determined at any time; and that the SD or MSP, for internal risk 
management purposes, monitors and controls its exposure to the 
counterparty on a net basis. The credit risk equivalent amount may be 
reduced to the extent of the market value of collateral pledged to and 
held by the swap dealer or major swap participant to secure an over-
the-counter position. The collateral would be subject to the following 
requirements:
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    \27\ For a single OTC position, the current exposure is the 
greater of the mark-to-market value of the over-the-counter position 
or zero.
    \28\ For a single over-the-counter position, the potential 
future exposure, including an over-the-counter position with a 
negative mark-to-market value, is calculated by multiplying the 
notional principal amount of the position by the appropriate 
conversion factor in Table E of the proposed rules. Table E is the 
same as the table proposed as ``Table to 1.3(sss)'' in proposed 
rulemaking issued jointly by the CFTC and SEC for purposes of the 
further definition of the term ``major swap participant.'' See 75 FR 
80174, 80214 (December 21, 2010). Both tables remove any references 
to credit ratings and require the same charge to be applied to all 
corporate debt regardless of rating.
    \29\ 76 FR 6715.
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     The collateral must be in the swap dealer or major swap 
participant's physical possession or control; Provided, However, 
collateral may include collateral held in independent third party 
accounts as provided under part 23;
     The collateral must meet the requirements specified in a 
credit support agreement meeting the requirements of Sec.  23.151;
     If the counterparty is a swap dealer, major swap 
participant or financial entity as defined in Sec.  23.150, certain 
additional requirements apply as described in the proposed rule at 
Sec.  23.104(j); and
     Applicable haircuts must be applied to the market value of 
the collateral.
    Once the credit equivalent amount is computed as described above, 
the SD or MSP would be required to apply a credit risk factor of 50 
percent, regardless of any credit rating of the counterparty by any 
credit rating agency.\30\ However, the SD or MSP also may apply to the 
Commission for approval to assign internal individual ratings to each 
of its counterparties, or for an affiliated bank or affiliated broker-
dealer to do so. The application will specify which internal ratings 
will result in application of a 20 percent risk weight, 50 percent risk 
weight, or 150 percent risk weight. Based on the strength of the 
applicant's internal credit risk management system, the Commission may 
approve the application. The SD or MSP must make and keep current a 
record of the basis for the credit rating for each counterparty, and 
the records must be maintained in accordance with Sec.  1.31 of the 
Commission's regulations.
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    \30\ The Basel credit risk factors are determined for 
counterparties based on credit ratings assigned by credit rating 
agencies to such counterparties. Section 939A of the Dodd-Frank Act 
requires the Commission to review and modify regulations that place 
reliance on credit rating agencies. Accordingly, the Commission is 
proposing a 50 percent credit risk factor in lieu of assigning a 
credit risk factor based on ratings issued by credit rating 
agencies.
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b. Additional Market Risk Exposure
    Proposed Sec.  23.103 specifies required calculations for market 
risk that are based on Basel ``standardized'' measurement procedures 
for assessing market risk arising from positions in traded debt and 
equity and in commodities and foreign currencies. The Basel 
standardized approach also includes market risk exposure requirements 
for options that have debt instruments, equities, foreign currency, or 
commodities as the underlying positions. Although proposing 
requirements based on the Basel standardized approach for market risk 
calculations, Commission staff recognizes that the Basel Accord 
expressly supports capital requirements based on internal risk 
measurement models as the better approach for a bank that has a 
significant business in options or commodities.\31\ However, as 
discussed above, absent a program for the review and approval of 
internal

[[Page 27810]]

models, the Commission believes that this established approach is the 
most appropriate method for computing market risk charges.
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    \31\ See ``Basel II: International Convergence of Capital 
Measurement and Capital Standards: A Revised Framework--
Comprehensive Version,'' issued by the Basel Committee on Banking 
Supervision in June 2006.
---------------------------------------------------------------------------

    The Basel standardized charges seek to address ``general market 
risk,'' meaning the risk of changes in the market value of transactions 
that arise from broad market movements, such as changing levels of 
market interest rates, broad equity indices, or currency exchange 
rates. Where applicable, the Basel standardized charges also seek to 
address ``specific'' risk, which is defined as changes in the market 
value of a position due to factors other than broad market movements. 
Such specific risk may include default risk,\32\ event risk (the risk 
of loss on a position that could result from sudden and unexpected 
large changes in market prices or specific events other than the 
default of the issuer), and idiosyncratic risk (the risk of loss in the 
value of a position that arises from changes in risk factors unique to 
that position).
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    \32\ Default risk is the risk of loss on a position that could 
result from the failure of an obligor to make timely payments of 
principal or interest on its debt obligation, and the risk of loss 
that could result from bankruptcy, insolvency, or similar 
proceeding. For credit derivatives, default risk means the risk of 
loss on a position that could result from the default of the 
reference exposure(s).
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    Applying the Basel standardized approach, the proposed rules 
require the calculation of separate charges for general and specific 
market risk for positions in equities and debt instruments (including 
options with underlying instruments in these categories), which are 
summed to determine the total charge required with respect to such 
positions. Only general market charges are calculated for positions in 
commodities and foreign currencies (including options with underlying 
instruments in these categories). For purposes of computing such 
specific and general market risk charges, off-balance sheet positions 
are included. For example, swaps are included in the calculation as two 
positions, with a receiving side treated as a long position and a 
paying side treated as a short position, and using market values of the 
notional position in the underlying debt or equity instrument, or index 
portfolio. The required calculations for specific risk and general 
market risk charges are described in more detail below.
i. Specific Risk
    For positions in equities, the proposed specific risk charge equals 
8 percent of the firm's gross equity positions, i.e., the absolute sum 
of all long equity positions and of all short equity positions, with 
netting allowed when the SD or MSP has long and short positions in 
exactly the same instrument.
    The specific risk charge required for debt instruments is based on 
risk-weight factors applied to the debt instrument positions of the SD 
or MSP. The applicable required risk weight factor is based in part on 
the identity of the obligor. For example, all positions in debt 
instruments of national governments of the Organization of Economic Co-
operation and Development (``OECD'') countries are assigned zero 
specific risk. Other debt securities issued by ``qualifying'' borrowers 
are assigned risk weights that vary by maturity; specifically, 0.25 
percent (6 months or less); 1 percent (6 to 24 months); or 1.6 percent 
(over 24 months). Qualifying debt instruments include those issued by 
U.S. government-sponsored agencies; general obligation debt instruments 
issued by states and other political subdivisions of OECD countries and 
multilateral development banks; and debt instruments issued by U.S. 
depository institutions or OECD-banks that do not qualify as capital of 
the issuing institution.
    The Basel standardized approach also permits certain rated 
corporate debt securities to be included as qualifying debt. However, 
given the legislative directive to eliminate the use of credit ratings 
in Commission regulations, the proposed rules do not permit any 
differentiation among the charges applied to corporate debt securities. 
As a result, the proposed rule would apply the same haircut to highly-
rated debt as to debt that is not highly-rated, i.e., the maximum 
specific risk weight of 8 percent. The total proposed specific risk 
charge for debt instruments would equal the sum of the risk-weighted 
positions, with netting allowed for long and short positions (including 
derivatives) in identical debt issues or indices.
    In drafting the terms of proposed Sec.  23.103, the Commission has 
taken into consideration Basel provisions relating to specific risk 
that have been incorporated into banking regulations of the Federal 
Reserve Board, FDIC, and OCC.\33\ These agencies have recently, 
however, proposed revisions to their general market risk and specific 
risk rules in light of certain amendments to the Basel Accord developed 
in 2005 and 2009.\34\ The revisions proposed by these banking agencies 
include requirements applicable to the treatment of credit derivatives 
in the calculation of standardized specific risk charges, and the 
proposed rules also set forth other offsetting permitted under the 
Basel Accord for positions in a credit derivative and its corresponding 
underlying instrument. The Commission's proposed requirements for 
credit derivatives include text that is based on the banking agencies' 
proposed rules. In particular, the text in proposed Sec.  23.104(c)(5) 
is the same as the text proposed by the proposed banking agencies.
---------------------------------------------------------------------------

    \33\ The market risk capital rules of the OCC, Federal Reserve 
Board, and FDIC appear respectively at 12 CFR part 3, appendix B; 12 
CFR part 208, appendix E and part 225, appendix E, and 12 CFR part 
325, appendix C.
    \34\ See 76 FR 1890 (January 11, 2011)(proposing amendments that 
include revisions to standardized specific risk charges). This 
proposed rulemaking refers to Basel Accord revisions set forth in 
``The Application of Basel II to Trading Activities and the 
Treatment of Double Default Effects'', issued by the Basel Committee 
on Banking Supervision and the International Organization of 
Securities Commissions (IOSCO) in July 2005, and to the ``Revisions 
to the Basel II Market Risk Framework, Guidelines for Computing 
Capital for Incremental Risk in the Trading Book'' and `` 
Enhancements to the Basel II Framework'' issued by the Basel 
Committee on Banking Supervision in July of 2009.
---------------------------------------------------------------------------

ii. General Market Risk Charges
    In contrast to the Basel standardized approach to specific risk 
charges, the federal banking agencies have not adopted the Basel 
standardized approach for computing general market risk capital 
charges.\35\ In 1995, U.S. banking regulators considered proposed rules 
to implement two approaches under the Basel Accord for the capital 
treatment of market risk: the internal models approach and the 
standardized approach. These agencies subsequently determined, however, 
that only the internal models approach would apply to general market 
risk capital charges, noting that ``an institution with significant 
exposure to market risk can most accurately measure that risk using 
detailed information available to the institution about its particular 
portfolio processed by its own risk measurement model.'' \36\ The 
Commission, however, is proposing the Basel standardized approach since 
such an approach does not rely upon proprietary internal models. The 
terms in the proposed Sec.  23.104 for general market risk therefore 
take into consideration the terms originally contemplated by these 
banking agencies in the 1995 proposed

[[Page 27811]]

rules. Proposed Sec.  23.104 requires the calculation of separate 
charges for general market risk for positions in equities, debt 
instruments, commodities and foreign currency (including options with 
underlying instruments in these categories), which are summed to 
determine the total general market risk requirement with respect to 
such positions.
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    \35\ With permission by its federal banking regulator, a bank 
also may use internal models for calculating specific risk charges. 
See 76 FR 1890, 1893 (January 11, 2011) (discussion of specific risk 
requirements currently applicable to banks).
    \36\ See 60 FR 38082 (July 25, 1995) (release proposing market 
risk capital charges) and 61 FR 47358, 47359 (September 6, 1996) 
(release adopting internal models approach).
---------------------------------------------------------------------------

Equities
    The standardized measure of market risk for equities applies to 
direct holdings of equity securities, equity derivatives and off-
balance-sheet positions whose market values are directly affected by 
equity prices. The required charge is the sum of the specific risk 
charge, calculated as described above, and of the general market risk 
charge, which is equal to 8.0 percent of the difference between the sum 
of the firm's long and the sum of the firm's short positions. The net 
long or short position must be calculated separately for each national 
market. Thus, for example, a long position in U.S. companies traded on 
the New York Stock Exchange cannot be netted against a short position 
in Japanese companies traded on the Tokyo Stock Exchange. Long and 
short equity positions (including derivatives) in identical equity 
issues or equity indices in the same market may be netted.
Debt Instruments
    Applying the ``maturity'' method under the Basel standardized 
approach, on and off-balance-sheet debt positions are distributed among 
a range of time-bands and zones that are specified by the Basel Accord, 
which are designed to take into account differences in price 
sensitivities and interest rate volatilities across various maturities. 
The time-band into which a position is distributed is determined by its 
maturity (fixed rate instruments) or the nearest interest rate reset 
date of the instrument (floating rates). Long positions are treated as 
positive amounts and short positions are treated as negative amounts. 
The net long or short position for each time-band is multiplied by the 
risk weight specified in a table set forth in the Basel Accord.\37\ The 
resulting risk-weighted position represents the amount by which the 
market value of that debt position is expected to change for a 
specified movement in interest rates. The sum of all risk-weighted 
positions (long or short) across all time-bands is the base capital 
charge for general market risk.
---------------------------------------------------------------------------

    \37\ The risk-weights provided in the table approximate the 
price sensitivity of various instruments. The price sensitivity of 
zero coupon and low coupon instruments can be materially greater 
than that of instruments with higher coupons, and the table 
therefore assigns higher risk weights to low coupon instruments.
---------------------------------------------------------------------------

    The standardized approach also requires a ``time-band 
disallowance'' to address the basis risk that exists between 
instruments with the same or similar maturities and also the possibly 
different price movements that may be experienced by different 
instruments within the same time-band due to the range of maturities 
(or repricing periods) that may exist within a time-band. To capture 
this risk, a disallowance of 10 percent is applied to the smaller of 
the offsetting (long or short) positions within a time-band.\38\ This 
amount would be added to the SD's or MSP's base capital charge.
---------------------------------------------------------------------------

    \38\ For example, if the sum of weighted long positions within a 
time-band equals $100 million and the sum of weighted short 
positions equals $90 million, the disallowance for the time-band 
would be 10 percent of $90 million, or $9 million. Also, if the 
offsetting amounts (long and short) are equal, the disallowance can 
be applied to either figure.
---------------------------------------------------------------------------

    Additional disallowances address the risk that interest rates along 
the yield curve are not perfectly correlated and that the risk-weighted 
positions may not be offset fully. The required disallowances, which 
apply to the smaller of the offsetting positions, are specified in a 
table provided under the Basel Accord, and range from 30 percent to 100 
percent. The amount of each disallowance varies in size by zone: 
Greater netting is allowed for positions in different time bands but 
within the same zone than is allowed for positions that are in 
different zones. The firm must first determine ``intra-zone'' 
disallowance amounts, and then the required ``inter-zone'' 
disallowances across zones. An SD's or MSP's general market risk 
requirement for debt instruments within a given currency would be the 
sum of (1) the value of its net risk-weighted position and (2) all of 
its time-band, intra-zone and inter-zone disallowances.\39\ The capital 
charges would be separately computed for each currency in which an SD 
or MSP has significant positions.
---------------------------------------------------------------------------

    \39\ The Basel standardized approach includes another maturity 
ladder approach for interest rate products, the ``duration method,'' 
which is not included in the proposed Appendix as it requires 
computations that are less standardized.
---------------------------------------------------------------------------

    Certain debt securities would not be included in the charges 
described above, but would instead be subject to the capital treatment 
under applicable provisions in the SEC's capital regulation at 17 CFR 
240. 15c3-1. For example, municipal securities would be subject to 
capital requirements in the SEC rule.\40\ All collateralized debt 
obligations, asset-backed securities or mortgage-backed securities, 
except pass-through mortgage-backed securities issued or guaranteed as 
to principal or interest by the United States or any agency thereof, 
would also be governed by the SEC rule.\41\
---------------------------------------------------------------------------

    \40\ This proposed separate treatment is consistent with the 
SEC's analysis when considering, in 1997, capital provisions similar 
to the Basel standardized approach for debt instruments. Although 
the proposed rules were not adopted, the proposing release included 
pertinent analysis that the market price of municipal securities 
``depends on tax issues to a much greater extent than other debt 
instruments,'' and that the price movements of non-investment grade 
debt securities ``tend to be based primarily on issuer-specific 
factors.'' See 62 FR 67996 (December 30, 1997).
    \41\ Id. at 68002.
---------------------------------------------------------------------------

Commodities
    The market risk capital requirement for commodities risk applies to 
holdings or positions taken in commodities, including precious metals, 
but excluding gold (which is treated as a foreign currency because of 
its market liquidity). The required charge addresses directional risk, 
which is the risk that a commodity's spot price will increase or 
decrease, as well as other important risks such as basis risk, interest 
rate risk, and forward gap risk.
    For purposes of determining the charge, the firm is required to 
calculate its net position in each commodity on the basis of spot 
rates. Long and short positions in the same commodity may be netted, 
and different categories of commodities may be netted if deliverable 
against each other. Under the ``simple'' approach under the Basel 
Accord, the firm's capital charge for directional risk would equal 15 
percent of its net position, long or short, in each commodity, and a 
supplemental charge of 3.0 percent of the gross position in each 
commodity is added to cover basis, interest rate and forward gap 
risk.\42\
---------------------------------------------------------------------------

    \42\ The standardized approach will in certain instances offer 
more than one measurement technique, of increasing degrees of 
complexity. The ``simplified'' method for calculating general market 
risk charges for positions in commodities has been included in the 
proposed rules.
---------------------------------------------------------------------------

Foreign Exchange
    The market risk capital requirement for foreign exchange covers the 
risk of holding or taking positions in foreign currencies (including 
gold). The charge is determined by the firm's net positions in a given 
currency, including its net spot and forward positions; any guarantees 
that are certain to be called and likely to be irrecoverable; its net 
future income and expenses that are not yet accrued, but that are 
already fully hedged; and any other items

[[Page 27812]]

representing a profit or loss in foreign currencies. For purposes of 
the calculation, forward and future positions are converted into the 
reporting currency at spot market rates.
    The standardized approach assumes the same volatility for all 
currencies and requires an SD or MSP to take capital charge equal to 
8.0 percent of the sum of (a) its net position in gold and (b) the 
greater of the sum of the net short positions or the sum of the net 
long positions in each foreign currency.
Options
    The proposed rule is based on the ``delta-plus method'' under the 
Basel standardized approach, which includes capital charges related to 
the option's delta (its price sensitivity relative to price changes in 
the underlying security, rate, or index); gamma (the change in delta 
for a given change in the underlying); and vega (the effect of changes 
in the volatility of the underlying).\43\ The three separate capital 
charges are computed as follows:
---------------------------------------------------------------------------

    \43\ Two other methods under the Basel standardized approach for 
options are not included in the Appendix, as the ``simplified'' 
method applies only to purchased options, and the ``scenario'' 
method incorporates measurements that must meet the same qualitative 
requirements applicable to the internal models approach. See 60 FR 
at 38091 (discussing restrictions on use of simplified and scenario 
methods).
---------------------------------------------------------------------------

    Delta risk charge--This charge is determined by incorporating 
options positions in the calculations (including specific risk if 
applicable) that are required elsewhere in the proposed rule for 
positions in commodities, foreign currencies, equities, and debt 
instruments. Specifically, options are included as positions equal to 
the market value of the underlying instrument multiplied by the delta. 
To determine the delta, and also gamma and vega, sensitivities of the 
options, the firm will use option pricing models that will be subject 
to Commission review.
    Total gamma risk charge--This charge requires the following steps: 
(1) For each option, perform a ``gamma impact'' calculation that is 
based on a Taylor series expansion and expressed in the Basel Accord 
as: Gamma impact = .05 x Gamma x VU\2\. In this formula, VU refers to 
the variation of the underlying of the option and is computed by 
multiplying the market value of the underlying by percentages derived 
from those specified elsewhere in the proposal for commodities, foreign 
currencies, equities and debt instruments.\44\
---------------------------------------------------------------------------

    \44\ Applying the required percentages, VU would be determined 
for a commodity option by multiplying the market value of the 
underlying commodity by 15 percent; for a foreign currency by 
multiplying the market value of the underlying by 8 percent; for an 
equity or index by multiplying the market value of the underlying by 
12 percent or 8 percent respectively, and for options on debt 
instruments or interest rates, the market value of the underlying 
multiplied by the risk weights for the appropriate time band as 
derived from Table A. The text of the rules for the gamma risk 
charge simplifies the required computation for options with debt 
instruments or interest rates as the underlying, by providing a 
table of specific risks weights to be used.
---------------------------------------------------------------------------

    (2) The gamma impact for each option will be positive or negative, 
and for options on the same underlying, the individual gamma impacts 
will be summed, resulting in a net gamma impact for each underlying 
that is either positive or negative.
    (3) Net positive gamma impacts amounts are disregarded, and the 
capital charge equals the absolute value of the sum of all of the net 
negative gamma impact amounts.
    Total vega risk charge--This charge requires the following steps: 
(1) Sum the vegas for all options on the same underlying, and multiply 
by a proportional shift in volatility of  25 percent; \45\ 
and (2) The total capital charge for vega risk will be the sum of the 
absolute value of the individual capital charges computed for options 
positions in the same underlying.
---------------------------------------------------------------------------

    \45\ Vega is quoted to show the theoretical price change for 
every 1 percentage point change in implied volatility. Assuming a 
European short call option with volatility of 20 percent, for 
purposes of the required calculation the volatility has to be 
increased by a relative shift of 25 percent (only an increase in 
volatility carries a risk of loss for a short call option.) Thus, in 
this example, the vega capital charge should be calculated on the 
basis of a change in volatility of 5 percentage points from 20 
percent to 25 percent. Assuming vega in this example equals 168, a 1 
percent increase in volatility increases the value of the option by 
1.68. Accordingly, the capital charge for vega risk is calculated as 
follows: 5 x 1.68 = 8.4
---------------------------------------------------------------------------

3. Calculations by SDs and MSPs That Are Not Using Internal Models and 
Are FCMs
    The existing capital treatment under Sec.  1.17 for those FCMs that 
are not approved to use internal models would remain the same under the 
proposed rules. Thus, SDs and MSPs that are also FCMs and not approved 
to use internal models for their capital calculations would be required 
to deduct 100 percent of the receivables associated with their 
uncleared swaps, except the extent of the market value, minus specified 
haircuts, of acceptable collateral that secure such receivables. The 
margin rules that have been proposed may result in fewer unsecured 
receivables for the FCM's uncleared swaps, especially as the Commission 
also is proposing to amend Sec.  1.17(c)(2)(ii)(G) to provide that 
receivables from third-party custodians that arise from initial and/or 
variation margin deposits associated with bilateral swap transactions 
pursuant to proposed Sec.  23.158 will be included in the FCM's current 
assets.
    The Commission also is proposing to provide greater clarity and 
transparency to the market risk haircut charges under Sec.  1.17 for 
OTC derivatives positions, by adding new paragraphs (iii) and (iv) to 
Sec.  1.17(c)(5) that would address proprietary OTC swap transactions 
that are not cleared by or through a clearing organization. The 
proposal is intended to codify existing guidance provided by the 
Commission and SEC regarding the computation of capital charges for OTC 
derivative transactions.
    As proposed, Sec.  1.17(c)(5)(iii)(A) would require a capital 
charge equal to the notional amount of an interest rate swap multiplied 
by the applicable percentages of the underlying securities specified in 
SEC Rule 15c3-1(c)(2)(vi)(A)(1), as if such notional amount was the 
market value of a security issued or guaranteed as to principal or 
interest by the United States, if the interest rate swap position was 
not hedged with U.S. Treasury securities of corresponding maturities or 
matched with offsetting interest rate swap positions with corresponding 
terms and maturities.\46\ Proposed Sec.  1.17(c)(5)(iii)(B) would 
address uncleared swaps maturing in 10 years or less that are hedged 
with U.S. Treasury securities of corresponding maturities, or matched 
with offsetting interest rate swap positions with corresponding terms 
and maturities, and would require a capital charge of 1 percent of the 
notional amount of such interest rate swaps. Proposed Sec.  
1.17(c)(5)(iii)(C) would require a capital charge of 3 percent of the 
notional amount of the interest rate swap, if the swap was hedged with 
U.S. Treasury securities of corresponding maturities or matched with 
offsetting interest rate swap positions with corresponding terms and 
maturities, and such interest rate swap positions were maturing in more 
than10 years.
---------------------------------------------------------------------------

    \46\ SEC Rule 15c3-1(c)(2)(vi)(A)(1) lists haircut percentages 
between 0 percent and 6 percent based upon the time to maturity of 
the security.
---------------------------------------------------------------------------

    Proposed Sec.  1.17(c)(5)(iv) addresses the capital charges on 
proprietary OTC swap positions in credit default swaps, equity swaps, 
or commodity swaps that are not cleared by or through a clearing 
organization. Credit default swaps that are not hedged by the same 
securities underlying the swap are subject to a capital charge computed 
by multiplying the notional principal amount of the

[[Page 27813]]

swap by the applicable percentages as determined by the underlying 
securities under SEC Rule 15c3-1(c)(2)(vi) and taking into account the 
remaining maturity of the swap agreement.
    Equity swaps would be subject to a capital charge equal to 15 
percent of the net notional principal amount of the swap transaction. 
Commodity swaps would be subject to a capital charge equal to 20 
percent of the net market value of the notional amount of the 
commodities underlying the swap transaction.

