swap haircuts under Rule 18a-1, equity withdrawal notices under
paragraph (i) under Rule 18a-1, and preparing and filing proposed
subordinated loan agreements with the Commission under Appendix D to
Rule 18a-1).
---------------------------------------------------------------------------

    Rule 18a-2 also would require nonbank MSBSPs to establish,
document, and maintain a system of internal risk management controls
required under Rule 15c3-4, as well as to review and update these
controls.\1190\ This requirement would impose one-time and annual costs
in the aggregate of $2.7 million \1191\ and $324,000 \1192\ for nonbank
MSBSPs, respectively. These nonbank MSBSPs also may incur initial and
ongoing information technology costs of $80,000 and $102,500,
respectively.\1193\
---------------------------------------------------------------------------

    \1190\ See section IV.A.2. of this release.
    \1191\ This consists of external costs of $400,000, plus
internal costs of $2.3 million. See section IV.D.2. of this release.
    \1192\ See section IV.D.2. of this release.
    \1193\ Id.
---------------------------------------------------------------------------

    Rule 18a-3 would require nonbank SBSDs to establish a written risk
analysis methodology, which would need to be reviewed and
updated.\1194\ This requirement would impose one-time and annual costs
in the aggregate of $1.7 million \1195\ and $483,000,
respectively.\1196\
---------------------------------------------------------------------------

    \1194\ See section IV.A.3. of this release.
    \1195\ See section IV.D.3. of this release. This consists of
external costs of $18,000, plus internal costs of $1.7 million.
    \1196\ Id.
---------------------------------------------------------------------------

    Finally, SBSDs and MSBSPs would incur various one-time and ongoing
costs in the aggregate in order to comply with the segregation and
notification requirements of proposed new Rule 18a-4.\1197\ Each SBSD
would incur one-time and annual costs in establishing special bank
accounts required by the rule. This requirement would impose one-time
and annual costs of $2.9 million \1198\ and $377,000 \1199\ in the
aggregate on SBSDs, respectively. In addition, SBSDs would be required
to perform a reserve computation required by Appendix A to proposed new
Rule 18a-4, which would impose on these firms annual costs in the
aggregate of $9.7 million.\1200\
---------------------------------------------------------------------------

    \1197\ See section IV.A.4. of this release.
    \1198\ See section IV.D.4. of this release.
    \1199\ Id.
    \1200\ Id.
---------------------------------------------------------------------------

    In addition, both SBSDs and MSBSPs would be required to prepare and
send to their counterparties segregation-related notices pursuant to
section 3E(f)

of the Exchange Act.\1201\ This requirement would impose one-time and
annual costs in the aggregate to SBSDs and MSBSPs of $770,000 \1202\
and $110,000, respectively.\1203\
---------------------------------------------------------------------------

    \1201\ See section IV.A.4. of this release.
    \1202\ See section IV.D.4. of this release. This consists of
external costs of $220,000, plus internal costs of $550,020.
    \1203\ Id.
---------------------------------------------------------------------------

    Finally, proposed new Rule 18a-4 would require each SBSD to draft,
prepare, and enter into subordination agreements with certain
counterparties.\1204\ This requirement would impose on these firms one-
time and annual costs in the aggregate of $99.7 million \1205\ and
$19.1 million,\1206\ respectively.
---------------------------------------------------------------------------

    \1204\ See section IV.A.4. of this release.
    \1205\ See section IV.D.4. of this release. This consists of
external costs of $400,000, plus internal costs of $3,780,000 and
$95,580,000.
    \1206\ Id.
---------------------------------------------------------------------------

D. General Request for Comment

    The Commission requests data to quantify, and estimates of, the
costs and the value of the benefits of the proposed rules described
above. Commenters should provide estimates of these costs and benefits,
as well as any costs and benefits not already defined, that may result
from the adoption of the proposed rules. Commenters should provide
analysis and empirical data to support their views on the costs and
benefits associated with the proposals. The Commission requests comment
on any effect the proposed new rules and rule amendments may have on
efficiency, competition, and capital formation, including the
competitive or anticompetitive effects the proposals may have on market
participants. In addition, the Commission requests comment on whether
other provisions of the Dodd-Frank Act for which Commission rulemaking
is required are likely to have an effect on the costs and benefits of
the proposed rules. Commenters should provide analysis and empirical
data to support their views on the costs and benefits associated with
the proposed rules.

VI. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \1207\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \1208\ of the Administrative
Procedure Act,\1209\ as amended by the RFA, generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules, or proposed rule amendments, to determine the impact of
such rulemaking on ``small entities.'' \1210\ Section 605(b) of the RFA
states that this requirement shall not apply to any proposed rule or
proposed rule amendment, which, if adopted, would not have a
significant economic impact on a substantial number of small
entities.\1211\
---------------------------------------------------------------------------

    \1207\ 5 U.S.C. 601 et seq.
    \1208\ 5 U.S.C. 603(a).
    \1209\ 5 U.S.C. 551 et seq.
    \1210\ Although section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10.
See Statement of Management on Internal Accounting Control, Exchange
Act Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982).
    \1211\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less,\1212\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\1213\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\1214\ Under the
standards adopted by the Small Business Administration, small entities
in the finance and insurance industry include the following: (1) For
entities in credit intermediation and related activities,\1215\ firms
with $175 million or less in assets; (2) for non-depository credit
intermediation and certain other activities,\1216\ firms with $7
million or less in annual receipts; (3) for entities in financial
investments and related activities,\1217\ firms with $7 million or less
in annual receipts; (4) for insurance carriers and entities in related
activities,\1218\ firms with $7 million or less in annual receipts; and
(5) for funds, trusts, and other financial vehicles,\1219\ firms with
$7 million or less in annual receipts.\1220\
---------------------------------------------------------------------------

    \1212\ See 17 CFR 240.0-10(a).
    \1213\ See 17 CFR 240.17a-5(d).
    \1214\ See 17 CFR 240.0-10(c).
    \1215\ Including commercial banks, savings institutions, credit
unions, firms involved in other depository credit intermediation,
credit card issuing, sales financing, consumer lending, real estate
credit, and international trade financing.
    \1216\ Including firms involved in secondary market financing,
all other non-depository credit intermediation, mortgage and
nonmortgage loan brokers, financial transactions processing, reserve
and clearing house activities, and other activities related to
credit intermediation.
    \1217\ Including firms involved in investment banking and
securities dealing, securities brokerage, commodity contracts
dealing, commodity contracts brokerage, securities and commodity
exchanges, miscellaneous intermediation, portfolio management,
providing investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment activities.
    \1218\ Including direct life insurance carriers, direct health
and medical insurance carriers, direct property and casualty
insurance carriers, direct title insurance carriers, other direct
insurance (except life, health and medical) carriers, reinsurance
carriers, insurance agencies and brokerages, claims adjusting, third
party administration of insurance and pension funds, and all other
insurance related activities.
    \1219\ Including pension funds, health and welfare funds, other
insurance funds, open-end investment funds, trusts, estates, and
agency accounts, real estate investment trusts, and other financial
vehicles.
    \1220\ See 13 CFR 121.201 (Jan. 1, 2010).
---------------------------------------------------------------------------

    Based on available information about the security-based swap
market,\1221\ the market, while broad in scope, is largely dominated by
entities such as those that would be covered by the SBSD and MSBSP
definitions. Subject to certain exceptions, section 3(a)(71)(A) of the
Exchange Act defines security-based swap dealer to mean any person who:
(1) Holds itself out as a dealer in security-based swaps; (2) makes a
market in security-based swaps; (3) regularly enters into security-
based swaps with counterparties as an ordinary course of business for
its own account; or (4) engages in any activity causing it to be
commonly known in the trade as a dealer or market maker in security-
based swaps. Section 3(a)(67)(A) of the Exchange Act defines major
security-based swap participant to be any person: (1) Who is not an
SBSD; and (2) who maintains a substantial position in security-based
swaps for any of the major security-based swap categories, as such
categories are determined by the Commission, excluding both positions
held for hedging or mitigating commercial risk and positions maintained
by any employee benefit plan (or any contract held by such a plan) as
defined in paragraphs (3) and (32) of section 3 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary
purpose of hedging or mitigating any risk directly associated with the
operation of the plan; whose outstanding security-based swaps create
substantial

counterparty exposure that could have serious adverse effects on the
financial stability of the United States banking system or financial
markets; or that is a financial entity that is highly leveraged
relative to the amount of capital such entity holds and that is not
subject to capital requirements established by an appropriate Federal
banking regulator; and maintains a substantial position in outstanding
security-based swaps in any major security-based swap category, as such
categories are determined by the Commission.\1222\
---------------------------------------------------------------------------

    \1221\ See CDS Data Analysis.
    \1222\ See also Entity Definitions Adopting Release, 77 FR 30596
(``The SEC continues to believe that the types of entities that
would engage in more than a de minimis amount of dealing activity
involving security-based swaps--which generally would be major
banks--would not be `small entities' for purposes of the RFA.
Similarly, the SEC continues to believe that the types of entities
that may have security-based swap positions above the level required
to be a `major security-based swap participant' would not be a
`small entity' for purposes of the RFA. Accordingly, the SEC
certifies that the final rules defining `security-based swap dealer'
or `major security-based swap participant' would not have a
significant economic impact on a substantial number of small
entities for purposes of the RFA.''). Id. at 30743.
---------------------------------------------------------------------------

    Based on feedback from industry participants about the security-
based swap markets, entities that will qualify as SBSDs and MSBSPs,
whether registered broker-dealers or not, will likely exceed the
thresholds defining ``small entities'' set out above. Thus, it is
unlikely that proposed Rules 18a-1 to 18a-4 and the amendments to Rule
15c3-1 would have a significant economic impact on any small entity.
    The Commission estimates that there are approximately 808 broker-
dealers that were ``small'' for the purposes Rule 0-10. The amendments
to Rule 15c3-1 relating to the standardized haircuts for swaps and
security-based swaps, as well as the proposed CDS maturity grid would
apply to all broker-dealers with such proprietary positions. These
proposed amendments, therefore, would apply to all ``small'' broker-
dealers in that they would be subject to the requirements in the
proposed amendments. It is likely, however, that these proposed
amendments would have no, or little, impact on ``small'' broker-
dealers, since most, if not all, of these firms generally would not
hold these types of positions.
    For the foregoing reasons, the Commission certifies that the
proposed new Rules 18a-1 through 18a-4, amendments to Rule 15c3-1, and
amendments to Rule 15c3-3 would not have a significant economic impact
on any small entity for purposes of the RFA.
    The Commission encourages written comments regarding this
certification. The Commission requests that commenters describe the
nature of any impact on small entities and provide empirical data to
illustrate the extent of the impact.

VII. Statutory Basis and Text of the Proposed Amendments

    Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and
particularly, sections 3(b), 3E, 15, 15F, 23(a), and 36 (15 U.S.C.
78c(b), 78c-5, 78o, 78o-10, 78w(a), and 78mm), thereof, the Commission
is proposing to amend Sec. Sec.  240.15c3-1, 240.15c3-1a, 240.15c3-1b,
240.15c3-1d, 240.15c3-1e, and 240.15c3-3, and proposing Sec. Sec.
240.18a-1, 240.18a-1a, 240.18a-1b, 240.18a-1c, 240.18a-1d, 240.18a-2,
240.18a-3, 240.18a-4, and 240.18a-4a under the Exchange Act.

List of Subjects in 17 CFR Parts 240

    Brokers, Fraud, Reporting and recordkeeping requirements,
Securities.

Text of Amendment

    In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

    1. The general authority citation for part 240 is revised, the
sectional authorities for Sec. Sec.  240.15c3-1 and 240.15c3-3 are
revised, add sectional authorities for Sec. Sec.  240.15c3-1a,
240.15c3-1e, 240.15c3-3, 240.18a-1, 240.18a-1a, 240.18a-1b, 240.18a-1c,
240.18a-1d, 240-18a-2, 240.18a-3 and 240.18a-4 in numerical order to
read as follows.

