91252 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 

1Commission regulations referred to herein are 

found at 17 CFR chapter 1. Commission regulations 

are accessible on the Commission’s Web site, http:// 

www.cftc.gov. 

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 to adopt new 

regulations and to amend existing 

regulations to implement sections 4s(e) 

and (f) of the Commodity Exchange Act 

(‘‘CEA’’), as added by section 731 of the 

Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’). 

Section 4s(e) requires the Commission 

to adopt capital requirements for swap 

dealers (‘‘SDs’’) and major swap 

participants (‘‘MSPs’’) that are not 

subject to capital rules of a prudential 

regulator. Section 4s(f) requires the 

Commission to adopt financial reporting 

and recordkeeping requirements for SDs 

and MSPs. The Commission also is 

proposing to amend existing capital 

rules for futures commission merchants 

(‘‘FCMs’’), providing specific capital 

deductions for market risk and credit 

risk for swaps and security-based swaps 

entered into by an FCM. The 

Commission is further proposing several 

technical amendments to the 

regulations. 

DATES: Comments must be received on 

or before March 16, 2017. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AD54 and 

‘‘Capital Requirements for Swap Dealers 

and Major Swap Participants’’, by any of 

the following methods: 

• CFTC Web site, via its Comments 

Online process: http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: Send to Chris Kirkpatrick, 

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. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one of these methods. 

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 Regulation 

145.9 of the Commission’s regulations.1

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: 

Eileen T. Flaherty, Director, Division of 

Swap Dealer and Intermediary 

Oversight, 202–418–5326, eflaherty@

cftc.gov; Thomas Smith, Deputy 

Director, Division of Swap Dealer and 

Intermediary Oversight, 202–418–5495, 

tsmith@cftc.gov; Jennifer C.P. Bauer, 

Special Counsel, Division of Swap 

Dealer and Intermediary Oversight, 202– 

418–5472, jbauer@cftc.gov; Joshua 

Beale, Special Counsel, Division of 

Swap Dealer and Intermediary 

Oversight, 202–418–5446, jbeale@

cftc.gov; Rafael Martinez, Senior 

Financial Risk Analyst, Division of 

Swap Dealer and Intermediary 

Oversight, 202–418–5462, rmartinez@

cftc.gov; Paul Schlichting, Assistant 

General Counsel, Office of the General 

Counsel, 202–418–5884, pschlichting@

cftc.gov; or Lihong McPhail, Research 

Economist, 202–418–5722, lmcphail@

cftc.gov, Office of the Chief Economist; 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. Statutory Authority 

B. Previous Proposed Rulemaking 

C. Consultation With U.S. Securities and 

Exchange Commission and Prudential 

Regulators 

II. Proposed Regulations and Amendments to 

Regulations 

A. Capital 

1. Introduction 

2. Capital Requirements for Swap Dealers 

and Major Swap Participants 

i. Capital Requirements for Swap Dealers 

Under a Bank-Based Capital Approach 

a. Computation of Minimum Capital 

Requirement 

b. Computation of Common Equity Tier 1 

Capital To Meet Minimum Capital 

Requirement 

ii. Capital Requirement for Swap Dealers 

Under a Net Liquid Assets Capital 

Approach 

a. Computation of Minimum Capital 

Requirement 

b. Computation of Net Capital To Meet 

Minimum Capital Requirement 

(1) Swap Dealers Computation of Tentative 

Net Capital and Net Capital Without 

Approval To Use Internal Capital Models 

(2) Swap Dealers Approved To Use Internal 

Capital Models 

iii. Capital Requirement for Swap Dealers 

That Are ‘‘Predominantly Engaged in 

non-Financial Activities’’ 

a. Computation of Minimum Capital 

Requirement 

b. Computation of Tangible Net Worth To 

Meet Minimum Capital Requirement 

iv. Capital Requirements for Major Swap 

Participants 

3. Capital Requirements for FCMs 

i. Introduction 

ii. FCM Capital Charges for Swaps and 

Security-Based Swaps in Computing 

Adjusted Net Capital 

a. Standardized Market Risk and Credit 

Risk Capital Charges 

b. Model-Based Market Risk and Credit 

Risk Capital Charges 

iii. Market Risk and Credit Risk Capital 

Models for Futures Commission 

Merchants That Are Not Alternative Net 

Capital Firms 

iv. Liquidity Requirements 

4. Model Approval Process 

i. VaR Models 

ii. Stressed VaR Models 

iii. Specific Risk Models 

iv. Incremental Risk Models 

v. Comprehensive Risk Models 

vi. Credit Risk Models 

B. Swap Dealer and Major Swap 

Participant Liquidity Requirements and 

Equity Withdrawal Restrictions 

1. Liquidity Requirements 

i. Swap Dealers Subject to the Bank-Based 

Capital Approach 

ii. Swap Dealers Subject to the Net Liquid 

Assets Capital Approach 

2. Swap Dealer Equity Withdrawal 

Restrictions 

C. Swap Dealer and Major Swap 

Participant Financial Recordkeeping, 

Reporting and Notification Requirements 

1. Swap Dealer and Major Swap Participant 

Financial Recordkeeping and Financial 

Statement Reporting Requirements 

2. Swap Dealer and Major Swap Participant 

Notice Requirements 

3. Electronic Filing Requirements for 

Financial Reports and Regulatory 

Notices 

4. Swap Dealer and Major Swap Participant 

Reporting of Position Information 

5. Reporting Requirements for Swap 

Dealers Approved To Use Internal 

Capital Models 


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Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 91253 

2See 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. 

3 7 U.S.C. 1 et seq. 

4See 7 U.S.C. 6s(e)(3)(A). Section 4s(e) also 

directs the Commission to adopt regulations for SDs 

and MSPs imposing initial and variation margin 

requirements on all swaps that are not cleared by 

a registered clearing organization. The Commission 

adopted final SD and MSP margin requirements for 

uncleared swap transactions on December 18, 2015. 

See, Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 81 FR 

636 (Jan. 6, 2016). 

5The term ‘‘prudential regulator’’ is defined in 

section 1a(39) of the CEA for purposes of the 

section 4s(e) capital requirements. Specifically, the 

term ‘‘prudential regulator’’ is defined to mean 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; the Farm Credit 

Administration; and the Federal Housing Finance 

Agency. All references to an ‘‘SD’’ or an ‘‘MSP’’ in 

this proposal will mean an SD or MSP that is 

subject to the Commission’s capital rules, unless 

otherwise specified. 

6The prudential regulators, including the Federal 

Reserve Board and OCC which have capital 

responsibilities for SDs provisionally-registered 

with the Commission, have adopted capital rules 

that incorporate capital requirements for swap and 

security-based swap transactions. In this regard, the 

Federal Reserve Board and OCC have adopted 

revised capital rules to incorporate Basel III capital 

adequacy requirements. See, Regulatory Capital 

Rules: Regulatory Capital, Implementation of Basel 

III, Capital Adequacy, Transition Provisions, 

Prompt Corrective Action, Standardized Approach 

for Risk-weighted Assets, Market Discipline and 

Disclosure Requirements, Advanced Approaches 

Risk-Based Capital Rule, and Market Risk Capital 

Rule, 78 FR 62018 (Oct. 11, 2013). 

7The Commission previously finalized certain 

record retention requirements for SDs and MSPs 

regarding their swap activities. See, Swap Dealer 

and Major Swap Participant Recordkeeping, 

Reporting, and Duties Rules; Futures Commission 

Merchant and Introducing Broker Conflicts of 

Interest Rules; and Chief Compliance Officer Rules 

for Swap Dealers, Major Swap Participants, and 

Futures Commission Merchants, 76 FR 20128 (Apr. 

3, 2012). 

8Section 4f(b) of the CEA authorizes the 

Commission to establish minimum financial 

requirements for FCMs. The Commission 

previously adopted minimum capital requirements 

for FCMs, which are set forth in Commission 

Regulation 1.17. 

9Regulation 1.3(ggg) defines the term ‘‘swap 

dealer’’ and contains a general exception from the 

definition for a person that engages in a de minimis 

Continued 

6. Financial Reporting Requirements for 

Swap Dealers and Major Swap 

Participants Subject to the Capital Rules 

of a Prudential Regulator 

7. Weekly Position and Margin Reporting 

D. Comparability Determinations for 

Eligible Swap Dealers and Major Swap 

Participants 

E. Technical Amendments 

1. Amendments to the Financial Reporting 

Requirements in Regulations 1.10 and 

1.16 

2. Amendments to the Notice Provisions in 

Regulation 1.12 

3. Commission Receivables for Certain 

Swap Transactions in Regulation 1.17 

4. Changes to Notice and Disclosure 

Requirements for Bulk Transfers in 

Regulation 1.65 

5. Conforming Amendments to Delegated 

Authority Provisions in Regulation 

140.91 

III. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

1. New Information Collection 

Requirements and Related Burden 

Estimates 

i. Form SBS 

ii. Notice of Failure to Maintain Minimum 

Financial Requirements 

iii. Requests for Extensions of Time To File 

Financial Statements 

iv. Capital Requirements Elections 

v. Application for Use of Models 

vi. Liquidity Requirements 

vii. Financial Recordkeeping, Reporting 

and Notification Requirements for SDs 

and MSPs 

viii. Capital Comparability Determinations 

2. Information Collection Comments 

IV. Cost Benefit Considerations 

A. Background 

B. Regulatory Capital 

C. General Summary of Proposal 

D. Baseline 

E. Overview of Approaches 

1. Bank Based Capital 

2. Net Liquid Assets 

3. Alternative Net Capital (‘‘ANC’’) 

4. Tangible Net Worth 

5. Substituted Compliance 

F. Entities 

1. Bank Subsidiaries 

2. SD/BD (Without Models) 

3. SD/BD/OTC Derivatives Dealers 

(Without Models) 

4. SD/FCM (Without Models) 

5. ANC Firms (SD/BD and/or FCMs That 

Use Models) 

6. Stand-Alone SD (With and Without 

Models) 

7. Non-Financial SD (With and Without 

Models) 

8. MSP 

9. Substituted Compliance 

G. Liquidity and Funding Requirements 

H. Reporting and Recordkeeping 

Requirements 

I. Section 15(a) Factors 

1. Protection of Market Participants and the 

Public 

2. Efficiency, Competitiveness, and 

Financial Integrity of Swaps Markets 

3. Price Discovery 

4. Sound Risk Management Practices 

5. Other Public Interest Considerations 

I. Introduction 

A. Statutory Authority 

Section 731 of the Dodd-Frank Act 2

amended the CEA 3 by adding section 

4s(e), which requires the Commission to 

adopt rules establishing capital 

requirements for SDs and MSPs to help 

ensure the safety and soundness of the 

SDs and MSPs.4 Section 4s(e) applies a 

bifurcated approach requiring each SD 

and MSP subject to the capital 

requirements of a prudential regulator to 

meet the capital requirements adopted 

by the applicable prudential regulator, 

and requiring each SD and MSP that is 

not subject to the capital requirements 

of a prudential regulator to meet the 

capital requirements adopted by the 

Commission.5 Therefore, SDs and MSPs 

that are not banking entities, including 

nonbank subsidiaries of bank holding 

companies regulated by the Federal 

Reserve Board, are subject to the 

Commission’s capital requirements.6

The Commission is also proposing in 

this release to require SDs to meet 

defined liquidity and funding 

requirements and is proposing certain 

limitations on the withdrawal of capital 

from SDs as part of the SD capital 

requirements. 

The Commission is also required to 

adopt regulations to implement 

provisions in section 4s related to 

financial reporting and recordkeeping 

by SDs and MSPs. Section 4s(f)(2) of the 

CEA directs the Commission to adopt 

rules governing financial condition 

reporting and recordkeeping for SDs and 

MSPs, and section 4s(f)(1)(A) 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 also proposing 

record retention and inspection 

requirements consistent with the 

provisions of section 4s(f)(1)(B).7

Pursuant to the financial reporting 

provisions, the Commission is 

proposing that SDs and MSPs submit 

periodic financial information and 

swaps and security-based swaps 

position information to the Commission, 

and that SDs and MSPs file written 

notices with the Commission whenever 

defined reportable events are triggered. 

In addition to proposing minimum 

capital and financial reporting 

requirements for SDs and MSPs, the 

Commission is also proposing to amend 

existing capital requirements for FCMs 

to include specific market risk capital 

charges and credit risk capital charges 

for swaps and security-based swaps 

transactions that are not cleared by 

clearing organizations.8 Section 4s(a) of 

the CEA requires entities that engage in 

swap dealing activities and otherwise 

meet the definition of an SD to register 

with the Commission as SDs. The 

Commission expects that certain FCMs 

will engage in swap dealing activities 

that requires them to register as SDs. In 

addition, the Commission expects that 

other FCMs may engage in a level of 

swap dealing activity that is below the 

de minimis exception and, therefore, 

exempts the FCMs from registering as 

SDs.9 Accordingly, the Commission is 


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91254 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 

level of swap dealing activities. Regulation 1.3(ggg) 

generally defines the term ‘‘de minimis’’ to mean 

that the swap dealing activities of a person, or any 

other entity controlling, controlled by or under 

common control with the person, over the 

preceding 12 months have an aggregate gross 

notional amount of no more than $3 billion (subject 

to a phase in level of $8 billion) and an aggregate 

notional amount of no more than $25 million with 

regard to swaps in which the counterparty is a 

‘‘special entity’’ as defined in section 4s(h)(2)(C) of 

the CEA and Commission Regulation 23.401(c). 

10See Capital Requirements of Swap Dealers and 

Major Swap Participants, 76 FR 27802 (May 12, 

2011). 

11Comments received on the Commission’s May 

12, 2011 proposed capital and financial reporting 

rules are available on the Commission’s Web site. 

Commenters included financial services 

associations, agricultural associations, energy 

associations, insurance associations, banks, 

brokerage firms, investment managers, insurance 

companies, pension funds, commercial end users, 

law firms, public interest organizations, and other 

members of the public. 

12See 81 FR 636 (Jan. 6, 2016). 

13The Commission adopted final regulations 

addressing the cross-border application of the 

uncleared swaps margin rules. See, Margin 

Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants—Cross-Border 

Application of the Margin Requirements, 81 FR 

34818 (May 31, 2016). 

14Section 15F(e) of the Exchange Act (15 U.S.C. 

78o–10(e)(1)(B)) provides that the SEC shall 

prescribe capital and margin requirements for 

SBSDs and nonbank MSBSPs that do not have a 

prudential regulator. The SEC proposed capital 

requirements for SBSDs and MSBSPs in November 

2012. See Capital, Margin, and Segregation 

Requirements for Security-Based Swap Dealers and 

Major Security-Based Swap Participants, 77 FR 

70214 (Nov. 23, 2012). The prudential regulators 

adopted amendments to the capital rules for banks 

and bank holding companies to incorporate certain 

requirements set forth in the Dodd-Frank Act. See, 

78 FR 62018 (Oct. 11, 2013). 

proposing to amend Regulation 1.17 to 

establish specific capital requirements 

for FCMs that engage in swaps or 

security-based swaps that are not 

cleared by a clearing organization. 

These proposed capital requirements 

would apply to all FCMs that enter into 

uncleared swaps or security-based 

swaps. The Commission also is 

proposing technical amendments to 

several regulations as part of the 

proposed capital and financial 

recordkeeping and reporting 

requirements. 

B. Previous Proposed Rulemaking 

The Commission previously proposed 

capital and financial reporting rules for 

SDs and MSPs in 2011.10 The 

Commission received comments from a 

broad spectrum of market participants, 

industry representatives, and other 

interested parties. The commenters 

addressed numerous topics including 

the permissible use of models for 

computing capital and the need for 

harmonization of the Commission’s 

rules with capital rules of the prudential 

regulators and the Securities and 

Exchange Commission (‘‘SEC’’).11

The Commission elected to defer 

consideration of final capital rules until 

the Commission adopted final 

regulations governing margin 

requirements for SDs and MSPs 

engaging in uncleared swap 

transactions. The Commission adopted 

the final margin requirements for 

uncleared swaps in December 2015.12

The Commission has considered the 

comments it received from its initial 

capital proposal in developing this 

proposal. In addition, and as discussed 

below, the Commission also has 

considered capital rules adopted by the 

prudential regulators and capital rules 

proposed by the SEC for security-based 

swap dealers (‘‘SBSDs’’) and major 

security-based swap participants 

(‘‘MSBSPs’’) in developing this 

proposal. The Commission further 

considered the impact of the final 

margin rules for uncleared swaps and 

the final rules addressing the crossborder application of the margin 

requirements for uncleared swaps in 

developing this proposal.13

C. Consultation With U.S. Securities and 

Exchange Commission and Prudential 

Regulators 

Section 4s(e)(3)(D) of the CEA 

provides that the CFTC, SEC, and 

prudential regulators (collectively, the 

‘‘Agencies’’) shall, to the maximum 

extent practicable, establish and 

maintain comparable minimum capital 

requirements for SDs and MSPs. 

Further, section 4s(e)(3)(D) directs staff 

of the Agencies to meet periodically, but 

no less frequently than annually, to 

consult on minimum capital 

requirements. Accordingly, staff from 

each of the Agencies had the 

opportunity to provide oral and/or 

written comments to the capital and 

financial reporting regulations for SDs 

and MSPs contained in this proposing 

release, and the proposal reflects certain 

elements of their comments. 

II. Proposed Regulations and 

Amendments to Regulations 

A. Capital 

1. Introduction 

Broadly speaking, in developing the 

proposed capital requirements for SDs 

and MSPs, the Commission strived to 

advance the statutory goal of helping to 

protect the safety and soundness of SDs 

and MSPs, while also taking into 

account the diverse nature of entities 

participating in the swaps market and 

the existing capital regimes that apply to 

these entities and/or their financial 

group. To that end, the Commission is 

proposing three alternative capital 

approaches for SDs and MSPs, which 

are intended to minimize competitive 

advantages that might otherwise arise if 

the Commission were to impose a 

singular capital approach in light of the 

different corporate and operating 

structures of the entities. The 

Commission further considered the 

degree to which its proposed capital 

requirements would be consistent with 

an existing regulatory framework (if 

any) to which these entities are already 

subject and the statutory objective of the 

capital requirements, to help ensure the 

safety and soundness of SD and MSP 

registrants. 

The Commission has, to a great 

extent, drawn on existing CFTC, 

prudential regulator, and SEC capital 

rules in developing the proposed capital 

requirements for SDs and MSPs. Also, 

as discussed in this release, the 

Commission’s proposed capital 

requirements for SDs and MSPs are 

consistent in many respects with the 

SEC’s proposed capital requirements for 

SBSDs and MSBSPs, and the prudential 

regulators’ capital requirements for 

banks and bank holding companies.14

Specifically, the proposal, depending on 

the characteristics of the registered 

entity, would: (i) Permit SDs to elect a 

capital requirement that is based on 

existing bank holding company capital 

rules adopted by the Federal Reserve 

Board (the ‘‘bank-based capital 

approach’’); (ii) permit SDs to elect a 

capital requirement that is based on the 

existing CFTC FCM capital rule, the 

existing SEC broker-dealer (‘‘BD’’) 

capital rule, and the SEC’s proposed 

capital requirements for SBSDs, (the 

‘‘net liquid assets capital approach’’); or 

(iii) permit SDs that meet defined 

conditions designed to ensure that they 

are ‘‘predominantly engaged in nonfinancial activities’’ to compute their 

minimum regulatory capital based upon 

the firms’ tangible net worth (the 

‘‘tangible net worth capital approach’’). 

With respect to MSPs, the 

Commission is proposing a minimum 

regulatory capital requirement based 

upon the tangible net worth of the MSP. 

This tangible net worth approach is 

consistent with the SEC’s proposed 

capital rule for MSBSPs as discussed in 

section II.A.2.iii of this release. 

The Commission’s proposed SD and 

MSP capital requirements are set forth 

in new Regulation 23.101, and are 

discussed in section II.A.2 of this 

release. Proposed Regulation 23.101 

details the minimum capital 

requirements for each of the three 

capital approaches and the eligibility 

criteria (as applicable), and further 


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15Section 3 of the CEA states that a purpose of 

the CEA is to establish a system of effective selfregulation under the oversight of the Commission. 

Consistent with the self-regulatory concept 

established under section 3, section 17 of the CEA 

provides a process whereby an association of 

persons may register with the Commission as a 

registered futures association (‘‘RFA’’). Currently, 

the National Futures Association (‘‘NFA’’) is the 

only RFA under section 17 of the CEA. 16See 81 FR 636, 640 (Jan. 6, 2016). 

17An OTC derivatives dealer is a limited purpose 

BD established by SEC regulations. An OTC 

derivatives dealer’s securities activities are limited 

to engaging in eligible OTC derivative instruments 

that are securities and other enumerated activities. 

See 17 CFR 240.3b–12. 

18FCM capital requirements are set forth in CFTC 

Regulation 1.17. SEC Rule 15c3–1 (17 CFR 

240.15c3–1) governs the capital requirements for 

BDs. SEC proposed Rule 18a–1 would govern the 

capital requirements for SBSDs that are not 

registered as BDs. (See 77 FR 70214). 

19See proposed Regulation 23.101(a)(2). 

defines the capital computations for 

each approach, including various 

market risk and credit risk charges, 

whether using models or otherwise, to 

determine whether an SD satisfies the 

minimum capital requirements. The 

proposal also defines a minimum 

capital requirement for MSPs and 

defines the capital computation for 

MSPs. 

The Commission is also proposing 

several amendments to Regulation 1.17, 

which governs the capital requirements 

for FCMs. The proposed amendments 

would establish specific market risk and 

credit risk capital charges for swap and 

security-based swap positions, and 

would provide a process for an FCM 

that is dually-registered as an SD to seek 

approval from the Commission or from 

the registered futures association 

(‘‘RFA’’) of which the FCM is a member 

to use internal capital models to 

compute market risk and credit risk 

capital charges.15 The discussion of the 

proposed FCM capital amendments is 

contained in section II.A.3 of this 

release. 

2. Capital Requirements for Swap 

Dealers and Major Swap Participants 

The Commission is proposing capital 

requirements for SDs and MSPs in order 

to help ensure the safety and soundness 

of the SDs and MSPs by requiring such 

firms to maintain a minimum level of 

financial resources that is based upon 

the activities of the firms. Adequate 

levels of capital will allow SDs and 

MSPs to meet their obligations to swap 

and security-based swap counterparties 

and general creditors. 

The Commission’s proposed SD 

capital requirements in Regulation 

23.101 are comprised of two 

components. First, an SD must compute 

the minimum amount of capital that the 

SD is required to maintain under 

proposed Regulation 23.101. Second, 

the SD must compute, based upon its 

balance sheet and certain adjustments 

including market risk and credit risk 

charges on its swaps, security-based 

swaps and other proprietary positions, 

the actual amount of capital that the SD 

maintains. The SD’s actual capital must 

be equal to or greater than the SD’s 

minimum capital requirement. This 

section discusses the proposed 

minimum amount of capital required to 

be maintained by an SD or MSP under 

the proposal and the proposed 

regulations governing the computation 

of the amount of capital that an SD or 

MSP actually maintains. 

To provide SDs with flexibility given 

the diverse nature of their corporate 

structures and operations, the 

Commission is proposing a bank-based 

capital approach, a net liquid assets 

capital approach, and a tangible net 

worth capital approach for SDs. And as 

described below, SDs which are subject 

to existing capital requirements that 

would adequately address their swaps 

transactions may choose to remain 

under those existing requirements. The 

Commission believes that providing this 

flexibility is appropriate as both the 

bank-based capital approach and the net 

liquid assets capital approach are based 

on internationally-recognized and 

accepted approaches for establishing 

strong minimum capital requirements 

for financial institutions. Both of these 

approaches are designed to ensure that 

SD’s meet their financial obligations and 

to help ensure that safety and soundness 

of the SD. Although there are 

differences between the bank-based and 

net liquid assets based capital 

approaches, they are structurally similar 

in that they evaluate the composition of 

the SD’s balance sheet and are 

formulated to ensure the SD’s ability to 

continue its operations in times of 

financial stress. The option to use the 

tangible net worth approach is 

appropriate because it would be 

available only for SDs that are 

predominantly engaged in non-financial 

activities. These SDs are primarily 

involved in commercial activities and 

engage in a relatively insignificant 

amount of financial transactions when 

compared to their entire operations, as 

described below. As the Commission 

has previously noted, financial firms 

generally present a higher level of 

systemic risk than commercial firms as 

the profitability and viability of 

financial firms is more tightly linked to 

the health of the financial system than 

commercial firms.16

In addition, as noted above, the 

Commission based the proposal on 

existing regulatory capital regimes. The 

Commission recognizes that certain of 

the current registered SDs are nonbank 

subsidiaries of bank holding companies 

that are already subject to the Federal 

Reserve Board’s bank-based capital 

requirements for bank holding 

companies. The Commission anticipates 

that SDs that are nonbank subsidiaries 

of bank holding companies may elect 

the bank-based capital approach as the 

firms consolidate into bank holding 

companies that are subject to the 

Federal Reserve Board’s bank-based 

capital requirements. The Commission’s 

proposed bank-based capital approach 

would allow an SD that consolidates 

into a bank holding company to 

maintain books and records, and 

perform capital computations, in a 

manner that is consistent with its 

holding company parent entity. 

Furthermore, several of the current 

provisionally-registered SDs are also 

dually-registered with the Commission 

as FCMs or dually-registered with the 

SEC as BDs or ‘‘OTC derivatives 

dealers,’’ and several of the current 

provisionally-registered SDs are 

anticipated to register with the SEC as 

SBSDs.17 FCMs, BDs, and OTC 

derivatives dealers currently are subject 

to a net liquid assets capital 

requirement, and the SEC is proposing 

a net liquid assets capital requirement 

for SBSDs.18 The Commission believes 

that permitting dually-registered SDs/

SBSDs or SDs/OTC derivatives dealers 

to use a uniform CFTC–SEC net liquid 

assets capital approach would simplify 

the SDs recordkeeping obligations and 

allow them to use existing accounting 

and financial reporting systems. This 

approach is also consistent with the 

Commission’s long-standing practice of 

maintaining a uniform capital rule for 

dually-registered FCM/BDs, while also 

imposing a strong capital requirement 

on the SDs to help ensure the safety and 

soundness of the firms. 

In addition to the bank-based capital 

approach and the net liquid assets 

capital approach, the Commission is 

also proposing to permit SDs that are 

‘‘predominantly engaged in nonfinancial activities,’’ as defined below, 

to elect a capital approach that is based 

on the SD’s tangible net worth.19 The 

Commission is proposing the tangible 

net worth capital approach in 

recognition that not all SDs will be 

principally engaged in traditional 

dealing and other financial activities. 

The Commission anticipates that a small 

number of SDs will be substantially 

engaged in commercial operations that 

would make meeting a traditional bankbased capital approach or net liquid 


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20See section 4s(e)(1) and (2). 

21The Commission, as discussed in section II.A.3 

of this release, also is proposing to amend 

Regulation 1.17 to specifically address capital 

requirements for FCMs that carry swaps and/or 

security-based swaps positions. 

22Proposed Regulations 23.101(a)(5) and 23.106. 

23BCBS is the primary global standard-setter for 

the prudential regulation of banks and provides a 

forum for cooperation on banking supervisory 

matters. Institutions represented on the BCBS 

include the Federal Reserve Board, the European 

Central Bank, Deutsche Bundesbank, Bank of 

France, Bank of England, Bank of Japan, and Bank 

of Canada. 

24Common equity tier 1 capital is defined in 12 

CFR 217.20 of the Federal Reserve Board’s rules. 

Common equity tier 1 capital generally represents 

the sum of a bank holding company’s common 

stock instruments and any related surpluses, 

retained earnings, and accumulated other 

comprehensive income. 

assets capital approach extremely 

challenging, if at all possible, without 

substantial corporate restructuring. The 

Commission’s proposal to use the 

tangible net worth approach would be 

limited to SDs that are predominantly 

engaged in non-financial (i.e., 

commercial) activities. 

The Commission’s proposed approach 

of recognizing existing capital 

requirements on firms that register as 

SDs and the Commission’s further 

recognition that not all SDs will be 

traditional financial firms offers 

potential benefits to swap market 

participants by encouraging more firms 

to act as SDs and to make markets in 

swaps. An approach that would impose 

a standardized capital requirement on 

firms that otherwise are subject to 

existing capital regimes that differ 

substantially from the standardized 

capital requirement or that would 

require substantial corporate 

reorganization to satisfy the 

standardized capital requirement would 

increase costs of swap transactions for 

swap dealers and their counterparties, 

including commercial end users and 

other non-financial market participants. 

A standardized capital requirement may 

also impose significant disincentives for 

certain SDs to remain in the market as 

dealers in swaps, which would 

concentrate dealing activities in a 

smaller number of firms. The 

Commission’s proposal implements 

strong capital requirements to help 

ensure the safety and soundness of the 

SDs, while at the same time offers an 

appropriate degree of flexibility, 

recognizing that a single, standardized 

capital approach is not appropriate for 

all SDs which could result in significant 

burdens on all swap market 

participants. 

Proposed Regulation 23.101 also is 

consistent with the statutory 

requirements under section 4s(e), which 

effectively provides that SDs subject to 

the capital rule of a prudential regulator 

are not subject to the Commission’s 

capital rules.20 Proposed Regulation 

23.101(a)(3) would provide that an SD 

subject to the capital rules of a 

prudential regulator is not subject to the 

Commission’s capital rules. 

Proposed Regulation 23.101(a)(4) also 

provides that certain SDs that are 

otherwise currently subject to the 

Commission’s capital rules are not 

subject to Regulation 23.101. 

Specifically, proposed Regulation 

23.101(a)(4) would provide that an SD 

that is also registered as an FCM with 

the Commission is subject to the 

Commission’s FCM capital requirements 

contained in Regulation 1.17.21 These 

SDs would be subject to the FCM capital 

requirements, which the Commission is 

proposing to amend in order to better 

reflect the specific risks of engaging in 

uncleared swaps and security-based 

swap transactions. The Commission is 

requiring an SD that is dually-registered 

as an FCM to meet the FCM capital 

requirements as such requirements 

reflect the Commission’s long 

experience in regulating the financial 

requirements of FCMs. For example, the 

FCM capital requirement, which 

requires an FCM to hold at least one 

dollar of liquid assets to meet each 

dollar of liabilities (except certain 

subordinated debt), is designed to 

ensure that an FCM has adequate liquid 

resources to effectively operate as a 

market intermediary by having 

resources to pay customers’ requests to 

withdraw funds and by satisfying its 

customers’ obligations to clearing 

organizations. The Commission 

proposed amendments for FCMs are 

discussed in section II.A.3 of this 

release. 

Lastly, proposed Regulation 

23.101(a)(5) would contain a provision 

of ‘‘substituted compliance’’ for capital 

and financial reporting requirements for 

SDs that are: (1) Not organized under 

the laws of the U.S., and (2) not 

domiciled in the U.S. The proposal 

would permit these non-U.S. organized 

and domiciled SDs (or a regulatory 

authority in the SDs’ home country 

jurisdictions) to petition the 

Commission to satisfy the Commission’s 

capital and financial reporting 

requirements through substituted 

compliance with the capital and 

financial reporting requirements of the 

SDs’ respective home country 

jurisdiction.22 The proposed substituted 

compliance provisions and the 

Commission program of conducting 

comparability determinations of foreign 

jurisdictions capital requirements are 

discussed in section II.D of this release. 

i. Capital Requirement for Swap Dealers 

Under a Bank-Based Capital Approach 

a. Computation of Minimum Capital 

Requirement 

The Commission is proposing to 

provide SDs with an option to elect the 

bank-based capital approach based on 

the capital requirements adopted by the 

Federal Reserve Board for bank holding 

companies. The Federal Reserve Board’s 

bank holding company capital 

requirements are consistent with the 

bank capital framework adopted by the 

Basel Committee on Banking 

Supervision (‘‘BCBS’’).23 The BCBS 

framework is an internationallyrecognized framework for setting capital 

requirements for banks and bank 

holding companies. The Commission 

believes that proposing capital 

requirements using the Federal Reserve 

Board’s capital framework is 

appropriate as the framework 

specifically reflects swaps and securitybased swaps in the capital requirements, 

and the framework was developed to 

provide prudential standards to help 

ensure the safety and soundness of bank 

and bank holding companies. In 

addition, as noted above, the proposal to 

allow SDs an option to elect this 

approach would provide efficiencies for 

several of the provisionally registered 

SDs that are part of a bank holding 

company structure, and have developed 

recordkeeping, accounting, and 

financial reporting systems that are 

designed to comply with existing 

prudential requirements. 

The Commission’s bank-based capital 

approach is set forth in proposed 

Regulation 23.101(a)(1)(i), and would 

require an SD to maintain a minimum 

level of regulatory capital that is equal 

to or in excess of the greater of the 

following four criteria: 

(1) $20 million of common equity tier 

1 capital, as defined under the bank 

holding company regulations in 12 CFR 

217.20, as if the SD itself were a bank 

holding company subject to 12 CFR part 

217; 24

(2) common equity tier 1 capital, as 

defined under the bank holding 

company regulations in 12 CFR part 

217.20, equal to or greater than eight 

percent of the SD’s risk-weighted assets 

computed under the bank holding 

company regulations in 12 CFR part 217 

as if the SD were a bank holding 

company subject to 12 CFR part 217; 

(3) common equity tier 1 capital, as 

defined under 12 CFR 217.20, equal to 

or greater than 8 percent of the sum of: 

(a) The amount of ‘‘uncleared swaps 

margin’’ (as that term is defined in 


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25The term ‘‘uncleared swap margin’’ is defined 

in Regulation 23.100 to mean the amount of initial 

margin that a swap dealer would be required to 

collect from each swap counterparty pursuant to the 

margin rules for uncleared swap transactions 

(Regulation 23.154). The term ‘‘uncleared swap 

margin’’ includes all uncleared swaps that an SD is 

required to collect margin for under the margin 

regulations, and also includes all uncleared swaps 

that are exempt or excluded from the margin 

requirements including swaps with commercial end 

users, swaps entered into prior to the respective 

compliance dates of the Commission’s margin 

requirements set forth in Regulation 23.161 (i.e., 

legacy swaps), and excluded swaps with an 

affiliated entity. 

26The SEC proposed capital requirements for 

SBSDs would impose a minimum net capital 

requirement of $20 million for SBSDs that are not 

approved to use internal capital models and a $100 

million dollar tentative net capital and $20 million 

net capital requirement for SBSDs that are approved 

to use internal capital models. See 77 FR 70214 

(Nov. 23, 2012). SEC Rule 15c3–1(a)(5) (17 CFR 

240.15c3–1(a)(5)) currently requires an OTC 

derivatives dealer that has obtained approval to use 

capital models to maintain a minimum of $100 

million of tentative net capital and $20 million of 

net capital. 

27As discussed further below, the Commission’s 

proposal differs from the rules of the Federal 

Reserve Board in that the Commission’s proposal 

would require an SD to add to its risk weighted 

assets the market risk capital charges computed in 

accordance with Regulation 1.17 if the SD has not 

obtained approval from the Commission or from an 

RFA to use internal market risk and credit risk 

models. 

28See 12 CFR 217.10. 29See 12 CFR 217 subparts D, E, and F. 30Large, complex banks also 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 See 12 CFR 217 

subpart F. The market risk requirements generally 

apply to Federal Reserve Board-regulated 

institutions with aggregate trading assets and 

trading liabilities equal to 10 percent or more of 

total assets or one billion dollars or more. 

31The Federal Reserve Board’s standardized 

approach under subpart D of 12 CFR 217 applies 

only to credit risk charges; the Federal Reserve 

Board has not adopted standardized market risk 

charges. Bank and bank holding companies that are 

subject to market risk charges are required to use 

internal models and, accordingly, subpart D of 12 

CFR 217 does not include a standardized approach 

for computing market risk charges. To address this 

issue, the Commission is proposing that an SD that 

has not obtained Commission or RFA approval to 

use internal market risk models must apply the 

rules-based market risk capital charges contained in 

Regulation 1.17 in computing its total risk-weighted 

assets. 

32For example, U.S. Treasuries are subject to 

capital charges of between zero and six percent 

depending on the time to maturity of each treasury 

instrument, and readily marketable equity securities 

are subject to a 15 percent capital charge. See 

Regulation 1.17(c)(5)(v), which references SEC Rule 

15c3–1(c)(2)(vi) (17 CFR 240.15c3–1(c)(2)(vi)). SEC 

Rule 15c3–1(c)(2)(vi)(A)(1) provides that a BD shall 

take a capital charge on U.S. Treasuries of between 

zero and six percent of the fair market value of the 

instrument depending upon the time to maturity. 

Rule 15c3–1(c)(2)(vi)(j) provides a capital charge for 

equities equal to 15 percent of the fair market value 

of the securities. 

33The 12.5 multiplication factor is necessary to 

ensure that the SD maintains common equity tier 

1 capital at level to cover the full amount of the 

Continued 

proposed Regulation 23.100) for each 

uncleared swap position open on the 

books of the SD, computed on a 

counterparty by counterparty basis 

pursuant to Regulation 23.154; 25

(b) the amount of initial margin that 

would be required for each uncleared 

security-based swap position open on 

the books of the SD, computed on a 

counterparty-by-counterparty basis 

pursuant to proposed SEC Rule 18a– 

3(c)(1)(i)(B), without regard to any 

initial margin exemptions or exclusions 

that the rules of the SEC may provide 

to such security-based swap positions; 

and 

(c) the amount of initial margin 

required by a clearing organization for 

cleared proprietary futures, foreign 

futures, swaps, and security-based swap 

positions open on the books of the SD; 

or 

(4) the capital required by an RFA of 

which each SD is a member. 

Each of the proposed minimum 

capital criteria is discussed below. 

The first criterion under the 

Commission’s proposal is that all SDs 

that elect the bank-based capital 

approach must maintain a minimum of 

$20 million of common equity tier 1 

capital. The Commission believes that 

given the role that SDs play in the 

financial markets by engaging in swap 

dealing activities that it is appropriate to 

require that all SDs maintain a 

minimum level of capital, stated as an 

absolute dollar amount that does not 

fluctuate with the level of the firms’ 

dealing activities to help ensure the 

safety and soundness of SDs. 

The proposed $20 million of 

minimum capital is consistent with the 

minimum regulatory capital 

requirements proposed by the 

Commission in this release for SDs that 

elect the net liquid assets capital 

approach or the tangible net worth 

capital approach discussed in sections 

II.A.2.ii and II.A.2.iii, respectively, of 

this release. The $20 million minimum 

capital requirement is also consistent 

with the net capital requirement 

proposed by the SEC for SBSDs, and is 

consistent with the current minimum 

net capital requirements for OTC 

derivatives dealers registered with the 

SEC.26

The second criterion of the minimum 

capital requirement for SDs that elect 

the bank-based capital approach is that 

the SD must maintain common equity 

tier 1 capital equal to or greater than 

eight percent of the SD’s risk-weighted 

assets computed under the bank holding 

company regulations in 12 CFR part 217 

as if the SD were a bank holding 

company. In effect, this provision of 

Regulation 23.101(a)(1)(i) imposes a 

capital approach on a SD that is 

generally consistent with the approach 

that the Federal Reserve Board imposes 

on bank holding companies.27 The 

Commission believes it is important to 

include this criterion so that an SD 

would maintain a level of common 

equity tier 1 capital that is comparable 

to the level it would have to maintain 

if it were subject to the capital rules of 

the Federal Reserve Board. 

The Commission is also proposing to 

measure the required minimum amount 

of regulatory capital in terms of a 

minimum ratio of total qualifying 

capital to risk-weighted assets of eight 

percent, in a manner that is comparable 

to the Federal Reserve Board’s capital 

rules for bank holding companies.28 For 

purposes of the Commission’s proposal, 

as is also the case for the Federal 

Reserve Board’s minimum ratio 

requirement, the assets and off-balance 

sheet transactions or exposures of the 

bank holding company are weighted 

relative to their risk.29 Thus, under the 

Commission’s proposal, the greater the 

perceived risk of the assets and the offbalance sheet items, the greater the 

weighting for the risk and the greater the 

amount of capital necessary to cover 

eight percent of the risk-weighted 

assets.30

Proposed Regulation 23.101(a)(1)(i) 

would require an SD that elects a bankbased capital approach to compute its 

risk-weighted assets in accordance with 

the Federal Reserve Board’s capital 

requirements contained in 12 CFR part 

217. The proposal includes the two 

general approaches to computing riskweighted assets under 12 CFR part 217. 

The first approach is for SDs that have 

not obtained Commission or RFA 

approval to calculate their risk-weighted 

assets using internal credit risk and 

market risk models. Proposed 

Regulation 23.103 would require these 

SDs to use a standardized, or rulesbased, approach to computing their riskweighted assets. Under this approach, 

these SDs would use the credit risk 

charges from the Federal Reserve 

Board’s standardized approach under 

subpart D of 12 CFR 217 and the market 

risk charges that are set forth in 

Regulation 1.17.31 Regulation 1.17 

contains the standard market risk 

capital charges that have been imposed 

on FCMs for many years. Generally, 

market risk charges are determined by 

multiplying the notional value or 

market value of an asset by a fixed 

percentage set forth in the regulations.32

The market risk charges are then 

multiplied by a factor of 12.5 and added 

to the total risk-weighted assets of the 

SD.33


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market risk charge. Since the SD is required to 

maintain common equity tier 1 capital equal to or 

in excess of eight percent of the risk-weighted 

assets, the market risk charge is multiplied by 12.5, 

which effectively requires the SD to hold common 

equity tier 1 capital in an amount equal to the full 

amount of the market risk charge. This approach is 

consistent with the Federal Reserve Board’s 

approach to bank holding companies. 

34Federal Reserve Board model-based capital 

charges for credit risk and market risk are set forth 

in 12 CFR part 217 subparts E and F, respectively. 

35FCMs are required to maintain a minimum 

level of adjusted net capital that is equal to or 

greater than eight percent of the margin required on 

futures, foreign futures, and cleared swaps positions 

carried by the FCM in customer and noncustomer 

accounts. See Regulation 1.17(a)(1)(i)(B). 

36Title III of the Terrorism Risk Insurance 

Program Reauthorization Act of 2015 amended 

sections 731 and 764 of the Dodd-Frank Act to 

provide that the Commission’s margin requirements 

shall not apply to a swap in which a counterparty: 

(1) Qualifies for an exception under section 

2(h)(7)(A) of the CEA; (2) qualifies for an exemption 

issued under section 4(c)(1) of the CEA for 

cooperative entities as defined in such exemption; 

or (3) satisfies the criteria in section 2(h)(7)(D) of 

the CEA. See Public Law 114–1, 129 Stat. 3. 

The second approach to computing 

risk-weighted assets allows SDs that 

have obtained Commission or RFA 

approval of internal credit risk and 

market risk models to use those models 

to calculate their risk-weighted assets. 

For SDs that have been approved to use 

internal models to compute market risk 

and credit risk, the models would have 

to meet the qualitative and quantitative 

requirements set forth in proposed 

Regulation 23.102 and Appendix A to 

Regulation 23.102, which are based 

upon the Federal Reserve Board’s 

qualitative and quantitative 

requirements in 12 CFR 217.34 The 

proposed qualitative and quantitative 

requirements for the models, and the 

proposed model submission process, are 

discussed in section II.4 of this release. 

The third criterion that comprises the 

SD minimum capital requirement under 

the proposed bank-based capital 

approach would require an SD to 

maintain common equity tier 1 capital 

equal to or in excess of eight percent of 

the sum of: (1) The SD’s uncleared 

swaps margin requirements for 

uncleared swaps transactions, (2) the 

initial margin that would be required for 

each uncleared security-based swap 

transactions pursuant to SEC’s proposed 

Rule 18a–3(c)(1)(i)(B), without regard 

for any amounts or security-based swaps 

that may be exempted or excluded 

under the SEC’s proposal, (3) the risk 

margin required on the SD’s cleared 

futures, foreign futures, and swaps 

positions, and (4) the amount of initial 

margin required by a clearing 

organization that clears the SD’s 

proprietary security-based swaps. Each 

of these elements is discussed below. 

This criterion is intended to ensure 

that an SD maintains a minimum level 

of capital that is correlated to the risk 

associated with the SD’s trading 

activities. The Commission believes that 

this approach would be appropriate for 

SDs as the minimum capital 

requirement would be correlated with 

the ‘‘risk’’ of the SD’s futures, foreign 

futures, swaps, and security-based 

swaps positions as measured by the 

margin required on the positions. 

Specifically, the SD’s minimum capital 

requirement would increase or decrease 

as the amount of margin necessary to 

support the SD’s futures, foreign futures, 

swaps and security-based swaps 

positions increased or decreased. This 

approach is consistent with the 

Commission’s current approach to 

establishing a minimum capital 

requirement for FCMs.35

As noted above, the term ‘‘uncleared 

swaps margin’’ is defined in proposed 

Regulation 23.100 and would mean the 

amount of initial margin that the SD 

would be required to collect from a 

swap counterparty pursuant to the 

Commission’s margin rules for 

uncleared swap transactions in 

Commission Regulations 23.150 through 

23.161, subject to certain adjustments to 

incorporate an amount for the initial 

margin for swaps that are otherwise 

exempt or excluded from the 

Commission’s margin requirements. The 

SD would compute the uncleared 

margin amount on a portfolio basis for 

each of its counterparties. Similarly, the 

Commission would also require the SD 

to compute, again on a portfolio basis, 

the amount of initial margin that would 

be required for each uncleared securitybased swap pursuant to SEC’s proposed 

Rule 18a–3(c)(1)(i)(B) without regard for 

any exemptions or exclusions that may 

be provided by the SEC’s proposal. The 

term ‘‘risk margin’’ is defined in 

Regulation 1.17(b)(8), and generally 

refers to the amount of margin required 

by clearing organizations that clear 

futures, foreign futures, and swaps 

transactions. Similarly, the proposed 

rules would also include the amount of 

initial margin required by clearing 

organizations for an SD’s cleared 

security-based swaps. 

The proposal would require an SD to 

include all swaps and security-based 

swaps in the computation, including 

swaps that are excluded from the 

Commission’s margin rules for 

uncleared swaps and any security-based 

swaps that the SEC may exclude from 

its margin rules when adopted as final. 

Specifically, the proposal would 

provide that an SD must include in its 

computation of the uncleared swaps 

margin each outstanding swap, 

including swaps exempt from the scope 

of the Commission’s swaps margin rules 

by Regulation 23.150 (‘‘TRIPRA 

Exemption’’),36 foreign exchange swap 

as the term is defined in Regulation 

23.151, or netting set of swaps or foreign 

exchange swaps, for each counterparty, 

as if that counterparty were an 

unaffiliated SD. 

The Commission’s proposal also 

would require an SD to include the 

initial margin for all swaps that would 

otherwise fall below the $50 million 

initial margin threshold amount or the 

$500,000 minimum transfer amount, as 

defined in Regulation 23.151, for 

purposes of computing the uncleared 

swap margin amount. As such, the 

uncleared swap margin amount would 

be the amount that an SD would have 

to collect from a counterparty, assuming 

that the exclusions and exemptions for 

collecting initial margin for uncleared 

swaps set forth in Regulations 23.150– 

161 would not apply, and also assuming 

that the thresholds under which initial 

margin and/or variation margin would 

not need to be exchanged would not 

apply. Accordingly, uncleared swaps 

that are not subject to the margin 

requirement such as those executed 

prior to the compliance date for margin 

requirements (‘‘legacy swaps’’), interaffiliate swaps, and TRIPRA Exemption 

swaps would have to be taken into 

account in determining the capital 

requirement. 

The Commission is proposing to 

include these swaps and comparable 

security-based swaps in the 

computation as it believes that it would 

be appropriate to require an SD to 

maintain capital for unmargined swap 

and security-based swap exposures to 

counterparties, so that capital would be 

available to cover the ‘‘residual’’ risk of 

a counterparty’s uncleared swaps and 

security-based swap positions. The 

Commission believes that its approach 

is consistent with its statutory 

mandate—helping to ensure the safety 

and soundness of the SDs subject to its 

jurisdiction—to require an SD to reserve 

capital for all of its uncollateralized 

exposures, including the exposures that 

have been excluded or exempted from 

the Commission’s margin requirements. 

This includes swaps where the 

counterparty is a commercial end user 

or an affiliate of the SD, as the 

uncollateralized exposures from these 

counterparties present risk to the 

financial condition of the SD. 

The Commission’s proposal to require 

an SD to reserve capital for 

uncollateralized exposures to swap and 

security-based swap counterparties is 

not inconsistent with the Commission’s 


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37See Regulation 23.150. 

38See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants; 

Proposed Rule 79 FR 59898 (Oct. 3, 2014). 

39 Id. 

40 Id. 

41See Regulations 1.17(a)(1)(i)(C) and 170.16. 

42See section 17(p)(2) of the CEA, which requires 

RFAs to adopt rules establishing minimum capital 

and other financial requirements applicable to its 

members for which such requirements are imposed 

by the Commission, provided that such 

requirements may not be less stringent than the 

requirements imposed by the CEA or by 

Commission regulations. 

43Under the Federal Reserve Board’s rules, a bank 

holding company’s total capital must equal or 

exceed at least eight percent of its risk-weighted 

assets. In addition, at least six percent of the bank 

holding company’s capital must be in the form of 

tier 1 capital, and at least 4.5 percent of the tier 1 

capital must qualify as common equity tier 1 

capital. The remaining two percent of capital may 

be comprised of tier 2 capital. 

regulations exempting or excluding 

uncleared swaps with certain 

counterparties from margin 

requirements.37 Initial margin is a 

transaction-based financial resource. 

Initial margin protects counterparties to 

a swap transaction as well as the overall 

financial system. Initial margin serves 

both as a check on risk-taking that might 

exceed a counterparty’s financial 

capacity and as a resource that can limit 

losses when there is a failure by a 

counterparty to meet its obligations. If a 

swap counterparty defaults, the other 

party may use initial margin to cover 

some or all of the loss. 

In developing its proposed margin 

requirements for uncleared swap 

transactions, the Commission 

recognized that different categories of 

counterparties present different levels of 

risk.38 The Commission stated its belief 

that financial firms generally present a 

higher level of risk than non-financial 

firms due to the profitability and 

viability of financial firms being more 

tightly linked to the health of the 

financial system than non-financial 

firms.39 Non-financial end users, 

however, generally use swaps to hedge 

commercial risk and were deemed to 

pose less risk to SDs.40 Due to the 

differences in perceived risk and 

potential systemic effects, and 

consistent with Congressional intent, 

the Commission excluded non-financial 

end users from the margin requirements. 

Capital, however, serves as an overall 

financial resource for the SD and is 

intended to cover potential risks that are 

not adequately covered by other risk 

management programs (i.e., ‘‘residual 

risk’’) including margin on uncleared 

swaps. Capital is intended to help 

ensure the safety and soundness of the 

SD by providing financial resources to 

allow an SD to absorb unanticipated 

losses and declines in asset values from 

all aspects of its business operations, 

including swap dealing activities, while 

also continuing to meet its financial 

obligations. The Commission is 

proposing to require that an SD reserve 

capital against all uncollateralized 

swaps exposures, as such exposures 

pose residual risk not covered by other 

assets of the SD. Accordingly, capital is 

necessary to provide a financial cushion 

to protect an SD from financial 

exposures, including uncollateralized 

exposures to swap counterparties. 

The Commission’s proposal would 

not require an SD to reserve capital 

equal to the full amount of its 

uncollateralized swap exposures. The 

Commission’s proposal would require 

an SD to reserve capital equal to a 

percentage of its uncollateralized 

exposures. In this respect, the 

Commission’s capital requirement 

would not have the same impact on the 

SD with respect to such uncollaterized 

swaps (e.g., an SD’s funding or pricing 

of swaps) as would the application of 

the Commission’s margin requirements 

to such swaps. The Commission’s 

proposal should also not have the same 

impact on the cost to commercial end 

users who are counterparties to such 

uncollaterized swaps as would 

imposition of margin requirements on 

such swaps, because of the different 

impact on an SD’s funding or pricing of 

swaps and because margin requirements 

impose specific transactional costs on 

counterparties (e.g., establishment of 

custodial arrangements, documentation 

requirements) that are not generated by 

SD capital requirements. The 

Commission’s proposed approach 

regarding the inclusion of 

uncollateralized swap exposures in the 

SD’s capital requirements is also 

consistent with the approach adopted 

by the prudential regulators in setting 

capital requirements for SDs subject to 

their jurisdiction and is consistent with 

the approach proposed by the SEC for 

SBSDs. 

The proposed capital requirement 

would require an SD to include in the 

eight percent calculation the amount of 

margin required by a clearing 

organization for the SD’s proprietary 

cleared swaps, security-based swaps, 

futures, and foreign futures positions. 

The Commission notes that while the 

proposed minimum capital requirement 

based on eight percent of margin on 

cleared and uncleared swaps is 

consistent with the SEC’s proposal for 

SBSDs, the SEC approach would require 

an SBSD to maintain a minimum level 

of net capital equal to or greater than 

eight percent of the risk margin required 

on cleared and uncleared security-based 

swaps only. The Commission’s proposal 

would expand the products included in 

the SD’s minimum capital requirement 

to include swaps, security-based swaps, 

futures and foreign futures positions. 

The Commission is expanding the 

products beyond the SEC proposal as it 

believes that it is appropriate for SDs to 

maintain a minimum level of capital 

that reflects the extent of the risks posed 

by the full, broad range of the SDs’ 

proprietary positions. 

The fourth criterion of the proposed 

minimum capital requirements would 

require an SD to maintain the minimum 

level of capital required by an RFA of 

which the SD is a member. The 

proposed minimum capital requirement 

based on membership requirements of 

an RFA is consistent with current FCM 

capital requirements under Regulation 

1.17, and reflects Commission 

regulations that require each SD to be a 

member of an RFA.41 The proposal also 

is consistent with section 17(p)(2) of the 

CEA, which provides, in relevant part, 

that an RFA must adopt rules 

establishing minimum capital and other 

financial requirements applicable to the 

RFA’s members for which such 

requirements are imposed by the 

Commission.42 As noted above, the NFA 

currently is the only RFA. The proposal 

recognizes that the NFA would be 

required by section 17 of the CEA to 

adopt SD capital rules once the 

Commission imposes capital 

requirements on SDs, and would 

incorporate the NFA minimum capital 

requirements into the Commission’s 

regulation. 

b. Computation of Common Equity Tier 

1 Capital To Meet Minimum Capital 

Requirement 

Each SD subject to the bank-based 

capital approach is required to maintain 

a level of common equity tier 1 capital 

that is equal to or in excess of the 

highest of the three criteria listed in 

section II.A.2.i above. The Commission 

is proposing to limit the SD’s capital 

that qualifies to satisfy the SD’s 

minimum capital requirement to 

common equity tier 1 capital. This 

limitation would be different from the 

Federal Reserve Board’s requirements, 

which allow a bank holding company to 

meet its minimum capital requirements 

with a combination of common equity 

tier 1 capital, additional tier 1 capital, 

and tier 2 capital.43

The Commission is proposing the 

stricter standard as common equity tier 

1 capital is a more conservative form of 

capital than additional tier 1 or tier 2 

capital, particularly as it relates to the 


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44See 12 CFR 217.10. 

45See 12 CFR 217.11. The capital conservation 

buffer and the countercyclical capital buffer 

represent capital ‘‘add-ons’’ to the standard bank 

capital requirements and are intended to require 

entities subject to the rules to have certain levels 

of capital in order to make capital distributions and 

discretionary bonuses. 46 77 FR 30596, 30610 fn. 199 (May 23, 2012). 

47The SEC has proposed a net liquid assets 

capital requirement for SBSDs that is set forth in 

proposed SEC Rule 18a–1. See 77 FR 70214 (Nov. 

23, 2012). 

48See SEC proposed Rule 18a–1(a)(1) (77 FR 

70214). 

49Net capital is generally defined to mean the 

SD’s liquid assets (less deductions for potential 

decreases in value of the assets) less all of the SD’s 

liabilities (excluding qualifying subordinated debt). 

permanence of the capital and its 

availability to absorb unexpected losses. 

As noted above, common equity tier 1 

capital is defined in 12 CFR 217.20 to 

generally comprise the sum of a bank 

holding company’s common stock 

instruments and any related surpluses, 

retained earnings, and accumulated 

other comprehensive income. Tier 1 

capital includes common equity tier 1 

capital and further includes such 

instruments as preferred stock. Tier 2 

capital includes certain types of 

instruments that include both debt and 

equity characteristics (e.g., certain 

perpetual preferred stock instruments 

and subordinated term debt 

instruments).44 The Commission also is 

proposing the stricter common equity 

tier 1 requirement as it is not proposing 

to include in the SD’s minimum capital 

requirement certain of the prudential 

regulators’ capital add-ons, including 

the capital conservation buffer and the 

countercyclical capital buffer.45 In order 

for the SD to meet its minimum 

requirements, it must demonstrate that 

its common equity tier 1 capital equals 

or exceeds the highest of the minimum 

requirements set forth in proposed 

Regulation 23.101(a)(1)(i) and discussed 

in section II.A.2.i.a above. 

Request for Comment 

The Commission requests comment 

on all aspects of the proposed bankbased capital approach. In addition, the 

Commission requests comment, 

including empirical data in support of 

comments, in response to the following 

questions: 

1. Is the proposed $20 million fixed 

amount of minimum tier 1 capital 

appropriate? If not, explain why not. If 

the minimum fixed-dollar amount 

should be set at a level greater or lesser 

than $20 million, explain what that 

greater or less amount should be and 

explain why that is a more appropriate 

amount. 

2. Is the proposed minimum capital 

requirement based upon an SD’s 

common equity tier 1 capital 

appropriate? If not, explain why, and 

suggest what modifications the 

Commission should make to the 

regulation. For example, should the 

proposal include tier 1 capital other 

than common equity tier 1 capital? Are 

there specific elements of tier 1 capital 

that the Commission should include in 

addition to common equity tier 1 

capital? Are there specific elements of 

tier 2 capital that the Commission 

should include in the regulation? 

3. Is the proposed minimum capital 

requirement based upon eight percent of 

the SD’s risk weighted assets 

appropriate? If not, explain why not. Is 

the proposed requirement that the SD 

add to its risk-weighted assets market 

risk capital charges computed in 

accordance with Regulation 1.17 if the 

SD has not obtained the approval of the 

Commission or of an RFA to use 

internal models appropriate? Are there 

other options to compute market risk 

charges when models are not approved? 

Should the 8 percent be set at a higher 

or lower level? If so, what percent 

should the Commission consider? 

4. Is the proposed minimum capital 

requirement based upon eight percent of 

the margin required on the SD’s cleared 

and uncleared swaps and security-based 

swaps, and the margin required on the 

SD’s futures and foreign futures 

appropriate? If not, explain why not. 

Should the percentage be set at a higher 

or lower level? Please explain your 

response. Is including in the 

computation margin for swaps and 

security-based swaps that are exempt or 

excluded from the uncleared margin 

requirements (e.g., legacy swaps and 

security-based swaps, and swaps with 

commercial end users) appropriate? If 

not, explain why these uncollateralized 

exposures do not result in risk to the SD 

without capital to address that risk. 

