exercise value of such call it shall be given no value and in the case
of an unlisted put if the market value of the underlying security is
more than the exercise value of the unlisted put it shall be given no
value.
    (C) Adding to net worth the lesser of any deferred income tax
liability related to the items in paragraphs (c)(1)(i)(C)(1) through
(3) of this section, or the sum of paragraphs (c)(1)(i)(C)(1), (2), and
(3) of this section;
    (1) The aggregate amount resulting from applying to the amount of
the deductions computed in accordance with paragraphs (c)(1)(vi) and
(vii) of this section and Appendices A and B, Sec. Sec.  240.18a-1a and
240.18a-1b, the appropriate Federal and State tax rate(s) applicable to
any unrealized gain on the asset on which the deduction was computed;
    (2) Any deferred tax liability related to income accrued which is
directly related to an asset otherwise deducted pursuant to this
section;
    (3) Any deferred tax liability related to unrealized appreciation
in value of any asset(s) which has been otherwise deducted from net
worth in accordance with the provisions of this section; and
    (D) Adding, in the case of future income tax benefits arising as a
result of unrealized losses, the amount of such benefits not to exceed
the amount of income tax liabilities accrued on the books and records
of the security-based swap dealer, but only to the extent such benefits
could have been applied to reduce accrued tax liabilities on the date
of the capital computation, had the related unrealized losses been
realized on that date.
    (E) Adding to net worth any actual tax liability related to income
accrued which is directly related to an asset otherwise deducted
pursuant to this section.
    (ii) Subordinated liabilities. Excluding liabilities of the
security-based swap dealer that are subordinated to the claims of
creditors pursuant to a satisfactory subordinated loan agreement, as
defined in Sec.  240.18a-1d.
    (iii) Assets not readily convertible into cash. Deducting fixed
assets and assets which cannot be readily converted into cash,
including, among other things:
    (A) Fixed assets and prepaid items. Real estate; furniture and
fixtures; exchange memberships; prepaid rent, insurance and other
expenses; goodwill; organization expenses;
    (B) Certain unsecured and partly secured receivables. All unsecured
advances and loans; deficits in customers' and non-customers' unsecured
and partly secured notes; deficits in customers' and non-customers'
unsecured and partly secured accounts after application of calls for
margin, marks to the market or other required deposits that are
outstanding for more than the required time frame to collect the
margin, marks to the market, or other required deposits; and the market
value of stock loaned in excess of the value of any collateral received
therefore.
    (C) Insurance claims. Insurance claims that, after seven (7)
business days from the date the loss giving rise to the claim is
discovered, are not covered by an opinion of outside counsel that the
claim is valid and is covered by insurance policies presently in
effect; insurance claims that after twenty (20) business days from the
date the loss giving rise to the claim is discovered and that are
accompanied by an opinion of outside counsel described above, have not
been acknowledged in writing by the insurance carrier as due and
payable; and insurance claims acknowledged in writing by the carrier as
due and payable outstanding longer than twenty (20) business days from
the date they are so acknowledged by the carrier; and
    (D) Other deductions. All other unsecured receivables; all assets
doubtful of collection less any reserves established therefore; the
amount by which the market value of securities failed to receive
outstanding longer than thirty (30) calendar days exceeds the contract
value of such fails to receive, and the funds on deposit in a
``segregated trust account'' in accordance with 17 CFR 270.27d-1 under
the Investment Company Act of 1940, but only to the extent that the
amount on deposit in such segregated trust account exceeds the amount
of liability reserves established and maintained for refunds of charges
required by sections 27(d) and 27(f) of the Investment Company Act of
1940; Provided, That any amount deposited in the ``special reserve
account for the exclusive benefit of the security-based swap
customers'' established pursuant to Sec.  240.18a-4 and clearing
deposits shall not be so deducted.
    (E) Repurchase agreements. (1) For purposes of this paragraph:
    (i) The term reverse repurchase agreement deficit shall mean the
difference between the contract price for resale of the securities
under a reverse repurchase agreement and the market value of those
securities (if less than the contract price).
    (ii) The term repurchase agreement deficit shall mean the
difference between the market value of securities subject to the
repurchase agreement and the contract price for repurchase of the
securities (if less than the market value of the securities).
    (iii) As used in this paragraph (c)(1)(iii)(E)(1), the term
contract price shall include accrued interest.
    (iv) Reverse repurchase agreement deficits and the repurchase
agreement deficits where the counterparty is the Federal Reserve Bank
of New York shall be disregarded.
    (2)(i) In the case of a reverse repurchase agreement, the deduction
shall be equal to the reverse repurchase agreement deficit.
    (ii) In determining the required deductions under paragraph
(c)(1)(iii)(E)(2)(i) of this section, the security-based swap dealer
may reduce the reverse repurchase agreement deficit by: Any margin or
other deposits held

by the security-based swap dealer on account of the reverse repurchase
agreement; any excess market value of the securities over the contract
price for resale of those securities under any other reverse repurchase
agreement with the same party; the difference between the contract
price for resale and the market value of securities subject to
repurchase agreements with the same party (if the market value of those
securities is less than the contract price); and calls for margin,
marks to the market, or other required deposits that are outstanding
one business day or less.
    (3) In the case of repurchase agreements, the deduction shall be:
    (i) The excess of the repurchase agreement deficit over 5 percent
of the contract price for resale of United States Treasury Bills, Notes
and Bonds, 10 percent of the contract price for the resale of
securities issued or guaranteed as to principal or interest by an
agency of the United States or mortgage related securities as defined
in section 3(a)(41) of the Act and 20 percent of the contract price for
the resale of other securities; and
    (ii) The excess of the aggregate repurchase agreement deficits with
any one party over 25 percent of the security-based swap dealer's net
capital before the application of paragraphs (c)(1)(vi) and (vii) of
this section (less any deduction taken with respect to repurchase
agreements with that party under paragraph (c)(1)(iii)(E)(3)(i) of this
section) or, if greater; the excess of the aggregate repurchase
agreement deficits over 300 percent of the security-based swap dealer's
net capital before the application of paragraphs (c)(1)(vi) and (vii)
of this section.
    (iii) In determining the required deduction under paragraphs
(c)(1)(iii)(E)(3)(i) and (ii) of this section, the security-based swap
dealer may reduce a repurchase agreement by any margin or other
deposits held by the security-based swap dealer on account of a reverse
repurchase agreement with the same party to the extent not otherwise
used to reduce a reverse repurchase agreement deficit; the difference
between the contract price and the market value of securities subject
to other repurchase agreements with the same party (if the market value
of those securities is less than the contract price) not otherwise used
to reduce a reverse repurchase agreement deficit; and calls for margin,
marks to the market, or other required deposits that are outstanding
one business day or less to the extent not otherwise used to reduce a
reverse repurchase agreement deficit.
    (F) Securities borrowed. One percent of the market value of
securities borrowed collateralized by an irrevocable letter of credit.
    (G) Affiliate receivables and collateral. Any receivable from an
affiliate of the security-based swap dealer (not otherwise deducted
from net worth) and the market value of any collateral given to an
affiliate (not otherwise deducted from net worth) to secure a liability
over the amount of the liability of the security-based swap dealer
unless the books and records of the affiliate are made available for
examination when requested by the representatives of the Commission in
order to demonstrate the validity of the receivable or payable. The
provisions of this subsection shall not apply where the affiliate is a
registered security-based swap dealer, registered broker or dealer,
registered government securities broker or dealer, bank as defined in
section 3(a)(6) of the Act, insurance company as defined in section
3(a)(19) of the Act, investment company registered under the Investment
Company Act of 1940, federally insured savings and loan association, or
futures commission merchant or swap dealer registered pursuant to the
Commodity Exchange Act.
    (iv) Non-marketable securities. Deducting 100 percent of the
carrying value in the case of securities or evidence of indebtedness in
the proprietary or other accounts of the security-based swap dealer,
for which there is no ready market, as defined in paragraph (c)(4) of
this section, and securities, in the proprietary or other accounts of
the security-based swap dealer, that cannot be publicly offered or sold
because of statutory, regulatory or contractual arrangements or other
restrictions.
    (v) Deducting from the contract value of each failed to deliver
contract that is outstanding five business days or longer (21 business
days or longer in the case of municipal securities) the percentages of
the market value of the underlying security that would be required by
application of the deduction required by paragraph (c)(1)(vii) of this
section. Such deduction, however, shall be increased by any excess of
the contract price of the failed to deliver contract over the market
value of the underlying security or reduced by any excess of the market
value of the underlying security over the contract value of the failed
to deliver contract, but not to exceed the amount of such deduction.
The Commission may, upon application of the security-based swap dealer,
extend for a period up to 5 business days, any period herein specified
when it is satisfied that the extension is warranted. The Commission
upon expiration of the extension may extend for one additional period
of up to 5 business days, any period herein specified when it is
satisfied that the extension is warranted.
    (vi)(A) Cleared security-based swaps. In the case of a cleared
security-based swap held in a proprietary account of the security-based
swap dealer, deducting the amount of the applicable margin requirement
of the clearing agency or, if the security-based swap references an
equity security, the security-based swap dealer may take a deduction
using the method specified in Sec.  240.18a-1a.
    (B) Non-cleared security-based swaps--(1) Credit default swaps--(i)
Short positions (selling protection). In the case of a non-cleared
security-based swap that is a short credit default swap, deducting the
percentage of the notional amount based upon the current basis point
spread of the credit default swap and the maturity of the credit
default swap in accordance with table 1 to Sec.  240.18a-
1(c)(1)(vi)(B)(1)(i):

                                                     Table 1 to Sec.   240.18a-1(c)(1)(vi)(B)(1)(i)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Basis point spread
    Length of time to maturity of credit default swap    -----------------------------------------------------------------------------------------------
                        contract                            100 or less                                                                     700 or more
                                                                (%)         101-300 (%)     301-400 (%)     401-500 (%)     501-699 (%)         (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than 12 months.....................................            1.00            2.00            5.00            7.50           10.00           15.00
12 months but less than 24 months.......................            1.50            3.50            7.50           10.00           12.50           17.50
24 months but less than 36 months.......................            2.00            5.00           10.00           12.50           15.00           20.00
36 months but less than 48 months.......................            3.00            6.00           12.50           15.00           17.50           22.50
48 months but less than 60 months.......................            4.00            7.00           15.00           17.50           20.00           25.00
60 months but less than 72 months.......................            5.50            8.50           17.50           20.00           22.50           27.50