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-10
78o-4, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23,
80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq.; 12 U.S.C.
5221(e)(3), 15 U.S.C. 8302, and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *
    Section 240.15c3-1 is also issued under 15 U.S.C. 78o(c)(3),
78o-10(d), and 78o-10(e).
    Section 240.15c3-3 is also issued under 15 U.S.C. 78c-5,
78o(c)(2), 78(c)(3), 78q(a), 78w(a); sec. 6(c), 84 Stat. 1652; 15
U.S.C. 78fff.
* * * * *
    Sections 240.18a-1, 240.18a-1a, 240.18a-1b, 240.18a-1c, 240.18a-
1d, 240.18a-2, and 240.18a-3 are also issued under 15 U.S.C. 78o-
10(d) and 78o-10(e).
    Section 240.18a-4 is also issued under 15 U.S.C. 78c-5(f).
* * * * *
    2. Section 240.15c3-1 is amended by:
    a. Revising the center heading above paragraph (a)(7);
    b. In paragraph (a)(7) removing the phrase ``and using the credit
risk standards of Appendix E to compute a deduction for credit risk on
certain credit exposures arising from transactions in derivatives
instruments, instead of the provisions of paragraph (c)(2)(iv) of this
section'' and in its place adding the phrase ``and using the credit
risk standards of Appendix E to compute a deduction for credit risk for
security-based swap transactions with commercial end users as defined
in Sec.  240.18a-3(b)(2), instead of the provisions of paragraphs
(c)(2)(iv) and (c)(2)(xiv)(B)(1) of this section'';
    c. Revising paragraph (a)(7)(i);
    d. In paragraph (a)(7)(ii), remove ``$5 billion'' and in its place
add ``$6 billion'';
    e. Adding a center heading and paragraph (a)(10);
    f. Adding paragraph (c)(2)(vi)(O);
    g. Re-designating paragraph (c)(2)(xii) as paragraph (c)(2)(xii)(A)
and adding new paragraph (c)(2)(xii)(B);
    h. Adding paragraph (c)(2)(xiv);
    i. Adding paragraph (c)(16); and
    j. Adding paragraph (f).
    The revisions and additions read as follows:

Sec.  240.15c3-1  Net capital requirements for brokers or dealers.

* * * * *
    (a) * * *

Alternative Net Capital Computation For Broker-Dealers Authorized To
Use Models

    (7) * * *
    (i) At all times maintain tentative net capital of not less than $5
billion and net capital of not less than the greater of $1 billion or
the sum of the ratio requirement under paragraph (a)(1) of this section
and eight percent (8%) of the risk margin amount;
* * * * *

Broker-Dealers Registered as Security-Based Swap Dealers

    (10) A broker or dealer registered with the Commission as a
security-based swap dealer, other than a broker or dealer subject to
the provisions of (a)(7) of this section, must:
    (i) At all times maintain net capital of not less than the greater
of $20 million or the sum of the ratio requirement under paragraph
(a)(1) of this section and eight percent (8%) of the risk margin
amount; and
    (ii) Comply with Sec.  240.15c3-4 as though it were an OTC
derivatives dealer with respect to all of its business

activities, except that paragraphs (c)(5)(xiii), (c)(5)(xiv), (d)(8),
and (d)(9) of Sec.  240.15c3-4 shall not apply.
* * * * *
    (c) * * *
    (2) * * *
    (vi)(O) Security-based swaps. (1) Credit default swaps. (i) Short
positions (selling protection). In the case of a security-based swap
that is a short credit default swap, deducting the percentage of the
notional amount based upon the current basis point spread of the credit
default swap and the maturity of the credit default swap in accordance
with the following table:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Basis point spread
                                                         -----------------------------------------------------------------------------------------------
       Length of time to maturity of  CDS contract          100 or less
                                                                (%)           101-300         301-400         401-500         501-699       700 or more
--------------------------------------------------------------------------------------------------------------------------------------------------------
12 months or less.......................................            1.00            2.00            5.00            7.50           10.00           15.00
13 months to 24 months..................................            1.50            3.50            7.50           10.00           12.50           17.50
25 months to 36 months..................................            2.00            5.00           10.00           12.50           15.00           20.00
37 months to 48 months..................................            3.00            6.00           12.50           15.00           17.50           22.50
49 months to 60 months..................................            4.00            7.00           15.00           17.50           20.00           25.00
61 months to 72 months..................................            5.50            8.50           17.50           20.00           22.50           27.50
73 months to 84 months..................................            7.00           10.00           20.00           22.50           25.00           30.00
85 months to 120 months.................................            8.50           15.00           22.50           25.00           27.50           40.00
121 months and longer...................................           10.00           20.00           25.00           27.50           30.00           50.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

     (ii) Long positions (purchasing protection). In the case of a
security-based swap that is a long credit default swap, deducting 50%
of the deduction that would be required by paragraph
(c)(2)(vi)(O)(1)(i) of this section if the security-based swap was a
short credit default swap.
    (iii) Long and short positions. (A) Long and short credit default
swaps. In the case of security-based swaps that are long and short
credit default swaps referencing the same entity (in the case of credit
default swap securities-based swaps referencing a corporate entity) or
obligation (in the case of credit default swap securities-based swaps
referencing an asset-backed security), that have the same credit events
which would trigger payment by the seller of protection, that have the
same basket of obligations which would determine the amount of payment
by the seller of protection upon the occurrence of a credit event, that
are in the same or adjacent spread category, and that are in the same
or adjacent maturity category and have a maturity date within three
months of the other maturity category, deducting the percentage of the
notional amount specified in the higher maturity category under
paragraph (c)(2)(vi)(O)(1)(i) or (ii) on the excess of the long or
short position. In the case of security-based swaps that are long and
short credit default swaps referencing corporate entities in the same
industry sector and the same spread and maturity categories prescribed
in paragraph (c)(2)(vi)(O)(1)(i) of this section, deducting 50% of the
amount required by paragraph (c)(2)(vi)(O)(1)(i) of this section on the
short position plus the deduction required by paragraph
(c)(2)(vi)(O)(1)(ii) of this section on the excess long position, if
any. For the purposes of this section, the broker or dealer must use an
industry sector classification system that is reasonable in terms of
grouping types of companies with similar business activities and risk
characteristics and the broker-dealer must document the industry sector
classification system used pursuant to this section.
    (B) Long security and long credit default swap. In the case of a
security-based swap that is a long credit default swap referencing a
debt security and the broker or dealer is long the same debt security,
deducting 50% of the amount specified in paragraph (c)(2)(vi) or (vii)
of this section for the bond, provided that the broker or dealer can
deliver the debt security to satisfy the obligation of the broker or
dealer on the credit default swap.
    (C) Short security and short credit default swap. In the case of a
security-based swap that is a short credit default swap referencing a
bond or a corporate entity, and the broker or dealer is short the bond
or a bond issued by the corporate entity, deducting the amount
specified in paragraph (c)(2)(vi) or (vii) of this section for the
bond. In the case of a security-based swap that is a short credit
default swap referencing an asset-backed security and the broker or
dealer is short the asset-backed security, deducting the amount
specified in paragraph (c)(2)(vi) or (vii) of this section for the
asset-backed security.
    (2) Security-based swaps that are not credit default swaps. In the
case of any security-based swap that is not a credit default swap,
deducting the amount calculated by multiplying the notional amount of
the security-based swap and the percentage specified in paragraph
(c)(2)(vi) of this section applicable to the reference security. A
broker or dealer may reduce the deduction under this paragraph
(c)(2)(vi)(O)(2) by an amount equal to any reduction recognized for a
comparable long or short position in the reference security under
paragraph (c)(2)(vi) of this section and, in the case of a security-
based swap referencing an equity security, the method specified in
Sec.  240.15c3-1a.
* * * * *
    (xii) * * *
    (B) Deducting the amount of cash required in the account of each
security-based swap customer to meet the margin requirements of a
clearing agency, Examining Authority, or the Commission, after
application of calls for margin, marks to the market, or other required
deposits which are outstanding one business day or less.
* * * * *
    (xiv) Deduction from net worth in lieu of collecting margin amounts
for security-based swaps. (A) Cleared security-based swap transactions.
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 transactions. The margin difference is the amount of the
deductions that the positions in the account would incur pursuant to
paragraph (c)(2)(vi)(O) of this section if owned by the broker or
dealer less the margin value of collateral held in the account.
    (B) Non-cleared security-based swap transactions. (1) Commercial
end users. Deducting, with respect to a counterparty that is a
commercial end user as that term is defined in Sec.  240.18a-3(b)(2),
the margin amount calculated pursuant to Sec.  240.18a-3(c)(1)(i)(B)
for the account of the counterparty at the broker or dealer less any
positive equity in that account as that term is defined in Sec.
240.18a-3(b)(7).
    (2) Margin collateral held by third-party custodian. Deducting,
with

respect to a counterparty that is not a commercial end user as that
term is defined in Sec.  240.18a-3(b)(2) and that elects to have
collateral segregated in an account at an independent third-party
custodian pursuant to section 3E(f) of the Act (15 U.S.C. 78c-5(f)),
the margin amount calculated pursuant to Sec.  240.18a-3(c)(1)(i)(B)
for the account of the counterparty less any positive equity in the
account as that term is defined in Sec.  240.18a-3(b)(7).
    (3) Security-based swap legacy accounts. Deducting, with respect to
a security-based swap legacy account as that term is defined in Sec.
240.18a-3(b)(9) of a counterparty that is not a commercial end user as
that term is defined in Sec.  240.18a-3(b)(2), the margin amount
calculated pursuant Sec.  240.18a-3(c)(1)(i)(B) for the account less
any positive equity in the account as that term is defined in Sec.
240.18a-3(b)(7).
* * * * *
    (16) The term risk margin amount means the sum of:
    (i) The greater of the total margin required to be delivered by the
broker or dealer with respect to security-based swap transactions
cleared for security-based swap customers at a clearing agency or the
amount of the deductions that would apply to the cleared security-based
swap positions of the security-based swap customers pursuant to
paragraph (c)(2)(vi)(O) of this section; 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).
* * * * *
    (f) Liquidity requirements. (1) Liquidity stress test. A broker or
dealer whose application, including amendments, has been approved, in
whole or in part, to calculate net capital under Appendix E of this
section must run a liquidity stress test at least monthly, the results
of which must be provided within ten business days to senior management
that has responsibility to oversee risk management at the broker or
dealer. The assumptions underlying the liquidity stress test must be
reviewed at least quarterly by senior management that has
responsibility to oversee risk management at the broker or dealer and
at least annually by senior management of the broker or dealer. The
liquidity stress test must include, at a minimum, the following assumed
conditions lasting for 30 consecutive days:
    (i) A stress event that includes a decline in creditworthiness of
the broker or dealer severe enough to trigger contractual credit-
related commitment provisions of counterparty agreements;
    (ii) The loss of all existing unsecured funding at the earlier of
its maturity or put date and an inability to acquire a material amount
of new unsecured funding, including intercompany advances and unfunded
committed lines of credit;
    (iii) The potential for a material net loss of secured funding;
    (iv) The loss of the ability to procure repurchase agreement
financing for less liquid assets;
    (v) The illiquidity of collateral required by and on deposit at
registered clearing agencies or other entities which is not deducted
from net worth or which is not funded by customer assets;
    (vi) A material increase in collateral required to be maintained at
registered clearing agencies of which it is a member; and
    (vii) The potential for a material loss of liquidity caused by
market participants exercising contractual rights and/or refusing to
enter into transactions with respect to the various businesses,
positions, and commitments of the broker or dealer, including those
related to customer businesses of the broker or dealer.
    (2) Stress test of consolidated entity. The broker or dealer must
justify and document any differences in the assumptions used in the
liquidity stress test of the broker or dealer from those used in the
liquidity stress test of the consolidated entity of which the broker or
dealer is a part.
    (3) Liquidity reserves. The broker or dealer must maintain at all
times liquidity reserves based on the results of the liquidity stress
test. The liquidity reserves used to satisfy the liquidity stress test
must be:
    (i) Cash, obligations of the United States, or obligations fully
guaranteed as to principal and interest by the United States; and
    (ii) Unencumbered and free of any liens at all times. Securities in
the liquidity reserve can be used to meet delivery requirements as long
as cash or other acceptable securities of equal or greater value are
moved into the liquidity pool contemporaneously.
    (4) Contingency funding plan. The broker or dealer must have a
written contingency funding plan that addresses the broker's or
dealer's policies and the roles and responsibilities of relevant
personnel for meeting the liquidity needs of the broker or dealer and
communications with the public and other market participants during a
liquidity stress event.
* * * * *
    3. Section 240.15c3-1a is amended by:
    a. In paragraph (a)(4), revising the first and last sentences; and
    b. Adding paragraph (b)(1)(v)(C)(5).
    The addition to read as follows:

Sec.  240.15c3-1a  Options (Appendix A to 17 CFR 240.15c3-1).

