Vol. 76 Thursday, 

No. 92 May 12, 2011 

Part III 

Commodity Futures Trading Commission 

17 CFR Parts 1, 23, and 140 

Capital Requirements of Swap Dealers and Major Swap Participants; 

Proposed Rule 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27802 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

1See 76 FR 23732 (April 28, 2011). 

2Commission 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. 

3See 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. 

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. 

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. 

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 § 145.9 of 

the Commission’s regulations.2

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. 

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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27803 

5The Commission previously has proposed 

certain record retention requirements for SDs and 

MSPs regarding their swap activities. See 75 FR 

76666 (Dec. 9, 2010). 

6An 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. 

7The 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. 

8The 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. 

9Section 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. 

10Regulation 1.10 includes a requirement for 

FCMs to file annual financial statements that have 

been certified by an independent public accountant 

in accordance with § 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. 

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

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 § 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 § 1.17, and reporting 

requirements related to capital and the 

FCM’s protection of customer funds are 

set forth in §§ 1.10, 1.12, and 1.16 of the 

Commission’s regulations.10

1. Background on FCM Capital 

Requirements in § 1.17 

FCM capital requirements in § 1.17 

are designed to require a minimum level 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27804 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

11Section 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. 12See 75 FR 71379, 71383 (November 23, 2010). 

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 § 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, § 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 § 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 § 1.17 

FCMs historically have not engaged in 

significant OTC derivatives transactions. 

The capital treatment of such 

transactions under § 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 § 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 

§ 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. 

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. 

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 § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27805 

13See joint proposed rulemaking issued by the 

prudential regulators on April 12, 2011, titled 

‘‘Margin and Capital Requirements for Covered 

Swap Entities.’’ 

14Section 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. 

15The 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.’’ 

16The 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). 17See, 12 CFR part 225, appendix A, § II.A. 18Mandatory 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. 

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

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 § 1.17), 

proposed § 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. 

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 § 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 § 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 § 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. 

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

The terms of proposed § 23.101 have 

been drafted to maintain consistent 

capital requirements among bank and 

nonbank subsidiaries (other than FCM 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27806 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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

20The 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. 

21See sections 2(c)(2)(B)(i) and (ii) of the CEA. 

22The 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. 

23For 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 

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

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, § 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. 

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 offexchange foreign currency transactions. 

The additional proposed minimum 

capital requirement based on 

membership requirements of a 

registered futures association is similar 

to FCM requirements under § 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 § 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 § 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 

§ 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. 

The term ‘‘over-the-counter 

derivatives credit risk requirement’’ is 

defined in proposed § 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 § 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 overthe-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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27807 

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. 

24FCMs that register as security-based swap 

dealers also will be subject to minimum capital 

requirements established by the SEC for securitybased swap dealers. 25See 17 CFR 15c3–1(a)(7). 

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. 

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 noncurrent 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 

§ 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

The Commission is proposing 

amendments to § 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 § 1.17(c)(6), which 

allows certain FCMs that are duallyregistered 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 § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27808 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

26See 17 CFR 15c3–1e(e)(1). 

CFTC if its tentative net capital fell 

below $5 billion.26

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 § 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 

§ 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27809 

27For a single OTC position, the current exposure 

is the greater of the mark-to-market value of the 

over-the-counter position or zero. 

28For a single over-the-counter position, the 

potential future exposure, including an over-thecounter 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. 

30The 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. 

31See ‘‘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. 

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 § 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 markto-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 × Agross) + (0.6 × 

NGR × 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-thecounter position. The collateral would 

be subject to the following 

requirements: 

• 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 § 23.151; 

• If the counterparty is a swap dealer, 

major swap participant or financial 

entity as defined in § 23.150, certain 

additional requirements apply as 

described in the proposed rule at 

§ 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 § 1.31 of 

the Commission’s regulations. 

b. Additional Market Risk Exposure 

Proposed § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27810 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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). 

33The 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. 

34See 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. 

35With 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). 

36See 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). 

models, the Commission believes that 

this established approach is the most 

appropriate method for computing 

market risk charges. 

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). 

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 

§ 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 § 23.104(c)(5) is the same as 

the text proposed by the proposed 

banking agencies. 

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 

§ 23.104 for general market risk 

therefore take into consideration the 

terms originally contemplated by these 

banking agencies in the 1995 proposed 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27811 

37The 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. 

38For 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. 

39The 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. 

40This 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 noninvestment grade debt securities ‘‘tend to be based 

primarily on issuer-specific factors.’’ See 62 FR 

67996 (December 30, 1997). 