D. Failure To Meet Minimum Capital Requirements

    Regulation 1.17(a)(4) currently provides that any FCM that fails to 
meet, or is unable to demonstrate compliance with, the minimum capital 
requirement must transfer all customer accounts and immediately cease 
doing business as an FCM until it is capable of demonstrating 
compliance with the capital requirements. The FCM may continue to trade 
for liquidation purposes only unless the Commission or the FCM's 
designated self-regulatory organization (DSRO) provides otherwise.\47\ 
The Commission and the FCM's DSRO also have the authority to grant the 
FCM up to a maximum of 10 business days to come back into compliance 
with the capital regulations without having to transfer customer 
accounts if the FCM can immediately demonstrate the capability of 
achieving capital compliance.
---------------------------------------------------------------------------

    \47\ The term ``designated self-regulatory organization'' is 
defined at Sec.  1.3(ff) as the self-regulatory organization of an 
FCM that has been delegated the responsibility of reviewing such 
FCM's compliance with minimum financial requirements and financial 
reports under a plan approved by the Commission pursuant to Sec.  
1.52.
---------------------------------------------------------------------------

    The Commission is not proposing to amend Sec.  1.17(a)(4). 
Accordingly, if an FCM that also is registered as an SD or MSP fails to 
maintain the minimum level of capital, it would have to cease operating 
as an FCM and transfer the customer futures and cleared swap accounts 
that it carries to another FCM. The FCM also could request that the 
Commission or DSRO grant the firm up to 10 business days to come back 
into compliance with the minimum capital requirements if the FCM could 
demonstrate an immediate plan to achieve compliance.
    The Commission recognizes that an FCM that is an SD or MSP and has 
open uncleared bilateral swap transactions cannot transfer the 
uncleared bilateral swap transactions in a manner similar to customer 
futures and cleared swap transactions. In such situations, the 
agreements between the SD or MSP and its counterparties should dictate 
the process. As previously proposed by the Commission, each SD or MSP 
would be required to establish written policies and procedures 
reasonably designed to ensure that each SD or MSP and its 
counterparties have agreed in writing to all of the terms governing 
their swap trading relationship. The Commission further has proposed 
that the swap trading relationship documentation include a written 
agreement by the parties on terms relating to events of default or 
other termination events, and dispute resolution procedures. Therefore, 
the SD's or MSP's written agreements with its counterparties should 
address the possible undercapitalization of the SD or MSP and the 
parties' rights in such a situation.\48\
---------------------------------------------------------------------------

    \48\ See 76 FR 6715 (Feb. 8, 2011). Proposed Sec.  23.504 would 
require each SD or MSP to execute with its counterparties swap 
trading relationship documentation that address, among other things, 
the events of default or other termination events.
---------------------------------------------------------------------------

    Proposed Sec.  23.105(a) requires an SD or MSP to provide the 
Commission with immediate notice if the SD or MSP fails to maintain 
compliance with the minimum capital requirements. FCMs also are 
required to provide the Commission with immediate notice under Sec.  
1.12(a). Upon receipt of an undercapitalization notice, the Commission 
would engage the SD or MSP to assess the situation and to determine 
whether the SD or MSP would be able to take reasonable actions to bring 
itself back into compliance with the minimum capital requirements. The 
Commission would further assess what other actions were necessary 
depending on the facts and circumstance of each situation, including 
the need for providing immediate notice to the SD's or MSP's swap 
counterparties.

E. SD and MSP Financial Reporting Requirements

1. SD and MSP Financial Statement Requirements
    Section 4s(f)(1)(A) of the CEA, as amended by section 731 of the 
Dodd-Frank Act, expressly requires each registered SD and MSP to make 
such reports as are required by Commission rule or regulation regarding 
the SD's or MSP's financial condition. The Commission is proposing new 
Sec.  23.106, which would require certain SDs and MSPs to file monthly 
unaudited financial statements and annual audited financial statements 
with the Commission and with any registered futures association of 
which they are members.
    Proposed Sec.  23.106 would apply to SDs and MSPs, except any SDs 
or MSPs that are subject to the capital requirements of a prudential 
regulator, or designated by the Financial Stability Oversight Council 
as a SIFI. SDs and MSPs that are subject to regulation by a prudential 
regulator would comply with the applicable financial reporting 
obligations imposed by such prudential regulator. SDs and MSPs that are 
designated as SIFIs would comply with any financial reporting 
obligations imposed by the Federal Reserve Board. Registered SDs or 
MSPs that are subject to prudential regulation or designated as SIFIs, 
however, would be required pursuant to proposed Sec.  23.105(d) to 
provide the Commission with copies of their capital computations and 
supporting documentation upon the Commission's request. In addition, 
SDs and MSPs that are required to register with the Commission as FCMs 
would not be required to file financial reports under Sec.  23.106, and 
would continue to comply with the FCM financial reporting obligations 
set forth in Sec.  1.10 of the Commission's regulations.
    The proposed financial statements under part 23 would include a 
statement of financial condition; a statement of income or loss; a 
statement of cash flows; and a statement of changes in stockholders', 
members', partners', or sole proprietor's equity. The financial 
statements also would include a schedule reconciling the firm's equity, 
as set forth in the statement of financial condition, to the firm's 
regulatory capital by detailing any goodwill or other intangible assets 
that are required to be deducted from the SD's or MSP's equity in order 
to compute its net tangible equity as required under proposed Sec.  
23.101. The schedule would further disclose the firm's minimum required 
capital under Sec.  23.101 as of the end of the month or end of its 
fiscal year, as applicable, and the amount of regulatory capital it 
held at such date.
    The proposed financial statements would be required to be prepared 
in accordance with generally accepted accounting principles as 
established in the United States, using the English language, and in 
U.S dollars. The unaudited financial statements would be required to be 
filed within 17 business days of the end of each month and the annual 
audited financial statements would be required to be filed within 90 
days of the end of the SD's or MSP's fiscal year.
    Proposed Sec.  23.106 also would authorize the Commission to 
require a SD or MSP that was not subject to regulation by a prudential 
regulator to

[[Page 27814]]

file with the Commission additional financial or operational 
information, and to prepare and to keep current ledgers or other 
similar records which show or summarize each transaction affecting the 
SD's or MSP's asset, liability, income, expense and capital accounts. 
These accounts would be required to be classified in accordance with 
United States generally accepted accounting principles. Proposed Sec.  
23.106 also would provide that the comprehensive data records 
supporting the information contained in the SD's or MSP's unaudited and 
annual audited financial reports must be maintained and retained for a 
period of five years pursuant to Sec.  1.31 of the Commission's 
regulations.
2. SD and MSP Notice Filing Requirements
    Proposed Sec.  23.105 would require SDs and MSPs to provide the 
Commission, and the registered futures association of which the SDs or 
MSPs are members, with written notice in the event of certain 
enumerated financial or operational issues. The proposal is intended to 
provide the Commission and the appropriate registered futures 
association with timely notice of potentially adverse financial or 
operational issues that may warrant immediate attention and ongoing 
surveillance. The proposed notice requirements are comparable to the 
notice requirements currently existing for FCMs under Sec.  1.12 of the 
Commission's regulations. Proposed Sec.  23.105 would not be applicable 
to SDs and MSPs that are registered as FCMs. Such SDs and MSPs would be 
subject to the FCM notice requirements set forth in Sec.  1.12 and, as 
noted above, such requirements are comparable to the proposed SD and 
MSP notice requirements set forth in Sec.  23.105.
    Proposed Sec.  23.105 also would not be applicable to SDs or MSPs 
that are subject to the capital requirements of a prudential regulator, 
with the exception of two provisions that are discussed below. SDs and 
MSPs that are subject to capital requirements imposed by a prudential 
regulator would be subject to the applicable financial surveillance 
program of its prudential regulator. The first exception is the 
proposed requirement in Sec.  23.105(c) that a SD or MSP that is 
subject to the capital rules of a prudential regulator file notice with 
the Commission and with a registered futures association if the SD or 
MSP fails to maintain compliance with the minimum capital requirements 
established by its prudential regulator. The second exception is set 
forth in proposed Sec.  23.105(e) which requires an SD or MSP to 
provide the Commission with notice if it fails to maintain current 
books and records.
    While the prudential regulator will be assessing such an SD's or 
MSP's financial condition, the Commission believes that notice of a 
CFTC registrant's failure to maintain compliance with applicable 
minimum capital requirements is critical information that may impact 
the Commission's assessment and monitoring of the SD's or MSP's ongoing 
compliance with applicable non-capital CFTC regulations and the SD's or 
MSP's potential adverse impact on counterparties, including other 
Commission registered SDs and MSPs.
    The proposed notice provisions would require a SD or MSP to give 
telephonic notice to the Commission, followed by a written notice, 
whenever it knows or should know that the firm does not maintain 
tangible net equity in excess of its minimum requirement under Sec.  
23.101. The SD or MSP also would be required to file documentation 
containing a calculation of its current tangible net equity with its 
notice of undercapitalization.
    Proposed Sec.  23.105 also would require a SD or MSP to file a 
written notice with the Commission whenever its tangible net equity 
fails to exceed 110 percent of its minimum tangible net equity 
requirement as computed under Sec.  23.101. The SD or MSP would be 
required to file the notice within 24 hours of failing to maintain 
tangible net equity at a level that is 110 percent or more above its 
minimum tangible net equity requirement. Proposed Sec.  23.105 also 
would require a registered SD or MSP to provide written notice of its 
failure to maintain current books and records, or of a substantial 
reduction in capital as previously reported to the Commission.

E. Proposed Financial Reporting and Other Amendments to FCM Regulations 
Relating to Customer Cleared Swap Transactions

    The Commission issued in December 2010 an advanced notice of 
proposed rulemaking seeking comment on possible models to implement 
section 4d(f)(2) of the CEA, as added by section 724 of the Dodd-Frank 
Act, which provides that funds deposited by customers to margin a 
cleared swap transaction shall not be commingled with the funds of the 
FCM or used to margin, guarantee or secure the positions of any other 
customer other than the customer that deposited the funds.\49\ The 
Commission is proposing in this release amendments to certain FCM 
financial reporting requirements in Sec. Sec.  1.10, 1.12, and 1.16 of 
the Commission's regulations to address the segregation of swap 
customers' funds. The proposed financial reporting requirements are 
similar to the current financial reporting requirements that FCMs must 
meet with respect to the segregation of customer funds deposited under 
section 4d(a)(2) of the CEA as margin for futures contracts and options 
on futures contracts executed on a designated contract market. The 
Commission is further proposing to amend Sec.  1.17 to provide that 
certain capital charges relating to undermargined customer and 
noncustomer accounts extends to undermargined customer and noncustomer 
accounts that carry cleared swap transactions.
---------------------------------------------------------------------------

    \49\ 75 FR 75162 (Dec. 2, 2010).
---------------------------------------------------------------------------

1. Financial Reporting Requirements in Sec.  1.10
    Regulation 1.10 currently requires each FCM to prepare and to file 
unaudited financial condition reports, Form 1-FR-FCM, within 17 
business days of the close of business each month. The Form 1-FR-FCM is 
required to be filed with the Commission and with the FCM's DSRO. An 
FCM also is required to file a Form 1-FR-FCM audited by an independent 
public accountant as of the end of the FCM's fiscal year. The audited 
financial Form 1-FR-FCM is required to be filed with the Commission and 
with the FCM's DSRO organization within 90 calendar days of the date of 
the FCM's fiscal year end.
    Regulation 1.10(d) provides that each unaudited and audited Form 1-
FR-FCM must include: a Statement of Financial Condition; a Statement of 
the Computation of Minimum Capital Requirements; a Statement of Income 
(Loss); a Statement of Changes in Ownership Equity; a Statement of 
Changes in Liabilities Subordinated to Claims of General Creditors 
Pursuant to a Satisfactory Subordination Agreement; a Statement of 
Segregation Requirements and Funds in Segregation for Customers Trading 
on U.S. Commodity Exchanges; and a Statement of Secured Amounts and 
Funds Held in Separate Accounts for Foreign Futures and Options 
Customers Pursuant to Sec.  30.7.
    The Commission is proposing to amend Sec. Sec.  1.10(d)(1) and (2) 
to include a new Statement of Cleared Swap Customer Segregation 
Requirements and Funds in Cleared Swap Customer Accounts Under 4d(f) of 
the CEA in both the unaudited monthly Form 1-FR-FCM and the audited 
annual Form

[[Page 27815]]

1-FR-FCM, respectively. This Statement is comparable to the statement 
required for the segregation of customer funds for trading on 
designated contract markets, the Statement of Segregation Requirements 
and Funds in Segregation for Customers Trading on U.S. Commodity 
Exchanges. The proposed swap segregation statement is intended to 
provide an FCM that carries accounts for customers that maintain 
cleared swap positions with a schedule to document and to demonstrate 
its compliance with its obligation to treat, and deal with all money, 
securities, and property of any swap customer received to margin, 
guarantee, or secure a swap cleared by or through a derivates clearing 
organization (including money, securities, or property accruing to swap 
customers as the result of such a swap) as belonging to the FCM's swap 
customers as required by section 4d of the CEA as amended by section 
724 of the Dodd-Frank Act.
    Pursuant to the proposal, each FCM would be required to include the 
Statement of Cleared Swap Customer Segregation Requirements and Funds 
in Cleared Swap Customer Accounts Under 4d(f) of the CEA in both its 
unaudited monthly financial Form 1-FR-FCM filings and its annual 
audited Form 1-FR-FCM filings. In addition, each FCM would be required 
to include a reconciliation of any material reconciling items between 
the Statement of Cleared Swap Customer Segregation Requirements and 
Funds in Cleared Swap Customer Accounts Under 4d(f) of the CEA 
contained in the audited annual Form 1-FR-FCM and the corresponding 
unaudited monthly financial Form 1-FR-FCM filed as of the FCM's year 
end date, or include a statement that there were no material 
reconciling items.
    The Commission also is proposing to amend Sec.  1.10(g)(2)(ii) to 
provide that an FCM's Statement of Cleared Swap Customer Segregation 
Requirements and Funds in Cleared Swap Customer Accounts Under 4d(f) of 
the CEA will not be treated as exempt from mandatory public disclosure 
under the Freedom of Information Act and the Government in the Sunshine 
Act and Parts 145 and 147 of Chapter I of the Commission's regulations. 
This proposed amendment would treat the public disclosure of an FCM's 
financial information regarding the holding of funds for customers' 
cleared swap transactions in a manner that is consistent with the 
public disclosure of information regarding the segregation of customer 
funds for trading on U.S. commodity exchanges, and regarding the 
securing of customer funds for trading on foreign boards of trade 
pursuant to Sec.  30.7 of the Commission's regulations.
    The Commission is further proposing a technical amendment to Sec.  
1.10(c)(1), which directs an FCM, and other registrants, to file the 
reports and other information required by Sec.  1.10 with Commission's 
Regional Office with jurisdiction over the registrant's principal place 
of business. Commission Sec.  140.02 establishes the jurisdiction of 
each Regional Office over filing requirements of registrants based upon 
the geographic location of the principal business office of the 
registrants. In order to clarify where a registrant should file 
required financial information with the Commission, the Commission 
proposes to amend Sec.  1.10(c) to include a reference to the 
geographic listing in Sec.  140.02 of the Commission's regulations.
    Except for the technical amendment described above, the other 
proposed amendments implementing reporting requirements for funds of 
cleared swap customers would not be adopted or effective unless the 
Commission adopts, after issuing proposed rules for comment, 
regulations establishing requirements for collateral posted by cleared 
swap customers under section 4d(f) of the CEA.
2. Audited Financial Statement Requirements in Sec.  1.16
    The Commission is proposing to amend Sec.  1.16 of the Commission's 
regulations. Regulation 1.16 sets forth the qualifications that an 
independent public accountant must meet to be qualified to conduct the 
annual examinations of an FCM as required by Sec.  1.10(b)(1)(ii), and 
establishes the minimum audit objectives of the independent 
accountant's examination of an FCM.
    Regulation 1.16(c)(2) provides that the accountant's report on the 
audit of an FCM must state whether the audit was made in accordance 
with generally accepted auditing standards and must designate any 
auditing procedures deemed necessary by the accountant under the 
circumstances of the particular case which have been omitted and the 
reason for the omission of such procedures. Regulation 1.16(c)(3) 
further provides that the accountant's report must clearly state the 
opinion of the accountant with respect to the financial statements and 
schedules covered by the report and the accounting principles and 
practices reflected therein.
    Regulation 1.16(d) sets forth the required audit objective of the 
accountant's examination of the financial statements of an FCM and 
provides, in relevant part, that the audit must be made in accordance 
with generally accepted auditing standards and must include a review 
and appropriate tests of the accounting systems, the internal 
accounting controls, and the procedures for safeguarding customer and 
firm assets in accordance with the CEA and Commission regulations, 
since the last examination date. The scope of the audit and review of 
the FCM's accounting systems, the internal accounting controls, and 
procedures for safeguarding customer and firm assets must be sufficient 
to provide reasonable assurance that any material inadequacies existing 
at the dates of the examination in (1) The accounting systems, (2) the 
internal accounting controls, and (3) the procedures for safeguarding 
customer and firm assets (including the segregation requirements of 
section 4d(a)(2) of the CEA and Commission regulations, and the secured 
amount requirements of the CEA and part 30 of the Commission's 
regulations) will be discovered. Regulation 1.16(d) further provides 
that as specified objectives the audit must include reviews of the 
practices and procedures followed by the FCM in making daily 
computations of the segregation requirements of section 4d(a)(2) of the 
CEA and the secured amount requirements of part 30 of the Commission's 
regulations.
    The proposed amendments would revise Sec.  1.16 to include the 
proposed new Statement of Cleared Swap Customer Segregation 
Requirements and Funds in Cleared Swap Customer Accounts Under 4d(f) of 
the CEA within the explicit audit scope of the examination of an FCM. 
Specifically, the Commission is proposing to amend the term 
``customer'' as defined in Sec.  1.16(a)(4) to include an FCM's swap 
customers that engage in cleared swap transactions. The proposed 
amendment would bring cleared swap positions carried in swap customers' 
accounts explicitly within the scope of the accountant's audit 
objectives, as set forth in Sec.  1.16(d), which includes the review 
and appropriate testing of the accounting systems, the internal 
accounting control, and the procedures for safeguarding customer and 
firm assets.
    The Commission also proposes to amend Sec.  1.16(d)(1) to 
explicitly provide that the scope of the independent accountant's 
review of the accounting systems, internal accounting controls, and 
procedures for safeguarding customer assets must be sufficient to 
provide reasonable assurance that any

[[Page 27816]]

material inadequacy existing as of the date of the examination in (1) 
the accounting system, (2) the internal accounting controls, and (3) 
the procedures for safeguarding customer and firms assets will be 
discovered includes the cleared swap segregation requirements as set 
forth in section 4d(f) of the CEA. The Commission further proposes to 
amend Sec.  1.16(d)(2) to include as a material inadequacy in the 
accounting systems, internal accounting controls, and the procedures 
for the safeguarding customer and firm assets that are required to be 
reported to the Commission any conditions which contribute 
substantially to or, if appropriate corrective action is not taken, 
could reasonably be expected to result in a violation of the 
requirement to segregate swap customers' funds.
    The proposed amendments to Sec.  1.16 would not be adopted or 
effective unless the Commission adopts, after issuing proposed rules 
for comment, regulations establishing segregation requirements for 
collateral posted by cleared swap customers under section 4d(f) of the 
CEA. As previously noted, the Commission published an advanced notice 
of proposed rulemaking on this topic on December 2, 2010.
3. Early Warning Requirements in Sec.  1.12
    Regulation 1.12 requires an FCM to provide notice to the Commission 
and to the FCM's DSRO of certain material financial or operational 
events. The self-reporting of these financial and operational events by 
an FCM is a key to the Commission's and self-regulatory organizations' 
financial surveillance oversight programs as such notices may lead to 
the discovery of accounting, recordkeeping, risk management, or other 
regulatory failures that require prompt attention to safeguard customer 
funds and to protect the clearing system.
    Regulation 1.12(b) is referred to as the ``early warning capital 
provisions'' and currently requires an FCM to file written notice with 
the Commission and with its DSRO whenever its adjusted net capital is 
less than: (1) 150 percent of the minimum dollar amount of adjusted net 
capital required by Sec.  1.17(a)(1)(i)(A); (2) 150 percent of the 
amount of adjusted net capital required by a registered futures 
association of which the FCM is a member (except if the registered 
futures association has adopted a margin-based capital rule, then the 
FCM is required to file a written notice if its adjusted net capital is 
less than 110 percent of its minimum adjusted net capital requirement 
as computed under the registered futures association's margin-based 
capital requirement); or (3) 110 percent of the FCM's margin-based 
capital requirement as computed under Sec.  1.17(a)(1)(i)(B). An FCM 
that also is registered with the SEC as a broker or dealer is required 
to provide the Commission with written notice whenever it fails to 
maintain net capital (as defined in SEC Rule 15c3-1) in an amount that 
exceeds the ``early warning level'' set forth in SEC Rule 17a-11(c). 
The early warning capital provisions are intended to provide the 
Commission and the FCM's DSRO with prompt notice of potential adverse 
financial or operational issues that may impact the FCM's ability to 
meet its obligations to its customers and the clearing system, and 
provide an opportunity for Commission and DSRO staff to review the 
financial condition of an FCM that does not maintain a significant 
amount of excess adjusted net capital prior to the firm falling under 
the minimum net capital requirement.
    The Commission is proposing to amend Sec.  1.12(b) by adding a new 
paragraph (b)(5) to require any FCM that also is registered with the 
SEC as a SSD or a MSSP to file a notice with the Commission if the SSD 
or MSSP fails to maintain net capital above the minimum ``early warning 
level'' established by rules or regulations of the SEC. The proposed 
new paragraph (b)(5) would provide the Commission and the FCM's DSRO 
with an opportunity to review the financial condition of an FCM and, if 
necessary, to assess possible courses of regulatory action to protect 
customer funds and to review potential financial risk presented by the 
FCM to the clearing system.
    The Commission also is proposing to amend Sec.  1.12(f)(4). 
Regulation 1.12(f)(4) requires an FCM to provide immediate notice by 
telephone communication, followed by immediate written confirmation, 
whenever any commodity futures, options, cleared swaps, or other 
Commission regulated account that the FCM carries is subject to a 
margin call, or a call for other deposits required by the FCM, that 
exceeds the FCM's excess adjusted net capital determined under Sec.  
1.17, and the call for additional deposits has not been answered by the 
close of business on the day following the issuance of the call.
    The Commission intends for all of the notice provisions of Sec.  
1.12 to apply, as applicable, to FCMs that carry swap customer 
accounts. The Commission, however, believes it is necessary to amend 
Sec.  1.12(f)(4) due to the reference in the regulation to ``commodity 
interest'' accounts. The term ``commodity interest'' is defined in 
Sec.  1.3(yy) as any contract for the purchase or sale of a commodity 
for future delivery and any contract, agreement, or transaction 
submitted under section 4c of the CEA. To avoid any confusion and to 
ensure that an FCM provides the Commission and its self-regulatory 
organizations with appropriate early warning notice, the Commission is 
proposing to amend Sec.  1.12(f)(4) to require notice of a failure of 
the owner of any commodity futures, option, swap, or other Commission 
regulated account carried by the FCM to meet a margin call that exceeds 
the FCM's excess adjusted net capital. The proposed amendment is 
intended to ensure that an FCM is required to file a written notice if 
a customer account containing cleared swap transactions fails to meet a 
margin call that exceeds the FCM's excess adjusted net capital.
    The Commission also is proposing to amend Sec.  1.12(h) to require 
an FCM to provide the Commission and its DSRO with immediate notice by 
telephone, confirmed immediately in writing, if the amount of funds on 
deposit in accounts segregated for the benefit of the FCM's swap 
customers is less than the amount that the FCM is required to hold in 
such accounts. The proposed amendment to Sec.  1.12(h) would impose an 
obligation upon the FCM that is consistent with an FCM's current 
obligation to provide immediate telephone notice, confirmed by writing, 
whenever the FCM fails to maintain the amount of funds in customer 
segregated or secured accounts as required by Sec.  1.20 and Sec.  
30.7, respectively.
4. Amendments to 1.17 for FCMs With Cleared Swaps Customers
    The Commission proposes to amend Commission regulation 
1.17(c)(2)(i) by adding references to cleared swap customers to this 
regulation, which currently provides that FCMs must exclude from 
current assets any unsecured commodity futures and options account (as 
amended, this would include cleared swaps customers and other 
Commission regulated accounts) containing a ledger balance and open 
trades, the combination of which liquidates to a deficit or containing 
a debit ledger balance only: Provided, however, Deficits or debit 
ledger balances in unsecured customers', non-customers', and 
proprietary accounts, which are the subject of calls for margin or 
other required deposits may be included in current assets until the 
close of business on the business day following the date on which such 
deficit or debit ledger balance originated providing that the account 
had timely satisfied, through the deposit of new funds, the previous 
day's debit or deficits, if any, in its

