Document ID: SEC-2018-1624-0001
Agency: sec
Document Type: Proposed Rule
Title: Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers
Posted Date: 2018-10-19T04:00Z

[Federal Register Volume 83, Number 203 (Friday, October 19, 2018)]
[Proposed Rules]
[Pages 53007-53020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22531]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-84409; File No. S7-08-12]
RIN 3235-AL12

Capital, Margin, and Segregation Requirements for Security-Based 
Swap Dealers and Major Security-Based Swap Participants and Capital 
Requirements for Broker-Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; reopening of comment period; request for 
additional comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
reopening the comment period and requesting additional comment 
(including potential modifications to proposed rule language) on the 
following: Proposed amendments and new rules that would establish 
capital and margin requirements for security-based swap dealers 
(``SBSDs'') and major security-based swap participants (``MSBSPs'') 
that do not have a prudential regulator, establish segregation 
requirements for SBSDs, establish notification requirements for SBSDs 
and MSBSPs relating to segregation, and raise minimum net capital 
requirements and establish liquidity requirements for broker-dealers 
permitted to use internal models when computing net capital (``ANC 
broker-dealers''). The Commission also is reopening the comment period 
and requesting additional comment on proposed amendments that would 
establish the cross-border treatment of security-based swap capital, 
margin, and segregation requirements; and a proposed amendment that 
would establish an additional capital requirement for SBSDs that do not 
have a prudential regulator.

DATES: The comment periods for portions of the proposed rules published 
Nov. 23, 2012 (77 FR 70213); May 23, 2013 (78 FR 30967); and May 2, 
2014 (79 FR 25193), are reopened. Comments should be submitted by 
November 19, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to [email protected]. Please include 
File No. S7-08-12 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-12. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's website (http://www.sec.gov). Comments are 
also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549, on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
All comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make publicly available.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at 
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202) 
551-5522; Sheila Dombal Swartz, Senior Special Counsel, at (202) 551-
5545; Timothy C. Fox, Branch Chief, at (202) 551-5687; Valentina Minak 
Deng, Special Counsel, at (202) 551-5778; or Nina Kostyukovsky, 
Attorney Advisor, at (202) 551-8833, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-7010.

SUPPLEMENTARY INFORMATION: 

I. Background

    In October 2012, the Commission proposed amendments and new rules 
to: (1) Establish capital and margin requirements for SBSDs and MSBSPs 
that do not have a prudential regulator \1\ (``nonbank SBSDs'' and 
``nonbank MSBSPs'', respectively); (2) establish segregation 
requirements for SBSDs; (3) establish notification requirements for 
SBSDs and MSBSPs relating to segregation; and (4) raise minimum net 
capital requirements and establish liquidity requirements for ANC 
broker-dealers.\2\ The Commission published the 2012 Proposals largely 
pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Title VII of the Dodd-Frank Act''). The Commission 
extended the comment period once,\3\ and reopened it once.\4\ The 
Commission has received a number of comment letters in response to the 
2012 Proposals.\5\
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    \1\ The term ``prudential regulator'' is defined in Section 
1(a)(39) of the Commodity Exchange Act (7 U.S.C. 1(a)(39)) and that 
definition is incorporated by reference in Section 3(a)(74) of the 
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act''). 15 
U.S.C. 78c(a)(74). Pursuant to the definition, the Board of 
Governors of the Federal Reserve System (``FRB''), the Office of the 
Comptroller of the Currency (``OCC''), the Federal Deposit Insurance 
Corporation (``FDIC''), the Farm Credit Administration (``FCA''), or 
the Federal Housing Finance Agency (``FHFA'') (collectively, the 
``prudential regulators'') is the ``prudential regulator'' of an 
SBSD, MSBSP, swap participant, or major swap participant if the 
entity is directly supervised by that agency.
    \2\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital Requirements for Broker-Dealers, Exchange 
Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214 (Nov. 23, 2012) 
(``2012 Proposals'').
    \3\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital Requirements for Broker-Dealers, Exchange 
Act Release No. 68660 (Jan. 15. 2013), 78 FR 4365 (Jan. 22, 2013).
    \4\ See Reopening of Comment Periods for Certain Rulemaking 
Releases and Policy Statement Applicable to Security-Based Swaps 
Proposed Pursuant to the Securities Exchange Act of 1934 and the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange 
Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013).
    \5\ The comment letters are available at http://www.sec.gov/comments/s7-08-12/s70812.shtml.
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    In addition, in May 2013, the Commission proposed provisions to 
establish the cross-border treatment of security-based swap capital, 
margin, and segregation requirements.\6\ The

[[Page 53008]]

Commission has received a number of comment letters in response to the 
2013 Proposals.\7\
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    \6\ See Cross-Border Security-Based Swap Activities; Re-Proposal 
of Regulation SBSR and Certain Rules and Forms Relating to the 
Registration of Security-Based Swap Dealers and Major Security-Based 
Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78 
FR 30968 (May 23, 2013) (``2013 Proposals'').
    \7\ The comment letters are available at http://www.sec.gov/comments/s7-02-13/s70213.shtml.
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    Finally, in April 2014, the Commission proposed an additional 
nonbank SBSD capital requirement.\8\ The Commission has received one 
comment letter in response to the 2014 Proposal.\9\
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    \8\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and 
Broker-Dealers; Capital Rule for Certain Security-Based Swap 
Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 
25194, 25254 (May 2, 2014) (the ``2014 Proposal'' and together with 
the 2012 Proposals and the 2013 Proposals, the ``Proposals'').
    \9\ The comment letter is available at: https://www.sec.gov/comments/s7-05-14/s70514.shtml.
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    In the releases publishing the Proposals, the Commission described 
the statutory and regulatory background for the proposed amendments and 
rules, the rationales for each of the proposed amendments and rules, 
the potential economic consequences, including the baseline against 
which the proposed amendments and rules may be evaluated, the potential 
costs and benefits, reasonable alternatives, and the potential effects 
on efficiency, competition, and capital formation.\10\
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    \10\ See Proposals.
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    Since publication of the 2012 Proposals, the Commission has adopted 
other rules relating to the regulation of the over-the-counter 
derivatives markets pursuant to Title VII of the Dodd-Frank Act.\11\ In 
addition, the prudential regulators and the Commodity Futures Trading 
Commission (``CFTC'') have adopted or proposed rules under Title VII of 
the Dodd-Frank Act that are relevant to the Proposals.\12\
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    \11\ See Clearing Agency Standards, Exchange Act Release No. 
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 11, 2012); Application of 
``Security-Based Swap Dealer'' and ``Major Security-Based Swap 
Participant'' Definitions to Cross-Border Security-Based Swap 
Activities, Exchange Act Release No. 72472 (June 25, 2014), 79 FR 
47278 (Aug. 12, 2014); Regulation SBSR--Reporting and Dissemination 
of Security-Based Swap Information, Exchange Act Release No. 74244 
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015); Security-Based Swap 
Data Repository Registration, Duties, and Core Principles, Exchange 
Act Release No. 74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015); 
Registration Process for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 75611 
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015); Security-Based Swap 
Transactions Connected with a Non-U.S. Person's Dealing Activity 
That Are Arranged, Negotiated, or Executed By Personnel Located in a 
U.S. Branch or Office or in a U.S. Branch or Office of an Agent; 
Security-Based Swap Dealer De Minimis Exception, Exchange Act 
Release No. 77104 (Feb. 10, 2016), 81 FR 8597 (Feb. 19, 2016); 
Business Conduct Standards for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 77617 
(Apr. 14, 2016), 81 FR 29960 (May 13, 2016); Trade Acknowledgment 
and Verification of Security-Based Swap Transactions, Exchange Act 
Release No. 78011 (June 8, 2016), 81 FR 39808 (June 17, 2016); 
Regulation SBSR--Reporting and Dissemination of Security-Based Swap 
Information, Exchange Act Release No. 78321 (July 14, 2016), 81 FR 
53545 (Aug. 12, 2016); Access to Data Obtained by Security-Based 
Swap Data Repositories, Exchange Act Release No. 78716 (Aug. 29, 
2016), 81 FR 60585 (Sept. 2, 2016).
    \12\ See FRB, OCC, FDIC, FCA, FHFA, Margin and Capital 
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) 
(adopting capital and margin requirements for bank swap dealers, 
bank SBSDs, bank swap participants, and bank MSBSPs); CFTC, Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 81 FR 636 (Jan. 6, 2016) (adopting margin requirements 
for nonbank swap dealers and nonbank major swap participants); CFTC, 
Capital Requirements of Swap Dealers and Major Swap Participants, 81 
FR 91252 (Dec. 16, 2016) (proposing capital requirements for nonbank 
swap dealers and nonbank major swap participants).
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    The Commission has carefully considered the comment letters, and 
the Commission believes it is prudent to reopen the comment period for 
the Proposals in light of these comments and regulatory developments. 
In addition, the Commission believes the public should have the 
opportunity to provide comment on the potential economic effects of the 
Proposals in light of regulatory and market developments since they 
were published. Accordingly, the Commission is reopening the public 
comment period for 30 days and seeking comment on all aspects of the 
Proposals. The Commission also is seeking specific comment on certain 
aspects of the Proposals where further information would be 
particularly helpful to the Commission. In particular, the Commission 
is seeking comment on potential rule language that would modify rule 
text that was in the Proposals. This modified rule language would be 
included in: (1) Existing rules 17 CFR 240.15c3-1 (``Rule 15c3-1''), 17 
CFR 240.15c3-1a (``Appendix A to Rule 15c3-1''), 17 CFR 240.15c3-3 
(``Rule 15c3-3''), and 17 CFR 240.3a71-6 (``Rule 3a71-6''); (2) new 
rule 17 CFR 240.15c3-3b (``Exhibit B to Rule 15c3-3''); and (3) in 
proposed rules 17 CFR 240.18a-1 (``Rule 18a-1''), 17 CFR 240.18a-1a 
(``Appendix A to Rule 18a-1''), 17 CFR 240.18a-3 (``Rule 18a-3''), 17 
CFR 240.18a-4 (``Rule 18a-4''), and 17 CFR 240.18a-4a (``Exhibit A to 
Rule 18a-4''). Comment letters received by the Commission previously 
need not be re-submitted as they will continue to be a part of the 
public comment file for this rulemaking and considered by the 
Commission.

II. Request for Comment

    The Commission renews its request for comment on all aspects of the 
Proposals and on the specific topics identified below. Commenters are 
requested to provide empirical data in support of any arguments and 
analyses. The Commission notes that comments are of the greatest 
assistance to rulemaking initiatives when accompanied by supporting 
data and analysis, and, if appropriate, accompanied by alternative 
approaches and suggested language.