    (a) * * *
    (4) The term underlying instrument refers to long and short
positions, as appropriate, covering the same foreign currency, the same
security, security future, or security-based swap, or a security which
is exchangeable for or convertible into the underlying security within
a period of 90 days. * * * The term underlying instrument shall not be
deemed to include securities options, futures contracts, options on
futures contracts, qualified stock baskets, or unlisted instruments
(other than security-based swaps).
* * * * *
    (b) * * *
    (1) * * *
    (v) * * *
    (C) * * *
    (5) In the case of portfolio types involving security futures and
equity options on the same underlying instrument and positions in that
underlying instrument, there will be a minimum charge of 25% times the
multiplier for each security-future and equity option.
* * * * *
    4. Section 240.15c3-1b is amended by adding a paragraph (b) to read
as follows:

Sec.  240.15c3-1b  Adjustments to net worth and aggregate indebtedness
for certain commodities transactions (Appendix B to 17 CFR 240.15c3-1).

* * * * *
    (b) Every broker or dealer in computing net capital pursuant to
Sec.  240.15c3-1 must comply with the following:
    (1) Swaps. In the case of any swap for which the deductions in
Appendix E of this section do not apply:
    (i) Credit default swaps referencing broad-based securities
indices. (A) Short positions (selling protection). In the case of a
swap that is a short credit default swap referencing a broad-based
securities index, deducting the percentage of the notional amount based
upon the current basis point spread of the credit default swap and the
maturity of the credit default swap in accordance with the following
table:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Basis point spread
                                                         -----------------------------------------------------------------------------------------------
       Length of time to maturity of  CDS contract          100 or less                                                                     700 or more
                                                                (%)         101-300 (%)     301-400 (%)     401-500 (%)     501-699 (%)         (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
12 months or less.......................................            0.67            1.33            3.33            5.00            6.67           10.00
13 months to 24 months..................................            1.00            2.33            5.00            6.67            8.33           11.67
25 months to 36 months..................................            1.33            3.33            6.67            8.33           10.00           13.33
37 months to 48 months..................................            2.00            4.00            8.33           10.00           11.67           15.00
49 months to 60 months..................................            2.67            4.67           10.00           11.67           13.33           16.67
61 months to 72 months..................................            3.67            5.67           11.67           13.33           15.00           18.33
73 months to 84 months..................................            4.67            6.67           13.33           15.00           16.67           20.00
85 months to 120 months.................................            5.67           10.00           15.00           16.67           18.33           26.67
121 months and longer...................................            6.67           13.33           16.67           18.33           20.00           33.33
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (B) Long positions (purchasing protection). In the case of a swap
that is a long credit default swap referencing a broad-based securities
index, deducting 50% of the deduction that would be required by
paragraph (b)(1)(i)(A) of this Appendix B if the swap was a short
credit default swap.
    (C) Long and short positions. (1) Long and short credit default
swaps. In the case of swaps that are long and short credit default
swaps referencing the same broad-based security index, have the same
credit events which would trigger payment by the seller of protection,
have the same basket of obligations which would determine the amount of
payment by the seller of protection upon the occurrence of a credit
event, that are in the same or adjacent spread category, and that are
in the same or adjacent maturity category and have a maturity date
within three months of the other maturity category, deducting the
percentage of the notional amount specified in the higher maturity
category under paragraph (b)(1)(i)(A) or (b)(1)(i)(B) of this Appendix
B on the excess of the long or short position.
    (2) Long basket of obligors and long credit default swap. In the
case of a swap that is a long credit default swap referencing a broad-
based securities index and the broker or dealer is long a basket of
debt securities comprising all of the components of the securities
index, deducting 50% of the amount specified in Sec.  240.15c3-
1(c)(2)(vi) for the component securities, provided the broker or dealer
can deliver the component securities to satisfy the obligation of the
broker or dealer on the credit default swap.
    (3) Short basket of obligors and short credit default swap. In the
case of a swap that is a short credit default swap referencing a broad-
based securities index and the broker or dealer is short a basket of
debt securities comprising all of the components of the securities
index, deducting the amount specified in Sec.  240.15c3-1(c)(2)(vi) for
the component securities.
    (2) All other swaps. (i) In the case of any swap that is not a
credit default swap, deducting the amount calculated by multiplying the
notional value of the swap by the percentage specified in:
    (A) Section 240.15c3-1 applicable to the reference asset if Sec.
240.15c3-1 specifies a percentage deduction for the type of asset;
    (B) 17 CFR 1.17 applicable to the reference asset if 17 CFR 1.17
specifies a percentage deduction for the type of asset and Sec.
240.15c3-1 does not specify a percentage deduction for the type of
asset; or
    (C) In the case of an interest rate swap, Sec.  240.15c3-
1(c)(2)(vi)(A) based on the maturity of the swap, provided that the
percentage deduction must be no less than 0.5%.
    (ii) A security-based swap dealer may reduce the deduction under
this paragraph (b)(2)(ii) by an amount equal to any reduction
recognized for a comparable long or short position in the reference
asset or interest rate under Sec.  240.15c3-1 or 17 CFR 1.17.

Sec.  240.15c3-1d  [Amended]

    5. Section 240.15c3-1d is amended by:
    a. Adding to the end of the second sentence of paragraph (b)(7) the
phrase ``, or if, in the case of a broker or dealer operating pursuant
to paragraph (a)(10) of Sec.  240.15c3-1, its net capital would be less
than either $24 million or 10% of the risk margin amount under Sec.
240.15c3-1'';
    b. In the first sentence of paragraph (b)(8)(i), adding after the
phrase ``if greater, or'' the phrase ``, in the case of a broker or
dealer operating pursuant to paragraph (a)(10) of Sec.  240.15c3-1, its
net capital would be less than either $24 million or 10% of the risk
margin amount under Sec.  240.15c3-1, or'';
    c. In paragraph (b)(10)(ii)(B), adding after the phrase ``if
greater,'' the phrase ``or, in the case of a broker or dealer operating
pursuant to paragraph (a)(10) of Sec.  240.15c3-1, its net capital is
less than either $20 million or 8% of the risk margin amount under
Sec.  240.15c3-1,'';
    d. In paragraph (c)(2), adding at the end of the sentence the
phrase ``, or, in the case of a broker or dealer operating pursuant to
paragraph (a)(10) of Sec.  240.15c3-1, its net capital would be less
than either $24 million or 10% of the risk margin amount under Sec.
240.15c3-1''; and
    e. In paragraph (c)(5)(i)(B), adding after the phrase ``if greater,
or less than 120 percent of the minimum dollar amount required by
paragraph (a)(1)(ii) of this section,'' the phrase ``, or, in the case
of a broker or dealer operating pursuant to paragraph (a)(10) of Sec.
240.15c3-1, its net capital would be less than either $24 million or
10% of the risk margin amount under Sec.  240.15c3-1,''.

Sec.  240.15c3-1e  [Amended]

    6. Section 240.15c3-1e is amended by:
    a. In the first sentence of paragraph (a) before the first ``:'',
removing the phrase ``transactions in derivatives instruments'' and
adding in its place the phrase ``security-based swap transactions with
commercial end users as defined in Sec.  240.18a-3(b)(2)'';
    b. In the first sentence of paragraph (c) before the first ``:'',
removing the phrase ``transactions in derivatives instruments'' and
adding in its place the phrase ``security-based swap transactions with
commercial end users as defined in Sec.  240.18a-3(b)(2)'';
    c. In paragraph (c)(2)(ii), removing the phrase ``$5 billion'' and
adding in its place the phrase ``$6 billion''; and
    d. In paragraph (e)(1), removing the phrase ``$5 billion'' and
adding in its place the phrase ``$6 billion''.
    7. Section 240.15c3-3 is amended by adding new paragraph (p) to
read as follows:

Sec.  240.15c3-3  Customer protection--reserves and custody of
securities.

* * * * *
    (p) Security-based swaps. A broker or dealer that is registered as
a security-based swap dealer pursuant to section 15F of the Act (15
U.S.C. 78o-8) must

also comply with the provisions of Sec.  240.18a-4.
    8. Section 240.18a-1 is added to read as follows:

Sec.  240.18a-1  Net capital requirements for security-based swap
dealers for which there is not a prudential regulator.

    Note to Sec.  240.18a-1:  Rule 18a-1 and its appendices do not
apply to a security-based swap dealer that has a prudential
regulator as such a security-based swap dealer is subject to the
capital requirement of the prudential regulator. In addition, Rule
18a-1 and its appendices do not apply to a security-based swap
dealer that also is registered as a broker or dealer pursuant to
section 15(b) of the Act (15 U.S.C. 78o(b)) as such a security-based
swap dealer is subject to the net capital requirements in Sec.
240.15c3-1 and its appendices.