5. Commodity Exchange Act section 

4s(e)(3)(A) only cites the risk of 

uncleared swaps in setting standards for 

capital. Additionally, in the 

Commission’s final swap dealer 

definition rule, it said it will ‘‘in 

connection with promulgation of final 

rules relating to capital requirements for 

swap dealers and major swap 

participants, consider institution of 

reduced capital requirements for entities 

or individuals that fall within the swap 

dealer definition and that execute swaps 

only on exchanges, using only 

proprietary funds.’’ 46 Given these 

pronouncements, should the 

Commission exclude cleared swaps 

from the capital calculation 

requirements? 

6. In addition to swaps, the proposal 

includes security-based swaps, futures, 

and foreign futures in the capital 

calculation requirements. The SEC’s 

capital proposal only included securitybased swaps. Given the statements 

above in question 5 and the narrower 

scope of the SEC’s proposal, should the 

Commission limit its capital calculation 

requirements to uncleared swaps only? 

7. If the swap dealer de minimis level 

falls to $3 billion, what impact would 

the proposed capital rule have on any 

new potential registrants? Please 

provide any quantitative estimates. 

ii. Capital Requirement for Swap 

Dealers Under a Net Liquid Assets 

Capital Approach 

a. Computation of Minimum Capital 

Requirement 

Proposed Regulation 23.101(a)(ii) 

would permit an SD to elect to be 

subject to a net liquid assets capital 

approach. The net liquid assets capital 

approach is consistent with the 

Commission’s current capital approach 

for FCMs, and is consistent with the 

SEC’s proposed capital rule for SBSDs 

and the SEC’s current capital 

requirements for BDs and OTC 

derivatives dealers.47 Harmonization of 

the CFTC and SEC capital requirements 

benefit firms that are dually-registered 

(including dually-registered SDs and 

SBSDs) as such firms should be able to 

meet the regulatory requirements of 

both the CFTC and SEC with a uniform 

set of books and records, and one capital 

computation. This concept of a 

harmonized capital approach is 

consistent with the Commission’s and 

SEC’s long standing uniform capital rule 

for FCMs and BDs. An SD that elects the 

proposed net liquid assets capital rule 

contained in Regulation 23.101(a)(1)(ii) 

would be required to comply with 

proposed SEC Rule 18a–1 as if the SD 

were a SBSD registered with the SEC, 

subject to several modifications 

discussed below.48

SDs that elect to comply with the 

proposed net liquid assets capital 

approach would be required to maintain 

a minimum level of net capital 49 equal 

to or greater than the highest of the 

following criteria: 

(1) $20 million; 

(2) net capital equal to or greater than 

eight percent of the sum of: 

(a) The amount of ‘‘uncleared swaps 

margin’’ (as that term is defined in 

proposed Regulation 23.100) for each 

uncleared swap position open on the 

books of the SD, computed on a 

counterparty by counterparty basis 

pursuant to Regulation 23.154; 


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50SEC Rules generally define ‘‘tentative net 

capital’’ as the registrant’s assets less liabilities 

(excluding certain qualifying subordinated debt), 

and ‘‘net capital’’ as tentative net capital less certain 

capital deductions such as market risk and credit 

risk deductions. See 17 CFR 240.15c3–1. 

51See SEC proposed Rule 18a–1(a)(2), (77 FR 

70214, 70333). 

(b) the amount of initial margin that 

would be required for each uncleared 

security-based swap position open on 

the books of the SD, computed on a 

counterparty-by-counterparty basis 

pursuant to proposed SEC Rule 18a– 

3(c)(1)(i)(B), without regard for any 

amounts that may be excluded or 

exempted under the SEC’s rules; 

(c) the amount of ‘‘risk margin 

requirement’’ (as that term is defined in 

Regulation 1.17(b)(8)) for the SD’s 

cleared futures, foreign futures, and 

swaps positions open on the books of 

the SD; and 

(d) the amount of initial margin 

required by a clearing organization for 

proprietary cleared security-based 

swaps positions open on the books of 

the SD; or 

(3) the capital required by the RFA of 

which the SD is a member. 

In addition, the proposal provides 

that an SD that has received approval 

from the Commission, or from an RFA 

of which the SD is a member, to use 

internal models to compute market risk 

and credit risk capital charges for its 

swaps and/or security-based swaps and 

other proprietary positions when 

computing its capital, as described in 

section II.A.4 of this release, must 

maintain a minimum level of tentative 

net capital equal to $100 million and net 

capital of $20 million.50 The proposal is 

consistent with the SEC’s proposed 

requirement that SBSDs that have 

obtained approval to use internal capital 

models must maintain tentative net 

capital of $100 million and net capital 

of $20 million.51

The first criterion of proposed 

Regulation 23.101(a)(1)(ii) would 

require the SD to maintain a minimum 

of $20 million of net capital. This 

requirement is consistent with the 

minimum requirements proposed for 

SDs under the bank-based capital 

approach discussed in section II.A.2.i.a 

of this release. As discussed in section 

II.A.2.i.a above, the Commission 

believes that given the role that SDs 

play in the financial markets by 

engaging in swap dealing activities that 

it is appropriate to require that all SDs 

maintain a minimum level of capital, 

stated as an absolute dollar amount that 

does not fluctuate with the level of the 

firms’ dealing activities to help ensure 

the safety and soundness of the SDs. 

Furthermore, the proposed $20 million 

minimum capital requirement is 

consistent with the SEC’s current 

minimum capital requirement for OTC 

derivatives dealers and the SEC 

proposed minimum capital requirement 

for SBSDs. 

The second criterion under the net 

liquid assets capital approach would 

require an SD to maintain a minimum 

level of net capital equal to or greater 

than eight percent of the sum of: (1) The 

amount of ‘‘uncleared swap margin’’ (as 

that term is proposed to be defined in 

Regulation 23.100) for each uncleared 

swap position open on the books of the 

SD, computed on a counterparty by 

counterparty basis pursuant to 

Regulation 23.154; (2) the amount of 

initial margin that would be required for 

each uncleared security-based swap 

position open on the books of the SD, 

computed on a counterparty by 

counterparty basis pursuant to SEC 

proposed Rule 18a–3(c)(1)(i)(B) without 

regard to any initial margin exemptions 

or exclusions that the rules of the SEC 

may provide to such security-based 

swap positons; (3) the amount of ‘‘risk 

margin’’ (as defined in Regulation 

1.17(b)(8)) required by a clearing 

organization for the SD’s futures, swaps, 

and foreign futures positions that are 

open on the books of the SD; and (4) the 

amount of initial margin required by a 

clearing organization for security-based 

swaps that are open on the books of the 

SD. 

Consistent with the requirements for 

SDs that elect the bank-based capital 

approach discussed in section II.A.2.a 

above, an SD that elects the net liquid 

assets approach would have to include 

all swaps and security-based swaps in 

its computation of the margin for 

uncleared swaps subject to the eight 

percent calculation, including any 

swaps positions that are not included in 

the Commission’s margin requirements 

in Regulations 23.150 through 23.161 

and any security-based swaps positions 

that may be exempt or excluded from 

the SEC’s proposed margin 

requirements in Rule 18a–3(c)(1)(i)(B). 

Consistent with the bank-based 

capital approach discussed in section 

II.A.2.a above, this minimum capital 

requirement is generally comparable to 

the SEC’s proposed minimum capital 

requirement for SBSDs, with the 

exception that the SEC proposal only 

requires a SBSD to compute its 

minimum capital requirement based 

upon eight percent of the initial margin 

required on cleared and uncleared 

security-based swaps. The Commission 

is proposing to require that an SD 

expand the positions subject to the eight 

percent initial margin minimum capital 

requirement to include the SD’s 

proprietary swaps, futures, and foreign 

futures positions. The Commission 

believes that the minimum capital 

requirement should reflect these 

additional positions to more fully reflect 

the potential exposure from all of the 

SD’s swaps, security-based swaps, 

futures and foreign futures positions. 

Accordingly, the Commission’s proposal 

has adjusted the calculation to include 

these additional positions of the SD. 

The proposed third criterion would 

require an SD to maintain net capital 

that is equal to or greater than the 

amount of net capital required by the 

RFA of which is a member. As 

discussed more fully in section II.A.2.i.a 

above, this provision recognizes that an 

RFA is required to adopt minimum 

capital requirements for SDs pursuant to 

Commission Regulation 170.16 and 

section 17(p)(2) of the CEA. 

b. Computation of Net Capital To Meet 

Minimum Capital Requirement 

Each SD that elects the proposed net 

liquid assets capital approach would be 

required to maintain net capital in 

excess of the highest of the three criteria 

listed above. The second component of 

the proposed capital requirement would 

require an SD to compute its net capital, 

including applicable charges for market 

and credit risk on its swaps and 

security-based swaps positions and 

other proprietary positions (including 

debt instruments such as U.S. treasury 

instruments and municipal bonds, and 

equity instruments), and determine if 

such net capital equals or exceeds the 

highest level required under the three 

criteria discussed in section II.A.2.ii.a 

above. 

Proposed Regulation 23.101(a)(1)(ii) 

would require each SD electing the net 

liquid assets capital approach to 

compute its tentative net capital and net 

capital in accordance with the SEC’s 

proposed computation of tentative net 

capital and net capital for SBSDs under 

proposed Rule 18a–1 as if the SD were 

a SBSD, subject to several adjustments. 

Under proposed SEC Rule 18a–1, a 

SBSD that has not received permission 

to use models to compute its market risk 

and credit risk capital charges, as 

described below, must maintain net 

capital of not less than the greater of $20 

million or eight percent of the risk 

margin amount on cleared and 

uncleared security-based swaps 

positions. For a SBSD that has received 

permission from the SEC to use internal 

models to compute its market risk and 

credit risk capital charges, the SBSD 

must at all times maintain tentative net 

capital of not less than $100 million and 

adjusted net capital of not less than the 

greater of $20 million or eight percent 


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91262 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 

52Under the SEC’s proposed Rule 18a–1, a SBSD 

would not be permitted to include margin funds 

deposited with a third party custodian as a current 

asset in computing the SBSD’s net capital. 

53See, 12 CFR 217, subparts E and F. 

of the risk margin amount on cleared 

and uncleared security-based swaps 

positions. The Commission is proposing 

the SEC’s general approach with the 

adjustments to include an SD’s swaps, 

security-bases swaps, futures and 

foreign futures positions in its 

calculation of the eight percent 

minimum capital requirement as 

discussed above. 

(1) Swap Dealers Computation of 

Tentative Net Capital and Net Capital 

Without Approval To Use Internal 

Capital Models 

The Commission is proposing that an 

SD electing the net liquid assets capital 

approach which has not obtained 

Commission or RFA approval to use 

internal models to compute its market 

risk and credit risk charges for positions 

in swaps, security-based swaps, and 

other proprietary positions must use the 

standardized capital charges set forth in 

proposed SEC Rule 18a–1 and the 

appendices thereto. The use of 

standardized capital charges would be 

consistent with the SEC’s proposal for 

SBSDs that have not obtained SEC 

approval to use internal capital models 

to compute market risk and credit risk 

capital charges. The Commission 

anticipates that this consistency would 

promote parity between SDs and SBSDs, 

as well as efficiency for an entity that is 

dually-registered as both an SBSD and 

SD. 

Under the Commission’s proposal, an 

SD would be required to compute a 

market risk capital charge for swaps and 

security-based swaps by multiplying the 

notional amount or fair market value of 

the swap or the security-based swap by 

a specified percentage set forth in 

proposed Rule 18a–1. The resulting 

market risk charge would be deducted 

from the SD’s tentative net capital to 

arrive at the firm’s net capital. 

SDs would also be required to 

compute standardized credit risk 

charges pursuant to proposed Rule 18a– 

1. Rule 18a–1 generally provides that a 

SBSD’s unsecured receivables are 

subject to a 100 percent credit risk 

capital charge (i.e., the SBSD would 

have to deduct 100 percent of any 

unsecured receivable balance from 

tentative net capital in computing its net 

capital). The Commission, however, is 

modifying the SEC approach in 

proposed Regulation 23.101(a)(1)(ii) by 

providing that an SD may recognize as 

a secured receivable, and not take a 

capital charge for, the amount of initial 

margin that the SD has deposited with 

a third party custodian for uncleared 

swap transactions pursuant to the 

Commission’s margin rules at 

Regulations 23.150 through 23.161 or 

margin deposited with a third party 

custodian for uncleared security-based 

swap transactions pursuant to the SEC’s 

proposed margin rules.52 Regulation 

23.157 provides that each SD that posts 

margin with a third party custodian 

must enter into an agreement with the 

custodian that, in relevant part: (1) 

Prohibits the custodian from 

rehypothecating, repledging, reusing, or 

otherwise transferring the collateral 

held by the custodian; and (2) is a 

legally binding and enforceable 

agreement under the laws of all relevant 

jurisdictions including in the event of 

bankruptcy, insolvency, or similar 

proceeding. 

(2) Swap Dealers Approved To Use 

Internal Capital Models 

The Commission is proposing to 

permit an SD that elects a net liquid 

assets capital approach to seek 

Commission or RFA approval to use 

internal models to compute market risk 

and credit risk capital charges on its 

swaps, security-based swaps and other 

proprietary positions in lieu of the 

standardized deductions contained in 

the SEC’s proposed Rule 18a–1. In order 

to be considered for approval, the SD’s 

models would have to meet the 

qualitative and quantitative 

requirements set forth in proposed 

Regulation 23.102 and Appendix A to 

Regulation 23.102. 

The Federal Reserve Board has 

adopted quantitative and qualitative 

requirements for internal models used 

by bank holding companies to compute 

market risk and credit risk capital 

charges.53 In developing the proposed 

market risk and credit risk requirements 

for SDs, including the proposed 

quantitative and qualitative 

requirements, the Commission has 

incorporated the market risk and credit 

risk model requirements adopted by the 

Federal Reserve Board. The 

Commission’s proposed model 

requirements are also comparable to the 

SEC’s model requirements. The model 

requirements and the process for 

obtaining Commission or RFA review is 

set forth in section II.4 of this release. 

Request for Comment 

The Commission requests comment 

on all aspects of the proposed net liquid 

assets capital approach. In addition, the 

Commission requests comment, 

including empirical data in support of 

comments, in response to the following 

questions: 

1. Is the proposed minimum $20 

million fixed-dollar amount of net 

capital appropriate for SDs that elect a 

net liquid assets capital approach? If 

not, explain why not. If the minimum 

fixed-dollar amount should be set at a 

level greater or lesser than $20 million, 

explain what that amount should be and 

why that is a more appropriate amount. 

2. Is the proposed minimum $100 

million fixed dollar amount of tentative 

net capital appropriate for SDs that use 

market risk and credit risk models 

approved by the Commission or by an 

RFA? If not, explain why not. If the 

minimum fixed-dollar amount should 

be set at a level greater or lesser than 

$100 million, explain what that amount 

should be and explain why that is more 

appropriate. 

3. Is the proposed minimum capital 

requirement based upon eight percent of 

the margin required on the SD’s cleared 

and uncleared swaps and security-based 

swaps, and the margin required on the 

SD’s futures and foreign futures 

appropriate? If not, explain why not. 

Should the percentage be set at a higher 

or lower level? Is so, what percent 

should the Commission consider? 

Please explain your response. Is 

including in the computation margin for 

swaps and security-based swaps that are 

exempt or excluded from the uncleared 

margin requirements (e.g., legacy swaps 

and security-based swaps, and swaps 

with commercial end users) 

appropriate? If not, explain why these 

uncollateralized exposures would not 

result in an SD that is not adequately 

capitalized. 

4. Is the proposed requirement for an 

SD to compute its capital in accordance 

with the SEC proposed capital rules for 

stand-alone SBSDs (i.e., SEC proposed 

Rule 18a–1) appropriate? If not, explain 

why not. What other alternatives 

approaches should the Commission 

consider? 

5. Is the proposal to allow SDs to 

recognize as current assets margin funds 

deposited with third-party custodians as 

margin for uncleared swaps or securitybased swaps in accordance with the 

Commission’s margin rules or the SEC’s 

proposed margin rules appropriate? If 

not, explain why not. 

6. Are there other adjustments to the 

SEC’s proposed capital rules for SBSDs 

that the Commission should consider in 

adopting such requirements for SDs that 

elect the net liquid asset capital 

approach? Is so, explain such 

adjustments and why the Commission 

should consider such adjustments. 

7. If the swap dealer de minimis level 

falls to $3 billion, what impact would 

the capital rule have on any new 


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54See proposed Regulation 23.101(a)(2)(ii). 

55See, 12 CFR 242.3. The Financial Stability 

Oversight Council will use the criteria when it 

considers the potential designation of a nonbank 

financial company for consolidated supervision by 

the Federal Reserve Board. 

56The term ‘‘swap dealer’’ is defined by section 

1a(49) of the CEA and § 1.3(ggg) of the 

Commission’s regulations. Section 1.3(ggg)(3) 

provides that an entity may apply to limit its 

designation as an SD to specified categories of 

swaps or specified activities in connection with 

swaps. 

57Furthermore, as a SD, the firm is subject to the 

Commission’s final swaps margin requirements. 

58See proposed Regulation 23.100. 

potential registrants? Please provide any 

quantitative estimates. 

iii. Capital Requirement for Swap 

Dealers That Are ‘‘Predominantly 

Engaged in non-Financial Activities’’ 

a. Computation of the Minimum Capital 

Requirement 

The Commission is proposing that 

SDs that are ‘‘predominantly engaged in 

non-financial activities’’, as defined 

below, would be permitted to elect a 

capital requirement based upon the SD’s 

tangible net worth.54 An SD eligible to 

elect the tangible net worth approach 

would have to maintain tangible net 

worth in an amount equal to or in 

excess of the greatest of: 

(1) $20 million plus the amount of the 

SD’s market risk exposure requirement 

and credit risk exposure requirement 

associated with the SD’s swap and 

related hedge positions that are part of 

the SD’s swap dealing activities; 

(2) Eight percent of the sum of: 

(a) The amount of uncleared swap 

margin (as that term is defined in 

Regulation 23.100) for each uncleared 

swap position open on the books of the 

SD, computed on a counterparty by 

counterparty basis pursuant to 

Regulation 23.154 without regard to any 

initial margin exemptions or thresholds 

that the Commission’s margin rules may 

provide; 

(b) the amount of initial margin that 

would be required for each uncleared 

security-based swap position open on 

the books of the SD, computed on a 

counterparty by counterparty basis 

pursuant to 17 CFR 240.18a–3(c)(1)(i)(B) 

without regard to any initial margin 

exemptions or exclusions that the rules 

of the SEC may provide to such 

security-based swap positions; and 

(c) the amount of initial margin 

required by clearing organizations for 

cleared proprietary futures, foreign 

futures, swaps and security-based swaps 

positions open on the books of the SD; 

or 

(3) the amount of net capital required 

by the registered futures association of 

which the SD is a member. 

The Commission is proposing that in 

order to be eligible to elect the tangible 

net worth capital approach, an SD’s 

overall financial activities would have 

to be insignificant in relation to its other 

overall non-financial activities. 

Accordingly, proposed Regulation 

23.101(a)(2) would define the term 

‘‘predominantly engaged in nonfinancial activities’’ by referencing the 

definition of the term ‘‘financial 

activities’’ under the Federal Reserve 

Board’s regulations establishing criteria 

for determining if a nonbank financial 

company is predominantly engaged in 

financial activities.55 For purposes of 

the proposal, an entity would be 

considered ‘‘primarily engaged in nonfinancial activities’’ if: (1) The 

consolidated annual gross financial 

revenues of the entity in either of its two 

most recently completed fiscal years 

represents less than 15 percent of the 

entity’s consolidated gross revenue in 

that fiscal year (‘‘15% revenue test’’), 

and (2) the consolidated total financial 

assets of an entity at the end of its two 

most recently completed fiscal years 

represents less than 15 percent of the 

entity’s consolidated total assets as of 

the end of the fiscal year (‘‘15% asset 

test’’). For purposes of the 15% revenue 

test, consolidated annual gross financial 

revenues means that portion of the 

consolidated total revenue of the entity 

that are related to activities that are 

financial in nature. For purposes of the 

15% asset test, consolidated total 

financial assets means that portion of 

the consolidated total assets of the 

entity that are related to activities that 

are financial in nature. 

The Commission is proposing to 

define the financial activities covered by 

the 15% revenue test and 15% asset test 

by reference to the listed financial 

activities set forth in Appendix A of 12 

CFR part 242, which covers an extensive 

range of financial activities and services. 

The financial activities include, among 

other things: (1) Lending, exchanging, 

transferring, investing for others, or 

safeguarding money or securities; (2) 

insuring, guaranteeing, or indemnifying 

against loss or harm, damage or death in 

any state; (3) providing financial, 

investment, or economic advisory 

services; (4) issuing or selling interests 

in a pool; (5) underwriting, dealing in, 

or making a market in securities; and (6) 

engaging as principal in the investment 

and trading of certain financial 

instruments. The Commission, however, 

is proposing to explicitly provide that 

accounts receivable from non-financial 

activities, which may meet the 

definition of financial activities under 

12 CFR part 242, may be excluded by 

the SD from the computation of its 

financial activities. The purpose of 

providing this exclusion is to prevent 

the SD’s non-financial activities from 

becoming part of the computation of the 

firm’s financial activities merely on the 

basis that the non-financial activities 

result in the SD recognizing receivables. 

The Commission is proposing an 

option to use a tangible net worth 

capital approach as it recognizes that 

certain entities that engage primarily in 

non-financial activities may currently or 

in the future meet the statutory and 

regulatory definition of the term ‘‘swap 

dealer’’ and, therefore, will be required 

to register as such with the 

Commission.56 However, while these 

entities may engage in dealing activities, 

they are primarily commercial entities 

and differ from financial entities in 

various ways, including the 

composition of their balance sheet (e.g., 

the types of assets they hold), the types 

of transactions they enter into, and the 

types of market participants and swap 

counterparties that they deal with. 

Because of these differences, the 

Commission believes that application of 

the bank-based or net liquid assets 

capital approaches to these SDs could 

result in inappropriate capital 

requirements that would not be 

proportionate to the risk associated with 

them, and, therefore, these SDs should 

have the option to apply a tangible net 

worth approach.57

b. Computation of Tangible Net Worth 

To Meet Minimum Capital Requirement 

Proposed Regulation 23.101(a)(2) 

would require an SD to maintain 

tangible net worth in an amount equal 

to or in excess of the greater of the 

tangible net worth of the SD plus the 

market risk capital charges and credit 

risk capital charges associated with the 

SD’s dealing swaps and related hedging, 

or eight percent of the initial margin 

required on the SD’s proprietary swaps, 

security-based swaps, futures, and 

foreign futures. The term ‘‘tangible net 

worth’’ is proposed to be defined as the 

net worth of an SD as determined in 

accordance with generally accepted 

accounting principles in the United 

States, excluding goodwill and other 

intangible assets.58 The proposal would 

further require an SD in computing its 

tangible net worth to include all 

liabilities or obligations of a subsidiary 

or affiliate that the SD guarantees, 

endorses, or assumes either directly or 

indirectly to ensure that the tangible net 

worth of the SD reflects the full extent 


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59See proposed definition of ‘‘tangible net worth’’ 

in Regulation 23.100. 

60 Id. 

61Section 4s(e)(2)(C) of the CEA states that for 

SDs that are designated as SDs for one single class 

or category of swap or activities, the Commission 

shall take into account the risks associated with 

other types of swaps or classes of swaps or 

categories of swaps engaged in and the other 

activities conducted by that person that are not 

otherwise subject to regulation applicable to that 

person by virtue of the status of the person as an 

SD. 

62There are currently no MSPs provisionally 

registered with the Commission. 

63See Regulation 1.3(hhh). 

of the SD’s potential financial 

obligations.59 The proposed definition 

would further provide that in 

determining net worth, all long and 

short positions in swaps, security-based 

swaps and related positions must be 

marked to their market value to ensure 

that the tangible net worth reflects the 

current market value of the SD’s swaps 

and security-based swaps, including any 

accrued losses on such positions.60

In proposing this approach and as 

discussed above, the Commission 

recognizes that SDs that predominantly 

engage in non-financial activities may 

differ from financial entities. However, 

the Commission also recognizes that 

capital should account for all the 

activities entered into by the entity and 

not just its swap dealing activities in 

order to help ensure the safety and 

soundness of the SD.61 By requiring the 

SD electing this approach to maintain 

tangible net worth equal to its liabilities 

and swaps market risk and credit risk 

exposures, the Commission believes that 

its approach would impose a sufficient 

level of capital (i.e., unencumbered 

tangible assets) to help ensure the safety 

and soundness of an SD and that the SD 

can meet its swap-related obligations to 

its swap counterparties. 

Pursuant to the proposal, the SD 

would have to compute its market risk 

charges and credit risk charges 

associated with its dealing swaps and 

related hedges. Proposed Regulation 

23.101(a)(2)(i)(A) provides that the SD 

may use internal capital models to 

compute its market risk and credit risk 

capital charges if the SD has obtained 

the approval of the Commission or an 

RFA. If the SD has not obtained 

approval to use internal capital models, 

the SD must use the standardized 

deductions under Regulation 1.17. 

Request for Comment 

The Commission requests comment 

on all aspects of the proposed tangible 

net worth capital approach for SDs that 

are predominantly engaged in nonfinancial activities. In addition, the 

Commission requests comment, 

including empirical data in support of 

comments, in response to the following 

questions: 

1. Is the proposed minimum net 

capital requirement of $20 million plus 

the amount of the SD’s market risk and 

credit risk charges for its dealing swaps 

appropriate for SDs that are eligible and 

elect the tangible net worth net capital 

approach? If not, explain why not. If the 

minimum dollar amount should be set 

at a level greater or lesser than $20 

million, explain what that amount 

should be and explain why that is more 

appropriate. 

2. Should the market risk and credit 

risk associated with the SD’s securitybased swap positions be added to the 

market risk and credit risk associated 

with the SD’s swap positions in setting 

the minimum capital requirement under 

proposed Regulation 23.101(a)(2)(A)? 

Explain why or why not such securitybased swap positions should or should 

not be included in the minimum capital 

requirement. Provide any empirical data 

to support your analysis. 

3. Is the proposed minimum capital 

requirement based upon eight percent of 

the margin required on the SD’s cleared 

and uncleared swaps and security-based 

swaps, and the margin required on the 

SD’s futures and foreign futures 

appropriate? If not, explain why not. 

Should the percentage be set at a higher 

or lower level? Please explain your 

response. Is including in the 

computation margin for swaps and 

security-based swaps that are exempt or 

excluded from the uncleared margin 

requirements (e.g., legacy swaps and 

security-based swaps, and swaps with 

commercial end users) appropriate? If 

not, explain why these uncollateralized 

exposures would not result in an SD 

that is not adequately capitalized. 

4. Is the Commission’s proposed 15% 

revenue test and 15% asset test 

appropriate for determining whether an 

SD is predominantly engaged in nonfinancial activities? If not, explain why 

not. What other alternatives should the 

Commission consider? If the approach is 

appropriate, should the Commission 

consider raising or lowering the 

percentages in the 15% revenue test and 

the 15% asset test? 

5. Is the Commission’s proposed 

reference to the definition of the term 

‘‘financial activities’’ in Rule 242.3 of 

the Federal Reserve Board (12 CFR 

242.3) to define whether an SD’s 

activities are ‘‘financial activities’’ for 

purposes of computing the 15% revenue 

test and 15% asset test appropriate? If 

not, explain why not. Provide other 

alternatives that the Commission should 

consider. 

6. Is the Commission’s adjustment in 

the application of Rule 242.3 to permit 

SDs to exclude receivables resulting 

from non-financial activities from the 

term ‘‘financial activities’’ in computing 

the 15% revenue and 15% asset tests 

appropriate? If not, explain why not. 

Are there other adjustments that the 

Commission should consider in the 

application of the 15% revenue and 

15% asset tests? If yes, explain what 

those adjustments are and why it is 

appropriate for the Commission to make 

such adjustments. 

iv. Capital Requirements for Major Swap 

Participants 

Proposed new Regulation 23.101(b) 

would establish capital requirements for 

MSPs that are not subject to the capital 

rules of a prudential regulator.62 An 

MSP is by definition a person that is not 

a swap dealer and that: (1) Maintains a 

substantial position in swaps, excluding 

positions held to hedge or mitigate 

commercial risk; (2) has outstanding 

swaps that create substantial 

counterparty exposures that could have 

serious adverse effects on the financial 

stability of the U.S. banking system or 

financial markets; or (3) is a financial 

entity that is highly leveraged, is not 

subject to capital requirements of a 

prudential regulator, and has a 

substantial position in swaps, including 

positions used to hedge and mitigate 

commercial risk.63

Under proposed Regulation 23.101(b), 

an MSP would be required to maintain 

positive tangible net worth or the 

amount of capital required by the RFA 

of which the MSP is a member. A 

tangible net worth standard is being 

proposed for MSPs, rather than the net 

liquid assets capital approach or the 

bank-based capital approach, as the 

Commission anticipates that entities 

that register as MSPs may engage in a 

diverse range of business activities 

different from, and broader than, the 

activities engaged in by SDs. For 

example, MSPs may engage in 

commercial activities that require them 

to have substantial fixed assets to 

support manufacturing and/or result in 

them having significant assets 

comprised of non-current assets as 

defined in the Regulations. In addition, 

MSPs typically use swaps for different 

purposes (e.g., hedging or investing) 

than SDs, which engage in swaps as a 

dealing activity. The Commission 

believes requiring MSPs to comply with 

the proposed net liquid assets capital 

approach or bank-based capital 

approach could result in MSPs having 

to obtain significant additional capital 

or engage in costly restructuring. 


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64See proposed Regulation 23.100. 

65See proposed Regulation 23.100. 

66 Id. 

67Section 4s(e)(3)(B)(i) states that nothing in 

section 4s(e) imposing capital and margin 

requirement on SDs and MSPs limits, or shall be 

construed to limit, the authority of the Commission 

to set financial responsibility rules for FCMs 

pursuant to section 4f(a). 

68Regulation 5.1(k) defines the term ‘‘retail forex 

customer’’ as a person, other than an eligible 

contract participant as defined in section 1a(18) of 

the CEA, acting on its own behalf in any account 

agreement, contract or transaction described in 

section 2(c)(2)(B) or 2(c)(2)(C) of the CEA. 

69The term ‘‘risk margin’’ is defined in 

Regulation 1.17(b)(8). 

The term ‘‘tangible net worth’’ is 

proposed to be defined as the net worth 

of an MSP as determined in accordance 

with generally accepted accounting 

principles in the United States, 

excluding goodwill and other intangible 

assets.64 The proposal would further 

require an MSP in computing its 

tangible net worth to include all 

liabilities or obligations of a subsidiary 

or affiliate that the MSP guarantees, 

endorses, or assumes either directly or 

indirectly to ensure that the tangible net 

worth of the MSP reflects the full extent 

of the MSP’s potential financial 

obligations.65 The proposed definition 

would further provide that in 

determining net worth, all long and 

short positions in swaps, security-based 

swaps and related positions must be 

marked to their market value to ensure 

that the tangible net worth reflects the 

current market value of the MSP’s 

swaps and security-based swaps, 

including any accrued losses on such 

positions.66

In developing the proposed positive 

tangible net worth requirement for 

MSPs, the Commission also considered 

the impact of its recent margin rules for 

uncleared swap transactions. Under the 

margin rules, MSPs are required to post 

and collect initial margin and variation 

margin with SDs, other MSPs, and 

financial end users (subject to certain 

thresholds and minimum transfer 

amounts). The exchanging of variation 

margin and the posting of initial margin 

by MSPs will substantially reduce their 

uncollateralized exposures, which will 

mitigate the possibility that MSPs could 

destabilize the financial markets or 

present systemic risk. Lastly, the 

Commission’s proposed MSP capital 

standard and definitions are comparable 

with the SEC’s proposal for MSBSPs, 

and are intended to require an MSP to 

maintain a sufficient level of assets to 

meet its obligations to counterparties 

and creditors and to help ensure the 

safety and soundness of the MSP. 

Request for Comment 

The Commission requests comment 

on the proposed capital requirements 

for MSPs. In addition, the Commission 

requests comment, including empirical 

data in support of comments, in 

response to the following questions: 

1. Is a tangible net worth test an 

appropriate standard for MSPs? If not, 

explain why not. Would the net liquid 

assets approach or bank-based capital 

approach be a more appropriate method 

for establishing capital requirements for 

MSPs? If so, please state which 

approach is more appropriate and 

describe the rationale for such 

approach. What other capital 

approaches should the Commission 

consider for MSPs? 

2. Should the proposed minimum 

capital requirement for MSPs include a 

minimum fixed-dollar amount of 

tangible net worth, for example, equal to 

$20 million or some greater or lesser 

amount? Is so, explain the merits of 

imposing a fixed-dollar amount and 

identify the recommended fixed-dollar 

amount. 

3. Should proposed Regulation 

23.101(b) require an MSP to maintain 

positive tangible net worth in an 

amount in excess of the market risk and 

credit risk charges on the MSP’s swaps 

and security-based swap positions? If 

so, please explain why. Should any 

other adjustments be made to the MSP’s 

minimum capital requirement? If so, 

please explain why. 

3. Capital Requirements for FCMs 

i. Introduction 

Section 4s(e)(3)(B)(i) of the CEA 

provides that the requirements 

applicable to SDs and MSPs under 

section 4s do not limit the 

Commission’s authority with respect to 

FCM regulatory requirements.67 The 

Commission’s current capital 

requirements for FCMs are contained in 

Regulation 1.17, and are designed to 

require a minimum level 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 cleared swaps markets. 

Specifically, an FCM is required to hold 

at all times more than one dollar of 

highly liquid assets for each dollar of 

unsubordinated liabilities (e.g., money 

owed to customers, counterparties and 

creditors). The capital requirements also 

are intended to ensure that an FCM 

maintains a sufficient level of liquid 

assets to wind-down its operations by 

transferring customer accounts to other 

FCMs in the event that the FCM 

decides, or is forced, to cease 

operations. 

Regulation 1.17(a) specifies the 

minimum amount of adjusted net 

capital that an FCM is required to 

maintain as the greatest of: (1) $1 

million; (2) for an FCM that engages in 

off-exchange foreign currency 

transactions with retail forex 

customers,68 $20 million, plus five 

percent of the FCM’s liabilities to the 

retail forex customers that exceed $10 

million; (3) eight percent of the sum of 

the risk margin of futures, options on 

futures, foreign futures, and swap 

positions cleared by a clearing 

organization and carried by the FCM in 

customer and non-customer accounts; 69

(4) the amount of adjusted net capital 

required by the RFA of which the FCM 

is a member; and (5) for an FCM that 

also is registered with the SEC as a BD, 

the amount of net capital required by 

the rules of the SEC. 

Regulation 1.17(c)(5) defines the term 

‘‘adjusted net capital’’ as an FCM’s 

‘‘current assets’’ (i.e., current, liquid 

assets excluding, however, most 

unsecured receivables), less all of the 

FCM’s liabilities (except certain 

qualifying subordinated debt). An FCM 

is further required to impose certain 

prescribed capital deductions (‘‘capital 

charges’’ or ‘‘haircuts’’) from the current 

market value of the FCM’s proprietary 

positions (e.g., futures positions, 

securities, debt instruments, money 

market instruments, and commodities) 

in computing its adjusted net capital to 

reflect potential market risk and credit 

risk of the firm’s current assets. 

An FCM, in computing its adjusted 

net capital, is required to compute a 

capital charge to reflect the potential 

market risk associated with uncleared 

swap and security-based swap 

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. Regulation 1.17(c)(5) does not 

explicitly address uncleared swap or 

security-based swap positions. The 

Commission, however, requires an FCM 

to use the capital charges specified in 

Regulation 1.17(c)(5)(ii), or the capital 

charges established by SEC Rule 15c3– 

1 for dually registered FCM–BDs, to 

compute its capital charges for 

uncleared swap and security-based 

swap positions. 

The Commission is proposing to 

amend the minimum adjusted net 

capital requirements for FCMs that are 

also registered as SDs. In this regard, the 

Commission is proposing amendments 

to Regulation 1.17(a) that would require 

an FCM that is also an SD to maintain 


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70The SEC proposed capital requirements for 

SBSDs and MSBSPs was proposed in 2012. See 

Capital, Margin, and Segregation Requirements for 

Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements 

for Broker-Dealers, 77 FR 70214 (Nov. 23, 2012). 71See Regulations 23.150, 23.152, and 23.154. 

adjusted net capital that is equal to or 

greater than the highest of: 

(1) $20 million; 

(2) Eight percent of the sum of the 

following: 

(a) The total risk margin (as defined 

in Regulation 1.17(b)(8)) for positions 

carried by the FCM in customer and 

non-customer accounts; 

(b) the total initial margin that the 

FCM is required to post with a clearing 

agency or broker for security-based 

swaps positions carried in customer and 

non-customer accounts; 

(c) the total uncleared swaps margin 

as defined in Regulation 23.100; 

(d) the total initial margin that the 

FCM is required to post with a broker 

or clearing organization for all 

proprietary cleared swap positions 

carried by the FCM; 

(e) the total initial margin computed 

pursuant to SEC Rule 18a–3(c)(1)(i)(B) 

(17 CFR 240.181–3(c)(1)(i)(B)) for all 

proprietary uncleared security-based 

swap positions carried by an FCM, 

without regard to any exemptions or 

exclusions that may be available to the 

FCM under the SEC’s proposal; and 

(f) the total initial margin that the 

FCM is required to post with a broker 

or clearing agency for proprietary 

cleared security-based swaps; 

(3) the amount of net capital required 

by the SEC if the FCM was a BD; or 

(4) the amount of capital required by 

the RFA of which the FCM was a 

member. 

The Commission’s proposed increase 

in the FCM’s minimum capital 

requirement from $1 million to $20 

million is consistent with the 

Commission’s proposal to adopt a 

minimum $20 million capital 

requirement for SDs and MSPs, and is 

necessary and appropriate given the 

change and increase in risk when the 

FCM is registered as an SD and engaging 

in uncleared swap activities. The 

Commission also notes that the 

proposed minimum dollar amount of 

$20 million is consistent with the 

current minimum dollar amount of 

adjusted net capital imposed by 

Regulation 1.17(a) on FCMs that engage 

in OTC forex transactions with 

counterparties that do not qualify as 

ECPs, and is consistent with the 

minimum dollar amount of net capital 

proposed by the SEC for SBSDs.70

The Commission is also proposing 

amendments to Regulation 1.17(a) to 

require an FCM to include eight percent 

of the uncleared swaps margin in its 

adjusted net capital. Currently FCMs 

must maintain adjusted net capital in 

excess of eight percent of the risk 

margin on futures, foreign futures and 

cleared swaps positions carried in 

customer and noncustomer accounts. 

The proposed amendments would also 

include in the FCM’s minimum capital 

requirements eight percent of the 

‘‘uncleared swaps margin’’ for uncleared 

swaps and the initial margin for 

uncleared security-based swaps position 

for which the FCM is a counterparty. 

The term ‘‘uncleared swaps margin’’ is 

defined in proposed new Regulation 

23.100 as the amount of initial margin 

that an SD would be required to collect 

pursuant to the Commission’s uncleared 

swaps margin rules for each outstanding 

swap.71 The ‘‘uncleared swaps margin’’ 

would include both swaps that an SD is 

required to collect margin for under the 

margin rules as well as swaps that are 

exempt from the margin rules. For 

example, the FCM would be required to 

compute the amount of initial margin 

that an SD would be required to collect 

from commercial end users and 

affiliated counterparties as if the swaps 

were not exempt from the scope of the 

Commission’s margin requirements. In 

addition, the FCM would have to 

compute the initial margin requirements 

for exempt foreign exchange swaps and 

foreign exchange forwards as if the 

transactions were not exempt from the 

Commission’s margin requirements. 

Finally, the ‘‘uncleared swaps margin’’ 

amount would not exclude initial 

margin that was below the initial margin 

threshold amount or the minimum 

margin transfer amounts defined in 

Regulation 23.151. Not excluding these 

amounts in determining the capital 

requirement is consistent with the 

approach as described above for those 

SDs that elect to apply a net capital 

standard as these uncollateralized 

exposures may present risk to the SD for 

which it should maintain capital. 

Similarly, the Commission would 

require an FCM to include in its initial 

margin amounts for security-based swap 

positions both the amounts that an SD 

would be required to collect and the 

amounts that the SD would not be 

required to collect if the SD were treated 

as an SBSD under SEC’s proposed rule 

18a–3(c)(1)(i)(B) due to the SEC 

provided an exemption or exclusion on 

the requirement to post or collect initial 

margin. 

As discussed above, the capital rule is 

intended to help ensure the safety and 

soundness of the SD. Accordingly, the 

FCM’s capital should reflect 

uncollateralized exposures to swap 

counterparties. 

ii. FCM Capital Charges for Swaps and 

Security-Based Swaps in Computing 

Adjusted Net Capital 

As noted in section II.A.3.i above, in 

computing its adjusted net capital, an 

FCM is required to take certain market 

risk and credit risk capital charges on its 

proprietary positions. Regulation 1.17(c) 

provides two approaches for an FCM to 

take capital charges in computing its 

adjusted net capital. The first approach 

is a rules-based approach of 

standardized haircuts that are set forth 

in Regulation 1.17(c)(5). The second 

approach is an approved model 

approach that is currently available only 

to FCMs that are dual-registered FCM/ 

BDs that have been approved by the SEC 

to use internal models to compute 

market risk and credit risk capital 

charges in lieu of standardized capital 

charges. These dually-registered FCM/

BDs are referred to as Alternative Net 

Capital Firms (‘‘ANC Firms’’). 

a. Standardized Market Risk and Credit 

Risk Capital Charges 

Currently, Regulation 1.17(c)(5) does 

not explicitly define market risk capital 

charges for swaps, and the Commission 

has imposed the general standardized 

haircuts that are applicable to inventory, 

fixed price commitments, and forward 

contracts to swaps. For example, an 

energy swap that is not offset by a 

futures contract is considered a fixed 

price commitment under Regulation 

1.17(c)(5) and the FCM is required to 

take a market risk capital charge equal 

to 20 percent of the notional value of the 

energy swap. The purpose of the capital 

charge is to require an FCM to reserve 

a minimum level of capital to cover 

potential future losses in the value of 

the swap, which may have to be paid to 

the swap counterparty in the form of 

variation margin or otherwise. 

The Commission recognizes that the 

current market risk capital charges, 

which were not explicitly designed for 

swaps or security-based swaps, should 

be amended to provide specific capital 

charges. Accordingly, the Commission 

is proposing to amend Regulation 

1.17(c)(5)(iii) to provide a schedule of 

standardized market risk capital 

deductions for positions in credit 

default swaps, interest rate swaps, 

foreign exchange swaps, commodity 

swaps, and all other uncleared swaps. 

This schedule of standardized capital 

deductions is the same as the 

standardized market risk capital 

deduction proposed by the SEC for such 

positions in SEC Rule 15c3–1 (17 CFR 


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72See 77 FR 70214 (Nov. 23, 2012). 73The capital deductions for debt instruments are 

incorporated into Regulation 1.17 by cross reference 

to the SEC’s standardized capital charges for debt 

instruments. See Regulation 1.17(c)(5)(v). 

74 17 CFR 240.15c3–1(a)(2)(7)(i). 

75 17 CFR 240.15c3–1(a)(2)(7)(ii). 

76See Alternative Net Capital Requirements for 

Broker-Dealers That Are Part of Consolidated 

Supervised Entities, 69 FR 34428 (Jun 21, 2004). 

240.15c3–1).72 The Commission is also 

proposing to amend Regulation 

1.17(c)(5)(iv) to provide that the FCM 

must impose the standardized market 

risk capital deduction set forth in SEC 

Rule 15c3–1 (17 CFR 240.15c3–1) for 

any security-based swap positions. 

Except for credit default swaps as 

described below, the proposed 

standardized market risk capital 

deductions would be the deduction 

currently prescribed in 17 CFR 

240.15c3–1 or proposed amended 

Regulation 1.17 applicable to the 

instrument referenced by the swap 

multiplied by the contract’s notional 

amount. 

The proposed standardized market 

risk deductions for swaps that are credit 

default swaps are designed to account 

for the unique attributes of these 

positions. Credit default swaps are 

generally defined by the reference asset 

or entity, the notional amount, the 

duration of the contract, and credit 

events. Therefore, the Commission 

believes that proposing a schedule of 

deductions for credit default swaps 

based on a ‘‘maturity grid’’ approach 

would be appropriate, as the 

Commission currently applies a 

maturity grid approach in setting 

standardized capital deductions for debt 

instruments.73 Under the proposal, the 

market risk capital deductions for credit 

default swaps would be based on two 

variables: The length of time to maturity 

and the amount of the current offered 

basis point spread on the credit default 

swap. The Commission’s proposed 

standardized deductions are consistent 

with the SEC’s proposed amendments to 

its capital rule. 

The Commission would allow an 

FCM to net long and short positions 

where the credit default swaps reference 

the same entity or obligation, reference 

the same credit events that would 

trigger payment by the seller of the 

protection, reference the same basket of 

obligations that would determine the 

amount of payment by the seller of 

protection upon the occurrence of a 

credit event, and are in the same or 

adjacent maturity and spread categories 

(as long as the long and short positions 

each have maturities within three 

months of the other maturity category). 

In this case, the FCM would need to 

take the specified percentage deduction 

only on the notional amount of the 

excess long or short position. 

The Commission would also allow 

limited netting in, for example, long and 

short credit default swap positions in 

the same maturity and spread categories 

and that reference corporate entities in 

the same industry sector; where the 

FCM is long (short) the bond or asset 

and long (short) protection through a 

credit default swap referencing the same 

underlying bond or asset. 

As noted above, the Commission is 

proposing the same market risk haircut 

schedule for swaps as proposed by the 

SEC in its proposed capital and margin 

rule for SBSDs. The Commission 

understands that the proposed capital 

charges for credit default swaps are 

derived from the SEC’s experience with 

maturity grids for other securities. Given 

the Commission’s experience with 

FCMs and the financial transactions that 

they may enter into, and also in 

recognition of the SEC’s experience with 

BDs and their financial products, the 

Commission believes that these charges 

should account for the risks of engaging 

in these swaps and security-based 

swaps. Further, the Commission 

believes that its approach is appropriate, 

given its long history of referencing 17 

CFR 240.15c3–1 in setting forth capital 

deductions for certain financial 

instruments held by FCMs and the 

SEC’s reciprocal practice of referencing 

Regulation 1.17 when setting forth 

capital deductions for certain CFTCregulated products held by BDs. The 

Commission further believes that this 

harmonized approach would benefit 

registrants that are dually registered 

with the Commission and the SEC. 

FCMs also are currently required to 

take a capital charge to reflect credit risk 

associated with uncleared swap and 

security-based swap transactions. 

Regulation 1.17(c)(2)(ii) requires an 

FCM to exclude unsecured receivables, 

which includes any unsecured 

receivables from swap and securitybased swap counterparties and would 

include any margin collateral for swap 

or security-based swap transactions that 

the FCM deposits with a third-party 

custodian pursuant to the Commission’s 

or SEC’s uncleared margin rules. 

The Commission is proposing to 

amend Regulation 1.17(c)(2)(ii) to 

permit FCM’s to include margin 

deposited with third-party custodians 

for swap and security-based swap 

transactions, provided that such margin 

is held by the custodians in accordance 

with the requirements established by 

the Commission and SEC rules, as 

applicable. 

b. Model-Based Market Risk and Credit 

Risk Capital Charges 

As noted in section II.A.3 above, the 

SEC has approved certain BDs to use 

internal models for computing market 

risk capital charges in lieu of the 

standardized haircuts in SEC Rule 

15c3–1(c)(2)(vi) and (vii) (17 CFR 

240.15c3–1(c)(2)(vi) and (vii)) for their 

proprietary positions in securities, debt 

instruments, futures, security-based 

swaps and swaps and for computing 

credit risk charges associated with 

exposures from swap and security-based 

swap counterparties in lieu of the 

unsecured receivable capital charges in 

Rule 15c3–1(c)(2)(iv) (17 CFR 240.15c3– 

1(c)(2)(iv)). The BDs that have been 

approved to use these internal models 

are referred to as ANC Firms. As 

described in section II.A.3 above, ANC 

Firms may obtain SEC approval to use 

internal models to compute their 

capital. Once approved by the SEC to 

use internal models, the ANC Firms that 

are also registered as FCMs may use the 

same models to compute market risk 

and credit risk charges under CFTC 

Regulation 1.17. 

The ANC Firms’ market risk and 

credit risk models must satisfy certain 

qualitative and quantitative 

requirements that are set forth in the 

SEC’s rules in order to be approved, and 

the firms are subject to certain enhanced 

reporting requirements. The 

requirements for such models are 

discussed in section II.A.4 of this 

release. 

ANC Firms are subject to heightened 

SEC capital requirements in order to 

qualify to use the market risk and credit 

risk models. Currently, an ANC Firm 

must maintain tentative net capital of at 

least $1 billion and net capital of at least 

$500 million in order to be approved, 

and to continue to use market risk and 

credit risk models.74 The SEC also 

requires an ANC Firm to provide notice 

to the SEC if the ANC Firm’s tentative 

net capital falls below $5 billion.75 In 

such situations, the SEC may impose 

restrictions on the ANC Firm, including 

limiting its use of the market risk and/ 

or credit risk models.76

As previously noted, CFTC Regulation 

1.17(c)(6) currently provides that an 

FCM that is also an ANC Firm, may use 

the same market risk and credit risk 

models approved by the SEC in lieu of 

the standardized capital charges in 

Regulation 1.17(c)(5). The Commission 

is proposing to retain this provision in 

Regulation 1.17(c)(6). Accordingly, 

FCMs that are ANC Firms that have 

obtained SEC approval to use market 

risk and credit risk models may 

continue to use such models in lieu of 


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77See proposed amendments to Rule 15c3– 

1(a)(7)(ii), 77 FR 70214, 70329. 

78 Id. 

79See proposed new paragraph (f) to Rule 15c3– 

1, 77 FR 70214, 70331. 

80 Id. 

81 Id. 

82 Id. 

83 77 FR 70214 at 70329. 

84 If an FCM or SD is also a registered BD, it may 

only use market risk and credit risk capital models 

if the SEC approves the firm as an ANC Firm. 

Accordingly, the Commission’s proposal to extend 

models to other FCMs would only apply to FCMs 

that are not also subject to the SEC’s capital 

requirements. 

85As noted above, the SEC has proposed to 

increase the ‘‘early warning’’ requirement to $6 

billion, the tentative net capital requirement to $5 

billion, and the net capital requirement to $1 

billion. 

taking the standardized capital chares in 

Regulation 1.17(c). Maintaining this 

provision would allow ANC Firms to 

engage in swap and security-based swap 

transactions under the existing 

regulatory structure, including the 

current capital requirements. 

The Commission notes that the SEC 

has proposed various changes to its 

regulations as part of its proposed 

capital requirements for SBSDs that, if 

adopted, would impact the ANC Firm’s 

CFTC and SEC capital requirements. In 

this connection, the SEC is proposing to 

increase the amount of tentative net 

capital that an ANC Firm must maintain 

from $1 billion to $5 billion, and the 

amount of net capital that the ANC Firm 

must maintain from $500 million to $1 

billion.77 The early warning threshold 

for an ANC Firm also would be 

increased from $5 billion to $6 billion.78

The SEC is also proposing to subject 

ANC Firms to liquidity risk 

management requirements.79 Under the 

SEC’s proposal, ANC Firms would need 

to perform a liquidity stress test at least 

monthly that takes into account certain 

assumed conditions lasting for 30 

consecutive days.80 The results of the 

liquidity stress test would need to be 

provided within ten business days of 

the month end to senior management 

responsible for overseeing risk 

management at the firm.81 In addition, 

the assumptions underlying the 

liquidity stress test would need to be 

reviewed at least quarterly by senior 

management responsible for overseeing 

risk management at the firm and at least 

annually by senior management of the 

firm.82 The Commission is also 

proposing similar liquidity 

requirements for SDs, which are 

discussed in section II.B of this release. 

In addition, the SEC is proposing to 

amend its regulations to limit an ANC 

Firm’s use of credit risk models to credit 

exposures solely from counterparties 

that are commercial end users.83

Currently, an ANC Firm is permitted to 

compute its credit charges for swaps 

and security-based swaps from all 

counterparties. This amendment would 

result in the uncollateralized receivables 

from counterparties that are noncommercial end users being subject to a 

100 percent charge to capital. 

Since those ANC Firms that are also 

registered as FCMs will be subject to 

both the capital requirements of the SEC 

and CFTC, the SEC proposed 

amendments, if adopted, would be 

applicable to the ANC Firm’s 

computation of net capital under CFTC 

Regulation 1.17(c)(6). 

iii. Market Risk and Credit Risk Capital 

Models for Futures Commission 

Merchants That Are Not Alternative Net 

Capital Firms 

As noted in section II.A.3 above, 

currently only FCMs that are registered 

with the SEC as ANC Firms and that 

have obtained SEC approval may use 

market risk and credit risk models in 

lieu of standardized haircuts on their 

swaps, security-based swaps and other 

proprietary positions in computing net 

capital. The Commission is proposing to 

amend current Regulation 1.17(c)(6) to 

extend the use of capital models to 

FCMs that are dually-registered as SDs 

and are not otherwise registered with 

the SEC as BDs.84 An FCM/SD that 

would seek to use capital models would 

have to obtain approval for the models 

from the Commission or from an RFA of 

which the FCM/SD is a member. The 

Commission is also proposing to amend 

Regulation 1.17(a)(1)(ii) to provide that 

any FCM/SD that seeks approval to use 

market risk and/or credit risk models 

must maintain a minimum level of net 

capital of $100 million and a minimum 

level of adjusted net capital equal to $20 

million. 

Proposed Regulation 1.17(c)(6)(v) 

would require an FCM/SD to apply in 

writing to the Commission or RFA of 

which the FCM/SD is a member for 

approval to use internal models to 

compute market risk and credit risk 

capital deductions in lieu of the 

standardized charges contained in 

Regulation 1.17(c)(2) and (5). The 

models must meet certain qualitative 

and quantitative requirements proposed 

to be established by the Commission in 

new Regulation 23.102 and Appendix A 

to new Regulation 23.102. The 

qualitative and quantitative 

requirements for the models are 

discussed in detail in section II.A.4 of 

this release. 

The Commission is proposing the 

higher minimum net capital 

requirement of $100 million for FCM/

SDs that have received permission to 

model their credit and market risk 

charges to account for the limitations 

that may be inherent in a model. The 

Commission notes that the $100 million 

minimum net capital requirement is the 

same as the SEC’s proposed minimum 

net capital requirement for stand-alone 

SBSDs that receive SEC approval to use 

internal models to compute their market 

and credit risk capital deductions, and 

is consistent with the Commission’s 

proposed requirement for SDs that elect 

to use a net capital approach as 

discussed in section II.A.2.ii of this 

release. The proposed $100 million net 

capital requirement for FCM/SDs, 

however, is not consistent with the 

SEC’s current approach for BDs 

approved to use internal capital models 

(i.e., ANC Firms), nor is it consistent 

with the SEC’s proposed capital 

requirements for SBSDs/ANC Firms 

approved to use internal models. As 

noted above, ANC Firms are subject 

under SEC rules to substantial capital 

requirements of a $5 billion ‘‘early 

warning’’ requirement, a $1 billion 

tentative net capital requirement, and a 

$500 million net capital requirement.85

The Commission believes, however, 

that FCM/SDs that are not BDs do not 

raise the same types of risks as ANC 

firms. ANC firms represent the largest 

BDs and engage in significant brokerage 

business including providing customer 

financing for securities transactions, 

engaging in repurchase transactions and 

other activities. FCMs generally have 

limited proprietary futures trading and 

operate primarily as market 

intermediaries for customers trading 

futures and foreign futures transactions. 

In this capacity, FCMs receive and hold 

customer funds in segregated accounts 

that are used to satisfy the customers’ 

financial obligations to derivatives 

clearing organizations (‘‘DCOs’’). FCMs 

also collect and hold funds from 

affiliates for futures trading. 

The Commission also expects that 

FCMs that are not registered as BDs and 

that register as SDs will provide a 

market in swaps for customers that may 

not be able to trade with larger SDs. The 

FCM/SDs may be more willing to 

provide swaps markets in commodities 

to agricultural firms and smaller 

commercial end users such as farmers 

and ranchers that might not otherwise 

be able to use such markets to manage 

risks in their businesses or might have 

to pay higher fees to engage in swaps if 

the number of SDs was limited. The 

Commission further believes that given 

the nature of the business operations of 

FCM/SDs, the proposed minimum 

capital requirement of $100 million of 


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86See proposed Regulation 23.102(b). 

87See 81 FR 636, 654 (Jan. 6, 2016). As an RFA, 

NFA also is required to establish minimum capital 

requirements for its members, including SDs and 

MSPs, that are at least as stringent as the capital 

rules imposed by the Commission. The Commission 

anticipates that NFA’s capital rules will permit SDs 

to use NFA approved capital models in computing 

regulatory capital. 

88 In many instances, SDs whose capital models 

would be subject to NFA review would be affiliates 

of SDs whose capital models are subject to review 

by one of the prudential regulators, or affiliates of 

foreign SDs whose capital models are reviewed by 

a foreign regulatory authority. The Commission 

expects that a prudential regulator’s or foreign 

regulator’s review and approval of capital models 

that are used throughout the corporate family 

would be a significant factor in NFA determining 

the scope of its review, provided that appropriate 

information would be available to the Commission 

and NFA. 

adjusted net capital is consistent with 

section 4s(e) of the CEA. 

The Commission believes that setting 

the same amount of minimum required 

capital would ensure a level playing 

field for SDs and FCMs that engage in 

swaps. However, to the extent that an 

FCM is dually registered as a BD and 

has received permission to use internal 

models for its credit and market risk 

charges, the FCM would follow the 

SEC’s requirements with respect to the 

minimum capital it needs to maintain. 

iv. Liquidity Requirements 

The Commission is further proposing 

to require an FCM that is also registered 

as an SD to comply with the liquidity 

requirements in Proposed Rule 

23.104(b)(1). The Commission 

recognizes that an FCM that acts as an 

SD is acting as a counterparty rather 

than as an intermediary between its 

customer and another counterparty. 

Therefore, for all the reasons discussed 

further below in section 3, the 

Commission is proposing to require 

FCMs that are also SDs to comply with 

the liquidity requirement set forth in 

Proposed Rule 23.104(b)(1). 

Request for Comment 

The Commission requests comment 

on all aspects of the proposed 

amendments to the FCM capital 

requirements. In addition, the 

Commission requests comment, 

including empirical data in support of 

comments, in response to the following 

questions: 

1. Is the proposed minimum adjusted 

net capital requirement of $20 million 

appropriate for an FCM that is duallyregistered as an SD? If not, explain why 

not. If the minimum dollar amount 

should be set at a level greater or lesser 

than $20 million, explain what that 

greater or lesser amount should be and 

explain why that is a more appropriate 

amount. 