Capital

    1. The 2012 Proposals included a provision that would establish a 
financial ratio-derived minimum net capital requirement for a nonbank 
SBSD equal to eight percent (8%) of the firm's risk margin amount.\13\ 
The risk margin amount would be the sum of:
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    \13\ See 2012 Proposals, 77 FR at 70223-24. Minimum net capital 
requirements would be the greater of a fixed-dollar amount and an 
amount derived by applying a financial ratio. See id. at 70221.
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     The greater of the total margin required to be delivered 
by the nonbank SBSD with respect to security-based swap transactions 
cleared for security-based swap customers at a clearing agency or the 
amount of the deductions (haircuts) that would apply to the cleared 
security-based swap positions of the security-based swap customers 
pursuant to the proposed capital requirements; and
     The total margin amount calculated by the nonbank SBSD 
with respect to non-cleared security-based swaps pursuant to the 
proposed margin rule.\14\
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    \14\ The ratio-based minimum net capital calculation shown as an 
equation would be: MRNC = [max(IM\C\, HC\C\) + IM\NC\] x 8%. Where 
MRNC is the ratio-based minimum net capital requirement, IM\C\ is 
the amount of initial margin for cleared security-based swaps, HC\C\ 
is the amount of haircuts applied to the same cleared security-based 
swaps, IM\NC\ is the amount of initial margin calculated for non-
cleared security-based swaps, and (max(IM\C\, HC\C\) + IM\NC\) is 
the risk margin amount. For example, assume that IM\C\ is $10, HC\C\ 
is $15, and IM\NC\ is $25. In this simple hypothetical example, the 
risk margin amount would equal $40 [max($10, $15) + $25], and the 
ratio-based minimum net capital requirement would be $3.20 ($40 x 
8%). As proposed, a stand-alone nonbank SBSD would be subject to 
this ratio-based minimum net capital requirement, whereas a nonbank 
SBSD dually registered as a broker-dealer would be subject to the 
sum of this ratio-based minimum net capital requirement plus one of 
the two existing financial ratio-based minimum net capital 
requirements in Rule 15c3-1.

The total of these two amounts would be multiplied by eight percent 
(8%) to determine the dollar amount of this ratio requirement (and the 
nonbank SBSD's minimum net capital requirement would be the greater of 
a

[[Page 53009]]

fixed-dollar amount and a ratio amount). The proposal for a ratio 
amount relating to security-based swaps was designed to establish a 
minimum net capital requirement that increases in tandem with an 
increase in the risks associated with a nonbank SBSD's security-based 
swap activities. This scaled ratio amount is separate from the fixed-
dollar amount that sets a floor to the minimum net capital 
requirement.\15\
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    \15\ See id. at 70223-24.
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    a. The Commission requests comment and supporting data on the 
potential minimum net capital amounts that would be required of nonbank 
SBSDs as a result of the requirement, as proposed. How would those 
potential minimum net capital amounts compare with the amounts of 
capital currently maintained by entities that may register as nonbank 
SBSDs?
    b. One commenter suggested that the Commission modify its proposed 
definition of the risk margin amount to reflect the lower risk 
associated with central clearing.\16\ In light of the comment and the 
goals of this provision, the Commission requests comment on whether the 
input to the risk margin amount for cleared security-based swaps should 
be modified. Should the input to the risk margin amount for cleared 
security-based swaps be determined solely by the total initial margin 
required to be delivered by the nonbank SBSD with respect to security-
based swap transactions cleared for security-based swap customers at a 
clearing agency (i.e., not be the greater of that amount or the amount 
of the deductions (haircuts) that would apply to the cleared security-
based swap positions)? \17\ The purpose of this potential modification 
would be to simplify the calculation, align it with the clearing agency 
margin requirements, and more closely align it with the CFTC's existing 
rules and proposals.\18\
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    \16\ See Letter from Stuart J. Kaswell, Executive Vice 
President, Managing Director, and General Counsel, Managed Funds 
Association (Feb. 22, 2013).
    \17\ The ratio-based minimum net capital calculation shown as an 
equation would be: MRNC = (IM\C\ + IM\NC\) x 8%.
    \18\ Eliminating the haircut input to the risk margin amount for 
cleared security-based swaps would more closely align it with the 
CFTC's existing rules and proposals. For example, currently futures 
commission merchants (``FCMs'') registered with the CFTC must 
maintain adjusted net capital in excess of eight percent (8%) of the 
risk margin on futures, foreign futures, and cleared swaps positions 
carried in customer and noncustomer accounts. See 17 CFR 1.17. The 
CFTC has proposed a similar requirement for swap dealers registered 
as FCMs that also would generally include in the FCM's minimum net 
capital requirement eight percent (8%) of the total initial margin 
an FCM is required to post to a clearing agency for cleared 
security-based swap positions (as well as the initial margin on 
uncleared swap and security-based swap positions for which the FCM 
is a counterparty). See Capital Requirements of Swap Dealers and 
Major Swap Participants, 81 FR at 91266.
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    Would rule language as described below effect this potential 
modification to the rule text in the 2012 Proposals? If not, please 
explain why and suggest alternative rule language. If the Commission 
were to use the language described below, would it strike an 
appropriate balance in terms of achieving the objectives of the 
proposed rule and addressing the commenter's concern described above? 
If not, please explain why and suggest alternative rule language that 
could more effectively and efficiently strike the balance and achieve 
the objective.
    The potential modifications to paragraph (c)(17) of Rule 15c3-1 
would provide that the term risk margin amount means the sum of: (i) 
The total initial margin required to be maintained by the broker or 
dealer at each clearing agency with respect to security-based swap 
transactions cleared for security-based swap customers; and (ii) the 
total margin amount calculated by the broker or dealer with respect to 
non-cleared security-based swaps pursuant to Sec.  240.18a-
3(c)(1)(i)(B).
    Similarly, the potential modifications to paragraph (c)(6) of Rule 
18a-1 would provide that the term risk margin amount means the sum of: 
(i) The total initial margin required to be maintained by the security-
based swap dealer at each clearing agency with respect to security-
based swap transactions cleared for security-based swap customers; and 
(ii) the total margin amount calculated by the security-based swap 
dealer with respect to non-cleared security-based swaps pursuant to 
Sec.  240.18a-3(c)(1)(i)(B).
    2. The 2012 Proposals included a capital charge that would apply if 
a nonbank SBSD collects an amount of margin from a counterparty to a 
cleared security-based swap that is less than the deduction that would 
apply to the security-based swap if it was a proprietary position of 
the firm.\19\ This proposed requirement was designed to account for the 
risk of the counterparty defaulting by requiring the nonbank SBSD to 
maintain capital in the place of margin in an amount that is no less 
than would be required for a proprietary position.\20\ It also was 
designed to ensure that there is a standard minimum coverage for 
exposure to cleared security-based swap counterparties apart from the 
individual clearing agency margin requirements, which could vary among 
clearing agencies and over time.\21\
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    \19\ See 2012 Proposals, 77 FR at 70245-46.
    \20\ See id. at 70246.
    \21\ See id.
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    One commenter opposed this proposal stating that the requirement 
would ``harm customers because it would provide an incentive for the 
collection of margin by nonbank SBSDs beyond the amount determined by 
the clearing agency.'' \22\ In light of the comment and the goals of 
this provision, the Commission requests comment on whether this 
proposed capital charge should be modified to include a risk-based 
threshold under which the proposed capital charge need not be taken. 
Should the rule provide that the deduction need not be taken if the 
difference between the clearing agency margin amount and the haircut is 
less than one percent (1%) or some other percent of the nonbank SBSD's 
tentative net capital \23\ and less than ten percent (10%) or some 
other percent of the counterparty's net worth,\24\ and the aggregate 
difference across all counterparties is less than twenty-five percent 
(25%) or some other percent of the nonbank SBSD's tentative net 
capital? \25\ The purpose of these thresholds would be to limit the 
nonbank SBSD's exposure to a single counterparty as well as to 
establish a concentration limit across all counterparties. In addition, 
these thresholds would be scalable and have a more direct relation to 
the risk to the nonbank SBSD arising from its security-based swap 
activities.
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    \22\ See Letter from Kenneth E. Bentsen, Jr., Executive Vice 
President, Securities Industry and Financial Markets Association 
(Feb. 22, 2013) (``SIFMA 2/22/2013 Letter'').
    \23\ See, e.g., Order Granting Conditional Exemption Under the 
Securities Exchange Act of 1934 in Connection with Portfolio 
Margining of Swaps and Security-Based Swaps, Exchange Act Release 
No. 68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012). Pursuant to 
this order, Commission staff granted conditional temporary approval 
to certain broker-dealers that are also registered as FCMs to 
participate in a credit default swap (CDS) portfolio margining 
program, subject to specified conditions. One condition requires a 
firm to calculate its net credit exposure to a client and if the 
client's net credit exposure is in excess of one percent (1%) of the 
firm's tentative net capital, the firm is required to either collect 
the net credit exposure above the one percent (1%) threshold in the 
form of margin from its client or take a capital charge equal to 
that amount. See, e.g., Letter to Keith Bailey, Barclays Capital 
Inc. from Michael A. Macchiaroli, Division of Trading and Markets, 
Commission (June 7, 2013).
    \24\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten 
percent (10%) of tentative net capital threshold for the calculation 
of undue concentration charges).
    \25\ See, e.g., 17 CFR 240.15c3-3a, Note E(5) (using a twenty-
five percent (25%) of tentative net capital threshold for when a 
broker-dealer must reduce debits in the customer reserve formula).
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    Would rule language as described below effect this potential 
modification

[[Page 53010]]

