Second, under paragraph (a)(4) of Rule 18a-10, the stand-alone SBSD
must be exempt from the segregation requirements of Rule 18a-4. As
discussed above in section II.C.2. of this release, the Commission has
added a provision to Rule 18a-4 that will exempt a stand-alone or bank
SBSD from the rule's omnibus segregation requirements if it meets
certain conditions, including that it does not clear security-based
swaps for other persons. Section 3E(g) of the Exchange Act applies the
customer protection elements of the stockbroker liquidation provisions
to cleared security-based swaps and related collateral, and to
collateral delivered as initial margin for non-cleared security-based
swaps if the collateral is subject to a customer protection requirement
under Section 15(c)(3) of the Exchange Act or a segregation
requirement. Consequently, a stand-alone SBSD that does not have
cleared security-based swap customers and is not subject to a
segregation requirement with respect to collateral for non-cleared
security-based swaps will not implicate the stockbroker liquidation
provisions. Given this result, the Commission believes it would be
appropriate to permit the firm to comply with CEA and CFTC segregation
requirements to the extent applicable in lieu of Rule 18a-4.
    Third, under paragraph (a)(5) of Rule 18a-10, the aggregate gross
notional amount of the firm's outstanding security-based swap positions
must not exceed the lesser of two thresholds as of the most recently
ended quarter of the firm's fiscal year.\708\ The thresholds are: (1)
The maximum fixed-dollar gross notional amount of open security-based
swaps specified in paragraph (f) of the rule (``maximum fixed-dollar
threshold''); and (2) 10% of the combined aggregate gross notional
amount of the firm's open security-based swap and swap positions (``10%
threshold'').
---------------------------------------------------------------------------

    \708\ The gross notional amount is based on the notional amounts
of the firm's security-based swaps and swaps that are outstanding as
of the quarter end. It is not based on transaction volume during the
quarter.
---------------------------------------------------------------------------

    These thresholds are designed to limit the availability of the
alternative compliance mechanism to firms whose security-based swaps
business is not a significant part of the security-based swap market
and that are predominately engaged in a swaps business as compared to a
security-based swaps business. In this regard, the capital, margin, and
segregation requirements being adopted today are designed to promote
the safety and soundness of an SBSD and the ability of the Commission
to oversee the firm and, thereby, protect the firm, its counterparties,
and the integrity of the security-based swap market. Moreover, the
security-based swap market and the broader securities markets (such as
the cash markets for equity and fixed-income securities) are
interrelated, given that economically similar instruments can be traded
in both markets (e.g., an equity security in the cash market and a
total return swap referencing that security in the security-based swap
market). For these reasons, the Commission has a heightened regulatory
interest in stand-alone SBSDs that will be significant participants in
the security-based swap market. Therefore, in crafting the alternative
compliance mechanism, the Commission sought to calibrate the maximum-
fixed-dollar and 10% thresholds to exclude stand-alone SBSDs that will
be significant participants in this market.\709\
---------------------------------------------------------------------------

    \709\ See also section VI. of the release (providing an economic
analysis of Rule 18a-10, as adopted, including the costs and
benefits of the rule).
---------------------------------------------------------------------------

    The amount of the maximum fixed-dollar threshold is $250 billion
for a transitional period of 3 years and then will drop to $50 billion
(unless the Commission issues an order as discussed below). Based on
current information about the security-based swap market and the
participants and potential participants in that market, the Commission
believes that a stand-alone SBSD with a gross notional amount of
outstanding security-based swaps of no more than $50 billion will not
be a

significant participant in the security-based swap market. However, as
stated above in section I.A. of this release, the Commission recognizes
that the firms subject to the capital, margin, and segregation
requirements being adopted today are operating in a market that
continues to experience significant changes in response to market and
regulatory developments. For these reasons, the Commission believes it
is appropriate to set a maximum fixed-dollar threshold that is well in
excess of $50 billion for a transitional period of 3 years. Therefore,
the maximum fixed-dollar threshold will be $250 billion for 3 years,
starting on the compliance date for the capital, margin and segregation
rules being adopted today. This transitional $250 billion threshold
will provide a stand-alone SBSD operating under the alternative
compliance mechanism (i.e., firms that are predominantly engaged in a
swaps business) with a substantial amount of leeway to develop their
security-based swaps business without managing the level of that
business to the lower $50 billion threshold. If the security-based
swaps business of these firms develops to a degree that the $50 billion
threshold would require them to refrain from taking on additional
business, the Commission can assess whether the amount of the
additional business that causes them to exceed the threshold makes them
a significant participant in the security-based swap market.
    The transitional period therefore will provide the Commission with
the opportunity to evaluate the impact that the $50 billion threshold
would have on firms operating pursuant to the alternative compliance
mechanism before the threshold drops from $250 billion to $50 billion.
Moreover, the final rule establishes a process through which the
Commission, by order, can: (1) Maintain the maximum fixed-dollar amount
at $250 billion for an additional period of time or indefinitely after
the 3-year transition period ends; or (2) lower it to an amount that is
less than $250 billion but greater than $50 billion.\710\ This process
could provide firms operating under the alternative compliance
mechanism with additional time to transition from the $250 billion
threshold to the $50 billion threshold or another threshold.
---------------------------------------------------------------------------

    \710\ See paragraphs (f)(1)(i) and (ii) of Rule 18a-10, as
adopted.
---------------------------------------------------------------------------

    The final rules provide that the Commission will issue an order
after considering the levels of security-based swap activity of stand-
alone SBSDs operating under the alternative compliance mechanism. The
Commission intends to analyze how significant these entities are to the
security-based swap market and broader securities markets based on
their levels of their security-based swap activity. The analysis will
consider the firm's individual and collective impact on the security-
based swap market. Based on this analysis, the Commission could decide
to take no action and let the $250 billion maximum fixed-dollar
threshold transition to $50 billion on the 3-year anniversary of the
compliance date for the capital, margin, and segregation rules being
adopted today. Alternatively, the Commission could decide to reset the
maximum fixed-dollar threshold to a level greater than $50 billion (but
no more than $250 billion) or provide additional time for firms to
transition from a $250 billion threshold to the $50 billion threshold.
    The process in the final rule provides that the Commission will
publish notice of the potential change to the maximum fixed-dollar
threshold (i.e., extending the $250 billion threshold for an additional
period of time or indefinitely, or lowering it to a level between $250
billion and $50 billion) and subsequently issue an order regarding the
change. The Commission intends to provide such notice in sufficient
time for the public to be aware of the potential change.
    In summary, the maximum fixed-dollar threshold sets an absolute
limit on the availability of the alternative compliance mechanism
irrespective of the size of the firm's swaps business as compared to
its security-based swaps business. Thus, a firm potentially may not
exceed the 10% threshold given the large size of its swaps business but
could exceed the maximum fixed-dollar threshold because its security-
based swaps business is sufficiently large. This absolute limit is
designed to exclude stand-alone SBSDs that are significant participants
in the security-based swap market from qualifying for the alternative
compliance mechanism.
    The 10% threshold establishes a limit on the ratio of the firm's
security-based swaps business to its combined security-based swaps and
swaps businesses. In crafting this threshold, the Commission sought to
limit the availability of the alternative compliance mechanism to firms
that are predominantly engaged in a swaps business as compared to a
security-based swaps business. Consequently, if the firm's security-
based swap business does not exceed the maximum fixed-dollar threshold,
it nonetheless may not qualify for the alternative compliance mechanism
if its security-based swaps business exceeds the ratio set by the 10%
threshold. This is designed to limit the alternative compliance
mechanism to firms for which the CFTC (as opposed to the Commission)
has a heightened regulatory interest.
    Under paragraph (a)(5) of Rule 18a-10, the firm must not exceed the
lesser of these thresholds as of the most recently ended quarter of its
fiscal year. This point-in-time requirement is designed to simplify the
process for determining whether the firm meets the condition by
aligning it with when the firm closes its books for financial
recordkeeping and reporting purposes. A quarterly test (as opposed to
an annual test) also is designed to ensure that a firm using the
alternative compliance mechanism consistently limits its security-based
swaps business in a manner that aligns with the Commission's objective:
To provide this option only to firms that are not a significant part of
the security-based swap market and predominantly deal in swaps as
compared to security-based swaps. Moreover, a quarterly test (as
opposed to a requirement to meet the threshold test at all times) is
designed to limit the possibility that a firm operating pursuant to the
alternative compliance mechanism inadvertently exceeds one of the
thresholds for a brief period of time (particularly by an immaterial
amount) and, as a consequence, can no longer use it.
    Paragraph (b) of Rule 18a-10 sets forth requirements for a firm
that is operating pursuant to the rule. Paragraph (b)(1) provides that
the firm must comply with the capital, margin, and segregation
requirements of the CEA and the CFTC's rules applicable to swap dealers
and treat security-based swaps and related collateral pursuant to those
requirements to the extent the requirements do not specifically address
security-based swaps and related collateral. Consequently, a firm that
is subject to Rule 18a-10 must comply with applicable capital, margin,
and segregation requirements of the CEA and the CFTC's rules and a
failure to comply with one or more of those rules will constitute a
failure to comply with Rule 18a-10. Moreover, the firm must treat
security-based swaps and related collateral pursuant to the
requirements of the CEA and the CFTC's rules even if the CEA and the
CFTC's rules do not specifically address security-based swaps and
related collateral. This provision is designed to ensure that security-
based swaps and related collateral do not fall into a ``regulatory
gap'' with respect to a nonbank SBSD operating under the alternative
compliance mechanism. Thus, if a capital, margin, or segregation

requirement applicable to a swap or collateral related to a swap is
silent as to a security-based swap or collateral related to a security-
based swap, the nonbank SBSD must treat the security-based swap or
collateral related to a security-based swap pursuant to the requirement
applicable to the swap or collateral related to the swap.\711\
---------------------------------------------------------------------------

    \711\ See, e.g., Letter from Eileen T. Flaherty, Director,
Division of Swap Dealer and Intermediary Oversight, and Jeffrey M.
Bandman, Acting Director, Division of Clearing and Risk, CFTC, to
Mary P. Johannes, Senior Director, ISDA (Aug. 23, 2016) (providing
no-action relief to swap dealers and major swap participants with
respect to the CFTC's margin rules for non-cleared swaps pursuant to
which these entities can portfolio margin non-cleared swaps with
non-cleared security-based swaps, provided, among other conditions,
the security-based swaps shall be treated as if they were swaps for
all applicable provisions of the CFTC's margin rules).
---------------------------------------------------------------------------

    Paragraph (b)(2) of Rule 18a-10 requires the firm to provide a
written disclosure to its counterparties after it begins operating
pursuant to the rule. The disclosure must be provided before the first
transaction with the counterparty after the firm begins operating
pursuant to the rule. The disclosure must notify the counterparty that
the firm is complying with the applicable capital, margin, and
segregation requirements of the CEA and the CFTC's rules in lieu of
complying with Rules 18a-1, 18a-3, and 18a-4. The disclosure
requirement is designed to alert the counterparty that the firm is not
complying with these Commission rules notwithstanding the fact that the
firm is registered with the Commission as an SBSD. This will provide
the counterparty with the opportunity to assess the implications of
transacting with the SBSD under these circumstances.
    Paragraph (b)(3) of Rule 18a-10 requires the firm to immediately
notify the Commission and the CFTC in writing if it fails to meet a
condition in paragraph (a) of the rule. This notice--by immediately
alerting the Commission and the CFTC of the firm's status--will provide
the agencies with the opportunity to promptly evaluate the situation
and coordinate any regulatory responses such as increased monitoring of
the firm.
    Paragraph (c) of Rule 18a-10 addresses when a firm fails to comply
with a condition in paragraph (a) of the rule and, therefore, no longer
qualifies to operate pursuant to the rule. The paragraph provides that
a firm in that circumstance must begin complying with Rules 18a-1, 18a-
3, and 18a-4 no later than either: (1) Two months after the end of the
month in which the firm failed to meet the condition in paragraph (a);
or (2) for a longer period of time as granted by the Commission by
order subject to any conditions imposed by the Commission. This period
of time to come into compliance with the Commission's rules
(``compliance period'') is modeled on the de minimis exception to the
``security-based swap dealer'' definition.\712\ Under paragraph (b) of
Rule 3a71-2, an entity that no longer meets the requirements of the de
minimis exception will be deemed to not be an SBSD until the earlier of
the date on which it submits a complete application to register as an
SBSD or two months after the end of the month in which the entity
becomes no longer able to take advantage of the exception. The
compliance period in Rule 18a-10 is designed to provide an SBSD with
time to implement systems, controls, policies, and procedures and take
other necessary steps to comply with Rules 18a-1, 18a-3, and 18a-4. The
Commission, by order, can grant the SBSD additional time if necessary.
---------------------------------------------------------------------------

    \712\ See Rule 3a71-2.
---------------------------------------------------------------------------