[[Page 27817]]

entirety. The Commission is also proposing to add similar references to 
cleared swap accounts of customers in Sec. Sec.  1.17(c)(5)(viii) and 
(ix), which requires certain capital charges when the accounts of 
customer or noncustomers are undermargined.
    The Commission also is proposing to amend provisions in Sec.  
1.17(c)(5)(v) that require an FCM to incur a capital charge not only on 
its proprietary securities included in the FCM's calculation of 
adjusted net capital, but also for securities held in customer 
segregated accounts when such securities were not deposited in 
segregation by a specific customer (i.e., the securities were purchased 
with cash held in the customer segregated accounts). The purpose of 
both of these capital requirements is to ensure that the FCM maintains 
a capital cushion in order to cover potential decreases in the value of 
the securities. The proposed rule would further require the FCM to 
incur a capital charge for any securities purchased by the FCM using 
funds belonging to the FCM's customers and held in the secured accounts 
for customers trading on foreign markets pursuant to Sec.  30.7 or in 
segregated accounts for cleared swap customers pursuant to section 
4d(f) of the CEA.

C. Request for Comment

    The Commission requests comment on all aspects of the proposed 
capital and financial reporting regulations. In particular, the 
Commission request comment on the following:
    (1) The Commission's capital proposal for SDs and MSPs includes a 
minimum dollar level of $20 million. A non-bank SD or MSP that is part 
of a U.S. bank holding company would be required to maintain a minimum 
of $20 million of Tier 1 capital as measured under the capital rules of 
the Federal Reserve Board. An SD or MSP that also is registered as an 
FCM would be required to maintain a minimum of $20 million of adjusted 
net capital as defined under Sec.  1.17. In addition, an SD or MSP that 
is not part of a U.S. bank holding company or registered as an FCM 
would be required to maintain a minimum of $20 million of tangible net 
equity, plus the amount of the SD's or MSP's market risk exposure and 
OTC counterparty credit risk exposure.
    The Commission requests comment on the amount of the proposed 
minimum dollar amount of regulatory capital. Should the minimum dollar 
amount of capital be set at a higher or lower level? Is a consistent 
$20 million of minimum regulatory capital appropriate for all SDs and 
MSPs?
    (2) The Commission is proposing in Sec.  23.101 to incorporate bank 
capital requirements into the CFTC capital requirements by requiring 
non-bank SDs and MSPs that are part of a U.S. bank holding company to 
meet bank capital requirements. The Commission requests comment on the 
appropriateness of the proposed incorporation of banking capital 
regulations in the terms of Sec.  23.101 for such SDs or MSPs.
    (3) The Commission is proposing in Sec.  23.101 to establish a 
regulatory capital requirement that is based upon tangible net equity 
if the SD or MSP is not: (1) An FCM; (2) part of a U.S. bank holding 
company; or (3) designated a SIFI. Proposed Sec.  23.102 provides that 
tangible net equity shall be determined under generally accepted 
accounting principles and shall exclude goodwill and other intangible 
assets. The Commission requests comment on the proposed definition of 
tangible net equity. Should all intangible assets be excluded?
    (4) The Commission requests comment on the appropriateness of 
establishing a minimum regulatory capital requirement based upon 
tangible net equity for all SDs and MSPs that are not also registered 
as FCMs, part of U.S. bank holding companies, or designated as SIFIs. 
Specifically, is the tangible net equity method appropriate for SDs and 
MSPs that are primarily engaged in non-financial operations? Is the 
tangible net equity method appropriate for SDs and MSPs that are 
primarily engaged in financial operations? Should minimum regulatory 
capital requirements be established under a different method for SDs 
and MSPs that are primarily financial or trading entities, such as 
funds or trading firms? Should the Commission impose additional capital 
or alternative capital requirements on financial firms that qualify to 
use the tangible net equity approach? What additional or alternative 
capital requirements would be appropriate for such firms?
    (5) The proposed tangible net equity capital computation does not 
require an SD or MSP to maintain the same level of highly liquid assets 
as the Commission's current capital requirement for FCMs. Specifically, 
the tangible net equity capital requirement would allow an SD or MSP to 
include fixed assets and other illiquid assets in meeting its 
regulatory capital requirement. Should the capital requirement for the 
tangible net equity method include a liquidity component that would 
effectively require an SD or MSP to hold a defined amount of highly 
liquid assets? What factors should the Commission consider in adopting 
a liquidity requirement?
    (6) One possible approach to a minimum liquidity requirement is to 
require an SD or MSP to hold unencumbered liquid assets equal to the 
sum of the total amount of initial margin that the SD or MSP would have 
to post with a counterparty for all uncleared swap transactions and the 
total amount of any unpaid variation margin that the SD or MSP owes to 
any counterparty. Liquid assets that could qualify for purposes of the 
liquidity requirement could be limited to cash, obligations guaranteed 
by the U.S., and obligations of government sponsored entities. Such 
assets could be part of the general operating assets of the SD or MSP 
and would not have to be held or ``segregated'' in any special account 
by the SD or MSP. Assets posted by the SD or MSP with custodians as 
margin on uncleared swap transactions could be included in meeting the 
liquidity requirement. The qualifying liquid assets also could be 
subject to market value haircuts set forth in the proposed margin rule 
Sec.  23.157(c). The Commission request comment on this approach to the 
computation of a liquidity requirement. If the Commission were to adopt 
such a liquidity requirement, would it be appropriate to incorporate 
minimum margin thresholds that would have to be exceeded before the SD 
or MSP was subject to the liquidity requirement? For example, should 
the Commission consider a rule that would impose a liquidity 
requirement only if the SD's or MSP's initial and variation margin 
obligations on uncleared swaps exceeded a minimum threshold? How would 
such thresholds be determined? What are the appropriate market value 
haircuts that should be imposed?
    (7) The Commission is proposing to amend Sec.  1.17 to specify 
capital charges for uncleared swap transactions held by an FCM. The 
Commission request comment on the appropriateness of the proposed 
calculations. Furthermore, the Commission request comment on viable 
alternative methods to compute capital charges for uncleared swap 
positions. Specifically, the Commission requests comment on whether 
capital charges should be based upon the margin calculations that would 
be required to be conducted under Part 23 of the proposed regulations.
    (8) SDs and MSPs that also are registered as FCMs are required 
under Sec.  1.17(c)(2)(ii) to exclude unsecured receivables from 
counterparties to OTC transactions in determining their adjusted net 
capital under Sec.  1.17. Certain SDs or MSPs that also are

[[Page 27818]]

registered as FCMs, however, may elect to use internal models to 
compute credit risk charges under Sec.  1.17(c)(6) if they comply with 
the Commission's requirements set forth in Sec.  1.17(c)(6) and have 
previously obtained an order from the SEC approving the use of such 
models for purpose of computing regulatory capital. In addition, 
proposed Sec.  1.17(c)(7) would permit SDs and MSPs that also are 
registered FCMs to seek Commission approval under Sec.  23.103 to use 
internal models to compute credit risk charges for OTC derivatives 
transactions in lieu of the current 100 percent capital charge for 
unsecured receivables.
    The Commission seeks comment on the appropriateness of allowing SDs 
and MSPs that also are registered as FCMs and have received approval to 
use internal models to compute their capital requirements to use such 
models to reduce the 100 percent capital charge for unsecured 
receivables arising from uncleared OTC swap transactions. The 
Commission requests comment on this issue as it is concerned that SDs 
and MSPs may have significant unsecured receivables for uncleared swap 
transactions that are not subject to variation margin requirements 
(e.g., bilateral swap positions entered into prior to the effective 
date of the Dodd-Frank Act). If such SDs and MSPs also were to register 
as FCMs, the unsecured receivables could have a significant impact on 
the financial condition of the FCMs and adversely impact the FCMs' 
customers if the debtor were to default.
    (9) The Commission solicits comment on all of the proposed rules 
related to the use of internal models for computing market risk and 
counterparty credit risk for capital purposes. Specifically, comment is 
requested regarding what resources, expertise, and capacity SDs and 
MSPs ought to have in order to be approved to use internal models.
    (10) The Commission solicits comment regarding whether it is 
appropriate to permit SDs and MSPs to use internal models for computing 
market risk and counterparty credit risk charges for capital purposes 
if such models have been approved by a foreign regulatory authority and 
are subject to periodic assessment by such foreign regulatory 
authority. What criteria should the Commission consider in assessing 
whether to approve or to accept a model approved by a foreign 
regulatory authority?
    (11) The Commission previously has proposed regulations that 
require each SD and MSP to promptly report to the Commission any swap 
valuation dispute not resolved within one business day if the 
counterparty is SD or MSP, or five business days if the counterparty is 
not an SD or MSP.\50\ The Commission requests comment on whether it is 
appropriate to require an SD or MSP to take a capital charge for the 
amount of any valuation dispute. Should the SD or MSP take a capital 
charge immediately upon learning of a valuation dispute, or should the 
capital charge be taken after one business day or five business days 
depending on whether the counterparty is an SD/MSP or a non-SD/MSP, 
respectively? What role should margin deposits have on the calculation 
of the capital charge? Are there any other issues that the Commission 
should consider?
---------------------------------------------------------------------------

    \50\ See, proposed Sec.  23.504(e) at 76 FR 6715 (Feb. 8, 2011).
---------------------------------------------------------------------------

    (12) What are the costs to counterparties resulting from the 
capital requirements being proposed by the Commission?
    (13) FCMs currently file monthly unaudited financial statements 
with the Commission, and the Commission is proposing to extend this 
monthly filing requirement to SDs and MSPs. The Commission seeks 
comment regarding the frequency of the filing of SD and MSP unaudited 
financial statements. Specifically, what challenges and costs are 
associated with monthly financial statement filings? Would the 
Commission receive adequate financial information from SDs and MSPs if 
they filed on a quarterly basis? Are there other financial statements 
or schedules other than, or in addition to, the proposed statements and 
schedules that the Commission should require from SDs and MSPs?
    (14) The Commission is proposing in Sec.  23.106(i) to make 
available to the public regulatory capital information provided by each 
SD and MSP in their financial statement filings with the Commission. 
Specifically, the Commission would make publicly available for each SD 
or MSP its minimum regulatory capital requirement, the amount of its 
regulatory capital, and any excess or deficiency in its regulatory 
capital. The disclosure of the regulatory capital information of SDs 
and MSPs is consistent with the disclosure of FCM financial 
information.

III. Conforming Amendments to Delegated Authority Provisions

    Commission Sec. Sec.  1.10, 1.12, and 1.17 reserve certain 
functions to the Commission, the greater part of which the Commission 
has delegated to the Director of the Division of Clearing and 
Intermediary Oversight through the provisions of Sec.  140.91 of the 
Commission's regulations. The Commission proposes to amend Sec.  140.91 
to provide similar delegations with respect to functions reserved to 
the Commission in Part 23.
    Proposed Sec.  23.101(c) would require an SD or MSP to be in 
compliance with the minimum regulatory capital requirements at all 
times and to be able to demonstrate such compliance to the Commission 
at any time. Proposed Sec.  23.103(d) would require an SD or MSP, upon 
the request of the Commission, to provide the Commission with 
additional information regarding its internal models used to compute 
its market risk exposure requirement and OTC derivatives credit risk 
requirement. Proposed Sec.  23.105(a)(2) would require an SD or MSP to 
provide the Commission with immediate notification if the SD or MSP 
failed to maintain compliance with the minimum regulatory capital 
requirements, and further authorizes the Commission to request 
financial condition reporting and other financial information from the 
SD or MSP. Proposed Sec.  23.105(d) authorizes the Commission to direct 
an SD or MSP that is subject to capital rules established by a 
prudential regulator, or has been designated a systemically important 
financial institution by the Financial Stability Oversight Council and 
is subject to capital requirements imposed by the Board of Governors of 
the Federal Reserve System to file with the Commission copies of its 
capital computations for any periods of time specified by the 
Commission.
    The Commission is proposing to amend Sec.  140.91 to delegate to 
the Director of the Division of Clearing and Intermediary Oversight, or 
the Director's designee, the authority reserved to the Commission under 
proposed Sec. Sec.  23.101(c), 23.103(d), and 23.105(a)(2) and (d). The 
delegation of such functions to staff of the Division of Clearing and 
Intermediary Oversight is necessary for the effective oversight of SDs 
and MSPs compliance with minimum financial and related reporting 
requirements. The delegation of authority also is comparable to the 
authorities currently delegated to staff of Division of Clearing and 
Intermediary Oversight under Sec.  140.91 regarding the supervision of 
FCMs compliance with minimum financial requirements.
    The following provisions relating to margin requirements are also 
proposed to be included in Part 140, in order to provide within Part 
140 a complete listing of the functions reserved to the Commission 
under Subpart E that are

[[Page 27819]]

proposed to be delegated to the Director of the Division of Clearing 
and Intermediary Oversight. As proposed in this release, Part 140 would 
include delegations for the Commission's ability under proposed Sec.  
23.155(b)(4)(ii) and (iii), with respect to initial margin, and under 
Sec.  23.155(c)(1) and (2) with respect to variation margin, to require 
at any time that a covered swap entity (``CSE'') provide further data 
or analysis concerning a model or methodology used to calculate margin, 
or to modify a model or methodology to address potential 
vulnerabilities. A similar delegation is provided for the Commission's 
ability under Sec.  23.155(c)(4) to require at any time that the CSE 
post or collect additional margin because of additional risk posed by a 
particular product, or because of additional risk posed by a particular 
party to the swap.
    The Commission also is proposing in this release to delegate 
authority with respect to the Commission's recently proposed Sec.  
23.157(d), which would authorize the Commission to take the following 
actions regarding margin assets: (i) Require a CSE to provide further 
data or analysis concerning any margin asset posted or received; (ii) 
require a CSE to replace a margin asset posted to a counterparty with a 
different margin asset to address potential risks posed by the asset; 
(iii) require a CSE to require a counterparty that is an SD, MSP, or a 
financial entity to replace a margin asset posted with the CSE with a 
different margin asset to address potential risks posed by the asset; 
(iv) require a CSE to provide further data or analysis concerning 
margin haircuts; or (v) require a CSE to modify a margin haircut 
applied to an asset received from an SD, MSP, or a financial entity to 
address potential risks posed by the asset.
    Finally, under proposed Sec.  23.158(c), the Commission may at any 
time require a CSE to provide further data or analysis concerning any 
custodian holding collateral collected by the CSE. Further, the 
Commission may at any time require a CSE participant to move assets 
held on behalf of a counterparty to another custodian to address risks 
posed by the original custodian. The Commission is proposing also to 
include delegations in Part 140 with respect to these functions 
reserved to the Commission under Sec.  23.158(c). Each of the proposed 
delegations would be to the Director of the Division of Clearing and 
Intermediary Oversight, with the concurrence of General Counsel. The 
Commission requests comment on each of the proposed amendments to Sec.  
140.91 described in this release.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \51\ requires that 
agencies consider whether the rules they propose will have a 
significant economic impact on a substantial number of small entities 
and if so, provide a regulatory flexibility analysis respecting the 
impact. The Commission has already established certain definitions of 
``small entities'' to be used in evaluating the impact of its rules on 
such small entities in accordance with the RFA.\52\ SDs and MSPs are 
new categories of registrant. Accordingly, the Commission has not 
previously addressed the question of whether such persons are, in fact, 
small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \51\ 5 U.S.C. 601 et seq.
    \52\ 47 FR 18618 (Apr. 30, 1982).
---------------------------------------------------------------------------

    The Commission previously has determined that FCMs should not be 
considered to be small entities for purposes of the RFA. The 
Commission's determination was based in part upon their obligation to 
meet the minimum financial requirements established by the Commission 
to enhance the protection of customers' segregated funds and protect 
the financial condition of FCMs generally.\53\ Like FCMs, SDs will be 
subject to minimum capital and margin requirements, and are expected to 
comprise the largest global financial firms. The Commission is required 
to exempt from designation entities that engage in a de minimis level 
of swap dealing in connection with transactions with or on behalf of 
customers. Accordingly, for purposes of the RFA for this and future 
rulemakings, the Commission is hereby proposing that SDs not be 
considered ``small entities'' for essentially the same reasons that 
FCMs have previously been determined not to be small entities.
---------------------------------------------------------------------------

    \53\  Id. at 18619.
---------------------------------------------------------------------------

    The Commission also has previously determined that large traders 
are not ``small entities'' for RFA purposes.\54\ The Commission 
considered the size of a trader's position to be the only appropriate 
test for purposes of large trader reporting.\55\ MSPs maintain 
substantial positions in swaps, creating substantial counterparty 
exposure that could have serious adverse effects on the financial 
stability of the United States banking system or financial markets. 
Accordingly, for purposes of the RFA for this and future rulemakings, 
the Commission is hereby proposing that MSPs not be considered ``small 
entities'' for essentially the same reasons that large traders have 
previously been determined not to be small entities.
---------------------------------------------------------------------------

    \54\ 47 FR at 18620.
    \55\ Id.
---------------------------------------------------------------------------

    The Commission is carrying out Congressional mandates by proposing 
these rules. The Commission is incorporating capital requirements of 
SDs and MSPs into the existing regulatory capital frameworks. In so 
doing, the Commission has attempted to formulate requirements in the 
manner that is consistent with the public interest and existing 
regulatory requirements. Accordingly, the Chairman, on behalf of the 
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
proposed rules will not have a significant economic impact on a 
substantial number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \56\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. This proposed rulemaking, as well as 
the proposed rulemaking on margin requirements for uncleared swaps, 
which was first published in the Federal Register on April 28, 2011, 
and is subject to a comment period that is being extended to correspond 
with the comment period for these proposed capital requirements, 
contain collections of information for which the Commission has 
previously sought or received control number from the Office of 
Management and Budget (``OMB''). This proposed rulemaking, as well as 
the proposed rulemaking on margin requirements for uncleared swaps, 
also would result in new mandatory collections of information within 
the meaning of the PRA. Therefore, pursuant to the PRA, the Commission 
is submitting a PRA proposal for both the capital and the margin rules, 
in the form of an amendment to the Commission's existing collection 
under OMB Control Number 3038-0024, to OMB for its review and approval 
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    \56\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

1. Collections of Information
a. Schedule to Form 1-FR-FCM
    The Commission has included as an exhibit to this proposed 
rulemaking the additional schedule that the proposed amendments to 
Sec.  1.10 would require FCMs to file with respect to the cleared swaps 
of their customers. The collection of information required by the 
amended Sec.  1.10 are necessary for the Commission's oversight of the 
FCM's compliance with its minimum financial requirements under the CEA 
and