to the rule text in the 2012 Proposals? If not, please explain why and 
suggest alternative rule language. If the Commission were to use the 
language described below, would it strike an appropriate balance in 
terms of achieving the objectives of the proposed rule and addressing 
the commenter's concern described above? If not, please explain why and 
suggest alternative rule language that could more effectively and 
efficiently strike the balance and achieve the objective.
    The potential modifications to paragraph (c)(2)(xv)(A) of Rule 
15c3-1 would provide the following deduction from net worth in lieu of 
collecting collateral for cleared security-based swaps and swap 
transactions: (1) Deducting the amount of the margin difference for 
each account carried by the broker or dealer for another person that 
holds cleared security-based swap or swap transactions. The margin 
difference is the amount of the deductions to the positions in the 
account calculated pursuant to paragraph (c)(2)(vi) of this section, 
Sec.  240.15c3-1b, or Sec.  240.15c3-1e (as applicable), less the 
margin value of collateral held in the account. (2) Exception. The 
deduction required pursuant to paragraph (c)(2)(xv)(A)(1) of this 
section need not be taken to the extent that: (i) The amount of the 
margin difference for the account does not exceed the lesser of 1 
percent (1%) of the tentative net capital of the broker or dealer or 
ten percent (10%) of the net worth of the counterparty; and (ii) The 
amount of the margin difference for all accounts that hold security-
based swaps or swaps does not exceed twenty-five percent (25%) of the 
tentative net capital of the broker or dealer.
    Similarly, the potential modifications to paragraph (c)(1)(ix)(A) 
of Rule 18a-1 would provide the following deduction from net worth in 
lieu of collecting collateral for security-based swaps and swap 
transactions: (1) Deducting the amount of the margin difference for 
each account carried by the security-based swap dealer for another 
person that holds cleared security-based swap or swap transactions. The 
margin difference is the amount of the deductions to the positions in 
the account calculated pursuant to paragraph (c)(1)(vi) or (vii) of 
this section, Sec.  240.18a-1(d), or Sec.  240.18a-1b (as applicable), 
less the margin value of collateral held in the account. (2) Exception. 
The deduction required pursuant to paragraph (c)(1)(ix)(A)(1) of this 
section need not be taken to the extent that: (i) The amount of the 
margin difference for the account does not exceed the lesser of 1 
percent (1%) of the tentative net capital of the security-based swap 
dealer or ten percent (10%) of the net worth of the counterparty; and 
(ii) The amount of the margin difference for all accounts that hold 
security-based swaps or swaps does not exceed twenty-five percent (25%) 
of the tentative net capital of the security-based swap dealer.
    3. The 2012 Proposals included a provision that a nonbank SBSD 
would be required to take a 100 percent (100%) capital charge when it 
does not collect variation or initial margin for non-cleared security-
based swaps because of an exception from collecting margin.\26\ The 
proposed capital charge was intended to require a nonbank SBSD to set 
aside net capital to address the risks that would otherwise be 
mitigated through the collection of variation and initial margin.\27\ 
The set aside net capital would serve as an alternative to obtaining 
margin.\28\ As an alternative to taking the 100 percent (100%) charge, 
the Commission proposed that firms using internal models to calculate 
net capital could take a credit risk charge if the uncollected margin 
involved a transaction with a commercial end user.\29\
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    \26\ See 2012 Proposals, 77 FR at 70425-27.
    \27\ See id.
    \28\ See id.
    \29\ See id. at 70240-45.
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    a. Commenters requested that nonbank SBSDs be permitted to apply 
the credit risk charge to other types of counterparties.\30\ In light 
of the comments and the goals of this provision, the Commission 
requests comment on whether the use of the credit risk charge should be 
expanded to other types of counterparties and transactions. Should the 
rule permit a firm to apply the credit risk charge for uncollected 
initial margin for security-based swaps and swap transactions with any 
type of counterparty and for uncollected variation margin for 
transactions with a commercial end user only? The purpose of limiting 
the application of the credit risk charge with respect to uncollected 
variation margin to transactions with commercial end users would be to 
reduce the types of unsecured receivables that qualify as allowable 
assets for net capital purposes and, thereby, promote the liquidity of 
the nonbank SBSD.
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    \30\ See, e.g., Letter from Anne-Marie Leroy, Senior Vice 
President and Group General Counsel, and David Harris, Acting Vice 
President and General Counsel, The World Bank (Feb. 21, 2013).
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    b. The Commission requests comment on whether the rule should 
establish a threshold for uncollected margin above which the use of the 
credit risk charge would not be permitted. Should there be a threshold 
when the aggregate amount of uncollected margin across all 
counterparties exceeds a level of the nonbank SBSD's tentative net 
capital? Should the threshold apply to the aggregate amount of 
uncollected initial and variation margin or just to the aggregate 
amount of uncollected variation margin? The latter approach would focus 
the threshold on unsecured receivables that result from not collecting 
variation margin and, thereby, promote the liquidity of the nonbank 
SBSD. Should there be a threshold with respect to uncollected variation 
margin for security-based swap and swap transactions with commercial 
end users and should that threshold be ten percent (10%) or some other 
percent of the nonbank SBSD's tentative net capital? \31\ This 
threshold would be designed to limit the nonbank SBSD's aggregate 
exposure arising from not collecting variation margin from commercial 
end users and would be scalable to the nonbank SBSD's financial 
condition.
---------------------------------------------------------------------------

    \31\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten 
percent (10%) of tentative net capital threshold for the calculation 
of undue concentration charges).
---------------------------------------------------------------------------

    c. The potential modifications to the rule text in the 2012 
Proposals discussed above in 3.a and 3.b would include: (1) Changing 
the proposed rule to permit a nonbank SBSD to apply the credit risk 
charge for uncollected initial margin for security-based swaps and 
swaps from any type of counterparty and for uncollected variation 
margin from a commercial end user; and (2) establishing a risk-based 
threshold with respect to uncollected variation margin from commercial 
end users. Would rule language as described below effect this potential 
modification to the rule text in the 2012 Proposals? If not, please 
explain why and suggest alternative rule language. If the Commission 
were to use the language described below, would it strike an 
appropriate balance in terms of achieving the objectives of the 
proposed rule and addressing commenters' requests to apply the credit 
risk charge more broadly? If not, please explain why and suggest 
alternative rule language that could more effectively and efficiently 
strike the balance and achieve the objective.
    The potential modifications to paragraph (a)(7) of Rule 15c3-1 
would provide: In accordance with Appendix E to this section (Sec.  
240.15c3-1e), the Commission may approve, in whole or in part, an 
application or an amendment to an application by a broker or dealer to 
calculate net capital using the market risk standards of appendix E to 
compute a deduction for market risk on some or

[[Page 53011]]

all of its positions, instead of the provisions of paragraphs 
(c)(2)(vi) and (c)(2)(vii) of this section, and Sec.  240.15c3-1b, and 
using the credit risk standards of Appendix E to compute a deduction 
for credit risk for certain security-based swap and swap transactions, 
as specified in this paragraph, instead of the provisions of paragraphs 
(c)(2)(iv), (c)(2)(xv)(B)(1), and (c)(2)(xv)(B)(2) of this section, 
subject to any conditions or limitations on the broker or dealer the 
Commission may require as necessary or appropriate in the public 
interest or for the protection of investors. A broker or dealer may use 
the credit risk standards of Appendix E to compute a deduction for 
credit risk for security-based swap transactions with commercial end 
users as that term is defined in Sec.  240.18a-3(b)(2), and swap 
transactions in which a counterparty qualifies for an exception from 
margin requirements pursuant to Section 4s(e)(4) of the Commodity 
Exchange Act (7 U.S.C. 6s(e)(4)) instead of the provisions of paragraph 
(c)(2)(iv) of this section, provided that the deductions, in the 
aggregate, do not exceed ten percent (10%) of the tentative net capital 
of the broker or dealer. A broker or dealer also may use the credit 
risk standards of Appendix E to compute a deduction for credit risk for 
security-based swap transactions that are subject to an initial margin 
exception set forth in Sec.  240.18a-3(c)(1)(iii) instead of the 
provisions of paragraph (c)(2)(xv)(B)(1) of this section, and for swap 
transactions instead of the provisions of paragraph (c)(2)(xv)(B)(2) of 
this section.
    Similarly, the potential modifications to paragraph (a)(2) of Rule 
18a-1 would provide: In accordance with paragraph (d) of this section, 
the Commission may approve, in whole or in part, an application or an 
amendment to an application by a security-based swap dealer to 
calculate net capital using the market risk standards of paragraph (d) 
to compute a deduction for market risk on some or all of its positions, 
instead of the provisions of paragraphs (c)(1)(iv), (vi), and (vii) of 
this section, and Sec.  240.18a-1b, and using the credit risk standards 
of paragraph (d) to compute a deduction for certain security-based swap 
and swap transactions, as specified in this paragraph, instead of the 
provisions of paragraphs (c)(1)(iii), (c)(1)(ix)(B)(1), and 
(c)(1)(ix)(B)(2) of this section, subject to any conditions or 
limitations on the security-based swap dealer the Commission may 
require as necessary or appropriate in the public interest or for the 
protection of investors. A security-based swap dealer may use the 
credit risk standards of paragraph (d) to compute a deduction for 
credit risk for security-based swap transactions with commercial end 
users as that term is defined in Sec.  240.18a-3(b)(2), and swap 
transactions in which a counterparty qualifies for an exception from 
margin requirements pursuant to Section 4s(e)(4) of the Commodity 
Exchange Act (7 U.S.C. 6s(e)(4)) instead of the provisions of paragraph 
(c)(1)(iii) of this section, provided that the deductions, in the 
aggregate, do not exceed ten percent (10%) of the tentative net capital 
of security-based swap dealer. A security-based swap dealer also may 
use the credit risk standards of paragraph (d) to compute a deduction 
for credit risk for security-based swap transactions that are subject 
to an initial margin exception set forth in Sec.  240.18a-3(c)(1)(iii) 
instead of the provisions of paragraph (c)(1)(ix)(B)(1) of this 
section, and for swap transactions instead of the provisions of 
paragraph (c)(1)(ix)(B)(2) of this section.
    4. The 2012 Proposals included a capital charge for nonbank SBSDs 
when a counterparty requires initial margin to be segregated pursuant 
to Section 3E(f) of the Act, which among other things, provides that 
the collateral must be carried by an independent third-party 
custodian.\32\ Collateral held in this manner would not be in the 
possession or control of the nonbank SBSD, nor would it would be 
capable of being liquidated promptly by the nonbank SBSD without the 
intervention of a third party.
---------------------------------------------------------------------------

    \32\ See 2012 Proposals, 77 FR at 70246-47; 15 U.S.C. 78c-
5(f)(3).
---------------------------------------------------------------------------

    a. Commenters argued that the charge would discourage the use of 
segregation under Section 3E(f) of the Act,\33\ that the charge would 
create costs to the affected nonbank SBSD (which would be passed on to 
customers),\34\ and that the parties could properly structure an 
agreement to address the Commission's concern about the nonbank SBSD's 
lack of control over the collateral.\35\ In light of the comments and 
the goals of this provision, the Commission requests comment on whether 
there should be an exception to taking the capital charge (whether 100 
percent (100%) or a credit risk charge, as applicable) under conditions 
that promote the SBSD's ability to promptly access the collateral if 
needed. Should there be an exception with the following conditions: (1) 
The custodian is a bank; (2) the nonbank SBSD enters into an agreement 
with the custodian and the counterparty that provides the nonbank SBSD 
with the same control over the collateral as would be the case if the 
nonbank SBSD controlled the collateral directly; and (3) an opinion of 
counsel deems the agreement enforceable? The purpose of these 
conditions would be to provide the nonbank SBSD with the unfettered 
ability to access the collateral in the event the counterparty defaults 
and, thereby, promote the financial condition of the nonbank SBSD, 
particularly in a time of market distress. Would this be a practical 
exception? If not, please explain why.
---------------------------------------------------------------------------

    \33\ See, e.g., Letter from American Benefits Council, Committee 
on Investment of Employee Benefit Assets, European Federation for 
Retirement Provision, the European Association of Paritarian 
Institutions, the National Coordinating Committee for Multiemployer 
Plans, and the Pension Investment Association of Canada (May 19, 
2014).
    \34\ See, e.g., Letter from Douglas M. Hodge, Managing Director 
and Chief Operating Officer, Pacific Investment Management Company 
LLC (Feb. 21, 2013).
    \35\ See, e.g., Letter from Karrie McMillan, General Counsel, 
Investment Company Institute (Dec. 5, 2013).
---------------------------------------------------------------------------

    b. The Commission is considering providing guidance on ways a 
nonbank SBSD could structure the account control agreement to meet a 
requirement that the nonbank SBSD have the same control over the 
collateral as would be the case if the nonbank SBSD controlled the 
collateral directly. In developing the guidance on ways this 
requirement could be met, the Commission asks commenters to address 
whether the agreement between the nonbank SBSD, counterparty, and the 
third-party custodian should: (1) Provide that the collateral will be 
released promptly and directed in accordance with the instructions of 
the nonbank SBSD upon the receipt of an effective notice from the 
nonbank SBSD; (2) provide that when the counterparty provides an 
effective notice to access the collateral the nonbank SBSD will have 
sufficient time to challenge the notice in good faith and that the 
collateral will not be released until a prior agreed-upon condition 
among the three parties has occurred; and (3) give priority to an 
effective notice from the nonbank SBSD over an effective notice from 
the counterparty, as well as priority to the nonbank SBSD's instruction 
about how to transfer the collateral in the event the custodian 
terminates the account control agreement? Are there any other 
provisions regarding the account control agreement that the Commission 
should address to assist nonbank SBSDs in structuring the agreements to 
meet a requirement in a rule that the nonbank SBSD have the same 
control over the collateral as would be the case if the nonbank SBSD 
controlled the collateral directly?
    c. The potential modification to the rule text in the 2012 
Proposals