    The conditions in paragraphs (a)(1) through (4) of Rule 18a-10 must
be met at all times an SBSD is operating pursuant to the rule.
Consequently, the compliance period will begin to run on the day of a
month that the SBSD fails to meet a condition in paragraphs (a)(1)
through (4). As discussed above, whether a firm meets the condition in
paragraph (a)(5) of Rule 18a-10 will be determined as of the most
recently ended quarter of the firm's fiscal year. Therefore, a firm
could fail to meet this condition only on a day that is the end of one
of its fiscal year quarters. If the firm fails to meet the condition on
one of those days, the compliance period will begin to run on that day.
    Paragraph (d) of Rule 18a-10 addresses how a firm would elect to
operate pursuant to the rule. Under paragraph (d)(1), a firm can make
the election as part of the process of applying to register as an SBSD.
In this case, the firm must provide written notice to the Commission
and the CFTC during the registration process of its intent to operate
pursuant to the rule. Upon being registered as an SBSD, the firm can
begin complying with Rule 18a-10, provided it meets the conditions in
paragraph (a) of the rule.
    Under paragraph (d)(2) of Rule 18a-10, an SBSD can make the
election after the firm has been registered as an SBSD. In this case,
the firm must provide written notice to the Commission and the CFTC of
its intent to operate pursuant to the rule and continue to comply with
Rules 18a-1, 18a-3, and 18a-4 for two months after the end of the month
in which the firm provides the notice or for a shorter period of time
as granted by the Commission by order subject to any conditions imposed
by the Commission. The requirement that the firm continue complying
with the Commission's rules for a period of time after making the
election is designed to provide the Commission and the CFTC with an
opportunity to examine the firm before it begins operating pursuant to
the alternative compliance mechanism and to prepare for the firm no
longer complying with the Commission's rules.
    As discussed above, paragraph (b)(3) requires a firm operating
pursuant to the rule to immediately notify the Commission and the CFTC
in writing if the SBSD fails to meet a condition in paragraph (a).
Further, paragraphs (d)(1) and (2) require a firm to provide written
notice to the Commission and the CFTC of its intent to operate pursuant
to the rule. Paragraph (e) of Rule 18a-10 provides that the notices
required by the rule must be sent by facsimile transmission to the
principal office of the Commission and the regional office of the
Commission for the region in which the security-based swap dealer has
its principal place of business or an email address to be specified
separately, and to the principal office of the CFTC in a manner
consistent with the notification requirements of the CFTC.\713\ The
paragraph also requires that notices include a brief summary of the
reason for the notice and the contact information of an individual who
can provide further information about the matter that is the subject of
the notice. This will facilitate the ability of the Commission and the
CFTC to follow-up with the firm and gather further information about
the matter that triggered the notice requirement.
---------------------------------------------------------------------------

    \713\ See 17 CFR 240.17a-11 (requiring a similar process to
provide notice to the Commission and the CFTC). See also Staff
Guidance for Filing Broker-Dealer Notices, Statements, and Reports,
available at https://www.sec.gov/divisions/marketreg/bdnotices.htm
(providing a fax number that broker-dealers may use to send these
notices).
---------------------------------------------------------------------------

E. Cross-Border Application of Capital, Margin, and Segregation
Requirements

1. Capital and Margin Requirements
    In 2013, the Commission preliminarily interpreted the Title VII
requirements associated with registration to apply generally to the
activities of registered entities. In reaching that preliminary
conclusion, the Commission did not concur with the views of certain
commenters that the Title VII requirements should not apply to the
foreign security-based swap activities of registered entities, stating
that such a view could be difficult to

reconcile with, among other things, the statutory language describing
the requirements applicable to SBSDs.\714\
---------------------------------------------------------------------------

    \714\ See Cross-Border Proposing Release, 78 FR at 30986.
---------------------------------------------------------------------------

a. Treatment of Cross-Border Transactions
    The Commission further preliminarily identified capital and margin
requirements as entity-level requirements, rather than requirements
specifically applicable to particular transactions. Entity-level
requirements primarily address concerns relating to the entity as a
whole, with a particular focus on safety and soundness of the entity to
reduce systemic risk in the U.S. financial system. The Commission
accordingly proposed to apply the entity-level requirements on a firm-
wide basis to address risks to the SBSD as a whole. The Commission did
not propose any exception from the application of the entity-level
requirements to SBSDs.\715\
---------------------------------------------------------------------------

    \715\ See 78 FR at 31011. The Commission similarly expressed the
preliminary view that MSBSPs should be required to adhere to the
entity-level requirements. See 78 FR at 31035.
---------------------------------------------------------------------------

    Commenters did not address the proposal to treat capital
requirements as entity-level requirements. The Commission continues to
believe these requirements must apply to the entity as a whole. In
reaching this conclusion, the Commission recognizes that the objective
of the capital rule for SBSDs is the same as the capital rule for
broker-dealers--to ensure that the entity maintains at all times
sufficient liquid assets to promptly satisfy its liabilities, and to
provide a cushion of liquid assets in excess of liabilities to cover
potential market, credit, and other risks.\716\ The tangible net worth
standard applicable to nonbank MSBSPs is intended to be applied to the
entity as a whole to ensure the MSBSP's solvency is based on tangible
assets. Therefore, the Commission is also treating the nonbank MSBSP
capital requirements as entity-level requirements.
---------------------------------------------------------------------------

    \716\ See Cross-Border Proposing Release, 78 FR at 31011.
---------------------------------------------------------------------------

    With respect to margin, a commenter pointed out that ``the
application and enforcement of margin requirements applies on a
transaction-by-transaction basis and the calculation of margin depends
on the circumstances of a particular [security-based swap].'' \717\
Another commenter opposed characterizing margin as an entity-level
requirement due to a concern that doing so could result in a
substituted compliance determination where firms could ``comply with
only a comparable foreign regime in every circumstance, regardless of
who they transact with or where the transactions occur.'' \718\ The
commenter advocated that the Commission ``either treat margin as a
transaction-level requirement or not permit substituted compliance in
these transactions.'' A number of commenters requested that margin be
treated as a transaction-level requirement for consistency with other
domestic and foreign regulators.\719\ Some commenters also argued there
could be costs and operational complications resulting from subjecting
a foreign registrant to both Commission and home country margin
requirements.\720\
---------------------------------------------------------------------------

    \717\ See Letter from Kenneth E. Bentsen, Jr., President, SIFMA,
Walt Lukken, President and Chief Executive Officer, Futures Industry
Association, and Richard M. Whiting, Executive Officer and General
Counsel, The Financial Services Roundtable (Aug. 21, 2013) (``SIFMA
8/21/2013 Letter'').
    \718\ See Letter from Dennis M. Kelleher, President and Chief
Executive Officer, Stephen W. Hall, Securities Specialist, and
Katelynn O. Bradley, Attorney, Better Markets, Inc. (Aug. 21, 2013)
(``Better Markets 8/21/2013 Letter'').
    \719\ See, e.g., Letter from Koichi Ishikura, Executive Chief of
Operations for International Headquarters, Japan Securities Dealers
Association (Aug. 21, 2013) (``Japan SDA Letter'') (urging the
Commission and the CFTC to align their rules to avoid ``hamper[ing]
efficient management of derivatives transactions'').
    \720\ See, e.g., Letter from Sarah A. Miller, Chief Executive
Officer, Institute of International Bankers (Aug. 21, 2013) (``IIB
8/21/2013 Letter'') (stating that it would be ``cost-intensive'' to
``negotiate and execute separate credit support documentation, make
separate margin calculations and have separate operational
procedures across its swap and [security-based swap]
transactions'').
---------------------------------------------------------------------------

    Margin is designed to protect the nonbank SBSD or MSBSP from the
consequences of a counterparty's default.\721\ Permitting different
margin requirements based on the location of the counterparty is not
consistent with this objective. Further, treating margin as a
transaction-level requirement could cause those counterparties entering
into transactions that constitute the U.S. business of a nonbank
registrant to bear a greater burden in ensuring the safety and
soundness of the nonbank registrant than counterparties that are part
of the nonbank registrant's foreign business.\722\ The Commission also
concludes that treating margin solely as a transaction-level
requirement would not adequately further the objectives of using margin
to ensure the safety and soundness of nonbank registrants because it
could result in entities with global businesses collecting
significantly less collateral than would otherwise be required to the
extent that they are not required by local law to collect comparable
margin from their counterparties. This potential outcome could increase
the registrant's risk of failure if certain counterparties are not
required to post margin, especially during a period when the market is
already unstable.\723\
---------------------------------------------------------------------------

    \721\ The Commission acknowledges that the requirement that
nonbank SBSDs post variation margin to counterparties is primarily
designed to protect the counterparty from the consequences of the
nonbank SBSD's default. However, because the collection of variation
and initial margin by the nonbank SBSD is critical to the safety and
soundness of the nonbank SBSD, the Commission believes it
appropriate to treat margin as an entity-level requirement even
though the component of the rule requiring the nonbank SBSD to post
variation margin is designed to protect the counterparty.
    \722\ See Section 15F(e)(3)(A) of the Exchange Act (providing
that the Commission's statutorily mandated initial and variation
margin requirements shall ``help ensure the safety and soundness''
of the SBSD or MSBSP).
    \723\ Prior to the financial crisis, the ability to enter into
OTC derivatives transactions without having to deliver collateral
allowed counterparties to enter into OTC derivatives transactions
without the necessity of using capital to support the transactions.
So, when ``trigger events'' occurred during the financial crisis,
counterparties faced significant liquidity strains in seeking to
meet the requirements to deliver collateral. As a result, some
dealers experienced large uncollateralized exposures to
counterparties experiencing financial difficulty, which, in turn,
risked exacerbating the already severe market dislocation. See,
e.g., Orice M. Williams, Director, Financial Markets and Community
Investment, GAO, Systemic Risk: Regulatory Oversight and Recent
Initiatives to Address Risk Posed by Credit Default Swaps, GAO-09-
397T (Mar. 2009); GAO, Financial Crisis: Review of Federal Reserve
System Financial Assistance to American International Group, Inc.,
GAO-11-616 (Sept. 2011).
---------------------------------------------------------------------------

    In response to the comment that treating margin requirements as
entity-level requirements would permit nonbank SBSDs in every
circumstance to use foreign requirements to satisfy the margin
requirements, the Commission intends to consider certain factors to
mitigate this risk prior to making a substituted compliance
determination. More specifically, the Commission intends to consider
whether the foreign financial regulatory system requires registrants to
adequately cover their current and potential future exposure to OTC
derivatives counterparties, and ensures registrants' safety and
soundness, in a manner comparable to the applicable provisions arising
from the Exchange Act and its rules and regulations.\724\
---------------------------------------------------------------------------

    \724\ See paragraph (d)(5) of Rule 3a71-6, as amended.
---------------------------------------------------------------------------

    For all of these reasons, the Commission is treating the nonbank
SBSD margin requirements as entity-level requirements. The margin
requirements applicable to nonbank MSBSPs are intended to be applied to
the entity as a whole for the same reasons the margin requirements for
nonbank SBSDs are intended to apply to the entity as a whole.
Therefore, the Commission is also treating the nonbank

MSBSP margin requirements as entity-level requirements.
    The Commission preliminarily identified the SBSD segregation
requirements as transaction-level requirements.\725\ Consequently,
proposed Rule 18a-4 contained provisions to address the application of
the segregation requirements to cross-border security-based swap
transactions of foreign SBSDs. The applicable segregation requirements
are tailored depending on the type of registrant, security-based swap,
and customer. The Commission did not receive comments specifically
addressing this proposed treatment of segregation requirements.
However, one commenter stated that it ``support[s] the Commission's
overall proposal to distinguish between entity-level and transaction-
level requirements'' and that it ``generally support[s] the
Commission's proposed cross-border application of segregation
requirements to foreign SBSDs.'' \726\ The Commission continues to
treat segregation requirements as transaction-level requirements.
---------------------------------------------------------------------------

    \725\ See Cross-Border Proposing Release, 78 FR at 31010-31011.
    \726\ See IIB 8/21/2013 Letter.
---------------------------------------------------------------------------

Amendments to the Substituted Compliance Rule
    The Commission proposed to make substituted compliance potentially
available in connection with the requirements applicable to foreign
SBSDs pursuant to Section 15F of the Exchange Act, other than the
registration requirements. Because the capital and margin requirements
were grounded in Section 15F, substituted compliance generally would
have been available for those requirements under the proposal.\727\
Upon a Commission substituted compliance determination, a person would
be able to satisfy relevant capital or margin requirements by
substituting compliance with corresponding requirements under a foreign
regulatory system.
---------------------------------------------------------------------------

    \727\ See Cross-Border Proposing Release, 78 FR at 31085.
---------------------------------------------------------------------------

    The Commission subsequently adopted Rule 3a71-6, which provides
that substituted compliance is available with respect to the
Commission's business conduct requirements, and (rather than addressing
all requirements under Section 15F of the Exchange Act) reserved the
issue as to whether substituted compliance also would be available in
connection with other requirements under that statute.\728\ Rule 3a71-6
was amended to make substituted compliance available with respect to
the Commission's trade acknowledgment and verification
requirements.\729\ Today the Commission is amending Rule 3a71-6 to make
the nonbank SBSD and MSBSP capital and margin requirements available
for substituted compliance determinations.
---------------------------------------------------------------------------