    (a) Minimum requirements. Every registered security-based swap
dealer must at all times have and maintain net capital no less than the
greater of the highest minimum requirements applicable to its business
under paragraphs (a)(1) or (2) of this section, and tentative net
capital no less than the minimum requirement under paragraph (a)(2) of
this section.
    (1) A security-based swap dealer must at all times maintain net
capital of not less than the greater of $20 million or eight percent
(8%) of the risk margin amount.
    (2) 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 using the credit risk standards of paragraph (d) to
compute a deduction for credit risk for security-based swap
transactions with commercial end users as defined in Sec.  240.18a-
3(b)(2), instead of the provisions of paragraphs (c)(1)(iii) and
(c)(1)(viii)(B)(1) 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 that has been
approved to calculate its net capital under paragraph (d) of this
section must at all times maintain tentative net capital of not less
than $100 million and net capital of not less than the greater of $20
million or eight percent (8%) of the risk margin amount; and
    (b) A security-based swap dealer must at all times maintain net
capital in addition to the amounts required under paragraph (a)(1) or
(2) of this section, as applicable, in an amount equal to 10 percent
of:
    (1) The excess of the market value of United States Treasury Bills,
Bonds and Notes subject to reverse repurchase agreements with any one
party over 105 percent of the contract prices (including accrued
interest) for reverse repurchase agreements with that party;
    (2) The excess of the market value of securities issued or
guaranteed as to principal or interest by an agency of the United
States or mortgage related securities as defined in section 3(a)(41) of
the Act subject to reverse repurchase agreements with any one party
over 110 percent of the contract prices (including accrued interest)
for reverse repurchase agreements with that party; and
    (3) The excess of the market value of other securities subject to
reverse repurchase agreements with any one party over 120 percent of
the contract prices (including accrued interest) for reverse repurchase
agreements with that party.
    (c) Definitions. For purpose of this section:
    (1) The term net capital shall be deemed to mean the net worth of a
security-based swap dealer, adjusted by:
    (i) Adjustments to net worth related to unrealized profit or loss
and deferred tax provisions. (A) Adding unrealized profits (or
deducting unrealized losses) in the accounts of the security-based swap
dealer;
    (B)(1) In determining net worth, all long and all short positions
in listed options shall be marked to their market value and all long
and all short securities and commodities positions shall be marked to
their market value.
    (2) In determining net worth, the value attributed to any unlisted
option shall be the difference between the option's exercise value and
the market value of the underlying security. In the case of an unlisted
call, if the market value of the underlying security is less than the
exercise value of such call it shall be given no value and in the case
of an unlisted put if the market value of the underlying security is
more than the exercise value of the unlisted put it shall be given no
value.
    (C) Adding to net worth the lesser of any deferred income tax
liability related to the items in paragraphs (c)(1)(i)(C)(1), (2), and
(3) of this section, or the sum of paragraphs (c)(1)(i)(C)(1), (2), and
(3) of this section;
    (1) The aggregate amount resulting from applying to the amount of
the deductions computed in accordance with paragraphs (c)(1)(vii) and
(viii) of this section and Appendices A and B, Sec.  240.18a-1a and
Sec.  240.18a-1b, the appropriate Federal and State tax rate(s)
applicable to any unrealized gain on the asset on which the deduction
was computed.
    (2) Any deferred tax liability related to income accrued which is
directly related to an asset otherwise deducted pursuant to this
section;
    (3) Any deferred tax liability related to unrealized appreciation
in value of any asset(s) which has been otherwise deducted from net
worth in accordance with the provisions of this section; and
    (D) Adding, in the case of future income tax benefits arising as a
result of unrealized losses, the amount of such benefits not to exceed
the amount of income tax liabilities accrued on the books and records
of the security-based swap dealer, but only to the extent such benefits
could have been applied to reduce accrued tax liabilities on the date
of the capital computation, had the related unrealized losses been
realized on that date.
    (E) Adding to net worth any actual tax liability related to income
accrued which is directly related to an asset otherwise deducted
pursuant to this section.
    (ii) Subordinated liabilities. Excluding liabilities of the
security-based swap dealer that are subordinated to the claims of
creditors pursuant to a satisfactory subordinated loan agreement, as
defined in Appendix D (Sec.  240.18a-1d).
    (iii) Assets not readily convertible into cash. Deducting fixed
assets and assets which cannot be readily converted into cash,
including, among other things:
    (A) Fixed assets and prepaid items. Real estate; furniture and
fixtures; exchange memberships; prepaid rent, insurance and other
expenses; goodwill, organization expenses;
    (B) Certain unsecured and partly secured receivables. All unsecured
advances and loans; deficits in customers' and non-customers' unsecured
and partly secured notes; deficits in customers' and non-customers'
unsecured and partly secured accounts after application of calls for
margin, marks to the market or other required deposits that are
outstanding for more than one business day; and the market value of
stock loaned in excess of the value of any collateral received
therefore.
    (C) Insurance claims. Insurance claims that, after seven (7)
business days from the date the loss giving rise to the claim is
discovered, are not covered by an opinion of outside counsel that the
claim is valid and is covered by insurance policies presently in
effect; insurance claims that after twenty (20)

business days from the date the loss giving rise to the claim is
discovered and that are not accompanied by an opinion of outside
counsel described above, have not been acknowledged in writing by the
insurance carrier as due and payable; and insurance claims acknowledged
in writing by the carrier as due and payable outstanding longer than
twenty (20) business days from the date they are so acknowledged by the
carrier; and
    (D) Other deductions. All other unsecured receivables; all assets
doubtful of collection less any reserves established therefore; the
amount by which the market value of securities failed to receive
outstanding thirty (30) calendar days exceeds the contract value of
such fails to receive, and the funds on deposit in a ``segregated trust
account'' in accordance with 17 CFR 270.27d-1 under the Investment
Company Act of 1940, but only to the extent that the amount on deposit
in such segregated trust account exceeds the amount of liability
reserves established and maintained for refunds of charges required by
sections 27(d) and 27(f) of the Investment Company Act of 1940;
Provided, That any amount deposited in the ``special account for the
exclusive benefit of security-based swap customers'' established
pursuant to Sec.  240.18a-4 and clearing deposits shall not be so
deducted.
    (E)(1) For purposes of this paragraph:
    (i) The term reverse repurchase agreement deficit shall mean the
difference between the contract price for resale of the securities
under a reverse repurchase agreement and the market value of those
securities (if less than the contract price).
    (ii) The term repurchase agreement deficit shall mean the
difference between the market value of securities subject to the
repurchase agreement and the contract price for repurchase of the
securities (if less than the market value of the securities).
    (iii) As used in paragraph (c)(1)(iii)(E)(1) of this section, the
term contract price shall include accrued interest.
    (iv) Reverse repurchase agreement deficits and the repurchase
agreement deficits where the counterparty is the Federal Reserve Bank
of New York shall be disregarded.
    (2)(i) In the case of a reverse repurchase agreement, the deduction
shall be equal to the reverse repurchase agreement deficit.
    (ii) In determining the required deductions under paragraph
(c)(1)(iii)(E)(2)(i) of this section, the security-based swap dealer
may reduce the reverse repurchase agreement deficit by:
    (A) Any margin or other deposits held by the security-based swap
dealer on account of the reverse repurchase agreement;
    (B) Any excess market value of the securities over the contract
price for resale of those securities under any other reverse repurchase
agreement with the same party;
    (C) The difference between the contract price for resale and the
market value of securities subject to repurchase agreements with the
same party (if the market value of those securities is less than the
contract price); and
    (D) Calls for margin, marks to the market, or other required
deposits that are outstanding one business day or less.
    (3)(i) In the case of repurchase agreements, the deduction shall
be:
    (A) The excess of the repurchase agreement deficit over 5 percent
of the contract price for resale of United States Treasury Bills, Notes
and Bonds, 10 percent of the contract price for the resale of
securities issued or guaranteed as to principal or interest by an
agency of the United States or mortgage related securities as defined
in section 3(a)(41) of the Act and 20 percent of the contract price for
the resale of other securities; and
    (B) The excess of the aggregate repurchase agreement deficits with
any one party over 25 percent of the security-based swap dealer's net
capital before the application of paragraphs (c)(1)(vii) and (viii) of
this section (less any deduction taken with respect to repurchase
agreements with that party under paragraph (c)(1)(iii)(E)(3)(i)(A) of
this section) or, if greater;
    (C) The excess of the aggregate repurchase agreement deficits over
300 percent of the security-based swap dealer's net capital before the
application of paragraphs (c)(1)(vii) and (viii) of this section.
    (ii) In determining the required deduction under paragraph
(c)(1)(iii)(E)(3)(i) of this section, the security-based swap dealer
may reduce a repurchase agreement by:
    (A) Any margin or other deposits held by the security-based swap
dealer on account of a reverse repurchase agreement with the same party
to the extent not otherwise used to reduce a reverse repurchase
agreement deficit;
    (B) The difference between the contract price and the market value
of securities subject to other repurchase agreements with the same
party (if the market value of those securities is less than the
contract price) not otherwise used to reduce a reverse repurchase
agreement deficit; and
    (C) Calls for margin, marks to the market, or other required
deposits that are outstanding one business day or less to the extent
not otherwise used to reduce a reverse repurchase agreement deficit.
    (F) Securities borrowed. One percent of the market value of
securities borrowed collateralized by an irrevocable letter of credit.
    (G) Any receivable from an affiliate of the security-based swap
dealer (not otherwise deducted from net worth) and the market value of
any collateral given to an affiliate (not otherwise deducted from net
worth) to secure a liability over the amount of the liability of the
security-based swap dealer unless the books and records of the
affiliate are made available for examination when requested by the
representatives of the Commission in order to demonstrate the validity
of the receivable or payable. The provisions of this subsection shall
not apply where the affiliate is a registered security-based swap
dealer, registered broker or dealer, registered government securities
broker or dealer, bank as defined in section 3(a)(6) of the Act,
insurance company as defined in section 3(a)(19) of the Act, investment
company registered under the Investment Company Act of 1940, federally
insured savings and loan association, or futures commission merchant or
swap dealer registered pursuant to the Commodity Exchange Act.
    (iv) Non-marketable securities. Deducting 100 percent of the
carrying value in the case of securities or evidence of indebtedness in
the proprietary or other accounts of the security-based swap dealer,
for which there is no ready market, as defined in paragraph (c)(4) of
this section, and securities, in the proprietary or other accounts of
the security-based swap dealer, that cannot be publicly offered or sold
because of statutory, regulatory or contractual arrangements or other
restrictions.
    (v) Deducting from the contract value of each failed to deliver
contract that is outstanding five business days or longer (21 business
days or longer in the case of municipal securities) the percentages of
the market value of the underlying security that would be required by
application of the deduction required by paragraph (c)(1)(vii) of this
section. Such deduction, however, shall be increased by any excess of
the contract price of the failed to deliver contract over the market
value of the underlying security or reduced by any excess of the market
value of the underlying security

over the contract value of the failed to deliver contract, but not to
exceed the amount of such deduction. The Commission may, upon
application of the security-based swap dealer, extend for a period up
to 5 business days, any period herein specified when it is satisfied
that the extension is warranted. The Commission upon expiration of the
extension may extend for one additional period of up to 5 business
days, any period herein specified when it is satisfied that the
extension is warranted.
    (vi) Security-based swaps. Deducting the percentages specified in
paragraphs (c)(1)(vi)(A) and (B) of this section (or the deductions
prescribed in Sec.  240.18a-1a) of the notional amount of any security-
based swaps in the proprietary account of the security-based swap
dealer.
    (A) Credit default swaps. (1) Short positions (selling protection).
In the case of a security-based swap that is a short credit default
swap, deducting the percentage of the notional amount based upon the
current basis point spread of the credit default swap and the maturity
of the credit default swap in accordance with the following table:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Basis point spread
                                                         -----------------------------------------------------------------------------------------------
       Length of time to maturity of  CDS contract          100 or less                                                                     700 or more
                                                                (%)        101-300  (%)    301-400  (%)    401-500  (%)    501-699  (%)         (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
12 months or less.......................................            1.00            2.00            5.00            7.50           10.00           15.00
13 months to 24 months..................................            1.50            3.50            7.50           10.00           12.50           17.50
25 months to 36 months..................................            2.00            5.00           10.00           12.50           15.00           20.00
37 months to 48 months..................................            3.00            6.00           12.50           15.00           17.50           22.50
49 months to 60 months..................................            4.00            7.00           15.00           17.50           20.00           25.00
61 months to 72 months..................................            5.50            8.50           17.50           20.00           22.50           27.50
73 months to 84 months..................................            7.00           10.00           20.00           22.50           25.00           30.00
85 months to 120 months.................................            8.50           15.00           22.50           25.00           27.50           40.00
121 months and longer...................................           10.00           20.00           25.00           27.50           30.00           50.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