2. Is the proposed minimum net 

capital requirement of $100 million 

appropriate for an FCM that is duallyregistered as an SD, and has been 

approved to use internal models to 

compute market risk and credit risk? If 

not, explain why not. If the minimum 

dollar amount should be set at a level 

greater or lesser than $100 million, 

explain what that greater or lesser 

amount should be and explain why that 

is a more appropriate amount. 

3. The proposal’s minimum capital 

requirement based on 8% of margin, 

includes swaps exempt or excluded 

from the CFTC’s margin requirements, 

such as inter-affiliate swaps. Please 

provide comment on the breadth of the 

definition. Should the scope be 

narrowed? If so, how? 

4. Should the 8 percent of margin 

capital requirement be set at a higher or 

lower level? If it should be adjusted, 

what percent should the Commission 

consider? Please provide analysis in 

support of the adjustment. 

4. Model Approval Process 

Under the proposal as discussed 

above, SDs subject to the bank-based 

capital approach, the net liquid assets 

capital approach, or the tangible net 

worth capital approach are subject to 

market risk and credit risk capital 

charges on their swaps, security-based 

swaps and other proprietary positions in 

computing their regulatory capital. The 

Commission is proposing in Regulation 

23.102 to permit SDs to compute market 

risk and credit risk capital charges using 

internal models in lieu of the 

standardized rules-based capital 

charges. The Commission recognizes 

that internal models, including value-atrisk models, can provide a more 

effective means of measuring economic 

risk from complex trading strategies 

involving uncleared swaps and other 

investment instruments. 

The Commission, however, is 

concerned, given the number of SDs and 

the likely complexity of the capital 

models, that it may not be able to review 

models as thoroughly and expeditiously 

as would be necessary with its limited 

resources. In addition, the Commission 

recognizes that with its current 

resources it would be challenged to 

perform appropriate ongoing monitoring 

and assessment of the capital models to 

ensure that such models operate as 

designed. Accordingly, the Commission 

is proposing in Regulation 23.102 to 

permit an SD to use internal capital 

models that have been approved by the 

Commission or by an RFA of which the 

SD is a member to compute market risk 

and credit risk capital charges in lieu of 

standardized deductions.86

As previously noted, NFA currently is 

the only RFA. Allowing an SD to use 

internal capital models that have been 

approved by NFA is consistent with the 

Commission’s recent approach with 

respect to margin models for uncleared 

swap transactions.87 Specifically, 

Commission Regulation 23.154(b) 

allows an SD to obtain NFA’s approval 

to use a model to calculate the initial 

margin requirement for uncleared swaps 

and security-based swap positions. NFA 

has established a process, and is 

reviewing the margin models submitted 

by SDs. 

Capital models, however, would pose 

different challenges for regulators, 

including NFA. Unlike the approach for 

initial margin, where SDs jointly 

developed a standardized initial margin 

model for swaps and security-based 

swaps that would be available for use by 

market participants, each SD seeking 

NFA approval would submit for review 

several individually developed capital 

models to compute the market risk for 

the full portfolio of trading positions, 

including swaps and security-based 

swaps, and counterparty credit risk 

charges that are discussed below. 

Therefore, reviewing capital models 

would significantly increase the number 

of models that NFA would need to 

review and approve relative to the 

margin models.88 In addition, NFA 

would have to perform ongoing 

supervision over the models to assess 

the effective operation and 

implementation. 

The SD’s application to use internal 

models must be in writing and must be 

filed with the Commission and with an 

RFA in accordance with the applicable 

instructions. The model application 

must include specified information 

regarding the models, which is 

contained in proposed Appendix A to 

Regulation 23.102. For example, 

proposed Appendix A would require an 

SD to submit: (1) A list of categories of 

positions the SD holds in its proprietary 

accounts and a brief description of the 

methods the SD would use to calculate 

deductions for market risk and credit 

risk on those categories of positions; (2) 

a description of the mathematical 

models to be used to price positions and 

to compute deductions for market risk, 

including those portions of the 

deductions attributable to specific risk, 

if applicable, and deductions for credit 

risk; (3) a description of how the SD will 

calculate current exposure and potential 

future exposure for it credit risk charges, 

and (4) a description of how the SD 


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89See Revisions to the Basel II market risk 

framework, published by the Basel Committee on 

Banking Supervision for an explanation of the 

implementation of the stressed VaR requirement. 

would determine internal credit risk 

weights of counterparties, if applicable. 

The Commission or RFA may also 

require the SD to submit supplemental 

information relating to its models. If any 

information in an application is found 

to be or becomes inaccurate before the 

Commission or RFA approves the 

application, the SD must notify the 

Commission and RFA promptly and 

provide the Commission and RFA with 

a description of the circumstances in 

which the information was inaccurate 

along with updated accurate 

information. As part of the approval 

process, and on an ongoing basis, an SD 

would be required to demonstrate to the 

Commission or RFA that the models 

reliably account for the risks that are 

specific to the types of positions the SD 

intends to include in the model 

computations. The Commission or RFA 

may approve, in whole or in part, an 

application or an amendment to the 

application, subject to any conditions or 

limitations the Commission or RFA may 

require. 

After receiving approval of its models, 

an SD would be required to amend and 

submit to the Commission or RFA for 

approval its application before 

materially changing its models or its 

internal risk management control 

system. Further, an SD would be 

required to notify the Commission or 

the RFA 45 days before it ceases using 

models to compute its capital. The 

Commission or the RFA may revoke an 

SD’s ability to use models to compute 

capital if either the Commission or the 

RFA finds that the use of the models by 

the SD is no longer appropriate. If the 

Commission or the RFA revokes an SD’s 

ability to use models to compute capital, 

the SD would need to use the 

standardized haircuts for all of its 

positions. 

In developing the proposed market 

risk and credit risk requirements, 

including the proposed quantitative and 

qualitative requirements discussed 

below, the Commission has 

incorporated in the proposed 

requirements the market risk and credit 

risk model requirements adopted by the 

Federal Reserve Board for bank holding 

companies, including the value at risk 

(‘‘VaR’’), stressed VaR, specific risk, 

incremental risk, and comprehensive 

risk qualitative and quantitative 

standards and requirements. The 

Commission’s proposed qualitative and 

quantitative requirements for capital 

models also are comparable to the SEC’s 

existing capital model requirements for 

OTC derivatives dealers and ANC BDs. 

i. VaR Models 

Proposed Regulation 23.102 would 

require that a VaR model’s quantitative 

criteria include the use of a VaR-based 

measure based on a 99 percent, onetailed confidence interval. The VaRbased measure must be based on a price 

shock equivalent to a ten business-day 

movement in rates or prices. Price 

changes estimated using shorter time 

periods must be adjusted to the tenbusiness-day standard. The minimum 

effective historical observation period 

for deriving the rate or price changes is 

one year and data sets must be updated 

at least quarterly or more frequently if 

market conditions warrant. For many 

types of positions it is appropriate for an 

SD to update its data positions more 

frequently than quarterly. In all cases, 

an SD must have the capability to 

update its data sets more frequently 

than quarterly in anticipation of market 

conditions that would require such 

updating. 

The SD would not need to employ a 

single internal capital model to 

calculate its VaR-based measure. An SD 

may use any generally accepted 

approach, such as variance-covariance 

models, historical simulations, or Monte 

Carlo simulations. However, the level of 

sophistication of the SD’s internal 

capital model must be commensurate 

with the nature and size of the positions 

the model covers. The internal capital 

model must use risk factors sufficient to 

measure the market and credit risk 

inherent in all positions. The risk 

factors must address the risks including 

interest rate risk, credit spread risk, 

equity price risk, foreign exchange risk, 

and commodity price risk. For material 

positions in the major currencies and 

markets, modeling techniques must 

incorporate enough segments of the 

yield curve—in no case less than six— 

to capture differences in volatility and 

less than perfect correlation of rates 

along the yield curve. 

The internal capital model may 

incorporate empirical correlations 

within and across risk categories, 

provided that the SD validates and 

demonstrates the reasonableness of its 

process for measuring correlations. If 

the internal capital model does not 

incorporate empirical correlations 

across risk categories, the SD must add 

the separate measures from its internal 

capital models for the appropriate risk 

categories as listed above to determine 

its aggregate VaR-based measure of 

capital. 

The VaR-based measure must include 

the risks arising from the nonlinear 

price characteristics of options positions 

or positions with embedded optionality 

and the sensitivity of the fair value of 

the positions to changes in the volatility 

of the underlying rates, prices or other 

material factors. An SD with a large or 

complex options portfolio must measure 

the volatility of options positions or 

positions with embedded optionality by 

different maturities and/or strike prices, 

where material. 

The internal capital model must be 

subject to back-testing requirements that 

must be calculated no less than 

quarterly. An SD must compare its daily 

VaR-based measure for each of the 

preceding 250 business days against its 

actual daily trading profit or loss, which 

includes realized and unrealized gains 

and losses on portfolio positions as well 

as fee income and commissions 

associated with its activities. If the 

quarterly backtesting shows that the 

SD’s daily net trading loss exceeded its 

corresponding daily VaR-based 

measure, a backtesting exception has 

occurred. If an SD experiences more 

than four backtesting exceptions over 

the preceding 250 business days, it is 

generally required to apply a 

multiplication factor in excess of three 

when it calculates its capital 

requirements. 

The qualitative requirements would 

specify, among other things, that: (1) 

Each VaR model must be integrated into 

the SD’s daily internal risk management 

system; (2) each VaR model must be 

reviewed periodically by the firm’s 

internal audit staff and annually by a 

third party service provider; and (3) the 

VaR measure computed by the model 

must be multiplied by a factor of at least 

three but potentially a greater amount if 

there are exceptions to the measure 

resulting from quarterly back-testing 

results. 

An SD would also be subject to ongoing supervision by staff of the 

Commission and or RFA with respect to 

its internal risk management, including 

its use of VaR models. 

ii. Stressed VaR Models 

The Commission is proposing a 

stressed VaR component for SDs that 

have permission to use VaR models to 

compute market risk capital deductions. 

The stressed VaR measure supplements 

the VaR measure, as the VaR measure’s 

inherent limitations produced an 

inadequate amount of capital to 

withstand the losses sustained by many 

financial institutions in the financial 

crisis of 2007–2008.89 The stressed VaR 

measure should also contribute to a 


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more appropriate measure of the risks of 

an SD’s positions, as it should account 

for more volatile and extreme price 

changes. 

An SD would be required to use the 

same model that it uses to compute its 

VaR measure for its stressed VaR 

measure. The model inputs however 

would be calibrated to reflect historical 

data from a continuous 12-month period 

that reflects a period of significant 

financial stress appropriate to the SD’s 

portfolio. The stressed VaR measure 

must be calculated at least weekly and 

be no less than the VaR measure. The 

Commission would expect that the 

stressed VaR measure would be 

substantially greater than the VaR 

measure. 

The Commission would require the 

stress tests to take into account 

concentration risk, illiquidity under 

stressed market conditions, and other 

risks arising from the SD’s activities that 

may not be captured adequately in the 

SD’s internal models. For example, it 

may be appropriate for the SD to 

include in its stress testing large price 

movements, one-way markets, nonlinear 

or deep out-of-the-money products, 

jumps-to-default, and significant 

changes in correlation. Relevant types of 

concentration risk include 

concentration by name, industry, sector, 

country, and market. 

The SD must maintain policies and 

procedures that describe how it 

determines the period of significant 

financial stress used to compute its 

stressed VaR measure and be able to 

provide empirical support for the period 

used. These policies and procedures 

must address: (1) How the SD links the 

period of significant financial stress 

used to calculate the stressed VaR-based 

measure to the composition and 

directional bias of the SD’s portfolio; 

and (2) the SD’s process for selecting, 

reviewing, and updating the period of 

significant financial stress used to 

calculate the stressed VaR measure and 

for monitoring the appropriateness of 

the 12-month period in light of the SD’s 

current portfolio. Before making 

material changes to these policies and 

procedures, an SD must obtain approval 

from the Commission or RFA. The 

Commission or the RFA may also 

require the SD to use a different period 

of stress to compute its stressed VaR 

measure. 

iii. Specific Risk Models 

The Commission’s proposal would 

allow SDs to model their specific risk. 

Under the proposal, the specific risk 

model must be able to demonstrate the 

historical price variation in the 

portfolio, be responsive to changes in 

market conditions, be robust to an 

adverse environment, and capture all 

material aspects of specific risk for its 

positions. The Commission would 

require that an SD’s models capture 

event risk (such as the risk of loss on 

equity or hybrid equity positions as a 

result of a financial event, such as the 

announcement or occurrence of a 

company merger, acquisition, spin-off, 

or dissolution) and idiosyncratic risk, 

capture and demonstrate sensitivity to 

material differences between positions 

that are similar but not identical, and to 

changes in portfolio composition and 

concentrations. If an SD calculates an 

incremental risk measure for a portfolio 

of debt or equity positions under 

paragraph (I) of 23.102 Appendix A, the 

SD is not required to capture default 

and credit migration risks in its internal 

models used to measure the specific risk 

of these portfolios. 

The Commission understands that not 

all debt, equity, or securitization 

positions (for example, certain interest 

rate swaps) have specific risk. 

Therefore, there would be no specific 

risk capital requirement for positions 

without specific risk. An SD must have 

clear policies and procedures for 

determining whether a position has 

specific risk. 

The Commission believes that an SD 

should develop and implement VaRbased models for both market risk and 

specific risk. An SD’s use of different 

approaches to model specific risk and 

general market risk (for example, the use 

of different models) will be reviewed to 

ensure that the overall capital 

requirement for market risk is 

commensurate with the risks of the SD’s 

covered positions. 

iv. Incremental Risk Models 

The Commission is proposing an 

incremental risk requirement for SDs 

that measures the specific risk of a 

portfolio of debt positions using internal 

models. Incremental risk consists of the 

default risk and credit migration risk of 

a position. Default risk means 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. 

Credit migration risk means the price 

risk that arises from significant changes 

in the underlying credit quality of the 

position. An SD may also include 

portfolios of equity positions in the 

incremental risk model with the prior 

permission from the Commission or 

RFA, provided that the SD consistently 

includes such equity positions in how it 

internally measures and manages the 

incremental risk for such positions at 

the portfolio level. Default is assumed to 

occur with respect to an equity position 

that is included in its incremental risk 

model upon the default of any debt of 

the issuer of the equity position. 

v. Comprehensive Risk Models 

Under the proposal, an SD would be 

required to compute all material price 

risks of one or more portfolios of 

correlation trading positions using an 

internal model. The Commission would 

require the model to measure all price 

risk consistent with a one-year time 

horizon at a one-tail, 99.9 percent 

confidence level, under the assumption 

either of a constant level of risk or of 

constant positions. The Commission 

would expect that the SD remains 

consistent in its choice of constant level 

or risk or positions, once it makes a 

selection. Also, the SD’s choice of a 

liquidity horizon must be consistent 

between its calculation of its 

comprehensive and incremental risk. 

The Commission would require an 

SD’s comprehensive risk model to 

capture all material price risk, 

including, but not limited to: (1) The 

risk associated with the contractual 

structure of cash flows of each position, 

its issuer, and its underlying exposures 

(for example, the risk arising from 

multiple defaults, including the 

ordering of defaults in tranched 

products); (2) credit spread risk, 

including nonlinear price risks; (3) 

volatility of implied correlations, 

including nonlinear price risks such as 

the cross-effect between spreads and 

correlations; (4) basis risks; (5) recovery 

rate volatility as it relates to the 

propensity for recovery rates to affect 

tranche prices; and (6) to the extent that 

comprehensive risk measure 

incorporates benefits from dynamic 

hedging, the static nature of the hedge 

over the liquidity horizon. The 

Commission notes that additional risks 

that are not explicitly discussed but are 

a material source of price risk must be 

included in the comprehensive risk 

measure. 

The Commission would require an SD 

to have sufficient market data to ensure 

that it fully captures the material price 

risks of the correlation trading positions 

in its comprehensive risk measure. 

Moreover, an SD must be able to 

demonstrate that its model is an 

appropriate representation of 

comprehensive risk in light of the 

historical price variation of its 

correlation trading positions. An SD 

would also be required to inform the 

Commission and RFA if the SD plans to 

extend the use of a model that has been 


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approved to an additional business line 

or product type. 

The comprehensive risk measure 

must be calculated at least weekly. In 

addition, an SD must at least weekly 

apply to its portfolio of correlation 

trading positions a set of specific 

stressed scenarios that capture changes 

in default rates, recovery rates, and 

credit spreads, and various correlations. 

An SD must retain and make available 

to the Commission and the RFA the 

results of the stress testing, including 

comparisons with capital comparisons 

generated by the SD’s comprehensive 

risk model. An SD must promptly report 

to the Commission or the RFA any 

instances where the stress tests indicate 

any material deficiencies in the 

comprehensive risk model. 

vi. Credit Risk Models 

Swap dealers that obtain Commission 

or RFA approval to use internal models 

to compute credit risk would be 

required to submit credit risk models 

that satisfy the quantitative and 

qualitative requirements set forth in 

Appendix A to proposed Regulation 

23.102. With respect to OTC derivatives 

contracts, an SD would need to 

determine an exposure charge for each 

OTC derivatives counterparty. The 

exposure charge for a counterparty that 

is insolvent, in a bankruptcy 

proceeding, or in default of an 

obligation on its senior debt, is the net 

replacement value of the OTC 

derivatives contracts with the 

counterparty (i.e., the net amount of 

uncollateralized current exposure to the 

counterparty). The counterparty 

exposure charge for all other 

counterparties is the credit equivalent 

amount of the SD’s exposure to the 

counterparty multiplied by an 

applicable credit risk weight factor 

multiplied by eight percent. The credit 

equivalent amount is the sum of the 

SD’s (1) maximum potential exposure 

(‘‘MPE’’) multiplied by a back-testing 

determined factor; and (2) current 

exposure to the counterparty. The MPE 

amount is a charge to address potential 

future exposure and is calculated using 

the VaR model as applied to the 

counterparty’s positions after giving 

effect to a netting agreement, taking into 

account collateral received, and taking 

into account the current replacement 

value of the counterparty’s positions. 

The Commission in its margin 

requirements (see Regulations 23.150 

through 23.161) has set forth the 

requirements for eligible collateral for 

uncleared swaps. In order to account for 

collateral in its VaR model for the credit 

risk charges, the Commission would 

expect an SD to account for only the 

collateral that complies with Regulation 

23.156 and is held in accordance with 

Regulation 23.157 for uncleared swaps 

that are subject to the Commission’s 

margin rules. An SD would be able to 

take into consideration in its VaR 

calculation collateral that does not 

comply with Regulation 23.156 and is 

not held in accordance with Regulation 

23.157 for uncleared swaps that are not 

subject to the Commission’s margin 

rules. 

The Commission is allowing SDs to 

use internal methodologies to determine 

the appropriate credit risk weights to 

apply to counterparties, if it has 

received the Commission’s or the RFA’s 

approval. A higher percentage credit 

risk weight factor would result in a 

larger counterparty exposure charge 

amount. The Commission expects that 

the counterparty credit risk weight 

should be based on an assessment of the 

creditworthiness of the counterparty. 

The second component to the credit 

risk charge would be a counterparty 

concentration charge. This charge is 

intended to account for the additional 

risk resulting from a relatively large 

exposure to a single counterparty. This 

charge is triggered if an SD’s current 

exposure to a counterparty exceeds five 

percent of the tier 1 or tentative net 

capital of the SD. In this case, an SD 

must take a counterparty concentration 

charge equal to: (1) Five percent of the 

amount by which the current exposure 

exceeds five percent of the tier 1 or 

tentative net capital of the SD for a 

counterparty with a credit risk weight of 

20 percent or less; (2) 20 percent of the 

amount by which the current exposure 

exceeds five percent of the tentative net 

capital for a counterparty with a risk 

weight factor of greater than 20 percent 

and less than 50 percent; and (3) 50 

percent of the amount by which the 

current exposure exceeds five percent of 

the tier 1 or tentative net capital for a 

counterparty with a risk weight factor of 

50 percent or more. 

The Commission is also proposing a 

portfolio concentration charge to 

address the risk of having a large 

amount of exposure relative to the 

capital of the SD. This charge is 

triggered when the aggregate current 

exposure of the SD to all counterparties 

exceed 50 percent of the SD’s common 

equity tier 1capital or tentative net 

capital. In this case, the portfolio 

concentration charge would be equal to 

100 percent of the amount by which the 

aggregate current exposure exceeds 50 

percent of the SD’s common equity tier 

1capital or tentative net capital. 

The Commission believes that its 

approach to calculating credit risk 

charges is appropriate given that its 

requirements are based on a method of 

computing capital charges for credit risk 

exposures in the international capital 

standards for banking institutions. Since 

credit risk is the risk that a counterparty 

could not meet its obligations on an 

OTC derivatives contract in accordance 

with agreed terms (such as failing to 

pay), the considerations that inform an 

SD’s assessment of a counterparty’s 

credit risk should be broadly similar 

across the various relationships that 

may arise between the dealer and the 

counterparty. Therefore, the 

Commission believes that its approach 

should be a reasonable model, as the 

SEC also uses a similar approach for its 

ANC broker-dealers or security-based 

SDs using models. 

SDs that are subject to the bank-based 

capital requirement could also request 

Commission or RFA approval to use the 

Federal Reserve Board’s internal ratingsbased and advanced measurement 

model approaches to compute riskweighted assets for the credit exposures 

listed in subpart E of 12 CFR 217. The 

SD would have to include such 

exposures in its application to the 

Commission and RFA, and explain how 

its proposed models are consistent with 

the Federal Reserve Board’s model 

criteria in subpart E of 12 CFR 217. 

Request for Comment 

The Commission requests comment 

on all aspects of the proposed model 

approval process and the computation 

of the credit risk charges. In addition, 

the Commission requests comment, 

including empirical data in support of 

comments, in response to the following 

questions: 

1. Do the proposed models 

appropriately account for the market 

and credit risk of swaps and securitybased swaps? If not, explain why and 

provide alternatives that the 

Commission should consider. 

2. Is the proposed model review 

process appropriate? If not, explain why 

not and provide alternatives that the 

Commission should consider. 

3. The proposal states that the 

Commission expects that a prudential 

regulator’s or foreign regulator’s review 

and approval of capital models that are 

used in the corporate family of an SD 

would be a significant factor in NFA 

determining the scope of its review, 

provided that appropriate information 

sharing agreements are in place. Given 

the number and complexity of the 

model review process, please provide 

comments on the viability of the 

proposed model review process? What 

other alternatives should the 

Commission consider? 


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90See 12 CFR part 249. 

91See SEC proposed Rule 18a–1(f), 77 FR 226 

(Nov. 23, 2012). 

92See 12 CFR 249.10. Federal Reserve Board rules 

require a regulated institution to maintain a 

liquidity coverage ratio of HQLA to net cash 

outflows that is equal to or greater than 1.0 on each 

business day. 93See 12 CFR 249.22(b). 

94See 12 CFR 249.20. 

95See 12 CFR 249.21. Level 2A liquid assets are 

subject to a 15 percent haircut, and level 2B liquid 

assets are subject to a 50 percent haircut. The 

concentration limits on level 2A and 2B assets are 

set forth in 12 CFR 249.21(d), and effectively 

provide that level 2A and level 2B assets may not 

comprise more than 40 percent and 15 percent, 

respectively, of an entity’s HQLAs. 

96See 12 CFR 249.21(a). 

97See 12 CFR 249.32. 

4. Should the Commission provide for 

automatic approval or temporary 

approval of capital models already 

approved by a prudential or foreign 

regulator? If so, please provide 

information regarding on what 

conditions such models should be 

approved? 

5. What factors should the 

Commission consider in setting an 

effective date for the capital rules given 

the application process and the model 

approval process? Are most SDs that 

would be subject to the rule already 

using models that are consistent with 

the proposed regulations? 

6. Are there other approaches 

available to facilitate the timely review 

of applications from SDs to use internal 

models? For example, could a more 

limited review be performed of models 

that have been approved by another 

regulator? If so, what conditions, if any, 

should the Commission consider prior 

to approving the model? 

7. How much implementation time is 

needed for the Commission’s proposed 

model review and approval process? 

8. Are the proposed methods of 

computing the credit risk charge 

appropriate for nonbank SDs? If not, 

explain why not. For example, are there 

differences between FCM/BDs that are 

also SDs and standalone SDs that would 

make the method of computing the 

credit risk charge appropriate for the 

former but not the latter. If so, identify 

the differences and explain why they 

would make the credit risk charge not 

appropriate for nonbank SDs. What 

modifications should be made in that 

case? 

9. Is the method of computing the 

counterparty exposure charge 

appropriate for nonbank SDs? If not, 

explain why not. For example, is the 

calculation of the credit equivalent 

amount (i.e., the sum of the MPE and 

the current exposure to the 

counterparty) a workable requirement 

for nonbank SDs? If not, explain why 

not. 

10. Are the conditions for taking 

collateral into account when calculating 

the credit equivalent amount 

appropriate for nonbank SDs? If not, 

explain why not. 

11. Are the conditions for taking 

netting agreements into account when 

calculating the credit equivalent amount 

appropriate for nonbank SDs? If not, 

explain why not. 

12. Are the standardized risk weight 

factors (20%, 50%, and 150%) proposed 

for calculating the credit equivalent 

amount appropriate for nonbank SDs? If 

not, explain why not. 

13. Is the method of computing the 

counterparty concentration charge 

appropriate for nonbank SDs? If not, 

explain why not. 

14. Is the method of computing the 

portfolio concentration charge 

appropriate for SDs? If not, explain why 

not. 

B. Swap Dealer and Major Swap 

Participant Liquidity Requirements and 

Equity Withdrawal Restrictions 

1. Liquidity Requirements 

The Commission is proposing 

liquidity requirements for SDs that elect 

a bank-based capital approach under 

proposed Regulation 23.101(a)(1)(i) or a 

net liquid assets capital approach under 

proposed Regulation 23.101(a)(1)(ii). 

The Commission also is proposing 

liquidity requirements for SDs that are 

registered FCMs. The Commission’s 

proposed liquidity requirements are 

designed to address the potential risk 

that an SD may not be able to efficiently 

meet both expected and unexpected 

current and future cash flow and 

collateral needs as a result of adverse 

events impacting the SD’s daily 

operations or financial condition. The 

proposed liquidity requirements for SDs 

subject to the bank-based capital 

approach are consistent with existing 

liquidity requirements adopted by the 

Federal Reserve Board for bank holding 

companies.90 The proposed liquidity 

requirements for SDs subject to the net 

liquid assets capital approach are 

consistent with liquidity requirements 

proposed by the SEC for SBSDs.91

SDs that are subject to the capital 

requirements of a prudential regulator, 

would not be subject to the 

Commission’s proposed liquidity 

requirements as such SDs are subject to 

regulation by the prudential regulators, 

including liquidity requirements 

established by the prudential regulators. 

The Commission also is not proposing 

liquidity requirements for SDs that are 

eligible to use the tangible net worth 

capital approach under proposed 

Regulation 23.101(a)(2)(i). SDs that are 

eligible to use the net worth capital 

approach are required to be primarily 

engaged in commercial activities, with 

their financial activities limited by the 

15% asset test or 15% revenue tests 

discussed in section II.A.2.iii of this 

release. Accordingly, the business 

operations of SDs that are eligible to use 

the tangible net worth capital approach 

are significantly different from the 

traditional business activities of 

financial firms and financial market 

intermediaries whose need for access to 

liquidity is crucial to meet their 

obligations to make daily payments to 

their clients and to meet other daily 

funding obligations. In contrast, the 

liquidity needs of SDs that are eligible 

to use the tangible net worth approach 

would encompass the daily funding and 

payment obligations of the non-financial 

business with which the SD is 

connected. 

i. Swap Dealers Subject to the BankBased Capital Approach 

Proposed Regulation 23.104(a)(1) 

would provide that an SD that elects the 

bank-based capital approach would 

need to meet the liquidity coverage ratio 

requirements set forth in 12 CFR part 

249, and apply such requirements as if 

the SD were a bank holding company 

subject to 12 CFR part 249. The 

proposed liquidity coverage ratio would 

require the SD to maintain each day an 

amount of high quality liquid assets 

(‘‘HQLAs’’), as defined in 12 CFR 

249.20, that is no less than 100 percent 

of the SDs total net cash outflows over 

a prospective 30 calendar-day period.92

HQLAs are assets that are 

unencumbered by liens and other 

restrictions on the ability of the SD to 

transfer the assets.93 There are three 

categories of HQLAs (level 1 and levels 

2A and 2B),94 and there are haircuts and 

concentration restrictions on the level 

2A and level 2B assets.95 Specifically, 

level 2A and level 2B assets are valued 

at 85 percent and 50 percent, 

respectively, of the fair value of the 

assets.96 The HQLA categories are 

designed so that the assets that are 

HQLAs could be converted quickly into 

cash without reasonably expecting to 

incur losses in excess of the applicable 

haircuts during a stress period. 

An SD’s total net cash outflow 

amount would be determined by 

applying outflow and inflow rates, 

which reflect certain standardized 

stressed assumptions, against the 

balances of an SD’s funding sources, 

obligations, transactions, and assets over 

a prospective 30 day period.97 Inflows 

that can be included to offset outflows 

are limited to 75 percent of the outflows 


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91274 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 

98The Commission is also proposing to explicitly 

include an SD’s cash deposits that are readily 

available to meet the general obligations of the SD 

as a level 1 liquid asset. The Commission is also 

modifying the proposal to provide that SDs 

organized and domiciled outside of the U.S. may 

include in its HQLAs held outside of the U.S. (See 

proposed Regulation 23.104(a)(1)). 

99See proposed Regulation 23.104(a)(1). 

100 Id. 

101See proposed Regulation 23.104(a)(2) and (3). 

102See proposed Regulation 23.104(a)(2). 

103The assumptions would include (1) a decline 

in creditworthiness of the SD severe enough to 

trigger contractual credit related commitment 

provisions of counterparty agreements; the loss of 

all existing unsecured funding at the earlier of its 

maturity and an inability to acquire a material 

amount of new unsecured funding; and, the 

potential for a material loss of secured funding. 

to ensure that the SD is maintaining 

sufficient liquidity and is not overly 

reliant on inflows. The stressed 

assumptions include events such as a 

partial loss of secured, short-term 

financing with certain collateral and 

counterparties and losses from 

derivatives positions and the collateral 

supporting those positions. 

The Commission recognizes that 

certain portions of 12 CFR part 249 may 

not be applicable to a particular SD. For 

example, an SD may not have certain of 

the instruments listed in 12 CFR part 

249 as an asset or may not have certain 

of the cash inflows and outflows listed 

in the regulation.98 However, the 

Commission believes that the portion of 

the regulations applicable to derivative 

transactions would be applicable to an 

SD. Therefore, the SD would be required 

to apply the portions of 12 CFR part 249 

that are applicable to it, based on its 

balance sheet and the composition of its 

assets and liabilities. 

Furthermore, the Commission is 

proposing to adjust the Federal Reserve 

Board’s liquidity coverage ratio to better 

reflect the business of an SD. 

Specifically, the proposal would 

explicitly include an SD’s cash deposits 

that are readily available to meet the 

general obligations of the SD as a level 

1 liquid asset in computing its liquidity 

coverage ratio.99 The Commission is 

also modifying the proposal to provide 

that an SD organized and domiciled 

outside of the U.S. may include in its 

HQLAs assets held in it home country 

jurisdiction.100 The Commission 

believes that these adjustments are 

appropriate to better align the liquidity 

coverage ratio with the expected 

operations of certain SDs. 

The Commission also believes that the 

results of stress tests play a key role in 

shaping an SD’s liquidity risk 

contingency planning. Thus, stress 

testing and contingency planning are 

closely intertwined. Under proposed 

Regulation 23.104(a)(4), an SD would be 

required to establish a contingency 

funding plan. The contingency funding 

plan would need to clearly set out the 

strategies and funding sources for 

addressing liquidity shortfalls in 

emergency situations and would need to 

address the policies, roles, and 

responsibilities for meeting the liquidity 

needs of the SD. 

The proposal further provides that the 

SD’s senior management that has 

responsibility for risk management 

would need to be informed if the SD did 

not maintain a liquidity coverage ratio 

of at least 1.0. In addition, the 

assumptions underlying the calculation 

of the liquidity coverage ratio would 

need to be reviewed at least quarterly by 

senior management that has 

responsibility to oversee risk 

management at the SD and at least 

annually by senior management of the 

SD.101

The Commission also is proposing to 

require an SD to obtain Commission 

approval prior to transferring HQLAs to 

the SD’s affiliates or parent if, after the 

transfer of those liquid assets, the SD 

would not be able to comply with the 

liquidity coverage ratio requirement.102

Therefore, an SD may not transfer assets 

that would qualify for the numerator of 

the liquidity coverage ratio to its 

affiliates or parent if, after the transfer, 

the SD’s HQLA would be below 100 

percent of its total projected net cash 

flows over a 30 day period. 

ii. Swap Dealers Subject to the Net 

Liquid Assets Capital Approach 

An SD that elects to be subject to a net 

liquid assets capital approach would 

need to comply with liquidity risk 

management requirements set forth in 

proposed Regulation 23.104(b). The 

Commission understands that many 

financial institutions have traditionally 

used liquidity funding stress tests as a 

means to measure liquidity risk. These 

tests would generally estimate cash and 

collateral needs over a period of time 

and assume that sources to meet those 

needs (e.g., obtaining secured funding 

lines and lines of credit) will become 

impaired or be unavailable. Therefore, 

to raise funds during a liquidity stress 

event, a firm would generally keep a 

pool of unencumbered liquid assets that 

can be used to meet its current liabilities 

or other funding needs. The size of the 

pool of unencumbered liquid assets 

would be based on a firm’s estimation 

of how much of a diminution of value 

in those liquid assets and the amount of 

funding that would be lost from external 

sources during a stress event and the 

duration of the event. 

Under proposed Regulation 23.104(b), 

an SD would need to perform a liquidity 

stress test at least monthly that takes 

into account certain assumed conditions 

lasting for 30 consecutive days. The 

results of the liquidity stress test would 

need to be provided within 10 business 

days of the month end to senior 

management responsible for overseeing 

risk management at the SD. In addition, 

the assumptions underlying the 

liquidity stress test would need to be 

reviewed at least quarterly by senior 

management responsible for overseeing 

risk management at the SD and at least 

annually by senior management of the 

SD.103

As noted above, the Commission’s 

proposed liquidity requirements for SDs 

that are subject to a net liquid assets 

capital approach are consistent with the 

SEC’s proposed liquidity requirements 

for SBSDs, and are intended to address 

the types of liquidity outflows 

experienced by ANC Firms in times of 

stress. Consistent with the SEC 

approach, the Commission’s liquidity 

stress test proposal is designed to ensure 

that SDs are using a stress test that is 

severe enough to produce an estimate of 

a potential funding loss of a magnitude 

that might be expected in a severely 

stressed market. Proposed Regulation 

23.104(b)(3) would require an SD to 

maintain at all times liquidity reserves 

based on the results of the liquidity 

stress test in the form of unencumbered 

cash or U.S. government securities. The 

Commission is proposing this 

requirement to ensure that only the 

most liquid instrument are held in 

reserves, given that the market for less 

liquid instruments may not be available 

during a time of market stress. 

As noted above, the results of stress 

tests play a key role in shaping an SD’s 

liquidity risk contingency planning. 

Therefore, similar to the requirement for 

an SD that elects to be subject to a bankbased capital approach, an SD that 

elects to be subject to a net liquid assets 

capital approach would be required by 

proposed Regulation 23.104(b)(4) to 

establish a contingency funding plan. 

The plan would need to clearly set out 

the strategies and funding sources for 

addressing liquidity shortfalls in 

emergency situations and would need to 

address the policies, roles, and 

responsibilities for meeting the liquidity 

needs of the SD. 

Request for Comment 

The Commission requests comment 

on all aspects of the proposed capital 

rule and liquidity requirements, 

including empirical data in support of 


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104Equity withdrawal restrictions for FCMs are 

set forth in Regulation 1.17(e), and for BDs is set 

forth in 17 CFR 240.15c3–1(e)(2). SEC proposed 

equity withdrawal restrictions for SBSDs is 

contained in proposed Rule 18a–1(e)(2). See 77 FR 

226 (Nov. 23, 2012). 

105See Rule 15c3–1(e)(3) (17 CFR 240.15c3– 

1(e)(3)). 

106See SEC proposed Rule 18a–1(e)(3) (77 FR 

70214 (Nov. 23, 2012). 

107See proposed Regulation 23.105(a)(2). 

108Commission Regulation 1.18 requires each 

FCM to 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. SEC Rule 17a–3 (17 

CFR 240.17a–3) requires a BD to make and maintain 

comparable ledgers and other similar records 

reflecting its assets, liabilities, income and 

expenses. 

109FCMs are required to classify accounts only in 

accordance with U.S. GAAP. 

comments. In addition, the Commission 

requests comment in response to the 

following questions: 

1. Should the Commission phase-in 

the implementation of any final capital 

rule? For example, the capital 

requirements would be implemented 

first and the liquidity requirements 

would be implemented second. Please 

provide recommendations and 

implementation time-periods. 

2. Should the Commission consider 

alternative approaches to the proposed 

liquidity requirements? If so, explain 

the alternatives and the rationale for the 

alternatives. Please provide any 

quantitative analysis in support of 

alternative approaches, if possible. 

2. Swap Dealer Equity Withdrawal 

Restrictions 

The Commission is proposing certain 

equity withdrawal restrictions for SDs 

that elect either the bank-based capital 

approach or the net liquid assets capital 

approach. Proposed Regulation 

23.104(c) would provide that the capital 

of an SD, or any subsidiary or affiliate 

of the SD that has any of its liabilities 

or obligations guaranteed by the SD, 

may not be withdrawn by action of an 

SD or equity holder of the SD, or by 

redemption of shares of stock by the 

swap dealer or such affiliates or 

subsidiaries, or through the payment of 

dividends or any similar distribution, if 

such withdrawal or payment, and any 

other similar transactions that are 

scheduled to occur within the 

succeeding six months, results in the SD 

holding less than 120 percent of the 

minimum regulatory capital that the SD 

is required to hold pursuant to proposed 

Regulation 23.101. The proposal 

includes an exception for paying 

required tax payments and for paying 

reasonable compensation to equity 

holders of the SD. The proposal is 

consistent with existing equity 

withdrawal restrictions imposed on 

FCMs and BDs, and is consistent with 

equity withdrawal restrictions proposed 

by the SEC for SBSDs.104

Proposed Regulation 23.104(d) would 

grant the Commission the ability to 

issue an order temporarily restricting for 

up to 20 business days the withdrawal 

of capital from an SD, or prohibiting the 

SD from making an unsecured loan or 

advance to any stockholder, partner, 

member, employee or affiliate of the SD. 

The Regulation would further provide 

that the Commission may issue such an 

order if, based upon the information 

available, the Commission concludes 

that such withdrawal, loan or advance 

may be detrimental to the financial 

integrity of the SD, or may unduly 

jeopardize the SD’s ability to meet its 

financial obligations to counterparties or 

to pay other liabilities which may cause 

a significant impact on the markets or 

expose the counterparties and creditors 

of the SD to loss. The proposal further 

provides that the SD may request a 

hearing on the order, which must be 

held within two business days of the 

date of the written request by the SD. 

The proposed grant of authority to the 

Commission to issue an order 

temporarily restricting certain 

unsecured loans or advances is 

consistent with the existing Commission 

authority under Regulation 1.17(g)(1) for 

FCMs and with the SEC’s authority over 

BDs.105 The proposed Commission 

authority to temporarily restrict equity 

withdrawals also is consistent with the 

SEC’s proposal governing SBSDs.106

Both the limitation on the withdrawal 

of equity capital and the authority of the 

Commission to temporarily restrict the 

withdrawal of capital are intended to 

provide mechanisms for the 

Commission to assess the financial and 

operational condition of SDs in times of 

financial stress. In such situations, it is 

a priority for the Commission that SDs 

maintain the financial strength and 

liquidity to meet their financial 

obligations to counterparties and 

creditors. 

C. Swap Dealer and Major Swap 

Participant Financial Recordkeeping, 

Reporting and Notification 

Requirements 

1. Swap Dealer and Major Swap 

Participant Financial Recordkeeping 

and Financial Statement Reporting 

Requirements 

Section 4s(f) of the CEA directs the 

Commission to adopt regulations 

governing reporting and recordkeeping 

for SDs and MSPs, including financial 

condition reporting and position 

reporting. Consistent with section 4s(f), 

the Commission is proposing new 

Regulation 23.105, which would require 

SDs and MSPs to satisfy current books 

and records requirements, ‘‘early 

warning’’ and other notification filing 

requirements, and periodic and annual 

financial report filing requirements with 

the Commission and with any RFA of 

which the SDs and MSPs are members. 

As discussed below, however, the 

proposed notice and financial reporting 

requirements differentiate between SDs 

and MSPs that are subject to the 

Commission’s capital requirements and 

SDs and MSPs that are subject to the 

prudential regulators’ capital 

requirements.107 The Commission is 

proposing not to impose the majority of 

the financial reporting provisions 

contained in Regulation 23.105 on SDs 

and MSPs that are subject to the capital 

rules of a prudential regulator from, 

with the exception of certain financial 

and swaps position and margin 

reporting requirements and notice filing 

requirements discussed below, as the 

financial condition of these entities will 

be supervised by the applicable 

prudential regulator and subject to its 

financial reporting requirements. The 

Commission believes that the proposal 

is consistent with section 4s of the CEA 

which grants the prudential regulators 

the authority to establish capital 

requirements for SDs and MSPs subject 

to their jurisdiction. Additionally, the 

Commission’s proposed approach 

avoids imposing potential duplicative, 

and potentially contradictory, 

requirements on SDs and MSPs that are 

subject to both Commission and 

prudential regulator oversight. 

Proposed Regulation 23.105(b) is 

based upon existing FCM and BD 

financial recordkeeping and reporting 

requirements and would require an SD 

or MSP to prepare current ledgers or 

other similar records showing or 

summarizing each transaction affecting 

its asset, liability, income, expense and 

capital accounts.108 The accounts must 

be classified in accordance with U.S. 

generally accepted accounting 

principles (‘‘U.S. GAAP’’) provided, 

however, that if the SD or MSP is 

organized under the laws of a foreign 

jurisdiction and is not otherwise 

required to prepare its records or 

financial statements in accordance with 

U.S. GAAP, the SD or MSP may prepare 

the required records in accordance with 

International Financial Reporting 

Standards (‘‘IFRS’’) issued by the 

International Accounting Standards 

Board (‘‘IASB’’).109 Proposed Regulation 


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110Regulation 1.10 requires FCMs to submit 

unaudited monthly and audited annual financial 

reports to the Commission and to the FCMs’ 

respective designated self-regulatory organization. 

SEC Rule 17a–5 (17 CFR 240.17a–5) directs BDs to 

file unaudited monthly reports and annual audited 

reports with the SEC. 

111The Commission also is proposing certain 

technical, administrative provisions for SD and 

MSP financial statements. Proposed paragraph (g) to 

Regulation 23.105 would prohibit an SD or MSP 

from changing its fiscal year end date unless the SD 

or MSP has requested and received written 

approval for the change from the RFA of which it 

is a member. Proposed paragraph (j) would provide 

that an SD or MSP may request an extension of time 

to file its unaudited monthly or audited annual 

report from the RFA, which may be granted on a 

conditional or unconditional basis, or disapproved 

by the RFA. Proposed paragraphs (g) and (j) of 

Regulation 23.105 are consistent with current 

provisions governing FCMs under Regulation 1.10. 

112See proposed Regulations 23.105(d)(2) and 

(e)(3). 

113See proposed Regulations 23.105(d)(2) and 

(e)(4). 

114FCMs currently are required to file unaudited 

financial reports and an annual financial report 

with the Commission within 17 and 60 days, 

respectively, of the end of the reporting period. See 

Regulation 1.10(b). 

115See proposed Regulations 23.105(d)(2) and 

(e)(3). Regulation 1.10 provides that FCMs must 

present its unaudited monthly reports and audited 

annual reports in accordance with U.S GAAP. 

23.105(b) also would require an SD or 

MSP to maintain its ledgers or other 

similar records showing or summarizing 

each transaction affecting its asset, 

liability, income, expense and capital 

accounts for a period of five years 

pursuant to Regulation 1.31. 

The Commission is proposing in 

Regulation 23.105(b) to permit an SD or 

MSP organized and domiciled outside 

of the U.S. to maintain financial books 

and records in accordance with IFRS in 

recognition that U.S. GAAP may not be 

the native accounting principles for a 

non-U.S. firm and that these firms may 

be subject to existing non-U.S. GAAP 

financial reporting requirements in their 

home country jurisdictions. These SDs 

and MSPs would be subject to 

substantial expense and burden if they 

were required to maintain two separate 

accounting records and systems to 

satisfy two separate financial reporting 

requirements. The Commission, 

however, is proposing that if the SD or 

MSP is otherwise required to maintain 

books and records in accordance with 

U.S. GAAP, the SD or MSP must 

maintain its records pursuant to U.S. 

GAAP in order to comply with 

Regulation 23.105(b). 

The Commission is also proposing to 

require SDs and MSPs to file periodic 

financial reports with the Commission 

and with the SDs’ or MSPs’ RFA. 

Consistent with the recordkeeping 

requirements, the proposed financial 

reporting requirements are consistent 

with existing Commission requirements 

for FCMs and SEC requirements for 

BDs.110

Proposed Regulation 23.105(d)(1) 

would require an SD or MSP to file a 

monthly unaudited financial report 

within 17 business days of the close of 

business each month, and proposed 

Regulation 23.105(e)(1) would require 

an SD or MSP to file an annual audited 

financial report within 60 days of the 

close of the SD’s or MSP’s fiscal yearend date.111 The monthly unaudited 

and the annual audited financial reports 

must be prepared in the English 

language and denominated in U.S. 

dollars.112 The monthly unaudited and 

annual audited financial reports also 

must include: (1) A statement of 

financial condition; (2) a statement of 

income or loss; (3) a statement of cash 

flows; (4) a statement of changes in 

ownership equity; (5) a statement of the 

applicable capital computation; and (6) 

any further materials that are necessary 

to make the required statements not 

misleading.113 Proposed Regulation 

23.105(e)(4)(iii) would further require 

that the annual audited financial 

statements also include any necessary 

footnote disclosures. Proposed 

Regulation 23.105(e)(2) would require 

the annual financial statements to be 

audited by a public accountant that is in 

good standing in the accountant’s home 

country jurisdiction.114

The monthly unaudited and annual 

audited financial statements must be 

prepared in accordance with U.S. 

GAAP, provided, however, that the 

Commission is proposing to permit SDs 

or MSPs that are organized and 

domiciled outside of the U.S., and 

otherwise are not required to prepare 

financial statements in accordance with 

U.S. GAAP, to prepare the financial 

statements in accordance with IFRS or 

another local accounting standard, after 

requesting approval by the Commission, 

which is discussed below, in lieu of 

U.S. GAAP.115 The use of IFRS in lieu 

of U.S. GAAP is consistent with the 

proposed treatment in Regulation 

23.105(b) discussed above that would 

allow a these SDs and MSP to maintain 

their financial books and records in 

accordance with IFRS. 

The Commission, however, is 

proposing that if the non-U.S. SD or 

non-U.S. MSP is otherwise required to 

prepare financial statements in 

accordance with U.S. GAAP, the SD or 

MSP must submit financial statements 

prepared in accordance with U.S. GAAP 

to the Commission and to the firm’s 

RFA in order to comply with the 

regulations. This requirement reflects 

the fact that certain foreign-based SDs or 

MSPs that consolidate into a U.S. parent 

organization may prepare U.S. GAAP 

financial statements as part of the 

consolidation. Under the proposed 

regulations, if the foreign-based SD or 

MSP prepares U.S. GAAP financial 

statements as part of the consolidation, 

it would be required to submit such U.S. 

GAAP statements to the Commission 

and to the firm’s RFA to comply with 

Regulation 23.105(d)(2) and (e)(3). 

While the Commission has proposed 

to permit SDs or MSPs organized and 

domiciled outside the U.S. to use IFRS 

in lieu of U.S. GAAP in the preparation 

and presentation of the monthly 

unaudited and annual audited financial 

reports, the Commission recognizes that 

not all non-U.S. jurisdictions have 

adopted IFRS. In addition, the 

Commission understands that even in 

certain foreign jurisdictions that have 

adopted IFRS, SDs and MSPs may be 

permitted to prepare and present their 

financial statements in accordance with 

local accounting standards. To address 

this issue, the Commission is proposing 

in Regulation 23.105(o) to permit an SD 

or MSP organized and domiciled 

outside of the U.S. to petition the 

Commission to use local accounting 

standards in lieu of U.S. GAAP or IFRS 

in monthly unaudited and annual 

audited financial reports filed with the 

Commission. 

The process for seeking Commission 

approval to use local accounting 

standards is set forth in proposed 

Regulation 23.106 and is discussed in 

more detail in section II.D below. The 

Commission would review each request 

on a case-by-case basis and determine 

what, if any, additional information 

would be necessary in order to accept 

financial reports prepared in accordance 

with local accounting standards, 

including possible reconciliations of the 

financial information to U.S. GAAP. The 

Commission notes further that 

notwithstanding the proposed 

substituted compliance provisions, 

financial statements from all SDs and 

MSPs must be prepared in the English 

language and denominated in U.S. 

dollars, as proposed in Regulation 

23.105(d)(2) and 23.105(e)(3). 

The Commission is also proposing in 

Regulation 23.105(d)(3), (4) and (e)(5) to 

permit an SD or MSP that is registered 

with the Commission as an FCM or 

registered with the SEC as a BD to 

satisfy the Commission’s SD or MSP 

financial statement reporting 

requirements by submitting a CFTC 

Form 1–FR–FCM or its applicable SEC 

Financial and Operational Combined 

Uniform Single (’’ FOCUS’’) Report in 

lieu of the specific financial statements 

required under proposed Regulation 


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116FCMs are required to file monthly unaudited 

and annual audited Forms 1–FR–FCM with the 

Commission and with their designated selfregulatory organization. The Forms 1–FR–FCM 

include, among other information, a statement of 

financial condition, a statement of income or loss, 

a statement of changes in ownership equity, a 

statement of liabilities subordinated to the claims 

of general creditors, a statement of the computation 

of regulatory minimum capital, and any further 

information as may be necessary to make the 

required statements not misleading. See Regulation 

1.10(d). 

SEC FOCUS Reports are required to contain, 

among other statements and information, a 

statement of financial condition, a statement of 

income or loss, a statement of changes in ownership 

equity, a statement of liabilities subordinated to the 

claims of general creditors, and a statement of the 

computation of regulatory minimum capital. See 

SEC Rule 17a–5 (17 CFR 240.17a–5). 

117See Regulation 1.10(h), which permits an FCM 

that is also registered as a BD to file its SEC FOCUS 

Report in lieu of the Commission’s Form 1–FR– 

FCM. 

118See CFTC Regulation 1.10(b)(4). 

119See Regulation 23.105(d)(4) and (e)(6), 

wherein SDs and MSPs dually registered as FCMs 

will be permitted to comply with the monthly and 

annual financial reporting requirements by filing 

form 1–FR–FCM in lieu of the financial reports 

required under proposed Regulation 23.105. 

120See Regulation 23.105(c)(5) referencing 

proposed 17 CFR 240–18a–8 for notification 

requirements for SBSDs and MSBSPs. See 

§ 23.105(d)(3) and § 23.105(e)(5) referencing 

proposed 17 CFR 240–18a–7, for monthly and 

annual financial reporting requirements for SBSDs 

and MSBSPs. 121See CFTC Regulations 23.152 and 23.153. 

23.105.116 The financial information 

that would be required under proposed 

Regulation 23.105(d) for SDs and MSPs 

is consistent with the Commission’s 

current requirements for Form 1–FR– 

FCM and the SEC’s requirements for 

FOCUS Reports for BDs. The proposal 

also is consistent with the Commission’s 

long history of permitting SEC 

registrants to meet their financial 

statement filing obligations with the 

Commission by submitting a FOCUS 

Report in lieu of CFTC Form 1–FR–FCM 

and reduces the burden on duallyregistered firms by not requiring two 

separate financial reporting 

requirements.117

In addition to the specific financial 

reporting requirements discussed above, 

the Commission is also proposing in 

Regulation 23.105(h) to require any SD 

or MSP to file additional financial or 

operational information as the 

Commission may deem necessary in 

order to adequately assess the SD’s or 

MSP’s financial condition or operational 

status. This additional financial and 

operational information may be 

necessary at times when an SD or MSP 

is experiencing a financial or 

operational crisis, and the additional 

information is necessary for the 

Commission to assess whether the SD or 

MSP will be able to continue to meet its 

obligations to counterparties and other 

creditors. The authorization to request 

additional information from a registrant 

also is consistent with existing 

Regulation 1.10 which provides the 

Commission with the authority to 

request financial information from 

FCMs and IBs, and it is consistent with 

existing authority that the SEC has with 

respect to BDs and with the proposed 

authority that the SEC would have over 

SBSDs and MSBSPs.118

The Commission also is proposing 

limited financial reporting for SDs and 

MSPs that are subject to the capital 

requirements of a prudential regulator 

as such regulators have existing 

financial reporting requirements in 

place for these SDs and MSPs. The 

financial reporting requirements for 

such SDs and MSPs are described in 

section II.C.6 below. 

The Commission, however, is 

proposing that SDs and MSPs that are 

subject to capital rules of a prudential 

regulator file financial reports and 

specific position and margin 

information with the Commission and 

with the RFA of which the SDs and 

MSPs are members within 17 business 

days of the end of each calendar quarter 

and not on a monthly basis. The 

financial reports and specific position 

information that would be required is 

set forth in Appendix B to proposed 

Regulation 23.105. 

SDs and MSPs that are dually 

registered as FCMs will continue to be 

subject to the capital requirements in 

Regulation 1.17, and along with 

proposed conforming amendments in 

Regulation 1.17 applicable to dually 

registered SDs and MSPs discussed 

above, will be permitted to comply with 

the applicable financial recordkeeping, 

notification and reporting under 

Regulation 23.105 by following 

applicable FCM requirements in 

Regulations 1.10, 1.12, and 1.16.119

Similarly, SDs and MSPs dually 

registered with the SEC as either SBSDs 

or MSBSPs will be permitted to comply 

with the Commission’s financial 

reporting and notification requirements 

under Regulation 23.105 by filing 

simultaneously with the Commission all 

applicable notices or reports required 

under the SEC’s rules.120

The Commission is further proposing 

to require that SDs and MSPs provide 

public disclosure on their Web site of 

some of the proposed required financial 

reporting, including a statement of 

financial condition and of the amount of 

minimum regulatory capital required 

and the amount of regulatory capital of 

the SD or MSP no less than quarterly, 

with the same information provided 

from an audited financial statement no 

less than annually. The proposal for 

public disclosure is consistent with 

financial reporting information the 

Commission has previously determined 

should not qualify as exempt from the 

Freedom of Information Act for FCMs. 

The proposal to require quarterly 

reporting is intended to make the 

frequency of such public disclosure 

consistent with publicly available 

information provided by bank entities in 

call reports. 

2. Swap Dealer and Major Swap 

Participant Notice Requirements 

The Commission is proposing to 

require SDs and MSPs to file certain 

regulatory notices with the Commission 

and with the RFA of which the SDs or 

MSPs are members if certain defined 

triggering events occur. Proposed 

Regulation 23.105(c) would require an 

SD or MSP that is not subject to the 

capital rules of a prudential regulator to 

provide the Commission and RFA with 

immediate written notice when the firm 

is: (1) Undercapitalized; (2) fails to 

maintain capital at a level that is in 

excess of 120 percent of its minimum 

capital requirement; or (3) fails to 

maintain current books and records. 

Proposed Regulation 23.105(c) would 

further require an SD or MSP, as 

applicable, to provide notice to the 

Commission and to the RFA within 24 

hours of: (1) Failing to comply with the 

liquidity requirements under proposed 

Regulation 23.104, (2) experiencing a 30 

percent reduction in capital as 

compared to the last reported capital in 

a financial report filed with the 

Commission, or (3) failing to post or 

collect initial margin for uncleared swap 

transactions or exchange uncleared 

swap variation margin as required under 

the Commission’s uncleared swaps 

margin rules and the initial margin that 

would be required for uncleared 

security-based swaps as required under 

17 CFR 240.18a–3(c)(1)(i)(B), if the total 

amount that has not been either 

collected by and exchanged with or 

posted by and exchanged with the SD is 

equal to or greater than: (1) 25 percent 

of the SD’s required capital under the 

Commission’s proposal calculated for a 

single counterparty or group of 

counterparties that are under common 

ownership or control; or (2) 50 percent 

of the SD’s required capital under the 

Commission’s proposal calculated for 

all of the SD’s counterparties.121

Proposed Regulation 23.105(c) also 

would require an SD to provide the 

Commission and the RFA with two 

business day’s advance notice of a 

withdrawal that would exceed 30 


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122The term ‘‘regulatory capital’’ is defined in 

proposed Regulation 23.100 and means the relevant 

capital approach applicable to the SD under 

proposed Regulation 23.101. 123See SEC Rule 17a–11 (17 CFR 240.17a–11). 124See SEC proposed Form SBS part 4. 

percent of the SD’s excess regulatory 

capital.122 Finally, the proposal would 

also require an SD or MSP that is 

dually-registered with the SEC as an 

SBSD or MSBSP to file with the 

Commission and with its RFA a copy of 

any notice that the SBSD or MSBSP is 

required to file with the SEC under SEC 

Rule 18a–8 (17 CFR 240.18a–8). SEC 

proposed Rule 18a–8 requires SBSDs 

and MSBSPs to provide written notice 

to the SEC for comparable reporting 

events as proposed by the Commission 

in Regulation 23.105(c), including if a 

SBSD or MSBSP is undercapitalized or 

fails to maintain current books and 

records. The Commission is proposing 

to require SDs and MSPs that are duallyregistered with the SEC to file copies 

with the Commission of notices filed 

with the SEC under Rule 18–8 to allow 

the Commission to be aware of any 

events that may indicate that the SD or 

MSP is unable to meet its operational or 

financial obligations on an ongoing 

basis. 

The proposed notice provisions are 

intended to provide the Commission 

and the appropriate RFA 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 concerning capital 

currently required for FCMs under 

Regulation 1.12 of the Commission’s 

regulations and with the SEC’s notice 

requirements for BDs.123

3. Electronic Filing Requirements for 

Financial Reports and Regulatory 

Notices 

Proposed Regulation 23.105(m) would 

require all notifications and financial 

statement filings submitted to the 

Commission pursuant to Regulation 

23.105 to be filed in an electronic 

manner using a user authentication 

process approved by the Commission. 

The Commission notes that the many 

SDs and MSPs are already familiar with 

the Commission approved WinJammer 

filing system maintained jointly by NFA 

and Chicago Mercantile Exchange. 