    \728\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Release
No. 77617 (Apr. 14, 2016). See Cross-Border Proposing Release, 78 FR
at 31207.
    \729\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, Exchange Act Release No. 78011 (June 8,
2016), 81 FR 39808, 30143-44 (June 17, 2016).
---------------------------------------------------------------------------

    One commenter expressed concerns that there is no adequate legal or
policy justification for allowing substituted compliance.\730\ In
contrast to the implication of that comment, however, substituted
compliance does not constitute exemptive relief and does not excuse
registered SBSDs and MSBSPs from having to comply with the Commission's
capital and margin requirements. Instead, substituted compliance
provides an alternative method of satisfying those requirements under
Title VII.
---------------------------------------------------------------------------

    \730\ See Better Markets 11/19/2018 Letter. See also Harrington
11/19/2018 Letter.
---------------------------------------------------------------------------

i. Basis for Substituted Compliance in Connection With Capital and
Margin Requirements
    In light of the global nature of the security-based swap market and
the prevalence of cross-border transactions within that market, there
is the potential that the application of the Title VII capital and
margin requirements may duplicate or conflict with applicable foreign
requirements, even when the two sets of requirements implement similar
goals and lead to similar results. Such duplications or conflicts could
disrupt existing business relationships, and, more generally, reduce
competition and market efficiency.\731\
---------------------------------------------------------------------------

    \731\ See generally Business Conduct Standards for Security-
Based Swap Dealers and Major Security-Based Swap Participants, 81 FR
at 30073-74 (addressing the basis for making substituted compliance
available in the context of the business conduct requirements).
---------------------------------------------------------------------------

    To address those effects, the Commission concludes that under
certain circumstances it may be appropriate to allow for the
possibility of substituted compliance whereby foreign SBSDs and MSBSPs
may satisfy Section 15F(e) of the Exchange Act and Rules 18a-1, 18a-2,
and 18a-3 thereunder by complying with comparable foreign requirements.
Allowing for the possibility of substituted compliance in this manner
may help achieve the benefits of these capital and margin requirements
in a way that helps avoid regulatory duplication or conflict and hence
promotes market efficiency, enhances competition, and facilitates a
well-functioning global security-based swap market. Accordingly, Rule
3a71-6 is amended to identify Section 15F(e) of the Exchange Act and
Rules 18a-1, 18a-2, and 18a-3 thereunder as being eligible for
substituted compliance.\732\
---------------------------------------------------------------------------

    \732\ See paragraph (d) of Rule 3a71-6, as adopted. Paragraph
(a)(1) of Rule 3a71-6 provides that the Commission may,
conditionally or unconditionally, by order, make a determination
with respect to a foreign financial regulatory system that
compliance with specified requirements under that foreign financial
system by a registered SBSD and/or registered MSBSP, or class
thereof, may satisfy the corresponding requirements identified in
paragraph (d) of the rule that would otherwise apply.
---------------------------------------------------------------------------

    A number of comments addressed substituted compliance as it
specifically applies to the Commission's capital and margin
requirements. One commenter generally asked the Commission to
``recognize local margin requirements'' for foreign SBSDs,\733\ while
other commenters requested that the Commission coordinate with the
prudential regulators on substituted compliance determinations for
capital and margin.\734\ Similarly, another commenter requested that
the Commission jointly propose and adopt rules reflecting a harmonized
and unified approach to the cross-border application of the security-
based swaps and swaps provisions of Title VII of the Dodd-Frank
Act.\735\ While a joint rulemaking would present logistical challenges
due to timing differences in agencies' implementation of cross-border
regimes, the Commission staff has consulted and coordinated with the
CFTC, the prudential regulators, and foreign regulatory authorities on
the cross-border application of its rules, and plans to continue such
consultation and coordination during the substituted compliance
determination process.\736\
---------------------------------------------------------------------------

    \733\ See ISDA 1/23/2013 Letter.
    \734\ See Center for Capital Markets Competitiveness, Chamber of
Commerce 11/19/2018 Letter; ICI 11/19/2018 Letter; SIFMA 8/21/2013
Letter.
    \735\ See Letter from Walt L. Lukken, President and Chief
Executive Officer, Futures Industry Association (Nov. 29, 2018)
(``FIA 11/29/2018 Letter'').
    \736\ Section 712(a)(2) of the Dodd-Frank Act provides in part
that the Commission shall ``consult and coordinate to the extent
possible with the [CFTC] and the prudential regulators for the
purposes of assuring regulatory consistency and comparability, to
the extent possible.''
---------------------------------------------------------------------------

    A few commenters sought blanket substituted compliance
determinations that would automatically grant substituted compliance
without requiring an independent comparability determination with
respect to firms subject to foreign capital or margin requirements that
are consistent with

certain international standards.\737\ In contrast, another commenter
recommended that the Commission not consider consistency with the
prudential regulators, international standards, and foreign regulators
when making substituted compliance determinations.\738\ In response to
these comments, the Commission believes it is appropriate to analyze
directly a foreign jurisdiction's capital and margin requirements. In
particular, jurisdictions may customize their capital and margin
requirements to local markets and activities. In addition, Rule 3a71-6
provides that the Commission's substituted compliance determination
will take into consideration the effectiveness of the supervisory
compliance program administered and the enforcement authority exercised
by the foreign regulatory authority, which are expected to vary among
foreign jurisdictions. Consequently, the analysis of any particular
foreign jurisdiction's capital and margin requirements will be fact
specific and therefore a ``blanket approach'' would not be appropriate.
---------------------------------------------------------------------------

    \737\ See, e.g., Citigroup 4/24/2018 Meeting; IIB/SIFMA Letter;
IIB 11/19/2018 Letter; ISDA 11/19/2018 Letter; SIFMA 3/12/2014
Letter; SIFMA 11/19/2018 Letter.
    \738\ See Harrington 11/19/2018 Letter.
---------------------------------------------------------------------------

    Another commenter sought an exemption for foreign firms with
respect to the Commission's margin requirements (among other
requirements) pursuant to which they could comply with local
requirements that are not comparable to U.S. requirements, provided the
aggregate notional value of swaps in the jurisdictions where this
exemption is used does not exceed 15% of the firm's total swap
activities.\739\ The Commission does not believe such an exemption
would be appropriate because it could negatively impact the safety and
soundness of the firm if the local requirements were less rigorous than
the Commission's requirements.
---------------------------------------------------------------------------

    \739\ See SIFMA 8/21/2013 Letter.
---------------------------------------------------------------------------

ii. Comparability Criteria, and Consideration of Related Requirements
    The Commission will endeavor to take a holistic approach in
determining the comparability of foreign requirements for substituted
compliance purposes, focusing on regulatory outcomes as a whole rather
than on requirement-by-requirement similarity.\740\ The Commission's
comparability assessments associated with Section 15F(e) of the
Exchange Act and Rules 18a-1, 18a-2, and 18a-3 thereunder accordingly
will consider whether, in the Commission's view, the foreign regulatory
system achieves regulatory outcomes that are comparable to the
regulatory outcomes associated with the capital and margin
requirements. More specifically, paragraph (a)(2)(i) of Rule 3a71-6
provides that the Commission's substituted compliance determination
will take into account factors that the Commission determines
appropriate, such as, for example, ``the scope and objectives of the
relevant foreign regulatory requirements . . . , as well as the
effectiveness of the supervisory compliance program administered, and
the enforcement authority exercised, by a foreign financial regulatory
authority or authorities in such system to support its oversight of
such foreign security-based swap entity (or class thereof) or of the
activities of such security-based swap entity (or class thereof).''
---------------------------------------------------------------------------

    \740\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 30078-
79.
---------------------------------------------------------------------------

    In reviewing applications, the Commission may determine to conduct
its comparability analyses regarding the capital and margin
requirements in conjunction with comparability analyses regarding other
Exchange Act requirements that promote risk management in connection
with SBSDs and MSBSPs. Accordingly, depending on the applicable facts
and circumstances, the comparability assessment associated with the
capital and margin requirements may constitute part of a broader
assessment of the foreign regulatory system's risk mitigation
requirements, and the applicable comparability assessments may be
conducted at the level of those risk mitigation requirements as a
whole. Commenters generally requested additional guidance regarding the
criteria the Commission would consider when making a substituted
compliance determination.\741\ Such criteria have been set forth in the
final rule as discussed below.
---------------------------------------------------------------------------

    \741\ See, e.g., Letter from Americans for Financial Reform
(Aug. 22, 2013) (``Americans for Financial Reform 8/22/2013
Letter''); Letter from Futures and Options Association (Aug. 21,
2013) (``Futures and Options Association Letter''). See also
Capital, Margin, and Segregation Comment Reopening, 83 FR at 53018-
19 (soliciting comment on potential rule language that would modify
the proposal in this manner).
---------------------------------------------------------------------------

Comparability Criteria for Nonbank SBSD Capital Requirements
    Rule 3a71-6 provides that prior to making a substituted compliance
determination regarding SBSD capital requirements, the Commission
intends to consider (in addition to any conditions imposed), whether
the capital requirements of the foreign financial regulatory system are
designed to help ensure the safety and soundness of registrants \742\
in a manner that is comparable to the applicable provisions arising
under the Exchange Act and its rules and regulations.\743\ Under this
provision, the Commission would analyze whether the capital and other
prudential requirements of the foreign jurisdiction from an outcome
perspective help ensure the safety and soundness of the registrants in
a manner that is comparable to the applicable provisions arising under
the Exchange Act and its rules and regulations.
---------------------------------------------------------------------------

    \742\ See Section 15F(e)(3)(A) of the Exchange Act (providing
that the capital requirements for SBSDs shall ``help ensure the
safety and soundness'' of the SBSD).
    \743\ See paragraph (d)(4)(i) of Rule 3a71-6, as amended.
---------------------------------------------------------------------------

Comparability Criteria for Nonbank MSBSP Capital Requirements
    Nonbank MSBSPs are subject to a tangible net worth standard, rather
than a net liquid assets test. This different standard recognizes that
the entities required to register as nonbank MSBSPs may engage in a
diverse range of business activities different from, and broader than,
the securities activities conducted by stand-alone broker-dealers or
nonbank SBSDs. In light of these considerations, Rule 3a71-6 provides
that prior to making a substituted compliance determination regarding
MSBSP capital requirements, the Commission intends to consider (in
addition to any conditions imposed), whether the capital requirements
of the foreign financial regulatory system are comparable to the
applicable provisions arising under the Exchange Act and its rules and
regulations.\744\
---------------------------------------------------------------------------

    \744\ See paragraph (d)(4)(ii) of Rule 3a71-6, as amended.
---------------------------------------------------------------------------

Comparability Criteria for Nonbank SBSD and MSBSP Margin Requirements
    Obtaining collateral is one of the ways OTC derivatives dealers
manage their credit risk exposure to OTC derivatives counterparties.
Prior to the financial crisis, in certain circumstances, counterparties
were able to enter into OTC derivatives transactions without having to
deliver collateral. When ``trigger events'' occurred during the
financial crisis, those counterparties faced significant liquidity
strains when they were required to deliver collateral.
    In light of these considerations, Rule 3a71-6 provides that prior
to making a substituted compliance determination regarding SBSD margin
requirements, the Commission intends to consider (in addition to any
conditions imposed) whether the foreign financial regulatory

system requires registrants to adequately cover their current and
future exposure to OTC derivatives counterparties,\745\ and ensures
registrants' safety and soundness,\746\ in a manner comparable to the
applicable provisions arising under the Exchange Act and its rules and
regulations.\747\
---------------------------------------------------------------------------

    \745\ See Section 15F(e)(3) of the Exchange Act (stating that
the margin requirements adopted under Section 15F(e)(2) of the
Exchange Act must, among other things, ``be appropriate for the risk
associated with the non-cleared security-based swaps held as a
[SBSD] or [MSBSP]'').
    \746\ See Section 15F(e)(3) of the Exchange Act (stating that
the margin requirements adopted under Section 15F(e)(2) of the
Exchange Act must, among other things, ``help ensure the safety and
soundness of the [SBSD] or [MSBSP]'').
    \747\ See paragraph (d)(5)(i) of Rule 3a71-6, as amended.
---------------------------------------------------------------------------

    Similarly, Rule 3a71-6 provides that prior to making a substituted
compliance determination regarding MSBSP margin requirements, the
Commission intends to consider (in addition to any conditions imposed)
whether the foreign financial regulatory system requires registrants to
adequately cover their current exposure to OTC derivatives
counterparties, and ensures registrants' safety and soundness, in a
manner comparable to the applicable provisions arising under the
Exchange Act and its rules and regulations.\748\
---------------------------------------------------------------------------

    \748\ See paragraph (d)(5)(ii) of Rule 3a71-6, as amended.
---------------------------------------------------------------------------