72 months but less than 84 months.......................            7.00           10.00           20.00           22.50           25.00           30.00
84 months but less than 120 months......................            8.50           15.00           22.50           25.00           27.50           40.00
120 months and longer...................................           10.00           20.00           25.00           27.50           30.00           50.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (ii) Long positions (purchasing protection). In the case of a non-
cleared security-based swap that is a long credit default swap,
deducting 50 percent of the deduction that would be required by
paragraph (c)(1)(vi)(B)(1)(i) of this section if the non-cleared
security-based swap was a short credit default swap, each such
deduction not to exceed the current market value of the long position.
    (iii) Long and short credit default swaps. In the case of non-
cleared security-based swaps that are long and short credit default
swaps referencing the same entity (in the case of non-cleared credit
default swap security-based swaps referencing a corporate entity) or
obligation (in the case of non-cleared credit default swap security-
based swaps referencing an asset-backed security), that have the same
credit events which would trigger payment by the seller of protection,
that have the same basket of obligations which would determine the
amount of payment by the seller of protection upon the occurrence of a
credit event, that are in the same or adjacent spread category, and
that are in the same or adjacent maturity category and have a maturity
date within three months of the other maturity category, deducting the
percentage of the notional amount specified in the higher maturity
category under paragraph (c)(1)(vi)(B)(1)(i) or (ii) on the excess of
the long or short position. In the case of non-cleared security-based
swaps that are long and short credit default swaps referencing
corporate entities in the same industry sector and the same spread and
maturity categories prescribed in paragraph (c)(1)(vi)(B)(1)(i) of this
section, deducting 50 percent of the amount required by paragraph
(c)(1)(vi)(B)(1)(i) of this section on the short position plus the
deduction required by paragraph (c)(1)(vi)(B)(1)(ii) of this section on
the excess long position, if any. For the purposes of this section, the
security-based swap dealer must use an industry sector classification
system that is reasonable in terms of grouping types of companies with
similar business activities and risk characteristics and the security-
based swap dealer must document the industry sector classification
system used pursuant to this section.
    (iv) Long security and long credit default swap. In the case of a
non-cleared security-based swap that is a long credit default swap
referencing a debt security and the security-based swap dealer is long
the same debt security, deducting 50 percent of the amount specified in
Sec.  240.15c3-1(c)(2)(vi) or (vii) for the debt security, provided
that the security-based swap dealer can deliver the debt security to
satisfy the obligation of the security-based swap dealer on the credit
default swap.
    (v) Short security and short credit default swap. In the case of a
non-cleared security-based swap that is a short credit default swap
referencing a debt security or a corporate entity, and the security-
based swap dealer is short the debt security or a debt security issued
by the corporate entity, deducting the amount specified in Sec.
240.15c3-1(c)(2)(vi) or (vii) for the debt security. In the case of a
non-cleared security-based swap that is a short credit default swap
referencing an asset-backed security and the security-based swap dealer
is short the asset-backed security, deducting the amount specified in
Sec.  240.15c3-1(c)(2)(vi) or (vii) for the asset-backed security.
    (2) All other security-based swaps. In the case of a non-cleared
security-based swap that is not a credit default swap, deducting the
amount calculated by multiplying the notional amount of the security-
based swap and the percentage specified in Sec.  240.15c3-1(c)(2)(vi)
applicable to the reference security. A security-based swap dealer may
reduce the deduction under this paragraph (c)(1)(vi)(B)(2) by an amount
equal to any reduction recognized for a comparable long or short
position in the reference security under Sec.  240.15c3-1(c)(2)(vi)
and, in the case of a security-based swap referencing an equity
security, the method specified in Sec.  240.18a-1a.
    (vii) All other securities, money market instruments or options.
Deducting the percentages specified in Sec.  240.15c3-1(c)(2)(vi) of
the market value of all securities, money market instruments, and
options in the proprietary accounts of the security-based swap dealer.
    (viii) Deduction from net worth for certain undermargined accounts.
Deducting the amount of cash required in the account of each security-
based swap and swap customer to meet the margin requirements of a
clearing agency, the Commission, derivatives clearing organization, or
the Commodity Futures Trading Commission, as applicable, after
application of calls for margin, marks to the market, or other required
deposits which are outstanding within the required time frame to
collect the margin, mark to the market, or other required deposits.
    (ix) Deduction from net worth in lieu of collecting collateral for
non-cleared security-based swap and swap transactions--(A) Security-
based swaps. Deducting the initial margin amount calculated pursuant to
Sec.  240.18a-3(c)(1)(i)(B) for the account of a counterparty at the
security-based swap dealer that is subject to a margin exception set
forth in Sec.  240.18a-3(c)(1)(iii), less the margin value of
collateral held in the account.
    (B) Swaps. Deducting the initial margin amount calculated pursuant
to the margin rules of the Commodity Futures Trading Commission in the
account of a counterparty at the security-based swap dealer that is
subject to a margin exception in those rules, less the margin value of
collateral held in the account.
    (C) Treatment of collateral held at a third-party custodian. For
the purposes of the deductions required pursuant to paragraphs
(c)(1)(ix)(A) and (B) of this section, collateral held by an
independent third-party custodian as initial margin may be treated as
collateral held in the account of the counterparty at the security-
based swap dealer if:
    (1) The independent third-party custodian is a bank as defined in
section 3(a)(6) of the Act or a registered U.S. clearing organization
or depository that is not affiliated with the counterparty or, if the
collateral consists of foreign securities or currencies, a supervised

foreign bank, clearing organization, or depository that is not
affiliated with the counterparty and that customarily maintains custody
of such foreign securities or currencies;
    (2) The security-based swap dealer, the independent third-party
custodian, and the counterparty that delivered the collateral to the
custodian have executed an account control agreement governing the
terms under which the custodian holds and releases collateral pledged
by the counterparty as initial margin that is a legal, valid, binding,
and enforceable agreement under the laws of all relevant jurisdictions,
including in the event of bankruptcy, insolvency, or a similar
proceeding of any of the parties to the agreement, and that provides
the security-based swap dealer with the right to access the collateral
to satisfy the counterparty's obligations to the security-based swap
dealer arising from transactions in the account of the counterparty;
and
    (3) The security-based swap dealer maintains written documentation
of its analysis that in the event of a legal challenge the relevant
court or administrative authorities would find the account control
agreement to be legal, valid, binding, and enforceable under the
applicable law, including in the event of the receivership,
conservatorship, insolvency, liquidation, or a similar proceeding of
any of the parties to the agreement.
    (x)(A) Deducting the market value of all short securities
differences (which shall include securities positions reflected on the
securities record which are not susceptible to either count or
confirmation) unresolved after discovery in accordance with the
schedule in table 2 to Sec.  240.18a-1(c)(1)(x)(A):

                 Table 2 to Sec.   240.18a-1(c)(1)(x)(A)
------------------------------------------------------------------------
                                                             Number of
                                                           business days
                     Differences \1\                           after
                                                             discovery
------------------------------------------------------------------------
25 percent..............................................               7
50 percent..............................................              14
75 percent..............................................              21
100 percent.............................................              28
------------------------------------------------------------------------
\1\ Percentage of market value of short securities differences.

    (B) Deducting the market value of any long securities differences,
where such securities have been sold by the security-based swap dealer
before they are adequately resolved, less any reserves established
therefor;
    (C) The Commission may extend the periods in paragraph (c)(1)(x)(A)
of this section for up to 10 business days if it finds that exceptional
circumstances warrant an extension.
    (2) The term exempted securities shall mean those securities deemed
exempted securities by section 3(a)(12) of the Act (15 U.S.C.
78c(a)(12)) and the rules thereunder.
    (3) Customer. The term customer shall mean any person from whom, or
on whose behalf, a security-based swap dealer has received, acquired or
holds funds or securities for the account of such person, but shall not
include a security-based swap dealer, a broker or dealer, a registered
municipal securities dealer, or a general, special or limited partner
or director or officer of the security-based swap dealer, or any person
to the extent that such person has a claim for property or funds which
by contract, agreement, or understanding, or by operation of law, is
part of the capital of the security-based swap dealer.
    (4) Ready market. The term ready market shall include a recognized
established securities market in which there exist independent bona
fide offers to buy and sell so that a price reasonably related to the
last sales price or current bona fide competitive bid and offer
quotations can be determined for a particular security almost
instantaneously and where payment will be received in settlement of a
sale at such price within a relatively short time conforming to trade
custom.
    (5) The term tentative net capital means the net capital of the
security-based swap dealer before deducting the haircuts computed
pursuant to paragraphs (c)(1)(vi) and (vii) of this section and the
charges on inventory computed pursuant to Sec.  240.18a-1b. However,
for purposes of paragraph (a)(2) of this section, the term tentative
net capital means the net capital of the security-based swap dealer
before deductions for market and credit risk computed pursuant to
paragraph (d) of this section or paragraphs (c)(1)(vi) and (vii) of
this section, if applicable, and increased by the balance sheet value
(including counterparty net exposure) resulting from transactions in
derivative instruments which would otherwise be deducted pursuant to
paragraph (c)(1)(iii) of this section. Tentative net capital shall
include securities for which there is no ready market, as defined in
paragraph (c)(4) of this section, if the use of mathematical models has
been approved for purposes of calculating deductions from net capital
for those securities pursuant to paragraph (d) of this section.
    (6) The term risk margin amount means the sum of:
    (i) The total initial margin required to be maintained by the
security-based swap dealer at each clearing agency with respect to
security-based swap transactions cleared for security-based swap
customers; and
    (ii) The total initial margin amount calculated by the security-
based swap dealer with respect to non-cleared security-based swaps
pursuant to Sec.  240.18a-3(c)(1)(i)(B).
    (d) Application to use models to compute deductions for market and
credit risk. (1) A security-based swap dealer may apply to the
Commission for authorization to compute deductions for market risk
under this paragraph (d) in lieu of computing deductions pursuant to
paragraphs (c)(1)(iv), (vi), and (vii) of this section, and Sec.
240.18a-1b, and to compute deductions for credit risk pursuant to this
paragraph (d) on credit exposures arising from transactions in
derivatives instruments (if this paragraph (d) is used to calculate
deductions for market risk on these instruments) in lieu of computing
deductions pursuant to paragraphs (c)(1)(iii) and (c)(1)(ix)(A) and (B)
of this section:
    (i) A security-based swap dealer shall submit the following
information to the Commission with its application:
    (A) An executive summary of the information provided to the
Commission with its application and an identification of the ultimate
holding company of the security-based swap dealer;
    (B) A comprehensive description of the internal risk management
control system of the security-based swap dealer and how that system
satisfies the requirements set forth in Sec.  240.15c3-4;
    (C) A list of the categories of positions that the security-based
swap dealer holds in its proprietary accounts and a brief description
of the methods that the security-based swap dealer will use to
calculate deductions for market and credit risk on those categories of
positions;
    (D) A description of the mathematical models to be used to price
positions and to compute deductions for market risk, including those
portions of the deductions attributable to specific risk, if
applicable, and deductions for credit risk; a description of the
creation, use, and maintenance of the mathematical models; a
description of the security-based swap dealer's internal risk
management controls over those models, including a description of each
category of persons who may input data into the models; if a
mathematical model incorporates empirical correlations across risk
categories, a description of the process for measuring