WinJammer currently allows 

Commission registrants that are 

authorized to use the electronic system 

to file financial reports and notices with 

the Commission and NFA 

simultaneously. The Commission views 

this system, as well as other future 

Commission approved systems, as the 

most effective way to ensure that the 

filings required under proposed 

Regulation 23.105 would be submitted 

promptly and directly to the 

Commission. 

4. Swap Dealer and Major Swap 

Participant Reporting of Position 

Information 

Proposed Regulation 23.105(l) would 

require each SD or MSP that was not 

subject to the capital rules of a 

prudential regulator to file monthly 

swap and security-based swap position 

information with the Commission and 

with the RFA of which the SD or MSP 

is a member. The information required 

to be submitted would be included in 

proposed Appendix A to Regulation 

23.105, and is based upon the 

information that the SEC is proposing be 

filed with the SEC by SBSDs.124

Accordingly, SDs or MSPs that are 

dually-registered as SBSDs would be 

subject to file the same position 

information with both regulators. 

The position information that would 

be required by proposed Regulation 

23.105(l) would include an SD’s or 

MSP’s: Current net exposure by the top 

15 counterparties, and all other 

counterparties combined; total exposure 

by the top 15 counterparties, and all 

others combined; the internal credit 

rating, gross replacement value, net 

replacement value, current net 

exposure, total exposure, and margin 

collected for the top 36 counterparties. 

The SD or MSP would also have to 

provide current exposure and net 

exposure by country for the top 10 

countries. The Commission would use 

this information as part of its financial 

surveillance program to monitor the 

financial condition and positions of SDs 

and MSPs. 

5. Reporting Requirements for Swap 

Dealers Approved To Use Internal 

Capital Models 

The Commission is proposing 

reporting requirements for SDs that have 

received approval from the Commission 

or from an RFA under proposed 

Regulation 23.102(d) to use internal 

models to compute market risk capital 

charges or credit risk capital charges. 

The Commission’s proposed 

requirements for the collection of model 

information are largely based on 

existing requirements for ANC Firms 

under Regulation 1.17 and the rules of 

the SEC, and on SEC proposed Rules for 

SBSDs and BDs. 

Regulation 23.105(k) would require an 

SD to file, on a monthly basis, a listing 

of each product category for which the 

SD does not use an internal model to 

compute market, and the amount of the 

market risk deduction; a graph 

reflecting, for each business line, the 

daily intra-month VaR; the aggregate 

VaR for the SD; for each product for 

which the SD uses scenario analysis, the 

product category and the deduction for 

market risk; and, credit risk information 

on swap, mixed swap, and securitybased swap exposures, including: (A) 

Overall current exposure, (B) current 

exposure listed by counterparty; (C) the 

10 largest commitments listed by 

counterparty, (D) the SD’s maximum 

potential exposure listed by 

counterparty for the 15 largest 

exposures; (E) the SD’s aggregate 

maximum potential exposure, (F) a 

summary report reflecting the SD’s 

current and maximum potential 

exposures by credit rating category, and 

(G) a summary report reflecting the SD’s 

current exposure for each of the top 10 

countries to which the SD is exposed. 

Regulation 23.105(k) would also 

require an SD to report the results of the 

liquidity stress tests required by 

proposed Regulation 23.104. Regulation 

23.104 also would require each SD 

approved to use internal capital models 

to submit a report identifying the 

number of business days for which the 

actual daily net trading loss exceeded 

the corresponding daily VaR and the 

results of backtesting of all internal 

models used to compute allowable 

capital, including VaR, and credit risk 

models, indicating the number of 

backtesting exceptions. All of the 

information required to be submitted to 

the Commission or RFA under proposed 

Regulation 23.105(k) would be required 

to be filed within 17 days of the close 

of each month, with the exception of the 

report identifying the number of 

business days for which the actual daily 

net trading loss exceeded the 

corresponding daily VaR, which would 

be required on a quarterly basis. 

6. Financial Reporting Requirements for 

Swap Dealers and Major Swap 

Participants Subject to the Capital Rules 

of a Prudential Regulator 

The Commission is proposing not to 

require an SD or MSP that is subject to 

the capital rules of a prudential 

regulator to file monthly unaudited or 

annual audited financial statements 

with the Commission or with the RFA 

of which the SD or MSP is a member. 

The Commission also is proposing to 

not to require such SDs or MSPs to file 

notifications contained in Regulation 

23.105(c) with the Commission or with 

an RFA. 

The Commission is, however, 

proposing to require SDs and MSPs that 

are subject to capital rules of a 


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125See proposed § 23.105(p) and Appendix B. See 

also Consolidated Reports of Condition and Income 

for a Bank with Domestic and Foreign Offices (‘‘call 

reports’’); 12 U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 

161; and 12 U.S.C. 1464. 

126See proposed SEC Rule 17 CFR 240.18a–8. 

127See 12 CFR 325.103; 12 CFR 6.4; 12 CFR 

208.43. 

128See id. 

129See 12 CFR 6.3(c); 12 CFR 208.42(c); 12 CFR 

325.102(c). 

130See 12 CFR 3.10; 12 CFR 217.10; 12 CFR 

324.10. 131 17 CFR 39.19(c)(1). 

prudential regulator to file quarterly 

unaudited financial reports and certain 

regulatory notices with the Commission 

and with an RFA. Proposed Regulation 

23.105(p) would require SDs and MSPs 

that are subject to the capital 

requirements of a prudential regulator to 

file quarterly unaudited financial 

reports with the Commission that are 

largely based on existing ‘‘call reports’’ 

that the SDs and MSPs are required to 

file with their respective prudential 

regulator.125 The proposed financial 

reporting requirement is consistent with 

the SEC proposed filing requirement for 

SBSDs that are subject to the capital rule 

of a prudential regulator.126

Specifically, the Commission is 

proposing that the SDs and MSPs 

submit to the Commission Appendix B 

of proposed Regulation 23.105, which is 

largely based on the SEC’s proposed 

Form SBS part 2 and part 5. 

The financial information required by 

Regulation 23.105(p) would include the 

SD’s or MSP’s balance sheet and details 

of the SD’s or MSP’s capital 

composition and capital ratios. The 

financial information would further 

focus on the SD’s or MSP’s swap and 

security-based swap activities, 

including requiring aggregate securitybased swaps, mixed swaps, swaps, and 

other derivatives information. The 

information would include both cleared 

and uncleared positions and would 

further differentiate between long and 

short positions. The Commission is 

requiring this information in order to 

provide the Commission and the SD’s or 

MSP’s RFA with swap and securitybased swap trading data, which may be 

monitored as part of their respective 

financial and market surveillance 

monitoring programs. 

Proposed Regulation 23.105(p) would 

also require SDs and MSPs that are 

subject to the capital rules of a 

prudential regulator to file regulatory 

notices with the Commission and with 

an RFA. Proposed Regulation 

23.105(p)(3)(i) would require an SD or 

MSP to file a notice with the 

Commission and with an RFA if the SD 

or MSP filed a notice of change of its 

reported capital category with the 

Federal Reserve Board, the OCC, or the 

FDIC. Prudential regulators have 

established five capital categories that 

are used to describe a bank’s capital 

strength: (1) Well capitalized; (2) 

adequately capitalized; (3) 

undercapitalized; (4) significantly 

undercapitalized; and (5) critically 

undercapitalized.127 The definition of 

each capital category is based on capital 

measures under the bank capital 

standard and other factors.128

A bank is required to notify its 

appropriate prudential regulator of 

adjustments to the bank’s capital 

category that may have occurred that 

would put the bank into a lower capital 

category from the category previously 

assigned to it. Following the notice, the 

prudential regulator determines whether 

the bank needs to adjust its capital 

category.129 Because these notices may 

indicate that a bank is in or approaching 

financial difficulty, the Commission is 

proposing to include a notification 

requirement in proposed regulation 

23.105(p)(3)(i) that would require a bank 

SD or a bank MSP to give notice to the 

Commission when it files an adjustment 

of reported capital category with its 

prudential regulator by transmitting a 

copy of the notice to the Commission. 

The rules of the Federal Reserve 

Board, OCC and FDIC also establish 

minimum capital requirements in the 

form of capital ratios that banks and 

bank holding companies are required to 

meet in order to comply with the 

respective Agencies capital 

requirements.130 The Commission is 

proposing to require a bank SD or bank 

MSP to file notice with the Commission 

if the SD’s or MSP’s regulatory capital 

is less than the applicable minimum 

capital requirements set forth in the 

prudential regulators’ rules. 

The Commission also is proposing in 

Regulation 23.105(p)(3) to require an SD 

that is a foreign bank to notify the 

Commission if the SD’s files a notice of 

a change in its capital category or a 

notice of falling below its minimum 

capital requirement with a prudential 

regulator or with it home country 

supervisors. This notice requirement is 

intended to provide the Commission 

with information that a registered SD 

may be experiencing financial issues, 

and provides the Commission with the 

opportunity to consult with the 

appropriate prudential regulator. 

The Commission also is proposing to 

require a bank SD or a bank MSP to file 

a notice in the event the SD or MSP fails 

to post or collect initial margin for 

uncleared swap transactions or post or 

collect uncleared swap variation margin 

as required under the respective 

prudential regulators’ rules, if the total 

amount that has not been either 

collected or posted by and exchanged 

with the SD or MSP is equal to or 

greater than: (1) 25 percent of the SD’s 

or MSP’s minimum capital requirement; 

or (2) 50 percent of the SD’s or MSP’s 

minimum capital requirement. 

Consistent with section 4s(e) of the 

CEA, bank SDs and bank MSPs are 

subject to the capital rules of the 

prudential regulators. The proposed 

bank SD and MSP notice requirements 

contained in Regulation 23.105(p) are 

intended to provide the Commission 

with sufficient information to effectively 

monitor these entities as market 

participants in the swap markets subject 

to Commission oversight. For example, 

bank SDs and bank MSPs may be swap 

counterparties to non-bank SDs and 

non-bank MSPs subject to the 

Commission’s capital and margin rules. 

The proposed notice provisions will 

assist Commission staff with monitoring 

these bank SDs and bank MSPs for 

compliance with other statutory and 

regulatory requirements, such as the 

existing business conduct rules 

applicable on all SDs, and the potential 

impacts these bank SDs and bank MSPs 

may have on other Commission 

registrants and on the market as a 

whole. The Commission anticipates that 

its staff, as appropriate, would engage 

with staff of the relevant prudential 

regulator in assessing the potential 

market impacts upon receiving a 

regulatory notice. 

Proposed paragraph (p) of Regulation 

23.105 would also include identical 

oath and affirmation provisions and 

electronic filing requirements for SDs 

and MSPs that are subject to the capital 

rules of a prudential regulator as the 

Commission is proposing under 

paragraphs (f) and (n) of Regulation 

23.105 for SDs and MSPs that are 

subject to the Commission’s capital 

rules. 

7. Weekly Position and Margin 

Reporting 

The Commission is proposing weekly 

reporting of position and margin 

information for the purposes of 

conducting risk surveillance of SDs and 

MSPs. This requirement would apply to 

SDs and MSPs subject to the capital and 

margin rules of either the Commission 

or a prudential regulator. Similar 

reporting is currently provided on a 

daily basis by DCOs for cleared 

swaps.131

Proposed Regulation 23.105(q)(1) 

would require SDs and MSPs to report 

position information, in a format 

specified by the Commission, (i) by 


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132 17 CFR 23.154(b)(2)(v). 

counterparty, and (ii) for each 

counterparty, by the following asset 

classes—commodity, credit, equity, and 

foreign exchange or interest rate. Under 

the uncleared margin rules, these are 

asset classes within which margin 

offsets may be taken.132

Proposed Regulation 23.105(q)(2) 

would require SDs and MSPs to report 

margin information, in a format 

specified by the Commission, showing 

(i) the total initial margin posted by the 

SD or MSP with each counterparty; (ii) 

the total initial margin collected by the 

SD or MSP from each counterparty; and 

(iii) the net variation margin paid or 

collected over the previous week with 

each counterparty. 

The Commission currently uses the 

position and margin information filed 

by DCOs to identify and to take steps to 

mitigate the risks posed to the financial 

system by participants in cleared 

markets including DCOs, clearing 

members, and large traders. The 

Commission would incorporate the 

additional data file by SDs and MSPs 

into that program. The Commission 

would analyze positions and margin 

across cleared and uncleared markets in 

order to obtain a picture of the risks 

posed by large market participants to 

one another and to the financial system. 

Request for Comment 

The Commission requests comment 

on all aspects of the proposed financial 

reporting, recordkeeping and 

notification requirements. In addition, 

the Commission requests comment, 

including empirical data in support of 

comments, in response to the following 

questions: 

1. For SDs or MSPs organized and 

domiciled outside the U.S., is IFRS 

issued by the IASB an appropriate 

accounting standard that would allow 

the Commission and RFA to properly 

assess the financial condition of SDs 

and MSPs? If not, explain why not, and 

suggest what modifications the 

Commission should make to the 

proposed regulation. 

2. Should the Commission accept 

financial statements prepared in 

accordance with local accounting 

standards from SDs or MSPs located in 

foreign jurisdictions and are not 

required to prepare financial statements 

in accordance with U.S. GAAP or IFRS? 

If not, explain why not. Should such 

firms be required to submit a 

reconciliation of the local accounting to 

U.S. GAAP? Would such a 

reconciliation provide the necessary 

information for the Commission and 

RFA to fully understand the financial 

position of the SD or MSP? What costs 

would be incurred by the SD or MSP in 

preparing the reconciliation? 

3. Should SDs or MSPs that file nonU.S. GAAP financial statements also file 

a reconciliation of the non-U.S. GAAP 

financial statements to U.S. GAAP? 

Would such a reconciliation provide the 

Commission with necessary information 

to understand the non-U.S. GAAP 

financial statements? What costs would 

be incurred by the SD or MSP in 

preparing the reconciliation? 

4. Are there competitive advantages to 

SDs and MSPs that would be permitted 

to prepare financial statements in 

accordance with IFRS or another nonU.S. GAAP reporting standard? If so, is 

it necessary for the Commission to 

address such advantages? How should 

the Commission address those 

advantages? 

5. The Commission is proposing to 

require SDs and MSPs that are subject 

to the capital rules of a prudential 

regulator to file notices with the 

Commission and with the SDs’ or MSPs’ 

RFA. Such notices include if the SD’s or 

MSP’s regulatory capital is less than the 

applicable minimum requirements set 

forth in the prudential regulators’ rules 

or an adjustment in the SD’s or MSP’s 

reported capital category. The proposal 

would also require SDs that are foreign 

banks to file notice with the 

Commission and with their RFA if they 

experience an adjustment in their 

regulatory capital category under the 

rules of a prudential regulator or a 

similar provision of the regulations of 

its home country supervisors, and to file 

notice with the Commission and with 

their RFA if their regulator capital is 

below the minimum required by the 

prudential regulators or their home 

country supervisors. Should the 

Commission require SDs that are subject 

to the capital rules of a prudential 

regulator to file notices with the 

Commission regarding changes to their 

capital status? If not, explain why not? 

Are SDs that are banks subject to an 

legal restrictions on disclosing such 

capital information to the Commission? 

If so, cite such legal restrictions. Should 

the Commission differentiate between 

SDs that are U.S. banks from SDs that 

are non-U.S. banks? If so, explain how 

and why the Commission should 

differentiate between such SDs. Are 

there other notices that the Commission 

should consider receiving from SDs or 

MSPs that are subject to the capital and 

margin rules of a prudential regulator? 

Do these rules adequately address SDs 

and MSPs that are foreign domiciled 

entities subject to prudential regulation 

by foreign banking authorities? Are 

there alternative provisions that the 

Commission should consider for both 

domestic and foreign SDs and MSPs that 

are subject to prudential regulation? 

6. Are the reporting elements to 

Appendix A adequately defined to 

capture the relevant information? If not, 

what specific changes should the 

Commission consider? 

7. Are the reporting elements to 

Appendix B adequately defined to 

capture the relevant information? If not, 

what specific changes should the 

Commission consider? 

8. Should the Commission make 

public any other monthly unaudited or 

annual audited financial information 

filed by an SD or MSP under Regulation 

23.105? If so, how would the public 

disclosure of such information be 

consistent with the FOIA and Sunshine 

Act exemptions? 

9. What SD or MSP financial 

information should the Commission 

make publicly available? 

10. Is it appropriate to have different 

disclosure rules for SDs and MSPs? If 

so, explain why disclosure rules should 

be different for SDs and MSPs? 

11. Would disclosure of certain 

financial information provide SD and 

MSP counterparties with necessary 

information concerning some SDs or 

MSPs without adversely impacting that 

particular SD’s or MSP’s ability to 

maintain a trading book? 

12. Should the Commission post SD 

and MSP financial data on the 

Commission’s Web site? 

D. Comparability Determinations for 

Eligible Swap Dealers and Major Swap 

Participants 

The Commission is proposing to 

permit eligible SDs and MSPs to rely on 

substituted compliance to meet certain 

components of the Commission’s capital 

and financial reporting requirements to 

the extent that the Commission 

determines that the relevant foreign 

jurisdiction’s capital and financial 

reporting requirements are comparable 

to the Commission’s corresponding 

capital and financial reporting 

requirements (i.e., ‘‘Comparability 

Determination’’). Proposed Regulation 

23.106 outlines a framework for the 

Commission’s Comparability 

Determinations, including establishing a 

standard of review for determining 

whether some or all of the relevant 

foreign jurisdiction’s capital and 

financial reporting requirements are 

comparable to the Commission’s 

corresponding capital and financial 

reporting requirements. This framework 

is generally consistent with the 

framework set forth in Regulation 

23.160 for assessing substituted 

compliance for applying margin to 


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133The term ‘‘self-regulatory organization’’ 

(‘‘SRO’’) is defined in Regulation 1.3(ee) as a 

contract market (as defined in Regulation 1.3(h)), a 

swap execution facility (as defined in Regulation 

1.3(rrrr)), or a registered futures association under 

section 17 of the Act. The term ‘‘designated selfregulatory organization’’ is defined in Regulation 

1.3(ff) and generally means the SRO that has 

primary financial surveillance responsibilities over 

a registrant. 

134See Regulation 1.10(d)(3). 

uncleared cross border swap 

transactions. 

Proposed Regulation 23.106 identifies 

persons eligible to request a 

Comparability Determination with 

respect to the Commission’s capital and 

financial reporting requirements, 

including any SD or MSP that is eligible 

for substituted compliance under 

Regulation 23.101 and any foreign 

regulatory authority that has direct 

supervisory authority over one or more 

SDs or MSPs that are eligible for 

substituted compliance under 

Regulation 23.101 and that is 

responsible for administering the 

relevant foreign jurisdiction’s capital 

adequacy and financial reporting 

requirements over the SD or MSP. The 

proposal would permit eligible persons 

to request a Comparability 

Determination individually or 

collectively with respect to the 

Commission’s capital and financial 

reporting requirements. Eligible SDs and 

MSPs may wish to coordinate with their 

home regulators and other SDs or MSPs 

in order to simplify and streamline the 

process. The Commission would make 

Comparability Determinations on a 

jurisdiction-by-jurisdiction basis. 

Persons requesting Comparability 

Determinations would need to provide 

the Commission with certain documents 

and information in support of their 

request. Notably, the proposal would 

require requesters to provide copies of 

the relevant foreign jurisdiction’s capital 

and financial reporting requirements 

(including English translations of any 

foreign language documents), 

descriptions of their objectives and how 

they are comparable to or differ from the 

Commission’s capital and financial 

reporting requirements (e.g., the net 

liquid assets approach and bank-based 

approach), international standards such 

as Basel bank capital requirements, if 

applicable, and how they address the 

elements of the Commission’s capital 

requirements. The requestors would 

need to identify the regulatory 

provisions that correspond to the 

Commission’s capital requirements 

(and, if necessary, whether the foreign 

jurisdiction’s capital requirements do 

not address a particular element). 

Requesters would also need to provide 

a description of the ability of the 

relevant foreign regulatory authority or 

authorities to supervise and enforce 

compliance with the relevant foreign 

jurisdiction’s capital requirements and 

any other information and 

documentation the Commission deems 

appropriate. 

The proposal identifies certain key 

factors that the Commission would 

consider in making a Comparability 

Determination. Specifically, the 

Commission would consider the scope 

and objectives of the relevant foreign 

jurisdiction’s capital requirements; how 

and whether the relevant foreign 

jurisdiction’s capital adequacy 

requirements compare to international 

Basel capital standards for banking 

institutions or to other standards such 

as those use for securities brokers or 

dealers; whether the relevant foreign 

jurisdiction’s capital requirements 

achieve comparable outcomes to the 

Commission’s corresponding capital 

requirements; the ability of the relevant 

regulatory authority or authorities to 

supervise and enforce compliance with 

the relevant foreign jurisdiction’s capital 

adequacy and financial reporting 

requirements; as well as any other facts 

or circumstances the Commission 

deems relevant. In making a 

comparability determination, it is 

possible that a foreign capital regime 

may be comparable in some, but not all, 

elements of the Commission’s capital 

requirements. 

Proposed Regulation 23.106 would 

provide that any SD or MSP that, in 

accordance with a Comparability 

Determination, complies with a foreign 

jurisdiction’s capital requirements 

would be deemed in compliance with 

the Commission’s corresponding capital 

adequacy and financial reporting 

requirements. Accordingly, the failure 

of such an SD or MSP to comply with 

the relevant foreign capital and financial 

reporting requirements may constitute a 

violation of the Commission’s capital 

adequacy and financial reporting 

requirements. In addition, all SDs and 

MSPs remain subject to the 

Commission’s examination and 

enforcement authority regardless of 

whether they rely on a Comparability 

Determination. The proposal would 

further provide that the Commission 

retains the authority to impose any 

terms and conditions it deems 

appropriate in issuing a Comparability 

Determination and to further condition, 

modify, suspend, terminate or otherwise 

restrict any Comparability 

Determination it has issued in its 

discretion. This could result, for 

example, from a situation where, after 

the Commission issues a comparability 

determination, the basis of that 

determination ceases to be true. 

In this regard, Comparability 

Determinations issued by the 

Commission would require that the 

Commission be notified of any material 

changes to information submitted in 

support of a Comparability 

Determination, including, but not 

limited to, changes in the relevant 

foreign jurisdiction’s supervisory or 

regulatory regime. The Commission 

expects that the comparability 

determination process would require 

close consultation, cooperation, and 

coordination with other appropriate 

U.S. regulators and relevant foreign 

regulators. The Commission would also 

expect that the relevant foreign regulator 

will enter into, or will have entered 

into, an appropriate memorandum of 

understanding or similar arrangement 

with the Commission in connection 

with a Comparability Determination. 

E. Technical Amendments 

1. Amendments to the Financial 

Reporting Requirements in Regulation 

1.10 and 1.16 

Regulation 1.10 currently requires 

each FCM to file within 17 business 

days of the close of each month an 

unaudited financial with the 

Commission and with the firm’s 

designated self-regulatory 

organization.133 Regulation 1.10 also 

requires each FCM to file within 60 days 

of the end of the firm’s fiscal year end 

an audited annual financial report. An 

FCM’s monthly financial reports must 

be submitted on CFTC Form 1–FR– 

FCM, while the annual financial report 

may be submitted on Form 1–FR–FCM 

or, subject to certain conditions, 

presented in a manner consistent with 

U.S. GAAP.134

Regulation 1.10 requires each IB to 

file an unaudited financial report with 

NFA on a semi-annual basis, and an 

audited annual financial report with the 

NFA. The IB unaudited reports must be 

submitted on Form 1–FR–IB and the 

audited annual report may be filed on 

Form 1–FR–IB or, subject to certain 

conditions, presented in a manner 

consistent with U.S. GAAP. 

Regulation 1.10(h) currently provides 

relief from the Form 1–FR filing 

requirements to FCMs or IBs that are 

dually-registered as BDs. Such dualregistrants are permitted to file the 

SEC’s Financial and Operational 

Combined Uniform Single Report under 

the Securities Exchange Act of 1934, 

Part II, Part IIA, or Part II CSE (FOCUS 

Report), in lieu of a Form 1–FR–FCM or 

Form 1–FR–IB. 

The Commission is proposing to 

amend Regulation 1.10(h) to permit an 


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135 If an FCM’s or IB’s adjusted net capital falls 

below a certain threshold, such as 120 percent of 

its minimum adjusted net capital requirement, the 

firm is deemed to be maintaining adjusted net 

capital at a level below its ‘‘early warning level.’’ 

FCM or IB that is dually-registered as 

SBSD or MSBSP to file its SEC FOCUS 

Report in lieu of a CFTC Form 1–FR– 

FCM or CFTC Form 1–FR–IB. The 

proposed amendment would be 

consistent, as noted above, with the 

current relief provided to entities that 

are dually-registered as an FCM and a 

BD. Furthermore, the Commission’s 

experience with Regulation 1.10(h) 

indicates that the FOCUS Reports 

include information that is substantially 

comparable to the Form 1–FR and 

adequate for the Commission to conduct 

financial surveillance of the registrant. 

Regulations 1.10(f) and 1.16(f) 

currently provide that a duallyregistered FCM/BD or IB/BD may 

automatically obtain an extension of 

time to file its unaudited and audited 

financial reports required under 

Regulation 1.10 by submitting a copy of 

the written approval for the extension 

issued by the BD’s securities designated 

examining authority (‘‘DEA’’). The 

Commission is proposing to amend 

Regulations 1.10(f) and 1.16 to provide 

that an FCM or IB that is also registered 

with the SEC as a SBSD or MSBSP may 

obtain the automatic extension of time 

to file its unaudited or audited FOCUS 

Report or Form SBS with the 

Commission and with the firm’s DSRO, 

as applicable, by submitting a copy of 

the SEC’s or the DEA’s approval of the 

extension request. This proposed 

amendment maintains the intent of the 

current regulations by retaining a 

consistent approach to the granting to 

dual registrants extensions of time to 

file financial reports. The Commission 

also is proposing a technical 

amendment to Regulation 1.16 to correct 

a cross reference to SEC Rule 17a–5 (17 

CFR 240.17a–5) for extensions of time to 

file audited financial statements. 

2. Amendments to the Notice Provisions 

in Regulation 1.12 

Regulation 1.12 requires an FCM or IB 

to file a notice with the Commission and 

with the firm’s DSRO when certain 

prescribed events occur that trigger a 

notice filing requirement. Such events 

include the firm: (1) Failing to maintain 

compliance with the Commission’s 

capital requirements or the capital rules 

of a SRO; (2) failing to hold sufficient 

funds in segregated or secured amount 

accounts to meet its regulatory 

requirements; (3) failing to maintain 

current books and records; and (4) 

experiencing a significant reduction in 

capital from the previous month-end. 

The Commission is proposing several 

amendments to Regulation 1.12. The 

proposed amendments to Regulation 

1.12(a) would revise the obligation of an 

FCM or IB to file a notice when it fails 

to meet the capital requirement of the 

Commission or of an SRO to include if 

the firm fails to meet the SEC’s capital 

requirements when the firm is a dualregistrant. Such notice is appropriate as 

it would provide Commission staff with 

the opportunity to assess the potential 

impact on its CFTC regulated activities, 

and to initiate discussions with the SEC 

regarding the capital deficiency. 

Commission Regulation 1.12(b) 

requires an FCM or IB to file notice with 

the Commission and with the firm’s 

DSRO if the firm’s adjusted net capital 

falls below the applicable ‘‘early 

warning level’’ set forth in the 

regulation.135 The Commission is 

proposing amendments to Regulation 

1.12(b) to require an FCM or IB that is 

also registered with the SEC as a SBSD 

or a MSBSP to file a notice if the SBSD 

or MSBSP falls below the ‘‘early 

warning level’’ established in the rules 

of the SEC. The proposal is intended to 

provide additional information to the 

Commission in its efforts to monitor the 

financial condition of its registrants. 

3. Commissions Receivable for Certain 

Swap Transactions in Regulation 1.17 

The Commission is proposing to 

amend Regulation 1.17(c)(2)(ii)(B) to 

codify several staff no-action letters that 

permit IBs to reflect certain 

commissions receivable balances from 

swap transactions that are aged not 

more than 60 days from the month-end 

accrual date as a current asset in 

computing the IB’s adjusted net capital, 

provided that the commissions are 

promptly billed. The proposed 

amendments would extend the current 

asset treatment to commission 

receivables from both cleared swaps and 

uncleared swaps. 

4. Changes to Notice and Disclosure 

Requirements for Bulk Transfers in 

Regulation 1.65 

Regulation 1.65 describes the notice 

and disclosure requirements to 

customers and to the Commission, 

which must be given prior to the 

transfer of customer accounts other than 

at the request of the customer, to 

another futures commission merchant or 

introducing broker. Regulation 1.65(b) 

requires that notice of such a transfer be 

filed with the Commission at least five 

business days in advance of the transfer 

if the transfer meets certain enumerated 

conditions. Further, Regulation 1.65(d) 

requires, among other things, that such 

notice to the Commission must be filed 

by mail, addressed to the Deputy 

Director, Compliance and Registration 

Section, Division of Swap Dealer and 

Intermediary Oversight and does not 

provide for electronic filing. Finally, 

Regulation 1.65(e) provides that in the 

event notice cannot be filed with the 

Commission within five days, then it 

must be filed as soon as practicable and 

no later than the day of the transfer 

along with a brief statement explaining 

the circumstances necessitating the 

delay in filing. 

The Commission has found that five 

days’ notice, when given, is often not a 

sufficient amount of time to allow the 

Commission to oversee the bulk transfer 

of customer accounts. Accordingly, the 

Commission is proposing to amend 

Regulation 1.65(b) to require that the 

notice of a bulk transfer of customer 

accounts be filed with the Commission 

at least ten business days in advance of 

a transfer. The Commission notes that 

bulk transfers of customer accounts are 

generally planned well in advance such 

that the FCM should be able to provide 

the Commission ten days advance 

notice of such a transfer. The 

Commission is also proposing to amend 

Regulation 1.65(d) to require the notice 

to be filed electronically. This is 

consistent with the filing requirements 

of other notices and financial forms 

with the Commission, which are already 

required to be filed electronically. The 

Commission notes that the electronic 

system to file such notices already exists 

and is in use by registrants, therefore, 

this change should not result in any 

additional costs either to the 

Commission or to registrants. 

Finally, the Commission is proposing 

to amend Regulation 1.65(e) to delegate 

to the Director of the Division of Swap 

Dealer and Intermediary Oversight the 

authority to accept a lesser time period 

for the notification provided for in 

Regulation 1.65(b). However, the notice 

must be filed as soon as practicable and 

in no event later than the day of the 

transfer. 

5. Conforming Amendments to 

Delegated Authority Provisions in 

Regulation 140.91 

Commission Regulations 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 Swap Dealer 

and Intermediary Oversight through the 

provisions of Regulation 140.91. The 

Commission proposes to amend 

Regulation 140.91 to provide similar 

delegations with respect to functions 

reserved to the Commission in part 23. 

Proposed Regulation 23.101(c) would 

require an SD or MSP to be in 


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136 5 U.S.C. 601 et seq. 

137See Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618 (Apr. 30, 

1982) (FCMs) and Registration of Swap Dealers and 

Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 

2012) (SDs and MSPs). 

138See Introducing Brokers and Associated 

Persons of Introducing Brokers, Commodity Trading 

Advisors and Commodity Pool Operators; 

Registration and Other Regulatory Requirements, 48 

FR 35248, 35276 (Aug. 3, 1983). 

139 44 U.S.C. 3501 et seq. 

140See OMB Control No. 3038–0024, http://

www.reginfo.gov/public/do/

PRAOMBHistory?ombControlNumber=3038-0024 

(last visited Apr. 7, 2016). This collection is being 

retitled ‘‘Regulations and Forms Pertaining to 

Financial Integrity of the Market Place.’’ 

141This discussion does not include information 

collection requirements that are included under 

other Commission regulations and related OMB 

control numbers. For example, Proposed 

Commission Regulation 1.17(c)(5)(iii)(E)(4) would 

require that appropriate documentation of 

qualifying master netting agreements be maintained 

by dual-registered FCM–SDs for purposes of certain 

margin deductions from net capital. As noted in the 

Margin rulemaking, this collection is already 

covered under OMB Control Number 3038–0088 

pertaining to swap trading relationship 

documentation. See 81 FR 636, 680 (Jan. 6, 2016). 

142The number of impacted SDs and MSPs is 

significantly smaller than the 300 expected in the 

Commission’s previous proposed rulemaking, and 

the Commission has reduced its burden estimates 

accordingly herein. See, Capital Requirements of 

Swap Dealers and Major Swap Participants, 76 FR 

27802 (May 12, 2011). 

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 Regulation 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 Regulation 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 Regulation 

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 Regulation 140.91 to delegate to 

the Director of the Division of Swap 

Dealer and Intermediary Oversight, or 

the Director’s designee, the authority 

reserved to the Commission under 

proposed Regulations 23.101(c), 

23.103(d), and 23.105(a)(2) and (d). The 

delegation of such functions to staff of 

the Division of Swap Dealer 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 under Regulation 

140.91 regarding the supervision of 

FCMs compliance with minimum 

financial requirements. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies consider 

whether the regulations they propose 

will have a significant economic impact 

on a substantial number of small 

entities.136 This proposed rulemaking 

would affect the obligations of SDs, 

MSPs, FCMs, and IBs. The Commission 

has previously determined that SDs, 

MSPs, and FCMs are not small entities 

for purposes of the RFA.137 Therefore, 

the requirements of the RFA do not 

apply to those entities. The Commission 

has found it appropriate to consider 

whether IBs should be deemed small 

entities for purposes of the RFA on a 

case-by-case basis, in the context of the 

particular Commission regulation at 

issue.138 As certain IBs may be small 

entities for purposes of the RFA, the 

Commission considered whether this 

proposed rulemaking would have a 

significant economic impact on such 

registrants. Only a few of the regulations 

included in this proposed rulemaking, 

the amendment of Commission 

regulations 1.10, 1.12, 1.16 and 1.17, 

will impact the obligations of IBs. As 

discussed above, these amendments will 

permit the filing and harmonization of 

financial reporting and notification 

rules as adopted by the SEC for dual 

registered SBSD and MSBSPs and 

accommodate common billing practices 

in the swap industry surrounding the 

collection of commission receivables. 

Because these amendments benefits IBs, 

they are not expected to impose any 

new burdens or costs on them. The 

Commission does not, therefore, expect 

small entities to incur any additional 

costs as a result of this proposed 

rulemaking. 

Accordingly, for the reasons stated 

above, the Commission believes that 

this proposed rulemaking will not have 

a significant economic impact on a 

substantial number of small entities. 

Therefore, the Chairman, on behalf of 

the Commission, hereby certifies, 

pursuant to 5 U.S.C. 605(b), that the 

proposed regulations being published 

today by this Federal Register release 

will not have a significant economic 

impact on a substantial number of small 

entities. The Commission invites 

comment on the impact of this proposal 

on small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 139 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, would result in 

an amendment to existing collection of 

information ‘‘Regulations and Forms 

Pertaining to Financial Integrity of the 

Market Place; Margin Requirements for 

SDs/MSPs’’ 140 as discussed below. The 

Commission, therefore, is submitting 

this proposed rulemaking to the Office 

of Management and Budget (‘‘OMB’’) for 

its review and approval in accordance 

with 44 U.S.C. 3507(d) and 5 CFR 

Regulation 1320.11. 

The responses to this collection of 

information are mandatory. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid control 

number issued by OMB. 

1. New Information Collection 

Requirements and Related Burden 

Estimates 141

Currently, there are approximately 

104 SDs and no MSPs provisionally 

registered with the Commission that 

may be impacted by this proposed 

rulemaking and, in particular, the 

collections of information contained 

herein and discussed below.142

i. Form SBS 

The proposed amendments to 

Commission regulation 1.10(h) would 

allow an FCM or IB that is also a 

securities broker or dealer to file, subject 

to certain conditions, its Form SBS in 

lieu of its Form 1–FR. Because these 

amendments would provide an 

alternative to filing Form 1–FR, the 

Commission believes that the 

amendments would not cause FCMs or 

IBs to incur any additional burden. 

Rather, to the extent that the proposed 

rule provides an alternative to filing a 

Form 1–FR and is elected by FCMs or 


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143The registrant would also be required to 

promptly file with the DSRO designated selfregulatory organization and the Commission copies 

of any notice it receives from its designated 

examining authority to approve or deny the 

requested extension of time. 

144Note that the changes to proposed 1.17(c)(6)(i), 

which permit any dual registered FCM BrokerDealer who has received approval by the SEC under 

§ 240.15c3–1(a)(7) to use models to calculate its 

market and credit risk charges, do not add an 

additional collection of information and therefore 

are not considered in this analysis. 

145 Id. at 70294. 

146 343,200 is the product of 55 and the sum of 

5,600 and 640. 

IBs, it is reasonable for the Commission 

to infer that the alternative is less 

burdensome to such FCMs and IBs. 

The proposed amendments to 

Commission regulation 1.10(f) would 

allow an FCM or IB that is duallyregistered with the SEC as either a SBSD 

or MSBSP to request an extension of 

time to file its uncertified Form SBS. 

The Commission is unable to estimate 

with precision how many requests it 

would receive from registrants under 

proposed § 1.10(f) in relation to Form 

SBS annually. The Commission 

anticipates that it would receive one 

such request in the aggregate annually, 

and that preparing such a request would 

consume five burden hours, resulting in 

an annual increase in burden of five 

hours in the aggregate. 

ii. Notice of Failure To Maintain 

Minimum Financial Requirements 

Commission regulations 1.12(a) and 

(b) currently require FCMs and IBs, to 

file notices if they know or should have 

known that certain specified minimum 

financial thresholds have been 

exceeded. The amendments to 

Commission regulation 1.12(a) and (b) 

would add as an additional threshold 

for such notices certain financial 

requirements of the SEC if the applicant 

or registrant is registered with the SEC 

as an SBSD or MSBSD. The Commission 

is unable to estimate with precision how 

many additional notices it would 

receive from such entities as a result of 

the additional minimum threshold. In 

an attempt to provide conservative 

estimates, the Commission anticipates 

that it would receive 10 such notices in 

the aggregate annually, and that 

preparing such a notice would consume 

five burden hours, resulting in an 

annual increase in burden of 50 hours 

in the aggregate. 

iii. Requests for Extensions of Time To 

File Financial Statements 

The proposed amendments to 

Commission regulation 1.16(f) would 

allow an FCM or IB that is registered 

with the SEC as an SBSD or MSBSP to 

request an extension of time to file its 

audited annual financial statements.143

The Commission is unable to estimate 

with precision how many of such 

requests it would receive from such 

entities. The Commission anticipates 

that it would receive one of such 

requests in the aggregate annually, and 

that preparing such a request would 

consume five burden hours, resulting in 

an annual increase in burden of five 

hours in the aggregate. 

iv. Capital Requirement Elections 

Proposed Commission regulation 

23.101(a)(7) would require that certain 

SDs that wish to change their capital 

election submit a written request to the 

Commission and provide any additional 

information and documentation 

requested by the Commission. The 

Commission is unable to estimate with 

precision how many of such requests it 

would receive from such entities. The 

Commission anticipates that it would 

receive one such request in the 

aggregate annually, and that preparing 

such a request would consume five 

burden hours, resulting in an annual 

increase in burden of five hours in the 

aggregate. 

v. Application for Use of Models 

Commission regulation 23.102(a) 

would allow an SD to apply to the 

Commission or an RFA of which it is a 

member for approval to use internal 

models when calculating its market risk 

exposure and credit risk exposure under 

§§ 23.101(a)(1)(i)(B), 23.101(a)(1)(ii)(A), 

or 23.101(a)(2)(ii)(A), by sending to the 

Commission and such RFA an 

application, including the information 

set forth in Appendix A to Commission 

regulation 23.102 and meeting certain 

other requirements. Proposed 

Commission regulation 1.17(c)(6)(v) 

relatedly would allow an FCM that is 

also an SD to apply in writing to the 

Commission or an RFA of which it is a 

member for approval to compute 

deductions for market risk and credit 

risk using internal models in lieu of the 

standardized deductions otherwise 

required under Commission regulation 

1.17.144

Appendices A and B to Commission 

regulation 23.102 contain further related 

information collection requirements, 

including that the SD: (i) Provide notice 

to the Commission and RFA and/or 

update its application and related 

materials for certain inaccuracies and 

amendments; (ii) notify the Commission 

or RFA before it ceases to use such 

internal models to compute deductions; 

(iii) if a VaR model is used, have an 

annual review of such model conducted 

by a qualified third party service, (iv) 

conduct stress-testing, retain and make 

available to the Commission and the 

RFA records of the results and all 

assumptions and parameters thereof, 

and notify the Commission and RFA 

promptly of instances where such tests 

indicate any material deficiencies in the 

comprehensive risk model; (v) 

demonstrate to the Commission or the 

RFA that certain additional conditions 

have been satisfied and retain and make 

available to the Commission or the RFA 

records related thereto; and (vi) comply 

with additional conditions that may be 

imposed on the SD by the Commission 

or the RFA. 

As discussed above, there are 

currently 104 SDs and 0 MSPs 

provisionally registered with the 

Commission. Of these, the Commission 

estimates that approximately 53 SDs 

and no MSPs would be subject to the 

Commission’s capital rules as they are 

not subject to the capital rules of a 

prudential regulator. The Commission 

further estimates conservatively that 32 

of these SDs would seek to obtain 

Commission approval to use models for 

computing their market and credit risk 

capital charges. 

The Commission staff estimates that 

an SD approved to use internal models 

would spend approximately 5,600 hours 

per year to review and update the 

models and approximately 640 hours 

per year to back-test the models for the 

aggregate of 6240 annual burden hours 

for each SD.145 Consequently, 

Commission staff estimates that 

reviewing and back-testing the models 

for the 32 SDs would result in an 

aggregate annual hour burden of 

approximately 199,680 hours.146

vi. Liquidity Requirements 

Commission regulation 23.104 

proposes additional liquidity 

requirements and equity withdrawal 

restrictions on certain SDs. Commission 

regulation 23.104(a)(2) would provide 

that certain SDs may not dispose of, or 

transfer to an affiliate, a high quality 

liquid asset without prior notice to and 

approval by the Commission. Section 

23.104(a)(3) would require certain SDs 

to have a written contingency funding 

plan that addresses the SD’s policies 

and the roles and responsibilities of 

relevant personnel for meeting the 

liquidity needs of the SD and 

communicating with the public and 

other market participants during a 

liquidity stress event. 

Commission regulations 23.104(a)(2) 

and 23.104(a)(3) apply only to SDs that 

have elected to be subject to the 

requirements of 23.101(a)(1)(i) as if the 


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SD were regulated by the Federal 

Reserve Board. Out of the 104 

provisionally registered SDs, the 

Commission currently estimates that 16 

SDs will elect to be subject to the 

requirements of 23.101(a)(1)(i). 

Accordingly, the Commission estimates 

these proposed regulations will add 50 

burden hours per month, or 600 burden 

hours per year, for each of the 16 

electing SDs, resulting in a an aggregate 

annual burden of 9,600. 

Commission regulation 23.104(b)(1) 

would require that certain SDs perform 

a monthly liquidity stress test, provide 

the results of that test to senior 

management, and perform a quarterly 

and annual reviews with appropriate 

levels of management. Commission 

regulation 23.104(b)(2) would require 

that an SD document any differences 

with those of the liquidity stress test of 

the consolidated parent and regulation 

23.104(b)(4) would require that an SD 

have a written contingency funding 

plan. Regulation 23.104(b) applies only 

to SDs that have elected to be subject to 

the requirements of regulation 

23.101(a)(1)(ii). The Commission 

estimates that 11 SDs out of the 104 

provisionally registered will fall into 

this category and that all 11 will be part 

of a consolidated entity that performs a 

liquidity stress test. As such, the 

Commission estimates that the proposed 

regulations will add 50 burden hours 

per month, or 600 burden hours per 

year, resulting in an aggregate annual 

burden of 6,600 hours. 

Commission regulation 23.104(c) 

would allow an SD to apply in writing 

for relief from restrictions on certain 

equity withdrawals. Regulation 

23.104(c) applies to SDs that have 

elected to comply under regulation 

23.101(a)(1)(i) and 23.101(a)(1)(ii). 

Commission staff estimates that 28 of 

the 104 currently provisionally 

registered SDs would be subject to this 

regulation. Commission staff estimates 

that each of these 28 SDs would file 

approximately two notices annually 

with the Commission and that it would 

take approximately 30 minutes to file 

each of these notices. This results in an 

aggregate annual hour burden estimate 

of approximately 28 hours. 

vii. Financial Recordkeeping, Reporting 

and Notification Requirements for SDs 

and MSPs 

Commission regulation 23.105 would 

require generally that each SD and MSP 

maintain certain specified records, 

report certain financial information and 

notify or request permission from the 

Commission under certain specified 

circumstances, in each case, as provided 

in the proposed regulation. For 

example, the regulation requires 

generally that SDs and MSPs maintain 

current books and records, provide 

notice to the Commission of regulatory 

capital deficiencies and related 

documentation, provide notice of 

certain other events specified in the 

proposed rule, and file financial reports 

and related materials with the 

Commission (including the information 

in Appendix A and B to the proposed 

regulation, as applicable). Regulation 

23.105 also requires the SD or MSP to 

furnish information about its custodians 

that hold margin for uncleared swap 

transactions and the amounts of margin 

so held, and for SDs approved to use 

models (as discussed above), provide 

additional information regarding such 

models, as further described in 

regulation 23.105(k). 

The Commission estimates that there 

are 28 SD firms which will be required 

to fulfill their financial reporting, 

recordkeeping and notification 

obligations under Regulation 23.105(a)– 

23.105(n) because they are not subject to 

a prudential regulator, not already 

registered as an FCM, and not dually 

registered as a SBSD. The Commission 

expects these 28 firms will apply to use 

models. Commission staff estimates that 

the preparation of monthly and annual 

financial reports for these SDs, 

including the recordkeeping, related 

notification and preparation of the 

specific information required in 

proposed Appendix A to regulation 

23.105, would impose an on-going 

burden of 250 hour per firm annually. 

The Commission further estimates it 

would cost each SD $300,000 to retain 

an independent public accountant to 

audit its financial statements each year. 

Thus, the total burden hours estimated 

for compliance with 23.105(a)–23.105(n) 

for these 28 SD firms would be 7,000 

hours annually. 

Regulation 23.105(p) and its 

accompanying Appendix B propose a 

quarterly financial reporting and 

notification obligations on SDs which 

are subject to a prudential regulator. The 

Commission expects that approximately 

51 of the 104 currently provisionally 

registered SDs are subject to a 

prudential regulator. The Commission 

estimates that this proposed reporting 

and notification requirements will 

impose a burden of 33 hours on-going 

annually. This results in a total 

aggregate burden of 1,683 hours 

annually. 

Regulation 23.105(q) requires all SDs 

and MSPs to report to the Commission 

weekly summary position and margin 

data. The Commission expects that all 

104 SDs and no MSPs will be subject to 

this requirement. The Commission 

estimates that it would impose 520 

burden hours per firm annually. This 

results in total aggregate burden of 

54,080 hours annually. 

viii. Capital Comparability 

Determinations 

Commission regulation 23.106 would 

allow certain SDs, MSPs, and foreign 

regulatory authorities to request a 

Capital Comparability Determination 

with respect to capital adequacy and 

financial reporting requirements for SDs 

or MSPs, as discussed above. As part of 

this request, persons are required to 

submit to the Commission certain 

specified supporting information and 

further information, as requested by the 

Commission. Further, if such a 

determination was made by the 

Commission, an SD or MSP would be 

required to file a notice with the RFA 

of which it is a member of its intent to 

comply with the capital adequacy and 

financial reporting requirements of the 

foreign jurisdiction. Moreover, in 

issuing a Capital Comparability 

Determination, the Commission would 

be able to impose any terms and 

conditions it deems appropriate, 

including additional capital and 

financial reporting requirements. 

The Commission expects that 17 firms 

out of the 104 currently provisionally 

registered SDs would seek Capital 

Comparability Determinations. These 17 

firms are located in five different 

jurisdictions, all of which appear to 

have adopted some level of Basel 

compliant capital rule or another capital 

rule that would apply to SDs. As such, 

Commission staff estimates that it will 

take approximately ten hours per firm 

annually to prepare and submit requests 

for Capital Comparability 

Determinations and otherwise comply 

with the requirements of proposed 

Regulation 23.106, resulting in aggregate 

annual burden of 170 hours. 

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 


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147U.S.C. 19(a). 

148The Commission notes that the costs and 

benefits considered in this proposal, and 

highlighted below, have informed the policy 

choices described throughout this release. 

149See Section 4s(e)(2)(B). 

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 respondents, 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 

(email). 

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. 

IV. Cost Benefit Considerations 

A. Background 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its discretionary actions 

before promulgating a regulation under 

the CEA or issuing certain orders.147

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. In this 

cost benefit section, the Commission 

discusses the costs and benefits 

resulting from its discretionary 

determinations with respect to the 

section 15(a) factors.148 In addition, in 

Appendix A to this section, the 

Commission, using available data, 

estimates the cost of the proposal to 

each type of SD or MSP and the overall 

market. 

This proposed rulemaking 

implements the new statutory 

framework of Section 4s(e) of the CEA, 

added by Section 731 of the Dodd-Frank 

Act, which requires the Commission to 

adopt capital requirements for SDs and 

MSPs that do not have a prudential 

regulator (i.e., ‘‘covered swap entities’’ 

or ‘‘CSEs’’) and amends Commission 

Regulation 1.17 to impose specific 

market risk and credit risk capital 

charges for uncleared swap and 

security-based swap positions held by 

an FCM.149 Section 4s(e) of the CEA 

requires the Commission to adopt 

minimum capital requirements for CSEs 

that are designed to help ensure the 

CSE’s safety and soundness and be 

appropriate for the risk associated with 

the uncleared swaps held by a CSE. In 

addition, section 4s(e)(2)(C) of the CEA, 

requires the Commission to set capital 

requirements for CSEs that account for 

the risks associated with the CSE’s 

entire swaps portfolio and all other 

activities conducted by the CSE. Lastly, 

section 4s(e)(3)(D) of the CEA provides 

that the Commission, the prudential 

regulators, and the SEC, must ‘‘to the 

maximum extent practicable’’ establish 

and maintain comparable capital rules. 

The proposal also includes certain 

financial reporting requirements related 

to an SDs and MSPs financial condition 

and capital requirements. 

In the following cost-benefit 

considerations, the Commission will 

discuss the costs and benefits of this 

proposal and some critical decisions it 

made in developing this proposal. The 

Commission will: (i) Discuss the general 

benefits and costs of regulatory capital; 

(ii) summarize the proposal; (iii) set the 

baseline for which the cost and benefits 

of this proposal will be compared; (iv) 

provide an overview of the different 

capital approaches set out in this 

proposal and the rationale for proposing 

each approach; (v) set out the costs and 

benefits to each type of SD and MSP 

under their corresponding capital 

approaches; (vi) discuss the proposal’s 

liquidity and funding requirements; (vii) 

discuss the proposal’s reporting 

requirements; and (viii) an analyze the 

proposal as it relates to each of the 15(a) 

factors. 

B. Regulatory Capital 

Regulatory capital is designed to 

ensure that a firm will have enough 

capital, in times of financial stress, to 

cover the risk inherent of the activities 

in the firm. Regulatory capital’s 

framework can be designed differently, 

but its primary purpose remains the 

same—to meet this objective. Although 

a firm may mitigate its risks through 

other methods, including risk 

management techniques (e.g., netting, 

credit limits, margin), capital is viewed 

as the last line of defense of an entity, 

ensuring its viability in times of 

financial stress. In designing this 

proposal, the Commission was 

cognizant of the purpose of capital and 

the potential trade-off between the costs 

of requiring additional capital and the 

Commission’s statutory mandate of 

helping to ensure the safety and 

soundness of SDs and MSPs thereby 

promoting the stability of the U.S. 

financial system. 

C. General Summary of Proposal 

The Commission designed this 

proposal on well-established existing 

capital regimes. The proposal’s 

framework, which draws upon the 

principles and structures of bank-based 

capital, broker-dealer capital, and FCM 

capital, provides CSEs, operating under 

a current capital regime, with the ability 

to continue to comply with that regime, 

with minor adjustments to account for 

the inherent risk of swap dealing and to 

mitigate regulatory arbitrage. The 

Commission, in developing its capital 

framework, provides CSEs with the 

flexibility to continue operating under a 

similar capital framework, which 

should result in minor disruptions to 

the markets and mitigate the possibility 

of duplicative or even conflicting rules, 

while helping to ensure the safety and 

soundness of the CSE and the stability 

of the U.S. financial system. 

The proposal details minimum capital 

requirements for different ‘‘types’’ or 

‘‘categories’’ of CSEs and further defines 

the capital computations, including 

various market risk and credit risk 

charges, whether using models or a 

standardized rules-based or table-based 

approach, to determine whether a CSE 

satisfies the minimum capital 

requirements. The Commission is 

proposing to permit SDs that are neither 


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150Section 17 of the CEA sets forth the 

registration requirements for RFAs. RFAs are 

defined as self-regulatory organizations under 

Regulation 1.3(ee). The Commission recognizes that 

SDs that seek model approval from the Commission 

or from an RFA will be required to submit 

documentation addressing several capital models 

including value at risk, stressed value at risk, 

specific risk, comprehensive risk and incremental 

risk. To the extent that models are reviewed and 

approved by an RFA, additional costs may be 

incurred by the RFA which may be passed on to 

the SDs. 

151The Federal Reserve Board has proposed 

funding requirements for certain large bank holding 

companies. See Net Stable Funding Ratio: Liquidity 

Risk Measurement Standards and Disclosure 

Requirements, 81 FR 35123 (Jun. 1, 2016). 

registered as FCMs nor subject to the 

capital rules of a prudential regulator to 

elect a capital requirement that is based 

on existing bank holding company 

(‘‘BHC’’) capital rules adopted by the 

Federal Reserve Board (the ‘‘bank-based 

capital approach’’) or a capital 

requirement that is based on the existing 

FCM/BD net capital rules (the ‘‘net 

liquid assets capital approach’’). The 

Commission is also proposing to permit 

certain SDs that meet defined 

conditions designed to ensure that they 

are ‘‘predominantly engaged in nonfinancial activities’’ to compute their 

minimum regulatory capital based upon 

the firms’ tangible net worth (the 

‘‘tangible net worth capital approach’’). 

Further, the Commission is proposing to 

allow SDs to obtain approval from the 

Commission, or from an RFA of which 

the SDs are members, to use internal 

models to compute certain market risk 

and credit risk capital charges when 

calculating their capital.150

The Commission is proposing to 

require SDs that elect to use the bankbased capital approach or the net liquid 

assets capital approach to perform 

prescribed liquidity stress testing and to 

maintain liquid assets above defined 

levels. The Commission is further 

proposing to impose certain restrictions 

on the withdrawal of capital from SDs 

if certain defined triggers are breached. 

The proposal also establishes a 

program of ‘‘substituted compliance’’ 

that would allow a CSE that is organized 

and domiciled in a non-U.S. jurisdiction 

(‘‘non-U.S. CSE’’) (or an appropriate 

regulatory authority in the non-U.S. 

CSE’s home country jurisdiction) to 

petition the Commission for a 

determination that the home country 

jurisdiction’s capital and financial 

reporting requirements are comparable 

to the CFTC’s capital and financial 

reporting requirements for such CSE, 

such that the CSE may satisfy its home 

country jurisdiction’s capital and 

financial reporting requirements 

(subject to any conditions imposed by 

the Commission) in lieu of the 

Commission’s capital and financial 

reporting requirements (i.e., 

‘‘Comparability Determination’’). 

Consistent with section 4s(f), the 

Commission is proposing to require SDs 

and MSPs to satisfy current books and 

records requirements, ‘‘early warning’’ 

and other notification filing 

requirements, and periodic and annual 

financial report filing requirements with 

the Commission and with any RFA of 

which the SDs and MSPs are members. 

D. Baseline 

In determining the costs and benefits 

of this proposal, the Commission’s 

benchmark from which this proposal is 

compared against is the market’s status 

quo, i.e., the swap market as it exists 

today. As the proposal will implement 

capital and financial reporting on CSEs 

and recordkeeping requirements on SDs 

and MSPs, the Commission will discuss 

the incremental costs and benefits to 

each type or category of SD and MSP, 

as to their current capital and financial 

reporting and recordkeeping 

requirements. As each CSE or its parent 

holding company may be complying 

with current capital requirements, based 

on capital requirements that are a result 

of the entity or its parent entity 

registering with a financial agency, as a 

result of it being a financial 

intermediary (e.g., as an BD, FCM or 

BHC), the Commission has set different 

baselines for each type or category of 

entity. In the case that a CSE does not 

have current capital requirements, the 

Commission considered the full cost 

and benefit of its proposal on the entity. 

The following is a list of types or 

categories of registered entities and their 

corresponding capital regimes that the 

CSE currently complies with, if there is 

any, and their corresponding financial 

reporting and capital requirements. 

Therefore, the Commission is using the 

status quo or baseline for this proposal 

for the following types or categories of 

CSEs: 

(1) SDs That Are Bank Subsidiaries 

(a) Capital. Currently U.S. CSEs that 

are bank subsidiaries and are not a BD 

or an FCM are not subject to capital 

requirements; however, as part of a BHC 

or a subsidiary of a bank, the CSE’s 

parent entity must comply with the 

prudential regulators’ capital 

requirements. In addition, certain nonU.S. CSEs that are subsidiaries within a 

bank holding company and are not BDs 

or FCMs are currently complying with 

a foreign jurisdiction’s capital, liquidity 

and financial reporting requirements 

and these CSEs are covered below, in 

the Substituted Compliance section. 

(b) Liquidity. Although the U.S. CSE 

entities do not have liquidity or funding 

requirements, their BHC must comply 

with the Federal Reserve Board’s 

liquidity requirements.151

(c) Reporting. These SDs do have 

reporting requirements, but not for the 

information that is requested in this 

proposal; however, a BHC must report 

the requested information to the Federal 

Reserve Board, which includes certain 

swap and security-based swap positions 

held at its SD subsidiary. 

(2) SDs That Are BDs (Including, OTC 

Derivatives Dealers) (With and Without 

Models) 

(a) Capital. If a CSE is also registered 

as a BD with the SEC, the CSE is already 

meeting the SEC’s BD capital 

requirements. 

(b) The SEC currently imposes the net 

liquid assets capital approach on BDs. 

However, the SEC has modified certain 

parts of this approach to address certain 

types of BDs (i.e., ANC Firms and OTC 

derivatives dealers). As discussed 

below, an ANC Firm is currently using 

SEC-approved capital models to 

calculate certain market and credit risk 

charges. In addition, OTC derivatives 

dealers that are registered as BDs may 

use SEC-approved capital models 

provided that they maintain a minimum 

of $100 million in tentative net capital 

and at least $20 million in net capital. 

Certain non-U.S. SDs are already 

complying with capital, liquidity and 

reporting requirements in other 

jurisdictions. Therefore, the 

Commission will cover these SDs in the 

Substituted Compliance section. 

(c) Liquidity. These SDs do not have 

any existing regulatory liquidity 

requirements. 