2. Segregation Requirements
a. Treatment of Cross-Border Transactions
    As discussed above, the Commission proposed to treat the
segregation requirements of Section 3E of the Exchange Act and proposed
Rule 18a-4 as transaction-level requirements. Further, these
requirements were not available for substituted compliance
determinations. However, proposed Rule 18a-4 included provisions that
addressed the applicability of these requirements with respect to
different types of cross-border transactions.\749\ These provisions in
proposed Rule 18a-4 applied to foreign SBSDs and MSBSPs that were not
dually registered as broker-dealers. Consequently, a broker-dealer SBSD
needed to treat cross-border transactions no differently than any other
types of transactions for purposes of the segregation requirements in
Section 3E of the Exchange Act and proposed Rule 18a-4.
---------------------------------------------------------------------------

    \749\ See Cross-Border Proposing Release, 78 FR at 31018-22.
---------------------------------------------------------------------------

    The cross-border provisions in proposed Rule 18a-4 for foreign
stand-alone and bank SBSDs and MSBSPs distinguished between entities
that were a U.S. branch or agency of a foreign bank, or neither of the
above, and between cleared or non-cleared security-based swap
transactions. The objective underlying these distinctions was to ensure
that U.S. customers of a foreign stand-alone or bank SBSD or MSBSP were
protected in the event the firm needed to be liquidated in a formal
proceeding. Consequently, the differing treatment of cross-border
transactions depending on these distinctions was tied to the applicable
bankruptcy or liquidation laws that would apply to a failed foreign
stand-alone or bank SBSD or MSBSP.
    A commenter expressed general support for the Commission's proposed
cross-border treatment of segregation requirements for foreign SBSDs as
``consistent with the objective of applying segregation requirements so
they work in tandem with applicable insolvency laws.'' \750\ Another
commenter believed the Commission intended to make segregation
requirements eligible for substituted compliance, and asked the
Commission to clarify this fact.\751\ The Commission is adopting the
approach as proposed that segregation is a transaction-level (rather
than entity-level) requirement, because the Commission believes
transaction-based rules are the best mechanism for protecting U.S.
customers, given that varying possible liquidation outcomes depending
on the type of registrant, security-based swap, and customer involved.
---------------------------------------------------------------------------

    \750\ See IIB 8/21/2013 Letter.
    \751\ See SIFMA 8/21/2013 Letter. See also IIB 11/19/2018 Letter
(requesting that in connection with collateral for cleared security-
based swaps, the Commission's segregation requirements should only
apply to transactions with U.S. persons, and the foreign SBSD should
be permitted to satisfy these requirements through substituted
compliance.)
---------------------------------------------------------------------------

    Another commenter generally requested substituted compliance for
all transaction-level requirements (which includes segregation
requirements) to mitigate the risk of duplicative and/or conflicting
regulatory requirements.\752\ The transaction-based approach to
segregation considers the risk of duplicative and/or conflicting
regulatory requirements, but without requiring a substituted compliance
application to be submitted. Similarly, another commenter asked for an
exemption from the Commission's omnibus segregation requirements for
foreign SBSDs (including foreign bank SBSDs) ``whose segregation and
custody of customer assets are subject to the supervision of a local
regulatory authority,'' because an insolvent or liquidated foreign SBSD
would be subject to banking regulations or home country law, rather
than SIPA or the U.S. Bankruptcy Code's stockbroker liquidation
provisions.\753\ However, the commenter's proposed approach does not
consider that the Commission's approach is designed to protect U.S.
customers of foreign SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \752\ See, e.g., Letter from Stuart J. Kaswell, Executive Vice
President & Managing Director, General Counsel, Managed Funds
Association, and Adam Jacobs, Director, Head of Markets Regulation,
Alternative Investment Management Association (Aug. 19, 2013)
(``MFA/AIMA 8/19/2013 Letter'').
    \753\ See IIB 8/21/2013 Letter.
---------------------------------------------------------------------------

    The same commenter requested that the Commission follow the
Department of Treasury's approach, which exempts banks from its
government securities dealer customer protection requirements if they
meet certain conditions and are subject to certain prudential regulator
rules. More specifically, the commenter requested a blanket exemption
from the Commission's omnibus segregation requirements for foreign
SBSDs that are foreign banks with a U.S. branch because they would be
liquidated under banking regulations instead of SIPA or the stockbroker
liquidation provisions. In response, the Commission recognizes that a
foreign SBSD that is not a registered broker-dealer but is a foreign
bank may not be eligible to be liquidated pursuant to the stockbroker
liquidation provisions, and as such, the foreign SBSD's insolvency
proceeding would be administered under U.S. or foreign banking
regulations. However, the Commission believes that due to existing
ring-fencing laws, imposing segregation requirements on such a foreign
SBSD with respect to certain security-based swap customers that are
U.S. persons in all circumstances, and with respect to security-based
swap customers regardless of U.S. person status when it receives funds
or other property arising out of a transaction with a U.S. branch or
agency of the foreign SBSD, will reduce the likelihood of U.S.
counterparties incurring losses by helping identify customers' assets
in an insolvency proceeding and would potentially minimize disruption
to the U.S. security-based swap market.
    A commenter requested that foreign SBSDs be exempted from
transaction-level requirements (including segregation) when transacting
with foreign funds managed by U.S. asset managers, because transaction-
level requirements primarily focus on protecting counterparties by
imposing certain obligations on both U.S. and foreign SBSDs.\754\ A
second commenter

stated that collateral segregation and disclosure requirements should
only apply to transactions with U.S. counterparties, so long as the
firm maintains a separate account for collateral collected from U.S.
persons as a way to protect U.S. counterparties in case of bankruptcy.
The commenter also requested that foreign branches of U.S. banks which
are not part of registered broker-dealers not be subject to segregation
requirements when transacting with non-U.S. persons, to ``mitigate the
competitive effects'' foreign branches may suffer relative to foreign
SBSDs that are subject to segregation requirements in a narrower set of
circumstances.
---------------------------------------------------------------------------

    \754\ See Letter from Karrie McMillan, General Counsel,
Investment Company Institute, and Dan Waters, Managing Director, ICI
Global (Aug. 21, 2013) (``ICI 8/21/2013 Letter'').
---------------------------------------------------------------------------

    In response to these comments, granting these exemption requests
would put U.S. customers' interests at risk in case of a foreign SBSD's
bankruptcy. A primary purpose of the Commission's segregation
requirements is to facilitate the prompt return of property to U.S.
customers and security-based swap customers either before or during a
liquidation if a registrant fails. The Commission is able to limit the
segregation rules applicable to U.S. branches of foreign banks to a
narrower set of transactions, because the applicable insolvency laws
enable a ring-fencing mechanism by which regulators may ring fence
creditor claims ``arising out of transactions had by them with'' the
U.S. branches or agencies of the foreign bank.\755\
---------------------------------------------------------------------------

    \755\ See 12 U.S.C. 3102(j).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission--as discussed below--is
adopting the substance of the proposed segregation cross-border
provisions in paragraph (e) of Rule 18a-4, but--as discussed in the
next section--the Commission is modifying the structure of the
paragraph by re-organizing it and making other non-substantive
modifications.
Final Cross-Border Provisions for Foreign Bank SBSDs
    A foreign bank SBSD that has a branch or agency in the United
States should not be eligible to be a debtor under the U.S. stockbroker
liquidation scheme.\756\ Instead, the foreign bank's U.S. branches and
agencies would likely be liquidated under federal or state banking law
which ``ring fences'' creditor claims ``arising out of transactions had
by them with'' the U.S. branches or agencies.\757\ With respect to a
foreign bank SBSD that has no branch or agency in the United States,
such entities probably would not be liquidated in the United States for
jurisdictional reasons. The treatment of U.S. customers in such a
liquidation is unknown because it depends on the laws of the
jurisdiction where the foreign SBSD is liquidated. However, many
jurisdictions' laws provide for ring fencing similar to U.S. bank
liquidation laws.
---------------------------------------------------------------------------

    \756\ See 11 U.S.C. 109(b)(3)(B).
    \757\ See, e.g., 12 U.S.C. 3102(j)(2); NY Banking Law Sec.
606(4)(a).
---------------------------------------------------------------------------

    The proposed cross-border segregation provisions for foreign bank
SBSDs were based on the understanding that ring fencing prioritized the
claims of U.S. creditors above the claims of foreign creditors (rather
than the actuality that both U.S. and foreign creditor claims arising
out of a transaction with U.S. branches and agencies receive priority).
Therefore, proposed Rule 18a-4 required a foreign bank SBSD with a U.S.
branch to comply with the segregation requirements in Section 3E of the
Exchange Act, and the rules and regulations thereunder (e.g., proposed
Rule 18a-4), with respect to cleared and non-cleared security-based
swap transactions only with U.S. persons. The proposed cross-border
provisions did not expressly address a foreign bank SBSD that has no
branch or agency in the United States.
    For the foregoing reasons, Rule 18a-4, as adopted, clarifies that
the segregation requirements of Section 3E of the Exchange Act, and the
rules and regulations thereunder, apply to a foreign bank SBSD (i.e., a
foreign bank, savings bank, cooperative bank, savings and loan
association, building and loan association, or credit union): (1) With
respect to a security-based swap customer that is a U.S. person
(regardless of which branch or agency the customer's transactions arise
out of), and (2) with respect to a security-based swap customer that is
not a U.S. person if the foreign bank SBSD holds funds or other
property arising out of a transaction had by such person with a U.S.
branch or agency of the foreign SBSD.\758\ Thus, the final cross-border
provisions for foreign bank SBSDs expressly account for foreign bank
SBSDs that do not have a U.S. branch and for foreign customers who
transact with a U.S. branch of a foreign bank SBSD and, therefore, may
be protected by U.S. ring fencing laws along with U.S. customers.
---------------------------------------------------------------------------

    \758\ See paragraph (e)(1)(i) of Rule 18a-4, as adopted.
---------------------------------------------------------------------------

    The Commission also proposed that the foreign bank SBSD maintain a
special account designated for the exclusive benefit of U.S. security-
based swap customers.\759\ However, this language is removed as
extraneous text because Rule 18a-4, as adopted, already requires SBSDs
to maintain a special reserve account for the exclusive benefit of
security-based swap customers.\760\
---------------------------------------------------------------------------

    \759\ See Cross-Border Proposing Release, 78 FR at 31022.
    \760\ See paragraph (c)(1) of Rule 18a-4, as adopted.
---------------------------------------------------------------------------

Final Cross-Border Provisions for Foreign Stand-Alone SBSDs
    A foreign stand-alone SBSD should be subject to the U.S. Bankruptcy
Code's stockholder liquidation provisions. In particular, Section 3E(g)
of the Exchange Act provides ``customer'' status under the stockbroker
liquidation provisions to all counterparties to cleared security-based
swaps, making no distinction between U.S. and non-U.S. customers or
counterparties.\761\ If the Commission were to apply the segregation
requirements only to assets of U.S. customers but not to assets of non-
U.S. customers, the amount of assets segregated (i.e., the assets of
U.S. person customers) could be insufficient to satisfy the combined
priority claims of both U.S. and non-U.S. customers in a stockbroker
liquidation proceeding, potentially resulting in losses to U.S.
customers. Therefore, proposed Rule 18a-4 required a foreign stand-
alone SBSD to comply with the segregation requirements of Section 3E of
the Exchange Act, and the rules and regulations thereunder, with
respect to assets received from both U.S. and non-U.S. persons if the
foreign stand-alone SBSD received collateral from at least one U.S.
person to secure cleared security-based swaps.
---------------------------------------------------------------------------

    \761\ See also 11 U.S.C. 741(2).
---------------------------------------------------------------------------

    Section 3E(g) of the Exchange Act also extends customer protection
under the stockbroker liquidation provisions to collateral delivered as
margin for non-cleared security-based swaps if the collateral is
subject to a customer protection requirement under Section 15(c)(3) of
the Exchange Act or a segregation requirement. Therefore, proposed Rule
18a-4 required a foreign stand-alone SBSD to comply with the
segregation requirements of Section 3E of the Exchange Act, and the
rules and regulations thereunder, with respect to non-cleared security-
based swap transactions with U.S. persons (but not with non-U.S.
persons). Under that approach, the collateral posted by U.S. person
counterparties was subject to a segregation requirement and therefore
these persons would have ``customer'' status under the stockbroker
liquidation

provisions.\762\ Collateral posted by non-U.S. persons was not subject
to a segregation requirement and, therefore, these persons would not
have ``customer'' status.
---------------------------------------------------------------------------

    \762\ Section 3E(g) of the Exchange Act provides that the term
``customer,'' as defined in Section 741 of title 11 of the U.S.
Code, excludes any person, to the extent that such person has a
claim based on any open repurchase agreement, open reverse
repurchase agreement, stock borrowed agreement, non-cleared option,
or non-cleared security-based swap except to the extent of any
margin delivered to or by the customer with respect to which there
is a customer protection requirement under Section 15(c)(3) of the
Exchange Act or a segregation requirement.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting the substance of the
proposed cross-border provisions for foreign stand-alone SBSDs.\763\
However, the Commission is making a clarifying modification to more
clearly state that these provisions apply to a foreign SBSD that is not
a broker-dealer and is not a foreign bank, savings bank, cooperative
bank, savings and loan association, building and loan association, or
credit union.\764\
---------------------------------------------------------------------------