     (2) Long positions (purchasing protection). In the case of a
security-based swap that is a long credit default swap, deducting 50%
of the deduction that would be required by paragraph (c)(1)(vi)(A)(1)
of this section if the security-based swap was a short credit default
swap.
    (3) Long and short positions. (i) Long and short credit default
swaps. In the case of security-based swaps that are long and short
credit default swaps referencing the same obligor or obligation, that
are in the same spread category, and that are in the same maturity
category or are in the next maturity category and have a maturity date
within three months of the other maturity category, deducting the
percentage of the notional amount specified in the higher maturity
category under paragraphs (c)(1)(vi)(A)(1) or (2) on the excess of the
long or short position. In the case of security-based swaps that are
long and short credit default swaps referencing obligors or obligations
of obligors in the same industry sector and the same spread and
maturity categories prescribed in paragraph (c)(1)(vi)(A)(1) of this
section, deducting 50% of the amount required by paragraph
(c)(1)(vi)(A)(1) of this section on the short position plus the
deduction required by paragraph (c)(1)(vi)(A)(2) of this section on the
excess long position, if any. For the purposes of this section, the
security-based swap dealer must use an industry sector classification
system that is reasonable in terms of grouping types of companies with
similar business activities and risk characteristics and document the
industry sector classification system used pursuant to this section.
    (ii) Long security and long credit default swap. In the case of a
security-based swap that is a long credit default swap referencing a
debt security and the security-based swap dealer is long the same debt
security, deducting 50% of the amount specified in Sec.  240.15c3-
1(c)(2)(vi) or (vii) for the bond, provided that the security-based
swap dealer can deliver the bond to satisfy the obligation of the
security-based swap dealer on the credit default swap.
    (iii) Short security and short credit default swap. In the case of
a security-based swap that is a short credit default swap referencing a
bond or a corporate entity and the security-based swap dealer is short
the bond or a bond issued by the corporate entity, deducting the amount
specified in Sec.  240.15c3-1(c)(2)(vi) or (vii) for the bond. In the
case of a security-based swap that is a short credit default swap
referencing an asset-backed security and the security-based swap dealer
is short the asset-backed security, deducting the amount specified in
Sec.  240.15c3-1(c)(2)(vi) or (vii) for the asset-backed security.
    (B) All other security-based swaps. In the case of any security-
based swap that is not a credit default swap, deducting the amount
calculated by multiplying the notional amount of the security-based
swap and the percentage specified in Sec.  240.15c3-1(c)(2)(vi)
applicable to the reference security. A security-based swap dealer may
reduce the deduction under this paragraph (c)(1)(vi)(B) by an amount
equal to any reduction recognized for a comparable long or short
position in the reference security under Sec.  240.15c3-1(c)(2)(vi)
and, in the case of a security-based swap referencing an equity
security, the method specified in Sec.  240.18a-1a.
    (vii) All other securities, money market instruments or options.
Deducting the percentages specified in Sec.  240.15c3-1(c)(2)(vi) of
the market value of all securities, money market instruments, and
options in the proprietary accounts of the security-based swap dealer.
    (viii) Deduction from net worth in lieu of collecting margin
amounts for security-based swaps. (A) Cleared security-based swap
transactions. 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 transactions. The margin
difference is the amount of the deductions that the positions in the
account would incur pursuant to paragraph (c)(1)(vi) of this section if
owned by the security-based swap dealer less the margin value of
collateral held in the account.
    (B) Non-cleared security-based swap transactions. (1) Commercial
end users. Deducting, with respect to a counterparty that is a
commercial end user as that term is defined in Sec.  240.18a-3(b)(2),
the margin amount calculated pursuant to Sec.  240.18a-3(c)(1)(i)(B)
for the account of the counterparty less any positive equity in the
account as that term is defined in Sec.  240.18a-3(b)(7).

    (2) Margin collateral held by third-party custodian. Deducting,
with respect to a counterparty that is not a commercial end user as
that term is defined in Sec.  240.18a-3(b)(2) and that elects to have
collateral segregated in an account at an independent third-party
custodian pursuant to section 3E(f) of the Act (15 U.S.C. 78c-5(f)),
the margin amount calculated pursuant to Sec.  240.18a-3(c)(1)(i)(B)
for the account of the counterparty at the security-based swap dealer
less any positive equity in that account as that term is defined in
Sec.  240.18a-3(b)(7).
    (3) Security-based swap legacy accounts. Deducting, with respect to
a security-based swap legacy account as that term is defined in Sec.
240.18a-3(b)(9) of a counterparty that is not a commercial end user as
that term is defined in Sec.  240.18a-3(b)(2), the margin amount
calculated pursuant Sec.  240.18a-3(c)(1)(i)(B) for the account less
any positive equity in the account as that term is defined in Sec.
240.18a-3(b)(7).
    (ix) Deduction from net worth for certain undermargined accounts.
Deducting the amount of cash required in the account of each security-
based swap customer to meet the margin requirements of a clearing
agency or the Commission, after application of calls for margin, marks
to the market, or other required deposits which are outstanding one
business day or less.
    (2) The term exempted securities shall mean those securities deemed
exempted securities by section 3(a)(12) of the Securities Exchange Act
of 1934 and the rules thereunder.
    (3) Customer. The term customer shall mean any person from whom, or
on whose behalf, a security-based swap dealer has received, acquired or
holds funds or securities for the account of such person, but shall not
include a security-based swap dealer, a broker or dealer, a registered
municipal securities dealer, or a general, special or limited partner
or director or officer of the security-based swap dealer, or any person
to the extent that such person has a claim for property or funds which
by contract, agreement, or understanding, or by operation of law, is
part of the capital of the security-based swap dealer.
    (4) Ready market. The term ready market shall include a recognized
established securities market in which there exists independent bona
fide offers to buy and sell so that a price reasonably related to the
last sales price or current bona fide competitive bid and offer
quotations can be determined for a particular security almost
instantaneously and where payment will be received in settlement of a
sale at such price within a relatively short time conforming to trade
custom.
    (5) The term tentative net capital means the net capital of the
security-based swap dealer before deductions for market and credit risk
computed pursuant to this section and increased by the balance sheet
value (including counterparty net exposure) resulting from transactions
in derivative instruments which would otherwise be deducted. Tentative
net capital shall include securities for which there is no ready
market, as defined in paragraph (c)(4) of this section, if the use of
mathematical models has been approved for purposes of calculating
deductions from net capital for those securities pursuant to paragraph
(d) of this section.
    (6) The term risk margin amount means the sum of:
    (i) The greater of the total margin required to be delivered by the
security-based swap dealer with respect to security-based swap
transactions cleared for security-based swap customers at a clearing
agency or the amount of the deductions that would apply to the cleared
security-based swap positions of the security-based swap customers
pursuant to paragraph (c)(1)(vi) of this section; 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).
    (d) Application to use models to compute deductions for market and
credit risk. (1) A security-based swap dealer may apply to the
Commission for authorization to compute deductions for market risk
under this paragraph (d) in lieu of computing deductions pursuant to
paragraphs (c)(1)(iv), (vi), and (vii) of this section and to compute
deductions for credit risk pursuant to this paragraph (d) on credit
exposures arising from transactions in derivatives instruments (if this
paragraph (d) is used to calculate deductions for market risk on these
instruments) in lieu of computing deductions pursuant to paragraph
(c)(1)(iii) of this section.
    (i) A security-based swap dealer shall submit the following
information to the Commission with its application:
    (A) An executive summary of the information provided to the
Commission with its application and an identification of the ultimate
holding company of the security-based swap dealer;
    (B) A comprehensive description of the internal risk management
control system of the security-based swap dealer and how that system
satisfies the requirements set forth in Sec.  240.15c3-4;
    (C) A list of the categories of positions that the security-based
swap dealer holds in its proprietary accounts and a brief description
of the methods that the security-based swap dealer will use to
calculate deductions for market and credit risk on those categories of
positions;
    (D) A description of the mathematical models to be used to price
positions and to compute deductions for market risk, including those
portions of the deductions attributable to specific risk, if
applicable, and deductions for credit risk; a description of the
creation, use, and maintenance of the mathematical models; a
description of the security-based swap dealer's internal risk
management controls over those models, including a description of each
category of persons who may input data into the models; if a
mathematical model incorporates empirical correlations across risk
categories, a description of the process for measuring correlations; a
description of the backtesting procedures the security-based swap
dealer will use to backtest the mathematical models used to calculate
maximum potential exposure; a description of how each mathematical
model satisfies the applicable qualitative and quantitative
requirements set forth in this paragraph (d); and a statement
describing the extent to which each mathematical model used to compute
deductions for market risk and credit risk will be used as part of the
risk analyses and reports presented to senior management;
    (E) If the security-based swap dealer is applying to the Commission
for approval to use scenario analysis to calculate deductions for
market risk for certain positions, a list of those types of positions,
a description of how those deductions will be calculated using scenario
analysis, and an explanation of why each scenario analysis is
appropriate to calculate deductions for market risk on those types of
positions;
    (F) A description of how the security-based swap dealer will
calculate current exposure;
    (G) A description of how the security-based swap dealer will
determine internal credit ratings of counterparties and internal credit
risk weights of counterparties, if applicable;
    (H) For each instance in which a mathematical model to be used by
the security-based swap dealer to calculate a deduction for market risk
or to calculate maximum potential exposure for a particular product or
counterparty differs from the mathematical model used by the ultimate
holding company to calculate an allowance for market risk or to
calculate maximum potential

exposure for that same product or counterparty, a description of the
difference(s) between the mathematical models; and
    (I) Sample risk reports that are provided to management at the
security-based swap dealer who are responsible for managing the
security-based swap dealer's risk.
    (ii) [Reserved].
    (2) The application of the security-based swap dealer shall be
supplemented by other information relating to the internal risk
management control system, mathematical models, and financial position
of the security-based swap dealer that the Commission may request to
complete its review of the application;
    (3) The application shall be considered filed when received at the
Commission's principal office in Washington, DC A person who files an
application pursuant to this section for which it seeks confidential
treatment may clearly mark each page or segregable portion of each page
with the words ``Confidential Treatment Requested.'' All information
submitted in connection with the application will be accorded
confidential treatment, to the extent permitted by law;
    (4) If any of the information filed with the Commission as part of
the application of the security-based swap dealer is found to be or
becomes inaccurate before the Commission approves the application, the
security-based swap dealer must notify the Commission promptly and
provide the Commission with a description of the circumstances in which
the information was found to be or has become inaccurate along with
updated, accurate information;
    (5) The Commission may approve the application or an amendment to
the application, in whole or in part, subject to any conditions or
limitations the Commission may require if the Commission finds the
approval to be necessary or appropriate in the public interest or for
the protection of investors, after determining, among other things,
whether the security-based swap dealer has met the requirements of this
paragraph (d) and is in compliance with other applicable rules
promulgated under the Act;
    (6) A security-based swap dealer shall amend its application to
calculate certain deductions for market and credit risk under this
paragraph (d) and submit the amendment to the Commission for approval
before it may change materially a mathematical model used to calculate
market or credit risk or before it may change materially its internal
risk management control system;
    (7) As a condition for the security-based swap dealer to compute
deductions for market and credit risk under this paragraph (d), the
security-based swap dealer agrees that:
    (i) It will notify the Commission 45 days before it ceases to
compute deductions for market and credit risk under this paragraph (d);
and
    (ii) The Commission may determine by order that the notice will
become effective after a shorter or longer period of time if the
security-based swap dealer consents or if the Commission determines
that a shorter or longer period of time is necessary or appropriate in
the public interest or for the protection of investors; and
    (8) Notwithstanding paragraph (d)(7) of this section, the
Commission, by order, may revoke a security-based swap dealer's
exemption that allows it to use the market risk standards of this
paragraph (d) to calculate deductions for market risk, and the
exemption to use the credit risk standards of this paragraph (d) to
calculate deductions for credit risk on certain credit exposures
arising from transactions in derivatives instruments if the Commission
finds that such exemption is no longer necessary or appropriate in the
public interest or for the protection of investors. In making its
finding, the Commission will consider the compliance history of the
security-based swap dealer related to its use of models, the financial
and operational strength of the security-based swap dealer and its
ultimate holding company, and the security-based swap dealer's
compliance with its internal risk management controls.
    (9) VaR models. To be approved, each value-at-risk (``VaR'') model
must meet the following minimum qualitative and quantitative
requirements:
    (i) Qualitative requirements. (A) The VaR model used to calculate
market or credit risk for a position must be integrated into the daily
internal risk management system of the security-based swap dealer;
    (B) The VaR model must be reviewed both periodically and annually.
The periodic review may be conducted by the security-based swap
dealer's internal audit staff, but the annual review must be conducted
by a registered public accounting firm, as that term is defined in
section 2(a)(12) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et
seq.); and
    (C) For purposes of computing market risk, the security-based swap
dealer must determine the appropriate multiplication factor as follows:
    (1) Beginning three months after the security-based swap dealer
begins using the VaR model to calculate market risk, the security-based
swap dealer must conduct backtesting of the model by comparing its
actual daily net trading profit or loss with the corresponding VaR
measure generated by the VaR model, using a 99 percent, one-tailed
confidence level with price changes equivalent to a one business-day
movement in rates and prices, for each of the past 250 business days,
or other period as may be appropriate for the first year of its use;
    (2) On the last business day of each quarter, the security-based
swap dealer must identify the number of backtesting exceptions of the
VaR model using clean profit and loss, that is, the number of business
days in the past 250 business days, or other period as may be
appropriate for the first year of its use, for which the actual net
trading loss, if any, exceeds the corresponding VaR measure; and
    (3) The security-based swap dealer must use the multiplication
factor indicated in Table 1 of this paragraph (d) in determining its
market risk until it obtains the next quarter's backtesting results;