(d) Reporting. As a BD, these SDs 

must comply with the SEC’s BD 

reporting requirements (the 

Commission’s proposed reporting 

requirements are based on the SEC 

reporting requirements). 

(3) SDs That Are FCMs and Not BDs 

(With and Without Models) 

(a) Capital. For CSEs that are also 

registered with the Commission as 

FCMs, the Commission is proposing a 

net liquid asset capital approach that is 

similar to the capital requirements of a 

registered BD. 

(b) Liquidity. These SDs do not have 

existing regulatory liquidity 

requirements. 

(c) Reporting. As an FCM, these SDs 

must comply with the Commission’s 

FCM reporting requirements (the 


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152The Commission estimates that there are 17 

SDs that may be eligible for substituted compliance 

under this proposal. 

153The Commission notes that under Section 

4s(e) of the CEA, these SDs must comply with the 

prudential regulators’ capital requirements, but 

must comply with the Commission’s reporting and 

recordkeeping requirements. 

Commission’s proposed reporting 

requirements are based on these). 

(4) SDs That Are BDs and/or FCMs 

(ANC Firms With Models and One 

Other SD) 

(a) Capital. For CSEs that are also 

registered as BDs/FCMs (using approved 

models), a significant percentage of 

these SDs are currently using the ANC 

capital approach, as discussed below. 

There is currently one other SD that is 

not an ANC Firm, but meets the 

requirements set out above for SD/BDs 

and SD/FCMs. 

(b) Liquidity. These SDs must comply 

with the SEC’s and the CFTC’s reporting 

requirements. 

(c) Reporting. As an ANC firm, these 

SDs must comply with the SEC’s and 

the CFTC’s ANC firm reporting 

requirements. 

(5) Stand-Alone SDs and Commercial 

SDs (With and Without Models) 

(a) Capital. Currently a CSE that is a 

stand-alone SD has no capital 

requirements; however, certain non-US 

Stand-alone SDs are complying with a 

foreign jurisdiction’s capital, liquidity 

and reporting requirements and 

therefore, will be included in the 

Substituted Compliance benchmark 

below. 

(b) Liquidity. These CSEs do not have 

existing liquidity requirements. 

(c) Reporting. As CSEs, these entities 

have reporting requirements, but not for 

the information requested in this 

proposal. 

(6) MSPs 

(a) Capital. Although there are no 

MSPs at this time, it is possible that an 

MSP in the future may have existing 

capital requirements. For example, if a 

bank is determined to be an MSP or an 

insurance company, these entities may 

have existing capital requirements. 

(b) Liquidity. These MSPs do not have 

existing regulatory liquidity 

requirements. 

(c) Reporting. As MSPs, these entities 

have reporting requirements, but not for 

the information requested in this 

proposal. 

(7) Substituted Compliance 152

(a) Capital. As discussed above, there 

are certain non-U.S. CSEs that comply 

with a foreign jurisdiction’s capital and 

financial reporting requirements. 

Commission staff understands that 

generally these foreign capital 

requirements are either a bank-based 

capital regime or a dealer-based regime, 

which, as the Commission has been 

informed by these foreign regulators, are 

similar to the net liquid assets capital 

approach. 

(b) Liquidity. The Commission is 

aware that there are certain liquidity 

requirements that some of these nonU.S. CSEs are currently complying with. 

The Commission understands that some 

of these non-U.S. CSEs or their parent 

entities are complying with a bankbased liquidity requirement. 

(c) Reporting. The Commission 

understands that some of these non-U.S. 

CSEs are currently complying with a 

foreign jurisdiction’s financial reporting 

requirements; however, these financial 

reporting requirements may not be the 

same as the Commission is requiring in 

this proposal. 

(8) Prudentially Regulated SDs 153

(a) Reporting. These SDs comply with 

their applicable prudential regulator’s 

reporting requirements. 

E. Overview of Approaches 

In developing the proposed capital 

approaches in this proposal, the 

Commission selected from wellestablished frameworks. As a result of 

the financial crisis and over the years 

after the crisis, each of the approaches 

has undergone significant analysis and 

changes. After conducting its analysis, 

BCBS and the prudential regulators 

acknowledged that capital alone was not 

enough to prevent certain financial 

entities from failing and, therefore, 

adopted requirements for banks and 

bank holding companies to meet 

defined liquidity requirements. As the 

financial crisis has shown, a firm can be 

adequately capitalized, but due to a lack 

of liquidity or funding in the firm, it 

may be unable to meet its current 

obligations. Accordingly, the 

Commission is proposing to include in 

its capital frameworks liquidity and 

funding requirements for SDs that are 

based upon the liquidity and funding 

requirements adopted by the prudential 

regulators and proposed by the SEC for 

SBSDs. As detailed above, the 

Commission is not including BCBS’s 

leverage ratio, as the Commission 

believes that this ratio is designed to 

cover a consolidated entity (i.e., the 

BHC), however, as noted above, the 

Commission may in the future include 

a similar leverage requirement. In 

addition, the Commission is not 

including a leverage ratio under the net 

liquid assets approach, but may 

consider leverage requirements in the 

future. 

Under the proposal, the Commission 

is providing certain CSEs with an option 

to choose between a bank-based capital 

approach (similar to the prudential 

regulators’ capital approach) and a net 

liquid assets capital approach (similar to 

the SEC’s and CFTC’s capital approach). 

As detailed below, the bank-based 

capital approach is designed to require 

an SD to have enough common equity 

tier 1 capital (as defined above) to 

absorb losses in a time of stress, while 

the net liquid assets method is designed 

to require an SD to hold at all times 

more than one dollar of highly liquid 

assets for each dollar of unsubordinated 

liabilities. 

The following table summarizes the 

Commission capital proposal followed 

by a summary of each approach: 

Approaches SD entities Equity type The greatest of the following: 

Bank-Based Capital ....................... Non-Bank Subsidiaries of BHC ....

Stand-Alone SDs. 

BDs (including, OTC Derivatives 

Dealers and ANC Firms). 

Common Tier 1 Equity ................. $20 million. 

8% of RWA (Basel Model or Regulation 1.17 table) plus current 

counterparty credit risk. 

8% of the total amount of a swap 

dealer’s margin. 

RFA. 


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154The SEC is proposing to increase the 

minimum capital requirements for ANC Firms to 

require the firms to maintain a minimum of $1 

billion of net capital and $5 billion of tentative net 

capital. Under the SEC proposal, ANC Firms also 

must file a regulatory notice (i.e., ‘‘early warning 

notice’’) with the SEC if its tentative net is below 

$6 billion. 

Approaches SD entities Equity type The greatest of the following: 

Net Liquid Assets Capital ..............

Regulation 1.17. 

Non-Bank Subsidiaries of BHC ....

FCMs (SDs). 

Stand-Alone SDs. 

Net Discounted Assets (Assets ¥ 

Liabilities = Net Capital, which 

is discounted (according to 

Regulation 1.17)).

$20 million or $100 million if approved to use capital models. 

8% of the total amount of a swap 

dealer’s margin. 

RFA. 

Net Liquid Assets Capital ..............

SEC Rule 15c3–1. 

BDs (SDs) .....................................

BDs (OTC Derivatives Dealers). 

Net Discounted Assets (Assets¥Liabilities = Net Capital, 

which is discounted (according 

to SEA 15c3–1 or VaR based 

models).

$20 million. 

8% of the total amount of a swap 

dealer’s margin. 

RFA. 

ANC ............................................... ANC Firms .................................... Net Discounted Assets (Assets¥Liabilities = Net Capital, 

which is discounted (VaR 

based model).

$5 billion tentative net capital (not 

discounted).154

$6 billion early warning net capital 

(not discounted). 

$1 billion Net Discounted Assets. 

RFA. 

Non-Financial Swap Dealers ......... Non-financial Entities (15% test) .. Equity ............................................ $20 million plus market and credit 

risk charges. 

8% of the total amount of a swap 

dealer’s margin. 

RFA. 

MSPs ............................................. MSP .............................................. Equity ............................................ ≥$1. 

RFA. 

1. Bank-Based Capital 

Under the bank-based capital 

approach a CSE would need to maintain 

common equity tier 1 capital equal to 

the greatest of the following: 

• $20 million; 

• Eight percent of the sum of the 

following: (i) The amount of its riskweighted-assets (‘‘RWA’’), which is the 

market risk capital charge under a VaR 

computation or a standardized formula 

table (Reg. 1.17); (ii) the amount of 

current counterparty credit risk 

(‘‘CCR’’), which is the sum of the default 

risk capital charge and a credit value 

adjustment (‘‘CVA’’) risk capital charge, 

which is under either a standardized 

formula table or a VaR method; 

• Eight percent of the total amount of 

a swap dealer’s uncleared swap margin, 

uncleared security-based swap margin 

and initial margin required for its 

cleared positions; or 

• The amount required by its RFA. 

As noted above, the Commission is 

proposing a $20 million fixed-dollar 

floor, as this is the minimum amount of 

required capital under all proposed 

approaches. The Commission is 

proposing this minimum level as it 

believes that this is the minimum 

amount of capital that should be 

required for a CSE, without regard to the 

volume of swaps the CSE engages in, to 

conduct its dealing activity. As noted 

above, this amount is based on the 

Commission’s experience with other 

registered entities that are currently 

subject to capital requirements. The 

Commission is also proposing, however, 

an eight percent of margin requirement, 

as through its experience in supervising 

FCMs, it recognizes that this capital 

computation is a determinative 

condition in computing their required 

capital and requires an SD to maintain 

a higher level of capital as the risks 

associated with its dealing activities 

increases, as measured by the initial 

margin requirements on the swaps 

positions. Moreover, under the net 

liquid assets approach, the Commission 

is including the same eight percent 

margin requirement. 

In calculating the eight percent of the 

total uncleared margin, the Commission 

is including all uncollateralized 

exposures from uncleared swaps (e.g., 

inter-affiliate swaps, swaps with 

commercial end users, and legacy 

swaps), as these are exposures where no 

initial margin is collected and, 

therefore, are part of the SD’s 

counterparty credit risk, which the 

Commission believes must be part of the 

SD’s required capital. The Commission 

believes that not requiring capital on 

these uncollateralized amounts would 

leave a significant gap in determining a 

level of capital that adequately reflects 

the overall risk of the SD and would not 

help to ensure that safety and soundness 

of the SD. 

In addition, the Commission is also 

requiring the inclusion of an SD’s 

required initial margin from clearing 

organizations for all its cleared 

positions. The Commission’s eight 

percent of margin requirement is 

intended to serve as a proxy for the level 

of risk associated with the SD’s swap 

activities and proprietary trading. The 

Commission believes it is appropriate to 

include the margin for both cleared and 

uncleared products in this calculation 

as it provides a measure of the potential 

risks posed by the cleared and 

uncleared positions. 

In addition, the Commission has 

proposed to include a standardized 

table for market risk that is currently not 

part of the BCBS or prudential regulator 

capital framework. The Commission 

included the standardized table in 

calculating an SD’s market risk charges 

to address SDs that do not use approved 

models in computing market risk 

charges. The Commission included the 

Regulation 1.17 standard market risk 

charges, as it believes these charges 

result in adequate capital computations 

for the level of market risk inherent in 

these financial instruments. In addition, 

the Commission is currently using these 

standardized charges in computing an 

FCM’s market risk charges on the same 

financial instruments for an FCM’s 

required capital. 

2. Net Liquid Assets 

Under this proposed approach, an SD 

would be required to maintain 

minimum net capital equal to or 

exceeding the greatest of: 

• $20 million; or 

• Eight percent of the total amount of 

a swap dealer’s uncleared swap margin, 


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155See proposed 17 CFR 240.15c3–1(a)(7) in 

Capital, Margin, and Segregation Requirements for 

Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements 

for Broker-Dealers; Proposed Rule, 77 FR 70214, at 

70228 (Nov. 23, 1012). 

156See Id. 

157See Id. 

uncleared security-based swap margin 

and initial margin required for its 

cleared positions. 

Net capital is generally defined as an 

SD’s current and liquid assets minus its 

liabilities (excluding certain qualifying 

subordinated debt), with the remainder 

discounted according to either a CFTCapproved VaR-based model or a 

standardized rules-based approach set 

out in Regulation 1.17. 

As noted and discussed above, under 

this approach, the Commission is 

proposing a $20 million fixed-dollar 

floor. In addition, the Commission is 

proposing, under this approach, a net 

liquid assets test that is designed to 

allow an SD to engage in activities that 

are part of its swaps business (e.g., 

holding risk inherent in swaps into its 

dealing inventory), but in a manner that 

places the SD in the position of holding 

at all times more than one dollar of 

highly liquid assets for each dollar of 

unsubordinated liabilities (e.g., money 

owed to customers, counterparties, and 

creditors). Further, the Commission is 

requiring a liquidity ratio and a funding 

plan under this approach. The 

Commission believes that the net liquid 

assets approach, although structurally 

different than the bank-based approach, 

helps to ensure the safety and 

soundness of the SD, while providing 

the same protections to the financial 

system. 

As discussed above and for the same 

reasons, the Commission is requiring an 

SD to include in its eight percent of the 

total uncleared margin calculation all 

uncollateralized exposures from 

uncleared swaps (e.g., inter-affiliate 

swaps, swaps with commercial end 

users, and legacy swaps) and with 

clearing organizations. 

3. Alternative Net Capital (‘‘ANC’’) 

Under the ANC approach, an SD 

would need to maintain its net capital 

in accordance with the following 

requirements: 

• $1 billion net capital; 155

• $5 billion tentative net capital; 156

and 

• $6 billion early warning net 

capital.157

Under the proposal, an SD that is 

registered with the SEC as a BD and is 

approved by the SEC to use internal 

models to compute certain market risk 

and credit risk capital charges (an ‘‘ANC 

Firm’’) will be able to continue to use 

the ANC approach in calculating its SD 

capital; however, with enhancements to 

the minimum capital requirements as 

proposed by the SEC. 

Under the proposal, an ANC Firm 

must maintain, at all times, tentative net 

capital, which is the net capital of an 

ANC Firm before deductions for market 

and credit risk, of $5 billion. In 

addition, an ANC Firm must maintain, 

at all times, early warning net capital, 

which is the net capital of an ANC Firm 

before deductions for market and credit 

risk, of $6 billion. Lastly, an ANC Firm 

must maintain, at all times, $1 billion of 

net capital, which is net discounted 

assets (discounted by VaR models for 

market and credit risk). 

In proposing to adopt this approach, 

but with some amendments to the 

requirements, the Commission 

recognizes that ANC Firms are dual 

registrants with the Commission and 

SEC that offer a wide-range of financial 

services and act as different types of 

intermediaries (e.g., BD, FCM, SD). As a 

result of the additional complexity and 

risk inherent in these entities, and the 

Commission’s experience with these 

ANC Firms, the Commission is 

proposing to increase their minimum 

capital requirements in this proposal 

consistent with the SEC. In addition, as 

with the other approaches, the 

Commission is proposing to require 

ANC Firms to meet liquidity and 

funding requirements consistent with 

the SEC. 

The Commission expects that SDs that 

are ANC Firms will elect to use this 

capital approach for its swaps 

transactions. The Commission believes 

that since this approach has been in 

effect for more than 10 years and it 

properly accounts for the inherent risk 

and complexity of these firms, including 

their swap dealing activities, that it is 

appropriate to propose to permit ANC 

Firms to continue using this approach, 

but with some enhancements based on 

the Commission’s experience. As 

discussed above, the Commission is 

proposing to increase the minimum 

capital requirements for ANC Firms in 

a manner consistent with the SEC’s 

proposed increases for ANC Firms. The 

Commission believes that the increases 

are appropriate to reflect the potential 

increase in swaps activities that ANC 

Firms may engage in, particularly if 

affiliates move their swaps activities 

into the ANC Firms to effectively use 

the capital held by the ANC Firms. 

4. Tangible Net Worth 

The Commission is proposing a 

tangible net worth approach for both 

SDs and MSPs. With respect to SDs, the 

proposal would require an SD to 

maintain minimum net capital equal to 

or in excess of the greater of: 

• $20 million plus market and credit 

risk charges; 

• 8 percent of the total amount of a 

swap dealer’s uncleared swap margin, 

uncleared security-based swap margin 

and initial margin required for its 

cleared positions; or 

• The amount required by its RFA. 

The term tangible net worth is 

proposed to be defined to mean an SD’s 

net worth as determined in accordance 

with generally accepted accounting 

principles in the United States, 

excluding goodwill and other intangible 

assets. 

As noted above, the Commission is 

proposing this approach as it recognizes 

that certain SD’s that are primarily 

engaged in non-financial activities may 

engage in a diverse range of business 

activities different from, and broader 

than, the dealing activities conducted by 

a financial entity. Under the proposal, 

an SD, availing itself of this approach, 

must meet the Commission’s 15% 

revenue test and 15% asset test as 

discussed in section II.A.2.iii of this 

proposal to demonstrate that entity is 

primarily engaged in non-financial 

activities. 

As discussed below, the Commission 

believes that the tangible net worth 

capital approach meets statutory 

mandate, as it is designed to help ensure 

the safety and soundness of the SD, 

while calibrated to the inherent risk of 

the uncleared swaps held by the SD and 

the overall activity of the SD. In 

addition, the Commission is not 

requiring these SDs to meet its liquidity 

and funding requirements. As discussed 

below, the Commission believes that the 

imposition of such requirements would 

result in an over-inclusive requirement, 

as it would include all non-financial 

funding requirements; likewise, if it 

narrowed the scope of the liquidity 

requirement to just swap dealing 

activity, the requirement would be 

under-inclusive as the required liquid 

assets would be comingled with the 

SD’s other liquid assets, which could be 

used for all the entity’s liabilities and 

not just for its swap dealing related 

liabilities. As the proposed tangible net 

worth capital approach would only be 

available to SDs that are primarily 

engaged in non-financial activities, the 

Commission believes that this approach 

has proper controls to ensure that it is 

not exploited by financial entities 

seeking a regulatory advantage. 

With respect to MSPs, the 

Commission is proposing to require an 

MSP to maintain net tangible net worth 

in the amount equal to or in excess of 


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Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 91291 

158The Commission acknowledges that some 

subsidiaries in a BHC may be an insurance 

company and, therefore, may have capital 

requirements set by its insurance regulator. Such 

entities are outside the scope of the Commission’s 

proposed rulemaking, as these entities are currently 

not registered with the CFTC as an SD or MSP. The 

Commission further acknowledges that there are 

some non-U.S. subsidiaries that are part of a bank 

and those subsidiaries and/or their parent may be 

subject to the capital regime of a foreign regulator. 

The Commission believes that in such a case, the 

capital regime that is likely to be applicable would 

be either the Basel III-based approach or a version 

of the net liquid assets approach. 

159See Regulatory Capital Rules: Regulatory 

Capital, Implementation of Basel III, Capital 

Adequacy, Transition Provisions, Prompt Corrective 

Action, Standardized Approach for Risk-weighted 

Assets, Market Discipline and Disclosure 

Requirements, Advanced Approaches Risk-Based 

Capital Rule, and Market Risk Capital Rule; Final 

Rule, 78 FR 62018 (Oct. 11, 2013). 

160The Commission notes that the bank or an 

insurance company in a BHC must maintain certain 

capital and as such, may not be able available to 

capitalize the CSE. 

the greater of the MSP’s positive net 

worth or the amount of capital required 

by an RFA of which the MSP is a 

member. There are currently no MSPs 

and the only previously registered MSP 

were required to register as a result of 

their legacy swaps and not any current 

swap activity. The Commission believes 

that the proposed capital requirements 

for MSPs are appropriate given that no 

entities are currently registered and the 

Commission is uncertain of the types of 

entities that may register in the future. 

As noted above, the Commission has 

taken this uncertainty into 

consideration by proposing to allow an 

RFA to establish an MSP’s minimum 

capital requirements. Such RFA’s are 

required under section 17 of the CEA to 

establish capital requirements for all 

members that are subject to a 

Commission minimum capital 

requirement. Accordingly, RFAs may 

adjust their rules going forward 

depending on the nature of any entities 

that may seek to register as MSPs, and 

adopt minimum capital requirements as 

appropriate. Such RFA rules must be 

submitted to the Commission for review 

prior to the rules becoming effective. 

5. Substituted Compliance 

As described above, the Commission 

is providing certain non-U.S. CSEs with 

the ability to petition the Commission 

for approval to comply with comparable 

foreign capital and financial reporting 

requirements in lieu of some or all of 

the Commission’s requirements. In 

proposing this approach, the 

Commission recognizes that this may 

provide these CSEs with cost advantages 

by avoiding the costs of potentially 

duplicative or conflicting regulation. 

In limiting the scope of substituted 

compliance, the Commission does not 

believe it should make available 

substituted compliance to all CSEs. The 

Commission is proposing substituted 

compliance only to non-U.S. CSEs, as it 

believes that it is necessary that its 

capital requirements apply to U.S. CSEs, 

as they are integral to the U.S. swaps 

market and critical in ensuring the 

stability of the U.S. financial system. 

Additionally, the Commission 

recognizes that substituted compliance, 

to the extent that it puts conditions on 

its comparability determination, may 

result in additional costs to these CSEs; 

however, the Commission believes that 

providing a substituted compliance 

regime that allows for conditions 

instead of an all-or-nothing approach 

will benefit these CSEs and provide for 

a more competitive swaps market. 

Moreover, to the extent that a non-U.S. 

CSE must comply with a foreign regime 

and the Commission does not find that 

regime comparable, the Commission 

recognizes that these non-U.S. CSE may 

be burdened with additional costs and 

subject to conflicting and/or duplicative 

costs. 

F. Entities 

The following section discusses the 

related incremental costs and benefits of 

the proposal’s capital approaches and 

reporting requirements on each type or 

category of SDs and MSPs. The 

Commission understands that certain 

SDs and MSP organized and domiciled 

outside of the U.S. would be included 

in these types or categories of entities. 

These non-U.S. SDs and MSPs are 

discussed in the Substituted 

Compliance section below. 

1. Bank Subsidiaries 

All U.S. CSEs that are subsidiaries in 

a BHC and are not a BD or FCM 

currently are not subject to capital 

requirements; 158 however, their parent 

BHC currently complies with the 

Federal Reserve’s capital requirements. 

Under the Federal Reserve Board’s 

capital requirements, which are based 

on Basel III requirements, a BHC must 

maintain adequate capital for the entire 

consolidated entity.159 That is, all the 

assets and liabilities of the BHC’s 

consolidated subsidiaries are 

consolidated into the holding company. 

The Federal Reserve Board’s capital 

requirements are then imposed on the 

BHC, requiring the BHC to maintain 

capital levels according to those 

requirements. 

As these CSEs are not currently 

required to be capitalized, the 

Commission understands that this may 

add incremental cost to the consolidated 

entity and/or the CSE as it will have to 

retain earnings or further capitalize the 

CSE to the required capital levels. 

However, the Commission recognizes 

that a consolidated entity may capitalize 

one of its subsidiaries in many different 

ways, including retaining earnings from 

the CSE or from within the consolidated 

group. Even with this proposed 

requirement imposing capital on the 

subsidiaries, as noted above, the BHC 

must maintain capital levels in 

accordance with the Federal Reserve 

Board’s capital requirements, which are 

calculated on a consolidated basis; 

therefore, incremental costs may be 

mitigated, as it may be possible for the 

consolidated entity to keep the same 

level of capital within the BHC, but 

reallocated among its subsidiaries.160 In 

addition, the Commission recognizes 

that earnings may now have to be 

retained in the CSE and may no longer 

be available to be reallocated to fund 

other more profitable activities within 

the consolidated group or to be returned 

to shareholders; however, the 

Commission believes that by providing 

these CSEs with the option of differing 

capital approaches, these CSEs will 

select the capital approach most optimal 

for its operations, financial structure 

and which will reduce duplicative or 

conflicting rules and the administrative 

costs of calculating and maintaining 

additional sets of books and records. 

The Commission believes that 

although the proposed capital 

approaches maybe structurally different, 

they require a CSE to maintain adequate 

capital levels for its activities, which 

should help ensure the safety and 

soundness of the CSE and the stability 

of the U.S. financial system. 

In requiring capital for a bank 

subsidiary that is an SD, as discussed 

above, the SD may incur additional 

costs. As a result of the additional costs, 

some SDs may be put at a competitive 

disadvantage, when compared to those 

dealers with lesser capital requirements 

or with no capital requirements. As a 

result of this additional cost, some swap 

dealing activity may become too 

costly—becoming a low margin 

activity—and, therefore, some SDs may 

limit their dealing activity or exit the 

swaps market. Additional costs may 

also be passed on to customers in the 

form of higher prices; however, if these 

SDs are to remain competitive in the 

swaps market, they must compete with 

competitors by matching or beating 

prices. In addition, as most of the largest 

swap dealers are part of a BHC, these 

SDs are already incurring capital 

charges at the consolidated level, and, 

therefore, the incremental cost and the 

effect on competition and pricing of 


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swaps may be mitigated. Because these 

SDs have the option to select the most 

optimal capital approach for them, they 

can control some of the burdens placed 

on them by the proposal and thereby, 

mitigate the proposal’s effect on pricing. 

2. SD/BD (Without Models) 

Under the proposal, an SD that is also 

a BD that does not use SEC/CFTCapproved models to calculate its market 

and credit risk charges has the option to 

use either the bank-based approach or 

the net liquid assets approach, but with 

a standardized capital charges for 

market risk and credit risk. The 

Commission recognizes that although it 

is giving an option to these SDs to 

comply with either approach, these SDs 

must still meet the SEC’s BD capital 

requirement. 

The standardized capital charges 

impose significant capital requirements 

for uncleared swaps primarily in the 

form of rules-based market risk charges 

and credit risk charges. Therefore, these 

firms currently engage in limited swaps 

activity in the BD, and the Commission 

does not anticipate that SD/BDs 

engaging in significant swaps activity in 

the future absent SEC rule amendments. 

3. SD/BD/OTC Derivatives Dealers 

(Without Models) 

Under the proposal, an SD that is 

registered with the SEC as an OTC 

derivatives dealer will have the option 

to comply with either the bank-based 

capital approach or the net liquid assets 

capital approach. As OTC derivatives 

dealers, these SDs already comply with 

the SEC’s net liquid assets capital 

requirements. OTC derivative dealers 

also may be approved by the SEC to use 

internal models to calculate market and 

credit risk charges in lieu of 

standardized, rules and table-based 

capital charges for swaps, security-based 

swaps and other financial instruments. 

The Commission believes that since 

SDs that are registered OTC derivatives 

dealers are already complying with the 

SEC’s net liquid assets approach, they 

will select this approach in meeting 

with the Commission SD’s proposed 

capital requirements. The Commission 

believes that allowing these entities to 

continue using current capital 

requirements will reduce the possibility 

of duplicative or conflicting rules and 

administrative costs of calculating and 

maintaining additional sets of books and 

records. The Commission believes that 

its proposal will result in only a small 

incremental cost to OTC derivative 

dealers. 

The Commission recognizes that OTC 

derivatives dealers already have SECapproved models in computing their 

current capital requirements and, 

therefore, will not incur any additional 

costs in developing and implementing 

this model-based approach in 

computing capital charges. 

4. SD/FCM (Without Models) 

Under the proposal, an SD that is also 

registered with the Commission as an 

FCM that does not use Var models to 

calculate market and credit risk charges, 

must compute its capital in accordance 

with the rules-based approach set forth 

in Regulation 1.17. In the proposal, the 

Commission is amending certain 

provisions of Regulation 1.17 to reduce 

the burden on an FCM engaging in 

swaps. The amendments align the FCM 

capital requirements with that of new 

net liquid assets capital approach set 

out in proposed Regulation 23.101. In 

amending the requirements, the 

Commission believes that it is reducing 

the burden placed on SDs/FCMs, as the 

amount of capital on uncleared swaps 

would have been significantly higher 

under the current requirements and 

would have placed SD/FCMs at a 

competitive disadvantage. Specifically, 

Regulation 1.17 currently does not allow 

an FCM to recognize collateral held at 

a third-party custodian as capital. 

Therefore, under Regulation 1.17 an SD/ 

FCM would have to take a 100 percent 

capital charge for margin posted with 

third-party custodians even though the 

Commission’s uncleared margin rules 

require initial margin to be held at a 

third-party custodian. This is true even 

though the custodian has no ability to 

rehypothecate the initial margin and the 

SD has the ability to retrieve the initial 

margin back from the custodian with no 

encumbrance. Therefore, the 

Commission believes that its proposed 

amendments to Regulation 1.17 to allow 

an SD/FCM to recognize margin posted 

with third-party custodians in 

accordance with the Commission’s 

margin rules will make it easier for an 

SD/FCM to meet its minimum level of 

required capital while also requiring an 

SD/FCM to maintain adequate capital 

levels, when considering the amount of 

initial margin that the SD has at its 

disposal in the event of a counterparty 

default. 

As a result of the proposal’s 

amendments, these SD/FCMs should 

benefit from lower capital charges and 

should allow these SD/FCMs to 

continue to comply with one capital 

rule, which should mitigate some of the 

administrative costs and reduce the 

possibility of duplicative or conflicting 

rules. The Commission is not providing 

these SDs with an option to use the 

bank-based capital approach, as the 

Commission believes that this option is 

unnecessary and costly, and the current 

FCM capital approach reflects that the 

firm acts as an intermediary for 

customers on futures markets. The 

Commission has made amendments to 

account for SD/FCMs’ swap activities 

and in allowing these FCMs to change 

their current capital method, the 

Commission believes that this would 

add an additional layer of complexity 

and costs to the FCMs, as the FCMs 

would have to change, modify or 

migrate all of their current systems to a 

new capital regime. In addition, the 

Commission believes that requiring the 

same capital regime, with beneficial 

amendments, is more appropriate in 

transitioning the Commission’s capital 

requirements to these entities, as it 

should result in fewer burdens and a 

simple transition in implementing the 

Commission’s proposed capital 

requirements. In addition, the 

Commission believes that this would 

simplify the Commission’s ability to 

supervise these entities, as the 

Commission will be able to seamlessly 

transition from its current capital regime 

to these new requirements; however, the 

Commission recognizes that by not 

providing these SDs with the option to 

use the bank-based capital approach it 

may be foreclosing the ability of these 

SDs to use a capital approach that may 

be more cost effective than the one 

proposed. 

As a result of this proposal, the 

Commission recognizes that by 

amending Regulation 1.17 capital 

charges it is reducing the burden 

currently placed on SD/FCMs’ swaps 

activities, which may result in greater 

liquidity in the swaps market, as this 

activity will be less costly and may 

incentivize these entities to engage in 

more swap dealing activity. 

As a result of the amendments to 

Regulation 1.17, these SD/FCMs may be 

able to realize some of the cost saving 

of the amendments when competing 

with other dealers for counterparties. 

This cost savings may also result in 

more efficient pricing for their 

counterparties. However, the 

Commission notes, as stated above, that 

as a result of the Commission’s margin 

requirements for uncleared swaps these 

benefits may be limited. 

5. ANC Firms (SD/BDs and/or FCMs 

That Use Models) 

Under the proposal, an SD that is an 

ANC Firm (i.e., also a BD and/or FCM, 

with approval by the SEC/CFTC to use 

models in computing market risk and 

credit risk charges), will incur minimal 

additional capital charges, as a result of 

this proposal. The Commission is 

retaining this approach for these firms, 


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161Under GAAP, tangible net equity is 

determined by subtracting a firm’s liabilities from 

its tangible assets. 

but with an increase in the capital 

thresholds, as noted above. The 

Commission is proposing these 

amendments based on market 

experience in supervising ANC Firms, 

and in recognition that the proposal is 

consistent with the SEC’s proposed 

capital increases for ANC Firms. The 

Commission notes that the current ANC 

Firms are already maintaining more 

than the amended thresholds; however, 

by increasing these capital requirements 

the Commission recognizes that this 

may have an additional cost, as ANC 

Firms will now be required to maintain 

these capital levels, as under the current 

capital thresholds, these were held at 

their discretion. 

The Commission recognizes that ANC 

firms already have SEC-approved 

models in computing their current 

capital requirements and, therefore, they 

will not incur any additional costs in 

developing and implementing this 

model-based approach in computing 

capital charges. 

6. Stand-Alone SD (With and Without 

Models) 

Under the proposal, a stand-alone SD 

is provided with an option to comply 

with either the bank-based capital 

approach or the net liquid assets capital 

approach. In providing this option, the 

Commission, as discussed above, 

believes that both options provide 

adequate capital requirements and 

account for the financial activities of an 

SD. Therefore, under the proposal, the 

Commission believes that these SDs will 

benefit, as these SDs will have the 

ability to select the most optimal 

approach, based on their organizational 

and operational structure and the 

composition of their assets. In addition, 

this option will also reduce the 

possibility of duplicative or conflicting 

rules and administrative costs of 

calculating and maintaining additional 

sets of books and records. 

Under the proposal, a stand-alone SD 

that does not use models must compute 

their market risk and credit risk charges 

in accordance with rules-based 

requirements and a standardized table. 

The Commission recognizes that under 

the bank-based capital approach, market 

risk charges are calculated with a 

prudential regulator’s approved model; 

however, to allow stand-alone SDs to 

use the bank-based capital approach 

without a model, the Commission is 

proposing to incorporate Regulation 

1.17 market risk charges into the 

framework. In providing this alternative, 

the Commission is providing an option 

to those stand-alone SDs that do not 

have Commission-approved models. In 

doing so, the Commission is providing 

these SDs with a benefit, as they are still 

able to choose the most efficient capital 

approach. The Commission 

incorporated Regulation 1.17 market 

risk charges, with proposed 

amendments, as it believes that this is 

a well-established method that properly 

accounts for market risk charges. 

However, the Commission recognizes 

that many of these entities are not 

currently subject to minimum capital 

requirements, and as such, will incur 

additional costs on all of their financial 

activities, including their swap 

activities, which may result in possible 

increases in costs and pricing. In 

addition, a stand-alone SD selecting to 

use models in computing its market and 

credit risk charges may incur additional 

costs in developing and implementing 

these models. 

As a result of this proposal, the 

Commission recognizes that by 

requiring capital for SDs this may put 

these SDs at a competitive disadvantage, 

when compared to those entities with a 

lesser capital requirement or with no 

capital requirements. As a result of this 

additional cost, some swap activities 

may become too costly and, therefore, 

some SDs may limit their activity or exit 

the swaps market. This additional cost 

may in turn be passed on to customers 

in the form of higher prices; however, if 

these SDs are to remain competitive in 

the swaps market, they must compete by 

matching or beating prices of their 

competitors. If an SD decides to limit its 

activity or withdraw from the swaps 

market, this may result in a reduced 

level of liquidity in the swaps market. 

In requiring minimum capital 

requirements, the Commission believes 

that it is complying with its statutory 

mandate, as these standards are 

calibrated to the level of risk in an SD 

and are designed to help ensure safety 

and soundness of the SD and the 

stability of the U.S. financial system. In 

addition, the Commission’s proposal is 

modeled after two well-established 

capital regimes, which should help 

ensure safety and soundness of the SD 

and competition among all registered 

SDs. 

7. Non-Financial SD (With and Without 

Models) 

Under the proposal, an SD that is 

predominantly engaged in non-financial 

activities, as defined in proposed 

Regulation 23.100 (85% non-financial 

threshold), may use the tangible net 

worth capital approach. This approach 

is designed after GAAP’s tangible net 

worth computation and excludes 

intangibles and goodwill.161 The 

Commission is also requiring that the 

non-financial SD include in its capital 

requirement its market risk and credit 

risk charges. 

The Commission believes that this 

approach, which is tailored to nonfinancial entities that are SDs, provides 

these entities with the flexibility to meet 

an appropriate capital requirement, 

without requiring the firms to engage in 

costly restructuring of their operations 

and business. The Commission 

recognizes that these SDs deal in swaps, 

but the Commission also recognizes that 

these entities are primarily engaged in 

commercial activities and counteract 

with primarily with commercial clients. 

BCBS, the Commission and the SEC did 

not fully consider this type of business 

model when developing the bank-based 

capital approach and the net liquid 

assets capital approach set out in this 

proposal. In allowing these entities to 

maintain their current structure, the 

Commission believes that its proposed 

approach will allow for less disruption 

to these SDs and in the markets, as these 

SDs may serve smaller clients that 

would not otherwise be able to 

participate in the swaps market without 

these SDs. However, the Commission, in 

helping to ensure the safety and 

soundness of these SDs, is requiring that 

these entities maintain a level of 

tangible net worth equal to or greater 

than the greatest of (i) $20 million plus 

the SD’s market and credit risk charges, 

(ii) eight percent of its margin amount 

(i.e., eight percent of all of the SD’s 

uncleared swap margin, uncleared 

security-based swap margin and initial 

margin required for its cleared 

positions), or (iii) the amount of capital 

required by an RFA, as this would 

account for the SD’s exposure (market 

and credit risk) to the swaps markets, 

without penalizes the SD’s commercial 

activities. 

In developing this approach, the 

Commission also recognizes that the 

commercial activities of a commercial 

SD could affect the overall financial 

health of the SD. That is, in the event 

of a substantial loss emanating from its 

commercial activities, this loss may 

have a substantial negative affect on the 

SD, which may find itself in financial 

distress. As the Commission is not 

accounting for the risk in the 

commercial activities, it is possible that 

the amount and type of capital that a 

commercial SD is required to maintain 

may not be adequate to prevent the 

failure of the SD, which then will affect 


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162See e.g., 17 CFR 39.6. 

all of its swap counterparties. However, 

in tailoring this method to these 

commercial SDs, the Commission is 

taking a position that is consistent with 

the Commission’s prior positions on 

commercial entities, as it believes these 

commercial entities and their 

corresponding activities are less risky 

than a financial entity.162 In addition, 

and as discussed above, an RFA will 

have the ability to assess capital levels 

at all SDs and may adopt rules to 

impose capital requirements that are 

more stringent than the Commission’s 

capital requirements on SDs as their 

experience with these firms develops. 

The Commission recognizes that these 

entities are not currently subject to 

minimum capital requirements, and as 

such, will incur additional costs on all 

of their swap activities, which may 

result in possible increases in pricing; 

however, as the Commission has 

developed its capital requirements to 

better target these commercial SDs, it 

believes that the additional cost should 

be mitigated by this approach. 

In addition, as the Commission 

expects that these SDs will use models 

in computing its market and credit risk 

charges, this may also result in 

additional costs in developing and 

implementing these models; however, 

this cost should be mitigated by the 

savings that may be realized by using 

such models. 

8. MSP 

Under the proposal, an MSP must 

maintain capital (i.e., tangible net 

worth) of the greater of positive tangible 

net worth or the amount of capital 

required by a registered futures 

association of which the MSP is a 

member. This approach is designed after 

GAAP’s tangible net worth computation 

and excludes intangible assets and 

goodwill. Currently there are no MSPs. 

The Commission cannot determine if 

other entities will register in the future 

as MSPs, however, the Commission is 

required to propose a capital 

requirement to address potential future 

registrants. 

In proposing the tangible net worth 

approach for MSPs, the Commission is 

allowing these entities to continue their 

operations if they become registered as 

MSPs with little to no changes to the 

entities’ structures. In providing for this, 

the Commission believes that these 

entities if they become registered as 

MSPs will incur minimal additional 

costs to comply with the proposed 

requirements. 

The Commission believes that the 

proposed capital requirements will help 

ensure the safety and soundness of 

MSPs, as these entities will typically be 

posting and collect margin on all of 

their new uncleared swaps and, 

therefore, as these MSPs are registered 

only as a result of being an end-user of 

swaps and not a swap dealer, the margin 

requirements are better tailored to cover 

that same risk, which is on a $1 for $1 

basis, than through its capital 

requirements. Therefore, the 

Commission is only proposing to 

require MSPs to be solvent, while 

nothing that the entity may be subject to 

other capital requirements and hence 

required to comply with those capital 

requirements. 

As the Commission’s capital 

requirements will result in minimal 

additional costs to these MSPs, there 

should be little to no effect on 

competition, as they are end-users (i.e., 

price takers) and little to no incremental 

effect on pricing. 

9. Substituted Compliance 

Under the proposal, a non-U.S. CSE 

that is already complying with a 

comparable foreign jurisdiction’s capital 

or financial reporting regime is provided 

with the ability to meet the 

Commission’s capital requirements by 

meeting the foreign jurisdiction’s capital 

requirements. In providing these CSEs 

with the ability to continue to comply 

with their current capital and financial 

reporting regimes the Commission 

believes that it is limiting the potential 

for conflicting and duplicate capital 

requirements. In addition, as each 

foreign jurisdiction must be determined 

to be comparable, the possible negative 

effect on the U.S. financial system is 

mitigated. 

The Commission further recognizes 

that non-U.S. CSEs that use conditional 

substituted compliance may incur 

additional costs; however, the 

Commission believes that conditional 

substituted compliance provides an 

offsetting benefit to these CSEs as it 

allows for a conditional substituted 

compliance determination instead of an 

all-or-nothing approach, which may 

result in the Commission not 

recognizing a foreign jurisdictions 

capital requirements, resulting in 

additional cost, including possible 

conflicting and/or duplicative 

requirements. 

G. Liquidity and Funding Requirements 

Under the proposal, the Commission 

is requiring that SDs, excluding SDs that 

are predominantly engaged in nonfinancial activities, be required to 

comply with a liquidity requirement 

and to adopt a funding plan. Depending 

on the capital approach that the SD is 

complying with, the SD must comply 

with the corresponding liquidity 

requirement. Any SD that complies with 

the bank-based capital approach must 

comply with liquidity coverage ratio 

(‘‘bank-based liquidity’’). Alternatively, 

any SD that complies with the net liquid 

assets capital approach must comply 

with the liquidity stress test 

requirement (‘‘liquidity stress test’’). 

As discussed above, in recognizing 

the limitations that were highlighted by 

the financial crisis and acknowledged 

by BCBS, the Commission is adopting a 

liquidity requirement to enhance 

protection provided by its capital 

requirements. During the financial 

crisis, it was evident that although many 

firms had adequate capital levels they 

did not have enough liquidity or 

funding sources to cover their current 

obligations, which resulted in firms 

being adequately capitalized under the 

applicable regulations, but nonetheless 

in default on their obligations. 

Therefore, the Commission believes that 

in proposing this requirement it is 

enhancing the safety and soundness of 

SDs and thereby, helping to ensure 

stability of the U.S. financial system. 

The Commission selected these two 

approaches from the prudential 

regulators’ liquidity model and the 

SEC’s proposed capital requirements, 

which contains a liquidity requirement. 

Each approach is designed to ensure 

that an SD has enough liquid assets over 

a stressed 30-day period to meet its 

obligations, over that same period. As 

the bank-based liquidity ratio is 

required under the prudential 

regulators’ capital rules, the 

Commission believes that it would be 

consistent in tying these two 

requirements, as it was developed to 

complement its corresponding capital 

requirements. Alternatively, the 

Commission is requiring the liquidity 

stress test approach for those SDs that 

comply with the net liquid assets capital 

approach, as the Commission believes 

these two approaches complement each 

other, as these both focus on net liquid 

assets of a SD. The Commission believes 

that matching these two requirements 

will benefit SDs, as they will not have 

to comply with possible duplicative 

and/or conflicting requirements. 

The Commission is also requiring 

these SDs to maintain a funding plan. 

The Commission believes that these 

costs are marginal and are accounted for 

in the proposal’s PRA. As discussed 

above in regard to the proposal’s 

liquidity requirements and for the same 

reasons, under the proposal the 

Commission is requiring a funding plan, 

as it believes that this requirement is 

necessary to further enhance the 


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163The Commission notes that Section 23A and 

23B may constrain the ability of moving liquidity 

in a BHC. In addition, if an entity must current 

comply with liquidity provisions, this may also 

limit the ability to move liquidity among 

consolidated entities. 

Commission’s capital requirements and 

to help ensure the safety and soundness 

of the CSEs. 

As noted above, SDs are not required 

by the Commission to comply with any 

liquidity or funding requirements. In 

requiring these SDs to comply with its 

liquidity requirements, the Commission 

recognizes that these SDs may have to 

hold more liquid assets; however, the 

Commission believes that this 

requirement increases the possibility 

that an SD will be able to withstand 

another financial crisis. As the 

Commission is mandated to set capital 

requirements to help ensure the safety 

and soundness of the SD, and in 

learning from the events of the financial 

crisis, the Commission believes that this 

requirement is necessary to ensure the 

viability of SDs. In addition, non-bank 

subsidiaries of a BHC, although not 

required to retain a certain level of 

liquid assets, are constrained on the 

amount of illiquid assets that they can 

hold on their balance sheet indirectly, 

as their BHC parent must meet the 

Federal Reserve’s liquidity 

requirements. This will mitigate some of 

the costs incurred by certain SDs that 

select the bank-based capital 

requirements. Moreover, the 

Commission recognizes that these costs 

will also be mitigated to some degree, as 

liquidity can be moved around an 

organization, provided there are no legal 

restrictions or constraints.163

The Commission believes that to the 

extent that all of its financial SDs must 

comply with one of the two liquidity 

requirements, the competitive effects 

should be mitigated. In addition, as a 

result of a liquidity requirement being 

an internationally accepted requirement 

under BCBS, this should mitigate some 

of the competitive advantages that nonCFTC registered dealers may have over 

financial SDs. In addition, to the extent 

that SDs maintain liquid assets to cover 

their initial margin requirements and 

variation margin requirements (under 

the Commission’s variation margin 

requirements, swaps between two CSEs 

require the exchange of cash or U.S. 

treasuries), this may also mitigate the 

cost of this proposed liquidity 

requirement. 

In proposing a liquidity requirement, 

the Commission understands that this 

may have a negative effect on liquidity 

of the swaps market. This proposed 

requirement will require financial SDs 

to hold more liquid assets than prior to 

this proposal. Therefore, this may cause 

some of these financial SDs, to limit or 

withdraw from swap dealing activity, as 

the proposal may make swaps activity 

more costly, which may result in a 

reduction in market liquidity. 

Under the proposal, the Commission 

is not requiring Commercial SDs to 

comply with its proposed liquidity and 

funding requirements. The Commission 

believes that if it were to impose 

liquidity and funding requirements on 

Commercial SDs it would result in an 

over-inclusive requirement, as it would 

include all non-financial liquidity and 

funding requirements. Alternatively, if 

the Commission narrowed the scope of 

the liquidity and funding requirements 

to just swap dealing activity, the 

Commission believes that it would be 

under-inclusive, as the required liquid 

assets will be comingled with the SD’s 

other liquid assets, which could be used 

for all the entity’s liabilities and not just 

for its swap dealing related liabilities. In 

addition, the Commission understands 

that if the Commercial SD defaults on 

any obligation, including commercial, 

this may have a negative impact on the 

entity’s SD. With these two conflicting 

views, the Commission believes it is not 

appropriate at this time to propose 

liquidity or funding requirements on 

Commercial SDs. 

As noted in the section F.9., the 

Commission is providing substituted 

compliance to certain non-U.S. CSEs. As 

discussed above and for the same 

reasons, the Commission believes that, 

in regards to its liquidity and funding 

requirements, providing substitute 

compliance to these non-U.S. CSEs 

should reduce the possibility of 

additional costs and duplicative or 

conflicting requirements. 

H. Reporting and Recordkeeping 

Requirements 

The recordkeeping, reporting and 

notification requirements set out in this 

proposal are intended to facilitate 

effective oversight and improve internal 

risk management, via requiring robust 

internal procedures for creating and 

retaining records central to the conduct 

of business as an SD or MSP. Requiring 

registered SDs and MSPs to comply 

with recordkeeping and reporting rules 

should help ensure more effective 

regulatory oversight. The proposal 

would help the Commission determine 

whether an SD or MSP is operating in 

compliance with the Commission’s 

capital requirements and allow the 

Commission to assess the risks and 

exposures that these entities are 

managing. 

As detailed above in Section II.C of 

this proposal, the Commission is 

requiring all SDs to file certain financial 

information pertaining to their capital 

requirements. Those SDs that are 

prudentially regulated are provided 

with the option to submit their financial 

information that is reported to their 

prudential regulator to the Commission. 

In addition, those SDs that are also 

FCMs may file their financial 

information pertaining to their capital 

requirements under this proposal with 

the Commission, including notices, in 

the same manner as they currently 

report. For those SDs that are also 

registered with the SEC as a BD or a 

SBSD, these SDs may file the same 

financial information to the 

Commission, as they file with the SEC. 

In filing the proposed required financial 

information with the Commission, these 

entities must file through the 

Winjammer electronic filing system. 

Alternatively, these same SDs have the 

option to report their financial 

information like stand-alone SDs, 

commercial SDs and MSPs report their 

financial information to the 

Commission. The Commission is 

providing this option, as the 

information reported to the Commission 

under this proposal and that is filed 

with the Commission or other financial 

regulatory agencies are similar, as the 

information provides the Commission 

with the ability to assess and monitor an 

SD’s financial condition and whether 

the SD is currently meeting the 

Commission’s capital requirements. In 

permitting these SDs to use their current 

required information, the Commission 

believes that this should mitigate some 

additional costs to prepare and report 

this information to the Commission. In 

addition, these SDs should already have 

developed policies, procedures and 

systems to aggregate, monitor, and track 

their swap dealing activities and risks. 

As such, this should also mitigate some 

of the costs incurred under the proposal. 

Under the proposal, those SDs and 

MSPs that are not subject to current 

capital requirements will have to 

develop and establish policies, 

procedures and systems to monitor, 

track, calculate and report the required 

information. In developing these 

policies, procedures and systems, these 

SDs will incur costs; however, as these 

entities are registered with the 

Commission as SDs, the Commission 

believes that they should already have 

developed policies, procedures and 

systems to aggregate, monitor, and track 

their swap activities and risks, as is 

required under the Commission’s swap 

dealer framework. This should mitigate 

some of the burdens of the proposed 

reporting and recordkeeping 


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requirements. In addition, as the 

information that the Commission is 

proposing to require is based on GAAP 

or another accounting method, this 

information is already being prepared 

for other purposes and therefore, should 

again mitigate the costs in meeting these 

proposed requirements. 

The Commission also believes that as 

a result of the proposed reporting and 

recordkeeping requirements, SDs should 

be able to more effectively track their 

trading and risk exposure in swaps and 

other financial activities. To the extent 

that these SDs can better monitor and 

track their risks, this should help them 

better manage risk. 

As noted in the section F.9., the 

Commission is providing substituted 

compliance to certain non-U.S. CSEs. As 

discussed above and for the same 

reasons, the Commission believes that, 

in regards its reporting requirements, 

providing substitute compliance to 

these non-U.S. CSEs it should reduce 

the possibility of additional costs and 

duplicative or conflicting requirements 

I. Section 15(a) Factors 

The following is a discussion of the 

cost and benefit considerations of the 

proposal, as it relates to the 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. 

1. Protection of Market Participants and 

the Public 

The proposed rules are intended to 

strengthen the swaps market by 

requiring all CSEs to maintain a 

minimum level of capital and liquidity. 

These minimum capital requirements 

should enhance the loss absorbing 

capacity of CSEs and reduce the 

probability of financial contagion in the 

event of a counterparty default or a 

financial crisis. In addition, capital 

functions as a risk management tool by 

limiting the amount of leverage that a 

CSE can incur. Moreover, the proposal’s 

liquidity and funding requirements 

should provide CSEs with the ability, in 

times of financial stress, to meet their 

current and other obligations as they 

come due, which should lower the 

probability of a CSE defaulting. This 

should help mitigate the overall risk in 

the financial system and ultimately 

reduce systemic risk. Financial 

reporting requirements for CSEs set out 

in this proposal should help the 

Commission and investors monitor and 

assess the financial condition of these 

CSEs. As this proposal is designed to 

protect financial entities from default, 

this should have a direct benefit to the 

public, as the failure of these CSEs 

could result in a financial contagion, 

which could negatively impact the 

general public. On the other hand, the 

proposed capital rules may require 

additional capital to be raised and may 

increase the cost of swaps, as described 

above. 

Request for Comment 

Do proposed capital, liquidity, and 

financial reporting requirements 

properly protect market participants and 

the public? Please explain. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Swaps Markets 

In this proposal, the Commission 

sought to promote efficiency and 

financial integrity of the swaps market, 

and where possible, mitigate undue 

competitive disparities. Most notably, 

the Commission aligned the proposed 

regulations with that of the prudential 

regulators’, SEC’s and the Commission’s 

current capital frameworks to the 

greatest extent possible. Doing so should 

promote greater operational efficiencies 

for those SDs that are part of a BHC or 

are also registered with the SEC as a BD 

or the Commission as an FCM, as they 

may be able to avoid creating 

duplicative compliance and operational 

infrastructures and instead, rely on the 

infrastructure supporting the other 

registered entities. In addition, this 

approach should also enhance 

efficiency and limit conflicting rules, as 

these entities can continue to operate 

under their current regimes. Moreover, 

the proposal permits CSEs to calculate 

credit and market risk charges under a 

standardized or model-based approach, 

which allows them to choose the 

methodology that is the most suitable 

for their asset composition. 

The Commission notes that the 

proposed capital rule, like other 

requirements under the Dodd-Frank 

Act, could have a substantial impact on 

competition in the swaps market. As the 

Commission’s proposal will result in 

additional costs to certain CSEs that do 

not have current capital requirements, 

these CSEs may either limit their swap 

activities or withdraw from the swaps 

market. In this event, it is possible that 

this may result in less competition and 

increases in prices of swaps. Depending 

on the relative cost of the Commission’s 

capital and liquidity requirements 

compared with corresponding 

requirements under prudential 

regulators’ regime, SEC’s regime or in 

other jurisdictions, certain CSEs may 

have a competitive advantage or 

disadvantage; however, the 

Commission, in developing the 

proposal, harmonized the proposal with 

those of the prudential regulators and 

the SEC to the maximum extent 

practicable. 

As noted above, the Commission, 

recognizing that SDs are critical to the 

financial integrity of the financial 

markets, designed their capital 

requirements to help ensure the safety 

and soundness of these SDs. In doing so, 

this should protect an SD in the event 

of a default by its counterparty or a 

financial crisis, which should reduce 

the probability of financial contagion. 

Request for Comment 

Is market integrity adversely affected 

by the proposed rules? If so, how might 

the Commission mitigate any harmful 

impact? 

3. Price Discovery 

As noted above, the proposal may 

have a negative effect on competition, as 

a result of increasing costs, which may 

result in some SDs limiting or 

withdrawing from the swaps markets. In 

that event, this negative effect on 

competition could result in a less liquid 

swaps market, which will have a 

negative effect on price discovery. 

However, as discussed above, most of 

the larger SDs or their parent entities are 

already subject to capital requirements 

that impose capital charges for their 

swap activities and, therefore, the 

proposal’s effect on competition, 

liquidity and price discovery should be 

limited. 

Request for Comment 

How might this proposal affect price 

discovery? Please explain. 

4. Sound Risk Management Practices 

A well-designed risk management 

system helps to identify, evaluate, 

address, and monitor the risks 

associated with a firm’s business. As 

discussed above, capital plays an 

important risk management function 

and limits the amount of leverage an 

entity can incur. In addition, capital 

serves as the last line of defensive in the 

event of a counterparty default or severe 

losses at a firm. The Commission’s 

proposal is developed from two wellestablished capital regimes. In addition, 

the Commission is requiring certain 

liquidity standards and a funding 

requirement. Therefore, the 

Commission’s proposal should promote 

increase risk management practices 

within a CSE. Moreover, the 

Commission believes that as a result of 

the proposed reporting and 

recordkeeping requirements, SDs may 


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164CAs of Nov. 9, 2016, one SD has filed a request 

with the Commission to withdraw its SD 

registration. 

more effectively track their trading and 

risk exposure in swaps and other 

financial activities. To the extent that 

these SDs can better monitor and track 

their risks, this should help them better 

manage risk within the entity. 

Request for Comment 

How might this proposal affect sound 

risk management practices? Please 

explain. 

5. Other Public Interest Considerations 

The Commission has not identified 

any additional public interest 

considerations related to the costs and 

benefits of the proposed rule. 

Request for Comment 

Are there other public interest 

considerations that the Commission 

should consider? Please explain. 

Appendix to Cost Benefit 

Considerations 

The Commission generally requests 

comments about its analysis of the 

general costs and benefits of the 

proposed rule. The Commission 

requests data to quantify and estimate 

the costs and the value of the benefits 

of the proposals. Are there additional 

costs and benefits that the Commission 

should consider? Has the Commission 

misidentified any costs or benefits? 

Commenters are encouraged to include 

both quantitative and qualitative 

assessments of benefits as well as data, 

or other information of support for such 

assessments. 

i. Minimum Capital Requirement 

The Commission focuses its analysis 

on cost arising from minimum capital 

requirement, due to data availability. As 

discussed above, this proposal would 

prescribe capital requirements for SDs 

and MSPs, and proposed amendments 

to existing capital rules for FCMs would 

prescribe capital requirement for FCMs 

that are also registered as SDs and 

increase capital requirement for FCMs 

to account for risk arising from their 

swaps and security-based swaps. The 

Commission first discusses cost at the 

entity level, and then quantifies cost at 

the industry level using SDR data. 

As of Nov. 9, 2016, there are 

approximately 104 SDs and no MSPs 

provisionally registered with the 

Commission. The Commission estimates 

that out of the 104 provisionally 

registered SDs, 15 U.S. Prudential 

Regulated Registrants SDs are exempt 

from the Commission’s capital 

requirement; 36 SDs which are Non-U.S. 

Registrants Overseen by the FRB are 

also exempt from the Commission’s 

capital requirement. For the rest 53 

provisionally registered SDs, eight SDs 

are currently also registered with the 

Commission as FCMs, while the other 

45 SDs currently are not FCMs.164

Discussing Capital Requirement Cost at 

Entity Level 

The Commission collects monthly 

financial and capital information from 

FCMs. There are currently eight SDs 

which are also registered as FCMs. The 

Commission proposed following 

amendments to existing FCM capital 

rule to increase capital requirement to 

account for risk arising from swaps. 

TABLE 1—MINIMUM CAPITAL REQUIREMENT FOR SDS THAT ARE ALSO FCMS

Tentative net 

capital 

Adjusted net capital 

Fixed dollar 

(million) 

Fixed dollar 

(million) Financial ratio 

FCM SD (not using models) ............ N/A $20 8% of risk margin plus ‘‘uncleared swap margin’’. 

FCM SD (using models) .................. $100 $20 8% of risk margin plus ‘‘uncleared swap margin’’. 

The Commission expects most if not 

all entities would use models. For the 

purpose of discussing cost of complying 

with these proposed minimum capital 

requirements, the Commission further 

separates these SDs that are also FCMs 

into two categories: SDs that are also 

SEC registered ANC firms, and FCMs 

that are not ANC firms registered with 

the SEC. 