    \763\ See paragraph (e)(1)(ii) of Rule 18a-4, as adopted.
    \764\ Throughout paragraph (e) of Rule 18a-4, as adopted, the
phrase ``foreign bank, foreign savings bank, foreign cooperative
bank, foreign savings and loan association, foreign building and
loan association, or foreign credit union'' parallels and is
intended to have the same meeting as the phrase ``foreign bank,
savings bank, cooperative bank, savings and loan association,
building and loan association, or credit union'' in 11 U.S.C.
109(b)(3)(B).
---------------------------------------------------------------------------

Final Cross-Border Provisions for Foreign MSBSPs
    The omnibus segregation requirements in Rule 18a-4 do not apply to
MSBSPs. Consequently, if an MSBSP holds collateral for a security-based
swap, it will be subject only to: (1) Paragraph (d) of Rule 18a-4,
which requires an SBSD or MSBSP to provide notice of the customer's
right to require segregation, and (2) Section 3E(f)(1)(B) of the
Exchange Act, which provides that, if requested by the security-based
swap customer, the MSBSP shall separately segregate the funds or other
property for the benefit of the security-based swap customer.
Consequently, proposed Rule 18a-4 excepted a foreign MSBSP that is not
a broker-dealer from the segregation requirements in Section 3E of the
Exchange Act and the disclosure requirements in paragraph (d) of Rule
18a-4 with respect to assets received from a security-based swap
customer that is not a U.S. person to secure security-based swaps.\765\
The Commission did not receive comment on this proposed exception and
is adopting the substance of the proposal.\766\
---------------------------------------------------------------------------

    \765\ See Cross-Border Proposing Release, 78 FR at 31035.
    \766\ See paragraph (e)(2) of Rule 18a-4, as adopted.
---------------------------------------------------------------------------

b. Disclosure Requirements
    The Commission proposed disclosure requirements for foreign SBSDs
because the treatment of security-swap customers in a liquidation
proceeding may vary depending on the foreign SBSD's status and the
insolvency laws applicable to the foreign SBSD. In particular, a
foreign SBSD was required to disclose to a U.S. security-based swap
customer--prior to accepting any assets from the person with respect to
a security-based swap--the potential treatment of the assets segregated
by the foreign SBSD pursuant to Section 3E of the Exchange Act, and the
rules and regulations thereunder, in insolvency proceedings under U.S.
bankruptcy law and applicable foreign insolvency laws.\767\ The intent
was to require that a foreign SBSD disclose whether it could be subject
to the stockbroker liquidation provisions in the U.S. Bankruptcy Code,
whether the segregated funds or other property could be afforded
customer property treatment under the U.S. bankruptcy law, and any
other relevant considerations that may affect the treatment of the
assets segregated under Section 3E of the Exchange Act in such foreign
SBSD's insolvency proceedings. One commenter responded to the
Commission's request for comment by opposing applying segregation-
related disclosure requirements to transactions with non-U.S.
counterparties, because of the Commission's more limited interest in
non-U.S. counterparties. The Commission agrees and is adopting its
proposal to limit the disclosure requirement to counterparties that are
U.S. persons.
---------------------------------------------------------------------------

    \767\ See Cross-Border Proposing Release, 78 FR at 31022.
---------------------------------------------------------------------------

    In addition, the Commission is modifying the rule text to clarify
that the disclosures must be made in writing. As discussed above, the
Commission intended that the matters to be disclosed would inform the
counterparty about the application of U.S. bankruptcy and foreign
insolvency laws to segregated funds or other property the SBSD will
hold for the counterparty. The Commission does not believe that an SBSD
could provide disclosure on these complex issues in a manner that, in
fact, would inform the counterparty about them other than in writing.
Therefore, the final rule explicitly provides that the disclosure must
be in writing.
    For the foregoing reasons, the Commission is adopting the
disclosure requirements with the modifications described above.\768\
---------------------------------------------------------------------------

    \768\ See paragraph (e)(3) of Rule 18a-4, as adopted.
---------------------------------------------------------------------------

c. Non-Substantive Modifications
    The Commission is making several organizational, clarifying, and
non-substantive modifications to the proposed cross-border segregation
rule text.
    Paragraph (e) of Rule 18a-4 now has a simplified organizational
structure compared to paragraphs (e) and (f) of proposed Rule 18a-4.
First, the rule text no longer explicitly states that a foreign broker-
dealer SBSD is subject to Section 3E of the Exchange Act and the
Commission's security-based swap segregation requirements, even though
broker-dealers continue to be subject to the segregation
requirements.\769\ The Commission's security-based swap segregation
requirements applicable to stand-alone broker-dealers are located in
paragraph (p) of Rule 15c3-3.\770\ Thus, all broker-dealers registered
with the Commission are subject to Rule 15c3-3, and there are no cross-
border exemptions from Rule 15c3-3, even if the broker-dealer is also a
foreign SBSD or MSBSP. The proposed rule text was intended to identify
exemptions from the Commission's security-based swap segregation rules.
As a result, it is not necessary to explicitly state that broker-
dealers are subject to Rule 15c3-3 even if they are also foreign SBSDs
or MSBSPs.
---------------------------------------------------------------------------

    \769\ See Cross-Border Proposing Release, 78 FR at 31020-21. As
discussed below, the Commission is re-organizing paragraph (e) and
making other non-substantive modifications to the paragraph.
    \770\ See Capital, Margin, and Segregation Comment Reopening, 83
FR at 53016 (soliciting comment on potential rule language that
would modify the proposal in this manner).
---------------------------------------------------------------------------

    Second, rather than categorizing the applicable rules by cleared
and non-cleared security-based swaps, and then further subdividing them
by entity type, the rule paragraphs are now categorized by entity type.
In addition, instead of a single paragraph addressing the cross-border
non-cleared security-based swap segregation treatment of all foreign
SBSDs that are not broker-dealers, there are separate paragraphs
addressing foreign SBSDs that are not broker-dealers and are not
foreign banks, and foreign SBSDs that are not broker-dealers and are
foreign banks. Since a foreign SBSD that is neither a broker-dealer nor
a foreign bank is the only entity that must apply a different rule
depending on whether the security-based swaps are cleared or non-
cleared, this is the only paragraph that requires

subparagraphs for cleared and non-cleared security-based swaps.\771\
---------------------------------------------------------------------------

    \771\ See paragraph (e)(1)(ii)(A) and (B) of Rule 18a-4, as
adopted.
---------------------------------------------------------------------------

    Paragraph (e)(2) of Rule 18a-4, which prescribes the segregation
requirements applicable to foreign MSBSPs, is now structured in the
affirmative instead of the negative by identifying which requirements
apply to foreign MSBSPs instead of identifying which requirements
``shall not'' apply to foreign MSBSPs.\772\
---------------------------------------------------------------------------

    \772\ See paragraph (e)(2) of Rule 18a-4, as adopted.
---------------------------------------------------------------------------

    The Commission is also making several changes to simplify and
clarify the rule text. Instead of including a cross-reference to the
rule defining ``foreign security-based swap dealer,'' ``foreign major
security-based swap participant,'' and ``U.S. person'' each time these
terms appear, definitions of these terms are added to the
``Definitions'' section in Rule 18a-4.\773\ With respect to SBSDs,
``counterparty'' is replaced with ``security-based swap customer'' for
consistency with the rest of Rule 18a-4 which uses the defined term
``security-based swap customer.'' To eliminate ambiguity about the term
``registered'' SBSD, MSBSP, or broker-dealer, the rule text now
clarifies that ``registered'' refers to an entity registered with the
Commission by explicitly cross-referencing the section of the Exchange
Act that the entity would register under (i.e., ``foreign [SBSD or
MSBSP] registered under Section 15 of the Exchange Act (15 U.S.C. 78o-
10)'' or ``broker or dealer registered under Section 15 of the Exchange
Act (15 U.S.C. 78o)'').
---------------------------------------------------------------------------

    \773\ See paragraphs (a)(3), (4), and (10) of Rule 18a-4, as
adopted.
---------------------------------------------------------------------------

    Several simplifying changes are being made to the cross-border
segregation rule text. Throughout the rule text, the phrase ``any
assets received . . . to margin, guarantee, or secure a [cleared or
non-cleared] security-based swap (including money, securities, or
property accruing to such [U.S. person or non-U.S. person] counterparty
as the result of such a security-based swap transaction)'' is
simplified to better align with the language used in other rule text.
Thus, paragraph (e)(1)(ii) of Rule 18a-4, as adopted, now references
``funds or other property for [a or at least one] security-based swap
customer that is a U.S. person with respect to a [cleared or non-
cleared] security-based swap transaction'' to parallel Rule 18a-4's
definition of a security-based swap customer. For the same reason,
paragraph (e)(3) of Rule 18a-4, as adopted, now references ``funds or
other property'' instead of ``assets,'' references ``funds or other
property received, acquired, or held for'' instead of ``assets
collected from,'' and references ``receiving, acquiring, or holding
funds or other property'' instead of ``accepting any assets.'' Finally,
paragraph (e)(2) of Rule 18a-4, as adopted, now omits the reference to
``assets . . . to margin, guarantee, or secure a security-based swap''
as extraneous.\774\
---------------------------------------------------------------------------

    \774\ Further, the phrase ``[S]ection 3E(f) of the Act (15
U.S.C. 78c-5(f))'' is replaced with ``section 3E of the Act (15
U.S.C. 78c-5)'' in paragraph (e)(2) of Rule 18a-4, as adopted, for
consistency with the other subparagraphs under paragraph (e) of Rule
18a-4, which reference Section 3E of the Exchange Act. In addition,
the following stylistic, corrective, and punctuation changes are
being made to improve the rule's readability: (1) Adding or
elaborating on paragraph and subparagraph headings; (2) replacing
``who'' with ``that'' in paragraphs (e)(1)(i) and (e)(3) of Rule
18a-4; (3) replacing the word ``shall'' with the word ``must'' in
paragraph (e)(3) of Rule 18a-4; (4) replacing ``the U.S. bankruptcy
law'' with ``U.S. bankruptcy law'' in paragraph (e)(3) of Rule 18a-
4; and (5) replacing ``Section 3E of the Act'' and ``Section 3E of
the Act, and the rules and regulations thereunder'' with ``section
3E of the Act (15 U.S.C. 3E( ), and the rules and regulations
thereunder,'' the second and third times it appears in paragraph
(e)(3) for completeness and for consistency with the first reference
to ``Section 3E of the Act (15 U.S.C. 78c-5), and the rules and
regulations thereunder'' in the same paragraph.
---------------------------------------------------------------------------

F. Delegation of Authority

    The Commission is amending its rules governing delegations of
authority to the Director of the Division of Trading and Markets
(``Division''). The amendments delegate authority to the Division with
respect to requirements in Rules 18a-1 and 18a-4, and are modeled on
preexisting delegations of authority with respect to requirements in
parallel Rules 15c3-1 and 15c3-3 under 17 CFR 200.30-3 (``Rule 30-3'').
The amendments also add additional delegations of authority with
respect to Rule 18a-1d (Satisfactory Subordinated Loan Agreements), as
well as to Appendix E to Rule 15c3-1 and paragraph (d) to Rule 18a-1
with respect to the approval of the temporary use of a provisional
model. These delegations are intended to permit Commission staff to
perform functions under Rule 18a-1d for stand-alone SBSDs that are
currently performed by a broker-dealer's DEA (i.e., FINRA) under
Appendix D to Rule 15c3-1.\775\
---------------------------------------------------------------------------

    \775\ The Commission is the examining authority for stand-alone
SBSDs because they are not required to be a member of an SRO.
---------------------------------------------------------------------------

    The amendments to Rule 30-3 authorize the Director of the Division
to: (1) Review amendments to applications of SBSDs filed pursuant to
paragraph (d) of Rule 18a-1 and to approve such amendments,
unconditionally or subject to specified terms and conditions; \776\ (2)
impose additional conditions, pursuant to paragraph (d)(9)(iii) of Rule
18a-1 on an SBSD that computes certain of its net capital deductions
pursuant to paragraph (d) of Rule 18a-1; \777\ (3) require that an SBSD
provide information to the Commission pursuant to paragraph (d)(2) of
Rule 18a-1; \778\ (4) pursuant to Rule 15c3-3 and Rule 18a-4, find and
designate as control locations for purposes of paragraph (p)(2)(ii)(E)
of Rule 15c3-3, and paragraph (b)(2)(v) of Rule 18a-4, certain broker-
dealer and SBSD accounts which are adequate for the protection of
customer securities; \779\ (5) pursuant to paragraph (b)(6) of Rule
18a-1d, approve prepayment of a subordinated loan; \780\ (6) pursuant
to paragraph (c)(4) of Rule 18a-1d, approve prepayment of a revolving
subordinated loan agreement; \781\ (7) pursuant to paragraph (c)(5) of
Appendix D to Rule 18a-1, examine any proposed subordinated loan
agreement filed by a security-based swap dealer and find the agreement
acceptable; \782\ (8) determine, pursuant Sec.  240.18a-1(d)(7)(ii),
that the notice a security-based swap dealer must provide to the
Commission pursuant to Sec.  240.18a-1(d)(7)(i) will become effective
for a shorter or longer period of time; \783\ and (9) approve, pursuant
to Sec.  240.15c3-1e(a)(7)(ii) and Sec.  240.18a-1(d)(5)(ii) of this
chapter, the temporary use of a provisional model, in whole or in part,
unconditionally or subject to any conditions or limitations.\784\ In
addition, paragraph (a)(7)(i)'s cross-reference to Rule 15c3-1 is
corrected to reference paragraph (a)(6)(iii)(B) instead of paragraph
(a)(6)(iii)(E), and paragraph (a)(7)(iv)'s cross-reference to Rule
15c3-1 is corrected to reference paragraph (a)(1)(ii) instead of
paragraphs (f)(1)(i) and (ii).
---------------------------------------------------------------------------