correlations; a description of the backtesting procedures the security-
based swap dealer will use to backtest the mathematical models used to
calculate maximum potential exposure; a description of how each
mathematical model satisfies the applicable qualitative and
quantitative requirements set forth in this paragraph (d); and a
statement describing the extent to which each mathematical model used
to compute deductions for market risk and credit risk will be used as
part of the risk analyses and reports presented to senior management;
    (E) If the security-based swap dealer is applying to the Commission
for approval to use scenario analysis to calculate deductions for
market risk for certain positions, a list of those types of positions,
a description of how those deductions will be calculated using scenario
analysis, and an explanation of why each scenario analysis is
appropriate to calculate deductions for market risk on those types of
positions;
    (F) A description of how the security-based swap dealer will
calculate current exposure;
    (G) A description of how the security-based swap dealer will
determine internal credit ratings of counterparties and internal credit
risk weights of counterparties, if applicable;
    (H) For each instance in which a mathematical model to be used by
the security-based swap dealer to calculate a deduction for market risk
or to calculate maximum potential exposure for a particular product or
counterparty differs from the mathematical model used by the ultimate
holding company to calculate an allowance for market risk or to
calculate maximum potential exposure for that same product or
counterparty, a description of the difference(s) between the
mathematical models; and
    (I) Sample risk reports that are provided to management at the
security-based swap dealer who are responsible for managing the
security-based swap dealer's risk.
    (ii) [Reserved].
    (2) The application of the security-based swap dealer shall be
supplemented by other information relating to the internal risk
management control system, mathematical models, and financial position
of the security-based swap dealer that the Commission may request to
complete its review of the application;
    (3) The application shall be considered filed when received at the
Commission's principal office in Washington, DC. A person who files an
application pursuant to this section for which it seeks confidential
treatment may clearly mark each page or segregable portion of each page
with the words ``Confidential Treatment Requested.'' All information
submitted in connection with the application will be accorded
confidential treatment, to the extent permitted by law;
    (4) If any of the information filed with the Commission as part of
the application of the security-based swap dealer is found to be or
becomes inaccurate before the Commission approves the application, the
security-based swap dealer must notify the Commission promptly and
provide the Commission with a description of the circumstances in which
the information was found to be or has become inaccurate along with
updated, accurate information;
    (5)(i) The Commission may approve the application or an amendment
to the application, in whole or in part, subject to any conditions or
limitations the Commission may require if the Commission finds the
approval to be necessary or appropriate in the public interest or for
the protection of investors, after determining, among other things,
whether the security-based swap dealer has met the requirements of this
paragraph (d) and is in compliance with other applicable rules
promulgated under the Act;
    (ii) The Commission may approve the temporary use of a provisional
model in whole or in part, subject to any conditions or limitations the
Commission may require, if:
    (A) The security-based swap dealer has a complete application
pending under this section;
    (B) The use of the provisional model has been approved by:
    (1) A prudential regulator;
    (2) The Commodity Futures Trading Commission or a futures
association registered with the Commodity Futures Trading Commission
under section 17 of the Commodity Exchange Act;
    (3) A foreign financial regulatory authority that administers a
foreign financial regulatory system with capital requirements that the
Commission has found are eligible for substituted compliance under
Sec.  240.3a71-6 if the provisional model is used for the purposes of
calculating net capital;
    (4) A foreign financial regulatory authority that administers a
foreign financial regulatory system with margin requirements that the
Commission has found are eligible for substituted compliance under
Sec.  240.3a71-6 if the provisional model is used for the purposes of
calculating initial margin pursuant to Sec.  240.18a-3; or
    (5) Any other foreign supervisory authority that the Commission
finds has approved and monitored the use of the provisional model
through a process comparable to the process set forth in this section.
    (6) A security-based swap dealer shall amend its application to
calculate certain deductions for market and credit risk under this
paragraph (d) and submit the amendment to the Commission for approval
before it may change materially a mathematical model used to calculate
market or credit risk or before it may change materially its internal
risk management control system;
    (7) As a condition for the security-based swap dealer to compute
deductions for market and credit risk under this paragraph (d), the
security-based swap dealer agrees that:
    (i) It will notify the Commission 45 days before it ceases to
compute deductions for market and credit risk under this paragraph (d);
and
    (ii) The Commission may determine by order that the notice will
become effective after a shorter or longer period of time if the
security-based swap dealer consents or if the Commission determines
that a shorter or longer period of time is necessary or appropriate in
the public interest or for the protection of investors; and
    (8) Notwithstanding paragraph (d)(7) of this section, the
Commission, by order, may revoke a security-based swap dealer's
exemption that allows it to use the market risk standards of this
paragraph (d) to calculate deductions for market risk, and the
exemption to use the credit risk standards of this paragraph (d) to
calculate deductions for credit risk on certain credit exposures
arising from transactions in derivatives instruments if the Commission
finds that such exemption is no longer necessary or appropriate in the
public interest or for the protection of investors. In making its
finding, the Commission will consider the compliance history of the
security-based swap dealer related to its use of models, the financial
and operational strength of the security-based swap dealer and its
ultimate holding company, and the security-based swap dealer's
compliance with its internal risk management controls.
    (9) To be approved, each value-at-risk (``VaR'') model must meet
the following minimum qualitative and quantitative requirements:
    (i) Qualitative requirements. (A) The VaR model used to calculate
market or credit risk for a position must be integrated into the daily
internal risk management system of the security-based swap dealer;

    (B) The VaR model must be reviewed both periodically and annually.
The periodic review may be conducted by the security-based swap
dealer's internal audit staff, but the annual review must be conducted
by a registered public accounting firm, as that term is defined in
section 2(a)(12) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et
seq.); and
    (C) For purposes of computing market risk, the security-based swap
dealer must determine the appropriate multiplication factor as follows:
    (1) Beginning three months after the security-based swap dealer
begins using the VaR model to calculate market risk, the security-based
swap dealer must conduct backtesting of the model by comparing its
actual daily net trading profit or loss with the corresponding VaR
measure generated by the VaR model, using a 99 percent, one-tailed
confidence level with price changes equivalent to a one business-day
movement in rates and prices, for each of the past 250 business days,
or other period as may be appropriate for the first year of its use;
    (2) On the last business day of each quarter, the security-based
swap dealer must identify the number of backtesting exceptions of the
VaR model, that is, the number of business days in the past 250
business days, or other period as may be appropriate for the first year
of its use, for which the actual net trading loss, if any, exceeds the
corresponding VaR measure; and
    (3) The security-based swap dealer must use the multiplication
factor indicated in table 3 to Sec.  240.18a-1(d)(9)(i)(C)(3) in
determining its market risk until it obtains the next quarter's
backtesting results;

 Table 3 to Sec.   240.18a-1(d)(9)(i)(C)(3)--Multiplication Factor Based
        on the Number of Backtesting Exceptions of the VaR model
------------------------------------------------------------------------
                                                          Multiplication
                  Number of exceptions                        factor
------------------------------------------------------------------------
4 or fewer..............................................            3.00
5.......................................................            3.40
6.......................................................            3.50
7.......................................................            3.65
8.......................................................            3.75
9.......................................................            3.85
10 or more..............................................            4.00
------------------------------------------------------------------------

    (4) For purposes of incorporating specific risk into a VaR model, a
security-based swap dealer must demonstrate that it has methodologies
in place to capture liquidity, event, and default risk adequately for
each position. Furthermore, the models used to calculate deductions for
specific risk must:
    (i) Explain the historical price variation in the portfolio;
    (ii) Capture concentration (magnitude and changes in composition);
    (iii) Be robust to an adverse environment;
    (iv) Capture name-related basis risk;
    (v) Capture event risk; and
    (vi) Be validated through backtesting.
    (5) For purposes of computing the credit equivalent amount of the
security-based swap dealer's exposures to a counterparty, the security-
based swap dealer must determine the appropriate multiplication factor
as follows:
    (i) Beginning three months after it begins using the VaR model to
calculate maximum potential exposure, the security-based swap dealer
must conduct backtesting of the model by comparing, for at least 80
counterparties with widely varying types and sizes of positions with
the firm, the ten-business day change in its current exposure to the
counterparty based on its positions held at the beginning of the ten-
business day period with the corresponding ten-business day maximum
potential exposure for the counterparty generated by the VaR model;
    (ii) As of the last business day of each quarter, the security-
based swap dealer must identify the number of backtesting exceptions of
the VaR model, that is, the number of ten-business day periods in the
past 250 business days, or other period as may be appropriate for the
first year of its use, for which the change in current exposure to a
counterparty exceeds the corresponding maximum potential exposure; and
    (iii) The security-based swap dealer will propose, as part of its
application, a schedule of multiplication factors, which must be
approved by the Commission based on the number of backtesting
exceptions of the VaR model. The security-based swap dealer must use
the multiplication factor indicated in the approved schedule in
determining the credit equivalent amount of its exposures to a
counterparty until it obtains the next quarter's backtesting results,
unless the Commission determines, based on, among other relevant
factors, a review of the security-based swap dealer's internal risk
management control system, including a review of the VaR model, that a
different adjustment or other action is appropriate.
    (ii) Quantitative requirements. (A) For purposes of determining
market risk, the VaR model must use a 99 percent, one-tailed confidence
level with price changes equivalent to a ten business-day movement in
rates and prices;
    (B) For purposes of determining maximum potential exposure, the VaR
model must use a 99 percent, one-tailed confidence level with price
changes equivalent to a one-year movement in rates and prices; or based
on a review of the security-based swap dealer's procedures for managing
collateral and if the collateral is marked to market daily and the
security-based swap dealer has the ability to call for additional
collateral daily, the Commission may approve a time horizon of not less
than ten business days;
    (C) The VaR model must use an effective historical observation
period of at least one year. The security-based swap dealer must
consider the effects of market stress in its construction of the model.
Historical data sets must be updated at least monthly and reassessed
whenever market prices or volatilities change significantly; and
    (D) The VaR model must take into account and incorporate all
significant, identifiable market risk factors applicable to positions
in the accounts of the security-based swap dealer, including:
    (1) Risks arising from the non-linear price characteristics of
derivatives and the sensitivity of the market value of those positions
to changes in the volatility of the derivatives' underlying rates and
prices;
    (2) Empirical correlations with and across risk factors or,
alternatively, risk factors sufficient to cover all the market risk
inherent in the positions in the proprietary or other trading accounts
of the security-based swap dealer, including interest rate risk, equity
price risk, foreign exchange risk, and commodity price risk;
    (3) Spread risk, where applicable, and segments of the yield curve
sufficient to capture differences in volatility and imperfect
correlation of rates along the yield curve for securities and
derivatives that are sensitive to different interest rates; and
    (4) Specific risk for individual positions:
    (iii) Additional conditions. As a condition for the security-based
swap dealer to use this paragraph (d) to calculate certain of its
capital charges, the Commission may impose additional conditions on the
security-based swap dealer, which may include, but are not limited to
restricting the security-based swap dealer's business on a product-
specific, category-specific, or general basis; submitting to the
Commission a plan to increase the security-based swap dealer's net
capital or tentative net