1. SDs That Are FCMs and ANC Firms 

With the SEC 

TABLE 2—CAPITAL FOR SDS THAT ARE ALSO FCMS AND ANC FIRMS AS OF APRIL 30, 2016 

Name of swap dealers Registered as Adjusted net 

capital 

Net capital 

requirement Excess net capital 

CITIGROUP GLOBAL MARKETS INC ....................................... FCM BD SD 7,378,708,335 1,449,570,569 5,929,137,766 

GOLDMAN SACHS & CO .......................................................... FCM BD SD 16,978,669,484 2,553,867,535 14,424,801,949 

JP MORGAN SECURITIES LLC ................................................ FCM BD SD 13,539,160,236 2,542,050,203 10,997,110,033 

MORGAN STANLEY & CO LLC ................................................ FCM BD SD 10,906,187,328 1,818,426,660 9,087,760,668 

Source: FCM financial data as of April 30, 2016. 

The Commission estimates that four 

SDs are already registered as ANC 

broker-dealers with SEC. ANC firms 

registered with the SEC are currently 

required to maintain a minimum of five 

billion dollars of tentative net capital 

and a minimum of one billion dollars of 

net capital. In addition, all ANC firms 

use models for risk charge 

computations. These required minimum 

capital for ANC firms by the SEC are 

much higher than the proposed 

minimum capital requirement by the 

Commission, thus are more likely the 

binding constraints for these firms. 

Based on financial information reported 

by these SDs in their monthly reports 

filed with the Commission, these four 

SDs maintain a significant amount of 

net capital in excess of SEC’s 

requirement and the Commission’s 

proposal. Therefore, the Commission 

expects that incremental costs from this 


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91298 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 

165Selected FCM Financial Data as of April 30, 

2016. http://www.cftc.gov/idc/groups/public/@

financialdataforfcms/documents/file/

fcmdata0416.pdf. 

proposed capital requirement may not 

be significant for these firms. 

2. SDs That Are FCMs but Currently Are 

Not ANC Firms Registered With SEC 

The Commission estimates that there 

are four SDs in this category with one 

SD withdrawn pending. Based on the 

FCM Financial data provided to the 

Commission, three SDs currently have 

excess net capital ranging from $26.4 

million to $312 million.165 The 

Commission expects that smaller SDs 

with less than 100 million adjusted net 

capital might need to raise additional 

capital and might incur significant cost 

to comply with this proposal. The 

Commission would like to request 

comments on (1) how much capital 

these SDs might need to raise? (2) Is it 

feasible for these SDs to raise capital? 

(3) If these SDs would raise capital 

through retained earnings, what would 

be the estimated ratio of required capital 

as percent of their current retained 

earnings? 

TABLE 3—CAPITAL FOR SDS THAT ARE FCMS BUT NOT ANC FIRMS AS OF APRIL 30, 2016 

Name of swap dealers Registered as Adjusted net 

capital 

Net capital 

requirement Excess net capital 

FOREX CAPITAL MARKETS LLC ............................................. FCMRFD SD 58,264,892 31,858,770 26,406,122 

MIZUHO SECURITIES USA INC ............................................... FCM BD SD 575,181,123 263,266,797 311,914,326 

RJ OBRIEN ASSOCIATES LLC ................................................. FCM SD 209,084,814 138,749,913 70,334,901 

IBFX INC * ................................................................................... .............................. .............................. ..............................

IBFX INC * withdrawn pending. 

Source: FCM financial data as of April 30, 2016. 

For SDs that are not FCMs, the 

Commission prescribes following 

minimum capital requirements 

depending whether SDs use models to 

compute credit and market risk charges 

and whether SDs are financial entities 

or commercial entities. In addition, the 

Commission proposes positive tangible 

net worth requirement for MSPs. The 

Commission expects that most, if not 

all, stand-alone SDs would use models. 

For the purpose of discussing the cost 

of complying with minimum capital 

requirement, the Commission separates 

stand-alone SDs into following 

categories. 

TABLE 4—MINIMUM CAPITAL REQUIREMENT FOR STAND-ALONE SDS/MSPS

Type of registrant Net liquid asset approach Bank-based capital approach Tangible net worth approach 

Tentative 

net capital 

Adjusted net capital Common equity tier 1 Tangible net worth 

Fixed dollar 

(million) 

Fixed dollar 

(million) 

Financial ratio Fixed dollar 

(million) 

Financial ratios Fixed dollar Financial ratio 

U.S. SD (Financial Entity not 

using internal 

models).

N/A $20 8% of the total 

amount of margin.

$20 8% of the total 

amount of margin.

8% of risk weighted asset.N/A ...................... N/A. 

U.S. SD (Financial Entity using 

internal models).

$100 $20 8% of the total 

amount of margin.

$20 8% of the total 

amount of margin.

8% of risk weighted asset.N/A ...................... N/A. 

U.S. SD (Not predominantly engaged in financial activities).N/A N/A N/A ...................... N/A N/A ...................... N/A ...................... $20 million plus 

credit risk 

charge and 

market risk 

charge.

8% of the total 

amount of margin. 

U.S. MSP ............ N/A N/A N/A ...................... N/A N/A ...................... N/A ...................... Positive ............... N/A. 

Non-U.S. SDs ..... Substituted Compliance Eligible, Capital Comparability Determination Required. 

3. Nonbank Subsidiaries of U.S. Bank 

Holding Companies (BHCs) 

The Commission estimates that 12 

SDs are nonbank subsidiaries of U.S. 

BHC. These SDs currently do not have 

any capital requirement, and the 

proposed capital requirement may 

increase cost to these SDs as it may have 

to retain earnings to capitalize to the 

required level. However, their parents 

are currently subject to Federal 

Reserve’s capital requirements on a 

consolidated basis, including U.S. Basel 

III capital requirement and also are 

participants of the Comprehensive 

Capital Analysis and Review (CCAR) 

and Dodd-Frank Act Stress Test 

(DFAST). CCAR evaluates the capital 

planning process and capital adequacy 

of the largest U.S.-based BHCs, 

including the firms’ planned capital 

actions. The Dodd-Frank Act stress tests 

are a forward-looking component to 

help assess whether firms have 

sufficient capital to absorb losses and 

have the ability to lend to households 

and businesses even in times of 

financial and economic stress. The 

parent BHCs of these nonbank SDs 

below are well capitalized due to these 

requirements, as indicated by their 

common equity tier 1 capital ratio at 

consolidated level is much higher than 

eight percent in the table below. 

Therefore, the additional cost from the 

Commission’s proposed capital 

requirement may not be significant, as it 

may be possible for the consolidated 

entity to keep the same level of capital 

within the BHC, but just reallocate 

among its subsidiaries. In addition, the 

Commission recognizes that earnings 


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166http://www.citigroup.com/citi/investor/data/

qer116.pdf?ieNocache=23. 

167http://www.goldmansachs.com/investorrelations/creditor-information/creditor-Websitepresentation.pdf 

168https://www.jpmorganchase.com/corporate/

investor-relations/document/1Q16_Earnings_

Presentation.pdf 

169http://investor.bankofamerica.com/

phoenix.zhtml?c=71595&p=quarterly

earnings#fbid=ECX9ZgSZ-Oq. 

170https://www.morganstanley.com/about-us-ir/

shareholder/1q2016.pdf. 

171Selected FCM Financial Data as of April 30, 

2016. http://www.cftc.gov/idc/groups/public/@

financialdataforfcms/documents/file/

fcmdata0416.pdf. 

will now have to retain in the SD and 

will no longer be available to be 

reallocated to fund other more profitable 

activities within the consolidated group 

or to be returned to shareholders. The 

Commission understands that capital is 

not additive, i.e., the sum of capital at 

individual subsidiary level may be more 

than the amount of capital required at 

the parent level for all its subsidiaries, 

due to the loss of netting benefits. The 

Commission requests comments on 

whether it is reasonable to assume that 

SDs would be able to comply with the 

proposal while consolidated group of 

these SDs would not be able to keep the 

current level of capital. If not, please 

provide specific comments and 

estimates the additional cost of 

complying with the proposal. 

TABLE 5—SD’S PARENT BHC’S COMMON EQUITY TIER 1 CAPITAL RATIO AS OF FIRST QUARTER 2016 

Name of swap dealers Common equity tier 1 

capital ratio of parent BHC 

SEC 

registered 

BD 

CITIGROUP ENERGY INC ........................................................ Citigroup Inc. 12.3% 166 ............................................................. N 

GOLDMAN SACHS FINANCIAL MARKETS LP ........................ Goldman Sachs 13.4% 167 ......................................................... Y 

GOLDMAN SACHS MITSUI MARINE DERIVATIVE PRODUCTS LP.Goldman Sachs 13.4% .............................................................. N 

J ARON & COMPANY ................................................................ Goldman Sachs 13.4% .............................................................. N 

JP MORGAN VENTURES ENERGY CORPORATION .............. JP Morgan Chase & Co. 11.7% 168 ........................................... N 

MERRILL LYNCH CAPITAL SERVICES INC ............................ Bank of America 11% 169 ........................................................... N 

MERRILL LYNCH COMMODITIES INC ..................................... Bank of America 11% ................................................................ N 

MERRILL LYNCH FINANCIAL MARKETS INC ......................... Bank of America 11% ................................................................ Y 

MORGAN STANLEY CAPITAL GROUP INC ............................ Morgan Stanley 14.5% 170 ......................................................... N 

MORGAN STANLEY CAPITAL SERVICES LLC ....................... Morgan Stanley 14.5% .............................................................. N 

MORGAN STANLEY DERIVATIVE PRODUCTS INC ............... Morgan Stanley 14.5% .............................................................. N 

MORGAN STANLEY CAPITAL PRODUCTS LLC ..................... Morgan Stanley 14.5% .............................................................. N 

As discussed above, the Commission 

expects all SDs would use models to 

calculate market risk and credit risk 

charges. Their parents BHCs most likely 

are already using their risk models to 

calculate capital for the positions of 

these wholly owned subsidiaries 

(including uncleared swaps) to measure 

the credit and market risk exposures of 

these positions. 

4. U.S. SDs That Are Not Part of U.S. 

BHCs 

The Commission estimates that there 

are 15 U.S. SDs not part of U.S. BHCs. 

These SDs currently do not have any 

capital requirement. However, out of 

these 15 SDs, six SDs are subsidiaries of 

foreign BHCs or a foreign financial 

holding company (FHC) which already 

comply with Basel III risk-based capital 

requirements and having common 

equity tier 1 capital ratio at consolidated 

level exceeding eight percent. 

Specifically, two SDs are wholly-owned 

subsidiaries of Japanese BHCs, two SDs 

are subsidiaries of a Japanese Financial 

Holding Company, one SD is subsidiary 

of Netherlands BHC, and one SD is 

subsidiary of Australian investment 

bank. For the 9 SDs that are not 

subsidiaries of foreign holding 

companies that comply with Basel III, 

six SDs are part of groups that are 

subject to the CFTC’s or the SEC’s net 

capital requirements. Specifically, four 

SDs are subsidiaries of FCMs, and two 

SDs are also SEC registered BDs. These 

SDs’ consolidated group has excess net 

capital ranging from $14.8 million to 

$1.2 billion.171 As it is possible for the 

consolidated entity to keep the same 

level of capital within the group, but 

just reallocate among its subsidiaries, 

the additional cost of complying with 

the Commission’s proposed capital 

requirement may not be too 

burdensome. However, for those SDs or 

their consolidated groups that currently 

have smaller amount of excess net 

capital, they might need to raise 

additional capital and thus might incur 

significant cost to comply with this 

proposal. The Commission would like 

to request comments on (1) how much 

capital these SDs might need to raise? 

(2) Is it feasible for these SDs to raise 

capital? (3) If these SDs would raise 

capital through retained earnings, what 

would be the estimated ratio of required 

capital as percent of their current 

retained earnings? 

The Commission estimates that three 

SDs do not belong to consolidated 

entities that have excess capital (either 

common equity tier 1 or net capital). 

The Commission, therefore, expects that 

these three SDs may incur significant 

additional costs to comply with this 

proposal and maintain their current 

business model. However, the 

Commission does not have data to 

precisely estimate the possible capital 

costs for these three SDs. 

TABLE 6—CURRENT CAPITAL REQUIREMENT (COMMON EQUITY TIER 1 CAPITAL RATIO OR EXCESS NET CAPITAL) AT THE

SD OR ITS PARENT LEVEL

Name of swap dealers Common equity tier 1 capital ratio at parent level 

Excess net 

capital at 

entity or its 

parent level 

SEC 

registered 

BD 

BTIG LLC ................................................................... .................................................................................... 172 50,043,660 Y 

GAIN GTX LLC .......................................................... .................................................................................... 173 14,821,951 N 


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172https://www.sec.gov/Archives/edgar/vprr/

1600/16001826.pdf. 

173 GAIN GTX LLC is a wholly owned subsidiary 

of GAIN Capital Holdings, Inc., a global provider of 

online trading services. GAIN Capital Group LLC (a 

CFTC registered FCM and RFD) is also subsidiary 

of GAIN Capital Holdings, Inc. and has excess net 

capital of 14,821,951. 

174 ING Bank was designated by the Basel 

Committee and the FSB as one of the global 

systemically important banks ‘G–SIBs’ and by the 

Dutch Central Bank and the Dutch Ministry of 

Finance as a domestic SIFI. See ‘‘ING Group Annual 

Report on Form 20–F 2015’’. 

175http://www.ing.com/About-us/Profile-Fastfacts/Fast-facts.htm. 176Excess net capital of Jefferies LLC, parent of 

Jefferies Derivative Products LLC, Jefferies Financial 

Products LLC, and Jefferies Financial Services LLC. 177 http://www.macquarie.com/us/about/

newsroom/2015/agm-2015. 178http://www.mizuho-fg.co.jp/english/faq/

kessan.html. 179 http://www.smfg.co.jp/english/investor/

financial/latest_statement/2016_3/h2803_e1_

01.pdf. 

180Excess net capital at Cantor Fitzgerald & CO. 

(FCM and Broker-Dealer), which is owned by 

Cantor Fitzgerald Securities (94% ownership). 

181http://www.cargill.com/company/financial/

five-year/index.jsp. 

182http://www.bis.org/bcbs/publ/d338.pdf. 

183An inter-affiliate swap is identified if the 

ultimate parent of both counterparties is the same 

entity, using the Commission’s internal legal entity 

hierarchy database. 

184These numbers are roughly the same numbers 

of CFTC Weekly Swap Report posted on http://

www.cftc.gov/MarketReports/SwapsReports/L1

GrossExpCS. The small discrepancies may be due 

to the fact that the table above is generated using 

the new automated weekly swaps report process. 

TABLE 6—CURRENT CAPITAL REQUIREMENT (COMMON EQUITY TIER 1 CAPITAL RATIO OR EXCESS NET CAPITAL) AT THE

SD OR ITS PARENT LEVEL—Continued 

Name of swap dealers Common equity tier 1 capital ratio at parent level 

Excess net 

capital at 

entity or its 

parent level 

SEC 

registered 

BD 

ING CAPITAL MARKETS LLC 174 ............................. ING bank—11.6% 175 ................................................ .............................. N 

INTL FCSTONE MARKETS LLC .............................. .................................................................................... 60,582,006 Y 

JEFFERIES FINANCIAL PRODUCTS LLC .............. .................................................................................... 176 1,204,270,344 N 

MACQUARIE ENERGY LLC ..................................... Macquarie Bank—9.9% 177 ....................................... .............................. N 

MIZUHO CAPITAL MARKETS CORPORATION ...... Mizuho Financial Group—10.5% 178 ......................... .............................. N 

NOMURA DERIVATIVE PRODUCTS INC ................ Nomura Holdings, Inc.—15.1% ................................. .............................. N 

NOMURA GLOBAL FINANCIAL PRODUCTS INC ... Nomura Holdings, Inc.—15.1% ................................. .............................. Y 

SMBC CAPITAL MARKETS INC .............................. SMFG—11.81% 179 ................................................... .............................. N 

JEFFERIES FINANCIAL SERVICES INC ................. .................................................................................... 1,204,270,344 N 

CANTOR FITZGERALD SECURITIES ..................... .................................................................................... 180 232,219,010 N 

SHELL TRADING RISK MANAGEMENT LLC .......... .................................................................................... .............................. N 

BP ENERGY COMPANY .......................................... .................................................................................... .............................. N 

CITADEL SECURITIES SWAP DEALER LLC .......... .................................................................................... .............................. N 

5. Non-Financial/Commercial SDs 

This proposal would require NonFinancial/Commercial SDs to maintain 

tangible net worth in an amount equal 

to or in excess of the minimum capital 

level ($20 million plus market risk 

charges and credit risk charges). 

Currently there is no capital 

requirement for commercial SDs. The 

Commission estimates that currently 

only one SD would be in this category, 

and believes that its tangible net worth 

greatly exceeds the Commission’s 

proposed requirement.181 Therefore, the 

costs of this proposal are not expected 

to be material because it is not expected 

that this firm would have to alter its 

existing business practice in any 

substantial way to comply with 

minimum tangible net worth 

requirement. 

6. Non-U.S. SDs Not Subject to a 

Prudential Regulator 

The Commission is proposing to 

allow a ‘‘substituted compliance’’ 

program for capital requirements for 

SDs that are: (1) Not organized under 

the laws of the U.S., and (2) not 

domiciled in the U.S. The Commission 

estimates that there are 17 non-U.S. 

provisionally registered SDs not subject 

to U.S. prudential regulators that would 

be eligible to apply for substituted 

compliance. Out of these 18 non-U.S. 

SDs, approximately 10 SDs are 

domiciled in the U.K., three SDs are 

domiciled in Japan, two SDs are 

domiciled in Mexico, one SD is 

domiciled in Singapore, and one SD is 

domiciled in Australia. The 

Commission would permit these nonU.S. SDs (or regulatory authorities in the 

non-U.S. SD’s home country 

jurisdictions) to petition the 

Commission to satisfy the Commission’s 

capital requirements through a program 

of substituted compliance with the SD’s 

home country capital requirements. 

U.K., Japan, Mexico, Singapore, and 

Australia are members of Basel 

Committee on Banking Supervision and 

have adopted Basel III risk-based 

capital.182 Thus, the Commission does 

not expect significant additional cost 

arising from this proposal for these 

entities. 

Estimated Capital Requirement for IRS 

Positions of the SDs Subject to the 

Commission’s Capital Requirement 

The Commission focuses its analysis 

on IRS as it covers the majority of 

swaps’ notional reported to SDRs. Table 

below shows that IRS positons reported 

to SDR on June 24, 2016 account for 

about $312 trillion. Cleared IRS 

positions are roughly $165 trillion, 

accounting for 53% of all IRS positions; 

while uncleared IRS positions are 

roughly $147 trillion, accounting for the 

rest 47%. Of the $147 trillion uncleared 

IRS positions, the Commission estimates 

that about 39% are inter-affiliate 

swaps 183 and 61% are outward-facing 

swaps. 

TABLE 7—GROSS NOTIONAL OF IRS BILLION $ REPORTED TO SDR ON POSITIONS

[June 24, 2016] 

Uncleared Cleared Total 

Outward-facing 184 ....................................................................................................................... 90,117 164,646 254,763 


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185These estimates are based on SDs registered 

with Commission on June 24, 2016. Since then, 

three SDs withdrew their registration with the 

Commission. 

186The upper bound 2% is based on standardized 

approach, while the lower bound 0.2% is based on 

surveys that show model-based margin numbers 

could be as low as 10% of standardized margin 

requirement. 

TABLE 7—GROSS NOTIONAL OF IRS BILLION $ REPORTED TO SDR ON POSITIONS—Continued 

[June 24, 2016] 

Uncleared Cleared Total 

Inter-affiliate ................................................................................................................................. 57,222 2 57,224 

Total ...................................................................................................................................... 147,339 164,648 311,987 

For the purpose of capital estimates, 

we double the notional amounts listed 

above since both counterparties to a 

swap position may be subject to the 

capital rules and therefore need to hold 

capital. Table below shows that of 

roughly $295 trillion uncleared IRS 

position on June 24, 2016 (double 

counting $147 trillion of uncleared 

notional), the Commission estimates 

that about 46% of uncleared swaps are 

held by SDs that are subject to the 

prudential regulators’ capital 

requirement and, therefore, are exempt 

from this proposal, 30% of uncleared 

swaps are held by SDs that are subject 

to the Commission’s capital 

requirement, while the rest 24% are 

held by institutions not subject to 

prudential regulators or the 

Commission’s capital requirement.185

About 88 trillion of uncleared IRS 

positions (with double counting) are 

held by SDs subject to the Commission’s 

capital requirement. Of the 88 trillion 

uncleared IRS swap positions (double 

counting), 38% are outward-facing 

swaps while 62% are inter-affiliate 

swaps. The Commission assumes that 

these uncleared swaps will require 

margin of about 0.2% to two percent of 

gross notional amount.186 The upper 

bound two percent margin rate based on 

average of table-based approach and is 

a conservative assumption because 

margin estimates from models tend to be 

on a much lower side. The initial 

margin amount required for these 

uncleared swaps (including interaffiliate swaps) is 177 billion to 1.77 

trillion. Assuming capital required is 

eight percent of margin amount, the 

capital required for the uncleared swaps 

held by SDs subject to CFTC’s capital 

requirement would range from $14 

billion to $140 billion. The Commission 

believes that most institutions, if not all 

institutions, will use models to calculate 

initial margin amount. If that is the case, 

the estimated capital required may be 

close to the lower bound of $14 billion. 

This estimated capital required here 

assumes that covered SDs currently do 

not hold capital for these swap 

positions. This is also a conservative 

assumption, because many SDs or their 

parent entities may already be holding 

capital against these uncleared swap 

positions. The Commission estimates 

that SDs may have significant amount of 

excess capital and in the case that SDs 

do not hold capital themselves, their 

parents may hold significant amount of 

excess capital. It may be possible for the 

consolidated entity (their parents) to 

keep the same level of capital within the 

group, but just reallocate among its 

subsidiaries and therefore, the 

additional cost of complying with the 

Commission’s proposed capital 

requirement may not be too 

burdensome. 

TABLE 8—GROSS NOTIONAL OF UNCLEARED IRS POSITIONS (BILLION $) REPORTED TO SDR ON JUNE 24, 2016 

[Double counting as both Counterparties may need to hold capital] 

Gross notional in billion $ for uncleared IRS position 

(double counting) 

Outwardfacing Inter-affiliate Total 

Held by SDs subject to CFTC capital requirement ..................................................................... 33,627 54,742 88,369 

Held by SDs subject to Prudential Regulator (PR)’s capital requirement .................................. 89,062 46,689 135,751 

Held by institutions not subject to CFTC or PR capital requirement .......................................... 57,546 13,013 70,558 

Total ...................................................................................................................................... 180,234 114,443 294,677 

The table below shows that of $329 

trillion cleared IRS position on June 24, 

2016 (double counting $216 trillion as 

both counterparties may need to hold 

capital against the same position), the 

Commission estimates that about 31% 

of cleared swaps are held by SDs that 

are already subject to prudential 

regulators’ capital requirement and 

exempt from this proposal, nine percent 

of cleared swaps are held by SDs that 

are subject to the Commission’s capital 

requirement, while the remaining 60% 

are held by institutions not subject to 

prudential regulators or the 

Commission’s capital requirement. 

Roughly $29 trillion of outward-facing 

cleared IRS positions (with double 

counting) are held by SDs subject to the 

Commission’s capital requirement. The 

Commission assumes that cleared swaps 

requires margin of about 0.14% (which 

is, 0.2%/√2) to 1.4% (2%/√2) of gross 

notional, because margin period of risk 

is five days for cleared swaps compared 

to ten days for uncleared swaps. The 

initial margin required for cleared 

swaps held by SDs subject to CFTC 

requirement is about 40 billion to 400.6 

billion. Assuming capital required is 

eight percent of initial margin, the 

capital required for the cleared swaps 

held by SDs subject to CFTC’s proposed 

capital requirement is about $4.84 

billion to $48.4 billion. As discussed 

earlier, estimated capital required for 

covered SDs is most likely to be close 

to the lower bound of $4.84 billion. 

Therefore, the total capital required for 

both cleared and uncleared IRS 

positions held by SDs subject to the 

Commission’s proposed rule would 

range from $18.84 billion to $188.4 

billion. As discussed earlier, the 

estimated capital for IRS swaps held by 

SDs subject to the Commission’s 

requirement is most likely to be $18.84 

billion. As discussed earlier, many SDs 


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already hold significant amount of 

excess capital. In the case that SDs do 

not hold capital themselves, their 

parents hold significant amount of 

excess capital. It may be possible for the 

consolidated entity to keep the same 

level of capital within the group, but 

just reallocate among its subsidiaries 

and therefore, the additional cost of 

complying with the Commission’s 

proposed capital requirement may not 

be too burdensome. 

TABLE 9—GROSS NOTIONAL OF CLEARED IRS POSITIONS (BILLION $) REPORTED TO SDR ON JUNE 24, 2016 

[Double counting as both Counterparties may need to hold capital] 

Gross notional in billion $ for uncleared IRS position 

(double counting) 

Outwardfacing Inter-affiliate Total 

Held by SDs subject to CFTC capital requirement ..................................................................... 28,612 0 28,612 

Held by SDs subject to Prudential Regulator (PR)’s capital requirement .................................. 102,221 0 102,221 

Held by institutions not subject to CFTC or PR capital requirement .......................................... 198,458 5 198,463 

Total ...................................................................................................................................... 329,291 5 329,296 

Request for Comment 

The Commission does not have 

sufficient financial information about 

these SDs to estimate precise costs of 

these proposed requirements and would 

welcome comments on how the 

proposed rule would impact the capital 

structure and the cost of doing business. 

1. Would the minimum capital 

requirements represent a barrier to entry 

to firms that may otherwise seek to trade 

swaps as SDs? If so, which types of 

firms would be foreclosed? 

2. Is it correct to assume that firms 

part of U.S. BHCs that are subject to 

Basel III and stress testing requirements 

would be readily able to meet the 

proposed capital requirement? 

3. Is it correct to assume that ANC 

firms would be readily able to meet the 

proposed capital requirement? 

4. Is it correct to assume that it would 

not be too costly for firms or their 

parents already subject to SEC current 

BD and/or proposed SBSD capital 

requirement or CFTC’s current FCM 

capital requirement to comply with the 

capital requirement? 

5. Is it correct to assume that 

proposed capital requirements would 

not be too burdensome for firms that are 

part of foreign BHCs subject to Basel? 

6. Would it be too costly for the 

smaller SDs and SDs that are not subject 

to Basel or SEC or CFTC capital 

requirements to comply? 

7. What restrictions would smaller 

firms be willing to accept for a lower 

capital requirement? 

8. What alternative capital 

requirements might achieve the same 

policy goal? 

ii. Margin vs. Capital 

The Commission’s proposal also 

would require an SD to include the 

initial margin for all swaps that would 

otherwise fall below the $50 million 

initial margin threshold amount or the 

$500,000 minimum transfer amount, as 

defined in Regulation 23.151, for 

purposes of computing the uncleared 

swap margin amount. As such, the 

uncleared swap margin amount would 

be the amount that an SD would have 

to collect from a counterparty, assuming 

that the exclusions and exemptions for 

collecting initial margin for uncleared 

swaps set forth in Regulations 23.150– 

161 would not apply, and also assuming 

that the thresholds under which initial 

margin and/or variation margin would 

not need to be exchanged would not 

apply. Accordingly, swaps that are not 

subject to the margin requirement such 

as those executed prior to the 

compliance date for margin 

requirements (‘‘legacy swaps’’), interaffiliate swaps, and swaps with 

counterparties that would qualify for the 

exception or exemption under section 

2(h)(7)(A) would have to be taken into 

account in determining the capital 

requirement. 

The Commission is proposing this 

approach as it believes that it would be 

appropriate to require an SD to maintain 

capital for uncollateralized swap 

exposures to counterparties to cover the 

‘‘residual’’ risk of a counterparty’s 

uncleared swaps positions. The 

Commission’s proposed approach 

regarding the inclusion of 

uncollateralized swap exposures in the 

SD’s capital requirements is consistent 

with the approach adopted by the 

prudential regulators in setting capital 

requirements for SDs subject to their 

jurisdiction and is consistent with the 

approach proposed by the SEC for 

SBSDs. 

The Commission provides certain 

exemptions from initial margin 

requirements for uncleared trades 

between affiliates. However, for the 

proposed capital rule inter-affiliate 

swaps would require capital to be held 

against them. The Commission requests 

comments on how the proposed capital 

rule would impact the competitiveness 

between different SDs based on the legal 

entity structure of the firm. The 

Commission understands that SDs may 

have different organizational structures 

due to various reasons. These reasons 

include, among others, centralized risk 

management for consolidation of 

balance-sheet, asset-liability and 

liquidity risk management; taxation 

benefits; funds transfer pricing; merger 

and acquisition; and subsidiaries in 

different jurisdictions. An arms-length 

swap may be offset by swap transaction 

with an affiliated SD because of any of 

the reasons listed above and possibly 

others. Centralization of risk within 

different entities of a firm in the same 

jurisdiction provides risk reduction 

benefits somewhat similar to the CCP 

and is encouraged. 

As per the proposed rule, both parties 

to a swap transaction may be required 

to hold capital even if they both are part 

of the same parent institution. In that 

sense, there may be double (or more) 

counting of capital at the parent level 

for a given outward facing swap based 

on the legal structure of the entity. This 

may lead to an uneven playing field 

between SDs if for a given swap, 

different swap dealers are required to 

hold different amount of capital based 

on the number of inter-affiliate trades 

that they execute for the same client 

facing trade. 

iii. Model vs. Table 

The proposal would allow an SD to 

apply to the Commission or an RFA of 

which it is a member for approval to use 

internal models when calculating its 

market risk exposure and credit risk 

exposure. The proposal would also 

allow an FCM that is also an SD to apply 

in writing to the Commission or an RFA 

of which it is a member for approval to 

compute deductions for market risk and 

credit risk using internal models in lieu 

of the standardized deductions 

otherwise required. 

As discussed above, there are 

approximately 107 SDs and no MSPs 

provisionally registered with the 


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Commission. Of these, the Commission 

estimates that approximately 55 SDs 

and no MSPs would be subject to the 

Commission’s capital rules as they are 

not subject to those of a prudential 

regulator. The Commission further 

estimates conservatively that most of 

these SDs and MSPs would seek to 

obtain Commission approval to use 

models for computing their market and 

credit risk capital charges. These 

entities would incur cost to develop, 

maintain, document, audit models, and 

seek model approval. The possibility of 

using models to calculate credit risk and 

market risk charges may allow SDs to 

more efficiently deploy capital in other 

parts of its operations, because models 

could reduce capital charges and 

thereby could make additional capital 

available. This reduced capital 

requirement due to model use could 

improve returns of SDs and make them 

more competitive. 

Although the Commission expects 

that SDs would use models for 

calculating market risk and credit risk 

charges, it is possible that some entities, 

particularly potential new entrants, may 

not have the risk management 

capabilities of which the models are an 

integral part, and, therefore, have to rely 

on the standardized haircut approach. 

The benefit of the standardized haircut 

approach for measuring market risk is 

its inherent simplicity. Therefore, this 

approach may improve customer 

protections and reduce systemic risk. In 

addition, a standardized haircut 

approach may reduce costs for the SD 

related to the risk of failing to observe 

or correct a problem with the use of 

models that could adversely impact the 

firm’s financial conditions, because the 

use of models would require the 

allocation by the SD of additional firm 

resources and personnel. Conversely, if 

the proposed standardized haircuts are 

too conservative, they could make 

conducting swap business too costly, 

preventing or impairing the ability of 

the firms to engage in swaps, increasing 

transaction costs, reducing liquidity, 

and reducing the availability of swaps 

for risk mitigation by end users. 

Request for Comment 

Does the proposed capital 

requirement reflect the increased risk 

associated with the use of models and 

trading in a portfolio of swaps? 

iv. Liquidity Requirement and Equity 

Withdrawal Restrictions 

The Commission proposes additional 

liquidity requirements and equity 

withdrawal restrictions on certain 

eligible SDs. For SDs that elect a bankbased capital approach, the Commission 

is proposing to require the SD to 

maintain each day an amount of high 

quality liquid assets (‘‘HQLAs’’), that is 

no less than 100 percent of the SDs total 

net cash outflows over a prospective 30 

calendar-day period. The HQLAs could 

be converted quickly into cash without 

reasonably expecting to incur losses in 

excess of the applicable haircuts during 

a stress period. Total net cash outflow 

amount are calculated by applying 

outflow and inflow rates, which reflect 

certain standardized stressed 

assumptions, against the balances of an 

SD’s funding sources, obligations, 

transactions, and assets over a 

prospective 30 day period. 

For SDs that elect a net liquid assets 

capital approach, the Commission is 

proposing a liquidity stress test to be 

conducted by SDs that elect a net liquid 

assets capital approach at least monthly 

that takes into account certain assumed 

stressed conditions lasting for 30 

consecutive days. The proposed 

minimum elements are designed to 

ensure that SDs employ a stress test that 

is severe enough to produce an estimate 

of a potential funding loss of a 

magnitude that might be expected in a 

severely stressed market. 

TABLE 10—MINIMUM LIQUIDITY REQUIREMENT

Liquidity reserve 

requirement Contingency funding plan Risk management Transferring approval 

SDs that elect a bankbased capital approach.Liquidity Coverage Ratio 

(LCR) >=1; 

HQLAs >= total net cash 

outflows over a prospective 30 calendar-day period.

Strategies to address liquidity shortfalls in 

emergency.

Review LCR quarterly by 

senior management 

overseeing risk management, annually by senior 

management.

Approval prior to transferring HQLAs if, after 

transferring, LCR <1. 

SDs that elect a net liquid 

asset capital approach.

Liquidity Stress Test; 

Unencumbered cash + 

U.S. government securities >= a potential funding loss of a magnitude 

that might be expected 

in a severely stressed 

market for 30 consecutive days.

Strategies to address liquidity shortfalls in 

emergency..

...........................................

SDs that elect a tangible 

net worth approach.

None ...........................................

The benefit of the proposed liquidity 

requirement is an additional level of 

protection against disruptions in the 

ability to obtain funding for a firm. This 

requirement intends to increase the 

likelihood that a firm could withstand a 

general loss of confidence in the firm 

itself, or the markets more generally and 

stay solvent for up to 30 days, during 

which time it could either regain the 

ability to obtain funding in the ordinary 

course or else better position itself for 

resolution, with less impact on other 

market participants and the financial 

system. Therefore, this requirement may 

reduce the likelihood and severity of a 

fire sale and thus mitigate spillover 

effects and lower systemic risk. This, in 

turn, may increase confidence in swap 

markets and may lead to an increase in 

the use of swaps. 

However, this requirement would 

impose additional cost of capital and 

other costs directly related to the 

amount of the required liquidity reserve 

because an SD would be unable to 

deploy the assets that are maintained for 

the liquidity reserve in other, 

potentially more profitable ways. In 

addition, some firms may incur more 

implementation costs, because, firms (or 

their parent holding companies) that are 


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already complying with Basel III or 

SEC’s liquidity requirements may 

already run stress tests, maintain 

liquidity reserves based on those tests, 

and/or have a written contingency 

funding plan. 

Request for Comment 

How much additional cost would SDs 

incur resulting from the proposed 

liquidity requirements given their 

current practice? The Commission 

requests that commenters quantify the 

extent of the additional cost the 

proposed minimum liquidity 

requirement would incur based on its 

portfolios and financials, and provide 

the Commission with such data. The 

Commission also requests comments on 

alternative approaches to liquidity 

requirements to achieve the same policy 

goal. 

v. Other Considerations 

The proposed requirements should 

reduce the risk of a failure of any major 

market participant in the swap market, 

which in turn reduces the possibility of 

a general market failure, and thus 

promotes confidence for market 

participants to transact in swaps for 

investment and hedging purposes. The 

proposed capital requirements are 

designed to promote confidence in SDs 

among customers, counterparties, and 

the entities that provide financing to 

SDs, thereby, lessen the potential that 

these market participants may seek to 

rapidly withdraw assets and financing 

from SDs during a time of market stress. 

This heightened confidence is expected 

to increase swap transactions and 

promote competition among dealers. A 

more competitive swap market may 

promote a more efficient capital 

allocation. 

However, to the extent that costs 

associated with the proposed rules are 

high, they may negatively affect 

competition within the swap markets. 

This may, for example, lead smaller 

dealers or entities for whom dealing is 

not a core business to exit the market 

because compliance with the proposed 

minimum capital, liquidity, and 

reporting requirements is not feasible 

due to its cost. The same costs might 

also deter the entry of new SDs into the 

market, and if sufficiently high, increase 

concentration among SDs. 

The proposals ultimately adopted 

could have a substantial impact on 

domestic and international commerce 

and the relative competitive position of 

SDs operating under different 

requirements of various jurisdictions. 

Specifically, SDs subject to a particular 

regulatory regime may be advantaged or 

disadvantaged if corresponding 

requirements in other regimes are 

substantially more or less stringent. This 

could affect the ability of U.S. SDs to 

compete in the domestic and global 

markets, the ability of non-U.S. to 

compete in U.S. markets. Substantial 

differences between the U.S. and foreign 

jurisdictions in the costs of complying 

with these requirements for swaps 

between U.S. and foreign jurisdictions 

could reduce cross-border capital flows 

and hinder the ability of global firms to 

most efficiently allocate capital among 

legal entities to meet the demands of 

their customers/counterparties. 

The willingness of end users to trade 

with an SD dealer will depend on their 

evaluation of the counterparty credit 

risks of trading with that particular SD 

compared to alternative SDs, and their 

ability to negotiate favorable price and 

other terms. The proposed capital, 

liquidity, and risk management 

requirements would in general reduce 

the likelihood of SDs’ defaulting or 

failing, and therefore may increase the 

willingness of end users to trade with 

more SDs that have strong capital and 

liquidity reserves. End users of covered 

swaps are mostly made up of 

sophisticated participants such as hedge 

fund, asset management, other financial 

firms, and large commercial 

corporations. Many of these entities 

trade substantial volume of swaps and 

are relatively well-positioned to 

negotiate price and other terms with 

competing dealers. To the extent that 

the proposals result in increased 

competition, participants should be able 

to take advantage of this increased 

competition and negotiate improved 

terms. On the other hand, SDs may pass 

on additional capital, liquidity, and 

operational costs resulting from the 

proposal to end users in the form of 

higher fees or wider spreads. Thus end 

users may experience increased cost of 

using swaps for hedging and investing 

purposes. 

In addition, benefits may arise when 

SDs consolidate with other affiliated 

SDs, FCMs, and/or broker-dealers. This 

may yield efficiencies for clients 

conducting business in swaps, 

including netting benefits, reduced 

number of account relationships, and 

reduced number of governing 

agreements. These potential benefits, 

however, may be offset by reduced 

competition from a smaller number of 

competing SDs. Further, the proposals 

would permit conducting swap business 

in an entity jointly registered as an 

FCM, or SBSD, or broker-dealer, which 

may offer the potential for these firms to 

offer portfolio margining for a variety of 

positions. From a holding company’s 

perspective, aggregating swap business 

in a single entity, could help simplify 

and streamline risk management, allow 

more efficient use of capital, as well as 

operational efficiencies, and avoid the 

need for multiple netting and other 

agreements. 

The proposed rules may create the 

potential for regulatory arbitrage to the 

extent that they differ from 

corresponding rules other regulators 

adopt. Also, to the extent that the 

proposed requirements are overly 

stringent, they may prevent or 

discourage new entrants into swap 

markets and thereby may either increase 

spreads and trading costs or even reduce 

the availability of swaps. In these cases, 

end users would face higher cost or be 

forced to use less effective financial 

instruments to meet their business 

needs. 

List of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Reporting and recordkeeping 

requirements. 

17 CFR Part 23 

Capital and margin requirements, 

Major swap participants, Swap dealers, 

Swaps. 

17 CFR Part 140 

Authority delegations (Government 

agencies). 

For the reasons discussed in the 

preamble, the Commodity Futures 

Trading Commission proposes to amend 

17 CFR chapter I 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. In § 1.10, revise paragraph (f)(1) 

introductory text; paragraphs (f)(1)(i)(B), 

(f)(1)(ii)(B), and (g)(1); paragraph (g)(2) 

introductory text; and paragraph (h) to 

read as follows: 

§ 1.10 Financial reports of futures 

commission merchants and introducing 

brokers. 

* * * * * 

(f) Extension of time for filing 

uncertified reports. (1) In the event a 

registrant finds that it cannot file its 

Form 1–FR, or, in accordance with 

paragraph (h) of this section, its 

Financial and Operational Combined 

Uniform Single Report under the 

Securities Exchange Act of 1934, part II, 


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part IIA, part II CSE (FOCUS report), or 

a Form SBS, for any period within the 

time specified in paragraphs (b)(1)(i) or 

(b)(2)(i) of this section without 

substantial undue hardship, it may 

request approval for an extension of 

time, as follows: 

(i) * * * 

(B) A futures commission merchant 

that is registered with the Securities and 

Exchange Commission as a securities 

broker or dealer may file with its 

designated self-regulatory organization a 

copy of any application that the 

registrant has filed with its designated 

examining authority, pursuant to 

§ 240.17a–5(m) of this title, for an 

extension of time to file its FOCUS 

report or Form SBS. The registrant must 

also promptly file with the designated 

self-regulatory organization and the 

Commission copies of any notice it 

receives from its designated examining 

authority to approve or deny the 

requested extension of time. Upon 

receipt by the designated self-regulatory 

organization and the Commission of 

copies of any such notice of approval, 

the requested extension of time 

referenced in the notice shall be deemed 

approved under this paragraph (f)(1). 

* * * * * 

(ii) * * * 

(B) An introducing broker that is 

registered with the Securities and 

Exchange Commission as a securities 

broker or dealer may file with the 

National Futures Association copies of 

any application that the registrant has 

filed with its designated examining 

authority, pursuant to § 240.17a–5(m) of 

this title, for an extension of time to file 

its FOCUS report or Form SBS. The 

registrant also must promptly file with 

the National Futures Association copies 

of any notice it receives from its 

designated examining authority to 

approve or deny the requested extension 

of time. Upon the receipt by the 

National Futures Association of a copy 

of any such notice of approval, the 

requested extension of time referenced 

in the notice shall be deemed approved 

under this paragraph (f)(1)(ii). 

* * * * * 

(g) Public availability of reports. (1) 

Forms 1–FR filed pursuant to this 

section, and FOCUS reports or Forms 

SBS filed in lieu of Forms 1–FR 

pursuant to paragraph (h) of this 

section, 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 (g)(2) of this 

section. 

(2) The following information in 

Forms 1–FR, and the same or equivalent 

information in FOCUS reports or Forms 

SBS filed in lieu of Forms 1–FR, will be 

publicly available: 

* * * * * 

(h) Filing option available to a futures 

commission merchant or an introducing 

broker that is also a securities broker or 

dealer. Any applicant or registrant 

which is registered with the Securities 

and Exchange Commission as a 

securities broker or dealer, a securitybased swap dealer, or a major securitybased market participant may comply 

with the requirements of this section by 

filing (in accordance with paragraphs 

(a), (b), (c), and (j) of this section) a 

copy, as applicable, of its Financial and 

Operational Combined Uniform Single 

Report under the Securities Exchange 

Act of 1934, Part II, Part IIA, or Part II 

CSE (FOCUS Report), or Form SBS, in 

lieu of Form 1–FR; Provided, however, 

That all information which is required 

to be furnished on and submitted with 

Form 1–FR is provided with such 

FOCUS Report or Form SBS; and 

Provided, further, That a certified 

FOCUS Report or Form SBS filed by an 

introducing broker or applicant for 

registration as an introducing broker in 

lieu of a certified Form 1–FR–IB must be 

filed according to National Futures 

Association rules, either in paper form 

or electronically, in accordance with 

procedures established by the National 

Futures Association, and if filed 

electronically, a paper copy of such 

filing with the original manually signed 

certification must be maintained by 

such introducing broker or applicant in 

accordance with § 1.31. 

* * * * * 

■ 3. Amend § 1.12 as follows: 

■ a. Revise paragraph (a) introductory 

text and paragraphs (a)(1), (b)(3), and 

(b)(4); and 

■ b. Add paragraph (b)(5). 

The revisions and addition to read as 

follows: 

§ 1.12 Maintenance of minimum financial 

requirements by futures commission 

merchants and introducing brokers. 

(a) Each person registered as a futures 

commission merchant or who files an 

application for registration as a futures 

commission merchant, and each person 

registered as an introducing broker or 

who files an application for registration 

as an introducing broker (except for an 

introducing broker or applicant for 

registration as an introducing broker 

operating pursuant to, or who has filed 

concurrently with its application for 

registration, a guarantee agreement and 

who is not also a securities broker or 

dealer), who knows or should have 

known that its adjusted net capital at 

any time is less than the minimum 

required by § 1.17 or by the capital rule 

of any self-regulatory organization to 

which such person is subject, or the 

minimum net capital requirements of 

the Securities and Exchange 

Commission if the applicant or 

registrant is registered with the 

Securities and Exchange Commission, 

must: 

(1) Give notice, as set forth in 

paragraph (n) of this section that the 

applicant’s or registrant’s capital is 

below the applicable minimum 

requirement. Such notice must be given 

immediately after the applicant or 

registrant knows or should have known 

that its adjusted net capital or net 

capital, as applicable, is less than 

minimum required amount; and 

* * * * * 

(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), 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(b) of the Securities and 

Exchange Commission (§ 240.17a–11(b) 

of this title); or 

(5) For security-based swap dealers or 

major security-based swap participants, 

the amount of net capital specified in 

Rule 18a–8(b) of the Securities and 

Exchange Commission (§ 240.18a–8(b) 

of this title), must file notice to that 

effect, as soon as possible and no later 

than twenty-four (24) hours of such 

event. 

* * * * * 

■ 4. In § 1.16, revise paragraphs 

(f)(1)(i)(B) and (f)(1)(ii)(B) to read as 

follows: 

§ 1.16 Qualifications and reports of 

accountants. 

* * * * * 

(f)(1) * * * 

(i) * * * 

(B) A futures commission merchant 

that is registered with the Securities and 

Exchange Commission as a securities 

broker or dealer, a security-based swap 

dealer, or a major security-based swap 

participant, may file with its designated 

self-regulatory organization a copy of 

any application that the registrant has 

filed with its designated examining 


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authority, pursuant to § 240.17a–5(m) of 

this title, for an extension of time to file 

audited annual financial statements. 

The registrant must also promptly file 

with the designated self-regulatory 

organization and the Commission copies 

of any notice it receives from its 

designated examining authority to 

approve or deny the requested extension 

of time. Upon receipt by the designated 

self-regulatory organization and the 

Commission of copies of any such 

notice of approval, the requested 

extension of time referenced in the 

notice shall be deemed approved under 

this paragraph (f)(1)(i). 

* * * * * 

(ii) * * * 

(B) An introducing broker that is 

registered with the Securities and 

Exchange Commission as a securities 

broker or dealer, a security-based swap 

dealer, or a major security-based swap 

participant may file with the National 

Futures Association copies of any 

application that the registrant has filed 

with its designated examining authority, 

pursuant to § 240.17a–5(m) of this title, 

for an extension of time to file audited 

annual financial statements. The 

registrant must also file promptly with 

the National Futures Association copies 

of any notice it receives from its 

designated examining authority to 

approve or deny the requested extension 

of time. Upon the receipt by the 

National Futures Association of a copy 

of any such notice of approval, the 

requested extension of time referenced 

in the notice shall be deemed approved 

under this paragraph (f)(1)(ii). 

* * * * * 

■ 5. Amend § 1.17 as follows: 

■ a. Revise paragraphs (a)(1)(i)(A), 

(a)(1)(i)(B), (a)(1)(ii), (b)(9), and (b)(10); 

■ b. Add paragraph (b)(11); 

■ c. Revise paragraphs (c)(1)(i), (c)(2)(i), 

(c)(2)(ii)(B), and (c)(2)(ii)(D); 

■ d. Add paragraphs (c)(2)(ii)(G) and 

(c)(5)(iii); 

■ e. Revise paragraphs (c)(5)(viii), 

(c)(5)(ix), (c)(5)(x), and (c)(5)(xiv); 

■ f. Add paragraph (c)(5)(xv); 

■ g. Revise paragraph (c)(6) introductory 

text and paragraphs (c)(6)(i) and 

(c)(6)(iv)(A); 

■ h. Add paragraphs (c)(6)(v) and 

(c)(6)(vi); and 

■ i. Revise paragraph (g)(1). 

The revisions and additions to 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 swap dealer, the minimum 

amount shall be $20,000,000; 

(B) The futures commission 

merchant’s risk-based capital 

requirement, computed as eight percent 

of the sum of: 

(1) The total risk margin requirement 

(as defined in paragraph (b)(8) of this 

section) for positions carried by the 

futures commission merchant in 

customer accounts and noncustomer 

accounts; 

(2) The total initial margin that the 

futures commission merchant is 

required to post with a clearing agency 

or broker for security-based swap 

positions carried in customer and 

noncustomer accounts; 

(3) The total uncleared swaps margin, 

as that term is defined in § 23.100 of this 

chapter; 

(4) The total initial margin that the 

futures commission merchant is 

required to post with a broker or 

clearing organization for all proprietary 

cleared swaps positions carried by the 

futures commission merchant; 

(5) The total initial margin computed 

pursuant to Rule 18a–3(c)(1)(i)(B) 

(§ 240.18a–3(c)(1)(B) of this title) of the 

Securities and Exchange Commission 

for all uncleared security-based swap 

positions carried by the futures 

commission merchant without regard to 

any initial margin exemptions or 

exclusions that the rules of the 

Securities and Exchange Commission 

may provide to such security-based 

swap positions; and 

(6) the total initial margin that the 

futures commission merchant is 

required to post with a broker or 

clearing agency for proprietary cleared 

security-based swaps; 

* * * * * 

(ii) A futures commission merchant 

that is registered as a swap dealer and 

has received approval from the 

Commission, or from a registered 

futures association of which the futures 

commission merchant is a member, to 

use internal models to compute market 

risk and credit risk charges for 

uncleared swaps must maintain net 

capital equal to or in excess of $100 

million and adjusted net capital equal to 

or in excess of $20 million. 

* * * * * 

(b) * * * 

(9) Cleared over the counter derivative 

positions means a swap cleared by a 

derivatives clearing organization or a 

clearing organization exempted by the 

Commission from registering as a 

derivatives clearing organization, and 

further includes positions cleared by 

any organization permitted to clear such 

positions under the laws of the relevant 

jurisdiction. 

(10) Cleared over the counter 

customer means any person that is not 

a proprietary person as defined in 

§ 1.3(y) and for whom the futures 

commission merchant carries on its 

books one or more accounts for the 

cleared over the counter derivative 

positions of such person. 

(11) Uncleared swap margin. This 

term means the amount of initial margin 

that would be required to be collected 

by a swap dealer, as set out in 

§ 23.152(a) of this chapter for each 

outstanding swap (including the swaps 

that are exempt from the scope of 

§ 23.152 of this chapter by § 23.150 of 

this chapter), exempt foreign exchange 

swaps or foreign exchange forwards, or 

netting set of swaps or foreign exchange 

swaps, for each counterparty, as if that 

counterparty was an unaffiliated swap 

dealer. In computing the uncleared 

swap margin amount, a swap dealer 

may not exclude the initial margin 

threshold amount or minimum transfer 

amount as such terms are defined in 

§ 23.151 of this chapter. 

(c) * * * 

(1) * * * 

(i) Unrealized profits shall be added 

and unrealized losses shall be deducted 

in the accounts of the applicant or 

registrant, including unrealized profits 

and losses on fixed price commitments, 

uncleared swaps, and forward contracts; 

* * * * * 

(2) * * * 

(i) Exclude any unsecured commodity 

futures, options, cleared swaps, 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) * * * 

(B)(1) Interest receivable, floor 

brokerage receivable, commissions 

receivable from other brokers or dealers 

(other than syndicate profits), mutual 

fund concessions receivable and 

management fees receivable from 

registered investment companies and 

commodity pools that are not 

outstanding more than thirty (30) days 

from the date they are due; 


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(2) Dividends receivable that are not 

outstanding more than thirty (30) days 

from the payable date; and 

(3) Commissions or fees receivable, 

including from other brokers or dealers, 

resulting from swap transactions that 

are not outstanding more than sixty (60) 

days from the month end accrual date 

provided they are billed promptly after 

the close of the month of their 

inception; 

* * * * * 

(D) Receivables from registered 

futures commission merchants or 

brokers, resulting from commodity 

futures, options, cleared swaps, foreign 

futures or foreign options transactions, 

except those specifically excluded 

under paragraph (c)(2)(i) of this section; 

* * * * * 

(G) Receivables from third-party 

custodians that represent the futures 

commission merchant’s initial margin 

deposits associated with uncleared 

swap transactions pursuant to § 23.158 

of this chapter or uncleared securitybased swap transactions under the rules 

of the Securities and Exchange 

Commission. 

* * * * * 

(5) * * * 

(iii) Swaps—(A) Uncleared swaps that 

are credit-default swaps referencing 

broad-based securities indices—(1) 

Short positions (selling protection). In 

the case of an uncleared short credit 

default swap that references a broadbased securities index, deducting the 

percentage of the notional amount based 

upon the current basis point spread of 

the credit default swap and the maturity 

of the credit default swap in accordance 

with the following table: 

Length of time to maturity of CDS contract 

Basis point spread 

(%) 

100 or less 101–300 301–400 401–500 501–699 700 or more 

12 months or less .................................... 0.67 1.33 3.33 5.00 6.67 10.00 

13 months to 24 months .......................... 1.00 2.33 5.00 6.67 8.33 11.67 

25 months to 36 months .......................... 1.33 3.33 6.67 8.33 10.00 13.33 

37 months to 48 months .......................... 2.00 4.00 8.33 10.00 11.67 15.00 

49 months to 60 months .......................... 2.67 4.67 10.00 11.67 13.33 16.67 

61 months to 72 months .......................... 3.67 5.67 11.67 13.33 15.00 18.33 

73 months to 84 months .......................... 4.67 6.67 13.33 15.00 16.67 20.00 

85 months to 120 months ........................ 5.67 10.00 15.00 16.67 18.33 26.67 

121 months and longer ............................ 6.67 13.33 16.67 18.33 20.00 33.33 

(2) Long positions (purchasing 

protection). In the case of an uncleared 

swap that is a long credit default swap 

referencing a broad-based securities 

index, deducting 50 percent of the 

deduction that would be required by 

paragraph (c)(5)(iii)(A)(1) of this section 

if the swap was a credit default swap. 

(3) Long and short positions—(i) Long 

and short uncleared credit default 

swaps referencing the same broad-based 

security index. In the case of uncleared 

swaps that are long and short credit 

default swaps referencing the same 

broad-based security index, have the 

same credit events which would trigger 

payment by the seller of protection, 

have the same basket of obligations 

which would determine the amount of 

payment by the seller of protection 

upon the occurrence of a credit event, 

that are in the same or adjacent maturity 

spread category and have a maturity 

date within three months of the other 

maturity category, deducting the 

percentage of the notional amounts 

specified in the higher maturity category 

under paragraph (c)(5)(iii)(A)(1) or 

(c)(5)(iii)(A)(2) of this section on the 

excess of the long or short position. 

(ii) Long basket of obligors and 

uncleared long credit default swap 

referencing a broad-based securities 

index. In the case of an uncleared swap 

that is a long credit default swap 

referencing a broad-based securities 

index and the futures commission 

merchant is long a basket of debt 

securities comprising all of the 

components of the securities index, 

deducting 50 percent of the amount 

specified in § 240.15c3–1(c)(2)(vi) of 

this title for the component of securities, 

provided the futures commission 

merchant can deliver the component 

securities to satisfy the obligation of the 

futures commission merchant on the 

credit default swap. 

(iii) Short basket of obligors and 

uncleared short credit default swap 

referencing a broad-based securities 

index. In the case of an uncleared swap 

that is a short credit default swap 

referencing a broad-based securities 

index and the futures commission 

merchant is short a basket of debt 

securities comprising all of the 

components of the securities index, 

deducting the amount specified in 

§ 240.15c3–1(c)(2)(vi) of this title for the 

component securities. 

(B) Interest rate swaps. In the case of 

an uncleared interest rate swap, 

deducting the percentage deduction 

specified in § 240.15c3–1(c)(2)(vi)(A) of 

this title based on the maturity of the 

interest rate swap, provided that the 

percentage deduction must be no less 

than 0.5 percent; 

(C) All other uncleared swaps. (1) In 

the case of any uncleared swap that is 

not a credit default swap or interest rate 

swap, deducting the amount calculated 

by multiplying the notional value of the 

swap by: 

(i) The percentage specified in 

§ 240.15c3–1 of this title applicable to 

the reference asset if § 240.15c3–1 of 

this title specifies a percentage 

deduction for the type of asset and this 

section does not specify a percentage 

deduction; 

(ii) Six percent in the case of a 

currency swap that references euros, 

British pounds, Canadian dollars, 

Japanese yen, or Swiss francs, and 

twenty percent in the case of currency 

swaps that reference any other foreign 

currencies; or 

(iii) In the case of over-the-counter 

swap transactions involving 

commodities, 20 percent of the market 

value of the amount of the underlying 

commodities; and 

(iv) In the case of security-based 

swaps as defined in section 3(a) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)), the percentage as 

specified in § 240.15c3–1 of this title. 

* * * * * 

(viii) In the case of a futures 

commission merchant, for 

undermargined customer 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, 


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clearing organization margin 

requirements applicable to such 

positions, after application of calls for 

margin or other required deposits which 

are outstanding no more than one 

business day. 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 no more than one 

business day, 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. 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: 

(A) The value attributable to the asset 

pursuant to the margin rules of the 

applicable board of trade, or 

(B) The market value of the asset after 

application of the percentage 

deductions specified in paragraph (c)(5) 

of this section; 

(ix) In the case of a futures 

commission merchant, for 

undermargined 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 no more than one 

business day. 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 no more than one 

business day 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. 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 paragraph 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 

paragraph (c)(5) of this section; 

(x) In the case of open futures 

contracts, cleared swaps, and granted 

(sold) commodity options held in 

proprietary accounts carried by the 

applicant or registrant which are not 

covered by a position held by the 

applicant or registrant or which are not 

the result of a ‘‘changer trade’’ made in 

accordance with the rules of a contract 

market: 

(A) For an applicant or registrant 

which is a clearing member of a clearing 

organization for the positions cleared by 

such member, the applicable margin 

requirement of the applicable clearing 

organization; 

(B) For an applicant or registrant 

which is a member of a self-regulatory 

organization, 150 percent of the 

applicable maintenance margin 

requirement of the applicable board of 

trade, or clearing organization, 

whichever is greater; 

(C) For all other applicants or 

registrants, 200 percent of the applicable 

maintenance margin requirements of the 

applicable board of trade or clearing 

organization, whichever is greater; or 

(D) For open contracts or granted 

(sold) commodity options for which 

there are no applicable maintenance 

margin requirements, 200 percent of the 

applicable initial margin requirement: 

Provided, the equity in any such 

proprietary account shall reduce the 

deduction required by this paragraph 

(c)(5)(x) if such equity is not otherwise 

includable in adjusted net capital; 

* * * * * 

(xiv) For securities brokers and 

dealers, all other deductions specified 

in § 240.15c3–1 of this title; 

(xv) In the case of a futures 

commission merchant, the amount of 

the uncleared swap margin that the 

futures commission merchant has not 

collected from a swap counterparty, less 

any amounts owed by the futures 

commission merchant to the swap 

counterparty for uncleared swap 

transactions. 