    \776\ See paragraph (a)(7)(vi)(A) of Rule 30-3, as amended.
    \777\ See paragraph (a)(7)(vi)(C) of Rule 30-3, as amended.
    \778\ See paragraph (a)(7)(vi)(D) of Rule 30-3, as amended.
    \779\ See paragraph (a)(10)(i) of Rule 30-3, as amended.
    \780\ See paragraph (a)(7)(vii)(A) of Rule 30-3, as amended.
    \781\ See paragraph (a)(7)(vii)(B) of Rule 30-3, as amended.
    \782\ See paragraph (a)(7)(vii)(C) of Rule 30-3, as amended.
    \783\ See paragraph (a)(7)(vi)(E) of Rule 30-3, as amended.
    \784\ See paragraph (a)(7)(vi)(F) of Rule 30-3, as amended.
---------------------------------------------------------------------------

    These delegations of authority are intended to preserve Commission
resources and increase the effectiveness and efficiency of the
Commission's oversight of the financial responsibility rules for SBSDs
being adopted today under the authority of the Dodd-Frank

Act. Nevertheless, the Division may submit matters to the Commission
for its consideration, as it deems appropriate.
Administrative Law Matters
    The Commission finds, in accordance with the Administrative
Procedure Act (``APA''),\785\ that these amendments relate solely to
agency organization, procedure, or practice, and do not relate to a
substantive rule. Accordingly, the provisions of the APA regarding
notice of rulemaking, opportunity for public comment, and publication
of the amendment prior to its effective date are not applicable. For
the same reason, and because this amendment does not substantively
affect the rights or obligations of non-agency parties, the provisions
of the Small Business Regulatory Enforcement Fairness Act,\786\ are not
applicable. Additionally, the provisions of the Regulatory Flexibility
Act, which apply only when notice and comment are required by the APA
or other law,\787\ are not applicable. Further, because this amendment
imposes no new burdens on private persons, the Commission does not
believe that the amendment will have any anti-competitive effects for
purposes of Section 23(a)(2) of the Exchange Act.\788\ Finally, this
amendment does not contain any collection of information requirements
as defined by the Paperwork Reduction Act of 1980, as amended.
---------------------------------------------------------------------------

    \785\ See 5 U.S.C. 553(b)(3)(A).
    \786\ See 5 U.S.C. 804(3)(C).
    \787\ See 5 U.S.C. 603.
    \788\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

III. Explanation of Dates

A. Effective Date

    These final rules will be effective 60 days after the date of this
release's publication in the Federal Register.

B. Compliance Dates

    In the release establishing the registration process for SBSDs and
MSBSPs, the Commission adopted a compliance date for SBSD and MSBSP
registration requirements (the ``Registration Compliance Date'') that
was tied to four then-pending rule sets.\789\ Two of those four rule
sets have been adopted \790\ and the Commission is adopting today in
this release one of the remaining two rule sets. The Commission
believes it appropriate to set the Registration Compliance Date in this
release rather than in final rules establishing recordkeeping and
reporting requirements for SBSDs and MSBSPs.\791\ Accordingly, the
Registration Compliance Date is 18 months after the later of: (1) The
effective date of final rules establishing recordkeeping and reporting
requirements for SBSDs and MSBSPs; or (2) the effective date of final
rules addressing the cross-border application of certain security-based
swap requirements.\792\ Similarly, the compliance date for the rule
amendments and new rules being adopted in this release is 18 months
after the later of: (1) The effective date of final rules establishing
recordkeeping and reporting requirements for SBSDs and MSBSPs; or (2)
the effective date of final rules addressing the cross-border
application of certain security-based swap requirements. The Commission
believes this extended compliance date addresses commenters' concerns
about needing enough time to prepare for and come into compliance with
the new requirements.\793\ In this regard, the Commission notes that
commenters recommended a period of 18 to 24 months following adoption
of final rules for firms to come into compliance.\794\ With respect to
the capital requirements being adopted today, a commenter recommended
that SBSD capital requirements take effect at the later of: (1) 2 years
after the start of the margin implementation period; and (2) the
effective date of the swaps push-out rule, and that, once in effect,
SBSD capital standards be determined with reference to the transaction
activity of counterparties subject to then-applicable initial margin
requirements, taking into account the transition period in the BCBS/
IOSCO Paper.\795\ The compliance date being adopted today is a
reasonable amount of time to come into compliance with the new
requirements, given that it is triggered by the adoption of rules that
were only recently proposed. Consequently, in practice, the compliance
date will be more than 18 months from today's date.
---------------------------------------------------------------------------

    \789\ The Registration Compliance Date was set as the later of:
Six months after the date of publication in the Federal Register of
final rules establishing capital, margin, and segregation
requirements for SBSDs and MSBSPs; the compliance date of final
rules establishing recordkeeping and reporting requirements for
SBSDs and MSBSPs; the compliance date of final rules establishing
business conduct requirements under Sections 15F(h) and 15F(k) of
the Exchange Act; or the compliance date for final rules
establishing a process for a registered SBSD or MSBSP to make an
application to the Commission to allow an associated person who is
subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on the SBSD or MSBSP's behalf. See
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants; Final Rule, 80 FR at 48988.
    \790\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30081 (May 13,
2019); Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, Exchange Act Release No. 84858 (Dec. 19, 2018), 84 FR
4906, 4920 (Feb. 19, 2019).
    \791\ The Registration Compliance Date is also the compliance
date for final rules establishing business conduct requirements
under Sections 15F(h) and 15F(k) of the Exchange Act and for
acknowledgement and verification of security-based swap
transactions. Rule of Practice 194 was effective on April 22, 2019.
    \792\ The Commission proposed these rules on May 10, 2019, which
include rules and/or guidance regarding security-based swap
transactions ``arranged, negotiated, or executed'' by personnel
located in the United States, the cross-border scope of the SBSD de
minimis exception, the certification and opinion of counsel
requirement of Rule 15Fb2-1, the questionnaire and application
requirement of Rule 18a-5, and the cross-border application of the
statutory disqualification prohibition within Section 15F(b)(6) of
the Exchange Act. See Proposed Guidance and Rule Amendments
Addressing Cross-Border Application of Certain Security-Based Swap
Requirements, Exchange Act Release No. 85823 (May 10, 2019), 84 FR
24206 (May 24, 2019).
    \793\ See also Capital, Margin, and Segregation Comment
Reopening, 83 FR at 53019 (soliciting comment on potential rule
language that would modify the proposal in this manner).
    \794\ See, e.g., IIB 11/19/2018 Letter (18 months); Letter from
Karrie McMillan, General Counsel, Investment Company Institute (Aug.
13, 2012) (``ICI 8/13/2012 Letter'') (18-24 months); ICI 11/19/2018
Letter (24 months); ISDA 11/19/2018 Letter (18 months); Mizuho/ING
Letter (4 years); Morgan Stanley 11/19/2018 Letter (18 months);
SIFMA 11/19/2018 Letter (18 months).
    \795\ See Morgan Stanley 10/29/2014 Letter.
---------------------------------------------------------------------------

    Some commenters recommended that the Commission adopt a compliance
date that is shorter than 18 months.\796\ The Commission agrees that
the Title VII dealer regime should be stood up as expeditiously as
possible but must balance that objective with the need to provide firms
with a reasonable amount of time to adapt to the new regime.
Specifically, firms need time to familiarize themselves with the
requirements in the rules being adopted today and how they interact
with other security-based swap rules. Firms also need to make and
implement informed decisions about business structure and to develop
and build compliance systems and controls.
---------------------------------------------------------------------------

    \796\ See, e.g., Better Markets 11/19/2018 Letter (6 months);
Harrington 11/19/2018 Letter (1 month).
---------------------------------------------------------------------------

    Regarding the Commission's policy statement on the sequencing of
final rules governing security-based swaps,\797\ commenters recommended
establishing phase-in periods for each major new

requirement based on asset class and market participant type.\798\
Commenters also suggested imposing requirements on the relatively less
complex, more standardized, more liquid products and on interdealer
transactions before imposing requirements on more complex, less
standardized and less liquid products or transactions involving end
users and other smaller market participants.\799\ Another commenter
suggested grouping rulemakings into two categories in terms of the
applicable compliance date.\800\ Other commenters requested that the
Commission delay the compliance date for the rules being adopted today
until after SBSDs and MSBSPs are required to register with the
Commission.\801\ In contrast, a commenter recommended that there should
be a single compliance date with respect to the Commission's margin
rules for all relevant market participants after a reasonable
compliance period, arguing that a phased-in compliance schedule would
create unfairly inconsistent treatment among market participants.\802\
---------------------------------------------------------------------------

    \797\ See Statement of General Policy on the Sequencing of the
Compliance Dates for Final Rules Applicable to Security-Based Swaps
Adopted Pursuant to the Securities Exchange Act of 1934 and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange
Act Release No. 67177 (June 11, 2012), 77 FR 35625 (June 14, 2012).
Comments on the Sequencing Policy Statement which are relevant to
the Commission's capital, margin, and segregation requirements are
available at http://www.sec.gov/comments/s7-05-12/s70512.shtml.
    \798\ See ICI 8/13/2012 Letter; Letter from Jeff Gooch, Chief
Executive Officer, MarkitSERV (Aug. 13, 2012) (``MarkitSERV
Letter''); Letter from Kenneth E. Bentsen, Jr., Executive Vice
President, Public Policy and Advocacy, Securities Industry and
Financial Markets Association (Aug. 13, 2012) (``SIFMA 8/13/2012
Letter''); Letter from Douglas L. Friedman, General Counsel,
Tradeweb Markets LLC (Sept. 5, 2012) (``Tradeweb Letter''), Appendix
1 (supporting the CFTC's proposal to phase in compliance with
clearing, trade execution and trade reporting requirements by class
of market participant and asset class).
    \799\ See SIFMA 8/13/2012 Letter (recommending certain single-
name credit default swaps as examples of more liquid and
standardized products and total return swaps on equity securities or
loans as examples of less liquid and standardized products); ICI 8/
13/2012 Letter.
    \800\ See Letter from Chris Barnard (Aug. 13, 2012) (``Barnard
8/13/2012 Letter'').
    \801\ See ISDA 11/19/2018 Letter.
    \802\ See MFA 2/22/2013 Letter.
---------------------------------------------------------------------------

    The Commission does not believe it is necessary to phase in the
capital, margin, and segregation requirements by asset or market
participant type. The compliance date for the rules being adopted today
will be more than 18 months from today's date. The Commission believes
this will give entities adequate time to take the necessary steps to
comply with the new requirements. The Commission also does not believe
it would be appropriate to delay the compliance date for the
Commission's capital, margin, and segregation rules beyond the date
when SBSDs and MSBSPs must register with the Commission, because this
would undermine the Commission's ability to effectively regulate and
supervise these registrants.
    A variety of comments stated that the implementation of the margin
rules must be delayed in relation to domestic and foreign regulators,
international standard setters, and the development of market
infrastructure.\803\ Several other jurisdictions and regulators,
including the CFTC and the prudential regulators, have finalized margin
requirements and certain entities are now subject to these
requirements. Given this fact, coupled with a compliance date in excess
of 18 months, the Commission believes the industry will have adequate
time to come into compliance with the margin rules being adopted today.
---------------------------------------------------------------------------

    \803\ See Letter from Jason Shafer, Vice President/Senior
Counsel, Center for Bank Derivatives Policy, American Bankers
Association, and Cecilia Calaby, Executive Director and General
Counsel, American Bankers Association Securities Association (July
29, 2016) (``American Bankers Association Letter'') (asking U.S.
regulators to synchronize their margin rules' effective dates with
the European Union's schedule); ICI 11/24/2014 Letter (recommending
coordinating a longer phase-in period for variation margin with the
CFTC and the prudential regulators); IIB 11/19/2018 Letter
(requesting a delay in the compliance date for margin rules if the
compliance date falls before the final phase-in recommended by the
BCBS and IOSCO); ISDA 2/5/2014 Letter (recommending a 2 year phase-
in after final margin rules are adopted in the U.S., Europe, and
Japan); PIMCO Letter (generally); SIFMA 3/12/2014 Letter
(recommending a 2 year phase-in after final margin rules are adopted
in the U.S., Europe, and Japan).
---------------------------------------------------------------------------