capital; filing more frequent reports with the Commission; modifying
the security-based swap dealer's internal risk management control
procedures; or computing the security-based swap dealer's deductions
for market and credit risk in accordance with paragraphs (c)(1)(iii),
(iv), (vi), (vii), and (c)(1)(ix)(A) and (B), as appropriate, and Sec.
240.18a-1b, as appropriate. If the Commission finds it is necessary or
appropriate in the public interest or for the protection of investors,
the Commission may impose additional conditions on the security-based
swap dealer, if:
    (A)-(B)_[Reserved];
    (C) There is a material deficiency in the internal risk management
control system or in the mathematical models used to price securities
or to calculate deductions for market and credit risk or allowances for
market and credit risk, as applicable, of the security-based swap
dealer;
    (D) The security-based swap dealer fails to comply with this
paragraph (d); or
    (E) The Commission finds that imposition of other conditions is
necessary or appropriate in the public interest or for the protection
of investors.
    (e) Models to compute deductions for market risk and credit risk--
(1) Market risk. A security-based swap dealer whose application,
including amendments, has been approved under paragraph (d) of this
section, shall compute a deduction for market risk in an amount equal
to the sum of the following:
    (i) For positions for which the Commission has approved the
security-based swap dealer's use of VaR models, the VaR of the
positions multiplied by the appropriate multiplication factor
determined according to paragraph (d) of this section, except that the
initial multiplication factor shall be three, unless the Commission
determines, based on a review of the security-based swap dealer's
application or an amendment to the application under paragraph (d) of
this section, including a review of its internal risk management
control system and practices and VaR models, that another
multiplication factor is appropriate;
    (ii) For positions for which the VaR model does not incorporate
specific risk, a deduction for specific risk to be determined by the
Commission based on a review of the security-based swap dealer's
application or an amendment to the application under paragraph (d) of
this section and the positions involved;
    (iii) For positions for which the Commission has approved the
security-based swap dealer's application to use scenario analysis, the
greatest loss resulting from a range of adverse movements in relevant
risk factors, prices, or spreads designed to represent a negative
movement greater than, or equal to, the worst ten-day movement of the
four years preceding calculation of the greatest loss, or some multiple
of the greatest loss based on the liquidity of the positions subject to
scenario analysis. If historical data is insufficient, the deduction
shall be the largest loss within a three standard deviation movement in
those risk factors, prices, or spreads over a ten-day period,
multiplied by an appropriate liquidity adjustment factor. Irrespective
of the deduction otherwise indicated under scenario analysis, the
resulting deduction for market risk must be at least $25 per 100 share
equivalent contract for equity positions, or one-half of one percent of
the face value of the contract for all other types of contracts, even
if the scenario analysis indicates a lower amount. A qualifying
scenario must include the following:
    (A) A set of pricing equations for the positions based on, for
example, arbitrage relations, statistical analysis, historic
relationships, merger evaluations, or fundamental valuation of an
offering of securities;
    (B) Auxiliary relationships mapping risk factors to prices; and
    (C) Data demonstrating the effectiveness of the scenario in
capturing market risk, including specific risk; and
    (iv) For all remaining positions, the deductions specified in Sec.
240.15c3-1(c)(2)(vi), Sec.  240.15c3-1(c)(2)(vii), and applicable
appendices to Sec.  240.15c3-1.
    (2) Credit risk. A security-based swap dealer whose application,
including amendments, has been approved under paragraph (d) of this
section may compute a deduction for credit risk on transactions in
derivatives instruments (if this paragraph (e) is used to calculate a
deduction for market risk on those positions) in an amount equal to the
sum of the following:
    (i) Counterparty exposure charge. A counterparty exposure charge in
an amount equal to the sum of the following:
    (A) The net replacement value in the account of each counterparty
that is insolvent, or in bankruptcy, or that has senior unsecured long-
term debt in default; and
    (B) For a counterparty not otherwise described in paragraph
(e)(2)(i)(A) of this section, the credit equivalent amount of the
security-based swap dealer's exposure to the counterparty, as defined
in paragraph (e)(2)(iii)(A) of this section, multiplied by the credit
risk weight of the counterparty, as determined in accordance with
paragraph (e)(2)(iii)(F) of this section, multiplied by eight percent;
and
    (ii) Counterparty concentration charge. A concentration charge by
counterparty in an amount equal to the sum of the following:
    (A) For each counterparty with a credit risk weight of 20 percent
or less, 5 percent of the amount of the current exposure to the
counterparty in excess of 5 percent of the tentative net capital of the
security-based swap dealer;
    (B) For each counterparty with a credit risk weight of greater than
20 percent but less than 50 percent, 20 percent of the amount of the
current exposure to the counterparty in excess of 5 percent of the
tentative net capital of the security-based swap dealer; and
    (C) For each counterparty with a credit risk weight of greater than
50 percent, 50 percent of the amount of the current exposure to the
counterparty in excess of 5 percent of the tentative net capital of the
security-based swap dealer;
    (iii) Terms. (A) The credit equivalent amount of the security-based
swap dealer's exposure to a counterparty is the sum of the security-
based swap dealer's maximum potential exposure to the counterparty, as
defined in paragraph (e)(2)(iii)(B) of this section, multiplied by the
appropriate multiplication factor, and the security-based swap dealer's
current exposure to the counterparty, as defined in paragraph
(e)(2)(iii)(C) of this section. The security-based swap dealer must use
the multiplication factor determined according to paragraph
(d)(9)(i)(C)(5) of this section, except that the initial multiplication
factor shall be one, unless the Commission determines, based on a
review of the security-based swap dealer's application or an amendment
to the application approved under paragraph (d) of this section,
including a review of its internal risk management control system and
practices and VaR models, that another multiplication factor is
appropriate;
    (B) The maximum potential exposure is the VaR of the counterparty's
positions with the security-based swap dealer, after applying netting
agreements with the counterparty meeting the requirements of paragraph
(e)(2)(iii)(D) of this section, taking into account the value of
collateral from the counterparty held by the security-based swap dealer
in accordance with paragraph (e)(2)(iii)(E) of this section, and taking
into account the current replacement value of the counterparty's

positions with the security-based swap dealer;
    (C) The current exposure of the security-based swap dealer to a
counterparty is the current replacement value of the counterparty's
positions with the security-based swap dealer, after applying netting
agreements with the counterparty meeting the requirements of paragraph
(e)(2)(iii)(D) of this section and taking into account the value of
collateral from the counterparty held by the security-based swap dealer
in accordance with paragraph (e)(2)(iii)(E) of this section;
    (D) Netting agreements. A security-based swap dealer may include
the effect of a netting agreement that allows the security-based swap
dealer to net gross receivables from and gross payables to a
counterparty upon default of the counterparty if:
    (1) The netting agreement is legally enforceable in each relevant
jurisdiction, including in insolvency proceedings;
    (2) The gross receivables and gross payables that are subject to
the netting agreement with a counterparty can be determined at any
time; and
    (3) For internal risk management purposes, the security-based swap
dealer monitors and controls its exposure to the counterparty on a net
basis;
    (E) Collateral. When calculating maximum potential exposure and
current exposure to a counterparty, the fair market value of collateral
pledged and held may be taken into account provided:
    (1) The collateral is marked to market each day and is subject to a
daily margin maintenance requirement;
    (2)(i) The collateral is subject to the security-based swap
dealer's physical possession or control and may be liquidated promptly
by the firm without intervention by any other party; or
    (ii) The collateral is held by an independent third-party custodian
that is a bank as defined in section 3(a)(6) of the Act or a registered
U.S. clearing organization or depository that is not affiliated with
the counterparty or, if the collateral consists of foreign securities
or currencies, a supervised foreign bank, clearing organization, or
depository that is not affiliated with the counterparty and that
customarily maintains custody of such foreign securities or currencies;
    (3) The collateral is liquid and transferable;
    (4) The collateral agreement is legally enforceable by the
security-based swap dealer against the counterparty and any other
parties to the agreement;
    (5) The collateral does not consist of securities issued by the
counterparty or a party related to the security-based swap dealer or to
the counterparty;
    (6) The Commission has approved the security-based swap dealer's
use of a VaR model to calculate deductions for market risk for the type
of collateral in accordance with paragraph (d) of this section; and
    (7) The collateral is not used in determining the credit rating of
the counterparty;
    (F) Credit risk weights of counterparties. A security-based swap
dealer that computes its deductions for credit risk pursuant to this
paragraph (e)(2) shall apply a credit risk weight for transactions with
a counterparty of either 20 percent, 50 percent, or 150 percent based
on an internal credit rating the security-based swap dealer determines
for the counterparty.
    (1) As part of its initial application or in an amendment, the
security-based swap dealer may request Commission approval to apply a
credit risk weight of either 20 percent, 50 percent, or 150 percent
based on internal calculations of credit ratings, including internal
estimates of the maturity adjustment. Based on the strength of the
security-based swap dealer's internal credit risk management system,
the Commission may approve the application. The security-based swap
dealer must make and keep current a record of the basis for the credit
risk weight of each counterparty;
    (2) As part of its initial application or in an amendment, the
security-based swap dealer may request Commission approval to determine
credit risk weights based on internal calculations, including internal
estimates of the maturity adjustment. Based on the strength of the
security-based swap dealer's internal credit risk management system,
the Commission may approve the application. The security-based swap
dealer must make and keep current a record of the basis for the credit
risk weight of each counterparty; and
    (3) As part of its initial application or in an amendment, the
security-based swap dealer may request Commission approval to reduce
deductions for credit risk through the use of credit derivatives.
    (f) Internal risk management control systems. A security-based swap
dealer must comply with Sec.  240.15c3-4 as if it were an OTC
derivatives dealer with respect to all of its business activities,
except that Sec.  240.15c3-4(c)(5)(xiii) and (xiv) and (d)(8) and (9)
shall not apply.
    (g) Debt-equity requirements. No security-based swap dealer shall
permit the total of outstanding principal amounts of its satisfactory
subordination agreements (other than such agreements which qualify
under this paragraph (g) as equity capital) to exceed 70 percent of its
debt-equity total, as hereinafter defined, for a period in excess of 90
days or for such longer period which the Commission may, upon
application of the security-based swap dealer, grant in the public
interest or for the protection of investors. In the case of a
corporation, the debt-equity total shall be the sum of its outstanding
principal amounts of satisfactory subordination agreements, par or
stated value of capital stock, paid in capital in excess of par,
retained earnings, unrealized profit and loss or other capital
accounts. In the case of a partnership, the debt-equity total shall be
the sum of its outstanding principal amounts of satisfactory
subordination agreements, capital accounts of partners (exclusive of
such partners' securities accounts) subject to the provisions of
paragraph (h) of this section, and unrealized profit and loss.
Provided, however, that a satisfactory subordinated loan agreement
entered into by a partner or stockholder which has an initial term of
at least three years and has a remaining term of not less than 12
months shall be considered equity for the purposes of this paragraph
(g) if:
    (1) It does not have any of the provisions for accelerated maturity
provided for by paragraph (b)(8)(i) or (b)(9)(i) or (ii) of Sec.
240.18a-1d and is maintained as capital subject to the provisions
restricting the withdrawal thereof required by paragraph (h) of this
section; or
    (2) The partnership agreement provides that capital contributed
pursuant to a satisfactory subordination agreement as defined in Sec.
240.18a-1d shall in all respects be partnership capital subject to the
provisions restricting the withdrawal thereof required by paragraph (h)
of this section.
    (h) Provisions relating to the withdrawal of equity capital--(1)
Notice provisions relating to limitations on the withdrawal of equity
capital. No equity capital of the security-based swap dealer or a
subsidiary or affiliate consolidated pursuant to Sec.  240.18a-1c may
be withdrawn by action of a stockholder or a partner or by redemption
or repurchase of shares of stock by any of the consolidated entities or
through the payment of dividends or any similar distribution, nor may
any unsecured advance or loan be made to a stockholder, partner,
employee or affiliate without written notice given in accordance with
paragraph (h)(1)(iv) of this section:

    (i) Two business days prior to any withdrawals, advances or loans
if those withdrawals, advances or loans on a net basis exceed in the
aggregate in any 30 calendar day period, 30 percent of the security-
based swap dealer's excess net capital. A security-based swap dealer,
in an emergency situation, may make withdrawals, advances or loans that
on a net basis exceed 30 percent of the security-based swap dealer's
excess net capital in any 30 calendar day period without giving the
advance notice required by this paragraph, with the prior approval of
the Commission. Where a security-based swap dealer makes a withdrawal
with the consent of the Commission, it shall in any event comply with
paragraph (h)(1)(ii) of this section; or
    (ii) Two business days after any withdrawals, advances or loans if
those withdrawals, advances or loans on a net basis exceed in the
aggregate in any 30 calendar day period, 20 percent of the security-
based swap dealer's excess net capital.
    (iii) This paragraph (h)(1) does not apply to:
    (A) Securities or commodities transactions in the ordinary course
of business between a security-based swap dealer and an affiliate where
the security-based swap dealer makes payment to or on behalf of such
affiliate for such transaction and then receives payment from such
affiliate for the securities or commodities transaction within two
business days from the date of the transaction; or
    (B) Withdrawals, advances or loans which in the aggregate in any
thirty calendar day period, on a net basis, equal $500,000 or less.
    (iv) Each required notice shall be effective when received by the
Commission in Washington, DC, the regional office of the Commission for
the region in which the security-based swap dealer has its principal
place of business, and the Commodity Futures Trading Commission if such
security-based swap dealer is registered with that Commission.
    (2) Limitations on withdrawal of equity capital. No equity capital
of the security-based swap dealer or a subsidiary or affiliate
consolidated pursuant to Sec.  240.18a-1c may be withdrawn by action of
a stockholder or a partner or by redemption or repurchase of shares of
stock by any of the consolidated entities or through the payment of
dividends or any similar distribution, nor may any unsecured advance or
loan be made to a stockholder, partner, employee or affiliate, if after
giving effect thereto and to any other such withdrawals, advances or
loans and any Payments of Payments Obligations (as defined in Sec.
240.18a-1d) under satisfactory subordinated loan agreements which are
scheduled to occur within 180 days following such withdrawal, advance
or loan if:
    (i) The security-based swap dealer's net capital would be less than
120 percent of the minimum dollar amount required by paragraph (a) of
this section; or
    (ii) The total outstanding principal amounts of satisfactory
subordinated loan agreements of the security-based swap dealer and any
subsidiaries or affiliates consolidated pursuant to Sec.  240.18a-1c
(other than such agreements which qualify as equity under paragraph (g)
of this section) would exceed 70 percent of the debt-equity total as
defined in paragraph (g) of this section.
    (3) Temporary restrictions on withdrawal of net capital. (i) The
Commission may by order restrict, for a period up to twenty business
days, any withdrawal by the security-based swap dealer of equity
capital or unsecured loan or advance to a stockholder, partner, member,
employee or affiliate under such terms and conditions as the Commission
deems necessary or appropriate in the public interest or consistent
with the protection of investors if the Commission, based on the
information available, concludes that such withdrawal, advance or loan
may be detrimental to the financial integrity of the security-based
swap dealer, or may unduly jeopardize the security-based swap dealer's
ability to repay its customer claims or other liabilities which may
cause a significant impact on the markets or expose the customers or
creditors of the security-based swap dealer to loss.
    (ii) An order temporarily prohibiting the withdrawal of capital
shall be rescinded if the Commission determines that the restriction on
capital withdrawal should not remain in effect. A hearing on an order
temporarily prohibiting withdrawal of capital will be held within two
business days from the date of the request in writing by the security-
based swap dealer.
    (4) Miscellaneous provisions. (i) Excess net capital is that amount
in excess of the amount required under paragraph (a) of this section.
For the purposes of paragraphs (h)(1) and (2) of this section, a
security-based swap dealer may use the amount of excess net capital and
deductions required under paragraphs (c)(1)(vi) and (vii) and Sec.
240.18a-1a reported in its most recently required filed Part II of Form
X-17A-5 for the purposes of calculating the effect of a projected
withdrawal, advance or loan relative to excess net capital or
deductions. The security-based swap dealer must assure itself that the
excess net capital or the deductions reported on the most recently
required filed Part II of Form X-17A-5 have not materially changed
since the time such report was filed.
    (ii) The term equity capital includes capital contributions by
partners, par or stated value of capital stock, paid-in capital in
excess of par, retained earnings or other capital accounts. The term
equity capital does not include securities in the securities accounts
of partners and balances in limited partners' capital accounts in
excess of their stated capital contributions.
    (iii) Paragraphs (h)(1) and (2) of this section shall not preclude
a security-based swap dealer from making required tax payments or
preclude the payment to partners of reasonable compensation, and such
payments shall not be included in the calculation of withdrawals,
advances, or loans for purposes of paragraphs (h)(1) and (2) of this
section.
    (iv) For the purpose of this paragraph (h), any transactions
between a security-based swap dealer and a stockholder, partner,
employee or affiliate that results in a diminution of the security-
based swap dealer's net capital shall be deemed to be an advance or
loan of net capital.