(6)(i) Election of alternative capital 

deductions that have received approval 

of Securities and Exchange Commission 

pursuant to § 240.15c3–1(a)(7) of this 

title. 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, 

under § 240.15c3–1(a)(7) of this title, the 

Securities and Exchange Commission 

has approved by written order in lieu of 

the deductions that would otherwise be 

required under this section. 

* * * * * 

(iv) * * * 

(A) Information that the futures 

commission merchant files on a 

monthly basis with its designated 

examining authority or the Securities 

and Exchange Commission, whether by 

way of schedules to its FOCUS reports 

or by other filings, in satisfaction of 

§ 240.17a–5(a)(5) of this title; 

* * * * * 

(v) Election of alternative market risk 

and credit risk capital deductions for a 

futures commission merchant that is 

registered as a swap dealer and has 

received approval of the Commission or 

a registered futures association for 

which the futures commission merchant 

is a member. For purposes of this 

paragraph (c)(6)(v) only, all references to 

futures commission merchant means a 

futures commission merchant that is 

also registered as a swap dealer. 

(A) A futures commission merchant 

may apply in writing to the Commission 

or a registered futures association of 

which it is a member for approval to 

compute deductions for market risk and 

credit risk using internal models in lieu 

of the standardized deductions 

otherwise required under this section. 

The futures commission merchant must 

file the application in accordance with 

instructions approved by the 

Commission and specified on the Web 

site of the registered futures association. 

(B) A futures commission merchant’s 

application must include the 

information set forth in Appendix A to 

§ 23.102 of this chapter and the market 

risk and credit risk charges must be 

computed in accordance with § 23.102 

of this chapter. 

(vi) A futures commission merchant 

that is also registered as a swap dealer 

must comply with the liquidity 

requirements in § 23.104(b)(1) of this 

chapter as though it were a swap dealer 

that elected to follow § 23.101(a)(1)(ii) of 

this chapter in computing its minimum 

capital requirement. 

* * * * * 

(g)(1) The Commission may by order 

restrict, for a period of up to twenty 

business days, any withdrawal by a 

futures commission merchant of equity 

capital, or any unsecured advance or 

loan to a stockholder, partner, limited 

liability company member, sole 

proprietor, employee or affiliate if the 

Commission, based on the facts and 

information available, concludes that 


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any such withdrawal, advance or loan 

may be detrimental to the financial 

integrity of the futures commission 

merchant, or may unduly jeopardize its 

ability to meet customer obligations or 

other liabilities that may cause a 

significant impact on the markets. 

* * * * * 

■ 6. In § 1.65, revise paragraph (b) 

introductory text and paragraphs (d) and 

(e) to read as follows: 

§ 1.65 Notice of bulk transfers and 

disclosure obligations to customers. 

* * * * * 

(b) Notice to the Commission. Each 

futures commission merchant or 

introducing broker shall file with the 

Commission, at least ten business days 

in advance of the transfer, notice of any 

transfer of customer accounts carried or 

introduced by such futures commission 

merchant or introducing broker that is 

not initiated at the request of the 

customer, where the transfer involves 

the lesser of: 

* * * * * 

(d) The notice required by paragraph 

(b) of this section shall be considered 

filed when submitted to the Director of 

the Division of Swap Dealer and 

Intermediary Oversight, 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. 

(e) In the event that the notice 

required by paragraph (b) of this section 

cannot be filed with the Commission at 

least ten days prior to the account 

transfer, the Commission hereby 

delegates to the Director of the Division 

of Swap Dealer and Intermediary 

Oversight, or such other employee or 

employees as the Director may designate 

from time to time, the authority to 

accept a lesser time period for such 

notification at the Director’s or 

designee’s discretion. In any event, 

however, the transferee futures 

commission merchant or introducing 

broker shall file such notice as soon as 

practicable and no later than the day of 

the transfer. Such notice shall include a 

brief statement explaining the 

circumstances necessitating the delay in 

filing. 

* * * * * 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

■ 7. The authority citation for part 23 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b–1, 

6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, 

18, 19, 21. 

Section 23.160 also issued under 7 U.S.C. 

2(i); Sec. 721(b), Pub. L. 111–203, 124 Stat. 

1641 (2010). 

■ 8. Revise subpart E of part 23 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 Calculation of market risk exposure 

requirement and credit risk exposure 

requirement using internal models. 

23.103 Calculation of market risk exposure 

requirement and credit risk exposure 

requirement when models are not 

approved. 

23.104 Liquidity requirements and equity 

withdrawal restrictions. 

23.105 Financial recordkeeping, reporting 

and notification requirements for swap 

dealers and major swap participants. 

23.106 Comparability determination for 

substituted compliance. 

23.107–23.149 [Reserved] 

Subpart E—Capital and Margin 

Requirements for Swap Dealers and 

Major Swap Participants 

§ 23.100 Definitions applicable to capital 

requirements. 

For purposes of §§ 23.101 through 

23.108 of subpart E of this part, the 

following terms are defined as follows: 

Actual daily net trading profit and 

loss. This term is used in assessing the 

performance of a swap dealer’s VaR 

measure and refers to changes in the 

swap dealer’s portfolio value that would 

have occurred were end-of-day 

positions to remain unchanged 

(therefore, excluding fees, commissions, 

reserves, net interest income, and 

intraday trading). 

Credit risk. This term refers to the risk 

that the counterparty to an uncleared 

swap transaction could default before 

the final settlement of the transaction’s 

cash flows. 

Credit risk exposure requirement. 

This term refers to the amount that the 

swap dealer is required to compute 

under § 23.102 if approved to use 

internal credit risk models, or to 

compute under § 23.103 if not approved 

to use internal credit risk models. 

Exempt foreign exchange swaps and 

foreign exchange forwards are those 

foreign exchange swaps and foreign 

exchange forwards that were exempted 

from the definition of a swap by the U.S. 

Department of the Treasury. 

Market risk exposure. This term 

means the risk of loss in a position or 

portfolio of positions resulting from 

movements in market prices and other 

factors. Market risk exposure is the sum 

of: 

(1) General market risks including 

changes in the market value of a 

particular assets that result from broad 

market movements, such as a changes in 

market interest rates, foreign exchange 

rates, equity prices, and commodity 

prices; 

(2) Specific risk, which includes 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; 

(3) Incremental risk, which means the 

risk of loss on a position that could 

result from the failure of an obligor to 

make timely payments of principal and 

interest; and 

(4) Comprehensive risk, which is the 

measure of all material price risks of one 

or more portfolios of correlation trading 

positions. 

Market risk exposure requirement. 

This term refers to the amount that the 

swap dealer is required to compute 

under § 23.102 if approved to use 

internal market risk models, or § 23.103 

if not approved to use internal market 

risk models. 

Predominantly engaged in nonfinancial activities. A swap dealer is 

predominantly engaged in non-financial 

activities if: 

(1) The swap dealer’s consolidated 

annual gross financial revenues in either 

of its two most recently completed fiscal 

years represents less than 15 percent of 

the swap dealer’s consolidated gross 

revenue in that fiscal year (‘‘15% 

revenue test’’), and 

(2) The consolidated total financial 

assets of the swap dealer at the end of 

its two most recently completed fiscal 

years represents less than 15 percent of 

the swap dealer’s consolidated total 

assets as of the end of the fiscal year 

(‘‘15% asset test’’). For purpose of 

computing the 15% revenue test or the 

15% asset test, a swap dealer’s activities 

shall be deemed financial activities if 

such activities are defined as financial 

activities under 12 CFR 242.3 and 

Appendix A of 12 CFR part 242, 

including lending, investing for others, 

safeguarding money or securities for 

others, providing financial or 

investment advisory services, 

underwriting or making markets in 

securities, providing securities 

brokerage services, and engaging as 

principal in investing and trading 

activities; provided, however, a swap 

dealer may exclude from its financial 

activities accounts receivable resulting 

from non-financial activities. 

Prudential regulator. This term has 

the same meaning as set forth in section 


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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. This term shall 

mean the amount of tier 1 capital or 

ratio based capital, tangible net worth, 

or calculated net capital of a swap 

dealer or major swap participant 

relevant to the associated applicable 

regulatory capital requirement. 

Regulatory capital requirement. This 

term refers to each of the capital 

requirements that § 23.101 applies to a 

swap dealer or major swap participant. 

Tangible net worth. This term means 

the net worth of a swap dealer or major 

swap participant as determined in 

accordance with generally accepted 

accounting principles in the United 

States, excluding goodwill and other 

intangible assets. In determining net 

worth, all long and short positions in 

swaps, security-based swaps and related 

positions must be marked to their 

market value. A swap dealer or major 

swap participant must include in its 

computation of tangible net worth all 

liabilities or obligations of a subsidiary 

or affiliate that the swap dealer or major 

swap participant guarantees, endorses, 

or assumes either directly or indirectly. 

Uncleared swap margin. This term 

means the amount of initial margin, 

computed in accordance with § 23.154, 

that a swap dealer would be required to 

collect from each counterparty for each 

outstanding swap position of the swap 

dealer. A swap dealer must include all 

swap positions in the calculation of the 

uncleared margin amount, including 

swaps that are exempt from the scope of 

the Commission’s margin for uncleared 

swaps rules pursuant to § 23.150, 

exempt foreign exchange swaps or 

foreign exchange forwards, or netting set 

of swaps or foreign exchange swaps, for 

each counterparty, as if that 

counterparty was an unaffiliated swap 

dealer. Furthermore, in computing the 

uncleared swap margin amount, a swap 

dealer may not exclude the initial 

margin threshold amount or minimum 

transfer amount as such terms are 

defined in § 23.151. 

§ 23.101 Minimum financial requirements 

for swap dealers and major swap 

participants. 

(a)(1) Except as provided in 

paragraphs (a)(2) through (a)(5) of this 

section, each swap dealer must elect to 

be subject to the minimum capital 

requirements set forth in either 

paragraphs (a)(1)(i) or (a)(1)(ii) of this 

section: 

(i) A swap dealer that elects to meet 

the capital requirements in this 

paragraph (a)(1)(i) must maintain 

regulatory capital that equals or exceeds 

the greatest of the following: 

(A) $20 million of common equity tier 

1 capital, as defined under the bank 

holding company regulations in 12 CFR 

217.20, as if the swap dealer itself were 

a bank holding company subject to 12 

CFR part 217; 

(B) Common equity tier 1 capital, as 

defined under the bank holding 

company regulations in 12 CFR 217.20, 

equal to or greater than eight percent of 

the swap dealer’s risk-weighted assets 

computed under the bank holding 

company regulations in 12 CFR part 

217, as if the swap dealer itself were a 

bank-holding company subject to 12 

CFR part 217; provided, however, that 

the swap dealer must add to its riskweighted assets market risk capital 

charges computed in accordance with 

§ 1.17 of this chapter if the swap dealer 

has not obtained the approval of the 

Commission or of a registered futures 

association to use internal capital 

models under § 23.102; 

(C) Common equity tier 1 capital, as 

defined under 12 CFR 217.20, equal to 

or greater than eight percent of the sum 

of: 

(1) The amount of uncleared swap 

margin, as that term is defined in 

§ 23.100, for each uncleared swap 

position open on the books of the swap 

dealer, computed on a counterparty by 

counterparty basis pursuant to § 23.154; 

(2) The amount of initial margin that 

would be required for each uncleared 

security-based swap position open on 

the books of the swap dealer, computed 

on a counterparty by counterparty basis 

pursuant to § 240.18a–3(c)(1)(i)(B) of 

this title without regard to any initial 

margin exemptions or exclusions that 

the rules of the Securities and Exchange 

Commission may provide to such 

security-based swap positions; and 

(3) The amount of initial margin 

required by clearing organizations for 

cleared proprietary futures, foreign 

futures, swaps, and security-based 

swaps positions open on the books of 

the swap dealer; or, 

(D) The amount of capital required by 

a registered futures association of which 

the swap dealer is a member. 

(ii) A swap dealer that elects to meet 

the capital requirements in this 

paragraph (a)(1)(ii) must maintain 

regulatory capital that equals or exceeds 

the greatest of the following: 

(A) The amount of tentative net 

capital and net capital required by, and 

computed in accordance with, 

§ 240.18a–1 of this title as if the swap 

dealer were a security-based swap 

dealer registered with the Securities and 

Exchange Commission and subject to 

§ 240.18a–1 of this title; Provided, 

however, that the swap dealer’s 

computation is subject to the following 

adjustments: 

(1) In computing its minimum capital 

requirement, a swap dealer shall adjust 

the ‘‘risk margin amount’’ subject to the 

eight percent computation under 

§ 240.18a–1(a)(1) and (2) of this title to 

be the sum of: 

(i) The amount of uncleared swap 

margin, as that term is defined in 

§ 23.100, for each uncleared swap 

position open on the books of the swap 

dealer, computed on a counterparty by 

counterparty basis pursuant to § 23.154; 

(ii) The amount of initial margin that 

would be required for each uncleared 

security-based swap position open on 

the books of the swap dealer, computed 

on a counterparty by counterparty basis 

pursuant to § 240.18a–3(c)(1)(i)(B) of 

this title without regard to any initial 

margin exemptions or exclusions that 

the rules of the Securities and Exchange 

Commission may provide to such 

security-based swap positions; 

(iii) The amount of risk margin, as 

defined in § 1.17(b)(8) of this chapter, 

required by a clearing organization for 

proprietary futures, swaps, and foreign 

futures positions open on the books of 

the swap dealer; and 

(iv) The amount of initial margin 

required by a clearing organization for 

proprietary security-based swaps open 

on the books of the swap dealer; 

(2) A swap dealer that uses internal 

models to compute market risk for its 

proprietary positions under § 240.18a– 

1(d) of this title must calculate the total 

market risk as the sum of the VaR 

measure, stressed VaR measure, specific 

risk measure, comprehensive risk 

measure, and incremental risk measure 

of the portfolio of proprietary positions 

in accordance with § 23.102 and 

Appendix A of § 23.102; 

(3) A swap dealer that has obtained 

approval from the Commission or from 

a registered futures association of which 

it is a member to uses internal models 

to compute credit risk capital charges 

for receivables resulting from uncleared 

swap and security-based swap 

transactions may use such models in 

computing the credit risk charge for 

receivables resulting from swap and 

security-based swap transactions under 

§ 240.18a–1(d) of this title from all 

counterparties, including commercial 

end users as defined in § 240.18a– 

3(b)(2) of this title; 

(4) A swap dealer may recognize as a 

current asset, receivables from thirdVerDate Sep<11>2014 19:23 Dec 15, 2016 Jkt 241001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 E:\FR\FM\16DEP2.SGM 16DEP2

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party custodians that maintain the swap 

dealer’s initial margin deposits 

associated with uncleared swap 

transactions under § 23.152 and the 

swap dealer’s initial margin deposits 

associated with uncleared securitybased swap transactions under 

§ 240.18a–1(c)(1) of this title; and 

(5) A swap dealer may not deduct the 

margin difference as that term is defined 

in § 240.18a–1(c)(1)(viii) of this title for 

swap and security-based swap 

transactions in lieu of collecting margin 

on such transactions; or 

(B) The amount of capital required by 

a registered futures association of which 

the swap dealer is a member. 

(2)(i) A swap dealer that is 

‘‘predominantly engaged in nonfinancial activities’’ as defined in 

§ 23.100 may elect to meet the minimum 

capital requirements in this paragraph 

(a)(2) in lieu of the capital requirements 

in paragraph (a)(1) of this section. 

(ii) A swap dealer that satisfies the 

requirements of paragraph (a)(2)(i) of 

this section and elects to meet the 

requirements of this paragraph (a)(2) 

must maintain tangible net worth, as 

defined in § 23.100, equal to or in excess 

of the greatest of the following: 

(A) $20 million plus the amount of 

the swap dealer’s market risk exposure 

requirement (as defined in § 23.100) and 

its credit risk exposure requirement (as 

defined in § 23.100) associated with the 

swap dealer’s swap and related hedge 

positions that are part of the swap 

dealer’s swap dealing activities. The 

swap dealer shall compute its market 

risk exposure requirement and credit 

risk exposure requirement for its swap 

positions in accordance with § 23.102 if 

the swap dealer has obtained the 

approval of the Commission or a 

registered futures association of which it 

is a member to use internal capital 

models. The swap dealer shall compute 

its market risk exposure requirement 

and credit risk exposure requirement in 

accordance with the standardized 

approach of paragraphs (b)(1) and (c)(1) 

of § 23.103 if it has not been approved 

by the Commission or a registered 

futures association to use internal 

capital models; 

(B) Eight percent of the sum of: 

(1) The amount of uncleared swap 

margin, as that term is defined in 

§ 23.100, for each uncleared swap 

positions open on the books of the swap 

dealer, computed on a counterparty by 

counterparty basis pursuant to § 23.154; 

(2) The amount of initial margin that 

would be required for each uncleared 

security-based swap position open on 

the books of the swap dealer, computed 

on a counterparty by counterparty basis 

pursuant to § 240.18a–3(c)(1)(i)(B) of 

this title without regard to any initial 

margin exemptions or exclusions that 

the rules of the Securities and Exchange 

Commission may provide to such 

security-based swap positions; and 

(3) The amount of initial margin 

required by clearing organizations for 

cleared proprietary futures, foreign 

futures, swaps, security-based swaps 

positions on the books of the swap 

dealer; or, 

(C) The amount of capital required by 

a registered futures association of which 

the swap dealer is a member. 

(3) A swap dealer that is subject to 

minimum capital requirements 

established by the rules or regulations of 

a prudential regulator pursuant to 

section 4s(e) of the Act is not subject to 

the regulatory capital requirements set 

forth in paragraph (a)(1) or (2) of this 

section. 

(4) A swap dealer that is a futures 

commission merchant is subject to the 

minimum capital requirements of § 1.17 

of this chapter, and is not subject to the 

regulatory capital requirements set forth 

in paragraph (a)(1) or (2) of this section. 

(5) A swap dealer that is organized 

and domiciled outside of the United 

States, including a swap dealer that is 

an affiliate of a person organized and 

domiciled in the United States, may 

satisfy its requirements for capital 

adequacy under paragraphs (a)(1) or (2) 

of this section by substituted 

compliance with the capital adequacy 

requirement of its home country 

jurisdiction. In order to qualify for 

substituted compliance, a swap dealer’s 

home country jurisdiction must receive 

from the Commission a Capital 

Comparability Determination under 

§ 23.106, and the swap dealer must 

obtain a confirmation to rely on the 

Capital Comparability Determination 

from a registered futures association as 

provided under § 23.106. 

(6) A swap dealer that elects to meet 

the capital requirements of paragraph 

(a)(1)(i), (a)(1)(ii), or (a)(2) of this section 

may not subsequently change its 

election without the prior written 

approval of the Commission. A swap 

dealer that wishes to change its election 

must submit a written request to the 

Commission and must provide any 

additional information and 

documentation requested by the 

Commission. 

(b)(1) Every major swap participant 

for which there is not a prudential 

regulator must at all time have and 

maintain positive tangible net worth. 

(2) Notwithstanding paragraph (b)(1) 

of this section, each major swap 

participant for which there is no 

prudential regulator must meet the 

minimum capital requirements 

established by a registered futures 

association of which the major swap 

participant is a member. 

(c)(1) Before any applicant may be 

registered as a swap dealer or major 

swap participant, the applicant must 

demonstrate to the satisfaction of a 

registered futures association of which it 

is a member, or applying for 

membership, one of the following: 

(i) That the applicant complies with 

the applicable regulatory capital 

requirements in paragraph (a)(1), (a)(2), 

(b)(1) or (b)(2) of this section; 

(ii) That the applicant is a futures 

commission merchant that complies 

with § 1.17 of this chapter; 

(iii) That the applicant is subject to 

minimum capital requirements 

established by the rules or regulations of 

a prudential regulator under paragraph 

(a)(3) of this section; 

(iv) That the applicant is organized 

and domiciled in a non-U.S. jurisdiction 

and is regulated in a jurisdiction for 

which the Commission has issued a 

Capital Comparability Determination 

under § 23.106, and the non-U.S. person 

has obtained confirmation from a 

registered futures association of which it 

is a member that it may rely upon the 

Commission’s Comparability 

Determination under § 23.106. 

(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 such 

requirements at all times, and must be 

able to demonstrate such compliance to 

the satisfaction of the Commission and 

to the registered futures association of 

which the swap dealer or major swap 

dealer is a member. 

§ 23.102 Calculation of market risk 

exposure requirement and credit risk 

exposure requirement using internal 

models. 

(a) A swap dealer may apply to the 

Commission, or to a registered futures 

association of which the swap dealer is 

a member, for approval to use internal 

models under terms and conditions 

required by the Commission and by 

these regulations, or under the terms 

and conditions required by the 

registered futures association of which 

the swap dealer is a member, when 

calculating the swap dealer’s market 

risk exposure and credit risk exposure 

under § 23.101(a)(1)(i)(B), (a)(1)(ii)(A), 

or (a)(2)(ii)(A). 

(b) The swap dealer’s application to 

use internal models to compute market 

risk exposure and credit risk exposure 

must be in writing and must be filed 

with the Commission and with the 

registered futures association of which 


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the swap dealer is a member. The swap 

dealer must file the application in 

accordance with instructions 

established by the Commission and the 

registered futures association. 

(c) A swap dealer’s application must 

include the information set forth in 

Appendix A of this section. 

(d) The Commission or the registered 

futures association 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 or 

registered futures association may 

require, if the Commission or registered 

futures association finds the approval to 

be appropriate in the public interest, 

after determining, among other things, 

whether the applicant has met the 

requirements of this section, and the 

appendices to this section. A swap 

dealer that has received Commission or 

registered futures association approval 

to compute market risk exposure 

requirements and credit risk exposure 

requirements pursuant to internal 

models must compute such charges in 

accordance with Appendix A of this 

section. 

(e) A swap dealer must cease using 

internal models to compute its market 

risk exposure requirement and credit 

risk exposure requirement, upon the 

occurrence of any of the following: 

(1) The swap dealer has materially 

changed a mathematical model 

described in the application or 

materially changed its internal risk 

management control system without 

first submitting amendments identifying 

such changes and obtaining the 

approval of the Commission or the 

registered futures association for such 

changes; 

(2) The Commission or the registered 

futures association of which the swap 

dealer is a member determines that the 

internal models are no longer sufficient 

for purposes of the capital calculations 

of the swap dealer as a result of changes 

in the operations of the swap dealer; 

(3) The swap dealer fails to come into 

compliance with its requirements under 

this section, after having received from 

the Director of the Commission’s 

Division of Swap Dealer and 

Intermediary Oversight, or from the 

registered futures association of which 

the swap dealer is a member, written 

notification that the swap dealer is not 

in compliance with its requirements, 

and must come into compliance by a 

date specified in the notice; or 

(4) The Commission by written order 

finds that permitting the swap dealer to 

continue to use the internal models is 

no longer appropriate. 

Appendix A to § 23.102—Application 

for Internal Models To Compute Market 

Risk Exposure Requirement and Credit 

Risk Exposure Requirement 

(a) A swap dealer that is requesting the 

approval of the Commission, or the approval 

of a registered futures association of which 

the swap dealer is a member, to use internal 

models to compute its market risk exposure 

requirement and credit risk exposure 

requirement under § 23.102 must include the 

following information as part of its 

application: 

(1) An executive summary of the 

information within its application and, if 

applicable, an identification of the ultimate 

holding company of the swap dealer; 

(2) A list of the categories of positions that 

the swap dealer holds in its proprietary 

accounts and a brief description of the 

methods that the swap dealer will use to 

calculate deductions for market risk and 

credit risk on those categories of positions; 

(3) A description of the mathematical 

models used by the swap dealer under this 

Appendix A to compute the VaR of the swap 

dealer’s positions; the stressed VaR of the 

swap dealer’s positions; the specific risk of 

the swap dealer’s positions subject to specific 

risk; comprehensive risk of the swap dealer’s 

positions; and the incremental risk of the 

swap dealer’s positions, and deductions for 

credit risk exposure. The description should 

encompass the creation, use, and 

maintenance of the mathematical models; a 

description of the swap dealer’s internal risk 

management controls over the models, 

including a description of each category of 

persons who may input data into the models; 

if a mathematical model incorporates 

empirical correlations across risk categories, 

a description of the process for measuring 

correlations; a description of the backtesting 

procedures the swap dealer will use to 

backtest the mathematical models; a 

description of how each mathematical model 

satisfies the applicable qualitative and 

quantitative requirements set forth in this 

Appendix A and a statement describing the 

extent to which each mathematical model 

used to compute deductions for market risk 

exposures and credit risk exposures will be 

used as part of the risk analyses and reports 

presented to senior management; 

(4) If the swap dealer is applying to the 

Commission or a registered futures 

association for approval to use scenario 

analysis to calculate deductions for market 

risk for certain positions, a list of those types 

of positions, a description of how those 

deductions will be calculated using scenario 

analysis, and an explanation of why each 

scenario analysis is appropriate to calculate 

deductions for market risk on those types of 

positions; 

(5) A description of how the swap dealer 

will calculate current exposure; 

(6) A description of how the swap dealer 

will determine internal credit ratings of 

counterparties and internal credit risk 

weights of counterparties, if applicable; 

(7) For each instance in which a 

mathematical model to be used by the swap 

dealer to calculate a deduction for market 

risk exposure or to calculate maximum 

potential exposure for a particular product or 

counterparty differs from the mathematical 

model used by the swap dealer’s ultimate 

holding company or the swap dealer’s 

affiliates (if applicable) to calculate an 

allowance for market risk exposure or to 

calculate maximum potential exposure for 

that same product or counterparty, a 

description of the difference(s) between the 

mathematical models; 

(8) A description of the swap dealer’s 

process of re-estimating, re-evaluating, and 

updating internal models to ensure 

continued applicability and relevance; and 

(9) Sample risk reports that are provided to 

management at the swap dealer who are 

responsible for managing the swap dealer’s 

risk. 

(b) The application of the swap dealer shall 

be supplemented by other information 

relating to the internal risk management 

control system, mathematical models, and 

financial position of the swap dealer that the 

Commission or a registered futures 

association may request to complete its 

review of the application. 

(c) A person who files an application 

pursuant to this section for which it seeks 

confidential treatment may clearly mark each 

page or segregable portion of each page with 

the words ‘‘Confidential Treatment 

Requested.’’ All information submitted in 

connection with the application will be 

accorded confidential treatment, to the extent 

permitted by law. 

(d) If any of the information filed with the 

Commission or a registered futures 

association as part of the application of the 

swap dealer is found to be or becomes 

inaccurate before the Commission or a 

registered futures association approves the 

application, the swap dealer must notify the 

Commission or registered futures association 

promptly and provide the Commission or 

registered futures associations with a 

description of the circumstances in which 

the information was found to be or has 

become inaccurate along with updated, 

accurate information. 

(e) The Commission or registered futures 

association may approve the application or 

an amendment to the application, in whole 

or in part, subject to any conditions or 

limitations the Commission or the registered 

futures association may require if the 

Commission or the registered futures 

association finds the approval to be 

appropriate in the public interest, after 

determining, among other things, whether 

the swap dealer has met all the requirements 

of this Appendix A. 

(f) A swap dealer shall amend its 

application under this Appendix A and 

submit the amendment to the Commission 

and the registered futures association for 

approval before it may materially change a 

mathematical model used to calculate market 

risk exposure requirements or credit risk 

exposure requirements or before it may 

materially change its internal risk 

management control system with respect to 

such model. 

(g) As a condition for a swap dealer to use 

internal models to compute deductions for 

market risk exposure and credit risk exposure 

under this Appendix A, the swap dealer 

agrees that: 


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(1) It will notify the Commission and 

registered futures association 45 days before 

it ceases to use internal models to compute 

deductions for market risk exposure and 

credit risk exposure under this Appendix A; 

and 

(2) The Commission or the registered 

futures association may determine that the 

notice will become effective after a shorter or 

longer period of time if the swap dealer 

consents or if the Commission or the 

registered futures association determines that 

a shorter or longer period of time is 

appropriate in the public interest. 

(h) The Commission may by written order, 

or the registered futures association by 

written notice, revoke a swap dealer’s 

approval to use internal models to compute 

market risk exposures and credit risk 

exposures on certain credit exposures arising 

from transactions in derivatives instruments 

if the Commission or the registered futures 

association of which the swap dealer is a 

member finds that such approval is no longer 

appropriate in the public interest. In making 

its finding, the Commission or the registered 

futures association will consider the 

compliance history of the swap dealer related 

to its use of models and the swap dealer’s 

compliance with its internal risk 

management controls. If the Commission or 

registered futures association withdraws all 

or part of a swap dealer’s approval to use 

internal models, the swap dealer shall 

compute market risk exposure requirements 

and credit risk exposure requirements in 

accordance with § 23.103. 

(i) VaR models. A value-at-risk (‘‘VaR’’) 

model must meet the following minimum 

requirements in order to be approved: 

(1) Qualitative requirements. 

(i) The VaR model used to calculate market 

risk exposure or credit risk exposure for a 

position must be integrated into the daily 

internal risk management system of the swap 

dealer; 

(ii) The VaR model must be reviewed both 

periodically and annually. The periodic 

review may be conducted by personnel of the 

swap dealer that are independent from the 

personnel that perform the VaR model 

calculations. The annual review must be 

conducted by a qualified third party service. 

The review must include: 

(A) An evaluation of the conceptual 

soundness of, and empirical support for, the 

internal models; 

(B) An ongoing monitoring process that 

includes verification of processes and the 

comparison of the swap dealer’s model 

outputs with relevant internal and external 

data sources or estimation techniques; and 

(C) An outcomes analysis process that 

includes backtesting. This process must 

include a comparison of the changes in the 

swap dealer’s portfolio value that would have 

occurred were end-of-day positions to remain 

unchanged (therefore, excluding fees, 

commissions, reserves, net interest income, 

and intraday trading) with VaR-based 

measures during a sample period not used in 

model development. 

(iii) For purposes of computing market 

risk, the swap dealer must determine the 

appropriate multiplication factor as follows: 

(A) Beginning three months after the swap 

dealer begins using the VaR model to 

calculate the market risk exposure, the swap 

dealer must conduct monthly backtesting of 

the model by comparing its actual daily net 

trading profit or loss with the corresponding 

VaR measure generated by the VaR model, 

using a 99 percent, one-tailed confidence 

level with price changes equivalent to a one 

business-day movement in rates and prices, 

for each of the past 250 business days, or 

other period as may be appropriate for the 

first year of its use; 

(B) On the last business day of each 

quarter, the swap dealer must identify the 

number of backtesting exceptions of the VaR 

model using actual daily net trading profit 

and loss, as that term is defined in § 23.100. 

An exception has occurred when for a 

business day the actual net trading loss, if 

any, exceeds the corresponding VaR measure. 

The counting period shall be for the prior 250 

business days except that during the first 

year of use of the model another appropriate 

period may be used; and 

(C) The swap dealer must use the 

multiplication factor indicated in Table 1 of 

this Appendix A in determining its market 

risk until it obtains the next quarter’s 

backtesting results; 

TABLE 1—MULTIPLICATION FACTOR

BASED ON THE NUMBER OF

BACKTESTING EXCEPTIONS OF THE

VAR MODEL

Number of 

exceptions 

Multiplication 

factor 

4 or fewer ......................... 3.00 

5 ........................................ 3.40 

6 ........................................ 3.50 

7 ........................................ 3.65 

8 ........................................ 3.75 

9 ........................................ 3.85 

10 or more ........................ 4.00 

(iv) For purposes of computing the credit 

equivalent amount of the swap dealer’s 

exposures to a counterparty, the swap dealer 

must determine the appropriate 

multiplication factor as follows: 

(A) Beginning three months after it begins 

using the VaR model to calculate maximum 

potential exposure, the swap dealer must 

conduct backtesting of the model by 

comparing, for at least 80 counterparties (or 

the actual number of counterparties if the 

swap dealer does not have 80 counterparties) 

with widely varying types and sizes of 

positions with the firm, the ten business day 

change in its current exposure to the 

counterparty based on its positions held at 

the beginning of the ten-business day period 

with the corresponding ten-business day 

maximum potential exposure for the 

counterparty generated by the VaR model; 

(B) As of the last business day of each 

quarter, the swap dealer must identify the 

number of backtesting exceptions of the VaR 

model, that is, the number of ten-business 

day periods in the past 250 business days, or 

other period as may be appropriate for the 

first year of its use, for which the change in 

current exposure to a counterparty, assuming 

the portfolio remains static for the tenbusiness day period, exceeds the 

corresponding maximum potential exposure; 

and 

(C) The swap dealer will propose, as part 

of its application, a schedule of 

multiplication factors, which must be 

approved by the Commission, or a registered 

futures association of which the swap dealer 

is a member, based on the number of 

backtesting exceptions of the VaR model. The 

swap dealer must use the multiplication 

factor indicated in the approved schedule in 

determining the credit equivalent amount of 

its exposures to a counterparty until it 

obtains the next quarter’s backtesting results, 

unless the Commission or the registered 

futures association determines, based on, 

among other relevant factors, a review of the 

swap dealer’s internal risk management 

control system, including a review of the VaR 

model, that a different adjustment or other 

action is appropriate. 

(2) Quantitative requirements. (i) For 

purposes of determining market risk 

exposure, the VaR model must use a 99 

percent, one-tailed confidence level with 

price changes equivalent to a ten businessday movement in rates and prices; 

(ii) For purposes of determining maximum 

potential exposure, the VaR model must use 

a 99 percent, one-tailed confidence level with 

price changes equivalent to a one-year 

movement in rates and prices; or based on a 

review of the swap dealer’s procedures for 

managing collateral and if the collateral is 

marked to market daily and the swap dealer 

has the ability to call for additional collateral 

daily, the Commission, or the registered 

futures association of which the swap dealer 

is a member, may approve a time horizon of 

not less than ten business days; 

(iii) The VaR model must use an effective 

historical observation period of at least one 

year. The swap dealer must consider the 

effects of market stress in its construction of 

the model. Historical data sets must be 

updated at least monthly and reassessed 

whenever market prices or volatilities change 

significantly or portfolio composition 

warrant; and 

(iv) The VaR model must take into account 

and incorporate all significant, identifiable 

market risk factors applicable to positions in 

the accounts of the swap dealer, including: 

(A) Risks arising from the non-linear price 

characteristics of derivatives and the 

sensitivity of the fair value of those positions 

to changes in the volatility of the derivatives’ 

underlying rates, prices, or other material 

risk factors. A swap dealer with a large or 

complex portfolio with non-linear derivatives 

(such as options or positions with embedded 

optionality) must measure the volatility of 

these positions at different maturities and/or 

strike prices, where material; 

(B) Empirical correlations within and 

across risk factors provided that the swap 

dealer validates and demonstrates the 

reasonableness of its process for measuring 

correlations, if the VaR-based measure does 

not incorporate empirical correlations across 

risk categories, the swap dealer must add the 

separate measures from its internal models 

used to calculate the VaR-based measure for 

the appropriate risk categories (interest rate 

risk, credit spread risk, equity price risk, 

foreign exchange rate risk, and/or commodity 


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price risk) to determine its aggregate VaRbased measure, or, alternatively, risk factors 

sufficient to cover all the market risk 

inherent in the positions in the proprietary 

or other trading accounts of the swap dealer, 

including interest rate risk, equity price risk, 

foreign exchange risk, and commodity price 

risk; and 

(C) Spread risk, where applicable, and 

segments of the yield curve sufficient to 

capture differences in volatility and 

imperfect correlation of rates along the yield 

curve for securities and derivatives that are 

sensitive to different interest rates. For 

material positions in major currencies and 

markets, modeling techniques must 

incorporate enough segments of the yield 

curve—in no case less than six—to capture 

differences in volatility and less than perfect 

correlation of rates along the yield curve. 

(j) Stressed VaR-based Measure. A stressed 

VaR model must meet the following 

minimum requirements in order to be 

approved: 

(1) Requirements for stressed VaR-based 

measure. (i) A swap dealer must calculate a 

stressed VaR-based measure for its positions 

using the same model(s) used to calculate the 

VaR-based measure under paragraph (i) of 

this appendix, subject to the same confidence 

level and holding period applicable to the 

VaR-based measure, but with model inputs 

calibrated to historical data from a 

continuous 12-month period that reflects a 

period of significant financial stress 

appropriate to the swap dealer’s current 

portfolio. 

(ii) The stressed VaR-based measure must 

be calculated at least weekly and be no less 

than the swap dealer’s VaR-based measure. 

(iii) A swap dealer must have policies and 

procedures that describe how it determines 

the period of significant financial stress used 

to calculate the swap dealer’s stressed VaRbased measure under this section and must 

be able to provide empirical support for the 

period used. The swap dealer must obtain the 

prior approval of the Commission, or a 

registered futures association of which the 

swap dealer is a member, if the swap dealer 

makes any material changes to these policies 

and procedures. The policies and procedures 

must address: 

(A) How the swap dealer links the period 

of significant financial stress used to 

calculate the stressed VaR-based measure to 

the composition and directional bias of its 

current portfolio; and 

(B) The swap dealer’s process for selecting, 

reviewing, and updating the period of 

significant financial stress used to calculate 

the stressed VaR-based measure and for 

monitoring the appropriateness of the period 

to the swap dealer’s current portfolio. 

(iv) Nothing in this appendix prevents the 

Commission or the registered futures 

association of which the swap dealer is a 

member from requiring a swap dealer to use 

a different period of significant financial 

stress in the calculation of the stressed VaRbased measure. 

(k) Specific Risk. A specific risk model 

must meet the following minimum 

requirements in order to be approved: 

(1) General requirement. A swap dealer 

must use one of the methods in this 

paragraph (k) to measure the specific risk for 

each of its debt, equity, and securitization 

positions with specific risk. 

(2) Modeled specific risk. A swap dealer 

may use models to measure the specific risk 

of its proprietary positions. A swap dealer 

must use models to measure the specific risk 

of correlation trading positions that are 

modeled under paragraph (m) of this 

appendix. 

(i) Requirements for specific risk modeling. 

(A) If a swap dealer uses internal models 

to measure the specific risk of a portfolio, the 

internal models must: 

(1) Explain the historical price variation in 

the portfolio; 

(2) Be responsive to changes in market 

conditions; 

(3) Be robust to an adverse environment, 

including signaling rising risk in an adverse 

environment; and 

(4) Capture all material components of 

specific risk for the debt and equity positions 

in the portfolio. Specifically, the internal 

models must: 

(i) Capture name-related basis risk; 

(ii) Capture event risk and idiosyncratic 

risk; and 

(iii) Capture and demonstrate sensitivity to 

material differences between positions that 

are similar but not identical and to changes 

in portfolio composition and concentrations. 

(B) If a swap dealer calculates an 

incremental risk measure for a portfolio of 

debt or equity positions under paragraph (l) 

of this appendix, the swap dealer is not 

required to capture default and credit 

migration risks in its internal models used to 

measure the specific risk of those portfolios. 

(C) A swap dealer shall validate a specific 

risk model through backtesting. 

(ii) Specific risk fully modeled for one or 

more portfolios. If the swap dealer’s VaRbased measure captures all material aspects 

of specific risk for one or more of its 

portfolios of debt, equity, or correlation 

trading positions, the swap dealer has no 

specific risk add-on for those portfolios. 

(3) Specific risk not modeled. 

(i) If the swap dealer’s VaR-based measure 

does not capture all material aspects of 

specific risk for a portfolio of debt, equity, or 

correlation trading positions, the swap dealer 

must calculate a specific-risk add-on for the 

portfolio under the standardized 

measurement method as described in 12 CFR 

217.210. 

(ii) A swap dealer must calculate a specific 

risk add-on under the standardized 

measurement method as described in 12 CFR 

217.200 for all of its securitization positions 

that are not modeled under this paragraph 

(k). 

(l) Incremental Risk. An incremental risk 

model must meet the following minimum 

requirements in order to be approved: 

(1) General requirement. A swap dealer 

that measures the specific risk of a portfolio 

of debt positions under paragraph (k) of this 

appendix using internal models must 

calculate at least weekly an incremental risk 

measure for that portfolio according to the 

requirements in this section. The incremental 

risk measure is the swap dealer’s measure of 

potential losses due to incremental risk over 

a one-year time horizon at a one-tail, 99.9 

percent confidence level, either under the 

assumption of a constant level of risk, or 

under the assumption of constant positions. 

With the prior approval of the Commission 

or a registered futures association of which 

the swap dealer is a member, a swap dealer 

may choose to include portfolios of equity 

positions in its incremental risk model, 

provided that it consistently includes such 

equity positions in a manner that is 

consistent with how the swap dealer 

internally measures and manages the 

incremental risk of such positions at the 

portfolio level. If equity positions are 

included in the model, for modeling 

purposes default is considered to have 

occurred upon the default of any debt of the 

issuer of the equity position. A swap dealer 

may not include correlation trading positions 

or securitization positions in its incremental 

risk measure. 

(2) Requirements for incremental risk 

modeling. For purposes of calculating the 

incremental risk measure, the incremental 

risk model must: 

(i) Measure incremental risk over a oneyear time horizon and at a one-tail, 99.9 

percent confidence level, either under the 

assumption of a constant level of risk, or 

under the assumption of constant positions. 

(A) A constant level of risk assumption 

means that the swap dealer rebalances, or 

rolls over, the swap dealer’s trading positions 

at the beginning of each liquidity horizon 

over the one-year horizon in a manner that 

maintains the swap dealer’s initial risk level. 

The swap dealer must determine the 

frequency of rebalancing in a manner 

consistent with the liquidity horizons of the 

positions in the portfolio. The liquidity 

horizon of a position or set of positions is the 

time required for a swap dealer to reduce its 

exposure to, or hedge all of its material risks 

of, the position(s) in a stressed market. The 

liquidity horizon for a position or set of 

positions may not be less than the shorter of 

three months or the contractual maturity of 

the position. 

(B) A constant position assumption means 

that the swap dealer maintains the same set 

of positions throughout the one-year horizon. 

If a swap dealer uses this assumption, it must 

do so consistently across all portfolios. 

(C) A swap dealer’s selection of a constant 

position or a constant risk assumption must 

be consistent between the swap dealer’s 

incremental risk model and its 

comprehensive risk model described in 

paragraph (m) of this appendix, if applicable. 

(D) A swap dealer’s treatment of liquidity 

horizons must be consistent between the 

swap dealer’s incremental risk model and its 

comprehensive risk model described in 

paragraph (m) of this appendix, if applicable. 

(ii) Recognize the impact of correlations 

between default and migration events among 

obligors. 

(iii) Reflect the effect of issuer and market 

concentrations, as well as concentrations that 

can arise within and across product classes 

during stressed conditions. 

(iv) Reflect netting only of long and short 

positions that reference the same financial 

instrument. 

(v) Reflect any material mismatch between 

a position and its hedge. 


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(vi) Recognize the effect that liquidity 

horizons have on dynamic hedging strategies. 

In such cases, a swap dealer must: 

(A) Choose to model the rebalancing of the 

hedge consistently over the relevant set of 

trading positions; 

(B) Demonstrate that the inclusion of 

rebalancing results in a more appropriate risk 

measurement; 

(C) Demonstrate that the market for the 

hedge is sufficiently liquid to permit 

rebalancing during periods of stress; and 

(D) Capture in the incremental risk model 

any residual risks arising from such hedging 

strategies. 

(vii) Reflect the nonlinear impact of 

options and other positions with material 

nonlinear behavior with respect to default 

and migration changes. 

(viii) Maintain consistency with the swap 

dealer’s internal risk management 

methodologies for identifying, measuring, 

and managing risk. 

(m) Comprehensive Risk. A comprehensive 

risk model must meet the following 

minimum requirements in order to be 

approved: 

(1) General requirement. 

(i) Subject to the prior approval of the 

Commission or a registered futures 

association of which the swap dealer is a 

member, a swap dealer may use the method 

in this paragraph to measure comprehensive 

risk, that is, all price risk, for one or more 

portfolios of correlation trading positions. 

(ii) A swap dealer that measures the price 

risk of a portfolio of correlation trading 

positions using internal models must 

calculate at least weekly a comprehensive 

risk measure that captures all price risk 

according to the requirements of this 

paragraph (m). The comprehensive risk 

measure is either: 

(A) The sum of: 

(1) The swap dealer’s modeled measure of 

all price risk determined according to the 

requirements in paragraph (m)(2) of this 

appendix; and 

(2) A surcharge for the swap dealer’s 

modeled correlation trading positions equal 

to the total specific risk add-on for such 

positions as calculated under paragraph (k) of 

this appendix multiplied by 8.0 percent; or 

(B) With approval of the Commission, or 

the registered futures association of which 

the swap dealer is member, and provided the 

swap dealer has met the requirements of this 

paragraph (m) for a period of at least one year 

and can demonstrate the effectiveness of the 

model through the results of ongoing model 

validation efforts including robust 

benchmarking, the greater of: 

(1) The swap dealer’s modeled measure of 

all price risk determined according to the 

requirements in paragraph (b) of this 

appendix; or 

(2) The total specific risk add-on that 

would apply to the swap dealer’s modeled 

correlation trading positions as calculated 

under paragraph (k) of this appendix 

multiplied by 8.0 percent. 

(2) Requirements for modeling all price 

risk. If a swap dealer uses an internal model 

to measure the price risk of a portfolio of 

correlation trading positions: 

(i) The internal model must measure 

comprehensive risk over a one-year time 

horizon at a one-tail, 99.9 percent confidence 

level, either under the assumption of a 

constant level of risk, or under the 

assumption of constant positions. 

(ii) The model must capture all material 

price risk, including but not limited to the 

following: 

(A) The risks associated with the 

contractual structure of cash flows of the 

position, its issuer, and its underlying 

exposures; 

(B) Credit spread risk, including nonlinear 

price risks; 

(C) The volatility of implied correlations, 

including nonlinear price risks such as the 

cross-effect between spreads and 

correlations; 

(D) Basis risk; 

(E) Recovery rate volatility as it relates to 

the propensity for recovery rates to affect 

tranche prices; and 

(F) To the extent the comprehensive risk 

measure incorporates the benefits of dynamic 

hedging, the static nature of the hedge over 

the liquidity horizon must be recognized. In 

such cases, a swap dealer must: 

(1) Choose to model the rebalancing of the 

hedge consistently over the relevant set of 

trading positions; 

(2) Demonstrate that the inclusion of 

rebalancing results in a more appropriate risk 

measurement; 

(3) Demonstrate that the market for the 

hedge is sufficiently liquid to permit 

rebalancing during periods of stress; and 

(4) Capture in the comprehensive risk 

model any residual risks arising from such 

hedging strategies; 

(iii) The swap dealer must use market data 

that are relevant in representing the risk 

profile of the swap dealer’s correlation 

trading positions in order to ensure that the 

swap dealer fully captures the material risks 

of the correlation trading positions in its 

comprehensive risk measure in accordance 

with this section; and 

(iv) The swap dealer must be able to 

demonstrate that its model is an appropriate 

representation of comprehensive risk in light 

of the historical price variation of its 

correlation trading positions. 

(3) Requirements for stress testing. 

(i) A swap dealer must at least weekly 

apply specific, supervisory stress scenarios to 

its portfolio of correlation trading positions 

that capture changes in: 

(A) Default rates; 

(B) Recovery rates; 

(C) Credit spreads; 

(D) Correlations of underlying exposures; 

and 

(E) Correlations of a correlation trading 

position and its hedge. 

(ii) Other requirements. (A) A swap dealer 

must retain and make available to the 

Commission and to the registered futures 

association of which the swap dealer is a 

member the results and all assumptions and 

parameters of the supervisory stress testing, 

including comparisons with the capital 

requirements generated by the swap dealer’s 

comprehensive risk model. 

(B) A swap dealer must report promptly to 

the Commission and to the registered futures 

association of which it is a member promptly 

any instances where the stress tests indicate 

any material deficiencies in the 

comprehensive risk model. 

(n) Securitization Exposures. (1) To use the 

simplified supervisory formula approach 

(SSFA) to determine the specific riskweighting factor for a securitization position, 

a swap dealer must have data that enables it 

to assign accurately the parameters described 

in paragraph (n)(2) of this appendix. Data 

used to assign the parameters described in 

paragraph (n)(2) of this appendix must be the 

most currently available data; if the contracts 

governing the underlying exposures of the 

securitization require payments on a monthly 

or quarterly basis, the data used to assign the 

parameters described in paragraph (n)(2) of 

this appendix must be no more than 91 

calendar days old. A swap dealer that does 

not have the appropriate data to assign the 

parameters described in paragraph (n)(2) of 

this appendix must assign a specific riskweighting of 100 percent to the position. 

(2) SSFA parameters. To calculate the 

specific risk-weighting factor for a 

securitization position using the SSFA, a 

swap dealer must have accurate information 

on the five inputs to the SSFA calculation 

described in paragraphs (n)(2)(i) through 

(n)(2)(v) of this appendix. 

(i) KG is the weighted-average (with unpaid 

principal used as the weight for each 

exposure) total capital requirement of the 

underlying exposures calculated for a swap 

dealer’s credit risk. KG is expressed as a 

decimal value between zero and one (that is, 

an average risk weight of 100 percent 

presents a value of KG equal to 0.08). 

(ii) Parameter W is expressed as a decimal 

value between zero and one. Parameter W is 

the ratio of the sum of the dollar amounts of 

any underlying exposures of the 

securitization that meet any of the criteria as 

set forth in paragraphs (n)(2)(ii)(A) through 

(F) of this appendix to the balance, measured 

in dollars, of underlying exposures: 

(A) Ninety days or more past due; 

(B) Subject to a bankruptcy or insolvency 

proceeding; 

(C) In the process of foreclosure; 

(D) Held as real estate owned; 

(E) Has contractually deferred payments for 

90 days or more, other than principal or 

interest payments deferred on; 

(1) Federally-guaranteed student loans, in 

accordance with the terms of those guarantee 

programs; or 

(2) Consumer loans, including nonfederally guaranteed student loans, provided 

that such payments are deferred pursuant to 

provisions included in the contract at the 

time funds are disbursed that provide for 

period(s) of deferral that are not initiated 

based on changes in the creditworthiness of 

the borrower; or 

(F) Is in default. 

(iii) Parameter A is the attachment point 

for the position, which represents the 

threshold at which credit losses will first be 

allocated to the position. Except as provided 

in 12 CFR 217.210(b)(2)(vii)(D) for nth to 

default derivatives, parameter A equals the 

ratio of the current dollar amount of 

underlying exposures that are subordinated 

to the position of the swap dealer to the 

current dollar amount of underlying 

exposures. Any reserve account funded by 


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the accumulated cash flows from the 

underlying exposures that is subordinated to 

the position that contains the swap dealer’s 

securitization exposure may be included in 

the calculation of parameter A to the extent 

that cash is present in the account. Parameter 

A is expressed as a decimal value between 

zero and one. 

(iv) Parameter D is the detachment point 

for the position, which represents the 

threshold at which credit losses of principal 

allocated to the position would result in a 

total loss of principal. Except as provided in 

12 CFR 217.210(b)(2)(vii)(D) for nth-to-default 

credit derivatives, parameter D equals 

parameter A plus the ratio of the current 

dollar amount of the securitization positions 

that are pari passu with the position (that is, 

have equal seniority with respect to credit 

risk) to the current dollar amount of the 

underlying exposures. Parameter D is 

expressed as a decimal value between zero 

and one. 

(v) A supervisory calibration parameter, p, 

is equal to 0.5 for securitization positions 

that are not resecuritization positions and 

equal to 1.5 for resecuritization positions. 

(3) Mechanics of the SSFA. KG and W are 

used to calculate KA, the augmented value of 

KG, which reflects the observed credit quality 

of the underlying exposures. KA is defined in 

paragraph (n)(4) of this section. The values of 

parameters A and D, relative to KA determine 

the specific risk-weighting factor assigned to 

a securitization position, or portion of a 

position, as appropriate, is the larger of the 

specific risk-weighting factor determined in 

accordance with paragraphs (n)(3) and (n)(4) 

of this appendix, and a specific riskweighting factor of 1.6 percent. 

(i) When the detachment point, parameter 

D, for a securitization position is less than or 

equal to KA, the position must be assigned a 

specific risk-weighting factor of 100 percent. 

(ii) When the attachment point, parameter 

A, for a securitization position is greater than 

or equal to KA, the swap dealer must 

calculate the specific risk-weighting factor in 

accordance with paragraph (n)(4) of this 

section. 

(iii) When A is less than KA and D is 

greater than KA, the specific risk-weighting 

factor is a weighted-average of 1.00 and KSSFA

calculated under paragraphs (n)(3)(iii)(A) and 

(3)(iii)(B) of this appendix. For the purpose 

of this calculation: 

(A) The weight assigned to 1.00 equals 

(o) Additional conditions. As a condition 

for the swap dealer to use this Appendix A 

to calculate certain of its capital charges, the 

Commission, or registered futures association 

of which the swap dealer is a member, may 

impose additional conditions on the swap 

dealer, which may include, but are not 

limited to restricting the swap dealer’s 

business on a product-specific, categoryspecific, or general basis; submitting to the 

Commission or registered futures association 

a plan to increase the swap dealer’s 

regulatory capital; filing more frequent 

reports with the Commission or registered 

futures association; modifying the swap 

dealer’s internal risk management control 

procedures; or computing the swap dealer’s 

deductions for market and credit risk in 

accordance with § 23.102 as appropriate. If 

the Commission or registered futures 

association finds it is necessary or 

appropriate in the public interest, the 

Commission or registered futures association 

may impose additional conditions on the 

swap dealer, if: 

(1) The swap dealer is required to provide 

notice to the Commission or a registered 


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futures association that the swap dealer’s 

regulatory capital is less than $100 million; 

(2) The swap dealer fails to meet the 

reporting requirements set forth in § 23.105; 

(3) Any event specified in § 23.105 occurs; 

(4) There is a material deficiency in the 

internal risk management control system or 

in the mathematical models used to price 

securities or to calculate deductions for 

market and credit risk or allowances for 

market and credit risk, as applicable, of the 

swap dealer; 

(5) The swap dealer fails to comply with 

this Appendix A; or 

(6) The Commission finds that imposition 

of other conditions is necessary or 

appropriate in the public interest. 

§ 23.103 Calculation of market risk 

exposure requirement and credit risk 

requirement when models are not 

approved. 

(a) Non-model approach. A swap 

dealer that has not received approval 

from the Commission, or from a 

registered futures association of which 

the swap dealer is a member, to 

compute its market risk exposure 

requirement and/or credit risk exposure 

requirement pursuant to internal models 

under § 23.102, or a swap dealer that 

has had its approval to compute its 

market risk exposure requirement and/ 

or credit risk exposure requirement 

pursuant to internal models under 

§ 23.102 revoked by the Commission or 

the registered futures association, must 

compute its market risk exposure 

requirements and/or credit risk 

exposure requirements pursuant to 

paragraphs (b) and (c) of this section. 

(b) Market risk exposure 

requirements. (1) A swap dealer that 

computes its regulatory capital under 

§ 23.101(a)(1)(i), (a)(1)(ii), or (a)(2) shall 

compute a market risk capital charge for 

the positions that the swap dealer holds 

in its proprietary accounts using the 

applicable standardized market risk 

charges set forth in § 240.18a-1 of this 

title and § 1.17 of this chapter for such 

positions. 

(2) In computing its regulatory capital 

under § 23.101(a)(1)(i), a swap dealer 

shall increase its risk-weighted assets by 

an amount equal to 1250 percent of the 

sum of the market risk capital charges 

computed under paragraph (b)(1) of this 

section. 

(3) In computing its net capital under 

§ 23.101(a)(1)(ii), a swap dealer shall 

deduct from its tentative net capital the 

sum of the market risk capital charges 

computed under paragraph (b)(1) of this 

section. 

(4) In computing its minimum capital 

requirement under § 23.101(a)(2), a 

swap dealer must add the amount of the 

market risk capital charge computed 

under this section to the $20 million 

minimum capital requirement. 

(c) Credit risk charges. (1) A swap 

dealer that computes its regulatory 

capital under § 23.101(a)(1)(i) shall 

compute counterparty credit risk capital 

charges in accordance with subpart D of 

12 CFR part 217. A swap dealer that 

computes regulatory capital under 

§ 23.101(a)(1)(ii) shall compute 

counterparty credit risk capital charges 

using the applicable standardized credit 

risk charges set forth in § 240.18a–1 of 

this title and § 1.17 of this chapter for 

such positions; Provided, however, that 

a swap dealer may reduce the 

counterparty credit risk for a particular 

counterparty by the amount of margin 

deposited by such counterparty for its 

uncleared swap positions that is 

maintained with a third party custodian 

in accordance with § 23.157 and by the 

amount of margin deposited by such 

counterparty for its uncleared securitybased swap positions that is maintained 

with a third party custodian in 

accordance with § 240.18a–3 of this 

title. 

(2) In computing its regulatory capital 

under § 23.101(a)(1)(i), a swap dealer 

shall increase its risk-weighted assets by 

the sum of the counterparty credit risk 

capital charges computed under 

paragraph (c)(1) of this section. 

(3) In computing its net capital under 

§ 23.101(a)(1)(ii), a swap dealer shall 

reduce its tentative net capital by the 

sum of the counterparty credit risk 

capital charges computed under 

paragraph (c)(1) of this section. 

(4) In computing its minimum capital 

requirement under § 23.101(a)(2), a 

swap dealer must add the amount of the 

credit risk capital charge computed 

under this section to the $20 million 

minimum capital requirement. 

§ 23.104 Liquidity requirements and equity 

withdrawal restrictions. 

(a)(1) Liquidity coverage ratio. A swap 

dealer that is subject to the minimum 

capital requirements of § 23.101(a)(1)(i) 

must meet the liquidity coverage ratio as 

defined in 12 CFR part 249 as if the 

swap dealer were regulated by the 

Federal Reserve Board and subject to the 

provisions of 12 CFR part 249; Provided, 

however, that a swap dealer may 

include cash deposited with banks that 

is readily available for withdrawal as 

level 1 assets under 12 CFR 249.20, and 

a swap dealer organized and domiciled 

outside of the U.S. may include high 

quality liquid assets maintained in its 

home country jurisdiction, in meeting 

its minimum liquidity coverage ratio. 

(2) Notification of senior 

management. The senior management of 

the swap dealer that is responsible for 

risk management must be promptly 

informed if the swap dealer’s liquidity 

coverage ratio falls below 1.0. In 

addition, the assumptions underlying 

the calculation of the liquidity coverage 

ratio must be reviewed at least quarterly 

by senior management of the swap 

dealer that is responsible for risk 

management, and at least annually by 

the full senior management of the swap 

dealer. 

(3) Restrictions on the disposition or 

transfer of high quality liquid assets. A 

swap dealer may not dispose of, or 

transfer to an affiliate, a high quality 

liquid asset (as that term is defined in 

12 CFR 249.20) without prior notice to 

and approval by the Commission if such 

disposition or transfer would result in 

the swap dealer failing to meet the 

liquidity coverage ratio in paragraph 

(a)(1) of this section. 