    Several commenters addressed the timing of the implementation of
the Commission's margin rules relative to its clearing rules. A
commenter believed that the Commission should not implement the final
margin rules until after relevant mandatory central clearing is fully
implemented under the Dodd-Frank Act.\804\ Other commenters similarly
suggested that the non-cleared margin rules should be implemented after
clearing rules take effect.\805\ A commenter noted that mandatory
clearing has not been phased in across market participants and that
rules relating to margin for non-cleared transactions should not apply
to a particular market participant until the mandatory clearing
requirement applies to that participant.\806\
---------------------------------------------------------------------------

    \804\ See Sutherland Letter.
    \805\ See American Benefits Council, et al. 1/29/2013 Letter;
ISDA 1/23/2013 Letter.
    \806\ See Letter from Kyle Brandon, Managing Director, Director
of Research, Securities Industry and Financial Markets Association
(Jan. 13, 2015) (``SIFMA 1/13/2015 Letter'') (``[P]hasing in
uncleared [security-based swap] margin requirements too close in
time to clearing determinations could lead to such margin
requirements becoming effective for a certain class of [security-
based swap] before that class of [security-based swap] is required
to be cleared--effectively forcing clearing before the class is
ready, as the cost of engaging in uncleared [security-based swap]
transactions would be greater.''); SIFMA 3/12/2014 Letter.
---------------------------------------------------------------------------

    In response to these comments, the Commission does not believe it
would be appropriate to link the compliance date for the margin rules
to the implementation of mandatory clearing. The margin rule applies to
non-cleared security-based swaps and is designed to promote the safety
and soundness of nonbank SBSDs and nonbank MSBSPs and to protect their
counterparties. Therefore, the Commission believes the better approach
is to make the compliance date of the margin rule the same as the
Registration Compliance Date for SBSDs and MSBSPs. As discussed above,
both of these compliance dates will be 18 months after the later of:
(1) The effective date of final rules establishing recordkeeping and
reporting requirements for SBSDs and MSBSPs; or (2) the effective date
of final rules addressing the cross-border application of certain
security-based swap requirements.
    Another commenter suggested that non-cleared security-based swap
margin rules should become effective only after operational
requirements for non-cleared margin can be met, and submitted models
have been reviewed.\807\ A commenter recommended that the Commission
adopt a compliance date that is at least 2 years from the effective
date of a final capital rule to allow for sufficient time for the
Commission or FINRA to approve internal models for capital
purposes.\808\ As discussed above, the compliance date will be in
excess of 18 months after these rules are adopted. This should provide
sufficient time for the Commission to review the models of entities
that will register as nonbank SBSDs and whose models have not already
been approved. Moreover, as discussed above, the final capital rules
provide that the Commission can approve the temporary use of a
provisional model under certain conditions.\809\
---------------------------------------------------------------------------

    \807\ See SIFMA AMG 2/22/2013 Letter. See also Mizuho/ING Letter
(requesting that capital requirements be phased in if the Commission
does not plan to approve models already approved by certain other
regulators).
    \808\ See Citadel 5/15/2017 Letter.
    \809\ See paragraph (a)(7)(ii) of Rule 15c3-1e, as amended;
paragraph (d)(5)(ii) of Rule 18a-1, as adopted.
---------------------------------------------------------------------------

C. Effect on Existing Commission Exemptive Relief

    Compliance with certain provisions of the Exchange Act and certain
rules and regulations thereunder in connection with security-based swap
transactions, positions and/or activity is currently subject to
temporary exemptive relief granted by the Commission. The rules

the Commission is adopting and amending today relate to temporary
exemptive relief for 3 key areas of requirements applicable to SBSDs
and MSBSPs: (1) Financial responsibility-related requirements; (2)
segregation requirements for non-cleared security-based swaps; and (3)
requirements in connection with certain CDS portfolio margin programs.
    First, the Commission has provided limited exemptions for
registered broker-dealers, subject to certain conditions and
limitations, from the application of Sections 7 and 15(c)(3) of the
Exchange Act, Rules 15c3-1, 15c3-3,\810\ and 15c3-4, and Regulation T
in connection with security-based swaps, some of which exemptions were
solely to the extent the provisions or rules did not apply to the
broker-dealer's security-based swap positions or activities as of July
15, 2011 (collectively, the ``Financial Responsibility Rule
Exemptions'').\811\ In connection with this and other exemptive relief,
the Commission also provided that, until such time as the underlying
exemptive relief expires, no contract entered into on or after July 16,
2011 shall be void or considered voidable by reason of Section 29(b) of
the Exchange Act because any person that is a party to the contract
violated a provision of the Exchange Act for which the Commission
provided exemptive relief in the Exchange Act Exemptive Order
(``Section 29(b) Exemption'').\812\ The Financial Responsibility Rule
Exemptions are scheduled to expire on the compliance date for any final
capital, margin, and segregation rules for SBSDs and MSBSPs.\813\
Accordingly, all of the Financial Responsibility Rule Exemptions,
together with the portion of the Section 29(b) Exemption that relates
to the Exchange Act provisions for which the Commission provided
exemptive relief in the Financial Responsibility Rule Exemptions, will
expire upon the compliance date set forth in section III.B. of this
release.
---------------------------------------------------------------------------

    \810\ The exemption from Rule 15c3-3 was not available for
activities and positions of a registered broker-dealer related to
cleared security-based swaps to the extent that the registered
broker-dealer is a member of a clearing agency that functions as a
central counterparty for security-based swaps, and holds customer
funds or securities in connection with cleared security-based swaps.
    \811\ See Order Granting Temporary Exemptions under the
Securities Exchange Act of 1934 in Connection with the Pending
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, and Request for Comment, Exchange Act Release No. 64795
(July 1, 2011), 76 FR 39927 (July 7, 2011) (``Exchange Act Exemptive
Order'')
    \812\ See Exchange Act Exemptive Order at 39940.
    \813\ The Financial Responsibility Rule Exemptions originally
were set to expire on the compliance date for final rules further
defining the terms ``security-based swap'' and ``eligible contract
participant.'' See Exchange Act Exemptive Order at 39938-39. In the
final rules further defining the term ``security-based swap,'' the
Commission extended this expiration date to February 13, 2013. See
Product Definitions Adopting Release at 48304. On February 7, 2013,
the Commission extended the expiration date until February 11, 2014.
See Order Extending Temporary Exemptions under the Securities
Exchange Act of 1934 in Connection with the Revision of the
Definition of ``Security'' to Encompass Security-Based Swaps, and
Request for Comment, Exchange Act Release No. 68864 (Feb. 7, 2013),
78 FR 10218, 10220 (Feb. 13, 2013). On February 5, 2014, the
Commission further extended the expiration date until the compliance
date set forth in any final capital, margin, and segregation rules
for SBSDs and MSBSPs. See Order Extending Temporary Exemptions under
the Securities Exchange Act of 1934 in Connection with the Revision
of the Definition of ``Security'' to Encompass Security-Based Swaps,
and Request for Comment, Exchange Act Release No. 71485 (Feb. 5,
2014), 79 FR 7731, 7734 (Feb. 10, 2014).
---------------------------------------------------------------------------

    Second, compliance with Section 3E(f) of the Exchange Act is
currently subject to temporary exemptive relief.\814\ That relief
includes an exemption for SBSDs and MSBSPs from the segregation
requirements for non-cleared security-based swaps in Section 3E(f) of
the Exchange Act, as well as an exemption (similar but not identical to
the Section 29(b) Exemption discussed above) providing that no SBS
contract entered into on or after July 16, 2011 shall be void or
considered voidable by reason of Section 29(b) of the Exchange Act
because any person that is a party to the contract violated Section
3E(f) of the Exchange Act. Both of these exemptions will expire on the
Registration Compliance Date set forth in section III.B. of this
release.
---------------------------------------------------------------------------

    \814\ See Order Pursuant to Sections 15F(b)(6) and 36 of the
Securities Exchange Act of 1934 Extending Certain Temporary
Exemptions and a Temporary and Limited Exception Related to
Security-Based Swaps, Exchange Act Release No. 75919 (Sept. 15,
2015), 80 FR 56519 (Sept. 18, 2015); Temporary Exemptions and Other
Temporary Relief, Together with Information on Compliance Dates for
New Provisions of the Securities Exchange Act of 1934 Applicable to
Security-Based Swaps, Exchange Act Release No. 64678 (June 15,
2011), 76 FR 36287 (June 22, 2011).
---------------------------------------------------------------------------

    Finally, on December 14, 2012, the Commission issued an order
granting conditional exemptive relief from compliance with certain
provisions of the Exchange Act in connection with a program to
commingle and portfolio margin customer positions in cleared CDS that
include both swaps and security-based swaps in a segregated account
established and maintained in accordance with Section 4d(f) of the
CEA.\815\ This exemptive relief does not contain a sunset date;
however, the exemptive relief for dually-registered clearing agency/
DCOs is subject to two conditions that will be triggered by the
adoption of final rules setting forth margin and segregation
requirements applicable to security-based swaps.\816\ By their terms,
these two conditions will begin to apply by the later of: (1) Six
months after adoption of final margin and segregation rules applicable
to security-based swaps consistent with Section 3E of the Exchange Act;
or (2) the compliance date of such rules. As discussed above in section
III.B. of this release, the compliance date for the rules the
Commission is adopting today will be 18 months after the later of: (1)
The effective date of final rules establishing recordkeeping and
reporting requirements for SBSDs and MSBSPs; or (2) the effective date
of final rules addressing the cross-border application of certain
security-based swap requirements.\817\ Accordingly, each dually
registered clearing agency/DCO must comply with these two

conditions no later than that date. Before the compliance date, the
Commission intends to continue coordinating with the CFTC to address
portfolio margining of security-based swaps and swaps by nonbank SBSDs
and swap dealers.
---------------------------------------------------------------------------

    \815\ Order Granting Conditional Exemptions Under the Securities
Exchange Act of 1934 in Connection With Portfolio Margining of Swaps
and Security-Based Swaps, Exchange Act Release No. 68433 (Dec. 14,
2012), 77 FR 75211 (Dec. 19, 2012) (``CDS Portfolio Margin Order'').
    \816\ See CDS Portfolio Margin Order at 75219 (conditions (a)(1)
and (2)). Specifically, the first condition requires that the
clearing agency/DCO, by the later of (i) six months after the
adoption date of final margin and segregation rules applicable to
security-based swaps consistent with Section 3E of the Exchange Act
or (ii) the compliance date of such rules, take all necessary action
within its control to obtain any relief needed to permit its dually-
registered broker-dealer/FCM clearing members to maintain customer
money, securities, and property received by the broker-dealer/FCM to
margin, guarantee, or secure customer positions in cleared CDS,
which include both swaps and security-based swaps, in a segregated
account established and maintained in accordance with Section 3E of
the Exchange Act and any rules thereunder for the purpose of
clearing (as a clearing member of the clearing agency/DCO) such
customer positions under a program to commingle and portfolio margin
CDS. The second condition requires that the clearing agency/DCO, by
the later of (i) six months after the adoption date of final margin
and segregation rules applicable to security-based swaps consistent
with Section 3E of the Exchange Act or (ii) the compliance date of
such rules, take all necessary action within its control to
establish rules and operational practices to permit a dually-
registered broker-dealer/FCM (at the broker-dealer/FCM's election)
to maintain customer money, securities, and property received by the
broker-dealer/FCM to margin, guarantee, or secure customer positions
in cleared CDS, which include both swaps and security-based swaps,
in a segregated account established and maintained in accordance
with Section 3E of the Exchange Act and any rules thereunder for the
purpose of clearing (as a clearing member of the clearing agency/
DCO) such customer positions under a program to commingle and
portfolio margin CDS.
    These two conditions are intended to provide for portfolio
margining within a securities account as an alternative for
customers who may desire to conduct portfolio margining under a
securities account structure as opposed to a swaps account. See CDS
Portfolio Margining Order at 75215-75218 (discussing conditional
exemptions for dually-registered Clearing Agencies/DCOs from
Sections 3E(b), (d) and (e) of the Exchange Act).
    \817\ See Proposed Guidance and Rule Amendments Addressing
Cross-Border Application of Certain Security-Based Swap
Requirements, 84 FR 24206.
---------------------------------------------------------------------------