[[Page 53012]]

discussed above in 4.a would establish conditions under which a nonbank 
SBSD could avoid the capital charge that applies when a counterparty 
requires initial margin to be segregated pursuant to Section 3E(f) of 
the Act. Would rule language as described below effect this potential 
modification to the rule text in the 2012 Proposals? If not, please 
explain why and suggest alternative rule language. If the Commission 
were to use the language described below, would it strike an 
appropriate balance in terms of achieving the objectives of the 
proposed rule and addressing the commenters' concerns about the impact 
of the capital charge? If not, please explain why and suggest 
alternative rule language that could more effectively and efficiently 
strike the balance and achieve the objective.
    The potential modifications to paragraph (c)(2)(xv)(B) of Rule 
15c3-1 would provide the following deductions from net worth in lieu of 
collecting collateral for security-based swap and swap transactions: 
(1) Security-based swaps. Deducting the amounts calculated pursuant to 
Sec.  240.18a-3(c)(1)(i)(B) for the account of a counterparty at the 
broker or dealer that is subject to an initial margin exception set 
forth in Sec.  240.18a-3(c)(1)(iii), less the margin value of 
collateral held in the account of the counterparty at the broker or 
dealer. (2) Swaps. Deducting the initial margin calculated pursuant to 
Sec.  240.18a-3(d)(2) for swaps other than equity swaps, or Sec.  
240.15c3-1b, as applicable, in the account of a counterparty at the 
broker or dealer, less the margin value of collateral held in the 
account of the counterparty at the broker or dealer. (3) Treatment of 
collateral held at a third-party custodian. For the purposes of the 
deductions required pursuant to paragraphs (c)(2)(xv)(B)(1) and (2) of 
this section, collateral held by an independent third-party custodian 
as initial margin pursuant to Section 3E(f) of the Act or Section 4s(l) 
of the Commodity Exchange Act may be treated as collateral held in the 
account of the counterparty at the broker or dealer if: (a) The 
independent third-party custodian is a bank as defined in Section 
3(a)(6) of the Act that is not affiliated with the counterparty; (b) 
The broker or dealer, the independent third-party custodian, and the 
counterparty that delivered the collateral to the custodian have 
executed an account control agreement governing the terms under which 
the custodian holds and releases collateral pledged by the counterparty 
as initial margin that provides the broker or dealer with the same 
control over the collateral as would be the case if the broker or 
dealer controlled the collateral directly; and (c) The broker or dealer 
obtains a written opinion from outside counsel that the account control 
agreement is legally valid, binding, and enforceable in all material 
respects, including in the event of bankruptcy, insolvency, or a 
similar proceeding.
    Similarly, the potential modifications to paragraph (c)(1)(ix) of 
Rule 18a-1 would provide the following deductions from net worth in 
lieu of collecting collateral for security-based swap and swap 
transactions: (1) Security-based swaps. Deducting the amounts 
calculated pursuant to Sec.  240.18a-3(c)(1)(i)(B) for the account of a 
counterparty at the security-based swap dealer that is subject to an 
initial margin exception set forth in Sec.  240.18a-3(c)(1)(iii), less 
the margin value of collateral held in the account of the counterparty 
at the security-based swap dealer. (2) Swaps. Deducting the initial 
margin calculated pursuant to Sec.  240.18a-3(d)(2) for swaps other 
than equity swaps, or Sec.  240.18a-1b, as applicable, in the account 
of a counterparty at the security-based swap dealer, less the margin 
value of collateral held in the account of the counterparty at the 
security-based swap dealer. (3) Treatment of collateral held at a 
third-party custodian. For the purposes of the deductions required 
pursuant to paragraphs (c)(1)(ix)(B)(1) and (2) of this section, 
collateral held by an independent third-party custodian as initial 
margin pursuant to Section 3E(f) of the Act or Section 4s(l) of the 
Commodity Exchange Act may be treated as collateral held in the account 
of the counterparty at the security-based swap dealer if: (a) The 
independent third-party custodian is a bank as defined in Section 
3(a)(6) of the Act that is not affiliated with the counterparty; (b) 
The security-based swap dealer, the independent third-party custodian, 
and the counterparty that delivered the collateral to the custodian 
have executed an account control agreement governing the terms under 
which the custodian holds and releases collateral pledged by the 
counterparty as initial margin that provides the security-based swap 
dealer with the same control over the collateral as would be the case 
if the security-based swap dealer controlled the collateral directly; 
and (c) The security-based swap dealer obtains a written opinion from 
outside counsel that the account control agreement is legally valid, 
binding, and enforceable in all material respects, including in the 
event of bankruptcy, insolvency, or a similar proceeding.
    5. The 2012 Proposals noted that a nonbank SBSD would need to 
deduct from net worth the value of initial margin delivered to a 
counterparty when computing net capital.\36\ A comment letter \37\ 
encouraged the Commission to provide a means for nonbank SBSDs to post 
initial margin to SBSDs and other types of counterparties without 
incurring the capital charge. If the Commission adopts capital and 
margin rules applicable to SBSDs, should the Commission provide a means 
for a nonbank SBSD to avoid this deduction if the following conditions 
are met: (1) The initial margin requirement is funded by a fully 
executed written loan agreement with an affiliate of the broker-dealer; 
(2) the loan agreement provides that the lender waives re-payment of 
the loan until the initial margin is returned to the broker-dealer; and 
(3) the broker-dealer's liability to the lender can be fully satisfied 
by delivering the collateral serving as initial margin to the lender? 
\38\ A Commission action providing this relief would be styled after 
the Staff Letter. Would this approach provide a practical solution with 
respect to avoiding this capital charge? If not, please explain why. 
Should the Commission by rule permit this approach? Are there 
alternatives that would more effectively and efficiently achieve this 
objective? If so, what are they?
---------------------------------------------------------------------------

    \36\ See 2012 Proposals, 77 FR at 70267.
    \37\ See Letter from Institute of International Bankers and 
Securities Industry and Financial Markets Association (June 21, 
2018).
    \38\ In this regard, although not binding, the staff of the 
Division of Trading and Markets issued a no-action letter (in the 
context of margin collateral posted by a broker-dealer to a swap 
dealer or other counterparty for a non-cleared swap) that stated 
that the staff would not recommend enforcement action to the 
Commission if a broker-dealer did not take this deduction but met 
certain conditions. The conditions include that: (1) The initial 
margin requirement is funded by a fully executed written loan 
agreement with an affiliate of the broker-dealer; (2) the loan 
agreement provides that the lender waives re-payment of the loan 
until the initial margin is returned to the broker-dealer; and (3) 
the broker-dealer's liability to the lender can be fully satisfied 
by delivering the collateral serving as initial margin to the 
lender. See Letter from Michael A. Macchiaroli, Associate Director, 
Division of Trading and Markets, Commission, to Kris Dailey, Vice 
President, Risk Oversight and Regulation, FINRA (Aug. 19, 2016) 
(``Staff Letter'').
---------------------------------------------------------------------------

Margin

    6. The 2012 Proposals included a provision that would require a 
nonbank SBSD to calculate a daily initial margin amount for each 
counterparty.\39\ The nonbank SBSD could use the standardized or model-
based deductions

[[Page 53013]]

prescribed in the proposed capital rule for nonbank SBSDs to calculate 
the initial margin amount, except that initial margin for equity 
security-based swaps would need to be determined exclusively using the 
standardized deductions.
---------------------------------------------------------------------------

    \39\ See 2012 Proposals, 77 FR at 70261.
---------------------------------------------------------------------------

    Some commenters argued that the Commission should approve a uniform 
initial margin model because it would reduce counterparty disputes and 
increase efficiency.\40\ Since the publication of the 2012 Proposals, 
the prudential regulators and the CFTC adopted final margin rules that 
permit the use of a model to calculate initial margin subject to the 
approval of the CFTC or a firm's prudential regulator.\41\ The 
Commission understands that the firms subject to these final rules have 
widely adopted the use of an industry-developed uniform model to 
compute initial margin.\42\ In light of the comments and the goals of 
this provision, the Commission requests comment on whether the margin 
rule should permit nonbank SBSDs to apply to use models other than 
proprietary capital models to compute initial margin, including 
applying to use a standard industry model. The purpose would be to 
provide flexibility to nonbank SBSDs to apply to the Commission for 
authorization to use a proprietary or other model to compute initial 
margin, and, with respect to an industry standard model, to increase 
transparency and decrease margin disputes among counterparties.
---------------------------------------------------------------------------

    \40\ See, e.g., Letter from Robert Pickel, Chief Executive 
Officer, International Swaps and Derivatives Association (Feb. 5, 
2014) (``ISDA 2/5/2014 Letter'').
    \41\ See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840; Margin Requirements for Uncleared Swaps for 
Swap Dealers and Major Swap Participants, 81 FR 636.
    \42\ See, e.g., ISDA, ISDA SIMM\TM\ Deployed Today; New Industry 
Standard for Calculating Initial Margin Widely Adopted by Market 
Participants (Sept. 1, 2016), available at: https://www.isda.org/2016/09/01/isda-simm-deployed-today-new-industry-standard-for-calculating-initial-margin-widely-adopted-by-market-participants/.
---------------------------------------------------------------------------

    Would rule language as described below effect this potential 
modification to the rule text in the 2012 Proposals? If not, please 
explain why and suggest alternative rule language. If the Commission 
were to use the language described below, would it strike an 
appropriate balance in terms of achieving the objectives of the 
proposed rule and addressing commenters' requests for more flexibility? 
If not, please explain why and suggest alternative rule language that 
could more effectively and efficiently strike the balance and achieve 
the objective.
    The potential modifications to paragraph (d)(2)(i) of Rule 18a-3 
would provide: For security-based swaps other than equity security-
based swaps, a security-based swap dealer may apply to the Commission 
for authorization to use a model to compute the margin amount required 
by paragraph (c)(1)(i)(B) of this section and to compute the deductions 
required by paragraph Sec.  240.15c3-1(c)(2)(xv) or Sec.  240.18a-
1(c)(1)(ix), as applicable, subject to the application process in Sec.  
240.15c3-1e or Sec.  240.18a-1(d), as applicable. The model must use a 
ninety-nine percent (99%), one-tailed confidence level with price 
changes equivalent to a ten business-day movement in rates and prices, 
and must use risk factors sufficient to cover all the material price 
risks inherent in the positions for which the margin amount or 
deductions are being calculated, including foreign exchange or interest 
rate risk, credit risk, equity risk, and commodity risk, as 
appropriate. Empirical correlations may be recognized by the model 
within each broad risk category, but not across broad risk categories.
    7. The 2012 Proposals included a requirement that a nonbank SBSD 
would need to collect initial and variation margin from each 
counterparty unless an exception applies.\43\ The proposed rule 
contained four exceptions under which variation and/or initial margin 
need not be collected: (1) When the counterparty is a commercial end 
user; (2) when the counterparty is another SBSD; (3) when the 
counterparty requires segregation pursuant to Section 3E(f) of the Act; 
and (4) when the counterparty's account holds only legacy 
transactions.\44\
---------------------------------------------------------------------------