    Table 1--Multiplication Factor Based on the Number of Backtesting
                       Exceptions of the VaR Model
------------------------------------------------------------------------
                                                         Multiplication
                 Number of  exceptions                       factor
------------------------------------------------------------------------
4 or fewer............................................              3.00
5.....................................................              3.40
6.....................................................              3.50
7.....................................................              3.65
8.....................................................              3.75
9.....................................................              3.85
10 or more............................................              4.00
------------------------------------------------------------------------

     (4) For purposes of incorporating specific risk into a VaR model,
a security-based swap dealer must demonstrate that it has methodologies
in place to capture liquidity, event, and default risk adequately for
each position. Furthermore, the models used to calculate deductions for
specific risk must:
    (i) Explain the historical price variation in the portfolio;
    (ii) Capture concentration (magnitude and changes in composition);
    (iii) Be robust to an adverse environment;
    (iv) Capture name-related basis risk;
    (v) Capture event risk; and
    (vi) Be validated through backtesting.
    (5) For purposes of computing the credit equivalent amount of the
security-based swap dealer's exposures

to a counterparty, the security-based swap dealer must determine the
appropriate multiplication factor as follows:
    (i) Beginning three months after it begins using the VaR model to
calculate maximum potential exposure, the security-based swap dealer
must conduct backtesting of the model by comparing, for at least 80
counterparties with widely varying types and sizes of positions with
the firm, the ten business day change in its current exposure to the
counterparty based on its positions held at the beginning of the ten-
business day period with the corresponding ten-business day maximum
potential exposure for the counterparty generated by the VaR model;
    (ii) As of the last business day of each quarter, the security-
based swap dealer must identify the number of backtesting exceptions of
the VaR model, that is, the number of ten-business day periods in the
past 250 business days, or other period as may be appropriate for the
first year of its use, for which the change in current exposure to a
counterparty exceeds the corresponding maximum potential exposure; and
    (iii) The security-based swap dealer will propose, as part of its
application, a schedule of multiplication factors, which must be
approved by the Commission based on the number of backtesting
exceptions of the VaR model. The security-based swap dealer must use
the multiplication factor indicated in the approved schedule in
determining the credit equivalent amount of its exposures to a
counterparty until it obtains the next quarter's backtesting results,
unless the Commission determines, based on, among other relevant
factors, a review of the security-based swap dealer's internal risk
management control system, including a review of the VaR model, that a
different adjustment or other action is appropriate.
    (ii) Quantitative requirements.
    (A) For purposes of determining market risk, the VaR model must use
a 99 percent, one-tailed confidence level with price changes equivalent
to a ten business-day movement in rates and prices;
    (B) For purposes of determining maximum potential exposure, the VaR
model must use a 99 percent, one-tailed confidence level with price
changes equivalent to a one-year movement in rates and prices; or based
on a review of the security-based swap dealer's procedures for managing
collateral and if the collateral is marked to market daily and the
security-based swap dealer has the ability to call for additional
collateral daily, the Commission may approve a time horizon of not less
than ten business days;
    (C) The VaR model must use an effective historical observation
period of at least one year. The security-based swap dealer must
consider the effects of market stress in its construction of the model.
Historical data sets must be updated at least monthly and reassessed
whenever market prices or volatilities change significantly; and
    (D) The VaR model must take into account and incorporate all
significant, identifiable market risk factors applicable to positions
in the accounts of the security-based swap dealer, including:
    (1) Risks arising from the non-linear price characteristics of
derivatives and the sensitivity of the market value of those positions
to changes in the volatility of the derivatives' underlying rates and
prices;
    (2) Empirical correlations with and across risk factors or,
alternatively, risk factors sufficient to cover all the market risk
inherent in the positions in the proprietary or other trading accounts
of the security-based swap dealer, including interest rate risk, equity
price risk, foreign exchange risk, and commodity price risk;
    (3) Spread risk, where applicable, and segments of the yield curve
sufficient to capture differences in volatility and imperfect
correlation of rates along the yield curve for securities and
derivatives that are sensitive to different interest rates; and
    (4) Specific risk for individual positions.
    (iii) Additional conditions. (A) As a condition for the security-
based swap dealer to use this paragraph (d) to calculate certain of its
capital charges, the Commission may impose additional conditions on the
security-based swap dealer, which may include, but are not limited to
restricting the security-based swap dealer's business on a product-
specific, category-specific, or general basis; submitting to the
Commission a plan to increase the security-based swap dealer's net
capital or tentative net capital; filing more frequent reports with the
Commission; modifying the security-based swap dealer's internal risk
management control procedures; or computing the security-based swap
dealer's deductions for market and credit risk in accordance with
paragraphs (c)(1) (iii), (iv), (vii), or (viii) as appropriate. If the
Commission finds it is necessary or appropriate in the public interest
or for the protection of investors, the Commission may impose
additional conditions on the security-based swap dealer, if:
    (1) The security-based swap dealer is required by Sec.  240.18a-8
to provide notice to the Commission that the security-based swap
dealer's tentative net capital is less than $100 million;
    (2) The security-based swap dealer fails to meet the reporting
requirements set forth in Sec.  240.18a-8;
    (3) Any event specified in Sec.  240.18a-8 occurs;
    (4) There is a material deficiency in the internal risk management
control system or in the mathematical models used to price securities
or to calculate deductions for market and credit risk or allowances for
market and credit risk, as applicable, of the security-based swap
dealer;
    (5) The security-based swap dealer fails to comply with this
paragraph (d); or
    (6) The Commission finds that imposition of other conditions is
necessary or appropriate in the public interest or for the protection
of investors.
    (e) Models to compute deductions for market risk and credit risk.
(1) Market risk. A security-based swap dealer whose application,
including amendments, has been approved under paragraph (d) of this
section, shall compute a deduction for market risk in an amount equal
to the sum of the following:
    (i) For positions for which the Commission has approved the
security-based swap dealer's use of VaR models, the VaR of the
positions multiplied by the appropriate multiplication factor
determined according to paragraph (d) of this section, except that the
initial multiplication factor shall be three, unless the Commission
determines, based on a review of the security-based swap dealer's
application or an amendment to the application under paragraph (d) of
this section, including a review of its internal risk management
control system and practices and VaR models, that another
multiplication factor is appropriate;
    (ii) For positions for which the VaR model does not incorporate
specific risk, a deduction for specific risk to be determined by the
Commission based on a review of the security-based swap dealer's
application or an amendment to the application under paragraph (d) of
this section and the positions involved;
    (iii) For positions for which the Commission has approved the
security-based swap dealer's application to use scenario analysis, the
greatest loss resulting from a range of adverse movements in relevant
risk factors, prices, or spreads designed to represent a negative
movement greater than, or equal to, the worst ten-day movement of

the four years preceding calculation of the greatest loss, or some
multiple of the greatest loss based on the liquidity of the positions
subject to scenario analysis. If historical data is insufficient, the
deduction shall be the largest loss within a three standard deviation
movement in those risk factors, prices, or spreads over a ten-day
period, multiplied by an appropriate liquidity adjustment factor.
Irrespective of the deduction otherwise indicated under scenario
analysis, the resulting deduction for market risk must be at least $25
per 100 share equivalent contract for equity positions, or one-half of
one percent of the face value of the contract for all other types of
contracts, even if the scenario analysis indicates a lower amount. A
qualifying scenario must include the following:
    (A) A set of pricing equations for the positions based on, for
example, arbitrage relations, statistical analysis, historic
relationships, merger evaluations, or fundamental valuation of an
offering of securities;
    (B) Auxiliary relationships mapping risk factors to prices; and
    (C) Data demonstrating the effectiveness of the scenario in
capturing market risk, including specific risk; and
    (iv) For all remaining positions, the deductions specified in Sec.
240.15c3-1(c)(2)(vi), Sec.  240.15c3-1(c)(2)(vii), and applicable
appendices to Sec.  240.15c3-1.
    (2) Credit risk. A security-based swap dealer whose application,
including amendments, has been approved under paragraph (d) of this
section with respect to positions in security-based swaps may compute a
deduction for credit risk on security-based swap transactions with
commercial end users as defined in Sec.  240.18a-3(b)(2) in an amount
equal to the sum of the following:
    (i) A counterparty exposure charge in an amount equal to the sum of
the following:
    (A) The net replacement value in the account of each counterparty
that is insolvent, or in bankruptcy, or that has senior unsecured long-
term debt in default; and
    (B) For a counterparty not otherwise described in paragraph
(e)(2)(i)(A) of this section, the credit equivalent amount of the
security-based swap dealer's exposure to the counterparty, as defined
in paragraph (e)(2)(iv)(A) of this section, multiplied by the credit
risk weight of the counterparty, as determined in accordance with
paragraph (e)(2)(iv)(F) of this section, multiplied by 8%;
    (ii) A concentration charge by counterparty in an amount equal to
the sum of the following:
    (A) For each counterparty with a credit risk weight of 20% or less,
5% of the amount of the current exposure to the counterparty in excess
of 5% of the tentative net capital of the security-based swap dealer;
    (B) For each counterparty with a credit risk weight of greater than
20% but less than 50%, 20% of the amount of the current exposure to the
counterparty in excess of 5% of the tentative net capital of the
security-based swap dealer; and
    (C) For each counterparty with a credit risk weight of greater than
50%, 50% of the amount of the current exposure to the counterparty in
excess of 5% of the tentative net capital of the security-based swap
dealer; and
    (iii) A portfolio concentration charge of 100% of the amount of the
security-based swap dealer's aggregate current exposure for all
counterparties in excess of 50% of the tentative net capital of the
security-based swap dealer.
    (iv) Terms. (A) The credit equivalent amount of the security-based
swap dealer's exposure to a counterparty is the sum of the security-
based swap dealer's maximum potential exposure to the counterparty, as
defined in paragraph (e)(2)(iv)(B) of this section, multiplied by the
appropriate multiplication factor, and the security-based swap dealer's
current exposure to the counterparty, as defined in paragraph
(e)(2)(iv)(C) of this section. The security-based swap dealer must use
the multiplication factor determined according to paragraph
(d)(9)(i)(C)(5) of this section, except that the initial multiplication
factor shall be one, unless the Commission determines, based on a
review of the security-based swap dealer's application or an amendment
to the application approved under paragraph (d) of this section,
including a review of its internal risk management control system and
practices and VaR models, that another multiplication factor is
appropriate;
    (B) The maximum potential exposure is the VaR of the counterparty's
positions with the security-based swap dealer, after applying netting
agreements with the counterparty meeting the requirements of paragraph
(e)(2)(iv)(D) of this section, taking into account the value of
collateral from the counterparty held by the security-based swap dealer
in accordance with paragraph (e)(2)(iv)(E) of this section, and taking
into account the current replacement value of the counterparty's
positions with the security-based swap dealer;
    (C) The current exposure of the security-based swap dealer to a
counterparty is the current replacement value of the counterparty's
positions with the security-based swap dealer, after applying netting
agreements with the counterparty meeting the requirements of paragraph
(e)(2)(iv)(D) of this section and taking into account the value of
collateral from the counterparty held by the security-based swap dealer
in accordance with paragraph (e)(2)(iv)(E) of this section;
    (D) Netting agreements. A security-based swap dealer may include
the effect of a netting agreement that allows the security-based swap
dealer to net gross receivables from and gross payables to a
counterparty upon default of the counterparty if:
    (1) The netting agreement is legally enforceable in each relevant
jurisdiction, including in insolvency proceedings;
    (2) The gross receivables and gross payables that are subject to
the netting agreement with a counterparty can be determined at any
time; and
    (3) For internal risk management purposes, the security-based swap
dealer monitors and controls its exposure to the counterparty on a net
basis.
    (E) Collateral. When calculating maximum potential exposure and
current exposure to a counterparty, the fair market value of collateral
pledged and held may be taken into account provided:
    (1) The collateral is marked to market each day and is subject to a
daily margin maintenance requirement;
    (2) The security-based swap dealer maintains physical possession or
sole control of the collateral;
    (3) The collateral is liquid and transferable;
    (4) The collateral may be liquidated promptly by the firm without
intervention by any other party;
    (5) The collateral agreement is legally enforceable by the
security-based swap dealer against the counterparty and any other
parties to the agreement;
    (6) The collateral does not consist of securities issued by the
counterparty or a party related to the security-based swap dealer or to
the counterparty;
    (7) The Commission has approved the security-based swap dealer's
use of a VaR model to calculate deductions for market risk for the type
of collateral in accordance with paragraph (d) of this section; and
    (8) The collateral is not used in determining the credit rating of
the counterparty.
    (F) Credit risk weights of counterparties. A security-based swap