41 Id. at 68002. 

42The 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. 

rules. Proposed § 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. 

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 timebands 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 timeband 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 timebands is the base capital charge for 

general market risk. 

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. 

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. 

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 passthrough 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

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

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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27812 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

43Two 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). 

44Applying 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. 

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 × 1.68 = 8.4 

46SEC 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. 

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: 

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 × Gamma × VU2. 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

(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. 

3. Calculations by SDs and MSPs That 

Are Not Using Internal Models and Are 

FCMs 

The existing capital treatment under 

§ 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 

§ 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 § 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 

§ 1.17 for OTC derivatives positions, by 

adding new paragraphs (iii) and (iv) to 

§ 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, § 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 

§ 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 § 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. 

Proposed § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27813 

47The term ‘‘designated self-regulatory 

organization’’ is defined at § 1.3(ff) as the selfregulatory 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 § 1.52. 

48See 76 FR 6715 (Feb. 8, 2011). Proposed 

§ 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. 

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. 

The Commission is not proposing to 

amend § 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

Proposed § 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 § 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 DoddFrank 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 § 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 § 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 § 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 § 23.106, and would continue to 

comply with the FCM financial 

reporting obligations set forth in § 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 § 23.101. The 

schedule would further disclose the 

firm’s minimum required capital under 

§ 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 § 23.106 also would 

authorize the Commission to require a 

SD or MSP that was not subject to 

regulation by a prudential regulator to 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27814 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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

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 

§ 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 § 1.31 of the Commission’s 

regulations. 

2. SD and MSP Notice Filing 

Requirements 

Proposed § 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 § 1.12 of the 

Commission’s regulations. Proposed 

§ 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 

§ 1.12 and, as noted above, such 

requirements are comparable to the 

proposed SD and MSP notice 

requirements set forth in § 23.105. 

Proposed § 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 § 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 § 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 § 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 § 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 

§ 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 § 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 

§§ 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 § 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. 

1. Financial Reporting Requirements in 

§ 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 

§ 30.7. 

The Commission is proposing to 

amend §§ 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 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 § 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 § 30.7 of the Commission’s 

regulations. 

The Commission is further proposing 

a technical amendment to § 1.10(c)(1), 

which directs an FCM, and other 

registrants, to file the reports and other 

information required by § 1.10 with 

Commission’s Regional Office with 

jurisdiction over the registrant’s 

principal place of business. Commission 

§ 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 

§ 1.10(c) to include a reference to the 

geographic listing in § 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 § 1.16 

The Commission is proposing to 

amend § 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 

§ 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 § 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 

§ 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 § 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 § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27816 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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 § 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 § 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 § 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 selfreporting 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 § 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 § 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 § 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 § 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 

§ 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 § 1.12 to apply, as 

applicable, to FCMs that carry swap 

customer accounts. The Commission, 

however, believes it is necessary to 

amend § 1.12(f)(4) due to the reference 

in the regulation to ‘‘commodity 

interest’’ accounts. The term 

‘‘commodity interest’’ is defined in 

§ 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 

§ 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 § 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 

§ 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 § 1.20 and § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27817 

entirety. The Commission is also 

proposing to add similar references to 

cleared swap accounts of customers in 

§§ 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 § 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 § 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 

§ 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 

§ 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 

§ 23.101 for such SDs or MSPs. 

(3) The Commission is proposing in 

§ 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 § 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 nonfinancial 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 § 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 § 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 

§ 1.17(c)(2)(ii) to exclude unsecured 

receivables from counterparties to OTC 

transactions in determining their 

adjusted net capital under § 1.17. 

Certain SDs or MSPs that also are 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27818 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

50See, proposed § 23.504(e) at 76 FR 6715 (Feb. 

8, 2011). 

registered as FCMs, however, may elect 

to use internal models to compute credit 

risk charges under § 1.17(c)(6) if they 

comply with the Commission’s 

requirements set forth in § 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 

§ 1.17(c)(7) would permit SDs and MSPs 

that also are registered FCMs to seek 

Commission approval under § 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 DoddFrank 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? 

(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 

§ 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 §§ 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 § 140.91 of the 

Commission’s regulations. The 

Commission proposes to amend 

§ 140.91 to provide similar delegations 

with respect to functions reserved to the 

Commission in Part 23. 

Proposed § 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 

§ 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 § 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 § 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 § 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 

§§ 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 § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27819 

51 5 U.S.C. 601 et seq. 

52 47 FR 18618 (Apr. 30, 1982). 

53 Id. at 18619. 

54 47 FR at 18620. 