    \43\ See 2012 Proposals, 77 FR at 70263-69.
    \44\ See id.
---------------------------------------------------------------------------

    Some commenters encouraged the Commission to adopt a threshold 
below which initial margin need not be collected and noted that the 
prudential regulators and the CFTC established a $50 million threshold 
(consistent with the recommendation of an international standard 
setting body).\45\ In light of the comments and the goals of this 
provision, the Commission requests comment on whether it would be 
appropriate to establish a risk-based threshold. A fixed-dollar 
threshold, depending on the size and activities of the nonbank SBSD, 
could either be too large and, therefore, not adequately address the 
risk, or too small and, therefore, overcompensate for the risk. Should 
a risk-based threshold take into account the financial condition of the 
SBSD and the counterparty by providing that initial margin need not be 
collected from a counterparty when the amount is less than one percent 
(1%) or some other percent of a nonbank SBSD's tentative net capital 
\46\ and is less than ten percent (10%) or some other percent \47\ of 
the counterparty's net worth (in which case, only the amount above the 
threshold would need to be collected)? The purpose of these financial 
metrics would be to establish a threshold that is scalable and has a 
more direct relation to the risk to the nonbank SBSD arising from its 
security-based swap activities.
---------------------------------------------------------------------------

    \45\ See, e.g., Letter from Karrie McMillan, General Counsel, 
Investment Company Institute (Feb. 4, 2013). See also BCBS, IOSCO, 
Margin Requirements for Non-centrally Cleared Derivatives (Mar. 
2015), available at: http://www.bis.org/bcbs/publ/d317.pdf.
    \46\ See, e.g., 17 CFR 240.15c3-3a, Note E(5) (using a twenty-
five percent (25%) of tentative net capital threshold for when a 
broker-dealer must reduce debits in the customer reserve formula).
    \47\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten 
percent (10%) of tentative net capital threshold for the calculation 
of undue concentration charges).
---------------------------------------------------------------------------

    Would rule language as described below effect this potential 
modification to the rule text in the 2012 Proposals? If not, please 
explain why and suggest alternative rule language. If the Commission 
were to use the language described below, would it strike an 
appropriate balance in terms of achieving the objectives of the 
proposed rule and addressing commenters' requests for a threshold? If 
not, please explain why and suggest alternative rule language that 
could more effectively and efficiently strike the balance and achieve 
the objective.
    The potential modifications to paragraph (c)(1)(iii)(E) of Rule 
18a-3 would provide that an SBSD may elect not to collect the amount 
required under paragraph (c)(1)(ii)(B) of this section to the extent 
that the amount does not exceed the lesser of: (1) 1 percent (1%) of 
the security-based swap dealer's tentative net capital; or (2) ten 
percent (10%) of the net worth of the counterparty.
    8. As noted above, the 2012 Proposals included an exception from 
collecting margin when the counterparty is another SBSD.\48\ In 
particular, the Commission proposed two alternatives with respect to 
SBSD counterparties.\49\ Under the first alternative, a nonbank SBSD 
would not need to collect initial margin if the counterparty is another 
SBSD (``Alternative A''). This approach is consistent with the broker-
dealer margin rules, which generally do not require a broker-dealer to 
collect margin

[[Page 53014]]

from another broker-dealer.\50\ Under the proposed second alternative, 
a nonbank SBSD would be required to collect initial margin from another 
SBSD and the initial margin would need to be segregated pursuant to 
Section 3E(f) of the Act (``Alternative B'').\51\
---------------------------------------------------------------------------

    \48\ See 2012 Proposals, 77 FR at 70267-68.
    \49\ See id.
    \50\ See id.
    \51\ See id.
---------------------------------------------------------------------------

    A commenter argued that Alternative A was the preferred approach 
because requiring SBSDs to collect initial margin from other SBSDs 
would curtail the use of non-cleared security-based swaps for hedging, 
which would disrupt key financial services, such as those that 
facilitate the availability of home loans and corporate finance.\52\ 
This commenter also argued that the requirement to collect initial 
margin from another SBSD would have detrimental pro-cyclical effects 
because it would increase collateral demands in times of market 
stress.\53\ Other commenters supported Alternative B stating that 
Alternative A would permit an inappropriate build-up of systemic risk 
for transactions within the financial system.\54\
---------------------------------------------------------------------------

    \52\ See Letter from Robert Pickel, Chief Executive Officer, 
International Swaps and Derivatives Association (Jan. 23, 2013) 
(``ISDA 1/23/2013 Letter'').
    \53\ See id.
    \54\ See, e.g., Letter from Americans for Financial Reform (Feb. 
22, 2013).
---------------------------------------------------------------------------

    a. The Commission requests comment and supporting data that would 
assist in the quantification of the economic impacts of Alternatives A 
and B. The 2012 Proposals discussed the potential for increased use of 
leverage, the potential for a nonbank SBSD to fail, and the potential 
that a default by a nonbank SBSD could translate to defaults of 
counterparty SBSDs.\55\ The 2012 Proposals also noted that the 
likelihood of these potential events occurring would be smaller under 
Alternative B than under Alternative A.\56\ Would the proposed capital 
requirements complement Alternative A to reduce the potential for 
increased use of leverage, the potential for a nonbank SBSD to fail, 
and the potential that a default by a nonbank SBSD could translate to a 
default of counterparty SBSDs caused by exposure to credit risk in 
inter-dealer positions? Would there be situations where the proposed 
capital requirements and Alternative A would not prevent a failure of a 
nonbank SBSD caused by security-based swap trading losses? Would there 
be situations where the proposed capital requirements and Alternative A 
would avoid a failure of a nonbank SBSD by not imposing pro-cyclical 
collateral demands?
---------------------------------------------------------------------------

    \55\ See 2012 Proposals, 77 FR at 70267, 70322.
    \56\ See id.
---------------------------------------------------------------------------

    The 2012 Proposals also noted that in comparison to Alternative A 
or current practices, Alternative B could have a more significant 
negative impact on the liquidity of nonbank SBSDs and their ability to 
trade in security-based swaps.\57\ If Alternative B is adopted, how 
much initial margin would be segregated at third-party custodians and 
how would it impact the liquidity of nonbank SBSDs? If Alternative B is 
adopted, would the proposed margin requirements limit the ability of 
nonbank SBSDs to trade in security-based swaps?
---------------------------------------------------------------------------

    \57\ See id. at 70322.
---------------------------------------------------------------------------

    Finally, the 2012 Proposals noted that depending on whether 
Alternative A or B is adopted, the proposed margin requirements may 
create the potential for regulatory arbitrage.\58\ In particular, the 
2012 Proposals noted that if the Commission does not require nonbank 
SBSDs to collect initial margin in their inter-dealer transactions (as 
proposed in Alternative A), while the prudential regulators require the 
collection of initial margin for the same transactions, intermediaries 
could have an incentive to conduct business through nonbank 
entities.\59\ Would Alternative A create more opportunities for 
regulatory arbitrage than Alternative B, and would these regulatory 
arbitrage opportunities have a significant economic impact? If so, 
please explain how. In addition, Alternative A would differ in some 
respects from an international policy framework establishing 
recommended minimum standards for margin requirements for non-centrally 
cleared derivatives.\60\ Would these or other differences create 
opportunities for regulatory arbitrage, impede transactions with other 
market participants, or have an impact on substituted compliance 
determinations?
---------------------------------------------------------------------------

    \58\ See id. at 70305-06.
    \59\ See id.
    \60\ See BCBS, IOSCO, Margin Requirements for Non-centrally 
Cleared Derivatives (Mar. 2015).
---------------------------------------------------------------------------

    b. If Alternative A is adopted, should the exception apply to a 
broader class of entities than just other SBSDs? Should it apply if the 
nonbank SBSD's counterparty is an SBSD, broker-dealer, bank, futures 
commission merchant, foreign bank, or foreign dealer? The purpose of 
adopting Alternative A with a modification to apply the exception to a 
broader class of counterparties would be to promote the liquidity of 
nonbank SBSDs and other market participants by reducing the amount of 
capital they must post as initial margin to counterparties.
    Would rule language as described below effect Alternative A with 
the potential modification to expand the range of entities from which 
initial margin need not be collected? If not, please explain why and 
suggest alternative rule language. If the Commission were to use the 
language described below, would it strike an appropriate balance in 
terms of promoting the liquidity of nonbank SBSDs and other market 
participants and addressing commenters' concerns about building up 
systemic risk? If not, please explain why and suggest alternative rule 
language that could more effectively and efficiently strike the balance 
and achieve the objective.
    The potential modifications to paragraph (c)(1)(iii)(B) of Rule 
18a-3 would provide that the requirements of paragraph (c)(1)(ii)(B) of 
this section do not apply to an account of a counterparty that is a 
security-based swap dealer, swap dealer, broker or dealer, futures 
commission merchant, bank, foreign bank, or a foreign broker or dealer.
    9. In response to the 2012 Proposals, commenters argued that the 
requirements adopted pursuant to Title VII of the Dodd-Frank Act should 
permit the portfolio margining of security-based swaps, swaps, and 
related positions.\61\ Portfolio margining of security-based swaps, 
swaps, and related positions can offer benefits to investors and the 
markets, including aligning margin requirements more closely with the 
overall risks of a customer's portfolio. Further, portfolio margining 
may help to improve cash flows and liquidity, and reduce volatility.
---------------------------------------------------------------------------

    \61\ See, e.g., Letter from Adam Jacobs, Director of Markets 
Regulation, Alternative Investment Management Association (Feb. 22, 
2013) (``AIMA 2/22/2013 Letter'').
---------------------------------------------------------------------------

    a. The Commission requests comment on whether swaps should be 
permitted to be held in a security-based swap account at an entity that 
is registered as a broker-dealer, nonbank SBSD, and swap dealer to 
provide a means to portfolio margin security-based swaps with swaps and 
related cash market and listed options positions. The Commission also 
requests comment on whether security-based swaps should be permitted to 
be held in a swap account at an entity that is registered as an FCM, 
swap dealer, and nonbank SBSD to provide a means to portfolio margin 
security-based swaps with swaps and related futures positions.
    b. The Commission requests comment on whether swaps should be 
permitted to be held in a security-based swap