(4) Contingency funding plan. The 

swap dealer must have a written 

contingency funding plan that addresses 

the swap dealer’s policies and the roles 

and responsibilities of relevant 

personnel for meeting the liquidity 

needs of the swap dealer and 

communications with the public and 

other market participants during a 

liquidity stress event. 

(b)(1) Liquidity stress test. A swap 

dealer that computes regulatory capital 

under paragraph (a)(1)(ii) of § 23.101 

must perform a liquidity stress test at 

least monthly, the results of which must 

be provided within ten business days to 

senior management that has 

responsibility to oversee risk 

management at the swap dealer. The 

assumptions underlying the liquidity 

stress test must be reviewed at least 

quarterly by senior management that has 

responsibility to oversee risk 

management at the swap dealer and at 

least annually by senior management of 

the swap dealer. The liquidity stress test 

must include, at a minimum, the 

following assumed conditions lasting 

for 30 consecutive days: 

(i) A stress event includes a decline in 

creditworthiness of the swap dealer 

severe enough to trigger contractual 

credit-related commitment provisions of 

counterparty agreements; 

(ii) The loss of all existing unsecured 

funding at the earlier of its maturity or 

put date and an inability to acquire a 

material amount of new unsecured 

funding, including intercompany 

advances and unfunded committed 

lines of credit; 

(iii) The potential for a material net 

loss of secured funding; 

(iv) The loss of the ability to procure 

repurchase agreement financing for less 

liquid assets; 

(v) The illiquidity of collateral 

required by and on deposit at clearing 

agencies or other entities which is not 


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deducted from net worth or which is not 

funded by customer assets; 

(vi) A material increase in collateral 

required to be maintained at registered 

clearing agencies of which it is a 

member; and 

(vii) The potential for a material loss 

of liquidity caused by market 

participants exercising contractual 

rights and/or refusing to enter into 

transactions with respect to the various 

businesses, positions, and commitments 

of the swap dealer. 

(2) Stress test of consolidated entity. 

If applicable, the swap dealer must 

justify and document any differences in 

the assumptions used in the liquidity 

stress test of the swap dealer from those 

used in the liquidity stress test of the 

consolidated entity of which the swap 

dealer is a part. 

(3) Liquidity reserves. The swap 

dealer must maintain at all times 

liquidity reserves based on the results of 

the liquidity stress test. The liquidity 

reserves used to satisfy the liquidity 

stress test must be: 

(i) Cash, obligations of the United 

States, or obligations fully guaranteed as 

to principal and interest by the United 

States; and 

(ii) Unencumbered and free of any 

liens at all times. 

(4) Contingency funding plan. The 

swap dealer must have a written 

contingency funding plan that addresses 

the swap dealer’s policies and the roles 

and responsibilities of relevant 

personnel for meeting the liquidity 

needs of the swap dealer and 

communications with the public and 

other market participants during a 

liquidity stress event. 

(c) Equity withdrawal restrictions. The 

capital of a swap dealer, including the 

capital of any affiliate or subsidiary 

whose liabilities or obligations are 

guaranteed, endorsed, or assumed by 

the swap dealer may not be withdrawn 

by action of the swap dealer or its equity 

holders, or by redemption of shares of 

stock by the swap dealer or by such 

affiliates or subsidiaries, or through the 

payment of dividends or any similar 

distribution, nor may any unsecured 

advance or loan be made to an equity 

holder or employee if, after giving effect 

thereto and to any other such 

withdrawals, advances, or loans which 

are scheduled to occur within six 

months following such withdrawal, 

advance or loan, the swap dealer’s 

regulatory capital is less than 120 

percent of the minimum regulatory 

capital required under § 23.101. The 

equity withdrawal restrictions, however, 

do not preclude a swap dealer from 

making required tax payments or from 

paying reasonable compensation to 

equity holders. The Commission may, 

upon application by the swap dealer, 

grant relief from this paragraph (c) if the 

Commission deems such relief to be in 

the public interest. 

(d) Temporary equity withdrawal 

restrictions by Commission order. (1) 

The Commission may by order restrict, 

for a period of up to twenty business 

days, any withdrawal by a swap dealer 

of capital or any unsecured loan or 

advance to a stockholder, partner, 

member, employee or affiliate under 

such terms and conditions as the 

Commission deems appropriate in the 

public interest if the Commission, based 

on the information available, concludes 

that such withdrawal, loan or advance 

may be detrimental to the financial 

integrity of the swap dealer, or may 

unduly jeopardize the swap dealer’s 

ability to meet its financial obligations 

to counterparties or to pay other 

liabilities which may cause a significant 

impact on the markets or expose the 

counterparties and creditors of the swap 

dealer to loss. 

(2) An order temporarily prohibiting 

the withdrawal of capital shall be 

rescinded if the Commission determines 

that the restriction on capital 

withdrawal should not remain in effect. 

A hearing on an order temporarily 

prohibiting withdrawal of capital will 

be held within two business days from 

the date of the request in writing by the 

swap dealer. 

§ 23.105 Financial recordkeeping, 

reporting and notification requirements for 

swap dealers and major swap participants. 

(a) Scope. (1) Except as provided in 

paragraphs (a)(2) and (a)(3) of this 

section, a swap dealer or major swap 

participant must comply with the 

applicable requirements set forth in 

paragraphs (b) through (q) of this 

section. 

(2) The requirements in paragraphs (b) 

through (o) of this section do not apply 

to any swap dealer or major swap 

participant that is subject to the capital 

requirements of a prudential regulator. 

(3) The requirements in paragraph (p) 

of this section do not apply to any swap 

dealer or major swap participant that is 

subject to the capital requirements of 

the Commission. 

(4) The requirements of paragraph (q) 

of this section apply to swap dealers or 

major swap participants that are subject 

to the capital requirements of the 

Commission or of a prudential regulator. 

(b) Current books and records. A 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 all its asset, liability and 

capital accounts are classified in 

accordance with U.S. generally accepted 

accounting principles, and as otherwise 

may be necessary for the capital 

calculations required under § 23.101: 

Provided, however, that a swap dealer or 

major swap participant that is not 

organized under the laws of a state or 

other jurisdiction in the United States, 

and is not otherwise required to prepare 

financial statements in accordance with 

U.S. generally accepted accounting 

principles, may prepare and keep 

records required by this section in 

accordance with International Financial 

Reporting Standards issued by the 

International Accounting Standards 

Board. Such records must be maintained 

in accordance with § 1.31 of this 

chapter. 

(c) Notices. (1) A swap dealer or major 

swap participant subject to minimum 

regulatory capital requirements under 

§ 23.101 and who knows or should have 

known that its regulatory capital at any 

time is less than the minimum required 

by § 23.101, must: 

(i) Provide immediate written notice 

that the swap dealer’s or major swap 

participant’s regulatory capital is less 

than that required by § 23.101; and 

(ii) Provide together with such notice, 

documentation in such form as 

necessary to adequately reflect the swap 

dealer’s or major swap participant’s 

regulatory capital condition as of any 

date such person’s regulatory 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. 

(2) A swap dealer or major swap 

participant who is subject to the 

minimum regulatory capital 

requirements under § 23.101 and who 

knows or should have known that its 

regulatory capital at any time is less 

than 120 percent of its minimum 

regulatory capital requirement as 

determined under § 23.101, must 

provide written notice to that effect 

within 24 hours of such event. 

(3) 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 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. 


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(4) Each swap dealer that fails to 

comply with the liquidity requirements 

set forth in § 23.104 must file written 

notice within 24 hours of when it knows 

or should have known that the swap 

dealer is not in compliance. 

(5) A swap dealer or major swap 

participant must provide notice of a 

substantial reduction in capital as 

compared to that last reported in a 

financial report filed with the 

Commission pursuant to this section. 

The notice shall be provided if the swap 

dealer or major swap participant 

experiences a 30 percent or more 

decrease in the amount of capital that 

the swap dealer or major swap 

participant holds in excess of its 

regulatory capital requirement as 

computed under § 23.101. 

(6) A swap dealer must provide the 

Commission with notice two business 

days prior to the withdrawal of capital 

by action of the equity holders of the 

swap dealer where the withdrawal 

exceeds 30 percent of the swap dealer’s 

excess regulatory capital as computed 

under § 23.101. 

(7) A swap dealer or major swap 

participant that is registered with the 

Securities and Exchange Commission as 

a security-based swap dealer or as a 

major security based swap participant 

and files a notice with the Securities 

and Exchange Commission under 

§ 240.18a–8 of this title, must file a copy 

of such notice with the Commission at 

the time the swap dealer or major 

security-based swap participant files the 

notice with the Securities and Exchange 

Commission. 

(8) A swap dealer or major swap 

participant must submit a notice to the 

Commission within 24 hours of the 

occurrence of any of the following 

events: 

(i) A single counterparty or group of 

counterparties that are under common 

ownership or control fails to post initial 

margin or pay variation margin to the 

swap dealer or major swap participant 

for swap positions in compliance with 

§ 23.152 and security-based swap 

positions in compliance with proposed 

§ 240.18a–3(c)(1)(i)(b) of this title and 

such initial margin and variation 

margin, in the aggregate, is equal to or 

greater than 25 percent of the swap 

dealer’s minimum capital requirement 

or 25 percent of the major swap 

participant’s tangible net worth; 

(ii) Counterparties fail to post initial 

margin or pay variation margin to the 

swap dealer or major swap participant 

for swap positions in compliance with 

§ 23.152 and security-based swap 

positions in compliance with proposed 

§ 240.18a–3(c)(1)(i)(B) in an amount 

that, in the aggregate, exceeds 50 

percent of the swap dealer’s minimum 

capital requirement or 50 percent of the 

major swap participant’s tangible net 

worth; 

(iii) A swap dealer or major swap 

participant fails to post initial margin or 

pay variation margin to a single 

counterparty or group of counterparties 

under common ownership and control 

for swap positions in compliance with 

§ 23.152 and security-based swap 

positions in compliance with proposed 

§ 240.18a–3(c)(1)(i)(B) of this title and 

such initial margin and variation 

margin, in the aggregate, exceeds 25 

percent of the swap dealer’s minimum 

capital requirement or 25 percent of the 

major swap participant’s tangible net 

worth; or 

(iv) A swap dealer or major swap 

participant fails to post initial margin or 

pay variation margin to counterparties 

for swap positions in compliance with 

§ 23.152 and security-based swap 

positions in compliance with proposed 

§ 240.18a–3(c)(1)(i)(B) in an amount 

that, in the aggregate, exceeds 50 

percent of the swap dealer’s s minimum 

capital requirement or 50 percent of the 

major swap participants tangible net 

worth. 

(d) Monthly unaudited financial 

reports. (1) A swap dealer or major swap 

participant shall file monthly financial 

reports meeting the requirements in 

paragraph (d)(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 of cash flows, 

a statement of changes in ownership 

equity, a statement demonstrating 

compliance with and calculation of the 

applicable regulatory capital 

requirement under § 23.101, and such 

further material information as may be 

necessary to make the required 

statements not misleading. The monthly 

report and schedules must be prepared 

in accordance with generally accepted 

accounting principles as established in 

the United States: Provided, however, 

that a swap dealer or major swap 

participant that is not organized under 

the laws of a state or other jurisdiction 

in the United States, and does not 

otherwise prepare financial statements 

in accordance with U.S. generally 

accepted accounting principles, may 

prepare the monthly report and 

schedules required by this section in 

accordance with International Financial 

Reporting Standards issued by the 

International Accounting Standards 

Board. 

(3) A swap dealer or major swap 

participant that is also registered with 

the Securities and Exchange 

Commission as a security-based swap 

dealer or a major security-based swap 

participant and files a monthly Form 

SBS with the Securities and Exchange 

Commission pursuant to § 240.18a–7 of 

this title, may file such Form SBS with 

the Commission in lieu of the financial 

reports required under paragraphs (d)(1) 

and (2) of this section. The swap dealer 

or major swap participant must file the 

Form SBS with the Commission when it 

files the Form SBS with the Securities 

and Exchange Commission, provided, 

however, that the swap dealer or major 

swap participant must file the Form SBS 

with the Commission no later than 17 

business days from the date the report 

is made. 

(4) A swap dealer or major swap 

participant that is also registered with 

the Commission as a futures 

commission merchant may file a Form 

1–FR–FCM in lieu of the monthly 

financial reports required under 

paragraphs (d)(1) and (2) of this section. 

(e) Annual audited financial reports. 

(1) A swap dealer and major swap 

participant shall file an annual audited 

financial report as of the close of its 

fiscal year, certified in accordance with 

paragraph (e)(2) of this section, and 

including the information specified in 

paragraph (e)(3) of this section no later 

than 60 days after the close of the swap 

dealer’s and major swap participant’s 

fiscal year-end. 

(2) The annual certified financial 

report shall be audited and reported 

upon with an opinion expressed by an 

independent certified public accountant 

or independent licensed accountant that 

is in good standing in the accountant’s 

home jurisdiction. 

(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: Provided, however, that a 

swap dealer or major swap participant 

that is not organized under the laws of 

a state or other jurisdiction in the 

United States, and does not otherwise 

prepare financial statements in 

accordance with U.S. generally accepted 

accounting principles, may prepare the 

annual audited financial reports 

required by this section in accordance 

with International Financial Reporting 

Standards issued by the International 

Accounting Standards Board. 


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(4) The annual audited financial 

report 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 statement demonstrating the 

swap dealer’s or major swap 

participant’s compliance with and 

calculation of the applicable regulatory 

capital requirement under § 23.101; 

(v) A reconciliation of any material 

differences from the monthly unaudited 

financial report prepared as of the swap 

dealer’s or major swap participant’s 

year-end date and the swap dealer’s or 

major swap participant’s annual 

financial report prepared under this 

paragraph (e); and 

(vi) Such further material information 

as may be necessary to make the 

required statements not misleading. 

(5) A swap dealer or major swap 

participant that is also registered with 

the Securities and Exchange 

Commission as a security-based swap 

dealer or a major security-based swap 

participant and files an annual financial 

report with the Securities and Exchange 

Commission pursuant to § 240.18a–7 of 

this title, may file such annual report 

with the Commission in lieu of the 

annual financial report required under 

this paragraph (e). The swap dealer or 

major swap participant must file its 

annual report with the Commission at 

the same time that it files the annual 

report with the Securities and Exchange 

Commission, provided that the annual 

report is filed with the Commission no 

later than 60 days from the swap 

dealer’s or major swap participant’s 

fiscal year-end date. 

(6) A swap dealer or major swap 

participant that is also registered with 

the Commission as a futures 

commission merchant may file an 

audited Form 1–FR–FCM in lieu of the 

annual financial reports required under 

this paragraph (e). 

(f) Oath or affirmation. Attached to 

each financial report, or other filing 

made 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) Change of fiscal year-end. A swap 

dealer or major swap participant may 

not change the date of its fiscal year-end 

from that used in its most recent annual 

report filed under paragraph (e) of this 

section unless the swap dealer or major 

swap participant has requested and 

received written approval for the change 

from a registered futures association of 

which it is a member. 

(h) Additional information 

requirements. 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. 

(i) Public disclosure and nonpublic 

treatment of reports. (1) A swap dealer 

or major swap participant must no less 

than quarterly make publicly available 

on its Web site the following 

information: 

(i) The statement of financial 

condition; and 

(ii) A statement disclosing the amount 

of the swap dealer’s or major swap 

participant’s regulatory capital as of the 

end of the quarter and the amount of its 

minimum regulatory capital 

requirement, computed in accordance 

with § 23.101. 

(2) A swap dealer or major swap 

participant must no less than annually 

make publicly available on its Web site 

the following information: 

(i) The statement of financial 

condition from the swap dealer or major 

swap participant’s audited financial 

statements including applicable 

footnotes; and 

(ii) A statement disclosing the amount 

of the swap dealer’s or major swap 

participant’s regulatory capital as of the 

fiscal year end and its minimum 

regulatory capital requirement, 

computed in accordance with § 23.101. 

(3) Financial information required to 

be made publicly available pursuant to 

this section must be posted within 10 

business days after the firm is required 

to file applicable financial reports with 

the Commission pursuant to paragraph 

(d) or (e) of this section. 

(4) 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; 

Provided, however, that all information 

that is exempt from mandatory public 

disclosure will 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. 

(j) Extension of time to file financial 

reports. A swap dealer or major swap 

participant may file a request with the 

registered futures association of which it 

is a member for an extension of time to 

file a monthly unaudited financial 

report or an annual audited financial 

report required under paragraphs (d) 

and (e) of this section. Such request will 

be approved, conditionally or 

unconditionally, or disapproved by the 

registered futures association. 

(k) Additional reporting requirements 

for swap dealers approved to use 

models to calculate market risk and 

credit risk for computing capital 

requirements. (1) A swap dealer that has 

received approval under § 23.102(d) 

from the Commission, or from a 

registered futures association of which 

the swap dealer is a member, to use 

internal models to compute its market 

risk exposure requirement and credit 

risk exposure requirement in computing 

its regulatory capital under § 23.101 

must file with the Commission and with 

the registered futures association of 

which the swap dealer is a member the 

following information within 17 

business days of the end of each month: 

(i) For each product for which the 

swap dealer calculates a deduction for 

market risk other than in accordance 

with a model approved pursuant to 

§ 23.102(d), the product category and 

the amount of the deduction for market 

risk; 

(ii) A graph reflecting, for each 

business line, the daily intra-month 

VaR; 

(iii) The aggregate VaR for the swap 

dealer; 

(iv) For each product for which the 

swap dealer uses scenario analysis, the 

product category and the deduction for 

market risk; 

(v) Credit risk information on swap, 

mixed swap and security-based swap 

exposures including: 

(A) Overall current exposure; 


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(B) Current exposure (including 

commitments) listed by counterparty for 

the 15 largest exposures; 

(C) The 10 largest commitments listed 

by counterparty; 

(D) The swap dealer’s maximum 

potential exposure listed by 

counterparty for the 15 largest 

exposures; 

(E) The swap dealer’s aggregate 

maximum potential exposure; 

(F) A summary report reflecting the 

swap dealer’s current and maximum 

potential exposures by credit rating 

category; and 

(G) A summary report reflecting the 

swap dealer’s current exposure for each 

of the top ten countries to which the 

swap dealer is exposed (by residence of 

the main operating group of the 

counterparty); and 

(vi) The results of the liquidity stress 

test required by § 23.104. 

(2) A swap dealer that has received 

approval under § 23.102(d) from the 

Commission or from a registered futures 

association of which the swap dealer is 

a member to use internal models to 

compute its market risk exposure 

requirement and credit risk exposure 

requirement in computing its regulatory 

capital under § 23.101 must file with the 

Commission and with the registered 

futures association of which the swap 

dealer is member the following 

information within 17 business days of 

the end of each calendar quarter: 

(i) A report identifying the number of 

business days for which the actual daily 

net trading loss exceeded the 

corresponding daily VaR; and 

(ii) The results of backtesting of all 

internal models used to compute 

allowable capital, including VaR, and 

credit risk models, indicating the 

number of backtesting exceptions. 

(l) Additional position and 

counterparty reporting requirements. A 

swap dealer or major swap participant 

must provide on a monthly basis to the 

Commission and to the registered 

futures association of which the swap 

dealer or major swap participant is a 

member the specific information 

required in Appendix A to this section. 

(m) Margin reporting. A swap dealer 

or major swap participant must file with 

the Commission and with the registered 

futures association of which the swap 

dealer or major swap participant is 

member the following information as of 

the end of each month within 17 

business days of the end of each month: 

(1) The name and address of each 

custodian holding initial margin or 

variation margin collected by the swap 

dealer or major swap participant for 

uncleared swap transactions pursuant to 

§§ 23.152 and 23.153; 

(2) The amount of initial margin and 

variation margin collected by the swap 

dealer or major swap participant that is 

held by each custodian listed in 

paragraph (m)(1) of this section; 

(3) The aggregate amount of initial 

margin that the swap dealer or major 

swap participant is required to collect 

from swap counterparties pursuant to 

§ 23.152(a); 

(4) The name and address of each 

custodian holding initial margin or 

variation margin posted by the swap 

dealer or major swap participant for 

uncleared swap transaction pursuant to 

§§ 23.152 and 23.153; 

(5) The amount of initial margin and 

variation margin posted by the swap 

dealer or major swap participant that is 

held by each custodian listed in 

paragraph (m)(4) of this section; and 

(6) The aggregate amount of initial 

margin that the swap dealer or majors 

swap participant is required to post to 

its swap counterparties pursuant to 

§ 23.152(b). 

(n) Electronic filing. All filings of 

financial reports, notices and other 

information required to be submitted to 

the Commission under paragraphs (b) 

through (m) of this section must be filed 

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. A swap dealer or major 

swap participant must provide 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 (d), (e), or (h) 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. 

(o) Comparability determination for 

certain financial reporting. A swap 

dealer or major swap participant that is 

subject to the monthly financial 

reporting requirements of paragraph (d) 

of this section and the annual financial 

reporting requirements of paragraph (e) 

of this section may petition the 

Commission for a Comparability 

Determination under § 23.106 to file 

monthly financial reports and/or annual 

financial reports prepared in accordance 

with the rules a foreign regulatory 

authority in lieu of the requirements 

contained in this section. 

(p) Quarterly financial reporting and 

notification provisions for swap dealers 

and major swap participants that are 

subject to the capital requirements of a 

prudential regulator. 

(1) Scope. A swap dealer or major 

swap participant that is subject to the 

capital requirements of a prudential 

regulator must comply with the 

requirements of this paragraph. 

(2) Financial report and position 

information. A swap dealer or major 

swap participant that is subject to the 

capital requirements of a prudential 

regulator shall file on a quarterly basis 

with the Commission the financial 

reports and specific position 

information set forth in Appendix B of 

this section. The swap dealer or major 

swap participant must file Appendix B 

with the Commission within 17 

business days of the date of the end of 

the swap dealer’s fiscal quarter. 

(3) Notices. A swap dealer or major 

swap participant that is subject to the 

capital requirements of a prudential 

regulator must comply with the 

following notice provisions: 

(i) A swap dealer or major swap 

participant that files a notice of 

adjustment of its reported capital 

category with the Federal Reserve 

Board, the Office of the Comptroller of 

the Currency, or the Federal Deposit 

Insurance Corporation, or files a similar 

notice with its home country 

supervisor(s), must give notice of this 

fact that same day by transmitting a 

copy of the notice of the adjustment of 

reported capital category, or the similar 

notice provided to its home country 

supervisor(s), to the Commission. 

(ii) A swap dealer or major swap 

participant must provide immediate 

written notice that the swap dealer’s or 

major swap participant’s regulatory 

capital is less than the applicable 

minimum capital requirements set forth 

in 12 CFR 217.10, 12 CFR 3.10, or 12 

CFR 324.10, or the minimum capital 

requirements established by its home 

country supervisor(s). 

(iii) A swap dealer or major swap 

participant must submit a notice to the 

Commission within 24 hours of the 

occurrence of any of the following 

events: 


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(A) A single counterparty or group of 

counterparties that are under common 

ownership or control fails to post initial 

margin or pay variation margin to the 

swap dealer for swap positions and 

security-based swap positions and such 

initial margin and variation margin, in 

the aggregate, is equal to or greater than 

25 percent of the swap dealer’s 

minimum capital requirement; 

(B) Counterparties fail to post initial 

margin or pay variation margin to the 

swap dealer for swap positions and 

security-based swap positions in an 

amount that, in the aggregate, exceeds 

50 percent of the swap dealer’s 

minimum capital requirement; 

(C) A swap dealer fails to post initial 

margin or pay variation margin to a 

single counterparty or group of 

counterparties under common 

ownership and control for swap 

positions and security-based swap 

positions and such initial margin and 

variation margin, in the aggregate, 

exceeds 25 percent of the swap dealer’s 

minimum capital requirement; or 

(D) A swap dealer fails to post initial 

margin or pay variation margin to 

counterparties for swap positions and 

security-based swap positions in an 

amount that, in the aggregate, exceeds 

50 percent of the swap dealer’s s 

minimum capital requirement. 

(iv) 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 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. 

(4) Additional information. From time 

to time the Commission may, by written 

notice, require a swap dealer or major 

swap participant that is subject to the 

capital rules of a prudential regulator 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. 

(5) Oath or affirmation. Attached to 

each financial report, notice filing, or 

other filing made pursuant to this 

paragraph (p) 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 filing is true and 

correct. With respect to financial 

reports, 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. 

(6) Electronic filing. All filings of 

financial reports, notices, and other 

information made pursuant to this 

paragraph (p) must 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. Each swap dealer and 

major swap participant must provide 

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 this 

paragraph (p) 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 

(p)(5) of this section. Every notice or 

report required to be transmitted to the 

Commission pursuant to this paragraph 

(p) must also be filed with the Securities 

and Exchange Commission if the swap 

dealer or major swap participant also is 

registered with the Securities and 

Exchange Commission. 

(7) Public disclosure and nonpublic 

treatment of reports. (i) A swap dealer 

or major swap participant that is subject 

to the capital requirements of a 

prudential regulator must no less than 

quarterly make publicly available on its 

Web site the following information: 

(A) The statement of financial 

condition; and 

(B) A statement disclosing the amount 

of the swap dealer’s or major swap 

participant’s regulatory capital as of the 

end of the quarter and the amount of its 

minimum regulatory capital 

requirement. 

(ii) Financial information required to 

be made publicly available pursuant to 

this section must be posted within 10 

business days after the firm is required 

to file applicable financial reports with 

the Commission pursuant to paragraph 

(p)(2) of this section. 

(iii) 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; 

Provided, however, that all information 

that is exempt from mandatory public 

disclosure will 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. 

(q) Weekly position and margin 

reporting—(1) Positions. On the first 

business day of every week, a swap 

dealer or major swap participant shall 

file with the Commission a report 

showing, in a format specified by the 

Commission, all open uncleared swap 

positions as of the close of business on 

the last business day of the previous 

week, sorted as follows: 

(i) By counterparty, and 

(ii) For each counterparty, by the 

following asset classes—commodity, 

credit, equity, and foreign exchange or 

interest rate. 

(2) Margin. On the first business day 

of every week, a swap dealer or major 

swap participant shall file with the 

Commission a report showing, in a 

format specified by the Commission, for 

open uncleared swap positions as of the 

close of business on the last business 

day of the previous week: 

(i) The total initial margin posted by 

the swap dealer or major swap 

participant with each counterparty; 

(ii) The total initial margin collected 

by the swap dealer or major swap 

participant from each counterparty; and 

(iii) The net variation margin paid or 

collected over the previous week with 

each counterparty. 

Appendix A to § 23.105—Swap Dealer 

and Major Swap Participant Position 

Information 

BILLING CODE 6351–01–P 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALS
Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 91323 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.001</GPH>

Reg. 23.105(1) SCHEDULE 1 -AGGREGATE SECURITIES, COMMODITIES, AND SWAPS POSITIONS 

Items on this page to be Reported by: Swap Dealers 

Major Swap Participants Appendix A 

Aggregate Securities Commodities SwaQs Positions LOI~G SHORT 

US treasury securities .. $ $ 

2. US government agency and US government-sponsored enterprises $ $ 

A Mortgage-backed secuntres rssued by U S government agency and U S governmentSponsored enterpnses . $ $ 

B. Debt securitres issued by US government agency and US 

government-sponsoredenterprises. $ $ 

3. Securities issued by states and politrcal subdivisions in the U S .. $ $ 

4. Foreign securities 

A Debtsecurities ... $ $ 

B. Equity secunties .. $ $ 

5 Money market instruments $ $ 

6. Private label mortgage backed securities ... $ $ 

7. Other asset-backed securities .. $ $ 

8. Corporate obligations .. $ $ 

9. Stocks and warrants (other than arbitrage positions) $ $ 

10. Arbitrage ............ $ $ 

11. Spot commodities .. $ $ 

12. Security-based swaps 

A Debt security-based swaps (other than credit default swaps) 

1. Cleared ...... $ $ 

2. Non-cleared .. $ $ 

B. Equity security-based swaps 

1. Cleared ........ $ $ 

2. Non-cleared .. $ $ 

c Credit default security-based swaps 

1. Cleared ... $ $ 

2. Non-cleared .. $ $ 

D. Other security-based swaps 

1. Cleared ... $ $ 

2. Non-cleared .. $ $ 

13. Mixed swaps 

1. Cleared ... $ $ 

2. Non-cleared .. $ $ 
91324 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.002</GPH>

Reg. 23.105(1) SCHEDULE 1 (confd)- AGGREGATE SECURITIES, COMMODITIES, AND SWAPS POSITIONS 

Appendix A 

Items on this page to be Reported by: Swap Dealers 

Major Swap Participants 

14. Swaps 

A Interest rate swaps 

1. Cleared ... $ $ 

2. Non-cleared ... $ $ 

B. Foreign exchange swaps 

1. Cleared ... $ $ 

2. Non-cleared ... $ $ 

c Commodity swaps 

1. Cleared ... $ $ 

2. Non-cleared ... $ $ 

D. Debt index swaps (other than credit default swaps) 

1. Cleared ... $ $ 

2. Non-cleared ... $ $ 

E. Equity 1ndex swaps 

1. Cleared ... $ $ 

2. Non-cleared ... $ $ 

F. Credit default swaps 

1. Cleared ... $ $ 

2 r~on-cleared $ $ 

G. Other swaps 

1. Cleared ... $ $ 

2. r~on-cleared ... $ $ 

15. Other derivatives and options .. $ $ 

16. Securities with no ready market 

A Equity ... $ $ 

B Debt $ $ 

C Other (include limited partnership interests) .. $ $ 

17. Other securities and commodities .. $ $ 

18. Total (sum of Lines 1-17) .. $ $ 
Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 91325 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.003</GPH>

Reg. 23.1 05(1) SCHEDULE 2- CREDIT CONCENTRATION REPORT FOR FIFTEEN LARGEST EXPOSURES IN DERIVATIVES 

Appendix A 

Counte r arty ldenllfier 

1 

? 

3 

4 

5 

b 

8 

9 

10. 

11 

12. 

13. 

14. 

15. 

I\ II other 

ounteroarties 

II. 

Counte r arty ldenllfier 

1 

? 

3 

4 

5 

6 

8 

9 

10. 

11 

12. 

13. 

14. 

15. 

I\ II other 

ounteroarties 

Items on this page to be Reported by: Swap Dealers 

Major Swap Participants 

By Current Net 

Exposure 

Internal Credit 

Rating 

[99991 

[99991 

[99991 

[99991 

[9999i 

[99991 

[9999i 

[9999i 

[99991 

[99991 

[99991 

[99991 

[99991 

[9999i 

[9999i 

Totals 

Gross Replacement Value 

Receivable Payable 

(Gross Gain) (Gross Loss) 

~fP ~fP 

~~ ~$ 

~~ ~$ 

~~ ~$ 

~~ ~$ 

~fP ~$ 

~fP ~$ 

13999fP ~$ 

~fP ~$ 

~~ ~$ 

~~ ~$ 

~~ ~$ 

~fP ~fP 

13999fP ~$ 

13999fP ~$ 

N/A ~ ~$ 

fP I 

By Total Gross Replacement Value 

Exposure 

Internal Credit Receivable Payable 

Ratmg (Gross Garn) (Gross Loss) 

[99991 ~fP ~~ 

[99991 ~~ ~$ 

[99991 ~~ ~$ 

[99991 ~~ ~$ 

[9999i 13999fP ~$ 

[9999i 13999fP ~$ 

[9999i 13999fP ~$ 

[99991 ~fP ~$ 

[99991 ~~ ~$ 

[99991 ~fP ~$ 

[99991 ~~ ~$ 

[9999i ~fP ~$ 

[9999i 13999fP ~fP 

[9999i 13999fP ~$ 

[99991 ~fP ~$ 

N/A ~ ~$ 

ITnt~h fP r= 

Net Replacement Current Net 

Value Exposure 

~9h ~:p 

fl9'9S$ ~$ 

fl99S ~$ 

fl99S~ ~$ 

~~ ~$ 

~~ ~$ 

~:p ~$ 

~:p 13999$ 

fl99S:p ~$ 

fl99S ~$ 

fl99S~ ~$ 

fl99S~ ~$ 

~~ ~$ 

~:p 13999$ 

~:p 13999$ 

~:p ~$ 

I I 

Net Replacement Current Net 

Value Exposure 

fl99S ~$ 

fl99S~ ~$ 

fl99S~ ~$ 

fl99S~ ~$ 

~~ 13999$ 

~~ 13999$ 

~:p 13999$ 

fl99S~ ~$ 

fl9'9S$ ~$ 

fl99S~ p9'§9$ 

fl99S~ p9'§9$ 

~~ ~$ 

~~ 13999$ 

~~ 13999$ 

fl99S~ ~$ 

9999$ 999'9$ 

r r 

Total Exposure lv1argin Collected 

~:p ~:p ~ 

~$ ~$ ~ 

~$ ~$ ~ 

~$ ~$ ~ 

~$ ~$ ~ 

~$ ~$ ~ ~$ 13999$ 13999 

~$ 13999$ 13999 

~$ ~$ ~ 

~$ ~$ ~ 

~$ ~$ ~ 

~$ ~$ ~ 

~$ ~$ ~ ~$ 13999$ 13999 

~$ 13999$ 13999 

~$ ~$ ~ 

I I I 

Total Exposure lv1argrn Collected 

~ ~$ ~ 

~$ ~$ ~ 

~$ ~$ ~ 

~$ ~$ p999 

~$ 13999$ 13999 

~$ 13999$ 13999 

~$ 13999$ 13999 

~$ ~$ ~ 

~$ ~$ ~ 

~$ p9'§9$ p999 

~$ p9'§9$ p999 

~$ 13999$ 13999 

~$ 13999$ 13999 

~$ 13999$ 13999 

~$ ~$ ~ 

999'9$ 999'9$ 9999 

r r r 
91326 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.004</GPH>

Reg. 23.105(1) 

Appendix A 

Internal Credit Rating 

1. 

2. 

3. 

4 

5. 

6. 

7. 

8. 

9. 

10. 

11. 

12. 

13. 

14. 

15. 

16. 

17 

18. 

19. 

20. 

21. 

22. 

23. 

24. 

25. 

26. 

27. 

28. 

29. 

30 

31. 

32. 

33. 

34. 

35. 

36. 

Unrated. 

Totals. 

SCHEDULE 3- PORTFOLIO SUMMARY OF DERIVATIVES EXPOSURES BY INTERNAL CREDIT RATING 

Items on this page to be Reported by: Swap Dealers 

9999$ 

~$ 

~$ 

tl§9§$ 

tl§9§$ 

~$ 

~$ 

~$ 

~$ 

tl§9§$ 

tl§9§$ 

~$ 

~$ 

~$ 

tl§9§$ 

tl§9§$ 

~$ 

~$ 

~$ 

~$ 

~$ 

tl§9§$ 

tl§9§$ 

~$ 

~$ 

~$ 

tl§9§$ 

tl§9§$ 

~$ 

~$ 

~$ 

~$ 

tl§9§$ 

tl§9§$ 

~$ 

~$ 

~$ 

tl§9§$ 

Gross Replacement Value 

Receivable 

p ava bl e 

B999 $ 

[9999 

[9999~ 

1§99h 

1§999~ 

1§99h 

1§999$ 

[9999 

[9999~ 

1§999~ 

1§999~ 

1§999$ 

[9999 

[9999~ 

1§999~ 

1§999~ 

1§999~ 

1§999~ 

[9999$ 

[9999 

[9999~ 

1§999~ 

1§999~ 

[9999 

[9999 

[9999~ 

1§999~ 

1§999~ 

1§999~ 

1§999$ 

[9999 

[9999~ 

1§999~ 

1§999~ 

[9999~ 

[9999~ 

[9999 

1§999~ 

MaJor Swap Participants 

B999 $ 

[9999$ 

[9999$ 

1§999$ 

1§999$ 

1§999$ 

1§999$ 

[9999$ 

[9999$ 

1§999$ 

1§999$ 

1§999$ 

[9999$ 

[9999$ 

1§999$ 

1§999$ 

1§999$ 

1§999$ 

[9999$ 

[9999$ 

[9999$ 

1§999$ 

1§999$ 

[9999$ 

[9999$ 

[9999$ 

1§999$ 

1§999$ 

1§999$ 

1§999$ 

[9999$ 

[9999$ 

1§999$ 

1§999$ 

[9999$ 

[9999$ 

[9999$ 

1§999$ 

Net Replacement 

Value 

B999 s 

[9999 

[9999:, 

1§999~ 

1§999~ 

1§999~ 

1§999s 

[9999 

[9999:, 

1§999:, 

1§999~ 

1§999s 

[9999 

[9999:, 

1§999~ 

1§999~ 

1§999~ 

1§999~ 

[9999s 

[9999 

[9999:, 

1§999~ 

1§999~ 

[9999 

[9999 

[9999:, 

1§999~ 

1§999~ 

1§999~ 

1§999s 

[9999 

[9999:, 

1§999~ 

1§999~ 

[9999~ 

[9999~ 

[9999 

1§999~ 

Current l~et Exposure Total Exposure 

B999 $ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

~$ 

Margin Collected 

B999 $ 9999 

~$ [9999 

~$ [9999 

tl§9§$ 1§999 

tl§9§$ 1§999 

~$ 1§999 

~$ 1§999 

~$ [9999 

~$ [9999 

tl§9§$ 1§999 

tl§9§$ 1§999 

~$ 1§999 

~$ [9999 

~$ [9999 

tl§9§$ 1§999 

tl§9§$ 1§999 

~$ 1§999 

~$ 1§999 

~$ [9999 

~$ [9999 

~$ [9999 

tl§9§$ 1§999 

tl§9§$ 1§999 

~$ [9999 

~$ [9999 

~$ [9999 

tl§9§$ 1§999 

tl§9§$ 1§999 

~$ 1§999 

~$ [9999 

~$ [9999 

~$ [9999 

tl§9§$ [9999 

tl§9§$ [9999 

~$ [9999 

~$ [9999 

~$ [9999 

tl§9§$ [9999 
Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 91327 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.005</GPH>

Reg. 23.105(1) SCHEDULE 4- GEOGRAPHIC DISTRIBUTION OF DERIVATIVES EXPOSURES FOR TEN LARGEST COUNTRIES 

Appendix A Items on this page to be Reported by: Swap Dealers 

Major Swap Participants 

By Current Net Exposure 

Gross Replacement Value 

Country Receivable Payable ~Jet Replacement Value Current ~Jet Exposure Total Exposure Margin Collected 

1. $ 

2. $ 

3 $ 

4. $ 

5. $ 

6. $ 

7. $ 

8 $ 

9. $ 

10. $ 

Totals $ 

II. By Total 

Exposure Gross Replacement Value 

Country Recervable Payable ~Jet Replacement Value Current Net Exposure Total Exposure Margrn Collected 

1. $ 

2 $ 

3. $ 

4. $ 

5. $ 

6. $ 

7 $ 

8. $ 

9. $ 

10. $ 

Totals. $ 
91328 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.006</GPH>

Appendix B to § 23.105 -Financial Reports and Specific Position Information for Swap Dealers 

and Major Swap Participants Subject to the Capital Requirements of a Prudential Regulator 

Reg.23.105(o) 

Appendix B Items on this page to be reported by a: 

1. Cash and balances due from depository institutions 

Bank SO 

Bank MSP 

BALANCE SHEET 

A. Noninterest-bearing balances and currency and COin ..................................................................................................................................... $ --------

B. lnterest-beanng balances ......................................................................................................................................................................... $---------

2. Securities 

A. Held-to-maturity secunties ...................................................................................................................................................................... $---------

B. Available-for-sale securities ................................................................................................................................................................... $---------

3. Federal funds sold and securities purchased under agreements to resell 

A. Federal funds sold in domestic offices ..... ... .. ... . .. ... ....... ... . . . ... .. ... ....... .. . ... ... .. ... .... .. ....... ... .. ....... ... .. ... ... . .. ....... ... .. . . . . .. ... .......... .. . ... .. ... ....... $ ________ _ 

B. Secunties purchased under agreements to resell ........................................................................................................................................... $ _______ _ 

4. Loans and lease financ1ng receivables 

A. Loans and leases held for sale ................... ................ .. ............. .. .. ................ ................ .. ................ .. ............. .. ................... ................ .. $ _______ _ 

B. Loans and leases, net of unearned income ................................................................................................................................................... $ _______ _ 

C LESS Allowance for loan and lease losses ....... .. . ... ... .. ... .... .. ....... ... .. ... . .. ... ....... ... .. . ... .. ... .... . . . . ... .......... .. . ... .. ... ....... ....... ... ... .. ... . .. ....... ... ... $ --------

D. Loans and leases, net of unearned income and allowance .. . .................................................................................... $ __ _ 

5. Trading Assets $ 

6. Premises and fixed assets (including capitalized leases) ...................................................................................................................................... $ _______ _ 

7 Other real estate owned s _______ _ 

8. Investment in unconsolidated subsidiaries and associated companies ... ....... . ... .. ... ... .... .... ... .. ... .... .. . ... ... ... ... .. . ... .. ... ....... ....... ... .. ... .... .. ....... ... .. . . . $-------

9. Direct and indirect investments in real estate ventures . .. ............. .. ................ .. ................ ................... ................ .. ............. .. .. ............. .. $ _______ _ 

10 Intangible assets 

A Goodwill .......... .. ................ .. ............. .. .. ................ ................ .. .. ............. .. ................ ................... .. ............. .. ................ .. ................ $---------

B. Other intangible assets .......................................................................................................................................................................... $ ---------

11 Other assets ............................................................................................................................................................................................ $---------

12.Totalassets(sumofLmes1through 11) .......................................................................................................................................................... $ _______ _ 
Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 91329 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.007</GPH>

Reg.23.105(o) 

Appendix B 

Liabilities 

13 Deposits 

Items on this page to be reported by a: Bank SD 

Bank MSP 

BALANCE SHEET 

A. In domestic offices ....................................................................................................................................................................................... $ _______ _ 

1 Non interest-bearing ........... ......... ............ ......... ............ ......... ......... ............ ......... ............ ......... ............ ......... ...................... ...................... $ _______ _ 

2. Interest-bearing ........................................................................................................................................................................................... $ _______ _ 

B. In foreign offices. Edge and Agreement subsidiaries. and IBFs ............................................................................................................. $ -----------

1 Non interest-bearing ........ ......... .. ......... ......... ............ ......... ............ ......... ............ ......... ......... ............ ......... ............ ......... ............ ......... $ _______ _ 

2 Interest-bearing $ ______ _ 

14 Federal funds purchased and securities sold under agreements to repurchase 

A Federal funds purchased in domestic offices................................................................................................................................... $-----------

B. Securities sold under agreements to repurchase ................................................................................................................................... $ __________ _ 

15. Trading liabilities .................................................................................................................................................................................................... $---------

16 Other borrowed money (Includes mortgage indebtedness and obligations under capitalized leases).. ............ .. ............ .. ............... ............ .. $ _______ _ 

17. Subordinated notes and debentures ..... ... .. .. .... ... .. .. .. .. ... .. . ... ... ..... .. ... ..... . ....... ... ... ........ . .... ....... . ........ . ... ........ . ........ . ... ........ . ... ..... . ... ........ . ... ..... $ ---------

18 Other liabilities ................................................................................................................................................................................................. $ _______ _ 

19.Totalliabilitles ................................................................................................................................................................................................... $ ________ _ 

Equity Capital 

20. Perpetual preferred stock and related surplus ...................... ......... ............ ......... ............ ......... ............ ......... ............ ......... ............ ......... ............ $---------

21.Commonstock .................................................................................................................................................................................................... $ _______ _ 

22. Surplus (exclude all surplus related to preferred stock) ............................................................................................................................................. $ ________ _ 

23A Reta1nedearnings ... ............ ......... ...................... ...................... ...................... ......... ............ ......... ......... ............ ......... ............ ......... ............ $ ________ _ 

B. Accumulatedothercomprehensiveincome ...... ......... ...................... ...................... ...................... ......... ............ ......... ............ ......... S __________ _ 

C Other equity capital components $ _________ _ 

24 A Total bank equity capital (sum oflines 20 through 23C) ...................................................................................................................................... $ _______ _ 

B. l~on-controlling (minority) interests in consolidated subsidiaries........................................................................................................ $-----------

25. Total equ1ty capital (sum of Lines 24A and 248) ...................................................................................................................................................... $--------

26. Totalliabilit1es and equity capital (sum of Lines 19 and 25) ........................................................................................................................................ $---------
91330 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.008</GPH>

Reg.23.1 05(o) 

Appendix B Items on this paqe to be reported by a: 

Capital 

1 Total bank equity capital 

2. T1er 1 capital 

3. T1er 2 capital 

4. Tier 3 capital allocated for market risk .. 

Bank SO 

Bank MSP 

REGULATORY CAPITAL 

s _______ _ 

$ ______ _ 

$ ______ _ 

s ________ _ 

5. Total risk-based capital ...................................................................................................................................................................................... $ ---------------

6 Total nsk-we1ghted assets $ ______ _ 

7. Total assets for leverage capital purposes .. $ ______ _ 

Capital Ratios (Column B 1s to be completed by all banks. Column A is to be completed 

by banks with financial subsidiaries.) 

8. Tier 1 Leverage ratio ... ....... .... ... ... .. ... . . . ... .......... ... . . . .. ... .......... .... ... .. ... ... .... ....... ... ... .. . . . ... ....... ... .. $ ________ _ $ ____ _ 

9. Tier 1 risk-based capital ratio ....................................................................................................... $ ________ _ $ ____ _ 

10 Total nsk-based cap1tal rat1o $ _____ _ $ ____ _ 
Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 91331 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.009</GPH>

Reg.23.105(o) SCHEDULE 1 -AGGREGATE SWAP POSITIONS 

Appendix B 

Items to be Reported by: Bank SDs 

Bank MSPs 

Aggregate Positions LmJG SHORT 

1. Secunty-based swaps 

A. Debt security-based swaps (other than credit default swaps) 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

B. Equity security-based swaps 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

c Credit default security-based swaps 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

D. Other security-based swaps 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

2. Mixed swaps 

A Cleared $ $ 

B. Non-cleared $ $ 

3. Swaps 

A. Interest rate swaps 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

B. Foreign exchange swaps 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

c Commodity swaps 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

D. Debt index swaps (other than credit default swaps) 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

E. Equity index swaps 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 

F. Credit default swaps 

1. Cleared .. $ $ 

2. Non-cleared .. $ $ 
91332 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 

BILLING CODE 6351–01–C 

§ 23.106 Comparability determination for 

substituted compliance. 

(a)(1) Eligibility requirements. The 

following persons may, either 

individually or collectively, request a 

Capital Comparability Determination 

with respect to the Commission’s capital 

adequacy and financial reporting 

requirements for swap dealers or major 

swap participants: 

(i) A swap dealer or major swap 

participant that is eligible for 

substituted compliance under § 23.101; 

or 

(ii) A foreign regulatory authority that 

has direct supervisory authority over 

one or more swap dealers or major swap 

participants that are eligible for 

substituted compliance under § 23.101, 

and such foreign regulatory authority is 

responsible for administering the 

relevant foreign jurisdiction’s capital 

adequacy and financial reporting 

requirements over the swap dealer or 

major swap participant. 

(2) Submission requirements. A 

person requesting a Capital 

Comparability Determination must 

electronically submit to the 

Commission: 

(i) A description of the objectives of 

the relevant foreign jurisdiction’s capital 

adequacy and financial reporting 

requirements over entities that are 

subject to the Commission’s capital 

adequacy and financial reporting 

requirements in this part; 

(ii) A description (including specific 

legal and regulatory provisions) of how 

the relevant foreign jurisdiction’s capital 

adequacy and financial reporting 

requirements address the elements of 

the Commission’s capital adequacy and 

financial reporting requirements for 

swap dealers and major swap 

participants, including, at a minimum, 

the methodologies for establishing and 

calculating capital adequacy 

requirements and whether such 

methodologies comport with any 

international standards, including 

Basel-based capital requirements for 

banking institutions; and 

(iii) A description of the ability of the 

relevant foreign regulatory authority or 

authorities to supervise and enforce 

compliance with the relevant foreign 

jurisdiction’s capital adequacy and 

financial reporting requirements. Such 

description should discuss the powers 

of the foreign regulatory authority or 

authorities to supervise, investigate, and 

discipline entities for compliance with 

capital adequacy and financial reporting 

requirements, and the ongoing efforts of 

the regulatory authority or authorities to 

detect and deter violations, and ensure 

compliance with capital adequacy and 

financial reporting requirements. The 

description should address how foreign 

authorities and foreign laws and 

regulations address situations where a 

swap dealer or major swap participant 

is unable to comply with the foreign 

jurisdictions capital adequacy or 

financial reporting requirements. 

(iv) Upon request, such other 

information and documentation that the 

Commission deems necessary to 

evaluate the comparability of the capital 

adequacy and financial reporting 

requirements of the foreign jurisdiction. 

(v) All supplied documents shall be 

provided in English, or provided 

translated to the English language, with 

currency amounts stated in or converted 

to USD (conversions to be noted with 

applicable date). 

(3) Standard of Review. The 

Commission will issue a Capital 

Comparability Determination to the 

extent that it determines that some or all 

of the relevant foreign jurisdiction’s 

capital adequacy and financial reporting 

requirements and related financial 

recordkeeping and reporting 

requirements for swap dealing financial 

intermediaries are comparable to the 

Commission’s corresponding capital 

adequacy and financial recordkeeping 

and reporting requirements. In 

determining whether the requirements 

are comparable, the Commission will 

consider all relevant factors, including: 

(i) The scope and objectives of the 

foreign jurisdiction’s capital adequacy 

and financial reporting requirements; 

(ii) How and whether the relevant 

foreign jurisdiction’s capital adequacy 

requirements compare to international 

Basel capital standards for banking 

institutions or to other standards such 

as those used for securities brokers or 

dealers; 

(iii) Whether the relevant foreign 

jurisdiction’s capital adequacy and 

financial reporting requirements achieve 

comparable outcomes to the 

Commission’s corresponding capital 

adequacy and financial reporting 

requirements for swap dealers and 

major swap participants; 

(iv) The ability of the relevant 

regulatory authority or authorities to 

supervise and enforce compliance with 

the relevant foreign jurisdiction’s capital 

adequacy and financial reporting 

requirements; and 

(v) Any other facts or circumstances 

the Commission deems relevant. 

(4) Reliance. (i) A swap dealer or 

major swap participant that is subject to 

the supervision of a foreign jurisdiction 

that has received a Capital 

Comparability Determination from the 

Commission must file a notice of its 

intent to comply with the capital 

adequacy and financial reporting 

requirements of the foreign jurisdiction 

with the registered futures association of 

which the swap dealer or major swap 

participant is a member. The registered 

futures association will determine the 

information that the swap dealer or 

major swap participant must include in 

the notice. A swap dealer or major swap 

participant must obtain a confirmation 

from the registered futures association 

that it may comply with the capital 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALSEP16DE16.010</GPH>
Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 91333 

adequacy and financial reporting 

requirements of the foreign jurisdiction 

in lieu of some or all of the capital 

adequacy and financial reporting 

requirements in the part. 

(ii) Any swap dealer or major swap 

participant that has obtained a 

confirmation from a registered futures 

association and, in accordance with a 

Capital Comparability Determination, 

complies with a foreign jurisdiction’s 

capital adequacy and financial reporting 

requirements will be deemed to be in 

compliance with the Commission’s 

corresponding capital adequacy and 

financial reporting requirements. 

Accordingly, the failure of such a swap 

dealer or major swap participant to 

comply with the foreign jurisdictions 

capital adequacy and financial reporting 

requirements may constitute a violation 

of the Commission’s capital adequacy 

and financial reporting requirements. 

All swaps dealer and major swap 

participants, regardless of whether they 

rely on a Capital Comparability 

Determination, remain subject to the 

Commission’s examination and 

enforcement authority. 

(5) Conditions. In issuing a Capital 

Comparability Determination, the 

Commission may impose any terms and 

conditions it deems appropriate, 

including certain capital adequacy and 

financial reporting requirements on 

swap dealers or major swap 

participants. The violation of such terms 

and conditions may constitute a 

violation of the Commission’s capital 

adequacy or financial reporting 

requirements and/or result in the 

modification or revocation of the Capital 

Comparability Determination. 

(6) Modifications. The Commission 

reserves the right to further condition, 

modify, suspend or terminate or 

otherwise restrict a Capital 

Comparability Determination in the 

Commission’s discretion. 

§§ 23.107–23.149 [Reserved] 

PART 140—ORGANIZATION, 

FUNCTIONS, AND PROCEDURES OF 

THE COMMISSION 

■ 9. The authority citation for part 140 

continues to read as follows: 

Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 

13(d), 13(e), and 16(b). 

■ 10. Amend § 140.91 as follows: 

■ a. Redesignate paragraph (a)(12) as 

paragraph (a)(13); 

■ b. Redesignate paragraph (a)(11) as 

paragraph (a)(12); 

■ c. Add new paragraph (a)(11). 

The addition to read as follows: 

§ 140.91 Delegation of authority to the 

Director of the Division of Clearing and Risk 

and to the Director of the Division of Swap 

Dealer and Intermediary Oversight. 

(a) * * * 

(11) All functions reserved to the 

Commission in §§ 23.100 through 

23.107 of this chapter, except for those 

related to the revocation of a swap 

dealer’s or major swap participant’s 

approval to use internal models to 

compute capital requirements under 

§ 23.102 of this chapter, and the 

issuance of Capital Comparability 

Determinations under § 23.106 of this 

chapter. 

* * * * * 

Issued in Washington, DC, on December 2, 

2016, by the Commission. 

Christopher J. Kirkpatrick, 

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, Chairman’s Statement, and 

Commissioner’s Statement 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Massad and 

Commissioners Bowen and Giancarlo voted 

in the affirmative. No Commissioner voted in 

the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

I support the proposed rulemaking the 

Commission unanimously approved today. 

Capital requirements for swap dealers are 

among the most important reforms of the 

over-the-counter swap market agreed to by 

the leaders of the G20 nations in 2009. They 

complement margin requirements for 

uncleared swaps, which the Commission 

finalized earlier this year. While margin is 

the front line defense against a default, 

adequate capital is critical to the ability of 

swap dealers to absorb losses. 

One of my priorities this year has been to 

issue a reproposal of our rule setting these 

capital requirements. Our original proposal 

was issued at a time when margin 

requirements for uncleared swaps had not yet 

been established and bank capital rules were 

still being finalized. It is important that our 

rules are harmonized with prudential 

requirements, which is why it was 

appropriate to update and repropose our rule. 

As with margin, the law provides that 

swap dealers for which there is a prudential 

regulator shall comply with the capital rules 

of the prudential regulators, and the CFTC 

must adopt capital rules for all others. 

Because capital requirements are entity-wide, 

and not specific to transactions, I believe the 

requirements should take into account the 

fact that there are different types of firms that 

act as swap dealers—such as bank affiliates, 

broker-dealers, futures commission 

merchants and others primarily engaged in 

non-financial activities. Requiring all firms to 

follow one approach could favor one 

business model over another, and cause even 

greater concentration in the industry. 

The reproposal we have approved today 

recognizes this diversity. It supports 

competition as well as safety and soundness, 

by providing three different approaches. 

First, for swap dealers that are affiliates of 

prudentially regulated firms, the proposal 

permits them to use a method based on that 

of our banking regulators. Swap dealers that 

are also broker-dealers can use an approach 

that is based on the Securities and Exchange 

Commission’s net liquid assets approach. 

And for those dealers that are engaged 

primarily in non-financial activities, we have 

proposed a third approach based on net 

worth. And we have harmonized these 

requirements, where appropriate, with the 

capital rules of our prudential regulators and 

the Securities and Exchange Commission. 

I thank the CFTC’s hardworking staff for 

the significant time and effort they have 

devoted to this rule. I thank my fellow 

Commissioners for their support of this 

measure. And I encourage public comment 

on this proposal. 

Appendix 3—Statement of 

Commissioner J. Christopher Giancarlo 

For some time now, I have been asking 

whether the amount of capital which 

regulators have caused financial institutions 

to take out of trading markets is at all 

calibrated to the amount of capital which is 

needed to be kept in global markets to 

support the health and durability of the 

global financial system. I have called on the 

Financial Stability Oversight Council and 

domestic and foreign financial regulators to 

conduct a thorough analysis in this regard. 

Those calls have been largely ignored. So, I 

hope that commenters to this capital 

proposal can help provide some insight into 

my question. 

Along those lines, I have included several 

questions in this proposal that ask for 

feedback on whether the capital requirements 

under the different capital approaches are 

appropriate. I thank staff of the Division of 

Swap Dealer and Intermediary Oversight for 

including my questions in the proposal. I am 

particularly interested in how the proposed 

capital requirements will affect smaller swap 

dealers and how much additional capital 

they may have to raise to comply with the 

proposal. I have included several questions 

in the cost-benefit section in this regard. I am 

also interested in the impact of the proposed 

rule on any potential new registrants if the 

swap dealer de minimis level falls to $3 

billion. 

I have also included several questions 

about the scope of the proposal. For example, 

the proposed minimum capital requirement 

is based upon eight percent of the margin 

required on the swap dealer’s cleared and 

uncleared swaps and security-based swaps 

and the margin required on the swap dealer’s 

futures and foreign futures. However, 

Commodity Exchange Act section 4s(e)(3)(A) 

only cites the risk of uncleared swaps in 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALS
91334 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Proposed Rules 

1 7 U.S.C. 6s(e)(3)(A). 

2 77 FR 30596, 30610 fn. 199 (May 23, 2012). 

setting standards for capital.1 Additionally, 

in the Commission’s final swap dealer 

definition rule, it said it will ‘‘in connection 

with promulgation of final rules relating to 

capital requirements for swap dealers and 

major swap participants, consider institution 

of reduced capital requirements for entities 

or individuals that fall within the swap 

dealer definition and that execute swaps only 

on exchanges, using only proprietary 

funds.’’ 2 Given these pronouncements, I 

welcome commenters’ views on the broad 

scope of the proposed capital requirements. 

Finally, I am concerned about the proposed 

capital model review and approval process. 

The proposal states that the Commission 

expects that a prudential regulator’s or 

foreign regulator’s review and approval of 

capital models that are used in the corporate 

family of a swap dealer would be a 

significant factor in the National Futures 

Association’s (NFA) determination of the 

scope of its review, provided that appropriate 

information sharing agreements are in place. 

Given the large number of models that will 

need to be reviewed, the complexity of those 

models and the practical resource constraints 

at the NFA, I am concerned that the proposed 

process will be unworkable. We have already 

seen the challenges in the model approval 

process for initial margin under tight 

implementation timelines, and in that case 

there was a standard initial margin model. 

We should learn from that lesson. So, I am 

interested to hear commenters’ views on 

alternative model approval processes, such as 

automatic or temporary approval of capital 

models that have been previously approved 

by a prudential or foreign regulator. 

I look forward to reviewing thoughtful and 

well-considered comments. 

[FR Doc. 2016–29368 Filed 12–15–16; 8:45 am] 

BILLING CODE 6351–01–P 


asabaliauskas on DSK3SPTVN1PROD with PROPOSALS