55 Id. 56 44 U.S.C. 3501 et seq. 

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 § 23.155(b)(4)(ii) and 

(iii), with respect to initial margin, and 

under § 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 

§ 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 § 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 § 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 

§ 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 § 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. 

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. 

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. 

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. 

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 § 1.10 would require 

FCMs to file with respect to the cleared 

swaps of their customers. The collection 

of information required by the amended 

§ 1.10 are necessary for the 

Commission’s oversight of the FCM’s 

compliance with its minimum financial 

requirements under the CEA and 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27820 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27821 

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

• 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 

§ 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 

§ 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 §§ 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 

§§ 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 § 1.12 and in proposed 

§§ 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27822 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

58Strictly 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. 

59See joint proposed rulemaking issued by the 

prudential regulators on April 12, 2011, titled 

‘‘Margin and Capital Requirements for Covered 

Swap Entities.’’ 

60This is not to say that the proposed rules for 

bank capital requirements are without costs and 

benefits measured with respect to some to-bespecified alternative. It is only to say that a 

discussion of such costs and benefits is beyond the 

scope of this analysis. 

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. 

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). 

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

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. 

To further promote consistent 

treatment where an FCM is also a 

subsidiary of a BHC, the Commission 

has proposed amendments to § 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. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27823 

61See ‘‘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. 

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 

§ 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 risksensitive (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 noncentrally cleared OTC derivatives products, 

such as the reforms proposed by [Basel 

Committee on Banking Supervision] relating 

to higher capital requirements * * *.61

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 costbenefit 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 § 1.10 by revising 

paragraphs (c), (d)(1)(v), (d)(2)(iv), 

(d)(2)(vi), and (g)(2)(ii) to read as 

follows: 

§ 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 § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27824 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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 § 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 § 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 § 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 

§ 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 

§ 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 § 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: 

§ 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 

§ 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 § 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 § 1.16 by revising 

paragraphs (a)(4), (d)(1), and (d)(2)(iv) to 

read as follows: 

§ 1.16 Qualifications and reports of 

accountants. 

(a) * * * 

(4) Customer. The term ‘‘customer’’ 

includes a customer as defined in 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27825 

§ 1.3(k) of this part; a cleared swaps 

customer as defined in § 22.2 of this 

chapter; and a foreign futures or foreign 

options customer as defined in § 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 

§ 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 § 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: 

§ 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 § 1.3(k) of this 

chapter; cleared over the counter 

customer as defined in § 1.17(b)(10) of 

this chapter, and includes a foreign 

futures or foreign options customer as 

defined in § 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’, noncustomers’, 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 § 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27826 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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 § 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 securitybased swap dealer or major securitybased 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 § 23.103 

of this chapter and the application is 

pending approval. A denial or approval 

of an application made under § 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 

§ 23.103. 

* * * * * 

(7) Any futures commission merchant 

that is also registered as a swap dealer 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 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 § 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] 

§ 23.100 Definitions applicable to capital 

requirements. 

For purposes of §§ 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 § 23.104, or to compute using 

internal models as approved under 

§ 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 § 23.104, or to compute 

using internal models approved under 

§ 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 § 23.101 of this part 

applies to a swap dealer or major swap 

participant. 

§ 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 

§ 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, 

§ II.A; 

(ii) The swap dealer’s minimum riskbased 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 

§ 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 

§ 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. bankholding company; or, 

(iii) The amount of capital required by 

a registered futures association of which 

the major swap participant is a member. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27828 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

(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 § 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 § 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. 

§ 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. 

§ 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-thecounter derivatives credit risk 

requirement to compute its minimum 

regulatory capital requirement under 

§§ 23.101(a)(1)(i) or 23.101(b)(1)(i), 

respectively, of this part; 

(2) Its market risk and over-thecounter 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 

§ 23.101(a)(2)(ii) or § 23.101(b)(2)(ii) of 

this part; or 

(3) The deductions from its net capital 

for market risk exposure and over-thecounter derivatives credit risk, in lieu of 

deductions otherwise required under 

§ 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 § 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 § 145.9 of this chapter. 

(c) The application must identify the 

categories of positions for which the 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27829 

swap dealer or major swap participant 

will use internal models for its 

computations for market risk and overthe-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 overthe-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 § 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-thecounter 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-thecounter 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 selfregulatory organizations. 

(h) A swap dealer or major swap 

participant may no longer use internal 

models to compute its market risk 

exposure requirement and over-thecounter 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. 