0
13. Section 240.18a-1a is added to read as follows:

Sec.  240.18a-1a  Options.

    (a)(1) Definitions. The term unlisted option means any option not
included in the definition of listed option provided in Sec.  240.15c3-
1(c)(2)(x).
    (2) The term option series refers to listed option contracts of the
same type (either a call or a put) and exercise style, covering the
same underlying security with the same exercise price, expiration date,
and number of underlying units.
    (3) The term related instrument within an option class or product
group refers to futures contracts, options on futures contracts,
security-based swaps on a narrow-based security index, and swaps
covering the same underlying instrument. In relation to options on
foreign currencies, a related instrument within an option class also
shall include forward contracts on the same underlying currency.
    (4) The term underlying instrument refers to long and short
positions, as appropriate, covering the same foreign currency, the same
security, security future, or security-based swap other than a
security-based swap on a narrow-based security index, or a security

which is exchangeable for or convertible into the underlying security
within a period of 90 days. If the exchange or conversion requires the
payment of money or results in a loss upon conversion at the time when
the security is deemed an underlying instrument for purposes of this
Appendix A, the broker or dealer will deduct from net worth the full
amount of the conversion loss. The term underlying instrument shall not
be deemed to include securities options, futures contracts, options on
futures contracts, security-based swaps on a narrow-based security
index, qualified stock baskets, unlisted instruments, or swaps.
    (5) The term options class refers to all options contracts covering
the same underlying instrument.
    (6) The term product group refers to two or more option classes,
related instruments, underlying instruments, and qualified stock
baskets in the same portfolio type (see paragraph (b)(1)(ii) of this
section) for which it has been determined that a percentage of
offsetting profits may be applied to losses at the same valuation
point.
    (b) The deduction under this Appendix A must equal the sum of the
deductions specified in paragraph (b)(1)(iv)(C) of this section.
    (1)(i) Definitions. (A) The terms theoretical gains and losses mean
the gain and loss in the value of individual option series, the value
of underlying instruments, related instruments, and qualified stock
baskets within that option's class, at 10 equidistant intervals
(valuation points) ranging from an assumed movement (both up and down)
in the current market value of the underlying instrument equal to the
percentage corresponding to the deductions otherwise required under
Sec.  240.15c3-1 for the underlying instrument (see paragraph
(b)(1)(iii) of this section). Theoretical gains and losses shall be
calculated using a theoretical options pricing model that satisfies the
criteria set forth in paragraph (b)(1)(i)(B) of this section.
    (B) The term theoretical options pricing model means any
mathematical model, other than a security-based swap dealer's
proprietary model, the use of which has been approved by the
Commission. Any such model shall calculate theoretical gains and losses
as described in paragraph (b)(1)(i)(A) of this section for all series
and issues of equity, index and foreign currency options and related
instruments, and shall be made available equally and on the same terms
to all security-based swap dealers. Its procedures shall include the
arrangement of the vendor to supply accurate and timely data to each
security-based swap dealer with respect to its services, and the fees
for distribution of the services. The data provided to security-based
swap dealers shall also contain the minimum requirements set forth in
paragraphs (b)(1)(iv)(C) of this section and the product group offsets
set forth in paragraphs (b)(1)(iv)(B) of this section. At a minimum,
the model shall consider the following factors in pricing the option:
    (1) The current spot price of the underlying asset;
    (2) The exercise price of the option;
    (3) The remaining time until the option's expiration;
    (4) The volatility of the underlying asset;
    (5) Any cash flows associated with ownership of the underlying
asset that can reasonably be expected to occur during the remaining
life of the option; and
    (6) The current term structure of interest rates.
    (C) The term major market foreign currency means the currency of a
sovereign nation for which there is a substantial inter-bank forward
currency market.
    (D) The term qualified stock basket means a set or basket of stock
positions which represents no less than 50 percent of the
capitalization for a high-capitalization or non-high-capitalization
diversified market index, or, in the case of a narrow-based index, no
less than 95 percent of the capitalization for such narrow-based index.
    (ii) With respect to positions involving listed options in its
proprietary or other account, the security-based swap dealer shall
group long and short positions into the following portfolio types:
    (A) Equity options on the same underlying instrument and positions
in that underlying instrument;
    (B) Options on the same major market foreign currency, positions in
that major market foreign currency, and related instruments within
those options' classes;
    (C) High-capitalization diversified market index options, related
instruments within the option's class, and qualified stock baskets in
the same index;
    (D) Non-high-capitalization diversified index options, related
instruments within the index option's class, and qualified stock
baskets in the same index; and
    (E) Narrow-based index options, related instruments within the
index option's class, and qualified stock baskets in the same index.
    (iii) Before making the computation, each security-based swap
dealer shall obtain the theoretical gains and losses for each option
series and for the related and underlying instruments within those
options' class in the proprietary or other accounts of that security-
based swap dealer. For each option series, the theoretical options
pricing model shall calculate theoretical prices at 10 equidistant
valuation points within a range consisting of an increase or a decrease
of the following percentages of the daily market price of the
underlying instrument:
    (A) +(-) 15 percent for equity securities with a ready market,
narrow-based indexes, and non-high-capitalization diversified indexes;
    (B) +(-) 6 percent for major market foreign currencies;
    (C) +(-) 20 percent for all other currencies; and
    (D) +(-)10 percent for high-capitalization diversified indexes.
    (iv)(A) The security-based swap dealer shall multiply the
corresponding theoretical gains and losses at each of the 10
equidistant valuation points by the number of positions held in a
particular option series, the related instruments and qualified stock
baskets within the option's class, and the positions in the same
underlying instrument.
    (B) In determining the aggregate profit or loss for each portfolio
type, the security-based swap dealer will be allowed the following
offsets in the following order, provided, that in the case of qualified
stock baskets, the security-based swap dealer may elect to net
individual stocks between qualified stock baskets and take the
appropriate deduction on the remaining, if any, securities:
    (1) First, a security-based swap dealer is allowed the following
offsets within an option's class:
    (i) Between options on the same underlying instrument, positions
covering the same underlying instrument, and related instruments within
the option's class, 100 percent of a position's gain shall offset
another position's loss at the same valuation point;
    (ii) Between index options, related instruments within the option's
class, and qualified stock baskets on the same index, 95 percent, or
such other amount as designated by the Commission, of gains shall
offset losses at the same valuation point;
    (2) Second, a security-based swap dealer is allowed the following
offsets within an index product group:
    (i) Among positions involving different high-capitalization
diversified

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

0
 14. Section 240.18a-1b is added to read as follows:

Sec.  240.18a-1b  Adjustments to net worth for certain commodities
transactions.

    (a) Every registered security-based swap dealer in computing net
capital pursuant to Sec.  240.18a-1 shall comply with the following:
    (1) Where a security-based swap dealer has an asset or liability
which is treated or defined in paragraph (c) of Sec.  240.18a-1, the
inclusion or exclusion of all or part of such asset or liability for
net capital shall be in accordance with Sec.  240.18a-1, except as
specifically provided otherwise in this section. Where a commodity
related asset or liability, including a swap-related asset or
liability, is specifically treated or defined in 17 CFR 1.17 and is not
generally or specifically treated or defined in Sec.  240.18a-1 or this
section, the inclusion or exclusion of all or part of such asset or
liability for net capital shall be in accordance with 17 CFR 1.17.
    (2) In computing net capital as defined in Sec.  240.18a-1(c)(1),
the net worth of a security-based swap dealer shall be adjusted as
follows with respect to commodity-related transactions:
    (i)(A) Unrealized profits shall be added and unrealized losses
shall be deducted in the commodities accounts of the security-based
swap dealer, including unrealized profits and losses on fixed price
commitments and forward contracts; and
    (B) The value attributed to any commodity option which is not
traded on a contract market shall be the difference between the
option's strike price and the market value for the physical or futures
contract which is the subject of the option. In the case of a long call
commodity option, if the market value for the physical or futures
contract which is the subject of the option is less than the strike
price of the option, it shall be given no value. In the case of a long
put commodity option, if the market value for the physical commodity or
futures contract which is the subject of the option is more than the
striking price of the option, it shall be given no value.
    (ii) Deduct any unsecured commodity futures or option account
containing a ledger balance and open trades, the combination of which
liquidates to a deficit or containing a debit ledger balance only:
Provided, however, Deficits or debit ledger balances in unsecured
customers', non-customers' and proprietary accounts, which are the
subject of calls for margin or other required deposits need not be
deducted until the close of business on the business day following the
date on which such deficit or debit ledger balance originated;
    (iii) Deduct all unsecured receivables, advances and loans except
for:
    (A) Management fees receivable from commodity pools outstanding no
longer than thirty (30) days from the date they are due;
    (B) Receivables from foreign clearing organizations;
    (C) Receivables from registered futures commission merchants or
brokers, resulting from cleared swap transactions or, commodity futures
or option transactions, except those specifically excluded under
paragraph (a)(2)(ii) of this section.
    (iv) Deduct all inventories (including work in process, finished
goods, raw materials and inventories held for resale) except for
readily marketable spot commodities; or spot commodities which
adequately collateralize indebtedness under 17 CFR 1.17(c)(7);
    (v) Guarantee deposits with commodities clearing organizations are
not required to be deducted from net worth;
    (vi) Stock in commodities clearing organizations to the extent of
its margin value is not required to be deducted from net worth;
    (vii) Deduct from net worth the amount by which any advances paid
by the security-based swap dealer on cash commodity contracts and used
in computing net capital exceeds 95 percent of the market value of the
commodities covered by such contracts.
    (viii) Do not include equity in the commodity accounts of partners
in net worth.