[[Page 27820]]

implementing regulations of the Commission. The increase in the annual 
reporting burden associated with OMB Collection of Information Control 
No. 3038-004 would not be significant, as the Commission estimates that 
a small percentage of FCMs (approximately 21 FCMs) would be required to 
file the schedule, and the schedule will be included in the Form 1-FR-
FCM that they must already file with the Commission. The requirements 
in part 23 also require monthly and annual financial reports to be 
filed with the Commission. The Commission estimates that no more than 
250 SDs and 50 MSPs would be required to file such reports. The 
estimated burden of the proposed part 23 financial reporting 
requirements was calculated as follows:
     Estimated number of respondents: 300.
     Reports annually by each respondent: 13.
     Total annual responses: 3,900.
     Estimated average number of hours per response: 2.75.
     Annual reporting burden: 10,725.
b. Approval of Margin Models
    In the rulemaking proposing margin requirements for uncleared 
swaps, the Commission would require any SD or MSP to file its margin 
model with the Commission for approval. Each filing must include an 
explanation of the manner in which the model meets the requirements of 
the margin rules; the mechanics of, theoretical basis of, and empirical 
support for the model; and independent third party validation of the 
model. The Commission would process filings for models that comply with 
the minimum requirements established in the margin rules, or that are 
currently used by a derivatives clearing organization for margining 
cleared swaps, that are currently used by an entity subject to regular 
assessment by a prudential regulator for margining uncleared swaps, or 
that are made available for licensing by a vendor. At a later date, at 
which point the Commission may have sufficient resources to evaluate 
such models, the Commission may begin processing filings of proprietary 
models to be used by SDs and MSPs.
    The Commission cannot estimate with precision the frequency with 
which margin model filings will be made by SDs and MSPs annually, as an 
SD or MSP may be expected to make one initial filing and then to change 
or supplement its margin model occasionally. In an attempt to provide 
conservative estimates, the calculations below have been developed in 
accordance with the Commission's estimate that there will be 250 SDs 
and 50 MSPs that will register with it, and with the assumption that 
40% of registrants will make 3 model filings per year with respect to 
the margining of various swap instruments. The estimated average number 
of hours per filing includes not only preparation of the filing, but 
also the time associated with third party evaluation of the model.
    Estimated number of respondents: 300.
    Frequency of filings: One initial response, and then occasional 
filings.
    Filings annually by each respondent: One initial filing, and 1 to 3 
occasional filings annually.
    Total annual filings: 300 initial filings, and 360 occasional 
filings annually.
    Estimated average number of hours per filing: 60 hours.
    Annual filing burden: 21,600.
c. Approval of Capital Models
    In this rulemaking proposing capital requirements for SDs and MSPs, 
the Commission would permit SDs and MSPs to use internal models to 
calculate minimum capital requirements, subject to the submission of an 
application to the Commission for approval of the internal model. The 
application must address several factors, including: (1) Identifying 
the categories of positions that the SD or MSP holds in its proprietary 
accounts; (2) describing the methods that the SD or MSP will use to 
calculate its market risk and credit risk capital requirements; (3) 
describing the internal models; and (4) describing how the SD or MSP 
will calculate current exposure and potential future exposure. The SD 
or MSP also must explain the extent to which the models have been 
reviewed and approved by the Federal Reserve Board or, as applicable, 
the SEC.
    The Commission cannot estimate with precision the frequency with 
which SDs and MSPs will file applications with the Commission for the 
use of internal capital models. At present, only those SDs or MSPs that 
are subject to prudential regulation or regulation by the SEC will be 
permitted to use internal models. The Commission cannot presently 
determine which SDs and MSPs will be subject either to prudential 
regulation or regulation by the SEC, how many of those SDs or MSPs will 
file applications with the Commission, or how frequently those SDs and 
MSPs may submit applications with respect to revised or new models. The 
Commission additionally cannot presently determine at what time it may 
be able to consider applications by SDs and MSPs that will be subject 
solely to Commission regulation, or how many of those SDs and MSPs may 
eventually file applications with the Commission.
    In an attempt to provide conservative estimates, the calculations 
below have been developed in accordance with the Commission's estimate 
that there will be 250 SDs and 50 MSPs that will register with it, and 
that 70% of those SDs and MSPs will file initial applications with the 
Commission for the use of an internal model. The Commission 
additionally estimates that in subsequent years, it will be asked to 
review 30 capital models annually.
     Estimated number of respondents: 300.
     Frequency of responses: One initial response and then 
occasional filings.
     Reports by each respondent: 1 filing occasionally.
     Total responses: 210 initial applications and 30 
applications annually.
     Estimated average number of hours per response: 30 for 
applicants presently using internal capital models, 60 for each 
application not subject to approval by a prudential regulator or the 
SEC.
     Reporting burden: 630 hours initial applications, and up 
to 1,800 hours annually.
d. Approval of Counterparty Credit Ratings
    This proposed capital rulemaking permits an SD or MSP, which is 
required to apply a credit risk factor to its counterparties, to apply 
to the Commission for approval to assign internal individual ratings to 
each of its counterparties, or for an affiliated bank or affiliated 
broker-dealer to do so. The Commission does not have experience with 
such an application process, and therefore cannot estimate with 
precision the burden hours associated with this regulatory provision. 
In an attempt to provide conservative estimate, the Commission 
estimates that it may receive up to 4 applications per year from 70% of 
the 300 anticipated SDs and MSPs that may use internal application 
models, and that the preparation and submission of these applications 
would consume up to 8 hours per application. At such time as the 
Commission is able to approve internal models of SDs and MSPs that are 
not subject to prudential regulation, the Commission estimates that it 
will receive up to 4 applications per year from an additional 20% of 
SDs and MSPs.
     Estimated Number of Respondents: 270.
     Frequency of Responses: Up to 4 applications annually.

[[Page 27821]]

     Total Annual Responses: 840 applications initially, and an 
additional 240 applications eventually.
     Estimated average number of hours per response: 8.
     Annual Reporting burden: 6,720 initially, plus an 
additional 1,920 eventually.
e. Recordkeeping and Occasional Reporting Obligations
    In this proposed capital rulemaking, the Commission would require 
SDs and MSPs to present certain information to the Commission on 
request. Proposed Sec.  23.104 would authorize the Commission to 
require an SD or MSP that is not subject to prudential regulation to 
file with the Commission additional financial or operational 
information, and to prepare and to keep current ledgers or other 
similar records which show or summarize each transaction affecting the 
SD's or MSP's asset, liability, income, expense and capital accounts. 
Under proposed Sec.  23.105, the Commission would require each 
registered SD or MSP subject to prudential supervision, or each SD or 
MSP designated as a SIFI, to provide to the Commission, on request, 
copies of its capital computations and accompanying schedules and other 
supporting documentation demonstrating compliance with the applicable 
prudential regulator with jurisdiction over the SD or MSP.
    SDs and MSPs additionally will be required to keep comprehensive 
data records supporting the information contained in the SD's or MSP's 
unaudited and annual audited financial reports for a period of five 
years. SDs and MSPs using internal capital models also would be 
obligated to make and keep current a record of the basis for the credit 
rating it applies to each of its counterparties for a period of five 
years.
    The Commission is unable to estimate with precision how many 
requests it will make of SDs and MSPs under proposed Sec. Sec.  23.104 
and 23.105 annually. Additionally, it is unable to estimate with 
precision the number of records an SD or MSP will be obligated to keep 
related to the credit rating it applies to its counterparties. In an 
attempt to provide conservative estimates, the Commission anticipates 
that it will make 200 requests under Sec. Sec.  23.104 and 23.105 in 
the aggregate annually, and that responding to those requests would 
consume 5 burden hours. It is estimated that recordkeeping of monthly 
and annual reports, estimated at 3,900 records, would consume .4 burden 
hours. And, it is estimated that .7 burden hours would be consumed by 
210 SDs and MSPs initially and 270 SDs and MSPs eventually to keep 
credit rating bases for up to an average of 75 counterparties annually.
i. Occasional Reporting Obligations
     Estimated Number of Respondents: 200.
     Frequency of Responses: Occasional.
     Total Annual Responses: 200.
     Estimated average number of hours per response: 5 hours.
     Annual Reporting burden: 1,000.
ii. Recordkeeping Obligations
     Estimated Number of Recordkeepers: 300.
     Estimated Number of Records per Recordkeeper: Average 94 
initially and 89 eventually.
     Total Annual Recordkeeping: 19,650 initially and 24,150 
eventually.
     Estimated average number of hours for recordkeeping: .4 
burden hours for 3,900 records, .7 burden hours for 15,750 records 
initially, and .7 burden hours for 16,905 records eventually.
     Annual recordkeeping burden: 12,585 initially and 13,393 
eventually.
f. Occasional Notice Filings
    Finally, the proposed capital rulemaking contains provisions that 
would require registered SDs and MSPs to provide notice to the 
Commission in the event that certain material financial or operational 
events occur. These include the notice filing obligations contained in 
Sec.  1.12 and in proposed Sec. Sec.  23.104 and 23.105. In an attempt 
to provide conservative estimates, the Commission anticipates receiving 
up to 90 occasional notices annually and that the burden of providing 
those notices will consume up to .7 burden hours.
     Estimated Number of Respondents: 90.
     Frequency of Responses: Occasional.
     Total Annual Responses: 90.
     Estimated average number of hours per response: .7.
     Annual Reporting burden: 63.
2. Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission will consider public comments on such proposed requirements 
in:
     Evaluating whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
     Evaluating the accuracy of the estimated burden of the 
proposed information collection requirements, including the degree to 
which the methodology and the assumptions that the Commission employed 
were valid;
     Enhancing the quality, utility, and clarity of the 
information proposed to be collected; and
     Minimizing the burden of the proposed information 
collection requirements on FCMs, SDs, and MSPs, including through the 
use of appropriate automated, electronic, mechanical, or other 
technological information collection techniques, e.g., permitting 
electronic submission of responses.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street, NW., Washington, DC 
20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and 
individuals desiring to submit comments on the proposed information 
collection requirements should send those comments to the OMB Office of 
Information and Regulatory Affairs at:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
    OIRAsubmissions@omb.eop.gov (e-mail).
    Please provide the Commission with a copy of submitted comments so 
that all comments can be summarized and addressed in the final rule 
preamble. Please refer to the ADDRESSES section of this rulemaking and 
the margin rulemaking for instructions on submitting comments to the 
Commission. OMB is required to make a decision concerning the proposed 
information collection requirements between thirty (30) and sixty (60) 
days after publication of the NPRM in the Federal Register. Therefore, 
a comment to OMB is best assured of receiving full consideration if OMB 
(as well as the Commission) receives it within thirty (30) days of 
publication of this NPRM.

C. Cost-Benefit Analysis

    Section 15(a) of the CEA \57\ requires the Commission to consider 
the costs and benefits of its action before issuing a rulemaking under 
the CEA. By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of a rule or to determine whether the 
benefits of the rulemaking outweigh its costs; rather, it simply

[[Page 27822]]

requires that the Commission ``consider'' the costs and benefits of its 
actions. Section 15(a) further specifies that the costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness and financial integrity of futures markets; 
(3) price discovery; (4) sound risk management practices; and (5) other 
public interest considerations. The Commission may in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or accomplish any of 
the purposes of the CEA.
---------------------------------------------------------------------------

    \57\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Summary of proposed requirements. The proposed regulations would 
implement provisions in Sections 4s(e), (d), and (f) of the Act, which 
were added by Section 731 of the Dodd-Frank Act. Sections 4s(e), (d), 
and (f) authorize the Commission to adopt regulations imposing capital 
requirements and financial condition reporting requirements on SDs and 
MSPs. The proposed capital requirements would only apply to SDs and 
MSPs that are not subject to regulation by a prudential regulator. The 
financial condition reporting requirements primarily apply to SDs and 
MSPs that are not subject to regulation by a prudential regulator.
    The proposed regulations also amend existing requirements for FCMs. 
Section 724 of the Dodd-Frank Act adds a new Section 4d(f) of the Act, 
which requires an FCM to segregate from its own assets any money, 
securities, and property deposited by swap customers to margin, 
guarantee, or secure swap transactions cleared by or through a 
derivatives clearing organization. The proposed regulations would 
require each FCM holding customer funds for cleared swap customers to 
prepare a monthly Statement of Cleared Swap Customer Segregation 
Requirements and Funds in Cleared Swap Customer Accounts under 4d(f) of 
the CEA (Cleared Swap Segregation Statement). The Cleared Swap 
Segregation Statement would be filed as part of the FCMs Form 1-FR-FCM. 
The proposal also would amend the notice filing requirements and 
capital requirements for FCMs.
Structure of the Analysis
    The Commission has decided to propose capital rules for SDs and 
MSPs falling under four separate categories: (C1) Those that are 
affiliates of U.S. bank holding companies (BHCs) and are not registered 
as FCMs; (C2) those that are not affiliated with a BHC and are not 
registered as FCMs; (C3) those that are affiliates of a BHC and are 
registered as FCMs; (C4) those that are not affiliated with a BHC and 
are registered as FCMs. Costs and benefits for each of these four 
categories is discussed relative to one of two approaches: (D1) What 
constitutes capital follows the current practice for the given 
category, and the method for determining the amount of required capital 
follows an internal models based approach approved by a prudential 
regulator; (D2) what constitutes capital is tangible net equity, and 
the method for determining the amount of required capital follows an 
internal models based approach approved by a prudential regulator. The 
first approach, D1, which defines capital as bank capital per the Basel 
Accords, applies to C1 (affiliates of BHCs that are not FCMs). D1 also 
applies to C3 (affiliates of BHCs that are FCMs) and C4 (non-affiliates 
of BHCs that are FCMs); in which cases, the definition of capital is 
adjusted net capital per Regulation 1.17.\58\ The second approach, D2, 
which defines capital as tangible net equity, applies to C2 (non-
affiliates of BHCs that are not FCMs).
---------------------------------------------------------------------------

    \58\ Strictly speaking, for D1 to apply to C1, the method for 
determining capital needs to be Basel III, whereas for D1 to apply 
to C3 and C4, the method for determining capital needs to be 
Regulation 1.17 coupled with an allowance for calculating market 
risk and credit risk capital using internal models. The common 
feature here is the allowed used of approved internal models. The 
subsequent analysis abstracts away from any potential differences.
---------------------------------------------------------------------------

1. Costs and Benefits of the Proposed Rule to C1 (Affiliates of BHCs 
That Are Not FCMs) and C3 (Affiliates of BHCs That Are FCMs)
    The rules proposed by the Commission for non-bank subsidiaries of 
BHCs would be the capital rules of the prudential regulator unless the 
SD or MSP was an FCM, in which case the capital rules would be the 
Commission's current FCM capital rules.
    The Commission notes that the five prudential regulators have 
recently issued proposed rules that would not impose new capital 
requirements on the swap entities subject to their prudential 
supervision. Instead, the swap entities are required to comply with the 
regulatory capital rules already made applicable to them by their 
prudential regulators. As noted by the prudential regulators:

    The Agencies have preliminarily determined that compliance with 
these regulatory capital requirements is sufficient to offset the 
greater risk to the swap entity and the financial system arising 
from the use of non-cleared swaps, helps ensure the safety and 
soundness of the covered swap entity, and is appropriate for the 
greater risk associated with the non-cleared swaps and non-cleared 
security-based swaps held as a [swap entity]. In particular, the 
Agencies note that the capital rules incorporated by reference into 
the proposed rule already address, in a risk-sensitive and 
comprehensive manner, the safety and soundness risks posed by a 
[swap entity's] derivatives positions. In addition, the Agencies 
preliminarily believe that these capital rules sufficiently take 
into account and address the risks associated with the derivatives 
positions that a covered swap entity holds and the other activities 
conducted by a covered swap entity. (internal footnotes 
omitted).\59\

    \59\ See joint proposed rulemaking issued by the prudential 
regulators on April 12, 2011, titled ``Margin and Capital 
Requirements for Covered Swap Entities.''
---------------------------------------------------------------------------

    The Commission is anticipating that some number of nonbank 
subsidiaries of BHCs will register with the Commission in order to hold 
positions that Section 716 of the Dodd-Frank Act may require federally 
insured bank subsidiaries to ``push out'' into affiliates within the 
same bank holding company structure. The number of such potential 
registrants is not known, but the Commission has proposed rules that 
would result in the same capital requirements regardless of which non-
FCM subsidiary within the bank holding company organization holds the 
positions. This approach produces neither any material costs nor 
benefits relative to D1, defined as bank capital per the Basel 
Accords.\60\ The only difference between the proposed rule affecting C1 
(affiliate of a BHC that is not an FCM) and the current banking 
regulatory requirements is the proposed minimum regulatory capital 
requirement of $20 million. The Commission has requested comment on 
whether this minimum would result in undue burdens on potential ``push 
out'' registrants.
---------------------------------------------------------------------------

    \60\ This is not to say that the proposed rules for bank capital 
requirements are without costs and benefits measured with respect to 
some to-be-specified alternative. It is only to say that a 
discussion of such costs and benefits is beyond the scope of this 
analysis.
---------------------------------------------------------------------------

    To further promote consistent treatment where an FCM is also a 
subsidiary of a BHC, the Commission has proposed amendments to Sec.  
1.17 to allow it to compute its capital using internal models that have 
been approved by the Federal Reserve Board, or as applicable, the SEC. 
Following parallel logic as stated above, the effect of the proposed 
rule on C3 (affiliate of a BHC that is an FCM), therefore, is to 
produce neither any material costs nor benefits with respect to the 
alternative.

[[Page 27823]]

2. Costs and Benefits of the Proposed Rule to C2 (Non-Affiliates of 
BHCs That Are Not FCMs) and C4 (Non-Affiliates of BHCs That Are FCMs)
    For SDs/MSPs that are not affiliated with BHCs and are not FCMs 
(C2), the tangible net equity approach would not place undue 
restrictions on an affected firm's working capital. This approach takes 
into consideration comments received at a public roundtable held 
jointly by the CFTC and SEC on December 10, 2010, which included 
representatives from each of the five prudential regulators. Industry 
commenters noted that some portion of SD and MSP registrants may 
include commercial or other entities for whom the costs of compliance 
with either FCM or bank regulatory capital requirements could be 
substantial, and that such rules may not fully recognize the ability of 
such firms to act as financially responsible SDs and MSPs by excluding 
some of their valuable assets from being counted towards regulatory 
capital.
    SDs and MSPs that are not affiliated with BHCs and are not FCMs 
(C2) and SDs and MSPs that not affiliates of a BHC and are FCMs (C4) 
might not be permitted to use models. Rather they might have to use the 
standardized Basel approach. C2 (non-affiliate of BHCs that are not 
FCMs) would be required to follow the tangible net equity method with a 
standardized Basel approach with respect to credit and market risks. C4 
(non-affiliates that are FCMs) would be required to follow Sec.  1.17, 
which generally does not include models. Consequently, while C2 and C4 
do not share a common capital definition, the costs and benefits of 
each relate to the potential for SDS and MSPs potentially being subject 
to a less risk-sensitive (i.e., standardized) capital charge than if 
they had been permitted to use an internal models based approach to 
capital determination.
    In this case, the cost of requiring an SD/MSP to take a 
standardized capital charge for some period of time (perhaps, 
indefinitely) is the opportunity cost on the potentially higher capital 
requirement under the standardized approach measured relative to an 
internal models based approach. When determining its proposed rules, 
the Commission took into consideration commitments by international 
regulators to develop risk-sensitive capital requirements for SDs and 
MSPs. As noted in an October 2010 of the Financial Stability Board:

    Supervisors should apply prudential requirements that 
appropriately reflect the risks, including systemic risks, of non-
centrally cleared OTC derivatives products, such as the reforms 
proposed by [Basel Committee on Banking Supervision] relating to 
higher capital requirements * * *.\61\
---------------------------------------------------------------------------

    \61\ See ``Implementing OTC Derivatives Market Reforms'', report 
of the Financial Stability Board (FSB) dated October 25, 2010, at p. 
34. The FSB was formed in 2009 by representatives of the G-20 
countries as a successor to the Financial Stability Forum, formed by 
the G-7 countries in 1999.

    Under the proposed rules, the amount of capital that these SDs and 
MSPs must hold would be determined by proposed market risk and OTC 
credit risk requirements that are based on internationally recognized 
Based Accord ``standardized'' methodologies for assessing market risk 
and OTC derivatives credit risk. The requirements would apply only to 
uncleared swaps of the SD that are associated with its swap activities, 
and also would apply to any related hedge positions. These proposed 
requirements would establish risk sensitive capital requirements that 
would require SDs and MSPs to hold increasing or decreasing levels of 
capital as the risk of proprietary positions that they carry increases 
or decreases, although the level of risk sensitivity achieved under 
these requirements may prove less than the corresponding level 
attributable to a well calibrated internal model.
    To the extent that the proposed rules would limit the potential use 
of models, they would potentially increase capital requirements. This 
potential cost, in turn, needs to be balanced against the operational 
cost to the Commission of validating internal capital models, as well 
as the potential model risk arising from an internal models based 
capital calculation that turns out to be less conservative than the 
corresponding standardized calculation. Since both potential increased 
capital requirements resulting under the proposed rules as well as 
forgone investment opportunities attributable to that increased capital 
are difficult to assess, the Commission invites comment.
    Finally, if increased capital requirements result under the 
proposed rules, such requirements may promote financial integrity by 
reducing the aggregate amount of capital at risk, with the cost of this 
reduction being paid in terms of reduced return expectations. Depending 
on the level of the increased capital required and the effect it has on 
the willingness of market participants to engage in swaps transactions, 
market efficiency may be negatively impacted through the introduction 
of higher costs. Any significant reduction in market participation 
would be anticipated to exercise correspondingly negative consequences 
on price discovery through reductions in liquidity.
    Public Comment. The Commission invites public comment on its cost-
benefit considerations. Commenters also are invited to submit any data 
or other information that they may have quantifying or qualifying the 
costs and benefits of the Proposal with their comment letters.

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 23

    Swaps, Swap dealers, Major swap participants, Capital and margin 
requirements.

17 CFR Part 140

    Authority delegations (Government agencies).

    For the reasons stated in this release, the Commission proposes to 
amend chapter I of title 17 of the Code of Federal Regulations, by 
amending in that chapter part 1; part 23, as proposed to be added at 75 
FR 71379, published November 23, 2010; and part 140, as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 9a, 12, 12a, 
16, 18, 19, 21, and 23.

    2. Amend Sec.  1.10 by revising paragraphs (c), (d)(1)(v), 
(d)(2)(iv), (d)(2)(vi), and (g)(2)(ii) to read as follows:

Sec.  1.10  Financial reports of futures commission merchants and 
introducing brokers.

* * * * *
    (c) Where to file reports. (1) Form 1-FR filed by an introducing 
broker pursuant to paragraph (b)(2) of this section need be filed only 
with, and will be considered filed when received by, the National 
Futures Association. Other reports or information provided for in this 
section will be considered filed when received by the regional office 
of the Commission with jurisdiction over the state in which the 
registrant's principal place of business is located (as set forth in 
Sec.  140.02 of this chapter) and by the designated self-regulatory 
organization, if any; and reports or other information required to be 
filed by this section by an applicant for registration will be 
considered filed when received

[[Page 27824]]

by the National Futures Association. Any report or information filed 
with the National Futures Association pursuant to this paragraph shall 
be deemed for all purposes to be filed with, and to be the official 
record of, the Commission.
* * * * *
    (d) * * *
    (1) * * *
    (v) For a futures commission merchant only, the statements of 
segregation requirements and funds in segregation for customers trading 
on U.S. commodity exchanges and for customers' dealer options accounts, 
the statement of secured amounts and funds held in separate accounts 
for foreign futures and foreign options customers in accordance with 
Sec.  30.7 of this chapter, and the statement of cleared swap customer 
segregation requirements and funds in cleared swap customer accounts 
under section 4d(f) of the Act as of the date for which the report is 
made; and
* * * * *
    (2) * * *
    (iv) For a futures commission merchant only, the statements of 
segregation requirements and funds in segregation for customers trading 
on U.S. commodity exchanges and for customers' dealer options accounts, 
the statement of secured amounts and funds held in separate accounts 
for foreign futures and foreign options customers in accordance with 
Sec.  30.7 of this chapter, and the statement of cleared swap customer 
segregation requirements and funds in cleared swap customer accounts 
under section 4d(f) of the Act as of the date for which the report is 
made;
* * * * *
    (vi) A reconciliation, including appropriate explanations, of the 
statement of the computation of the minimum capital requirements 
pursuant to Sec.  1.17 of this part and, for a futures commission 
merchant only, the statements of segregation requirements and funds in 
segregation for customers trading on U.S. commodity exchanges and for 
customers' dealer option accounts, the statement of secured amounts and 
funds held in separate accounts for foreign futures and foreign options 
customers in accordance with Sec.  30.7 of this chapter, and the 
statement of cleared swap customer segregation requirements and funds 
in cleared swap customer accounts under section 4d(f) of the Act, in 
the certified Form 1-FR with the applicant's or registrant's 
corresponding uncertified most recent Form 1-FR filing when material 
differences exist or, if no material differences exist, a statement so 
indicating; and
* * * * *
    (g) * * *
    (2) * * *
    (ii) The following statements and footnote disclosures thereof: the 
Statement of Financial Condition in the certified annual financial 
reports of futures commission merchants and introducing brokers; the 
Statements (to be filed by a futures commission merchant only) of 
Segregation Requirements and Funds in Segregation for customers trading 
on U.S. commodity exchanges and for customers' dealer options accounts, 
and the Statement (to be filed by a futures commission merchant only) 
of Secured Amounts and Funds held in Separate Accounts for foreign 
futures and foreign options customers in accordance with Sec.  30.7 of 
this chapter, and the Statement (to be filed by futures commission 
merchants only) of Cleared Swap Customer Segregation Requirements and 
Funds in Cleared Swap Customer Accounts under section 4d(f) of the Act.
    3. Amend Sec.  1.12 by:
    a. Revising paragraphs (b)(3), (b)(4), (f)(4), and (h); and
    b. Adding paragraph (b)(5).
    The revisions and addtion read as follows:

Sec.  1.12  Maintenance of minimum financial requirements by futures 
commission merchants and introducing brokers.