§ 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 § 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 overthe-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 § 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 § 23.101(a)(2)(ii) or 

§ 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 § 1.17(c) 

of this chapter. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27830 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

(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 mortgagebacked 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 § 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 nonvoting 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 shortterm 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. governmentsponsored 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 OECDbanks 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

Category Remaining maturity (contractual) Weighting factor 

(in percent) 

Government ............................................ N/A .......................................................................................................................... 0.00 

Qualifying ............................................... 6 months or less ..................................................................................................... 0.25 

Over 6 months to 24 months .................................................................................. 1.00 

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 riskweighted 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 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-todefault 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-todefault 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-todefault 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 riskweighted 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 riskweight factor set forth in Table B of this 

section to determine the risk-weighted 

long interest rate position for each timeband. The summed short interest rate 

positions in each time-band also are 

multiplied by the appropriate riskweight 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

Zone Coupon 3% or more Coupon less than 3% Risk weight 

(%) 

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 riskweighted 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27832 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

or the total risk-weighted short interest 

rate position, or if the total long riskweighted 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

Zone Time band 

Within the 

zone 

(%) 

Between adjacent zones 

(%) 

Between 

zones 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 riskweighted long positions and riskweighted 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 riskweighted 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27834 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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 timeband, 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 

Time-band Modified 

duration 

Assumed 

interest rate 

change 

(%) 

Risk-weight 

for gamma 

(average 

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 timeband. 

(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 deltabased) 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 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 § 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 

Remaining maturity Interest rate Foreign exchange 

rate and gold Credit Equity Precious metals (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 × Agross) + (0.6 × NGR × 

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-thecounter 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 § 23.151 of this part; 

and 

(iii) If the counterparty is a swap 

dealer, major swap participant or 

financial entity as defined in § 23.150 of 

this part: 

(A) The collateral must be financial 

collateral that is liquid and transferable; 

marked-to-market each day, and subject 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27836 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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 § 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 

§ 23.150 of this part, applying the 

haircuts required pursuant to a credit 

support agreement meeting the 

requirements of § 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). 

Zone Time-band and position Risk weight 

% Risk-weighted position Net time-band positions Net zone positions 

1 ........................ 0–1 mth ................................ 0.00 

1–3 mth Long 75 Gov. bond 0.20 Long 0.15 ............................. Long 0.15 ............................. Long 1.00. 

3–6 mth Short 50 Future ...... 0.40 Short 0.20 ............................ Short 0.20.

6–12 mths Long 150 Swap .. 0.70 Long 1.05 ............................. Long 1.05.

2 ........................ 1–2 yrs ................................. 1.25 

2–3 yrs ................................. 1.75 

3–4 yrs Long 50 Future ....... 2.25 Long 1.125 ........................... Long 1.125 ........................... Long 1.125. 

3 ........................ 4–5 yrs ................................. 2.75 

5–7 yrs ................................. 3.25 

7–10 yrs Short 150 Swap, 

Long 13.33 Qual Bond.

3.75 Short 5.625, Long 0.050 ...... Short 5.125 .......................... Short 5.125. 

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 × 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 × 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 × 

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 × 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 riskfree 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 × 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 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 × 0.01125 × 5002 = 

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 BlackScholes 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 × 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. 

Instrument Specific risk 

charge General market risk charge 

Exchange-Traded Future: 

Government security ............................................................ No ................ Yes, as two positions. 

Corporate debt security ........................................................ Yes ............... Yes, as two positions. 

Index on short-term interest rates (e.g. LIBOR) .................. No ................ Yes, as two positions. 

OTC Forward: 

Government security ............................................................ No ................ Yes, as two positions. 

Corporate debt security ........................................................ Yes ............... Yes, as two positions. 

Index on short-term interest rates. ....................................... No ................ Yes, as two 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 interest rates ........................................ No. 

(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. 

§ 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 

§ 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 § 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 § 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 

§ 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 

§ 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 § 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 § 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 

§ 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27838 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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 

§ 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. 

§ 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 § 23.101. Such records 

must be maintained in accordance with 

§ 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 § 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 § 1.16 of this chapter: 

Provided, however, that for purposes of 

application of the provisions of § 1.16 to 

swap dealers and major swap 

participants, the term ‘‘§ 23.101’’ shall be 

substituted for the term ‘‘§ 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 

§ 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 § 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. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27839 

part 225, and appendices thereto, as if 

the subsidiary itself were a U.S. bankholding 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 § 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. 

§§ 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 § 140.91 by revising the 

section heading and adding paragraphs 

(a)(9) through (15) to read as follows: 

§ 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
27840 Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 

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 DoddFrank 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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Proposed Rules 27841 

[FR Doc. 2011–10881 Filed 5–11–11; 8:45 am] 

BILLING CODE C 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 3EP12MY11.002</GPH>