D. Application to Substituted Compliance

    For the amendments to Rule 3a71-6, the Commission is adopting an
effective date of 60 days following publication in the Federal
Register. There will be no separate compliance date in connection with
that rule, as the rule does not impose obligations upon entities. As
discussed above, SBSDs and MSBSPs will not be required to comply with
the capital and margin requirements until they are registered, and the
registration requirement for those entities will not be triggered until
a number of regulatory benchmarks have been met.
    In practice, the Commission recognizes that if the requirements of
a foreign regime are comparable to Title VII requirements, and the
other prerequisites to substituted compliance also have been satisfied,
then it may be appropriate to permit an SBSD or MSBSP to rely on
substituted compliance commencing at the time that entity is registered
with the Commission. Accordingly, the Commission would consider
substituted compliance requests that are submitted prior to the
compliance date for its capital and margin requirements. The Commission
believes this addresses commenters' concerns that the compliance date
could be before substituted compliance determinations are made.\818\
---------------------------------------------------------------------------

    \818\ See IIB 11/19/2018 Letter; SIFMA 11/19/2018 Letter.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    Certain provisions of the new rules and amendments contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\819\ The Commission
published notice requesting comment on the collection of information
requirements \820\ and submitted the amendments and the proposed new
rules to the Office of Management and Budget (``OMB'') for review in
accordance with the PRA.\821\ The Commission's earlier PRA assessments
have been revised to reflect the modifications to the final rules and
amendments from those that were proposed, the adoption of new Rule 18a-
10 as a result of comments received,\822\ and additional information
and data now available to the Commission.\823\ An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid OMB
control number. The titles for the collections of information are:
---------------------------------------------------------------------------

    \819\ See 44 U.S.C. 3501, et seq.
    \820\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70214; Cross-Border Proposing Release, 81 FR at 31204. See also
Trade Acknowledgment and Verification of Security-Based Swap
Transactions, 81 FR at 39831-33 (discussing the paperwork burden for
Rule 3a71-6).
    \821\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \822\ As discussed in more detail below, the Commission is
adopting new Rule 18a-10 in response to comments received on the
proposal not related to the collection of information discussion in
the proposing release. Therefore, the proposal did not contain a
collection of information for this new rule. The Commission
estimates that 3 stand-alone SBSDs will elect to operate under Rule
18a-10. As discussed in more detail below, however, these
respondents were included in the proposing release in other
collections of information (Rule 18a-1 and Rule 18a-3, as proposed),
and have been moved to the information collection for Rule 18a-10.
Therefore, the total respondents in the collections of information
for Rules 18a-1 and 18a-3, as adopted, have been adjusted by three
respondents. The hour burdens and costs for the collection of
information for Rule 18a-10, as adopted, are included in the
collection of information for Rule 18a-3, as adopted.
    \823\ The hourly rates use for internal professionals used
throughout this section IV of the release are taken from SIFMA's
Management & Professional Earnings in the Securities Industry 2013,
modified to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead, in addition to SIFMA's Office Salaries in
the Securities Industry 2013, modified by Commission staff to
account for an 1,800-hour work-year and inflation, and multiplied by
2.93 to account for bonuses, firm size, employee benefits, and
overhead.
    \824\ The proposed hour burdens for the collection of
information related to Rule 15c3-3, as amended, in this release were
included in the collection of information for proposed Rule 18a-4 in
the proposing release. These hours were moved (and modified as a
result of comments) to the existing collection of information in
Rule 15c3-3, as amended, as a result of changes made to the final
rule to require that broker-dealers that are also registered as
nonbank SBSDs comply with the segregation requirements of paragraph
(p) to Rule 15c3-3, as amended, with respect to their security-based
swap activities. In addition, as a result of comments received, the
collection of information in the final rule related to Rule 15c3-3,
as amended, contains additional respondents to account for the
activities of stand-alone broker-dealers engaged in security-based
swap activities.

------------------------------------------------------------------------
                                                            OMB control
              Rule                      Rule title              No.
------------------------------------------------------------------------
Rule 18a-1, Rule 18a-1a, Rule    Net capital                   3235-0701
 18a-1b, Rule 18a-1c, and Rule    requirements for SBSDs
 18a-1d.                          for which there is not
                                  a prudential regulator.
Rule 18a-2.....................  Capital requirements          3235-0699
                                  for MSBSPs for which
                                  there is not a
                                  prudential regulator.
Rule 18a-3 and Rule 18a-10.....  Non-cleared security-         3235-0702
                                  based swap margin
                                  requirements for SBSDs
                                  and MSBSPs for which
                                  there is not a
                                  prudential regulator;
                                  Alternative compliance
                                  mechanism for security-
                                  based swap dealers
                                  that are registered as
                                  swap dealers and have
                                  limited security-based
                                  swap activities.
Rule 18a-4 and exhibit.........  Segregation                   3235-0700
                                  requirements for SBSDs
                                  and MSBSPs.
Rule 15c3-1 and appendices.....  Net capital                   3235-0200
                                  requirements for
                                  brokers or dealers.
Rule 15c3-3 and exhibits.......  Customer protection--       \824\ 3235-
                                  reserves and custody              0078
                                  of securities.
Rule 3a71-6....................  Substituted compliance        3235-0715
                                  for SBSDs and MSBSPs.
------------------------------------------------------------------------

A. Summary of Collections of Information Under the Rules and Rule
Amendments

1. Rule 18a-1 and Amendments to Rule 15c3-1
    Rule 18a-1 establishes minimum capital requirements for stand-alone
SBSDs and the amendments to Rule 15c3-1 augment capital requirements
for broker-dealers to accommodate broker-dealer SBSDs and to enhance
the provisions applicable to ANC broker-dealers. The new rule and
amendments establish new collections of information requirements.
    First, under paragraphs (a)(2) and (d) of Rule 18a-1, a stand-alone
SBSD must apply to the Commission to be authorized to use internal
models to compute net capital. As part of the application process, a
stand-alone SBSD is required to provide the Commission staff with
information specified in the rule. In addition, a stand-alone SBSD
authorized to use internal models will review and update the models it
uses to compute market and credit risk, as well as backtest the models.

    Second, under paragraph (f) of Rule 18a-1 and paragraph (a)(10)(ii)
of Rule 15c3-1, as amended, nonbank SBSDs, including broker-dealer
SBSDs, are required to implement internal risk management controls in
compliance with certain requirements of Rule 15c3-4.
    Third, under paragraph (c)(1)(vi)(B)(1)(iii)(A) of Rule 18a-1 and
paragraph (c)(2)(vi)(P)(1)(iii) of Rule 15c3-1, as amended, broker-
dealers, broker-dealer SBSDs, and stand-alone SBSDs not using models
are required to use an industry sector classification system, that is
documented and reasonable in terms of grouping types of companies with
similar business activities and risk characteristics, for the purposes
of calculating ``haircuts'' on non-cleared CDS. These firms could use a
third-party classification system or develop their own classification
system.
    Fourth, under paragraph (h) of Rule 18a-1, stand-alone SBSDs are
required to provide the Commission with certain written notices with
respect to equity withdrawals.
    Fifth, under paragraph (c)(5) of Rule 18a-1d, a stand-alone SBSD is
required to file with the Commission two copies of any proposed
subordinated loan agreement at least 30 days prior to the proposed
execution date of the agreement, as well as a statement setting forth
the name and address of the lender, the business relationship of the
lender to the SBSD, and whether the SBSD carried an account for the
lender effecting transactions in security-based swaps at or about the
time the proposed agreement was filed.
    Finally, under paragraph (c)(1)(ix)(C)(3) of Rule 18a-1 and
paragraph (c)(2)(xv)(C)(3) of Rule 15c3-1, as amended, stand-alone
broker-dealers and nonbank SBSDs may treat collateral held by a third-
party custodian to meet an initial margin requirement of a security-
based swap or swap customer as being held by the stand-alone broker-
dealer or nonbank SBSD for purposes of avoiding the capital deduction
in lieu of margin or credit risk charge if certain conditions are met.
2. Rule 18a-2
    Rule 18a-2 establishes capital requirements for nonbank MSBSPs. In
particular, a nonbank MSBSP is required at all times to have and
maintain positive tangible net worth, and comply with Rule 15c3-4 with
respect to its security-based swap and swap activities.
3. Rule 18a-3
    Rule 18a-3 prescribes non-cleared security-based swap margin
requirements for nonbank SBSDs and MSBSPs. Paragraph (e) of Rule 18a-3
requires a nonbank SBSD to monitor the risk of each account, and
establish, maintain, and document procedures and guidelines for
monitoring the risk.
    Finally, under paragraph (d) to Rule 18a-3, a nonbank SBSD applying
to the Commission for authorization to use and be responsible for a
model to calculate the initial margin amount under the rule will be
subject to the application process and ongoing conditions in Rule 15c3-
1e or paragraph (d) of Rule 18a-1, as applicable, governing the use of
internal models to compute net capital.
4. Rule 18a-4 and Amendments to Rule 15c3-3
    Rule 18a-4 establishes segregation requirements for cleared and
non-cleared security-based swap transactions for bank and stand-alone
SBSDs, as well as notification requirements for these entities.
Amendments to Rule 15c3-3 establish segregation requirements for stand-
alone broker-dealers and broker-dealer SBSDs that are largely parallel
to the requirements in Rule 18a-4. Specifically, new paragraph (p) to
Rule 15c3-3 establishes segregation requirements for stand-alone
broker-dealers and broker-dealer SBSDs with respect to their security-
based swap activity. The provisions of Rule 18a-4, as well as the
amendments to Rule 15c3-3, are modeled on existing Rule 15c3-3--the
broker-dealer segregation rule. Rules 18a-4 and 15c3-3 also contain
provisions that are not modeled specifically on Rule 15c3-3 as it
exists today. First, paragraph (d) of Rule 18a-4 and paragraph (p)(4)
of Rule 15c3-3 require SBSDs and MSBSPs to provide the notice required
by Section 3E(f)(1)(A) of the Exchange Act to a counterparty in writing
prior to the execution of the first non-cleared security-based swap
transaction with the counterparty. Second, SBSDs must obtain
subordination agreements from counterparties that elect individual or
omnibus segregation.
    Additionally, paragraph (a)(5)(iii) of Rule 18a-4 and paragraph
(p)(1)(iii) of Rule 15c3-3, as amended, impose documentation
requirements with respect to a qualified clearing agency account a
broker-dealer or SBSD maintains at a clearing agency that holds funds
and other property in order to margin, guarantee, or secure cleared
security-based swaps of the firm's security-based swap customers.
    Under paragraph (a)(4) of Rule 18a-4 and paragraph (p)(1)(iv) of
Rule 15c3-3, as amended, a qualified registered security-based swap
dealer account is defined to mean an account at an SBSD registered with
the Commission pursuant to Section 15F of the Exchange Act that meets
conditions that are largely identical to the conditions for a qualified
clearing agency account.
    Finally, paragraph (c)(1) of Rule 18a-4 and paragraph (p)(3)(i) of
Rule 15c3-3 require an stand-alone broker-dealer and SBSD, among other
things, to maintain a special reserve account for the exclusive benefit
of security-based swap customers separate from any other bank account
of the broker-dealer or SBSD.
    Paragraph (c)(1) of Rule 18a-4 and paragraph (p)(3)(i) of Rule
15c3-3, as amended, provide that the stand-alone broker-dealer or SBSD
must at all times maintain in a customer reserve account, through
deposits into the account, cash and/or qualified securities in amounts
computed weekly in accordance with the formula set forth in Exhibit A
to Rule 18a-4 or Exhibit B to Rule 15c3-3, which is modeled on the
formula in Exhibit A to Rule 15c3-3.
    Paragraph (e) of Rule 18a-4 specifies when foreign stand-alone and
bank SBSDs and MSBSPs are not required to comply with the segregation
requirements in Section 3E of the Exchange Act and Rule 18a-4
thereunder. In addition, a foreign stand-alone or bank SBSD is required
to disclose to a U.S. security-based swap customer the potential
bankruptcy treatment of property segregated by the SBSD.
    Finally, under paragraph (f) of Rule 18a-4, a stand-alone or bank
SBSD will be exempt from the requirements of Rule 18a-4 if the SBSD
meets certain conditions, including that the SBSD provides notice to
the counterparty regarding the right to segregate initial margin at an
independent third-party custodian, and provides certain disclosures in
writing regarding the collateral received by the SBSD.
5. Rule 18a-10
    Rule 18a-10 is an alternative compliance mechanism pursuant to
which a stand-alone SBSD that is registered as a swap dealer and
predominantly engages in a swaps business may elect to comply with the
capital, margin, and segregation requirements of the CEA and the CFTC's
rules in lieu of complying with Rules 18a-1, 18a-3, and 18a-4.

    Paragraph (b) of Rule 18a-10 sets forth certain requirements for a
firm that is operating pursuant to the rule. Among other things,
paragraph (b)(2) of Rule 18a-10 requires the firm to provide a written
disclosure to its counterparties before the first transaction with the
counterparty after the firm begins the operating pursuant to the rule
notifying the counterparty that the firm is complying with the
applicable capital, margin, and segregation requirements of the CEA and
the CFTC's rules in lieu of complying with applicable Commission rules.
Paragraph (b)(3) of Rule 18a-10 requires a stand-alone SBSD operating
pursuant to the rule to immediately notify the Commission and the CFTC
in writing if it fails to meet a condition in paragraph (a) of the
rule.
    Finally, paragraph (d) of Rule 18a-10 addresses how a firm would