[[Page 53015]]

account at an entity that is registered as a nonbank SBSD and swap 
dealer (but not as a broker-dealer or FCM) to provide a means to 
portfolio margin security-based swaps and swaps in a security-based 
swap account. The Commission also requests comment on whether security-
based swaps should be permitted to be held in a swap account at an 
entity that is registered as a swap dealer and SBSD (but not as an FCM 
or broker-dealer) to provide a means to portfolio margin security-based 
swaps and swaps in a swap account. If so, should such portfolio 
margining be subject to conditions similar to those set forth in the 
Commission's exemptive order permitting portfolio margining of credit 
default swaps (e.g., conditions regarding subordination agreements and 
disclosures)? \62\ In either scenario identified in this paragraph, 
should the SBSD dually registered as a swap dealer be permitted to use 
a model to determine portfolio margin requirements for security-based 
swaps and swaps that reference equity securities, provided the accounts 
do not hold cash market equity and listed options positions?
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    \62\ See Order Granting Conditional Exemptions Under the 
Securities Exchange Act of 1934 in Connection with Portfolio 
Margining of Swaps and Security-Based Swaps, Exchange Act Release 
No. 68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012).
---------------------------------------------------------------------------

    c. The Commission requests comment on how security-based swaps, 
swaps, cash market and listed options positions, and collateral held in 
a security-based swap account at an entity registered as a broker-
dealer, nonbank SBSD, and swap dealer would be treated in a liquidation 
proceeding. The Commission requests comment on how security-based 
swaps, swaps, futures positions, and collateral held in a swap account 
at an entity registered as an FCM, swap dealer, and nonbank SBSD would 
be treated in a liquidation proceeding. Would the treatment be 
different if the entity was also registered as a broker-dealer? The 
Commission requests comment on how swaps and security-based swaps held 
in a security-based swap account at an entity registered as an SBSD and 
swap dealer would be treated in a liquidation proceeding and how 
security-based swaps and swaps held in a swap account at such an entity 
would be treated in a liquidation proceeding.
    For each of the four scenarios described above, what steps should 
be taken to provide protections to the accountholders? What rights 
(including rights under the bankruptcy laws) might accountholders have 
to waive? Should there be limits on the types of counterparties that 
would be permitted to waive these rights? Should the rule require the 
nonbank SBSD to provide complete and accurate disclosures about the 
treatment of assets in a liquidation, bankruptcy, or similar proceeding 
under each of the scenarios described above so that accountholders and 
prospective accountholders can make informed decisions about the type 
of portfolio margin account they want to use and about waiving any 
rights with respect to the account?
    d. The scenarios described above include permitting: (1) An entity 
registered as a broker-dealer, nonbank SBSD, and swap dealer to hold 
swaps in a security-based swap account to provide a means to portfolio 
margin security-based swaps with swaps and related cash market and 
listed options positions; and (2) an entity that is registered as an 
SBSD and swap dealer (but not as an FCM or broker-dealer) to hold swaps 
in a security-based swap account to provide a means to portfolio margin 
security-based swaps and swaps in a security-based swap account and to 
use a model to determine portfolio margin requirements for security-
based swaps and swaps that reference equity securities, provided the 
accounts do not hold cash market equity and listed options positions.
    Would rule language as described below effect these approaches to 
implement portfolio margining of swaps in a security-based swap 
account? If not, please explain why and suggest alternative rule 
language. If the Commission were to use the language described below, 
would it strike an appropriate balance in terms of achieving the 
objectives of the proposed rules and addressing commenters' requests to 
permit portfolio margining of swaps and security-based swaps? If not, 
please explain why and suggest alternative rule language that could 
more effectively and efficiently strike the balance and achieve the 
objective.
    The potential modifications to paragraph (a)(3) of Appendix A to 
Rule 15c3-1 would provide: The term related instrument within an option 
class or product group refers to futures contracts, options on futures 
contracts, and swaps covering the same underlying instrument. In 
relation to options on foreign currencies a related instrument within 
an option class also shall include forward contracts on the same 
underlying currency.
    The potential modifications to paragraph (a)(4) of Appendix A to 
Rule 15c3-1 would also provide: The term underlying instrument refers 
to long and short positions, as appropriate, covering the same foreign 
currency, the same security, security future, security-based swap, or a 
security which is exchangeable for or convertible into the underlying 
security within a period of 90 days. If the exchange or conversion 
requires the payment of money or results in a loss upon conversion at 
the time when the security is deemed an underlying instrument for 
purposes of this Appendix A, the broker or dealer will deduct from net 
worth the full amount of the conversion loss. The term underlying 
instrument shall not be deemed to include securities options, futures 
contracts, options on futures contracts, qualified stock baskets, 
unlisted instruments (other than security-based swaps), or swaps.
    The potential modifications to paragraph (a)(3) of Appendix A to 
Rule 18a-1 would provide: The term related instrument within an option 
class or product group refers to futures contracts, options on futures 
contracts, and swaps covering the same underlying instrument. In 
relation to options on foreign currencies, a related instrument within 
an option class also shall include forward contracts on the same 
underlying currency.
    The potential modifications to paragraph (a)(4) of Appendix A to 
Rule 18a-1 would provide: The term underlying instrument refers to long 
and short positions, as appropriate, covering the same foreign 
currency, the same security, security future, security-based swap, or a 
security which is exchangeable for or convertible into the underlying 
security within a period of 90 days. If the exchange or conversion 
requires the payment of money or results in a loss upon conversion at 
the time when the security is deemed an underlying instrument for 
purposes of this Appendix A, the security-based swap dealer will deduct 
from net worth the full amount of the conversion loss. The term 
underlying instrument shall not be deemed to include securities 
options, futures contracts, options on futures contracts, qualified 
stock baskets, unlisted instruments (other than security-based swaps), 
or swaps.
    The potential modifications to paragraph (d)(2)(ii) of Rule 18a-3 
would provide: Notwithstanding paragraph (d)(2)(i) of this section, a 
security-based swap dealer that is not registered as a broker or dealer 
pursuant to Section 15(b) of the Act (15 U.S.C. 78o(b)) may apply to 
the Commission for authorization to use a model to compute the margin 
amount required by paragraph (c)(1)(i)(B) of this section and to 
compute the deductions required by paragraph Sec.  240.18a-1(c)(1)(ix) 
for equity security-based swaps and equity swaps, subject to the 
application process and model requirements of

[[Page 53016]]

paragraph (d)(2)(i) of this section; provided, however, the account of 
the counterparty subject to the requirements of this paragraph may not 
hold equity securities or listed options.

Segregation

    10. Section 3E(f) of the Act provides that a counterparty to a non-
cleared security-based swap with an SBSD can require that initial 
margin be segregated at a third-party custodian or waive 
segregation.\63\ The 2012 Proposals included a third alternative under 
which the initial margin for the non-cleared security-based swap could 
be held by the SBSD and subject to requirements modeled on the broker-
dealer customer protection rule but tailored to security-based swaps 
(``omnibus segregation requirements'').\64\ The omnibus segregation 
requirements would be mandatory for initial margin held by the SBSD for 
cleared security-based swaps.
---------------------------------------------------------------------------

    \63\ See 15 U.S.C. 78c-5(f)(3).
    \64\ See 2012 Proposals, 77 FR at 70274-88; 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

    a. The Commission received a number of comments asking technical 
questions about how the proposed omnibus segregation requirements would 
operate in the context of security-based swap transactions, including 
specific questions about the computation of the reserve formula, and 
what types of hedging would be permitted under the proposed definition 
of ``excess securities collateral.'' \65\ The Commission requests 
comment on whether there are aspects of the proposed omnibus 
segregation requirements where greater clarity regarding the 
application of the rule would be helpful. If so, please identify them 
and suggest appropriate modifications to the proposed rule.
---------------------------------------------------------------------------

    \65\ See, e.g., SIFMA 2/22/2013 Letter.
---------------------------------------------------------------------------

    b. The 2013 Proposals would treat segregation as a transaction-
level requirement, and the Commission proposed paragraph (e) of Rule 
18a-4 to prescribe the scope of application of the segregation 
requirements in Section 3E(f) of the Act and Rule 18a-4.\66\ The 
proposed cross-border application of these segregation requirements to 
a foreign SBSD or foreign MSBSP depended on whether it is a registered 
broker-dealer, a U.S. branch or agency of a foreign bank, or neither of 
the above, and whether the security-based swaps are cleared or non-
cleared.\67\ The Commission requests comment on whether there are 
aspects of the proposed cross-border application of the segregation 
requirements where greater clarity regarding the application of the 
rule would be helpful. If so, please identify them and suggest 
appropriate modifications to the proposed rule.
---------------------------------------------------------------------------

    \66\ See 2013 Proposals, 78 FR at 31010-11, 31018-22, 31209-10.
    \67\ See id. at 31018-22.
---------------------------------------------------------------------------

    c. The 2013 Proposals provided that a foreign SBSD that is a U.S. 
branch or agency of a foreign bank must comply with segregation 
requirements with respect to security-based swap transactions with U.S. 
security-based swap customers, but not with foreign security-based swap 
customers.\68\ Should the segregation requirements apply to certain 
foreign security-based swap customers? In particular, the Commission 
requests comment on whether a foreign SBSD that is not a broker-dealer 
and is a foreign bank should be required to comply with the segregation 
requirements (1) with respect to U.S. security-based swap customers 
(regardless of which branch or agency the customer's transactions arise 
out of), and (2) with respect to a foreign security-based swap customer 
if the foreign SBSD holds funds or other property arising out of a 
transaction had by such person with a U.S. branch or agency of the 
foreign SBSD.
---------------------------------------------------------------------------

    \68\ See id.
---------------------------------------------------------------------------

    11. The Commission received a comment that the broker-dealer 
customer protection rule (Rule 15c3-3) should be amended to take into 
account margin that is posted at a clearing agency by broker-dealers 
not registered as SBSDs.\69\ The Commission requests comment on whether 
Rule 15c3-3 should be amended to add a new paragraph (p) and a new 
Exhibit B that would contain segregation requirements and a customer 
reserve formula that parallel those in proposed Rule 18a-4. The 
security-based swap segregation requirements that would be added to 
Rule 15c3-3 would be substantially the same as the requirements in each 
paragraph of proposed Rule 18a-4.\70\ The purpose would be to permit 
broker-dealers that are not registered as SBSDs but that engage in 
security-based swap activities to use segregation requirements that 
parallel those in proposed Rule 18a-4 and which are tailored to 
security-based swaps. In addition, the purpose would be to locate in 
Rule 15c3-3 the security-based swap segregation requirements for 
entities registered as a broker-dealer and SBSD. Proposed Rule 18a-4 
would apply to SBSDs that are not registered as broker-dealers.
---------------------------------------------------------------------------

    \69\ See Letter from Kathleen M. Cronin, CME Group Inc. (Feb. 
22, 2013).
    \70\ The provisions of paragraph (d) of proposed Rule 18a-4 
would not apply to a broker-dealer that is not also registered as 
either an SBSD or MSBSP because Section 3E(f)(1)(A) of the Act does 
not apply to broker-dealers. See 2012 Proposals, 77 FR at 70287.
---------------------------------------------------------------------------

    12. The 2012 Proposals include a definition of ``excess securities 
collateral'' to identify securities and money market instruments 
received from security-based swap customers that must be held in 
physical possession or control.\71\ In particular, securities and money 
market instruments that are not being used to collateralize the SBSD's 
current exposure to the customer (i.e., exceed the variation margin 
requirement) would need to be in the physical possession or control of 
the SBSD unless one of two exceptions applied.\72\ The exceptions are 
that the securities and money market instruments are held in a: (1) 
Qualified clearing agency account but only to the extent they are being 
used to meet a margin requirement of the clearing agency; or (2) 
qualified SBSD account but only to the extent they are being used to 
meet a margin requirement that applies to the other SBSD resulting from 
entering into a non-cleared security-based swap transaction with the 
other SBSD to offset the risk of a non-cleared security-based swap 
transaction between the SBSD and the customer.\73\ In addition, the 
2012 Proposals included a requirement for an SBSD to perform a customer 
reserve formula calculation.\74\ Under the proposal, an SBSD could 
include as a debit item in the formula cash collateral posted to a 
clearing agency or another SBSD under the same circumstances as the 
exceptions to the definition of ``excess securities collateral.'' \75\ 
The prudential regulators require initial margin posted by an SBSD to a 
bank SBSD to be held at a third-party custodian (rather than being held 
directly by the bank SBSD).\76\ This means that if an SBSD enters into 
a transaction with a bank SBSD to hedge a non-cleared security-based 
swap transaction with a security-based swap customer, the SBSD may have 
to post initial margin to the bank SBSD and that initial margin would 
need to be held by a third-party custodian rather than directly by the 
bank SBSD.
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    \71\ See 2012 Proposals, 77 FR at 70278-70282.
    \72\ See id.
    \73\ See id.
    \74\ See id. at 70282-87.
    \75\ See id.
    \76\ See 12 CFR 45.7; 12 CFR 237.7; 12 CFR 624.7; 12 CFR 1221.7; 
12 CFR 349.7.
---------------------------------------------------------------------------