    (ix) In the case of all inventory, fixed price commitments and
forward contracts, except for inventory and forward contracts in the
inter-bank market in those foreign currencies which are purchased or
sold for further delivery on or subject to the rules of a contract
market and covered by an open futures contract for which there will be
no charge, deduct the applicable percentage of the net position
specified below:
    (A) Inventory which is currently registered as deliverable on a
contract market and covered by an open futures contract or by a
commodity option on a physical--No charge.
    (B) Inventory which is covered by an open futures contract or
commodity option--5 percent of the market value.
    (C) Inventory which is not covered--20 percent of the market value.
    (D) Fixed price commitments (open purchases and sales) and forward
contracts which are covered by an open futures contract or commodity
option--10 percent of the market value.
    (E) Fixed price commitments (open purchases and sales) and forward
contracts which are not covered by an open futures contract or
commodity option--20 percent of the market value.
    (x) Deduct for undermargined customer commodity futures accounts
the amount of funds required in each such account to meet maintenance
margin requirements of the applicable board of trade or, if there are
no such maintenance margin requirements, clearing organization margin
requirements applicable to such positions, after application of calls
for margin, or other required deposits which are outstanding three
business days or less. If there are no such maintenance margin
requirements or clearing organization margin requirements on such
accounts, then deduct the amount of funds required to provide margin
equal to the amount necessary after application of calls for margin, or
other required deposits outstanding three days or less to restore
original margin when the original margin has been depleted by 50
percent or more. Provided, To the extent a deficit is deducted from net
worth in accordance with paragraph (a)(2)(ii) of this section, such
amount shall not also be deducted under this paragraph (a)(2)(x). In
the event that an owner of a customer account has deposited an asset
other than cash to margin, guarantee or secure his account, the value
attributable to such asset for purposes of this paragraph shall be the
lesser of the value attributable to such asset pursuant to the margin
rules of the applicable board of trade, or the market value of such
asset after application of the percentage deductions specified in
paragraph (a)(2)(ix) of this section or, where appropriate, specified
in Sec.  240.18a-1(c)(1)(iv), (vi), or (vii) of this part;
    (xi) Deduct for undermargined non-customer and omnibus commodity
futures accounts the amount of funds required in each such account to
meet maintenance margin requirements of the applicable board of trade
or, if there are no such maintenance margin requirements, clearing
organization margin requirements applicable to such positions, after
application of calls for margin, or other required deposits which are
outstanding two business days or less. If there are no such maintenance
margin requirements or clearing organization margin requirements, then
deduct the amount of funds required to provide margin equal to the
amount necessary after application of calls for margin, or other
required deposits outstanding two days or less to restore original
margin when the original margin has been depleted by 50 percent or
more. Provided, To the extent a deficit is deducted from net worth in
accordance with paragraph (a)(2)(ii) of this section such amount shall
not also be deducted under this paragraph (a)(2)(xi). In the event that
an owner of a non-customer or omnibus account has deposited an asset
other than cash to margin, guarantee or secure the account, the value
attributable to such asset for purposes of this paragraph shall be the
lesser of the value attributable to such asset pursuant to the margin
rules of the applicable board of trade, or the market value of such
asset after application of the percentage deductions specified in
paragraph (a)(2)(ix) of this section or, where appropriate, specified
in Sec.  240.18a-1(c)(1)(iv), (vi), or (vii) of this part;
    (xii) In the case of open futures contracts and granted (sold)
commodity options held in proprietary accounts carried by the security-
based swap dealer which are not covered by a position held by the
security-based swap dealer or which are not the result of a ``changer
trade'' made in accordance with the rules of a contract market, deduct:
    (A) For a security-based swap dealer which is a clearing member of
a contract market for the positions on such contract market cleared by
such member, the applicable margin requirement of the applicable
clearing organization;
    (B) For a security-based swap dealer which is a member of a self-
regulatory organization, 150 percent of the applicable maintenance
margin requirement of the applicable board of trade or clearing
organization, whichever is greater; or
    (C) For all other security-based swap dealers, 200 percent of the
applicable maintenance margin requirement of the applicable board of
trade or clearing organization, whichever is greater; or
    (D) For open contracts or granted (sold) commodity options for
which there are no applicable maintenance margin requirements, 200
percent of the applicable initial margin requirement; Provided, the
equity in any such proprietary account shall reduce the deduction
required by this paragraph (a)(2)(xii) if such equity is not otherwise
includable in net capital.
    (xiii) In the case of a security-based swap dealer which is a
purchaser of a commodity option which is traded on a contract market,
the deduction shall be the same safety factor as if the security-based
swap dealer were the grantor of such option in accordance with
paragraph (a)(2)(xii) of this section, but in no event shall the safety
factor be greater than the market value attributed to such option.
    (xiv) In the case of a security-based swap dealer which is a
purchaser of a commodity option not traded on a contract market which
has value and such value is used to increase net capital, the deduction
is ten percent of the market value of the physical or futures contract
which is the subject of such option but in no event more than the value
attributed to such option.
    (xv) A loan or advance or any other form of receivable shall not be
considered ``secured'' for the purposes of paragraph (a)(2) of this
section unless the following conditions exist:
    (A) The receivable is secured by readily marketable collateral
which is otherwise unencumbered and which can be readily converted into
cash: Provided, however, That the receivable will be considered secured
only to the extent of the market value of such collateral after
application of the percentage deductions specified in paragraph
(a)(2)(ix) of this section; and
    (B)(1) The readily marketable collateral is in the possession or
control of the security-based swap dealer; or
    (2) The security-based swap dealer has a legally enforceable,
written security agreement, signed by the debtor, and has a perfected
security interest in the readily marketable collateral within the
meaning of the laws of the State in which the readily marketable
collateral is located.
    (xvi) The term cover for purposes of this section shall mean cover
as defined in 17 CFR 1.17(j).

    (xvii) The term customer for purposes of this section shall mean
customer as defined in 17 CFR 1.17(b)(2). The term non-customer for
purposes of this section shall mean non-customer as defined in 17 CFR
1.17(b)(4).
    (b) Every registered security-based swap dealer in computing net
capital pursuant to Sec.  240.18a-1 shall comply with the following:
    (1) Cleared swaps. In the case of a cleared swap held in a
proprietary account of the security-based swap dealer, deducting the
amount of the applicable margin requirement of the derivatives clearing
organization or, if the swap references an equity security index, the
security-based swap dealer may take a deduction using the method
specified in Sec.  240.18a-1a.
    (2) Non-cleared swaps--(i) Credit default swaps referencing broad-
based security indices. In the case of a non-cleared credit default
swap for which the deductions in Sec.  240.18a-1(e) do not apply:
    (A) Short positions (selling protection). In the case of a non-
cleared swap that is a short credit default swap referencing a broad-
based security index, deducting the percentage of the notional amount
based upon the current basis point spread of the credit default swap
and the maturity of the credit default swap in accordance with table 1
to Sec.  240.18a-1b(b)(2)(i)(A):

                                                        Table 1 to Sec.   240.18a-1b(b)(2)(i)(A)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Basis point spread
   Length of time to maturity of credit  default swap    -----------------------------------------------------------------------------------------------
                        contract                            100 or less                                                                     700 or more
                                                                (%)        101-300  (%)    301-400  (%)    401-500  (%)    501-699  (%)         (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than 12 months.....................................            0.67            1.33            3.33            5.00            6.67           10.00
12 months but less than 24 months.......................            1.00            2.33            5.00            6.67            8.33           11.67
24 months but less than 36 months.......................            1.33            3.33            6.67            8.33           10.00           13.33
36 months but less than 48 months.......................            2.00            4.00            8.33           10.00           11.67           15.00
48 months but less than 60 months.......................            2.67            4.67           10.00           11.67           13.33           16.67
60 months but less than 72 months.......................            3.67            5.67           11.67           13.33           15.00           18.33
72 months but less than 84 months.......................            4.67            6.67           13.33           15.00           16.67           20.00
84 months but less than 120 months......................            5.67           10.00           15.00           16.67           18.33           26.67
120 months and longer...................................            6.67           13.33           16.67           18.33           20.00           33.33
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (B) Long positions (purchasing protection). In the case of a non-
cleared swap that is a long credit default swap referencing a broad-
based security index, deducting 50 percent of the deduction that would
be required by paragraph (b)(2)(i)(A) of this section if the non-
cleared swap was a short credit default swap, each such deduction not
to exceed the current market value of the long position.
    (C) Long and short credit default swaps. In the case of non-cleared
swaps that are long and short credit default swaps referencing the same
broad-based security index, have the same credit events which would
trigger payment by the seller of protection, have the same basket of
obligations which would determine the amount of payment by the seller
of protection upon the occurrence of a credit event, that are in the
same or adjacent spread category, and that are in the same or adjacent
maturity category and have a maturity date within three months of the
other maturity category, deducting the percentage of the notional
amount specified in the higher maturity category under paragraph
(b)(2)(i)(A) or (B) of this section on the excess of the long or short
position.
    (D) Long basket of obligors and long credit default swap. In the
case of a non-cleared swap that is a long credit default swap
referencing a broad-based security index and the security-based swap
dealer is long a basket of debt securities comprising all of the
components of the security index, deducting 50 percent of the amount
specified in Sec.  240.15c3-1(c)(2)(vi) for the component securities,
provided the security-based swap dealer can deliver the component
securities to satisfy the obligation of the security-based swap dealer
on the credit default swap.
    (E) Short basket of obligors and short credit default swap. In the
case of a non-cleared swap that is a short credit default swap
referencing a broad-based security index and the security-based swap
dealer is short a basket of debt securities comprising all of the
components of the security index, deducting the amount specified in
Sec.  240.15c3-1(c)(2)(vi) for the component securities.
    (ii) All other swaps. (A) In the case of any non-cleared swap that
is not a credit default swap for which the deductions in Sec.  240.18a-
1(e) do not apply, deducting the amount calculated by multiplying the
notional value of the swap by the percentage specified in:
    (1) Section 240.15c3-1 applicable to the reference asset if Sec.
240.15c3-1 specifies a percentage deduction for the type of asset;
    (2) 17 CFR 1.17 applicable to the reference asset if 17 CFR 1.17
specifies a percentage deduction for the type of asset and Sec.
240.15c3-1 does not specify a percentage deduction for the type of
asset; or
    (3) In the case of a non-cleared interest rate swap, Sec.
240.15c3-1(c)(2)(vi)(A) based on the maturity of the swap, provided
that the percentage deduction must be no less than one eighth of 1
percent of the amount of a long position that is netted against a short
position in the case of a non-cleared swap with a maturity of three
months or more.
    (B) A security-based swap dealer may reduce the deduction under
paragraph (b)(2)(ii) of this section by an amount equal to any
reduction recognized for a comparable long or short position in the
reference asset or interest rate under 17 CFR 1.17 or Sec.  240.15c3-1.

0
15. Section 240.18a-1c is added to read as follows:

Sec.  240.18a-1c  Consolidated Computations of Net Capital for Certain
Subsidiaries and Affiliates of Security-Based Swap Dealers.

    Every security-based swap dealer in computing its net capital
pursuant to Sec.  240.18a-1 shall include in its computation all
liabilities or obligations of a subsidiary or affiliate that the
security-based swap dealer guarantees, endorses, or assumes either
directly or indirectly.

0
16. Section 240.18a-1d is added to read as follows:

Sec.  240.18a-1d  Satisfactory Subordinated Loan Agreements.