* * * * *
    (b) * * *
    (3) 150 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member, unless such 
amount has been determined by a margin-based capital computation set 
forth in the rules of the registered futures association, and such 
amount meets or exceeds the amount of adjusted net capital required 
under the margin-based capital computation set forth in Sec.  
1.17(a)(1)(i)(B) of this part, in which case the required percentage is 
110 percent,
    (4) For securities brokers or dealers, the amount of net capital 
specified in Rule 17a-11(c) of the Securities and Exchange Commission 
(17 CFR 240.17a-11(c)), or
    (5) For security-based swap dealers or material security-based swap 
participants, the amount of net capital specified in the rules of the 
Securities and Exchange Commission that impose comparable reporting 
requirements as set forth in this paragraph (b), must file written 
notice to that effect as set forth in paragraph (i) of this section 
within twenty-four (24) hours of such event.
* * * * *
    (f) * * *
    (4) A futures commission merchant shall report immediately by 
telephone, confirmed immediately in writing by facsimile notice, 
whenever any commodity futures, option, swap or other Commission 
regulated account it carries is subject to a margin call, or call for 
other deposits required by the futures commission merchant, that 
exceeds the futures commission merchant's excess adjusted net capital, 
determined in accordance with Sec.  1.17 of this part, and such call 
has not been answered by the close of business on the day following the 
issuance of the call. This applies to all accounts carried by the 
futures commission merchant, whether customer, noncustomer, or omnibus, 
that are subject to margining, including commodity futures, options on 
futures, and swap positions. In addition to actual margin deposits by 
an account owner, a futures commission merchant may also take account 
of favorable market moves in determining whether the margin call is 
required to be reported under this paragraph.
* * * * *
    (h) Whenever a person registered as a futures commission merchant 
knows or should know that the total amount of its funds on deposit in 
segregated accounts on behalf of customers, that the total amount set 
aside on behalf of customers trading on non-United States markets, or 
that the total amount of its funds in segregated accounts on behalf of 
customers for cleared swap transactions is less than the total amount 
of such funds required by the Act and the Commission's rules to be on 
deposit in segregated futures accounts, secured amount accounts, or 
segregated cleared swap accounts, the registrant must report such 
deficiency immediately by telephone notice, confirmed immediately in 
writing by facsimile notice, to the registrant's designated self-
regulatory organization and the principal office of the Commission in 
Washington, DC, to the attentions of the Director and the Chief 
Accountant of the Division of Clearing and Intermediary Oversight.
* * * * *
    4. Amend Sec.  1.16 by revising paragraphs (a)(4), (d)(1), and 
(d)(2)(iv) to read as follows:

Sec.  1.16  Qualifications and reports of accountants.

    (a) * * *
    (4) Customer. The term ``customer'' includes a customer as defined 
in

[[Page 27825]]

Sec.  1.3(k) of this part; a cleared swaps customer as defined in Sec.  
22.2 of this chapter; and a foreign futures or foreign options customer 
as defined in Sec.  30.1(c) of this chapter.
* * * * *
    (d) Audit objectives. (1) The audit must be made in accordance with 
generally accepted auditing standards and must include a review and 
appropriate tests of the accounting system, the internal accounting 
controls, and the procedures for safeguarding customer and firm assets 
in accordance with the provisions of the Act and the regulations 
thereunder, since the prior examination date. The audit must include 
all procedures necessary under the circumstances to enable the 
independent licensed or certified public accountant to express an 
opinion on the financial statements and schedules. The scope of the 
audit and review of the accounting system, the internal controls, and 
procedures for safeguarding customer and firm assets must be sufficient 
to provide reasonable assurance that any material inadequacies existing 
at the date of the examination in the accounting system, the internal 
accounting controls, and the procedures for safeguarding customer and 
firm assets (including, in the case of a futures commission merchant, 
the segregation requirements of section 4d(a)(2) of the Act and these 
regulations, the secured amount requirements of the Act and these 
regulations, and the segregation requirements for cleared swap 
positions under section 4d(f) of the Act and these regulations) will be 
discovered. Additionally, as specified objectives the audit must 
include reviews of the practices and procedures followed by the 
registrant in making periodic computations of the minimum financial 
requirements pursuant to Sec.  1.17 of this chapter and in the case of 
a futures commission merchant, daily computations of the segregation 
requirements of section 4d(a)(2) of the Act and these regulations, the 
secured amount requirements of the Act and these regulations, and the 
segregation requirements for cleared swap positions under section 4d(f) 
of the Act and these regulations.
    (2) * * *
    (iv) Result in violations of the Commission's segregation, secured 
amount or cleared swaps segregation amount (in the case of a futures 
commission merchant), recordkeeping or financial reporting requirements 
to the extent that could reasonably be expected to result in the 
conditions described in paragraph (d)(2)(i), (ii), or (iii) of this 
section
* * * * *
    5. Amend Sec.  1.17 by:
    a. Revising paragraph (a)(1)(i)(A);
    b. Revising paragraph (b)(2);
    c. Revising paragraph (b)(9);
    d. Revising paragraph (c)(2)(i);
    e. Revising paragraphs (c)(2)(ii)(D) and (G);
    f. Adding paragraphs (c)(5)(iii) and (iv);
    g. Revising paragraphs (c)(5)(v), (viii), and (ix);
    h. Revising paragraph (c)(6); and
    i. Redesignating paragraphs (c)(7) and (c)(8) as paragraphs (c)(8) 
and (c)(9) and add new paragraph (c)(7).
    The revisions and additions read as follows:

Sec.  1.17  Minimum financial requirements for futures commission 
merchants and introducing brokers.

    (a)(1)(i) * * *
    (A) $1,000,000, Provided, however, that if the futures commission 
merchant also is a registered swap dealer, the minimum amount shall be 
$20,000,000;
* * * * *
    (b) * * *
    (2) Customer. This term means customer as defined in Sec.  1.3(k) 
of this chapter; cleared over the counter customer as defined in Sec.  
1.17(b)(10) of this chapter, and includes a foreign futures or foreign 
options customer as defined in Sec.  30.1(c) of this chapter.
* * * * *
    (9) Cleared over the counter derivative positions means over the 
counter derivative instruments, including swaps as defined in section 
1a(47) of the Act, of any person in accounts that are carried on the 
books of the futures commission merchant and cleared by any 
organization permitted to clear such instruments under the laws of the 
relevant jurisdiction, including cleared swaps as defined in section 
1a(7) of the Act.
* * * * *
    (c) * * *
    (2) * * *
    (i) Exclude any unsecured commodity futures, option, cleared swap, 
or other Commission regulated account containing a ledger balance and 
open trades, the combination of which liquidates to a deficit or 
containing a debit ledger balance only: Provided, however, Deficits or 
debit ledger balances in unsecured customers', non-customers', and 
proprietary accounts, which are the subject of calls for margin or 
other required deposits may be included in current assets until the 
close of business on the business day following the date on which such 
deficit or debit ledger balance originated providing that the account 
had timely satisfied, through the deposit of new funds, the previous 
day's debit or deficits, if any, in its entirety.
    (ii) * * *
    (D) Receivables from registered futures commission merchants or 
brokers, resulting from commodity futures, options, cleared swaps, or 
other Commission regulated transactions, except those specifically 
excluded under paragraph (c)(2)(i) of this section;
* * * * *
    (G) Receivables from third-party custodians that arise from initial 
margin deposits associated with bilateral swap transactions pursuant to 
Sec.  23.158 of this chapter.
    (5) * * *
    (iii) For positions in over-the-counter interest rate swaps that 
are not cleared by a clearing organization, the following amounts:
    (A) If not hedged with U.S. Treasury securities of corresponding 
maturities or matched with offsetting interest rate swap positions with 
corresponding terms and maturities, the applicable haircut shall be the 
notional amount of the interest rate swaps multiplied by the applicable 
percentages for the underlying securities specified in Rule 240.15c3-
1(c)(2)(vi)(A)(i) of the Securities and Exchange Commission (17 CFR 
240.15c3-1(c)(2)(vi)(A)(i)), as if such notional amount was the market 
value of a security issued or guaranteed as to principal or interest by 
the United States;
    (B) If hedged with U.S. Treasury securities of corresponding 
maturities or matched with offsetting interest rate swap positions with 
corresponding terms and maturities, and such interest rate swaps are 
maturing in ten years or less, the applicable haircut shall be one 
percent of the notional amount of the interest rate swaps; and
    (C) If hedged with U.S. Treasury securities of corresponding 
maturities or matched with offsetting interest rate swap positions with 
corresponding terms and maturities, and such interest rate swaps are 
maturing in excess of ten years, the applicable haircut shall be three 
percent of the notional amount of the interest rate swaps;
    (iv) For the net position in the following:
    (A) Over-the-counter credit default swaps that are not cleared by a 
clearing organization, the notional principal amount multiplied by the 
applicable percentages, as determined by the underlying securities and 
the remaining maturity of the swap agreement, that are

[[Page 27826]]

specified in Rule 240.15c3-1(c)(2)(vi) of the Securities and Exchange 
Commission (17 CFR 240.15c3-1(c)(2)(vi)) (``securities haircuts'') and 
100 percent of the value of ``nonmarketable securities'' as specified 
in Rule 240.15c3-1(c)(2)(vii) of the Securities and Exchange Commission 
(17 CFR 240.15c3-1(c)(2)(vii));
    (B) Over-the-counter equity swaps that are not cleared by a 
clearing organization, 15 percent of the notional principal amount;
    (C) Over-the-counter foreign currency swap transactions involving 
euros, British pounds, Canadian dollars, Japanese yen, or Swiss francs, 
6 percent of the notional principal amount of the swap transaction;
    (D) Over-the-counter foreign currency swap transactions involving 
currencies other than euros, British pounds, Canadian dollars, Japanese 
yen, or Swiss francs, 20 percent of the notional principal amount of 
the swap transaction;
    (E) Over-the-counter commodity swaps, 20 percent of the market 
value of the notional amount of the underlying commodities; or
    (F) Over-the-counter swap transactions involving an underlying 
instrument that is not listed in paragraph (c)(5)(iv)(A), (B), (C), 
(D), or (E) of this section, 20 percent of the effective notional 
principal amount of the swap transaction.
    (v) In the case of securities and obligations used by the applicant 
or registrant in computing net capital, and in the case of a futures 
commission merchant with securities in segregation pursuant to sections 
4d(a)(2) and 4d(f) of the Act and the regulations in this chapter, and 
Sec.  30.7 secured accounts as set forth in part 30 of this chapter, 
which were not deposited by customers, the percentages specified in 
Rule 240.15c3-1(c)(2)(vi) of the Securities and Exchange Commission (17 
CFR 240.15c3-1(c)(2)(vi)) (``securities haircuts'') and 100 percent of 
the value of ``nonmarketable securities'' as specified in Rule 
240.15c3-1(c)(2)(vii) of the Securities and Exchange Commission (17 CFR 
240.15c3-1(c)(2)(vii));
* * * * *
    (viii) In the case of a futures commission merchant, for 
undermargined customer commodity futures, options, cleared swaps or 
other Commission regulated accounts the amount of funds required in 
each such account to meet maintenance margin requirements of the 
applicable board of trade or if there are no such maintenance margin 
requirements, clearing organization margin requirements applicable to 
such positions, after application of calls for margin or other required 
deposits which are outstanding three business days or less. If there 
are no such maintenance margin requirements or clearing organization 
margin requirements, then the amount of funds required to provide 
margin equal to the amount necessary after application of calls for 
margin or other required deposits outstanding three business days or 
less to restore original margin when the original margin has been 
depleted by 50 percent or more: Provided, To the extent a deficit is 
excluded from current assets in accordance with paragraph (c)(2)(i) of 
this section such amount shall not also be deducted under this 
paragraph (c)(5)(viii). In the event that an owner of a customer 
account has deposited an asset other than cash to margin, guarantee or 
secure his account, the value attributable to such asset for purposes 
of this subparagraph shall be the lesser of the value attributable to 
the asset pursuant to the margin rules of the applicable board of 
trade, or the market value of the asset after application of the 
percentage deductions specified in this paragraph (c)(5);
    (ix) In the case of a futures commission merchant, for 
undermargined commodity futures, options, cleared swaps, or other 
Commission regulated noncustomer and omnibus accounts the amount of 
funds required in each such account to meet maintenance margin 
requirements of the applicable board of trade or if there are no such 
maintenance margin requirements, clearing organization margin 
requirements applicable to such positions, after application of calls 
for margin or other required deposits which are outstanding two 
business days or less. If there are no such maintenance margin 
requirements or clearing organization margin requirements, then the 
amount of funds required to provide margin equal to the amount 
necessary after application of calls for margin or other required 
deposits outstanding two business days or less to restore original 
margin when the original margin has been depleted by 50 percent or 
more: Provided, To the extent a deficit is excluded from current assets 
in accordance with paragraph (c)(2)(i) of this section such amount 
shall not also be deducted under this paragraph (c)(5)(ix). In the 
event that an owner of a noncustomer or omnibus account has deposited 
an asset other than cash to margin, guarantee or secure his account the 
value attributable to such asset for purposes of this subparagraph 
shall be the lesser of the value attributable to such asset pursuant to 
the margin rules of the applicable board of trade, or the market value 
of such asset after application of the percentage deductions specified 
in this paragraph (c)(5);
* * * * *
    (6) * * *
    (i)(A) Any futures commission merchant that is also registered with 
the Securities and Exchange Commission as a securities broker or 
dealer, and who also satisfies the other requirements of this paragraph 
(c)(6), may elect to compute its adjusted net capital using the 
alternative capital deductions that the Securities and Exchange 
Commission has approved by written order, provided, however, that such 
order was dated before May 12, 2011;
    (B) If an election under this paragraph (c)(6) was authorized 
before the date specified in paragraph (c)(6)(i)(A) of this section, 
and the futures commission merchant otherwise remains in compliance 
with this paragraph (c)(6), a futures commission merchant that is 
permitted by the Securities and Exchange Commission to use alternative 
capital deductions for its unsecured receivables from over-the-counter 
transactions in derivatives, or for its proprietary positions in 
securities, commodities, forward contracts, swap transactions, options, 
or futures contracts, may continue to use these same alternative 
capital deductions when computing its adjusted net capital in lieu of 
the standard deductions otherwise specified in this section.
    (C) If a futures commission merchant computing alternative 
deductions under paragraph (c)(6)(B) of this section is also registered 
with the Commission as swap dealer or major swap participant, or 
registered with the Securities and Exchange Commission as a security-
based swap dealer or major security-based swap participant, the 
alternative deductions approved under this paragraph (c)(6) shall 
remain effective only if the futures commission merchant has filed an 
application under Sec.  23.103 of this chapter and the application is 
pending approval. A denial or approval of an application made under 
Sec.  23.103 shall also terminate approval of alternative deductions 
under this paragraph (c)(6). The futures commission merchant's capital 
deductions must thereafter be calculated as required under the terms of 
the Commission's order issued under Sec.  23.103.
* * * * *
    (7) Any futures commission merchant that is also registered as a 
swap dealer

[[Page 27827]]

or major swap participant, or is also registered as a security-based 
swap dealer or major security-based swap participant, and which has 
received approval of its application to the Commission under Sec.  
23.103 of this chapter for capital computations using the firm's 
internal models, shall calculate its adjusted net capital in accordance 
with the terms and conditions of such Commission approval.
* * * * *

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

    6. The authority citation for part 23 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b-1, 6c, 6p, 6r, 6s, 6t, 9, 
9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

    7. Part 23, as proposed to be added at 75 FR 71379, November 213, 
2010, is amended by adding Subpart E to read as follows:

Subpart E--Capital and Margin Requirements for Swap Dealers and 
Major Swap Participants

Sec.
23.100 Definitions applicable to capital requirements.
23.101 Minimum financial requirements for swap dealers and major 
swap participants.
23.102 Tangible net equity.
23.103 Calculation of market risk exposure requirement and over-the-
counter derivatives credit risk requirement using internal models.
23.104 Calculation of market risk exposure requirement and over-the-
counter derivatives credit risk requirement when models are not 
approved.
23.105 Maintenance of minimum financial requirements by swap dealers 
and major swap participants.
23.106 Financial recordkeeping and reporting requirements for swap 
dealers and major swap participants.
23.107-23.149 [Reserved]

Sec.  23.100  Definitions applicable to capital requirements.

    For purposes of Sec. Sec.  23.101 through 23.149 of subpart E, the 
following terms are defined as follows:
    Market risk exposure. This term means the risk of loss resulting 
from movements in market prices. Market risk exposure includes 
``specific risk'' (referring to those risks that affect the market 
value of a specific instrument, such as the credit risk of the issuer 
of the particular instrument, but do not materially alter broad market 
conditions), and it also includes market risk in general (referring to 
the change in the market value of a particular asset that results from 
broad market movements, such as a change in market interest rates, 
foreign exchange rates, equity prices, and commodity prices).
    Market risk exposure requirement. This term refers to the amount 
that the registered swap dealer or major swap participant is required 
to compute under Sec.  23.104, or to compute using internal models as 
approved under Sec.  23.103.
    Over-the-counter derivatives credit risk. This term refers to the 
risk that the counterparty to an over-the-counter transaction could 
default before the final settlement of the transaction's cash flows.
    Over-the-counter derivatives credit risk requirement. This term 
refers to the amount that the registered swap dealer or major swap 
participant is required to compute under Sec.  23.104, or to compute 
using internal models approved under Sec.  23.103.
    Prudential regulator. This term has the same meaning as set forth 
in section 1a(39) of the Act, and includes the Board of Governors of 
the Federal Reserve System, the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, the Farm Credit 
Administration, and the Federal Housing Finance Agency, as applicable 
to a swap dealer or major swap participant.
    Regulatory capital requirement. This term refers to each of the 
capital requirements that Sec.  23.101 of this part applies to a swap 
dealer or major swap participant.

Sec.  23.101  Minimum financial requirements for swap dealers and major 
swap participants.

    (a)(1) Except as provided in paragraph (a)(2), (3), or (4) of this 
section, each registered swap dealer must meet or exceed the greatest 
of the following regulatory capital requirements:
    (i) Tangible net equity (as defined in Sec.  23.102 of this part) 
in an amount equal to $20,000,000 plus the amounts calculated under 
this part for the swap dealer's market risk exposure requirement and 
its over-the-counter derivatives credit risk requirement associated 
with swap positions and related hedge positions that are part of the 
swap dealer's swap activities; or,
    (ii) The amount of capital required by a registered futures 
association of which the swap dealer is a member.
    (2) Except as provided in paragraph (a)(3) or (4) of this section, 
each registered swap dealer that is a subsidiary of a U.S. bank holding 
company must meet or exceed the greatest of the following regulatory 
capital requirements:
    (i) $20 million of Tier 1 capital as defined in 12 CFR part 225, 
appendix A, Sec.  II.A;
    (ii) The swap dealer's minimum risk-based ratio requirements set 
forth in 12 CFR part 225, and any appendices thereto, as if the swap 
dealer itself were a U.S. bank-holding company; or,
    (iii) The amount of capital required by a registered futures 
association of which the swap dealer is a member.
    (3) A registered swap dealer that is subject to minimum capital 
requirements established by rule or regulation of a prudential 
regulator, or a registered swap dealer that also is a registered 
futures commission merchant subject to the capital requirements of 
Sec.  1.17 of this chapter, is not subject to the regulatory capital 
requirements set forth in paragraph (a)(1) or (2) of this section.
    (4) A registered swap dealer that is a U.S. nonbank financial 
company that has been designated a systemically important financial 
institution by the Financial Stability Oversight Council and subject to 
supervision by the Board of Governors of the Federal Reserve System is 
not subject to the regulatory capital requirements set forth in 
paragraph (a)(1) or (2) of this section.
    (b)(1) Except as provided in paragraph (b)(2), (3), or (4) of this 
section, each major swap participant must meet or exceed the greatest 
of the following regulatory capital requirements:
    (i) Tangible net equity (as defined in Sec.  23.102 of this part) 
in an amount equal to $20,000,000 plus the amounts calculated under 
this part for the major swap participant's market risk exposure 
requirement and its over-the-counter derivatives credit risk 
requirement associated with its swap positions and related hedge 
positions; or
    (ii) The amount of capital required by a registered futures 
association of which the major swap participant is a member.
    (2) Except as provided in paragraph (b)(3) or (4) of this section, 
each registered major swap participant that is a subsidiary of a U.S. 
bank-holding company must meet or exceed the greatest of the following 
regulatory capital requirements:
    (i) $20 million of Tier 1 capital as defined in 12 CFR part 225, 
appendix A, section II.A;
    (ii) The major swap participant's minimum risk-based ratio 
requirements set forth in 12 CFR part 225, and any appendices thereto, 
as if the major swap participant itself were a U.S. bank-holding 
company; or,
    (iii) The amount of capital required by a registered futures 
association of which the major swap participant is a member.

[[Page 27828]]

    (3) A registered major swap participant that is subject to minimum 
capital requirements established by rule or regulation of a prudential 
regulator, or a registered major swap participant that also is a 
registered futures commission merchant subject to the capital 
requirements of Sec.  1.17 of this chapter, is not subject to the 
regulatory capital requirements set forth in paragraph (b)(1) or (2) of 
this section.
    (4) A registered major swap participant that is a U.S. nonbank 
financial company that has been designated a systemically important 
financial institution by the Financial Stability Oversight Council and 
subject to supervision by the Board of Governors of the Federal Reserve 
System is not subject to the regulatory capital requirements set forth 
in paragraph (b)(1) or (2) of this section.
    (c)(1) Before any applicant may be registered as a swap dealer or 
major swap participant, the applicant must demonstrate to the 
satisfaction of the National Futures Association one of the following:
    (i) Its compliance with the applicable regulatory capital 
requirements in paragraphs (a)(1), (2), (b)(1) or (2) of this section;
    (ii) that it is a futures commission merchant that complies with 
Sec.  1.17 of this chapter;
    (iii) that its minimum regulatory capital requirements are 
supervised by a prudential regulator in paragraph (a)(3) or (b)(3) of 
this section; or
    (iv) that it is designated by the Financial Stability Oversight 
Council as a systemically important financial institution and subject 
to supervision by the Federal Reserve Board under paragraph (a)(4) or 
(b)(4) of this section.
    (2) Each swap dealer and major swap participant subject to the 
minimum capital requirements set forth in paragraphs (a) and (b) of 
this section must be in compliance with the Commission's minimum 
capital requirements at all times and must be able to demonstrate such 
compliance to the satisfaction of the Commission.