    The Commission requests comment on how initial margin posted by an 
SBSD to a bank SBSD to hedge a transaction with a security-based swap 
customer should be treated for purposes of the possession or control 
and customer reserve requirements in the

[[Page 53017]]

proposed SBSD segregation rule. For purposes of the possession or 
control and customer reserve account requirements, should the initial 
margin be treated similarly to how initial margin an SBSD posts to a 
nonbank SBSD is treated if the purpose is to enter into a transaction 
that hedges a transaction with a security-based swap customer? The 
purpose would be to accommodate an SBSD that elects to enter into a 
hedging transaction with a bank SBSD and must post initial margin that 
is segregated at a third-party custodian.
    Would rule language as described below effect this potential 
modification to the rule text in the 2012 Proposals? If not, please 
explain why and suggest alternative rule language. If the Commission 
were to use the language described below, would it strike an 
appropriate balance in terms of achieving the objectives of the 
proposed rule and accommodating SBSDs that elect to hedge a non-cleared 
security-based swap transaction by entering into an off-setting 
transaction with a bank SBSD? If not, please explain why and suggest 
alternative rule language that could more effectively and efficiently 
strike the balance and achieve the objective.
    The potential modifications to paragraph (p)(1)(ii) of Rule 15c3-3 
would provide: The term excess securities collateral means securities 
and money market instruments carried for the account of a security-
based swap customer that have a market value in excess of the current 
exposure of the broker or dealer (after reducing the current exposure 
by the amount of cash in the account) to the security-based swap 
customer, excluding: (A) Securities and money market instruments held 
in a qualified clearing agency account but only to the extent the 
securities and money market instruments are being used to meet a margin 
requirement of the clearing agency resulting from a security-based swap 
transaction of the security-based swap customer; and (B) securities and 
money market instruments held in a qualified registered security-based 
swap dealer account or in a third-party custodial account but only to 
the extent the securities and money market instruments are being used 
to meet a regulatory margin requirement of a security-based swap dealer 
resulting from the broker or dealer entering into a non-cleared 
security-based swap transaction with the security-based swap dealer to 
offset the risk of a non-cleared security-based swap transaction 
between the broker or dealer and the security-based swap customer.
    The potential modifications to paragraph (p)(1)(viii) of Rule 15c3-
3 would provide: The term third-party custodial account means an 
account carried by an independent third-party custodian that meets the 
following conditions: (A) The account is established for the purposes 
of meeting regulatory margin requirements of another security-based 
swap dealer; (B) The account is carried by a bank; (C) The account is 
designated for and on behalf of the broker or dealer for the benefit of 
its security-based swap customers and the account is subject to a 
written acknowledgement by the bank provided to and retained by the 
broker or dealer that the funds and other property held in the account 
are being held by the bank for the exclusive benefit of the security-
based swap customers of the broker or dealer and are being kept 
separate from any other accounts maintained by the broker or dealer 
with the bank; and (D) The account is subject to a written contract 
between the broker or dealer and the bank which provides that the funds 
and other property in the account shall at no time be used directly or 
indirectly as security for a loan or other extension of credit to the 
security-based swap dealer by the bank and, shall be subject to no 
right, charge, security interest, lien, or claim of any kind in favor 
of the bank or any person claiming through the bank.
    The potential modifications to Line 16 of Exhibit B to Rule 15c3-3 
would provide: Margin related to non-cleared security-based swap 
transactions in accounts carried for security-based swap customers 
required and held in a qualified registered security-based swap dealer 
account at another security-based swap dealer or at a third-party 
custodial account.
    The potential modifications to paragraph (a)(2) of Rule 18a-4 would 
provide: The term excess securities collateral means securities and 
money market instruments carried for the account of a security-based 
swap customer that have a market value in excess of the current 
exposure of the security-based swap dealer (after reducing the current 
exposure by the amount of cash in the account) to the security-based 
swap customer, excluding (i) securities and money market instruments 
held in a qualified clearing agency account but only to the extent the 
securities and money market instruments are being used to meet a margin 
requirement of the clearing agency resulting from a security-based swap 
transaction of the security-based swap customer; and (ii) securities 
and money market instruments held in a qualified registered security-
based swap dealer account or in a third-party custodial account but 
only to the extent the securities and money market instruments are 
being used to meet a regulatory margin requirement of another security-
based swap dealer resulting from the security-based swap dealer 
entering into a non-cleared security-based swap transaction with the 
other security-based swap dealer to offset the risk of a non-cleared 
security-based swap transaction between the security-based swap dealer 
and the security-based swap customer.
    The potential modifications to paragraph (a)(10) of Rule 18a-4 
would also provide: The term third-party custodial account means an 
account carried by an independent third-party custodian that meets the 
following conditions: (i) The account is established for the purposes 
of meeting regulatory margin requirements of another security-based 
swap dealer; (ii) The account is carried by a bank; (iii) The account 
is designated for and on behalf of the security-based swap dealer for 
the benefit of its security-based swap customers and the account is 
subject to a written acknowledgement by the bank provided to and 
retained by the security-based swap dealer that the funds and other 
property held in the account are being held by the bank for the 
exclusive benefit of the security-based swap customers of the security-
based swap dealer and are being kept separate from any other accounts 
maintained by the security-based swap dealer with the bank; and (iv) 
The account is subject to a written contract between the security-based 
swap dealer and the bank which provides that the funds and other 
property in the account shall at no time be used directly or indirectly 
as security for a loan or other extension of credit to the security-
based swap dealer by the bank and, shall be subject to no right, 
charge, security interest, lien, or claim of any kind in favor of the 
bank or any person claiming through the bank.
    The potential modifications to Line 14 of Exhibit A to Rule 18a-4 
would provide: Margin related to non-cleared security-based swap 
transactions in accounts carried for security-based swap customers 
required and held in a qualified registered security-based swap dealer 
account at another security-based swap dealer or at a third-party 
custodial account.
    13. The 2012 Proposals required an SBSD to deduct the amount of 
funds held in a security-based swap customer reserve account at a 
single bank to the extent the amount exceeds ten percent (10%) of the 
equity capital of the bank

[[Page 53018]]

as reported by the bank in its most recent Consolidated Report of 
Condition and Income (``Call Report'').\77\ This proposal was 
consistent with amendments to Rule 15c3-3 that at that time were still 
in the proposal stage.\78\ In 2013, the Commission adopted with 
modifications the amendments to Rule 15c3-3.\79\ The modifications 
increased the threshold applicable to broker-dealer customer reserve 
accounts held at a bank to fifteen percent (15%) and excluded cash on 
deposit at an affiliated bank.
---------------------------------------------------------------------------

    \77\ See 2012 Proposals, 77 FR at 70282-86.
    \78\ See Amendments to Financial Responsibility Rules for 
Broker-Dealers, Exchange Act Release No. 55431 (Mar. 9, 2007), 72 FR 
12862 (Mar. 19, 2007).
    \79\ See Financial Responsibility Rules for Broker-Dealers, 
Exchange Act Release No. 70072 (Jul. 30, 2013), 78 FR 51824, 51832-
35 (Aug. 21, 2013).
---------------------------------------------------------------------------

    The Commission requests comment on whether, for consistency with 
broker-dealers, the threshold applicable to SBSD customer reserve 
accounts held at a bank should be increased to fifteen percent (15%) of 
the bank's equity capital and whether any cash deposited with an 
affiliated bank should be excluded. The purpose would be to more 
closely align the proposed segregation requirements for security-based 
swaps with the existing customer reserve requirements in Rule 15c3-3, 
as amended in 2013. Should the fifteen percent (15%) threshold not 
apply if the SBSD is a bank and maintains the security-based swap 
customer reserve account itself rather than at an affiliated or non-
affiliated bank? The purpose of this exception would be to accommodate 
a bank SBSD that holds the customer reserve account directly.
    The changes discussed above would modify paragraph (c)(1) of 
proposed Rule 18a-4 and new paragraph (p)(3) of proposed Rule 15c3-3 to 
more closely align them with the 2013 amendments to Rule 15c3-3 and, 
with respect to proposed Rule 18a-4, establish an exception from the 
fifteen percent (15%) threshold for a bank SBSD that maintains the 
security-based swap customer reserve account itself. Would rule 
language as described below effect this potential modification to the 
rule text in the 2012 Proposals? If not, please explain why and suggest 
alternative rule language. If the Commission were to use the language 
described below, would it strike an appropriate balance in terms of 
achieving the objectives of the proposed rule and providing sufficient 
flexibility to SBSDs in terms of locating their reserve account 
deposits? If not, please explain why and suggest alternative rule 
language that could more effectively and efficiently strike the balance 
and achieve the objective.
    The potential modifications to paragraph (p)(3)(i) of Rule 15c3-3 
would provide: In determining the amount maintained in a special 
reserve account for the exclusive benefit of security-based swap 
customers, the security-based swap dealer must deduct (A) the amount of 
cash deposited with a single non-affiliated bank to the extent the 
amount exceeds fifteen percent (15%) of the equity capital of the bank 
as reported by the bank in its most recent Call Report or any successor 
form the bank is required to file by its appropriate federal banking 
agency (as defined by Section 3 of the Federal Deposit Insurance Act 
(12 U.S.C. 1813)); and (B) the total amount of cash deposited with an 
affiliated bank.
    Similarly, the potential modifications to paragraph (c)(1)(i) of 
Rule 18a-4 would provide: In determining the amount maintained in a 
special reserve account for the exclusive benefit of security-based 
swap customers, the security-based swap dealer must deduct (A) the 
amount of cash deposited with a single non-affiliated bank to the 
extent the amount exceeds fifteen percent (15%) of the equity capital 
of the bank as reported by the bank in its most recent Call Report or 
any successor form the bank is required to file by its appropriate 
federal banking agency (as defined by Section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813)); and (B) for a security-based swap 
dealer for which there is not a prudential regulator, the total amount 
of cash deposited with an affiliated bank.
    The potential modifications to paragraph (c)(1)(ii) of Rule 18a-4 
would provide the following exception: A security-based swap dealer for 
which there is a prudential regulator need not take the deduction 
specified in paragraph (c)(1)(i)(D) of this section if it maintains the 
special reserve account for the exclusive benefit of security-based 
swap customers itself rather than at an affiliated or non-affiliated 
bank.