dealer that computes its deductions for credit risk pursuant to
paragraph (e)(2) of this section shall apply a credit risk weight for
transactions with a counterparty of either 20%, 50%, or 150% based on
an internal credit rating the security-based swap dealer determines for
the counterparty.
    (1) As part of its initial application or in an amendment, the
security-based swap dealer may request Commission approval to apply a
credit risk weight of either 20%, 50%, or 150% based on internal
calculations of credit ratings, including internal estimates of the
maturity adjustment. Based on the strength of the security-based swap
dealer's internal credit risk management system, the Commission may
approve the application. The security-based swap dealer must make and
keep current a record of the basis for the credit risk weight of each
counterparty;
    (2) As part of its initial application or in an amendment, the
security-based swap dealer may request Commission approval to determine
credit risk weights based on internal calculations, including internal
estimates of the maturity adjustment. Based on the strength of the
security-based swap dealer's internal credit risk management system,
the Commission may approve the application. The security-based swap
dealer must make and keep current a record of the basis for the credit
risk weight of each counterparty; and
    (3) As part of its initial application or in an amendment, the
security-based swap dealer may request Commission approval to reduce
deductions for credit risk through the use of credit derivatives.
    (f) Liquidity requirements. (1) Liquidity stress test. A security-
based swap dealer that computes net capital under paragraph (a)(2) of
this Rule 18a-1 must perform a liquidity stress test at least monthly,
the results of which must be provided within ten business days to
senior management that has responsibility to oversee risk management at
the security-based swap dealer. The assumptions underlying the
liquidity stress test must be reviewed at least quarterly by senior
management that has responsibility to oversee risk management at the
security-based swap dealer and at least annually by senior management
of the security-based swap dealer. The liquidity stress test must
include, at a minimum, the following assumed conditions lasting for 30
consecutive days:
    (i) A stress event includes a decline in creditworthiness of the
broker or dealer severe enough to trigger contractual credit-related
commitment provisions of counterparty agreements;
    (ii) The loss of all existing unsecured funding at the earlier of
its maturity or put date and an inability to acquire a material amount
of new unsecured funding, including intercompany advances and unfunded
committed lines of credit;
    (iii) The potential for a material net loss of secured funding;
    (iv) The loss of the ability to procure repurchase agreement
financing for less liquid assets;
    (v) The illiquidity of collateral required by and on deposit at
clearing agencies or other entities which is not deducted from net
worth or which is not funded by customer assets;
    (vi) A material increase in collateral required to be maintained at
registered clearing agencies of which it is a member; and
    (vii) The potential for a material loss of liquidity caused by
market participants exercising contractual rights and/or refusing to
enter into transactions with respect to the various businesses,
positions, and commitments of the security-based swap dealer, including
those related to customer businesses of the security-based swap dealer.
    (2) Stress test of consolidated entity. The security-based swap
dealer must justify and document any differences in the assumptions
used in the liquidity stress test of the security-based swap dealer
from those used in the liquidity stress test of the consolidated entity
of which the security-based swap dealer is a part.
    (3) Liquidity reserves. The security-based swap dealer must
maintain at all times liquidity reserves based on the results of the
liquidity stress test. The liquidity reserves used to satisfy the
liquidity stress test must be:
    (i) Cash, obligations of the United States, or obligations fully
guaranteed as to principal and interest by the United States; and
    (ii) Unencumbered and free of any liens at all times.
    Securities in the liquidity reserve can be used to meet delivery
requirements as long as cash or other acceptable securities of equal or
greater value are moved into the liquidity pool contemporaneously.
    (4) Contingency funding plan. The security-based swap dealer must
have a written contingency funding plan that addresses the security-
based swap dealer's policies and the roles and responsibilities of
relevant personnel for meeting the liquidity needs of the security-
based swap dealer and communications with the public and other market
participants during a liquidity stress event.
    (g) Internal risk management control systems. A security-based swap
dealer must comply with Sec.  240.15c3-4 as if it were an OTC
derivatives dealer with respect to all of its business activities,
except that paragraphs (c)(5)(xiii) and (xiv) and (d)(8) and (9) of
Sec.  240.15c3-4 shall not apply.
    (h) Debt-equity requirements. No security-based swap dealer shall
permit the total of outstanding principal amounts of its satisfactory
subordination agreements (other than such agreements which qualify
under this paragraph (h) as equity capital) to exceed 70 percent of its
debt-equity total, as hereinafter defined, for a period in excess of 90
days or for such longer period which the Commission may, upon
application of the security-based swap dealer, grant in the public
interest or for the protection of investors. In the case of a
corporation, the debt-equity total shall be the sum of its outstanding
principal amounts of satisfactory subordination agreements, par or
stated value of capital stock, paid in capital in excess of par,
retained earnings, unrealized profit and loss or other capital
accounts. In the case of a partnership, the debt-equity total shall be
the sum of its outstanding principal amounts of satisfactory
subordination agreements, capital accounts of partners (exclusive of
such partners' securities accounts) subject to the provisions of
paragraph (i) of this section, and unrealized profit and loss.
Provided, however, that a satisfactory subordinated loan agreement
entered into by a partner or stockholder which has an initial term of
at least three years and has a remaining term of not less than 12
months shall be considered equity for the purposes of this paragraph
(h) if:
    (1) It does not have any of the provisions for accelerated maturity
provided for by paragraphs (b)(8)(i), (9)(i), or (9)(ii) of Appendix D
of this section and is maintained as capital subject to the provisions
restricting the withdrawal thereof required by paragraph (i) of this
section; or
    (2) The partnership agreement provides that capital contributed
pursuant to a satisfactory subordination agreement as defined in
Appendix D of this section shall in all respects be partnership capital
subject to the provisions restricting the withdrawal thereof required
by paragraph (i) of this section.
    (i) Notice provisions relating to limitations on the withdrawal of
equity capital. (1) No equity capital of the security-based swap dealer
or a

subsidiary or affiliate consolidated pursuant to Appendix C of this
section may be withdrawn by action of a stockholder or a partner or by
redemption or repurchase of shares of stock by any of the consolidated
entities or through the payment of dividends or any similar
distribution, nor may any unsecured advance or loan be made to a
stockholder, partner, employee or affiliate without written notice
given in accordance with paragraph (i)(1)(iv) of this section:
    (i) Two business days prior to any withdrawals, advances or loans
if those withdrawals, advances or loans on a net basis exceed in the
aggregate in any 30 calendar day period, 30 percent of the security-
based swap dealer's excess net capital. A security-based swap dealer,
in an emergency situation, may make withdrawals, advances or loans that
on a net basis exceed 30 percent of the security-based swap dealer's
excess net capital in any 30 calendar day period without giving the
advance notice required by this paragraph, with the prior approval of
the Commission. Where a security-based swap dealer makes a withdrawal
with the consent of the Commission, it shall in any event comply with
paragraph (i)(1)(ii) of this section; or
    (ii) Two business days after any withdrawals, advances or loans if
those withdrawals, advances or loans on a net basis exceed in the
aggregate in any 30 calendar day period, 20 percent of the security-
based swap dealer's excess net capital.
    (iii) This paragraph (i)(1) does not apply to:
    (A) Securities or commodities transactions in the ordinary course
of business between a security-based swap dealer and an affiliate where
the security-based swap dealer makes payment to or on behalf of such
affiliate for such transaction and then receives payment from such
affiliate for the securities or commodities transaction within two
business days from the date of the transaction; or
    (B) Withdrawals, advances or loans which in the aggregate in any
thirty calendar day period, on a net basis, equal $500,000 or less.
    (iv) Each required notice shall be effective when received by the
Commission in Washington, DC, the regional office of the Commission for
the region in which the security-based swap dealer has its principal
place of business, and the Commodity Futures Trading Commission if such
security-based swap dealer is registered with that Commission.
    (2) Limitations on withdrawal of equity capital. No equity capital
of the security-based swap dealer or a subsidiary or affiliate
consolidated pursuant to Appendix C of this section may be withdrawn by
action of a stockholder or a partner or by redemption or repurchase of
shares of stock by any of the consolidated entities or through the
payment of dividends or any similar distribution, nor may any unsecured
advance or loan be made to a stockholder, partner, employee or
affiliate, if after giving effect thereto and to any other such
withdrawals, advances or loans and any Payments of Payments Obligations
(as defined in Appendix D of this section) under satisfactory
subordinated loan agreements which are scheduled to occur within 180
days following such withdrawal, advance or loan if:
    (i) The security-based swap dealer's net capital would be less than
120 percent of the minimum dollar amount required by paragraph (a) of
this section; and
    (ii) The total outstanding principal amounts of satisfactory
subordinated loan agreements of the security-based swap dealer and any
subsidiaries or affiliates consolidated pursuant to Appendix C of this
section (other than such agreements which qualify as equity under
paragraph (h) of this section) would exceed 70% of the debt-equity
total as defined in paragraph (h) of this section.
    (3) Temporary restrictions on withdrawal of net capital. (i) The
Commission may by order restrict, for a period up to twenty business
days, any withdrawal by the security-based swap dealer of equity
capital or unsecured loan or advance to a stockholder, partner, member,
employee or affiliate under such terms and conditions as the Commission
deems necessary or appropriate in the public interest or consistent
with the protection of investors if the Commission, based on the
information available, concludes that such withdrawal, advance or loan
may be detrimental to the financial integrity of the security-based
swap dealer, or may unduly jeopardize the security-based swap dealer's
ability to repay its customer claims or other liabilities which may
cause a significant impact on the markets or expose the customers or
creditors of the security-based swap dealer to loss.
    (ii) An order temporarily prohibiting the withdrawal of capital
shall be rescinded if the Commission determines that the restriction on
capital withdrawal should not remain in effect. A hearing on an order
temporarily prohibiting withdrawal of capital will be held within two
business days from the date of the request in writing by the security-
based swap dealer.
    (4) Miscellaneous provisions. (i) Excess net capital is that amount
in excess of the amount required under paragraph (a) of this section.
For the purposes of paragraphs (i)(1) and (2) of this section, a
security-based swap dealer may use the amount of excess net capital and
deductions required under paragraphs (c)(1)(vii) and (viii) and
Appendix A of this section reported in its most recently required filed
Form X-18A-7 for the purposes of calculating the effect of a projected
withdrawal, advance or loan relative to excess net capital or
deductions. The security-based swap dealer must assure itself that the
excess net capital or the deductions reported on the most recently
required filed Form X-18A-7 have not materially changed since the time
such report was filed.
    (ii) The term equity capital includes capital contributions by
partners, par or stated value of capital stock, paid-in capital in
excess of par, retained earnings or other capital accounts. The term
equity capital does not include securities in the securities accounts
of partners and balances in limited partners' capital accounts in
excess of their stated capital contributions.
    (iii) Paragraphs (i)(1) and (2) of this section shall not preclude
a security-based swap dealer from making required tax payments or
preclude the payment to partners of reasonable compensation, and such
payments shall not be included in the calculation of withdrawals,
advances, or loans for purposes of paragraphs (i)(1) and (2) of this
section.
    (iv) For the purpose of this paragraph (i), any transactions
between a security-based swap dealer and a stockholder, partner,
employee or affiliate that results in a diminution of the security-
based swap dealer's net capital shall be deemed to be an advance or
loan of net capital.
    9. Section 240.18a-1a is added to read as follows:

Sec.  240.18a-1a  Options (Appendix A to 17 CFR 240.18a-1).