Sec.  23.102  Tangible net equity.

    (a) Tangible net equity is a swap dealer's or major swap 
participant's equity as determined under U.S. generally accepted 
accounting principles, and excludes goodwill and other intangible 
assets.
    (b)(1) Subject to the provisions of paragraph (b)(2) of this 
section:
    (i) Tangible net equity is computed by consolidating in a single 
computation assets and liabilities of any subsidiary or affiliate for 
which the swap dealer or major swap participant guarantees, endorses, 
or assumes directly or indirectly the obligations or liabilities; or
    (ii) If an opinion of outside counsel is obtained as provided for 
in paragraph (b)(3) of this section, a swap dealer or major swap 
participant may elect to consolidate assets and liabilities of a 
subsidiary or affiliate whose liabilities and obligations have not been 
guaranteed, endorsed, or assumed directly or indirectly by the swap 
dealer or major swap participant, but which is majority owned and 
controlled by the swap dealer or major swap participant.
    (2) If the consolidation required or permitted under paragraph 
(b)(1) of this section results in the increase of the swap dealer's or 
major swap participant's tangible net equity or decreases the minimum 
regulatory capital requirement, such benefits shall not be recognized 
unless an opinion of counsel meeting the requirements of paragraph 
(b)(3) of this section has been obtained by the swap dealer or major 
swap participant.
    (3) For purposes of paragraph (b)(1) or (2) of this section, the 
swap dealer or major swap participant shall demonstrate by written 
opinion of outside counsel that the net asset values or the portion 
thereof related to the parent's ownership interest in the subsidiary or 
affiliate, may be caused by the swap dealer or major swap participant 
or an appointed trustee, to be distributed to the swap dealer or major 
swap participant within 30 calendar days. Such opinion also must set 
forth the actions necessary to cause such a distribution to be made, 
identify the parties having the authority to take such actions, 
identify and describe the rights of other parties or classes of 
parties, including but not limited to customers, general creditors, 
subordinated lenders, minority shareholders, employees, litigants, and 
governmental or regulatory authorities, who may delay or prevent such a 
distribution and such other assurances as the Commission by rule or 
interpretation may require. Such opinion must be current and 
periodically renewed in connection with the swap dealer's or major swap 
participant's annual audit pursuant to part 23 of this title or upon 
any material change in circumstances.
    (4) In preparing a consolidated computation of tangible net equity:
    (i) Consolidated tangible net equity shall be reduced by the 
estimated amount of any tax reasonably anticipated to be incurred upon 
distribution of the assets of the subsidiary or affiliate; and
    (ii) Each swap dealer or major swap participant included within the 
consolidation shall at all times be in compliance with the regulatory 
capital requirements to which it is subject.
    (5) No swap dealer or major swap participant shall guarantee, 
endorse, or assume directly or indirectly any obligation or liability 
of a subsidiary or affiliate unless the obligation or liability is 
reflected in the computation of tangible net equity of the swap dealer 
or major swap participant, except as provided in paragraph (b)(4)(ii) 
of this section.

Sec.  23.103  Calculation of market risk exposure requirement and over-
the-counter derivatives credit risk requirement using internal models

    (a) A registered swap dealer or major swap participant may apply to 
the Commission for approval to use internal models under terms and 
conditions required by the Commission and by these regulations when 
calculating:
    (1) the amounts that the swap dealer or major swap participant must 
add to its tangible net equity for its market risk exposure requirement 
and over-the-counter derivatives credit risk requirement to compute its 
minimum regulatory capital requirement under Sec. Sec.  23.101(a)(1)(i) 
or 23.101(b)(1)(i), respectively, of this part;
    (2) Its market risk and over-the-counter derivatives credit risk 
requirements under 12 CFR part 225, Appendix E and Appendix G, if the 
swap dealer or major swap participant is a subsidiary of a U.S. bank 
holding company that must meet regulatory capital requirements set 
forth in Sec.  23.101(a)(2)(ii) or Sec.  23.101(b)(2)(ii) of this part; 
or
    (3) The deductions from its net capital for market risk exposure 
and over-the-counter derivatives credit risk, in lieu of deductions 
otherwise required under Sec.  1.17(c) of this chapter, if the swap 
dealer or major swap participant also is registered as a futures 
commission merchant.
    (b) The application shall be in writing and filed with the regional 
office of the Commission having local jurisdiction over the swap dealer 
or major swap participant as set forth in Sec.  140.2 of this chapter. 
The application may be filed electronically in accordance with 
instructions approved by the Commission and specified on the 
Commission's Web site. A petition for confidential treatment of 
information within the application may be submitted according to 
procedures set forth in Sec.  145.9 of this chapter.
    (c) The application must identify the categories of positions for 
which the

[[Page 27829]]

swap dealer or major swap participant will use internal models for its 
computations for market risk and over-the-counter derivatives credit 
risk, and, for each such category, provide a description of the methods 
that the swap dealer or major swap participant will use to calculate 
its deductions, and also, if calculated separately, deductions for 
specific risk; a description of the internal models, and an overview of 
the integration of the models into the internal risk management control 
system of the swap dealer or major swap participant; a description of 
how the swap dealer or major swap participant will calculate current 
exposure and potential future exposure for its over-the-counter 
derivatives credit risk; a description of how the swap dealer or major 
swap participant will determine internal credit ratings of 
counterparties and internal credit risk weights of counterparties, if 
applicable; and a description of the estimated market risk exposure and 
over-the-counter derivatives credit risk exposure amounts to be 
reported by the swap dealer or major swap participant.
    (d) The swap dealer or major swap participant must promptly, upon 
the request of the Commission at any time, provide any other 
explanatory information as the Commission may require at its discretion 
regarding the swap dealer's or major swap participant's internal models 
and the swap dealer's or major swap participant's computation of its 
market risk exposure or over-the-counter derivatives credit risk 
requirements.
    (e) Except as permitted under paragraph (f) of this section, the 
swap dealer or major swap participant requesting approval under this 
section must be either:
    (1) A subsidiary of a U.S. bank holding company whose calculations 
of minimum risk-based capital requirements under Sec.  23.101 complies 
with the requirements that are set forth in regulations of the Board of 
Governors of the Federal Reserve System (Federal Reserve Board) at 12 
CFR part 225, appendix E and appendix G for calculating capital 
requirements for its market risk exposure and over-the-counter 
derivatives credit risk requirements, and whose internal models have 
been reviewed and are subject to regular assessment by the Federal 
Reserve Board; or
    (2) A security-based swap dealer or major security-based swap 
participant registered with the Securities and Exchange Commission, and 
whose internal models used for calculating capital requirements for its 
market risk exposure and its over-the-counter derivatives credit risk 
have been reviewed and are subject to regular assessment by the 
Securities and Exchange Commission.
    (f) At any time after the effective date of this rule, the 
Commission may in its sole discretion determine by written order that 
swap dealers or major swap participants not described in paragraph (e) 
of this section also may apply for approval under this section to 
calculate the amount of their market risk exposure requirements or 
over-the-counter derivatives credit risk requirements using proprietary 
internal models.
    (g) The Commission may approve or deny the application, or approve 
an amendment to the application, in whole or in part, subject to any 
conditions or limitations the Commission may require, if the Commission 
finds the approval to be necessary or appropriate in the public 
interest or for the protection of customers, after determining, among 
other things, whether the applicant has met the requirements of this 
section and is in compliance with other applicable rules promulgated 
under the Act and by self-regulatory organizations.
    (h) A swap dealer or major swap participant may no longer use 
internal models to compute its market risk exposure requirement and 
over-the-counter counterparty credit risk requirement, upon the 
occurrence of any of the following:
    (1) Internal models that received Commission approval under 
paragraph (e) of this section are no longer periodically reviewed or 
assessed by the Federal Reserve Board or the Securities and Exchange 
Commission;
    (2) The swap dealer or major swap participant has changed 
materially a mathematical model described in the application or changed 
materially its internal risk management control system without first 
submitting amendments identifying such changes and obtaining Commission 
approval for such changes;
    (3) The Commission determines that the internal models are no 
longer sufficient for purposes of the capital calculations of the swap 
dealer or major swap participant as a result of changes in the 
operations of the swap dealer or major swap participant;
    (4) The swap dealer or major swap participant fails to come into 
compliance with its requirements under this section, after having 
received from the Director of the Division of Clearing and Intermediary 
Oversight written notification that the firm is not in compliance with 
its requirements, and must come into compliance by a date specified in 
the notice; or
    (5) The Commission by written order finds that permitting the swap 
dealer or major swap participant to continue to use the internal models 
is no longer necessary or appropriate for the protection of customers 
of the futures commission merchant (if the swap dealer or major swap 
participant is also a futures commission merchant) or of the integrity 
of Commission-regulated markets.

Sec.  23.104  Calculation of market risk exposure requirement and over-
the-counter derivatives credit risk requirement when models are not 
approved.

    (a) General requirements for calculations. If internal models have 
not been submitted and received approval under Sec.  23.103 of this 
part, the market risk exposure requirement shall be calculated as set 
forth in paragraphs (b) through (d) of this section, and the over-the-
counter derivatives credit risk requirement shall be calculated as set 
forth in paragraphs (e) through (j) of this section.
    (b) Market risk exposure requirement. (1) A swap dealer or major 
swap participant that must meet the minimum regulatory capital 
requirements in Sec.  23.101(a)(1)(i) or 23.101(b)(1)(i), respectively, 
shall calculate its market risk exposure requirement as the sum of the 
amounts for specific risk in paragraphs (c) of this section and the 
amounts for market risk in general in paragraph (d) of this section, as 
applied to the swap dealer's or major swap participant's:
    (i) Swaps that are not cleared; and
    (ii) Debt instruments, equities, commodities or foreign currency, 
including derivatives of the same, that hedge such uncleared swaps;
    (2) A swap dealer or major swap participant that must meet the 
requirements in Sec.  23.101(a)(2)(ii) or Sec.  23.101(b)(2)(ii) of 
this part shall calculate the market risk deductions required by 12 CFR 
part 225, Appendix E as the sum of the amounts for specific risk in 
paragraphs (c) of this section and the amounts for market risk in 
general in paragraph (d) of this section, as applied to the swap 
dealer's or major swap participant's ``covered positions'', as that 
term is defined in 12 CFR part 225, Appendix E. Section 2(a); and
    (3) A swap dealer or major swap participant that is also a futures 
commission merchant shall calculate its deductions from net capital for 
market risk and over-the-counter derivatives credit risk in accordance 
with Sec.  1.17(c) of this chapter.

[[Page 27830]]

    (4) The following definitions apply for purposes of the calculation 
of the market risk exposure requirement:
    ``Credit derivative'' means a financial contract that allows one 
party (the protection purchaser) to transfer the credit risk of one or 
more exposures (reference exposure(s)) to another party (the protection 
provider).
    ``Debt positions'' means fixed-rate or floating rate instruments, 
and other instruments with values that react primarily to changes in 
interest rates, including certain non-convertible preferred stock; 
convertible bonds; instruments subject to repurchase and lending 
agreements; and any derivatives (including written and purchased 
options) for which the underlying instrument is a debt position. 
Excluded from this definition are asset-backed securities, mortgage-
backed securities and collateralized debt obligations (except for pass-
through mortgage-backed securities issued or guaranteed as to principal 
or interest by the United States or any agency thereof); municipal 
securities; and non-investment grade debt securities. Debt instruments 
excluded from this definition shall remain subject to applicable 
haircuts under Sec.  240.15c3-1 of this title.
    ``Equity Positions'' means equity instruments and other instruments 
with values that react primarily to changes in equity prices, including 
voting or non-voting common stock, certain convertible bonds, and 
commitments to buy or sell equity instruments. Also included are 
derivatives (including written and purchased options) for which the 
underlying is an equity position.
    (c) Specific risk. (1) The required deduction from capital for 
specific risk shall equal the sum of the weighted values for debt 
positions held by the swap dealer or major swap participant, as 
determined in paragraph (c)(2) of this section, plus the sum of the 
weighted values of the equity positions held by the swap dealer or 
major swap participant, as determined under paragraph (c)(3) of this 
section.
    (2) Sum of weighted values for debt positions. The sum of the 
required weighted values of debt positions is determined by multiplying 
the weighting factor indicated in Table A in paragraph (c)(2)(v) of 
this section by the absolute value of the current market value of each 
net long or short debt position held by the swap dealer or major swap 
participant, and summing all of the calculated weighted values for each 
position. For purposes of the calculation:
    (i) Interest rate derivatives shall be included as set forth in 
paragraph (d)(2) of this section;
    (ii) Credit derivatives shall be included as set forth in paragraph 
(c)(4) of this section;
    (iii) Long and short debt positions (including derivatives) in 
identical debt issues or debt indices may be netted; and
    (iv) Debt instruments are classified in Table A of this section as 
one of the following categories:
    (A) ``Government category'' includes all debt instruments of 
central governments that are members of the Organization for Economic 
Co-operation and Development (``OECD'') including bonds, Treasury 
bills, and other short-term instruments, as well as local currency 
instruments of non-OECD central governments to the extent of 
liabilities booked in that currency;
    (B) ``Qualifying category'' includes debt instruments of U.S. 
government-sponsored agencies, general obligation debt instruments 
issued by states and other political subdivisions of OECD countries, 
multilateral development banks, and debt instruments issued by U.S. 
depository institutions or OECD-banks that do not qualify as capital of 
the issuing institution; or
    (C) ``Other category'' includes debt instruments that are not 
included in the government or qualifying categories.
    (v) Table A is as set forth as follows:

     Table A--``Specific Risk'' Weighting Factors for Debt Positions
------------------------------------------------------------------------
                                 Remaining maturity    Weighting factor
           Category                (contractual)         (in percent)
------------------------------------------------------------------------
Government...................  N/A..................                0.00
Qualifying...................  6 months or less.....                0.25
                               Over 6 months to 24                  1.00
                                months.
                               Over 24 months.......                1.60
Other........................  N/A..................                8.00
------------------------------------------------------------------------

     (3) Sum of the weighted values for equity positions. The sum of 
the required weighted values of equity positions is determined by 
multiplying a weighting factor of 8 percent by the absolute value of 
the current market value of each net long or short equity position, and 
summing all of the risk-weighted values. For purposes of the 
calculation:
    (i) Equity derivatives shall be included as set forth in paragraph 
(d)(4) of this section; and
    (ii) Long and short equity positions (including derivatives) in 
identical equity issues or equity indices in the same market may be 
netted.
    (4) Credit derivatives. The following requirements apply when 
computing specific risk charges for credit derivatives:
    (i) For each credit derivative in which the swap dealer or major 
swap participant is the protection seller, the credit derivative is 
treated as a long notional position in the reference exposure, and 
where the swap dealer or major swap participant is the protection 
buyer, the credit derivative is treated as a short notional position in 
the reference exposure.
    (ii) The specific risk charge for an individual debt position that 
represents purchased credit protection is capped at the market value of 
the protection.
    (iii) A set of transactions consisting of a debt position and its 
credit derivative hedge has a specific risk charge of zero if the debt 
position is fully hedged by a total return swap (or similar instrument 
where there is a matching of payments and changes in market value of 
the position) and there is an exact match between the reference 
obligation of the swap and the debt position, the maturity of the swap 
and the debt position, and the currency of the swap and the debt 
position.
    (iv) The specific risk charge for a set of transactions consisting 
of a debt position and its credit derivative hedge that does not meet 
the criteria of paragraph (c)(4)(iii) of this section is equal to 20.0 
percent of the capital requirement for the side of the transaction with 
the higher capital requirement when the credit risk of the position is 
fully hedged by a credit default swap or similar instrument and there 
is an exact match between the reference obligation of the credit 
derivative hedge and the debt position, the maturity of the credit 
derivative

[[Page 27831]]

hedge and the debt position, and the currency of the credit derivative 
hedge and the debt position.
    (v) The specific risk charge for a set of transactions consisting 
of a debt position and its credit derivative hedge that does not meet 
the criteria of either paragraphs (c)(4)(iii) or (iv) of this section, 
but in which all or substantially all of the price risk has been 
hedged, is equal to the specific risk charge for the side of the 
transaction with the higher specific risk charge.
    (vi) The total specific risk charge for a portfolio of nth-to-
default credit derivatives is the sum of the specific risk charges for 
individual nth-to-default credit derivatives, as computed under this 
paragraph. The specific risk charge for each nth-to-default credit 
derivative position applies irrespective of whether a swap dealer or 
major swap participant is a net protection buyer or net protection 
seller.
    (vii) The specific risk charge for a first-to-default credit 
derivative is the lesser of:
    (A) The sum of the specific risk charges for the individual 
reference credit exposures in the group of reference exposures; or
    (B) The maximum possible credit event payment under the credit 
derivative contract.
    (viii) Where a swap dealer or major swap participant has a risk 
position in one of the reference credit exposures underlying a first-
to-default credit derivative and this credit derivative hedges the swap 
dealer's or major swap participant's risk position, the swap dealer or 
major swap participant is allowed to reduce both the specific risk 
charge for the reference credit exposure and that part of the specific 
risk charge for the credit derivative that relates to this particular 
reference credit exposure such that its specific risk charge for the 
pair reflects the net position in the reference credit exposure. Where 
a swap dealer or major swap participant has multiple risk positions in 
reference credit exposures underlying a first-to-default credit 
derivative, this offset is allowed only for the underlying reference 
credit exposure having the lowest specific risk charge.
    (ix) The specific risk charge for a second or-subsequent-to-default 
credit derivative is the lesser of:
    (A) The sum of the specific risk charges for the individual 
reference credit exposures in the group of reference exposures, but 
disregarding the (n-1) obligations with the lowest specific risk add-
ons; or
    (B) The maximum possible credit event payment under the credit 
derivative contract.
    (x) For second-or-subsequent-to-default credit derivatives, no 
offset of the specific risk charge with an underlying reference credit 
exposure is allowed.
    (d) Market Risk in General. The required deduction from capital for 
the market risk in general of the swap dealer or major swap 
participant's proprietary positions shall be computed as set forth in 
this paragraph:
    (1) Interest rate risk: Time-bands and zones. A swap dealer or 
major swap participant shall calculate a general market risk capital 
charge for interest rate risk on proprietary positions that equals the 
sum of the total time-band disallowances in paragraph (d)(1)(vii) of 
this section; the total intra-zone disallowances and the total inter-
zone disallowances in paragraphs (d)(1)(viii)(C) and (F) of this 
section, and the amount of the final net risk-weighted long or short 
position in paragraph (d)(1)(viii)(G) of this section, in accordance 
with the following methodology:
    (i) Each long or short interest rate position shall be reported at 
its current market value and distributed into the time bands of the 
maturity ladder specified in Table B of this section. Interest rate 
derivatives shall be included as set forth in paragraph (d)(2) of this 
section. For purposes of this distribution into time-bands, fixed-rate 
instruments are allocated according to the remaining term to maturity 
and floating-rate instruments according to the next repricing date.
    (ii) The long interest rate positions in each time-band are summed 
and the short interest rate positions in each time-band are summed.
    (iii) The summed long interest rate positions in each time-band are 
multiplied by the appropriate risk-weight factor set forth in Table B 
of this section to determine the risk-weighted long interest rate 
position for each time-band. The summed short interest rate positions 
in each time-band also are multiplied by the appropriate risk-weight 
factor in Table B of this section to determine the risk-weighted short 
interest rate position for each time-band.
    (iv) Table B is as set forth as follows:

                        Table B--Time-Bands and Risk Weights for Interest Rate Positions
----------------------------------------------------------------------------------------------------------------
                                                                                                    Risk weight
              Zone                      Coupon 3% or more               Coupon less than 3%             (%)
----------------------------------------------------------------------------------------------------------------
1..............................  1 month or less................  1 month or less...............            0.00
1..............................  1 to 3 months..................  1 to 3 months.................            0.20
1..............................  3 to 6 months..................  3 to 6 months.................            0.40
1..............................  6 to 12 months.................  6 to 12 months................            0.70
2..............................  1 to 2 years...................  1.0 to 1.9 years..............            1.25
2..............................  2 to 3 years...................  1.9 to 2.8 years..............            1.75
2..............................  3 to 4 years...................  2.8 to 3.6 years..............            2.25
3..............................  4 to 5 years...................  3.6 to 4.3 years..............            2.75
3..............................  5 to 7 years...................  4.3 to 5.7 years..............            3.25
3..............................  7 to 10 years..................  5.7 to 7.3 years..............            3.75
3..............................  10 to 15 years.................  7.3 to 9.3 years..............            4.50
3..............................  15 to 20 years.................  9.3 to 10.6 years.............            5.25
3..............................  Over 20 years..................  10.6 to 12 years..............            6.00
3..............................  ...............................  12 to 20 years................            8.00
                                                                  Over 20 years.................           12.50
----------------------------------------------------------------------------------------------------------------

     (v) If a time-band includes both risk-weighted long interest rate 
positions and short interest rate positions, such risk-weighted long 
positions and short interest rate positions are netted, resulting in a 
single net risk-weighted long or short interest rate position for each 
time-band.
    (vi) If risk-weighted long interest rate positions and risk-
weighted short interest rate positions in a time-band have been netted, 
a ``time-band disallowance'' charge is computed equal to 10 percent of 
the smaller of the total risk-weighted long interest rate position

[[Page 27832]]

or the total risk-weighted short interest rate position, or if the 
total long risk-weighted interest rate position and the total short 
risk-weighted interest rate position are equal, 10 percent of either 
long or short position.
    (vii) The total time-band disallowance equals the sum of the 
absolute values of the individual disallowances for each time-band in 
Table B.
    (viii) Table C of this section also groups the time-bands into 
three ``zones'': Zone 1 consists of the first three time-bands (0 up to 
1 month; 1 month up to 3 months, and 3 months up to 6 months); zone 2 
consists of the next four time-bands (6 months up to 12 months; 1 year 
up to 2 years; 2 years up to 3 years; and 3 years up to 4 years), and 
the remaining time-bands in Table C are in zone 3. Table C is as set 
forth below:

                                        Table C--Horizontal Disallowance
----------------------------------------------------------------------------------------------------------------
                                                                                      Between
               Zone                           Time band             Within the    adjacent zones   Between zones
                                                                     zone  (%)          (%)        1 and 3  (%)
----------------------------------------------------------------------------------------------------------------
1.................................  1 mth or less...............              40              40             100
1.................................  1 to 3 mths.................  ..............  ..............  ..............
1.................................  3 to 6 mths.................  ..............  ..............  ..............
1.................................  6 to 12 mths................  ..............  ..............  ..............
2.................................  1 to 2 yrs..................              30  ..............  ..............
2.................................  2 to 3 yrs..................  ..............  ..............  ..............
2.................................  3 to 4 yrs..................  ..............  ..............  ..............
3.................................  4 to 5 yrs..................              30              40  ..............
3.................................  5 to 7 yrs..................  ..............  ..............  ..............
3.................................  7 to 10 yrs.................  ..............  ..............  ..............
3.................................  10 to 15 yrs................  ..............  ..............  ..............
3.................................  15 to 20 yrs................  ..............  ..............  ..............
3.................................  Over 20 yrs.................  ..............  ..............  ..............
----------------------------------------------------------------------------------------------------------------

     (A) If a zone includes both risk-weighted long positions and risk-
weighted short interest rate positions in different time-bands, the 
risk-weighted long positions and risk-weighted short positions in all 
of the time-bands within the zone are netted, resulting in a single net 
risk-weighted long or short position for each zone.
    (B) An ``intra-zone disallowance'' is computed by multiplying the 
percent disallowance factors for each zone set out in Table C of this 
section by the smaller of the net risk-weighted long or net risk-
weighted short positions within the zone, or if the positions are 
equal, a percentage of either position.
    (C) The total intra-zone disallowance equals the sum of the 
absolute values of the individual intra-zone disallowances.
    (D) Risk-weighted long and short positions are then netted between 
zone 1 and zone 2, between zone 2 and zone 3, and then zone 3 and zone 
1.
    (E) An ``inter-zone disallowance'' is calculated by multiplying the 
percent disallowance in Table C of this section by the smaller of the 
net long or short position eliminated by the inter-zone netting, or if 
the positions are equal, a percentage of either position.
    (F) The total inter-zone disallowance equals the sum of the 
absolute values of the individual inter-zone disallowances.
    (G) Lastly, the net risk-weighted long interest rate position or 
net risk-weighted short interest rate position remaining in the zones 
are summed to reach a single net risk-weighted long or net risk-
weighted short.
    (2) Interest rate derivative contracts. (i) Derivative contracts 
are converted into positions in the relevant underlying instrument and 
are included in the calculation of specific and general market risk 
capital charges as described in paragraphs (c) and (d) of this section. 
The amount to be included is the market value of the principal amount 
of the underlying or of the notional underlying. In the case of a 
futures contract on a corporate bond index, positions are included at 
the market value of the notional underlying portfolio of securities.
    (ii) Futures and forward contracts (including forward rate 
contracts) are converted into a combination of a long position and 
short position in the notional security. The maturity of a futures 
contract or a forward rate contract is the period until delivery or 
exercise of the contract, plus the life of the underlying instrument.
    (iii) Swaps are treated as two notional positions in the relevant 
instruments with appropriate maturities. The receiving side is treated 
as the long position and the paying side is treated as the short 
position. For example, an interest rate swap in which the registrant is 
receiving floating-rate interest and paying fixed is treated as a long 
position in a floating rate instrument with a maturity equivalent to 
the period until the next interest rate reset date and a short position 
in a fixed-rate instrument with a maturity equivalent to the remaining 
life of the swap.
    (iv) For swaps that pay or receive a fixed or floating interest 
rate against some other reference price, for example, an equity index, 
the interest rate component is slotted into the appropriate repricing 
maturity category, with the long or short position attributable to the 
equity component being included in the equity framework set out in this 
section.
    (v) Offsets of long and short positions (both actual and notional) 
are permitted in identical derivative instruments with exactly the same 
issuer, coupon, currency, and maturity before slotting these positions 
into time-bands. A matched position in a futures and its corresponding 
underlying may also be fully offset and, thus, excluded from the 
calculation, except when the futures comprises a range of deliverable 
instruments. No offsetting is allowed between positions in different 
currencies.
    (vi) Offsetting positions in the same category of instruments can 
in certain circumstances be regarded as matched and treated by the swap 
dealer or major swap participant as a single net position which should 
be entered into the appropriate time-band. To qualify for this 
treatment the positions must be based on the same underlying 
instrument, be of the same nominal value, and be denominated in the 
same currency. The separate sides of different swaps also may be 
``matched'' subject to the same conditions. In addition:
    (A) For futures, offsetting positions in the notional or underlying 
instruments

[[Page 27833]]

to which the futures contract relates must be for identical instruments 
and the instruments must mature within seven days of each other;
    (B) For swaps and forward rate contracts, the reference rate (for 
floating rate positions) must be identical and the coupon closely 
matched; and
    (C) For swaps, forward rate contracts and forwards, the next 
interest reset date, or for fixed coupon positions or forwards the 
remaining maturity, must correspond within the following limits:
    (1) If the reset (remaining maturity) dates occur within one month, 
then the reset (remaining maturity) dates must be on the same day;
    (2) If the reset (remaining maturity) dates occur between one month 
and one year later, then the reset (remaining maturity) dates must 
occur within seven days of each other, or if the reset (remaining 
maturity) dates occur over one year later, then the reset (remaining 
maturity) dates must occur within thirty days of each other.
    (3) Equity Risk. A swap dealer or major swap participant shall 
calculate a general market risk charge for equity risk on its 
proprietary positions equal to 8 percent of its net position in each 
national equity market. For each national equity market, the net 
position of the swap dealer or major swap participant equals the 
difference between the sum of the long positions and the sum of the 
short positions at current market value. Equity derivatives shall be 
included in this calculation as set forth in paragraph (d)(4) of this 
section.
    (4) Equity derivatives. (i) Equity derivatives must be converted 
into the notional equity positions in the relevant underlying. For 
example, an equity swap in which a swap dealer or major swap 
participant is receiving an amount based on the change in value of one 
particular equity or equity index and paying a different index will be 
treated as a long position in the former and a short position in the 
latter.
    (ii) Futures and forward contracts relating to individual equities 
should be reported as current market prices of the underlying. Futures 
relating to equity indices should be reported as the marked-to-market 
value of the notional underlying equity portfolio. Equity swaps are 
treated as two notional positions, with the receiving side as the long 
position and the paying side as the short position. If one of the legs 
involves receiving/paying a fixed or floating interest rate, the 
exposure should be slotted into the appropriate repricing maturity band 
for debt securities. Matched positions in each identical equity in each 
national market may be treated as offsetting and excluded from the 
capital calculation, with any remaining position included in the 
calculations for specific and general market risk. For example, a 
future in a given equity may be offset against an opposite cash 
position in the same equity.
    (5) Foreign Exchange Risk. The swap dealer or major swap 
participant shall calculate a market risk charge for foreign exchange 
risk on its proprietary positions equal to:
    (i) 8.0 percent of the sum of:
    (A) The greater of the sum of the net open short positions or the 
sum of the net open long positions in each currency; and
    (B) The net open position in gold, regardless of sign.
    (ii) For purposes of the calculation in paragraph (d)(5)(i) of this 
section, the net open position in each currency and gold is the sum of:
    (A) The net spot position determined by deducting all liabilities 
denominated in a currency (or gold) from all assets denominated in the 
same currency (or gold), including accrued interest earned but not yet 
received and accrued expenses, and
    (B) All foreign exchange derivatives and any other item 
representing a profit or loss in foreign currencies. Forward currency 
positions should be valued at current spot market exchange rates.
    (iii) In order to report the required charge in U.S. currency, the 
calculation of the net open position requires the nominal amount (or 
net present value) of the net open position in each foreign currency 
(and gold) to be converted at spot rates into the reporting currency.
    (6) Commodities risk. The swap dealer or major swap participant 
shall calculate a market risk charge for the commodities risk of its 
proprietary positions. For purposes of this calculation, each long and 
short commodity position (spot and forward) is expressed in terms of 
the standard unit of measurement (such as barrels, kilos, or grams). 
Commodity derivative positions also are converted into notional 
positions. The open positions in each category of commodities are then 
converted at current spot rates into U.S. currency, with long and short 
positions offset to arrive at the net open position in each commodity. 
Positions in different categories of commodities may not be offset 
unless deliverable against each other. The total capital requirement 
for commodities risk is the sum of the following:
    (i) 15.0 percent of the net open position, long or short, in each 
commodity, and
    (ii) 3.0 percent of the swap dealer or major swap participant's 
gross positions, long plus short, in the particular commodity. In 
valuing gross positions in commodity derivatives for this purpose, a 
swap dealer or major swap participant should use the current spot 
price.
    (7) Option positions. (i) A swap dealer or major swap participant 
is not required to deduct a capital charge for market risk if the swap 
dealer or major swap participant writes options that are hedged by 
perfectly matched long positions in exactly the same options.
    (ii) Except for options for which no capital charge is required 
under paragraph of (d)(7)(i) of this section, a swap dealer or major 
swap participant shall calculate its market risk charges (both specific 
and general market) for option activities using the ``delta-plus 
method''. Under the delta plus method, a swap dealer or major swap 
participant shall include delta-weighted options positions within the 
appropriate measurement framework set forth in paragraphs (c) through 
(d)(6) of this section.
    (iii) The delta-weighted option position is equal to the market 
value of the underlying instrument multiplied by the option delta. The 
delta represents the expected change in the option's price as a 
proportion of a change in the price of the underlying instrument. For 
example, an option whose price changes $1 for every $2 change in the 
price of the underlying instrument has a delta of 0.50.
    (iv) In addition to the capital charges associated with the 
option's delta, each option position is subject to additional capital 
charges to reflect risks for the gamma (the change of the delta for a 
given change in the price of the underlying) and the vega (the 
sensitivity of the option price with respect to a change in volatility) 
for each such option position (including hedge positions). The option 
delta, and gamma and vega sensitivities shall be calculated according 
to the swap dealer or major swap participant's option pricing model and 
will be subject to Commission review. The capital requirement for delta 
risk, plus the additional capital charges for gamma and vega risks, are 
calculated as follows:
    (A) Options with debt instruments or interest rates as the 
underlying instrument. The delta-weighted options positions are 
included in the specific risk calculations under paragraph (c) of this 
section, and also are slotted into the debt instrument time-bands in 
Table B of this section, using a two-legged approach requiring one 
entry at the time the underlying contract takes effect and

[[Page 27834]]

one at the time the underlying contract matures; and
    (1) Floating rate instruments with caps or floors should be treated 
as a combination of floating rate securities and a series of European 
style options;
    (2) For options such as caps and floors whose underlying instrument 
is an interest rate, the delta and gamma should be expressed in terms 
of a hypothetical underlying security;
    (3) For gamma risk, for each time-band, net gammas that are 
negative are multiplied by the risk weights set out in Table D and by 
the square of the market value of the underlying instrument (net 
positive gammas may be disregarded);
    (4) Table D is as set forth as follows:

                                                     Table D
----------------------------------------------------------------------------------------------------------------
                                                                                                    Risk-weight
                                                                                      Assumed        for gamma
                            Time-band                                Modified      interest rate     (average
                                                                     duration       change  (%)     assumed for
                                                                                                    time band)
----------------------------------------------------------------------------------------------------------------
Under 1 month...................................................            0.00            1.00         0.00000
1 up to 3 months................................................            0.20            1.00         0.00020
3 up to 6 months................................................            0.40            1.00         0.00080
6 up to 12 months...............................................            0.70            1.00         0.00245
1 up to 2 years.................................................            1.40            0.90         0.00794
2 up to 3 years.................................................            2.20            0.80         0.01549
3 up to 4 years.................................................            3.00            0.75         0.02531
4 up to 5 years.................................................            3.65            0.75         0.03747
5 up to 7 years.................................................            4.65            0.70         0.05298
7 up to 10 years................................................            5.80            0.65         0.07106
10 up to 15 years...............................................            7.50            0.60         0.10125
15 up to 20 years...............................................            8.75            0.60         0.13781
Over 20 years...................................................           10.00            0.60         0.18000
----------------------------------------------------------------------------------------------------------------

    (5) For volatility risk, the capital requirements for vega are 
calculated in each time-band assuming a proportional shift in 
volatility of 25.0 percent; and
    (6) The additional capital requirement for gamma and vega risk is 
the absolute value of the sum of the individual capital requirements 
for net negative gammas plus the absolute value of the sum of the 
individual capital requirements for vega risk for each time-band.
    (B) Options with equities as the underlying. The delta-weighted 
option positions are included in the calculation of the specific risk 
charge under paragraph (c) of this section, and also are incorporated 
in the general market risk charge calculated under paragraph (d)(3) of 
this section, with individual equity issues and indices treated as 
separate underlyings; and
    (1) For gamma risk, the net gammas that are negative for each 
underlying are multiplied by 0.72 percent (in the case of an individual 
equity) or 0.32 percent (in the case of an index as the underlying) and 
by the square of the market value of the underlying;
    (2) For volatility risk, the capital requirement for vega is 
calculated for each underlying, assuming a proportional shift in 
volatility of 25.0 percent; and
    (3) The additional capital requirement for gamma and vega risk is 
the absolute value of the sum of the individual capital requirements 
for net negative gammas plus the absolute value of the individual 
capital requirements for vega risk.
    (C) Options on foreign exchange and gold positions. The net delta 
(or delta-based) equivalent of the total book of foreign currency and 
gold options is incorporated into the measurement of the exposure in a 
single currency position as set forth in paragraph (d)(5) of this 
section; and
    (1) For gamma risk, for each underlying exchange rate, net gammas 
that are negative are multiplied by 0.32 percent and by the square of 
the market value of the positions;
    (2) For volatility risk, the capital requirements for vega are 
calculated for each currency pair and gold assuming a proportional 
shift in volatility of 25.0 percent; and
    (3) The additional capital requirement for gamma and vega risk is 
the absolute value of the sum of the individual capital requirements 
for net negative gammas plus the absolute value of the sum of the 
individual capital requirements for vega risk.
    (D) Options on commodities. The delta-weighted positions are 
incorporated into the measure described in paragraph (d)(6) of this 
section; and
    (1) For gamma risk, net gammas that are negative for each 
underlying are multiplied by 1.125 percent and by the square of the 
market value of the commodity;
    (2) For volatility risk, a bank calculates the capital requirements 
for vega for each commodity assuming a proportional shift in volatility 
of 25.0 percent; and
    (3) The additional capital requirement for gamma and vega risk is 
the absolute value of the sum of the individual capital requirements 
for net negative gammas plus the absolute value of the sum of the 
individual capital requirements for vega risk.
    (e) Credit Risk. The swap dealer or major swap participant shall 
compute an additional capital requirement for the credit risk of over-
the-counter derivatives transactions that are not cleared in an amount 
equal to the sum of the following:
    (1) A counterparty exposure charge in an amount equal to the sum of 
the following:
    (i) The net replacement value in the account of each counterparty 
that is insolvent, or in bankruptcy, or that has senior unsecured long-
term debt in default; and
    (ii) For a counterparty not otherwise described in paragraph 
(e)(1)(i) of this section, the credit equivalent amount of the swap 
dealer or major swap participant's exposure to the counterparty, minus 
collateral values as set forth in this section, multiplied by a credit 
risk factor of 50 percent or a credit risk factor computed under 
paragraph (e)(1)(iii) of this section, multiplied by 8 percent;
    (iii) Counterparties may be rated by the swap dealer or major swap 
participant, or by an affiliated bank or affiliated broker-dealer of 
the swap dealer or major swap participant, upon

[[Page 27835]]

approval by the Commission on application by the swap dealer or major 
swap participant. The application will specify which internal ratings 
will result in application of a 20 percent risk weight, 50 percent risk 
weight, or 150 percent risk weight. Based on the strength of the 
applicant's internal credit risk management system, the Commission may 
approve the application. The swap dealer or major swap participant must 
make and keep current a record of the basis for the credit rating for 
each counterparty. The records must be maintained in accordance with 
Sec.  1.31 of this chapter.
    (2) A concentration charge by counterparty in an amount equal to 50 
percent of the amount of the current exposure to the counterparty in 
excess of 5 percent of the tangible net equity of the swap dealer or 
major swap participant and a portfolio concentration charge of 100 
percent of the amount of the swap dealer or major swap participant's 
aggregate current exposure for all counterparties in excess of 50 
percent of the tangible net equity of the swap dealer or major swap 
participant.
    (f) Calculation of the credit equivalent amount. The credit 
equivalent amount of a swap dealer or major swap participant's exposure 
to a counterparty is the sum of the swap dealer or major swap 
participant's current exposure to the counterparty, and the swap dealer 
or major swap participant's potential future exposure to the 
counterparty.
    (g) The current exposure of the swap dealer or major swap 
participant to a counterparty is calculated as follows:
    (1) For a single over-the-counter position, the current exposure is 
the greater of the mark-to-market value of the over-the-counter 
position or zero.
    (2) For multiple over-the-counter positions, the current credit 
exposure is the greater of:
    (i) The net sum of all positive and negative mark-to-market values 
of the individual over-the-counter positions, subject to permitted 
netting pursuant to a qualifying master netting agreement; or
    (ii) Zero.
    (h) The potential future exposure of the swap dealer or major swap 
participant is calculated as follows:
    (1) For a single over-the counter position, the potential future 
exposure, including an over-the-counter position with a negative mark-
to-market value, is calculated by multiplying the notional principal 
amount of the position by the appropriate conversion factor in Table E 
of this section. For purposes of this calculation, the swap dealer or 
major swap participant must use the apparent or stated notional 
principal amount multiplied by any multiplier in the over-the-counter 
position. For exchange rate contracts and other similar contracts in 
which the notional principal amount is equivalent to the cash flows, 
notional principal amount is the net receipts to each party falling due 
on each value date in each currency. The potential future exposure of 
the protection provider of a credit derivative is capped at the net 
present value of the amount of unpaid premiums. For an over-the-counter 
derivative contract with multiple exchanges of principal, the 
conversion factor is multiplied by the number of remaining payments in 
the derivative contract. For an over-the-counter derivative contract 
that is structured such that on specified dates any outstanding 
exposure is settled and the terms are reset so that the market value of 
the contract is zero, the remaining maturity equals the time until the 
next reset date. For an interest rate derivative contract with a 
remaining maturity of greater than one year that meets these criteria, 
the minimum conversion factor is 0.005.

                                                                         Table E
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Foreign exchange                                   Precious metals
                Remaining maturity                   Interest rate    rate and gold        Credit          Equity        (except gold)         Other
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less..................................           0.00               0.01             0.10            0.06               0.07            0.10
Over one to five years............................           0.005              0.05             0.10            0.08               0.07            0.12
Over five years...................................           0.015              0.075            0.10            0.10               0.08            0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------

     (2) For multiple over-the-counter positions that are subject to a 
qualifying master netting agreement, the swap dealer or major swap 
participant shall compute its potential future exposure in accordance 
with the following formula: Anet = (0.4 x Agross) + (0.6 x NGR x 
Agross), where:
    (i) Agross equals the sum of the potential future exposure for each 
individual over-the-counter position subject to the qualifying master 
netting agreement; and
    (ii) NGR equals the ratio of the net current credit exposure to the 
gross current credit exposure. In calculating the NGR, the gross 
current credit exposure equals the sum of the positive current credit 
exposures of all individual over-the-counter derivative contracts 
subject to the qualifying master netting agreement.
    (i) Netting agreements. In computing its credit equivalent amount 
pursuant to paragraph (f) of this section, a swap dealer or major swap 
participant may net gross receivables and gross payables to and from a 
single counterparty if the swap dealer or major swap participant has 
entered into a netting agreement with the counterparty that meets the 
following criteria:
    (1) The netting agreement is legally enforceable in each relevant 
jurisdiction, including in insolvency proceedings;
    (2) The gross receivables and gross payables that are subject to 
the netting agreement with a counterparty can be determined at any 
time; and
    (3) For internal risk management purposes, the swap dealer or major 
swap participant monitors and controls its exposure to the counterparty 
on a net basis.
    (j) Collateral. (1) Subject to the haircuts specified in paragraph 
(j)(2) of this section, a swap dealer or major swap participant may 
reduce its credit risk equivalent computed under paragraph (f) of this 
section to the extent of the market value of collateral pledged to and 
held by the swap dealer or major swap participant to secure an over-
the-counter position. The collateral is subject to the following 
requirements:
    (i) The collateral must be in the swap dealer or major swap 
participant's physical possession or control; Provided, However, 
collateral may include collateral held in independent third party 
accounts as provided under part 23 of this chapter;
    (ii) The collateral must meet the requirements specified in a 
credit support agreement meeting the requirements of Sec.  23.151 of 
this part; and
    (iii) If the counterparty is a swap dealer, major swap participant 
or financial entity as defined in Sec.  23.150 of this part:
    (A) The collateral must be financial collateral that is liquid and 
transferable; marked-to-market each day, and subject

[[Page 27836]]

to a daily maintenance margin requirement;
    (B) The collateral must be capable of being liquidated promptly by 
the swap dealer or major swap participant without intervention by any 
other party;
    (C) The collateral must be subject to an agreement that is legally 
enforceable by the swap dealer or major swap participant against the 
counterparty and any other parties to the agreement;
    (D) The collateral cannot consist of securities issued by the 
counterparty or a party related to the swap dealer or major swap 
participant or to the counterparty; and
    (E) The collateral cannot be used in determining the credit rating 
of the counterparty.
    (2) A swap dealer or major swap participant must reduce the market 
value of the counterparty's collateral used to reduce the swap dealer's 
or major swap participant's credit risk equivalent amount computed 
under paragraph (f) of this section by:
    (i) Applying the market haircuts specified in Sec.  1.17(c)(5) of 
this chapter, and a further deduction of 8 percent of the market value 
of the collateral when the settlement currency of the interest rate 
position and collateral currency are not the same; or
    (ii) where the collateral has been received from a counterparty 
that is not a swap dealer, major swap participant, or a financial 
entity as defined in Sec.  23.150 of this part, applying the haircuts 
required pursuant to a credit support agreement meeting the 
requirements of Sec.  23.151.
    (k) Sample Calculation of General Market Risk for Debt Instruments 
Using the Maturity Method. (1) The following positions are slotted into 
a maturity ladder as shown below, which uses the risk weights specified 
in Table B of this section:
    (i) Qualifying bond, $13.33mn market value, remaining maturity 8 
years, coupon 8 percent;
    (ii) Government bond, $75mn market value, remaining maturity 2 
months, coupon 7 percent;
    (iii) Interest rate swap, $150 mn, bank receives floating rate 
interest and pays fixed, next interest reset after 12 months, remaining 
life of swap is 8 years (The position should be reported as the market 
value of the notional underlying. Depending on the current interest 
rate, the market value of each leg of the swap (i.e. the 8 year bond 
and the 9 months floater) can be either higher or lower than the 
notional amount. For sake of simplicity the example assumes that the 
current interest rate is identical with the one the swap is based on.)
    (iv) Long position in interest rate future, $50mn, delivery date 
after 6 months, life of underlying government security is 3.5 years 
(assumes the current interest rate is identical to the one the futures 
is based on).