    (a) Introduction--(1) Minimum requirements. This section sets forth
minimum and non-exclusive requirements for satisfactory subordinated
loan agreements. The Commission may require or the

security-based swap dealer may include such other provisions as deemed
necessary or appropriate to the extent such provisions do not cause the
subordinated loan agreement to fail to meet the minimum requirements of
this section.
    (2) Certain definitions. For purposes of Sec.  240.18a-1 and this
section:
    (i) The term ``subordinated loan agreement'' shall mean the
agreement or agreements evidencing or governing a subordinated
borrowing of cash.
    (ii) The term ``Payment Obligation'' shall mean the obligation of a
security-based swap dealer to repay cash loaned to the security-based
swap dealer pursuant to a subordinated loan agreement and ``Payment''
shall mean the performance by a security-based swap dealer of a Payment
Obligation.
    (iii) The term ``lender'' shall mean the person who lends cash to a
security-based swap dealer pursuant to a subordinated loan agreement.
    (b) Minimum requirements for subordinated loan agreements--(1)
Subordinated loan agreement. Subject to paragraph (a) of this section,
a subordinated loan agreement shall mean a written agreement between
the security-based swap dealer and the lender, which has a minimum term
of one year, and is a valid and binding obligation enforceable in
accordance with its terms (subject as to enforcement to applicable
bankruptcy, insolvency, reorganization, moratorium and other similar
laws) against the security-based swap dealer and the lender and their
respective heirs, executors, administrators, successors and assigns.
    (2) Specific amount. All subordinated loan agreements shall be for
a specific dollar amount which shall not be reduced for the duration of
the agreement except by installments as specifically provided for
therein and except as otherwise provided in this section.
    (3) Effective subordination. The subordinated loan agreement shall
effectively subordinate any right of the lender to receive any Payment
with respect thereto, together with accrued interest or compensation,
to the prior payment or provision for payment in full of all claims of
all present and future creditors of the security-based swap dealer
arising out of any matter occurring prior to the date on which the
related Payment Obligation matures consistent with the provisions of
Sec. Sec.  240.18a-1 and 240.18a-1d, except for claims which are the
subject of subordinated loan agreements that rank on the same priority
as or junior to the claim of the lender under such subordinated loan
agreements.
    (4) Proceeds of subordinated loan agreements. The subordinated loan
agreement shall provide that the cash proceeds thereof shall be used
and dealt with by the security-based swap dealer as part of its capital
and shall be subject to the risks of the business.
    (5) Certain rights of the security-based swap dealer. The
subordinated loan agreement shall provide that the security-based swap
dealer shall have the right to deposit any cash proceeds of a
subordinated loan agreement in an account or accounts in its own name
in any bank or trust company.
    (6) Permissive prepayments. A security-based swap dealer at its
option but not at the option of the lender may, if the subordinated
loan agreement so provides, make a Payment of all or any portion of the
Payment Obligation thereunder prior to the scheduled maturity date of
such Payment Obligation (hereinafter referred to as a ``Prepayment''),
but in no event may any Prepayment be made before the expiration of one
year from the date such subordinated loan agreement became effective.
No Prepayment shall be made, if, after giving effect thereto (and to
all Payments of Payment Obligations under any other subordinated loan
agreements then outstanding the maturity or accelerated maturities of
which are scheduled to fall due within six months after the date such
Prepayment is to occur pursuant to this provision or on or prior to the
date on which the Payment Obligation in respect of such Prepayment is
scheduled to mature disregarding this provision, whichever date is
earlier) without reference to any projected profit or loss of the
security-based swap dealer, either its net capital would fall below 120
percent of its minimum requirement under Sec.  240.18a-1, or, if the
security-based swap dealer is approved to calculate net capital under
Sec.  240.18a-1(d), its tentative net capital would fall to an amount
below 120 percent of the minimum requirement. Notwithstanding the
above, no Prepayment shall occur without the prior written approval of
the Commission.
    (7) Suspended repayment. The Payment Obligation of the security-
based swap dealer in respect of any subordinated loan agreement shall
be suspended and shall not mature if, after giving effect to Payment of
such Payment Obligation (and to all Payments of Payment Obligations of
such security-based swap dealer under any other subordinated loan
agreement(s) then outstanding that are scheduled to mature on or before
such Payment Obligation) either its net capital would fall below 120
percent of its minimum requirement under Sec.  240.18a-1, or, if the
security-based swap dealer is approved to calculate net capital under
Sec.  240.18a-1(d), its tentative net capital would fall to an amount
below 120 percent of the minimum requirement. The subordinated loan
agreement may provide that if the Payment Obligation of the security-
based swap dealer thereunder does not mature and is suspended as a
result of the requirement of this paragraph (b)(7) for a period of not
less than six months, the security-based swap dealer shall thereupon
commence the rapid and orderly liquidation of its business, but the
right of the lender to receive Payment, together with accrued interest
or compensation, shall remain subordinate as required by the provisions
of Sec. Sec.  240.18a-1 and 240.18a-1d.
    (8) Accelerated maturity--obligation to repay to remain
subordinate. (i) Subject to the provisions of paragraph (b)(7) of this
section, a subordinated loan agreement may provide that the lender may,
upon prior written notice to the security-based swap dealer and the
Commission given not earlier than six months after the effective date
of such subordinated loan agreement, accelerate the date on which the
Payment Obligation of the security-based swap dealer, together with
accrued interest or compensation, is scheduled to mature to a date not
earlier than six months after the giving of such notice, but the right
of the lender to receive Payment, together with accrued interest or
compensation, shall remain subordinate as required by the provisions of
Sec. Sec.  240.18a-1 and 240.18a-1d.
    (ii) Notwithstanding the provisions of paragraph (b)(7) of this
section, the Payment Obligation of the security-based swap dealer with
respect to a subordinated loan agreement, together with accrued
interest and compensation, shall mature in the event of any
receivership, insolvency, liquidation, bankruptcy, assignment for the
benefit of creditors, reorganization whether or not pursuant to the
bankruptcy laws, or any other marshalling of the assets and liabilities
of the security-based swap dealer but the right of the lender to
receive Payment, together with accrued interest or compensation, shall
remain subordinate as required by the provisions of Sec. Sec.  240.18a-
1 and 240.18a-1d.
    (9) Accelerated maturity of subordinated loan agreements on event
of default and event of acceleration--obligation to repay to remain
subordinate. (i) A subordinated loan

agreement may provide that the lender may, upon prior written notice to
the security-based swap dealer and the Commission of the occurrence of
any Event of Acceleration (as hereinafter defined) given no sooner than
six months after the effective date of such subordinated loan
agreement, accelerate the date on which the Payment Obligation of the
security-based swap dealer, together with accrued interest or
compensation, is scheduled to mature, to the last business day of a
calendar month which is not less than six months after notice of
acceleration is received by the security-based swap dealer and the
Commission. Any subordinated loan agreement containing such Events of
Acceleration may also provide, that if upon such accelerated maturity
date the Payment Obligation of the security-based swap dealer is
suspended as required by paragraph (b)(7) of this section and
liquidation of the security-based swap dealer has not commenced on or
prior to such accelerated maturity date, then notwithstanding paragraph
(b)(7) the Payment Obligation of the security-based swap dealer with
respect to such subordinated loan agreement shall mature on the day
immediately following such accelerated maturity date and in any such
event the Payment Obligations of the security-based swap dealer with
respect to all other subordinated loan agreements then outstanding
shall also mature at the same time but the rights of the respective
lenders to receive Payment, together with accrued interest or
compensation, shall remain subordinate as required by the provisions of
this section. Events of Acceleration which may be included in a
subordinated loan agreement complying with this paragraph (b)(9) shall
be limited to:
    (A) Failure to pay interest or any installment of principal on a
subordinated loan agreement as scheduled;
    (B) Failure to pay when due other money obligations of a specified
material amount;
    (C) Discovery that any material, specified representation or
warranty of the security-based swap dealer which is included in the
subordinated loan agreement and on which the subordinated loan
agreement was based or continued was inaccurate in a material respect
at the time made;
    (D) Any specified and clearly measurable event which is included in
the subordinated loan agreement and which the lender and the security-
based swap dealer agree:
    (1) Is a significant indication that the financial position of the
security-based swap dealer has changed materially and adversely from
agreed upon specified norms; or
    (2) Could materially and adversely affect the ability of the
security-based swap dealer to conduct its business as conducted on the
date the subordinated loan agreement was made; or
    (3) Is a significant change in the senior management of the
security-based swap dealer or in the general business conducted by the
security-based swap dealer from that which obtained on the date the
subordinated loan agreement became effective;
    (E) Any continued failure to perform agreed covenants included in
the subordinated loan agreement relating to the conduct of the business
of the security-based swap dealer or relating to the maintenance and
reporting of its financial position; and
    (ii) Notwithstanding the provisions of paragraph (b)(7) of this
section, a subordinated loan agreement may provide that, if liquidation
of the business of the security-based swap dealer has not already
commenced, the Payment Obligation of the security-based swap dealer
shall mature, together with accrued interest or compensation, upon the
occurrence of an Event of Default (as hereinafter defined). Such
agreement may also provide that, if liquidation of the business of the
security-based swap dealer has not already commenced, the rapid and
orderly liquidation of the business of the security-based swap dealer
shall then commence upon the happening of an Event of Default. Any
subordinated loan agreement which so provides for maturity of the
Payment Obligation upon the occurrence of an Event of Default shall
also provide that the date on which such Event of Default occurs shall,
if liquidation of the security-based swap dealer has not already
commenced, be the date on which the Payment Obligations of the
security-based swap dealer with respect to all other subordinated loan
agreements then outstanding shall mature but the rights of the
respective lenders to receive Payment, together with accrued interest
or compensation, shall remain subordinate as required by the provisions
of this section. Events of Default which may be included in a
subordinated loan agreement shall be limited to:
    (A) The net capital of the security-based swap dealer falling to an
amount below its minimum requirement under Sec.  240.18a-1, or, if the
security-based swap dealer is approved to calculate net capital under
Sec.  240.18a-1(d), its tentative net capital falling below the minimum
requirement, throughout a period of 15 consecutive business days,
commencing on the day the security-based swap dealer first determines
and notifies the Commission, or the Commission first determines and
notifies the security-based swap dealer of such fact;
    (B) The Commission revoking the registration of the security-based
swap dealer;
    (C) The Commission suspending (and not reinstating within 10 days)
the registration of the security-based swap dealer;
    (D) Any receivership, insolvency, liquidation, bankruptcy,
assignment for the benefit of creditors, reorganization whether or not
pursuant to bankruptcy laws, or any other marshalling of the assets and
liabilities of the security-based swap dealer. A subordinated loan
agreement that contains any of the provisions permitted by this
paragraph (b)(9) shall not contain the provision otherwise permitted by
paragraph (b)(8)(i) of this section.
    (c) Miscellaneous provisions--(1) Prohibited cancellation. The
subordinated loan agreement shall not be subject to cancellation by
either party; no Payment shall be made with respect thereto and the
agreement shall not be terminated, rescinded or modified by mutual
consent or otherwise if the effect thereof would be inconsistent with
the requirements of Sec. Sec.  240.18a-1 and 240.18a-1d.
    (2) Notification. Every security-based swap dealer shall
immediately notify the Commission if, after giving effect to all
Payments of Payment Obligations under subordinated loan agreements then
outstanding that are then due or mature within the following six months
without reference to any projected profit or loss of the security-based
swap dealer, either its net capital would fall below 120 percent of its
minimum requirement under Sec.  240.18a-1, or, if the security-based
swap dealer is approved to calculate net capital under Sec.  240.18a-
1(d), its tentative net capital would fall to an amount below 120
percent of the minimum requirement.
    (3) Certain legends. If all the provisions of a satisfactory
subordinated loan agreement do not appear in a single instrument, then
the debenture or other evidence of indebtedness shall bear on its face
an appropriate legend stating that it is issued subject to the
provisions of a satisfactory subordinated loan agreement which shall be
adequately referred to and incorporated by reference.
    (4) Revolving subordinated loan agreements. A security-based swap
dealer shall be permitted to enter into a revolving subordinated loan
agreement that provides for prepayment within

less than one year of all or any portion of the Payment Obligation
thereunder at the option of the security-based swap dealer upon the
prior written approval of the Commission. The Commission, however,
shall not approve any prepayment if:
    (i) After giving effect thereto (and to all Payments of Payment
Obligations under any other subordinated loan agreements then
outstanding, the maturity or accelerated maturities of which are
scheduled to fall due within six months after the date such prepayment
is to occur pursuant to this provision or on or prior to the date on
which the Payment Obligation in respect of such prepayment is scheduled
to mature disregarding this provision, whichever date is earlier)
without reference to any projected profit or loss of the security-based
swap dealer, either its net capital would fall below 120 percent of its
minimum requirement under Sec.  240.18a-1, or, if the security-based
swap dealer is approved to calculate net capital under Sec.  240.18a-
1(d), its tentative net capital would fall to an amount below 120
percent of the minimum requirement; or
    (ii) Pre-tax losses during the latest three-month period equaled
more than 15 percent of current excess net capital. Any subordinated
loan agreement entered into pursuant to this paragraph (c)(4) shall be
subject to all the other provisions of this section. Any such
subordinated loan agreement shall not be considered equity for purposes
of Sec.  240.18a-1(g), despite the length of the initial term of the
loan.
    (5) Filing. Two copies of any proposed subordinated loan agreement
(including nonconforming subordinated loan agreements) shall be filed
at least 30 days prior to the proposed execution date of the agreement
with the Commission. The security-based swap dealer shall also file
with the Commission a statement setting forth the name and address of
the lender, the business relationship of the lender to the security-
based swap dealer, and whether the security-based swap dealer carried
an account for the lender for effecting transactions in security-based
swaps at or about the time the proposed agreement was so filed. All
agreements shall be examined by the Commission prior to their becoming
effective. No proposed agreement shall be a satisfactory subordinated
loan agreement for the purposes of this section unless and until the
Commission has found the agreement acceptable and such agreement has
become effective in the form found acceptable.