    (a)(1) Definitions. The term unlisted option means any option not
included in the definition of listed option provided in Sec.  240.15c3-
1(c)(2)(x).
    (2) The term option series refers to listed option contracts of the
same type (either a call or a put) and exercise style, covering the
same underlying security with the same exercise price, expiration date,
and number of underlying units.
    (3) The term related instrument within an option class or product
group refers to futures contracts and options

on futures contracts 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.
    (4) The term underlying instrument refers to long and short
positions, as appropriate, covering the same foreign currency, the same
security, security future, or 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, or unlisted
instruments (other than security-based swaps).
    (5) The term options class refers to all options contracts covering
the same underlying instrument.
    (6) The term product group refers to two or more option classes,
related instruments, underlying instruments, and qualified stock
baskets in the same portfolio type (see paragraph (b)(1)(ii) of this
section) for which it has been determined that a percentage of
offsetting profits may be applied to losses at the same valuation
point.
    (b) The deduction under this Appendix A must equal the sum of the
deductions specified in paragraph (b)(1)(iv)(C) of this section.

Theoretical Pricing Charges

    (1)(i) Definitions. (A) The terms theoretical gains and losses mean
the gain and loss in the value of individual option series, the value
of underlying instruments, related instruments, and qualified stock
baskets within that option's class, at 10 equidistant intervals
(valuation points) ranging from an assumed movement (both up and down)
in the current market value of the underlying instrument equal to the
percentage corresponding to the deductions otherwise required under
Sec.  240.15c3-1 for the underlying instrument (see paragraph
(b)(1)(iii) of this section). Theoretical gains and losses shall be
calculated using a theoretical options pricing model that satisfies the
criteria set forth in paragraph (b)(1)(i)(B) of this section.
    (B) The term theoretical options pricing model means any
mathematical model, other than a security-based swap dealer's
proprietary model, the use of which has been approved by the
Commission. Any such model shall calculate theoretical gains and losses
as described in paragraph (b)(1)(i)(A) of this section for all series
and issues of equity, index and foreign currency options and related
instruments, and shall be made available equally and on the same terms
to all security-based swap dealers. Its procedures shall include the
arrangement of the vendor to supply accurate and timely data to each
security-based swap dealer with respect to its services, and the fees
for distribution of the services. The data provided to security-based
swap dealers shall also contain the minimum requirements set forth in
paragraphs (b)(1)(iv)(C) of this section and the product group offsets
set forth in paragraphs (b)(1)(iv)(B) of this section. At a minimum,
the model shall consider the following factors in pricing the option:
    (1) The current spot price of the underlying asset;
    (2) The exercise price of the option;
    (3) The remaining time until the option's expiration;
    (4) The volatility of the underlying asset;
    (5) Any cash flows associated with ownership of the underlying
asset that can reasonably be expected to occur during the remaining
life of the option; and
    (6) The current term structure of interest rates.
    (C) The term major market foreign currency means the currency of a
sovereign nation for which there is a substantial inter-bank forward
currency market.
    (D) The term qualified stock basket means a set or basket of stock
positions which represents no less than 50% of the capitalization for a
high-capitalization or non-high-capitalization diversified market
index, or, in the case of a narrow-based index, no less than 95% of the
capitalization for such narrow-based index.
    (ii) With respect to positions involving listed option positions in
its proprietary or other account, the security-based swap dealer shall
group long and short positions into the following portfolio types:
    (A) Equity options on the same underlying instrument and positions
in that underlying instrument;
    (B) Options on the same major market foreign currency, positions in
that major market foreign currency, and related instruments within
those options' classes;
    (C) High-capitalization diversified market index options, related
instruments within the option's class, and qualified stock baskets in
the same index;
    (D) Non-high-capitalization diversified index options, related
instruments within the index option's class, and qualified stock
baskets in the same index; and
    (E) Narrow-based index options, related instruments within the
index option's class, and qualified stock baskets in the same index.
    (iii) Before making the computation, each security-based swap
dealer shall obtain the theoretical gains and losses for each option
series and for the related and underlying instruments within those
options' class in the proprietary or other accounts of that security-
based swap dealer. For each option series, the theoretical options
pricing model shall calculate theoretical prices at 10 equidistant
valuation points within a range consisting of an increase or a decrease
of the following percentages of the daily market price of the
underlying instrument:
    (A) +(-)15% for equity securities with a ready market, narrow-based
indexes, and non-high-capitalization diversified indexes;
    (B) +(-)6% for major market foreign currencies;
    (C) +(-)20% for all other currencies; and
    (D) +(-)10% for high-capitalization diversified indexes.
    (iv)(A) The security-based swap dealer shall multiply the
corresponding theoretical gains and losses at each of the 10
equidistant valuation points by the number of positions held in a
particular option series, the related instruments and qualified stock
baskets within the option's class, and the positions in the same
underlying instrument.
    (B) In determining the aggregate profit or loss for each portfolio
type, the security-based swap dealer will be allowed the following
offsets in the following order, provided, that in the case of qualified
stock baskets, the security-based swap dealer may elect to net
individual stocks between qualified stock baskets and take the
appropriate deduction on the remaining, if any, securities:
    (1) First, a security-based swap dealer is allowed the following
offsets within an option's class:
    (i) Between options on the same underlying instrument, positions
covering the same underlying instrument, and related instruments within
the option's class, 100% of a position's gain shall offset another
position's loss at the same valuation point;

    (ii) Between index options, related instruments within the option's
class, and qualified stock baskets on the same index, 95%, or such
other amount as designated by the Commission, of gains shall offset
losses at the same valuation point;
    (2) Second, a security-based swap dealer is allowed the following
offsets within an index product group:
    (i) Among positions involving different high-capitalization
diversified index option classes within the same product group, 90% of
the gain in a high-capitalization diversified market index option,
related instruments, and qualified stock baskets within that index
option's class shall offset the loss at the same valuation point in a
different high-capitalization diversified market index option, related
instruments, and qualified stock baskets within that index option's
class;
    (ii) Among positions involving different non-high-capitalization
diversified index option classes within the same product group, 75% of
the gain in a non-high-capitalization diversified market index option,
related instruments, and qualified stock baskets within that index
option's class shall offset the loss at the same valuation point in
another non-high-capitalization diversified market index option,
related instruments, and qualified stock baskets within that index
option's class or product group;
    (iii) Among positions involving different narrow-based index option
classes within the same product group, 90% of the gain in a narrow-
based market index option, related instruments, and qualified stock
baskets within that index option's class shall offset the loss at the
same valuation point in another narrow-based market index option,
related instruments, and qualified stock baskets within that index
option's class or product group;
    (iv) No qualified stock basket should offset another qualified
stock basket; and
    (3) Third, a security-based swap dealer is allowed the following
offsets between product groups: Among positions involving different
diversified index product groups within the same market group, 50% of
the gain in a diversified market index option, a related instrument, or
a qualified stock basket within that index option's product group shall
offset the loss at the same valuation point in another product group;
    (C) For each portfolio type, the total deduction shall be the
larger of:
    (1) The amount for any of the 10 equidistant valuation points
representing the largest theoretical loss after applying the offsets
provided in paragraph (b)(1)(iv)(B) if this section; or
    (2) A minimum charge equal to 25% times the multiplier for each
equity and index option contract and each related instrument within the
option's class or product group, or $25 for each option on a major
market foreign currency with the minimum charge for futures contracts
and options on futures contracts adjusted for contract size
differentials, not to exceed market value in the case of long positions
in options and options on futures contracts; plus
    (3) In the case of portfolio types involving index options and
related instruments offset by a qualified stock basket, there will be a
minimum charge of 5% of the market value of the qualified stock basket
for high-capitalization diversified and narrow-based indexes; and
    (4) In the case of portfolio types involving index options and
related instruments offset by a qualified stock basket, there will be a
minimum charge of 7\1/2\% of the market value of the qualified stock
basket for non-high-capitalization diversified indexes.
    (5) In the case of portfolio types involving security futures and
equity options on the same underlying instrument and positions in that
underlying instrument, there will be a minimum charge of 25% times the
multiplier for each security-future and equity option.
    10. Section 240.18a-1b is added to read as follows:

Sec.  240.18a-1b  Adjustments to net worth for certain commodities
transactions (Appendix B to 17 CFR 240.18a-1).

    (a) Every registered security-based swap dealer in computing net
capital pursuant to Sec.  240.18a-1 shall comply with the following:
    (1) Where a security-based swap dealer has an asset or liability
which is treated or defined in paragraph Sec.  240.18a-1, the inclusion
or exclusion of all or part of such asset or liability for net capital
shall be in accordance with Sec.  240.18a-1, except as specifically
provided otherwise in this Appendix B. Where a commodity related asset
or liability is specifically treated or defined in 17 CFR 1.17 and is
not generally or specifically treated or defined in Sec.  240.18a-1 or
this Appendix B, the inclusion or exclusion of all or part of such
asset or liability for net capital shall be in accordance with 17 CFR
1.17.
    (2) In computing net capital as defined in paragraph (c)(1) of
Sec.  240.18a-1, the net worth of a security-based swap dealer shall be
adjusted as follows with respect to commodity-related transactions:
    (i) Unrealized profit or loss for certain commodities transactions.
(A) Unrealized profits shall be added and unrealized losses shall be
deducted in the commodities accounts of the security-based swap dealer,
including unrealized profits and losses on fixed price commitments and
forward contracts; and
    (B) The value attributed to any commodity option which is not
traded on a contract market shall be the difference between the
option's strike price and the market value for the physical or futures
contract which is the subject of the option. In the case of a long call
commodity option, if the market value for the physical or futures
contract which is the subject of the option is less than the strike
price of the option, it shall be given no value. In the case of a long
put commodity option, if the market value for the physical commodity or
futures contract which is the subject of the option is more than the
striking price of the option, it shall be given no value.
    (ii) Deduct any unsecured commodity futures or option account
containing a ledger balance and open trades, the combination of which
liquidates to a deficit or containing a debit ledger balance only:
Provided, however, Deficits or debit ledger balances in unsecured
customers', non-customers' and proprietary accounts, which are the
subject of calls for margin or other required deposits need not be
deducted until the close of business on the business day following the
date on which such deficit or debit ledger balance originated;
    (iii) Deduct all unsecured receivables, advances and loans except
for:
    (A) Management fees receivable from commodity pools outstanding no
longer than thirty (30) days from the date they are due;
    (B) Receivables from foreign clearing organizations;
    (C) Receivables from registered futures commission merchants or
brokers, resulting from commodity futures or option transactions,
except those specifically excluded under paragraph (a)(2)(ii) of this
Appendix B.
    (iv) Deduct all inventories (including work in process, finished
goods, raw materials and inventories held for resale) except for
readily marketable spot commodities; or spot commodities which
adequately collateralize indebtedness under 17 CFR 1.17(c)(7);
    (v) Guarantee deposits with commodities clearing organizations are
not required to be deducted from net worth;

    (vi) Stock in commodities clearing organizations to the extent of
its margin value is not required to be deducted from net worth;
    (vii) Deduct from net worth the amount by which any advances paid
by the security-based swap dealer on cash commodity contracts and used
in computing net capital exceeds 95 percent of the market value of the
commodities covered by such contracts.
    (viii) Do not include equity in the commodity accounts of partners
in net worth.
    (ix) In the case of all inventory, fixed price commitments and
forward contracts, except for inventory and forward contracts in the
inter-bank market in those foreign currencies which are purchased or
sold for further delivery on or subject to the rules of a contract
market and covered by an open futures contract for which there will be
no charge, deduct the applicable percentage of the net position
specified below:
    (A) Inventory which is currently registered as deliverable on a
contract market and covered by an open futures contract or by a
commodity option on a physical--No charge.
    (B) Inventory which is covered by an open futures contract or
commodity option--5% of the market value.
    (C) Inventory which is not covered--20% of the market value.
    (D) Fixed price commitments (open purchases and sales) and forward
contracts which are covered by an open futures contract or commodity
option--10% of the market value.