----------------------------------------------------------------------------------------------------------------
                          Time-band and                      Risk-weighted     Net time-band        Net zone
         Zone                position      Risk weight  %      position          positions         positions
----------------------------------------------------------------------------------------------------------------
1.....................  0-1 mth..........            0.00
                        1-3 mth Long 75              0.20  Long 0.15.......  Long 0.15.......  Long 1.00.
                         Gov. bond.
                        3-6 mth Short 50             0.40  Short 0.20......  Short 0.20......
                         Future.
                        6-12 mths Long               0.70  Long 1.05.......  Long 1.05.......
                         150 Swap.
2.....................  1-2 yrs..........            1.25
                        2-3 yrs..........            1.75
                        3-4 yrs Long 50              2.25  Long 1.125......  Long 1.125......  Long 1.125.
                         Future.
3.....................  4-5 yrs..........            2.75
                        5-7 yrs..........            3.25
                        7-10 yrs Short               3.75  Short 5.625,      Short 5.125.....  Short 5.125.
                         150 Swap, Long                     Long 0.050.
                         13.33 Qual Bond.
                        10-15 yrs........            4.50
                        15-20 yrs........            5.25
                        Over 20 yrs......            6.00
----------------------------------------------------------------------------------------------------------------

    (2) A vertical disallowance is calculated for time-band 7-10 years, 
and equals 10 percent of the matched positions in the time-band--10.0 x 
0.5 = 0.05 ($50,000).
    (3) A horizontal disallowance is calculated for zone 1, and equals 
40 percent of the matched positions in the zone--40.0 x 0.20 = 0.80 
($80,000). The remaining net position in Zone 1 equals +1.00.
    (4) A horizontal disallowance is calculated for adjacent zones 2 
and 3. It equals 40 percent of the matched positions between the 
zones--40.0 x 1.125 = 0.45 (450,000). The remaining position in zone 3 
equals -4.00.
    (5) A horizontal disallowance is calculated between zones 1 and 3. 
It equals 100 percent of the matched positions between the zones--100 x 
1.00 = 1.00 (1,000,000).
    (6) The remaining net open position equals 3.00 ($3,000,000). The 
total capital requirement for general market risk for this portfolio 
equals:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
The vertical disallowance..................................      $50,000
Horizontal disallowance in zone 1..........................       80,000
Horizontal disallowance-- zones 2 and 3....................      450,000
Horizontal disallowance-- zones 1 and 3....................    1,000,000
Overall net open position..................................    3,000,000
                                                            ------------
    Total requirement for general market risk..............    4,580,000
------------------------------------------------------------------------

    (l) Sample Calculation for Delta-Plus Method for Options. (1) 
Assume the swap dealer or major swap participant has a European short 
call option on a commodity with an exercise price of 490 and a market 
value of the underlying 12 months from the expiration of the option at 
500; a risk-free interest rate at 8 percent per annum, and the 
volatility at 20 percent. The current delta for this position is 
according to the Black-Scholes formula -0.721 (that is, the price of 
the option changes by -0.721 if the price of the underlying moves by 
1). The gamma is -0.0034 (that is, the delta changes by -0.0034 from -
0.721 to -0.7244 if the price of the underlying moves by 1). The 
current value of the option is 65.48.
    (2) The first step under the delta-plus method is to multiply the 
market value of the commodity by the absolute value of the delta: 500 x 
0.721 = 360.5. The delta-weighted position is then incorporated into 
the measure described for general market risk for commodities. If no 
other positions in the commodity exist, the delta-weighted position is 
multiplied by 0.15 to calculate the capital requirement for delta: 
360.5 times 0.15 = 54.075.
    (3) The capital requirement for gamma is calculated according to 
the Taylor expansion by multiplying the absolute

[[Page 27837]]

value of the assumed gamma of -0.0034 by 1.125 percent and by the 
square of the market value of the underlying: 0.0034 x 0.01125 x 500\2\ 
= 9.5625.
    (4) The capital requirement for vega is calculated next. The 
assumed current (implied) volatility is 20 percent. Since only an 
increase in volatility carries a risk of loss for a short call option, 
the volatility has to be increased by a relative shift of 25 percent. 
This means that the vega capital requirement has to be calculated on 
the basis of a change in volatility of 5 percentage points from 20 
percent to 25 percent in this example. According to the Black-Scholes 
formula used here, the vega equals 168. Thus, a 1 percent or 0.01 
increase in volatility increases the value of the option by 1.68. 
Accordingly, a change in volatility of 5 percentage points increases 
the value: 5 x 1.68 = 8.4. This is the capital requirement for vega 
risk.
    (m) Summary of Treatment for Interest Rate Derivatives. (1) The 
following chart summarizes the application of specific risk and general 
market risk charges for specific types of interest rate derivatives.

------------------------------------------------------------------------
                                  Specific risk     General market risk
          Instrument                  charge               charge
------------------------------------------------------------------------
Exchange-Traded Future:
    Government security.......  No...............  Yes, as two
                                                    positions.
    Corporate debt security...  Yes..............  Yes, as two
                                                    positions.
    Index on short-term         No...............  Yes, as two
     interest rates (e.g.                           positions.
     LIBOR).
OTC Forward:
    Government security.......  No...............  Yes, as two
                                                    positions.
    Corporate debt security...  Yes..............  Yes, as two
                                                    positions.
    Index on short-term         No...............  Yes, as two
     interest rates..                               positions.
    FRAs, Swaps...............  No...............  Yes, as two
                                                    positions.
    Forward foreign exchange..  No...............  Yes, as one position
                                                    in each currency.
Options:
    Government security.......  No.
    Corporate debt security...  Yes..............  General market risk
                                                    charge for each type
                                                    of transaction,
                                                    using the Delta-plus
                                                    method (gamma and
                                                    vega receive
                                                    separate capital
                                                    charges).
    Index on short-term         No.
     interest rates.
------------------------------------------------------------------------

     (2) The chart provided in paragraph (m)(1) of this section is 
provided as a summary only. The requirements for specific risk and 
general market risk charges applicable to interest rate derivatives are 
set forth in paragraphs (a) through (d) of this section.

Sec.  23.105  Maintenance of minimum financial requirements by swap 
dealers and major swap participants.

    (a) Each swap dealer or major swap participant who is subject to 
the minimum capital requirements under Sec.  23.101 of this part and 
who knows or should have known that its capital at any time is less 
than the minimum required by Sec.  23.101 of this part, must:
    (1) Give telephonic notice, to be confirmed in writing by facsimile 
notice, that the swap dealer's or major swap participant's capital is 
less than that required by Sec.  23.101 of this part. The notice must 
be given immediately after the swap dealer or major swap participant 
knows or should know that its capital is less than that required by 
Sec.  23.101 of this part; and
    (2) Provide together with such notice documentation in such form as 
necessary to adequately reflect the swap dealer's or major swap 
participant's capital condition as of any date such person's capital is 
less than the minimum required. The swap dealer or major swap 
participant must provide similar documentation for other days as the 
Commission may request.
    (b) Each swap dealer or major swap participant who is subject to 
the minimum capital requirements under Sec.  23.101 of this part and 
who knows or should have known that its capital at any time is less 
than 110 percent of its minimum capital requirement as determined under 
Sec.  23.101 of this part, must file written notice to that effect 
within 24 hours of such event.
    (c) Each swap dealer or major swap participant who is subject to 
capital rules established by a prudential regulator, or has been 
designated a systemically important financial institution by the 
Financial Stability Oversight Council and is subject to capital 
requirements imposed by the Board of Governors of the Federal Reserve 
System, must provide immediate written notice transmitted by facsimile 
if it fails to maintain compliance with the minimum capital 
requirements established by the prudential regulator or the Board of 
Governors of the Federal Reserve System.
    (d) Upon the request of the Commission, each swap dealer or major 
swap participant who is subject to capital rules established by a 
prudential regulator, or has been designated a systemically important 
financial institution by the Financial Stability Oversight Council and 
is subject to capital requirements imposed by the Board of Governors of 
the Federal Reserve System must provide the Commission with copies of 
its capital computations for any periods of time specified by the 
Commission. The capital computations must be computed in accordance 
with the requirements of the swap dealer's or major swap participant's 
prudential regulator, and must include all supporting schedules and 
other documentation.
    (e) If a swap dealer or major swap participant at any time fails to 
make or to keep current the books and records required by these 
regulations, such swap dealer or major swap participant must, on the 
same day such event occurs, provide facsimile notice of such fact, 
specifying the books and records which have not been made or which are 
not current, and within 48 hours after giving such notice file a 
written report stating what steps have been and are being taken to 
correct the situation.
    (f) A swap dealer or major swap participant that is subject to the 
minimum capital requirements set forth in Sec.  23.101 of this part, 
must provide written facsimile notice of a substantial reduction in 
capital as compared to that last reported in a financial report filed 
with the Commission pursuant to Sec.  23.105 of this part. This notice 
shall be provided as follows:
    (1) If any event or series of events, including any withdrawal, 
advance, loan or loss cause, on a net basis, a reduction in tangible 
net equity of

[[Page 27838]]

20 percent or more, notice must be provided within two business days of 
the event or series of events causing the reduction; and
    (2) If the equity capital of the swap dealer or major swap 
participant would be withdrawn by action of a stockholder or a partner 
or a limited liability company member or by redemption or repurchase of 
shares of stock by any of the consolidated entities or through the 
payment of dividends or any similar distribution, or an unsecured 
advance or loan would be made to a stockholder, partner, sole 
proprietor, limited liability company member, employee or affiliate, 
such that the withdrawal, advance or loan would cause, on a net basis, 
a reduction in excess net tangible equity of 30 percent or more, notice 
must be provided at least two business days prior to the withdrawal, 
advance or loan that would cause the reduction: Provided, however, That 
the provisions of paragraphs (f)(1) and (2) of this section do not 
apply to any futures or swaps transaction in the ordinary course of 
business between a swap dealer or major swap participant and any 
affiliate where the swap dealer or major swap participant makes payment 
to or on behalf of such affiliate for such transaction and then 
receives payment from such affiliate for such transaction within two 
business days from the date of the transaction.
    (3) Upon receipt of such notice from a swap dealer or major swap 
participant, the Director of the Division of Clearing and Intermediary 
Oversight or the Director's designee may require that the swap dealer 
or major swap participant provide, within three business days from the 
date of the request or such shorter period as the Director or designee 
may specify, such other information as the Director or designee 
determines to be necessary based upon market conditions, reports 
provided by swap dealer or major swap participant, or other available 
information.
    (g) Every notice and written report required by this section to be 
filed by a swap dealer or major swap participant shall be filed with 
the regional office of the Commission with jurisdiction over the state 
in which the swap dealer's or major swap participant's principal place 
of business is located, as set forth in Sec.  140.02 of this chapter, 
and with the registered futures association of which the swap dealer or 
major swap participant is a member. In addition, every notice and 
written report required to be given by this section must also be filed 
with the Chief Accountant of the Division of Clearing and Intermediary 
Oversight at the Commission's principal office in Washington, DC.

Sec.  23.106  Financial recordkeeping and reporting requirements for 
swap dealers and major swap participants.

    (a)(1) Except as provided in paragraph (a)(2) of this section, each 
registered swap dealer or major swap participant must comply with the 
requirements set forth in paragraphs (b) through (j) of this section.
    (2) The requirements in paragraphs (b) through (j) of this section 
do not apply to any swap dealer or major swap participant that:
    (i) Is subject to the capital requirements of a prudential 
regulator;
    (ii) Has been designated a systemically important financial 
institution by the Financial Stability Oversight Council and is subject 
to supervision by the Board of Governors of the Federal Reserve System; 
or
    (iii) Is registered as a futures commission merchant.
    (b) Each swap dealer or major swap participant shall prepare and 
keep current ledgers or other similar records which show or summarize, 
with appropriate references to supporting documents, each transaction 
affecting its asset, liability, income, expense and capital accounts, 
and in which (except as otherwise permitted in writing by the 
Commission) all its asset, liability and capital accounts are 
classified in accord with generally accepted accounting principles as 
established in the United States, and as otherwise may be necessary for 
the capital calculations required under Sec.  23.101. Such records must 
be maintained in accordance with Sec.  1.31 of this chapter.
    (c)(1) Each swap dealer and major swap participant shall file 
financial reports meeting the requirements in paragraph (c)(2) of this 
section as of the close of business each month. Such financial reports 
must be filed no later than 17 business days after the date for which 
the report is made.
    (2) The monthly financial reports must be prepared in the English 
language and be denominated in United States dollars. The monthly 
financial reports shall include a statement of financial condition, a 
statement of income/loss, a statement reconciling the net equity in the 
statement of financial condition to the firm's tangible net equity, a 
schedule detailing, as applicable under Sec.  23.101, the calculation 
of the firm's minimum tangible net equity requirement or its minimum 
risk-based capital ratios requirements, and showing the excess or 
deficiency in its regulatory capital after subtracting the minimum 
tangible net equity requirement from its tangible net equity, or after 
comparing its risk-based capital ratios to its minimum risk-based 
capital ratios. The monthly report and schedules must be prepared in 
accordance with generally accepted accounting principles as established 
in the United States.
    (d)(1) Each swap dealer and major swap participant shall file 
annual audited financial reports certified in accordance with paragraph 
(d)(2) of this section, and including the information specified in 
paragraph (d)(3) of this section, as of the close of its fiscal year no 
later than 90 days after the close of the swap dealer's and major swap 
participant's fiscal year.
    (2) The annual audited financial report shall be certified in 
accordance with the provisions of paragraphs (a) through (e) of Sec.  
1.16 of this chapter: Provided, however, that for purposes of 
application of the provisions of Sec.  1.16 to swap dealers and major 
swap participants, the term ``Sec.  23.101'' shall be substituted for 
the term ``Sec.  1.17,'' and the terms ``swap dealer'' or ``major swap 
participant'' shall be substituted for the term ``futures commission 
merchant,'' as appropriate.
    (3) The annual audited financial reports shall be prepared in 
accordance with generally accepted accounting principles as established 
in the United States, be prepared in the English language, and 
denominated in United States dollars. The annual audited financial 
reports must include the following:
    (i) A statement of financial condition as of the date for which the 
report is made;
    (ii) Statements of income (loss), cash flows, and changes in 
ownership equity for the period between the date of the most recent 
certified statement of financial condition filed with the Commission 
and the date for which the report is made;
    (iii) Appropriate footnote disclosures;
    (iv)(A) If the swap dealer or major swap participant must comply 
with capital requirements set forth in Sec.  23.101(a)(1) of this part, 
a schedule including the swap dealer's or major swap participant's net 
equity; its intangible assets; its minimum tangible net equity; its 
minimum tangible net equity requirement; and the excess or deficiency 
in its regulatory capital after subtracting the minimum tangible net 
equity requirement from its tangible net equity; or
    (B) If the swap dealer or major swap participant must comply with 
capital requirements set forth in Sec.  23.101(a)(2) of this part, a 
schedule including the swap dealer's or major swap participant's 
minimum risk-based capital ratio requirements as calculated using 
requirements set forth in 12 CFR.

[[Page 27839]]

part 225, and appendices thereto, as if the subsidiary itself were a 
U.S. bank-holding company; its risk-based capital ratios; and the 
excess or deficiency in its regulatory capital after comparing its 
risk-based capital ratios to its minimum risk-based capital ratio 
requirements.
    (v) Such further material information as may be necessary to make 
the required statements not misleading.
    (e) A registered swap dealer or major swap participant may not 
change its fiscal year from that used in its most recent report filed 
under paragraph (c) or (d) of this section unless it has requested and 
received written approval for the change from a registered futures 
association of which it is a member.
    (f) Attached to each financial report filed pursuant to this 
section must be an oath or affirmation that to the best knowledge and 
belief of the individual making such oath or affirmation the 
information contained in the financial report is true and correct. The 
individual making such oath or affirmation must be: If the swap dealer 
or major swap participant is a sole proprietorship, the proprietor; if 
a partnership, any general partner; if a corporation, the chief 
executive officer or chief financial officer; and, if a limited 
liability company or limited liability partnership, the chief executive 
officer, the chief financial officer, the manager, the managing member, 
or those members vested with the management authority for the limited 
liability company or limited liability partnership.
    (g) From time to time the Commission may, by written notice, 
require any swap dealer or major swap participant to file financial or 
operational information on a daily basis or at such other times as may 
be specified by the Commission. Such information must be furnished in 
accordance with the requirements included in the written Commission 
notice.
    (h) Procedures for filing with Commission. (1) Unless filed 
electronically as permitted under paragraph (h)(2) of this section, all 
filings made under this section must be addressed to, and received at, 
the location of the regional office of the Commission with jurisdiction 
over the state in which the registrant's principal place of business is 
located as set forth in Sec.  140.02 of this chapter.
    (2) All filings of financial reports made pursuant to this section 
may be submitted to the Commission in electronic form using a form of 
user authentication assigned in accordance with procedures established 
by or approved by the Commission, and otherwise in accordance with 
instructions issued by or approved by the Commission, if the swap 
dealer or major swap participant has provided the Commission with the 
means necessary to read and to process the information contained in 
such report. Any such electronic submission must clearly indicate the 
swap dealer or major swap participant on whose behalf such filing is 
made and the use of such user authentication in submitting such filing 
will constitute and become a substitute for the manual signature of the 
authorized signer. In the case of a financial report required under 
paragraphs (c), (d), or (g) of this section and filed via electronic 
transmission in accordance with procedures established by or approved 
by the Commission, such transmission must be accompanied by the user 
authentication assigned to the authorized signer under such procedures, 
and the use of such user authentication will constitute and become a 
substitute for the manual signature of the authorized signer for the 
purpose of making the oath or affirmation referred to in paragraph (f) 
of this section.
    (i) Public availability of reports. (1) Financial information 
required to be filed pursuant to this section, and not otherwise 
publicly available, will be treated as exempt from mandatory public 
disclosure for purposes of the Freedom of Information Act and the 
Government in the Sunshine Act and parts 145 and 147 of this chapter, 
except for the information described in paragraph (i)(2) of this 
section.
    (2) The following information will be publicly available:
    (i) As applicable, the amounts calculated by the swap dealer or 
major swap participant as its tangible net equity; its minimum tangible 
net equity requirement; its tangible net equity in excess of its 
minimum tangible net equity requirement; its risk-based capital ratios; 
and the excess or deficiency in its regulatory capital after comparing 
its risk-based capital ratios to its minimum risk-based capital ratio 
requirements.
    (ii) The opinion of the independent public accountant in the 
certified annual financial reports.
    (3) All information that is exempt from mandatory public disclosure 
under paragraph (i)(1) of this section will, however, be available for 
official use by any official or employee of the United States or any 
State, by the National Futures Association and by any other person to 
whom the Commission believes disclosure of such information is in the 
public interest.

Sec. Sec.  23.107-23.149  [Reserved]

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    7. The authority citation for part 140 continues to read as 
follows:

     Authority:  7 U.S.C. 2 and 12a.

    8. Amend Sec.  140.91 by revising the section heading and adding 
paragraphs (a)(9) through (15) to read as follows:

Sec.  140.91  Delegation of authority to the Director of the Division 
of Clearing and Intermediary Oversight.

    (a) * * *
    (9) All functions reserved to the Commission in Sec.  23.101(c)(2) 
of this chapter, with the concurrence of the General Counsel or his or 
her designee;
    (10) All functions reserved to the Commission in Sec.  23.103(d) of 
this chapter, with the concurrence of the General Counsel or his or her 
designee;
    (11) All functions reserved to the Commission in Sec.  23.105(a)(2) 
and (d) of this chapter, with the concurrence of the General Counsel or 
his or her designee;
    (12) All functions reserved to the Commission in Sec.  
23.155(b)(4)(ii), (iii) and (c)(4) of this chapter, with the 
concurrence of the General Counsel or his or her designee;
    (13) All functions reserved to the Commission in Sec.  23.156(c)(1) 
and (2) of this chapter, with the concurrence of the General Counsel or 
his or her designee;
    (14) All functions reserved to the Commission in Sec.  23.157(d) of 
this chapter, with the concurrence of the General Counsel or his or her 
designee; and
    (15) All functions reserved to the Commission in Sec.  23.158(c) of 
this chapter, with the concurrence of the General Counsel or his or her 
designee.
* * * * *

    Issued in Washington, DC, on April 27, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Capital Requirements of Swap Dealers and Major Swap 
Participants--Commission Voting Summary and Statements of Commissioners

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Sommers 
and Chilton voted in the affirmative; Commissioner O'Malia voted in 
the negative.

[[Page 27840]]

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking to establish capital 
requirements for nonbank swap dealers and major swap participants. 
The Dodd-Frank Act requires capital requirements to help ensure the 
safety and soundness of swap dealers and major swap participants. 
Capital rules help protect commercial end-users and other market 
participants by requiring that dealers have sufficient capital to 
stand behind their obligations with such end-users and market 
participants. The proposal fulfills the Dodd-Frank Act's mandate in 
Section 731 to establish capital rules for all registered swap 
dealers and major swap participants that are not banks, including 
nonbank subsidiaries of bank holding companies.
    The proposed rule addresses capital requirements for swap 
dealers and major swap participants in three different categories: 
(1) If they are an futures commission merchants (FCMs); 2) if they 
are subsidiaries of bank holding companies or systemically important 
financial institutions; or 3) if they are neither.
    With regard to dealers that also are FCMs, generally speaking, 
the Commission's existing capital rules for FCMs would apply. This 
is to ensure that FCMs have sufficient capital to continue to carry 
and clear customer swaps and futures transactions cleared by a DCO.
    The proposed rule would require dealers that are subsidiaries of 
bank holding companies or that have been designated as systemically 
important financial institutions by the Financial Stability 
Oversight Council (FSOC) to follow the rules set by the prudential 
regulators. For instance, a subsidiary of a U.S. bank holding 
company would have to comply with the capital requirements set by 
the Federal Reserve Board as if the subsidiary itself were a U.S. 
bank holding company. This is intended to prevent regulatory 
arbitrage and ensure consistency among capital regimes for those 
entities that are regulated by prudential regulators.
    For those swap dealers and major swap participants that are not 
regulated for capital by a prudential capital and not FCMs, part of 
a bank holding company or a systemically important financial 
institution, the proposed rule departs from bank capital rules. It 
takes into consideration that these dealers are likely to have 
different balance sheets from those financial institutions that 
traditionally have been subject to prudential supervision. Such 
entities would be required to maintain a minimum level of tangible 
net equity greater than $20 million plus a measurement for market 
risk and a measurement for credit risk. This market risk and credit 
risk would be scaled to the dealers' activities and be measured 
based upon swaps activity and related hedges. The proposal would 
allow such firms to recognize as part of their capital fixed assets 
and other assets that traditionally have not been recognized by 
prudential regulators.
    I also support the proposed rulemaking's financial condition 
reporting requirements that relate generally to capital and other 
matters. These reporting requirements are comparable to existing 
requirements for FCMs and will facilitate ongoing financial 
oversight of these entities.
    CFTC staff worked very closely with prudential regulators to 
establish these capital requirements that are comparable to the 
maximum extent practicable. Staff also consulted with the SEC and 
with international authorities. The rule benefited from the CFTC and 
SEC staff roundtable on capital and margin requirements where we 
received significant input from the public.

    Note:  The following exhibit also will not appear in the Code of 
Federal Regulations.

BILLING CODE P

[[Page 27841]]

[GRAPHIC] [TIFF OMITTED] TP12MY11.002

[FR Doc. 2011-10881 Filed 5-11-11; 8:45 am]
BILLING CODE C
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