0
 17. Section 240.18a-2 is added to read as follows:

Sec.  240.18a-2  Capital requirements for major security-based swap
participants for which there is not a prudential regulator.

    (a) Every major security-based swap participant for which there is
not a prudential regulator and is not registered as a broker or dealer
pursuant to section 15(b) of the Act (15 U.S.C. 78o(b)) must at all
times have and maintain positive tangible net worth.
    (b) The term tangible net worth means the net worth of the major
security-based swap participant as determined in accordance with
generally accepted accounting principles in the United States,
excluding goodwill and other intangible assets. In determining net
worth, all long and short positions in security-based swaps, swaps, and
related positions must be marked to their market value. A major
security-based swap participant must include in its computation of
tangible net worth all liabilities or obligations of a subsidiary or
affiliate that the participant guarantees, endorses, or assumes either
directly or indirectly.
    (c) Every major security-based swap participant must comply with
Sec.  240.15c3-4 as though it were an OTC derivatives dealer with
respect to its security-based swap and swap activities, except that
Sec.  240.15c3-4(c)(5)(xiii) and (xiv) and (d)(8) and (9) shall not
apply.

0
18. Section 240.18a-3 is added to read as follows:

Sec.  240.18a-3  Non-cleared security-based swap margin requirements
for security-based swap dealers and major security-based swap
participants for which there is not a prudential regulator.

    (a) Every security-based swap dealer and major security-based swap
participant for which there is not a prudential regulator must comply
with this section.
    (b) Definitions. For the purposes of this section:
    (1) The term account means an account carried by a security-based
swap dealer or major security-based swap participant that holds one or
more non-cleared security-based swaps for a counterparty.
    (2) The term commercial end user means a counterparty that
qualifies for an exception from clearing under section 3C(g)(1) of the
Act (15 U.S.C. 78o-3(g)(1)) and implementing regulations or satisfies
the criteria in section 3C(g)(4) of the Act (15 U.S.C. 78o-3(g)(4)) and
implementing regulations.
    (3) The term counterparty means a person with whom the security-
based swap dealer or major security-based swap participant has entered
into a non-cleared security-based swap transaction.
    (4) The term initial margin amount means the amount calculated
pursuant to paragraph (d) of this section.
    (5) The term non-cleared security-based swap means a security-based
swap that is not, directly or indirectly, submitted to and cleared by a
clearing agency registered pursuant to section 17A of the Act (15
U.S.C. 78q-1) or by a clearing agency that the Commission has exempted
from registration by rule or order pursuant to section 17A of the Act
(15 U.S.C. 78q-1).
    (6) The term security-based swap legacy account means an account
that holds no security-based swaps entered into after the compliance
date of this section and that only is used to hold one or more
security-based swaps entered into prior to the compliance date of this
section and collateral for those security-based swaps.
    (c) Margin requirements--(1) Security-based swap dealers--(i)
Calculation required. A security-based swap dealer must calculate with
respect to each account of a counterparty as of the close of each
business day:
    (A) The amount of the current exposure in the account of the
counterparty; and
    (B) The initial margin amount for the account of the counterparty.
    (ii) Account equity requirements. Except as provided in paragraph
(c)(1)(iii) of this section, a security-based swap dealer must take an
action required in paragraph (c)(1)(ii)(A) or (B) of this section by no
later than the close of business of the first business day following
the day of the calculation required under paragraph (c)(1)(i) of this
section or, if the counterparty is located in another country and more
than four time zones away, the second business day following the day of
the calculation required under paragraph (c)(1)(i) of this section:
    (A)(1) Collect from the counterparty collateral in an amount equal
to the current exposure that the security-based swap dealer has to the
counterparty; or
    (2) Deliver to the counterparty collateral in an amount equal to
the current exposure that the counterparty has to the security-based
swap dealer, provided that such amount does not include the initial
margin amount collected from the counterparty under paragraph
(c)(1)(ii)(B) of this section; and
    (B) Collect from the counterparty collateral in an amount equal to
the initial margin amount.
    (iii) Exceptions--(A) Commercial end users. The requirements of
paragraph

(c)(1)(ii) of this section do not apply to an account of a counterparty
that is a commercial end user.
    (B) Counterparties that are financial market intermediaries. The
requirements of paragraph (c)(1)(ii)(B) of this section do not apply to
an account of a counterparty that is a security-based swap dealer, swap
dealer, broker or dealer, futures commission merchant, bank, foreign
bank, or foreign broker or dealer.
    (C) Counterparties that use third-party custodians. The
requirements of paragraph (c)(1)(ii)(B) of this section do not apply to
an account of a counterparty that delivers the collateral to meet the
initial margin amount to an independent third-party custodian.
    (D) Security-based swap legacy accounts. The requirements of
paragraph (c)(1)(ii) of this section do not apply to a security-based
swap legacy account.
    (E) Bank for International Settlements, European Stability
Mechanism, and Multilateral development banks. The requirements of
paragraph (c)(1)(ii) of this section do not apply to an account of a
counterparty that is the Bank for International Settlements or the
European Stability Mechanism, or is the International Bank for
Reconstruction and Development, the Multilateral Investment Guarantee
Agency, the International Finance Corporation, the Inter-American
Development Bank, the Asian Development Bank, the African Development
Bank, the European Bank for Reconstruction and Development, the
European Investment Bank, the European Investment Fund, the Nordic
Investment Bank, the Caribbean Development Bank, the Islamic
Development Bank, the Council of Europe Development Bank, or any other
multilateral development bank that provides financing for national or
regional development in which the U.S. government is a shareholder or
contributing member.
    (F) Sovereign entities. The requirements of paragraph (c)(1)(ii)(B)
of this section do not apply to an account of a counterparty that is a
central government (including the U.S. government) or an agency,
department, ministry, or central bank of a central government if the
security-based swap dealer has determined that the counterparty has
only a minimal amount of credit risk pursuant to policies and
procedures or credit risk models established pursuant to Sec.
240.15c3-1 or Sec.  240.18a-1 (as applicable).
    (G) Affiliates. The requirements of paragraph (c)(1)(ii)(B) of this
section do not apply to an account of a counterparty that is an
affiliate of the security-based swap dealer.
    (H) Threshold amount. (1) A security-based swap dealer may elect
not to collect the initial margin amount required under paragraph
(c)(1)(ii)(B) of this section to the extent that the sum of that amount
plus all other credit exposures resulting from non-cleared swaps and
non-cleared security-based swaps of the security-based swap dealer and
its affiliates with the counterparty and its affiliates does not exceed
$50 million. For purposes of this calculation, a security-based swap
dealer need not include any exposures arising from non-cleared security
based swap transactions with a counterparty that is a commercial end
user, and non-cleared swap transactions with a counterparty that
qualifies for an exception from margin requirements pursuant to section
4s(e)(4) of the Commodity Exchange Act (7 U.S.C. 6s(e)(4)).
    (2) One-time deferral. Notwithstanding paragraph (c)(1)(iii)(H)(1)
of this section, a security-based swap dealer may defer collecting the
initial margin amount required under paragraph (c)(1)(ii)(B) of this
section for up to two months following the month in which a
counterparty no longer qualifies for this threshold exception for the
first time.
    (I) Minimum transfer amount. Notwithstanding any other provision of
this rule, a security-based swap dealer is not required to collect or
deliver collateral pursuant to this section with respect to a
particular counterparty unless and until the total amount of collateral
that is required to be collected or delivered, and has not yet been
collected or delivered, with respect to the counterparty is greater
than $500,000.
    (2) Major security-based swap participants--(i) Calculation
required. A major security-based swap participant must with respect to
each account of a counterparty calculate as of the close of each
business day the amount of the current exposure in the account of the
counterparty.
    (ii) Account equity requirements. Except as provided in paragraph
(c)(2)(iii) of this section, a major security-based swap participant
must take an action required in paragraph (c)(2)(ii)(A) or (B) of this
section by no later than the close of business of the first business
day following the day of the calculation required under paragraph
(c)(2)(i) or, if the counterparty is located in another country and
more than four time zones away, the second business day following the
day of the calculation required under paragraph (c)(2)(i) of this
section:
    (A) Collect from the counterparty collateral in an amount equal to
the current exposure that the major security-based swap participant has
to the counterparty; or
    (B) Deliver to the counterparty collateral in an amount equal to
the current exposure that the counterparty has to the major security-
based swap participant.
    (iii) Exceptions--(A) Commercial end users. The requirements of
paragraph (c)(2)(ii)(A) of this section do not apply to an account of a
counterparty that is a commercial end user.
    (B) Security-based swap legacy accounts. The requirements of
paragraph (c)(2)(ii) of this section do not apply to a security-based
swap legacy account.
    (C) Bank for International Settlements, European Stability
Mechanism, and Multilateral development banks. The requirements of
paragraph (c)(2)(ii)(A) of this section do not apply to an account of a
counterparty that is the Bank for International Settlements or the
European Stability Mechanism, or is the International Bank for
Reconstruction and Development, the Multilateral Investment Guarantee
Agency, the International Finance Corporation, the Inter-American
Development Bank, the Asian Development Bank, the African Development
Bank, the European Bank for Reconstruction and Development, the
European Investment Bank, the European Investment Fund, the Nordic
Investment Bank, the Caribbean Development Bank, the Islamic
Development Bank, the Council of Europe Development Bank, or any other
multilateral development bank that provides financing for national or
regional development in which the U.S. government is a shareholder or
contributing member.
    (D) Minimum transfer amount. Notwithstanding any other provision of
this rule, a major security-based swap participant is not required to
collect or deliver collateral pursuant to this section with respect to
a particular counterparty unless and until the total amount of
collateral that is required to be collected or delivered, and has not
yet been collected or delivered, with respect to the counterparty is
greater than $500,000.
    (3) Deductions for collateral. (i) The fair market value of
collateral delivered by a counterparty or the security-based swap
dealer must be reduced by the amount of the standardized deductions the
security-based swap dealer would apply to the collateral pursuant to

Sec.  240.15c3-1 or Sec.  240.18a-1, as applicable, for the purpose of
paragraph (c)(1)(ii) of this section.
    (ii) Notwithstanding paragraph (c)(3)(i) of this section, the fair
market value of assets delivered as collateral by a counterparty or the
security-based swap dealer may be reduced by the amount of the
standardized deductions prescribed in 17 CFR 23.156 if the security-
based swap dealer applies these standardized deductions consistently
with respect to the particular counterparty.