Substituted Compliance

    14. The 2013 Proposals would make substituted compliance with 
respect to capital and margin requirements available to foreign nonbank 
SBSDs that are not also registered as broker-dealers.\80\ Upon a 
Commission substituted compliance determination, this type of SBSD 
would be able to satisfy relevant capital and margin requirements by 
complying with corresponding requirements under a foreign regulatory 
system. The Commission requests comment on whether the potential 
modifications to the rule text in the 2012 Proposals discussed in this 
release would have an impact on substituted compliance determinations. 
If so, please explain how.
---------------------------------------------------------------------------

    \80\ See 2013 Proposals, 78 FR at 31207-08.
---------------------------------------------------------------------------

    A number of commenters requested that the Commission consider 
consistency with the prudential regulators, international standards, 
and foreign regulators when making substituted compliance 
determinations with respect to the proposed nonbank SBSD capital 
requirements.\81\
---------------------------------------------------------------------------

    \81\ See, e.g., ISDA 1/23/2013 Letter.
---------------------------------------------------------------------------

    a. Commenters generally requested additional guidance regarding the 
criteria the Commission would consider when making substituted 
compliance determinations.\82\ In light of the comments and the goals 
of this provision, the Commission requests comment on the factors it 
should consider in making a substituted compliance determination with 
respect to the proposed nonbank SBSD capital requirements of Section 
15F(e) of the Act and proposed Rule 18a-1. In making a substituted 
compliance determination, should the Commission consider whether the 
capital requirements of the foreign financial regulatory system are 
designed to help ensure the safety and soundness of registrants in a 
manner that is comparable to the proposed capital requirements for 
nonbank SBSDs? \83\ In addition, the proposed nonbank SBSD capital rule 
prescribes a net liquid assets test that requires the firm to have an 
amount of highly liquid assets that exceeds the amount of the firm's 
unsubordinated liabilities.\84\ In terms of the conditions that might 
be included in an order making an affirmative substituted compliance 
determination, should the Commission consider a condition that requires 
foreign nonbank SBSDs relying on the order to maintain liquid assets in 
excess of their unsubordinated liabilities? \85\ Are there

[[Page 53019]]

reasonable alternatives to a net liquid assets test that could be the 
basis for a condition that is designed to ensure the foreign nonbank 
SBSD maintains sufficient liquidity to meet its obligations to 
security-based swap customers and other creditors? If so, describe them 
and explain how they would achieve this objective. Would these 
alternatives be appropriate for a domestic nonbank SBSD that is not 
registered as a broker-dealer? If so, explain why. Should the 
Commission consider a condition that the foreign nonbank SBSD not have 
a disproportionate number of U.S. customers? If not, explain why.
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    \82\ See, e.g., Letter from the Coalition for Derivatives End-
Users (Agricultural Retailers Association, Business Roundtable, 
Financial Executives International, National Association of 
Corporate Treasurers, National Association of Manufacturers, U.S. 
Chamber of Commerce) (Aug. 21, 2013).
    \83\ See, e.g., 15 U.S.C. 78o-10(e)(3)(A).
    \84\ See 2012 Proposals, 77 FR at 70221-25.
    \85\ See Interpretation Guide to Net Capital Computation for 
Brokers and Dealers, Exchange Act Release No. 8024 (Jan. 18, 1967), 
32 FR 856 (Jan. 25, 1967) (``Rule 15c3-1 (17 CFR 240.15c3-1) was 
adopted to provide safeguards for public investors by setting 
standards of financial responsibility to be met by brokers and 
dealers. The basic concept of the rule is liquidity; its object 
being to require a broker-dealer to have at all times sufficient 
liquid assets to cover his current indebtedness.'') (footnotes 
omitted); Net Capital Requirements for Brokers and Dealers, Exchange 
Act Release No. 15426 (Dec. 21, 1978), 44 FR 1754 (Jan. 8, 1979) 
(``The rule requires brokers or dealers to have sufficient cash or 
liquid assets to protect the cash or securities positions carried in 
their customers' accounts. The thrust of the rule is to insure that 
a broker or dealer has sufficient liquid assets to cover current 
indebtedness.''); Net Capital Requirements for Brokers and Dealers, 
Exchange Act Release No. 26402 (Dec. 28, 1989), 54 FR 315 (Jan. 5, 
1989) (``The rule's design is that broker-dealers maintain liquid 
assets in sufficient amounts to enable them to satisfy promptly 
their liabilities. The rule accomplishes this by requiring broker-
dealers to maintain liquid assets in excess of their liabilities to 
protect against potential market and credit risks.'') (footnote 
omitted). See also Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to 
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants; Proposed Rule, 78 FR at 31090.
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    b. The Commission requests comment on the composition of the 
balance sheets of entities in foreign jurisdictions that may register 
as nonbank SBSDs. Are the assets and liabilities of these foreign 
entities similar to the assets and liabilities of U.S. broker-dealers 
that are subject to the net liquid assets test? If not, explain the 
differences.
    c. The approach described in 14.a would modify Rule 3a71-6 
(proposed as Exchange Act Rule 3a71-5 at 78 FR 30967, 31207-08) to 
describe factors that the Commission would consider in making a 
substituted compliance determination with respect to the proposed 
nonbank SBSD capital requirements.\86\ Would rule language as described 
below effect this potential modification to the rule text in the 2012 
Proposals? If not, please explain why and suggest alternative rule 
language. If the Commission were to use the language described below, 
would it strike an appropriate balance in terms of achieving the 
objectives of the proposed rule and addressing the commenters' concerns 
described above? If not, please explain why and suggest alternative 
rule language that could more effectively and efficiently strike the 
balance and achieve the objective.
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    \86\ See 17 CFR 240.3a71-6.
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    The potential modifications to paragraph (d)(4) of Rule 3a71-6 
would provide that substituted compliance is available with respect to: 
The capital requirements of Section 15F(e) of the Act (15 U.S.C. 78o-
10(e)) and Sec.  240.18a-1; provided, however, that prior to making 
such substituted compliance determination with respect to security-
based swap dealers, the Commission intends to consider (in addition to 
any conditions imposed) whether the capital requirements of the foreign 
financial regulatory system are designed to help ensure the safety and 
soundness of registrants in a manner that is comparable to the 
applicable provisions arising under the Act and its rules and 
regulations.

Compliance Date

    15. In the Commission's release establishing the registration 
process for SBSDs and MSBSPs, the Commission provided that the 
compliance date for the SBSD and MSBSP registration requirements will 
be the later of: Six months after the date of publication in the 
Federal Register of final rules establishing capital, margin, and 
segregation requirements for SBSDs and MSBSPs; the compliance date of 
final rules establishing recordkeeping and reporting requirements for 
SBSDs and MSBSPs; the compliance date of final rules establishing 
business conduct requirements under Sections 15F(h) and 15F(k) of the 
Exchange Act; or the compliance date for final rules establishing a 
process for a registered SBSD or MSBSP to make an application to the 
Commission to allow an associated person who is subject to a statutory 
disqualification to effect or be involved in effecting security-based 
swaps on the SBSD or MSBSP's behalf (the ``Registration Compliance 
Date'').\87\ Would this provide enough time for registrants to take the 
necessary steps to come into compliance with applicable requirements? 
If not, explain why. Would a longer period, such as 18 months after the 
date of publication of the last of four releases noted above in the 
Federal Register, be more appropriate? If so, explain why. Would a 
shorter period be more appropriate? If so, explain why. Should the 
Commission consider the timing of the phased implementation of initial 
margin requirements provided for by other regulators in making any 
changes to the compliance period? \88\ If so, explain why.
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    \87\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, Exchange Act Release No. 
75611 (Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015).
    \88\ See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR at 74849-51 (adopting compliance dates phasing-in 
initial margin requirements beginning September 1, 2016 and ending 
September 1, 2020 for bank swap dealers, bank SBSDs, bank swap 
participants, and bank MSBSPs); Margin Requirements for Uncleared 
Swaps for Swap Dealers and Major Swap Participants, 81 FR at 674-677 
(adopting compliance dates phasing-in initial margin requirements 
beginning September 1, 2016 and ending September 1, 2020 for nonbank 
swap dealers and nonbank major swap participants).
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Additional Requests for Comment--Economic Implications

    16. The Proposals contain economic analyses seeking to identify and 
consider the benefits and costs--including the effects on efficiency, 
competition and capital formation--that would result from the proposed 
capital, margin, and segregation requirements. To assist in the 
quantification of the economic effects of the proposed requirements, 
the Commission requests comment and supporting data on the current risk 
management practices that support the trading activity in security-
based swaps. Specifically, what are the main sources of funding 
available to entities that would be registering as nonbank SBSDs to 
support their trading activity? How much of the capital available to an 
entity that would be registering as a nonbank SBSD consists of liquid 
capital? What are typical risk management procedures for dealing with 
losses stemming from the market risk of security-based swap positions? 
What are typical risk management procedures for dealing with losses 
stemming from the credit risk of uncollateralized security-based swap 
positions? In the event that losses from trading activities overcome 
the available liquid capital, how are excess losses dealt with? What 
are the operational risks and concerns associated with maintaining 
adequate levels of capital?
    The Commission also requests comment and data on how the baseline 
of the economic analyses has changed since the publication of the 
Proposals. For example, in 2015, the U.S. prudential regulators and the 
CFTC adopted final rules on minimum margin requirements for non-cleared 
swaps that began to be implemented in September 2016. A June 2017 
survey on dealer financing terms noted that some of the survey 
respondents indicated that their clients' transaction volume or their 
own transaction volume in non-cleared swaps decreased somewhat over the 
period of September 2016 to June 2017.\89\ However, the respondents 
reported no changes in the prices that

[[Page 53020]]

they quote to their clients in non-cleared swaps over this period. One-
fifth of the survey respondents also reported that they would be less 
likely to exchange daily variation margin with mutual funds, exchange-
traded funds, pension plans, endowments, and separately managed 
accounts established with investment advisers due primarily to lack of 
operational readiness (e.g., the need to establish or update the 
necessary credit support annexes to cover daily exchange of variation 
margin) over this period. Two-fifths of the survey respondents also 
reported that the volume of mark and collateral disputes on variation 
margin has increased somewhat over this period. Furthermore, the survey 
noted that there is variation among respondents with respect to the 
number of days it takes to resolve a mark and collateral dispute on 
variation margin, with one-third reporting less than two days, while 
three-fifths reporting more than two days but less than a week, on 
average. This type of data could provide insight regarding how entities 
that may register as nonbank SBSDs may respond to the Commission's 
final margin requirements.
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    \89\ See Yesol Huh, Division of Research and Statistics, Board 
of Governors of the Federal Reserve System, The June 2017 Senior 
Credit Officer Opinion Survey on Dealer Financing Terms, available 
at https://www.federalreserve.gov/data/scoos/files/scoos_201706.pdf.
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    Commenters are asked to describe changes, if applicable, in: (1) 
The trading volumes in the relevant security-based swap and swap 
markets; (2) the regulatory structure of these markets; and (3) the 
number and types of entities that participate in these markets. 
Commenters also are asked to describe how those changes in the baseline 
would impact the potential benefits and costs--including the effects on 
efficiency, competition and capital formation--of the Proposals as well 
as the potential benefits and costs--including the effects on 
efficiency, competition and capital formation--that would result from 
the potential alternatives described in the questions above taking the 
changes in the baseline into account (if applicable).
    Finally, the Commission requests comment on whether there are 
economic considerations apart from those discussed in the Proposals 
that should be considered in the economic analysis of the capital, 
margin, and segregation requirements as well as the alternatives 
described in the questions above.

    By the Commission.

     Dated: October 11, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22531 Filed 10-18-18; 8:45 am]
 BILLING CODE 8011-01-P