In either case, they were not subject to margin requirements. Following
the passage of Dodd-Frank, these entities will have to reconsider the
costs and benefits of these alternative organizational structures
taking into consideration differences in capital, margin, and
segregation requirements applicable to the different types of entities.
    An SBSD's choice between these competing regulatory regimes will
likely be driven by the relative costs arising from differences in the
two regimes. The most significant of these differences are: (1) Initial
margin requirements for inter-dealer transactions; (2) segregation
requirements; (3) capital treatment of security-based swaps; and (4)
availability of collateral financing.
    The Commission's margin requirements on inter-dealer transactions
are not consistent with the prudential regulators' rules. Under the
Commission's final margin rule, nonbank SBSDs are not required to
collect initial margin from financial market intermediaries, including
other SBSDs. In contrast, under the prudential regulators' rules,
covered entities, including SBSDs, are required to exchange initial
margin on inter-dealer transactions. Furthermore, covered entities are
required to segregate the initial margin at an independent third-party
custodian.
    The prudential regulators' approach to collateralizing inter-dealer
transactions puts significant strain on dealers' capital. Under this
approach, dealers ``consume'' their own capital every time they enter a
transaction with other dealers. As a result, market-making activities,
such as book-matching transactions with end users, become very capital
intensive. While bank SBSDs may have access to alternative ways of
funding collateral relative to nonbank SBSDs, the sheer amount of
collateral needed to intermediate non-cleared security based swaps
under the prudential regulators' margin rule will make it expensive for
bank SBSDs to conduct business in this market.
    The Commission's approach does not require that nonbank SBSDs
collect initial margin from financial market intermediaries, but it
does require them to take capital deductions in lieu of margin or
credit risk charges with respect to uncollateralized potential futures
exposures. They also will need to increase their net capital by a
factor proportional to the initial margin that would cover this
exposure when the amount of the 2% margin factor reaches or exceeds
their minimum fixed-dollar net capital requirement. However, this
additional capital is not likely to exceed the initial margin for the
exposure, which means that for a given inter-dealer exposure, a nonbank
SBSD will likely allocate less capital than a bank SBSD. Furthermore,
unlike the prudential regulators' margin rules, the additional capital
that nonbank SBSDs have to allocate to inter-dealer exposures is always
under the firm's control. In addition, while bank SBSDs are not subject
to a requirement to deduct 100% of the value of initial margin posted
to a counterparty, nonbank SBSDs may avoid this deduction using the
guidance in section II.A.2.b.i. of this release.
    These considerations suggest that nonbank SBSDs may have a
competitive advantage over bank SBSDs in the market for non-cleared
security-based swaps. In particular, a bank holding company may
determine to structure its dealing activities into a nonbank SBSD.
However, this competitive advantage may be muted given the advantages
bank SBSDs have over nonbank SBSDs in terms of access to low cost
sources of funding (i.e., deposits) and central bank support
mechanisms.
    A counterparty posting initial margin to an SBSD for a non-cleared
security-based swap transaction may elect individual segregation or to
waive segregation (if permitted to waive segregation) under section
3E(f) of the Exchange Act, or elect that the initial margin be held
directly by the SBSD subject to the omnibus segregation requirements of
the Commission's final segregation rule. Under the margin rule of the
prudential regulators, initial margin must be segregated in an
individual account at an independent third-party custodian.
    Individual segregation of collateral is expensive because it
prevents the re-hypothecation of collateral along intermediation
chains. With individual segregation, the amount of initial margin
required to support the transfer of risk from party A to party B
depends on the length of the intermediation chain linking party A to
party B (i.e., the number of SBSDs with matched books standing between
the initial transaction by party A and the final transaction with party
B): Each SBSD in the chain may require initial margin to be ``locked
up'' at the custodian. In contrast, when individual segregation is not
used, the amount of collateral required to support the transfer of risk
from party A to party B does not depend on the length of the
intermediation chain linking party A to party B; at each non-terminal
link in the chain initial margin that is collected by an SBSD can be
delivered to the SBSD that is the next link in the chain (i.e., the
initial margin can be re-hypothecated).
    Thus, operating as a nonbank SBSD could provide a potential cost
advantage. Specifically, if the parties along an intermediation chain
are willing to rely on the default omnibus segregation regime, or agree
to waive segregation entirely (when this is permitted), then the amount
of collateral necessary to support the transaction can be considerably
smaller than under third-party segregation. For example, a CDS
transaction involving 3 dealers where dealer A purchases protection
from dealer B who in turn purchases this protection from dealer C
requires approximately two units of initial margin under third-party
segregation: Dealer C provides one unit collateral to the third-party
custodian for the benefit of dealer B, while dealer B provides another
unit of collateral to the third-party custodian for the benefit of
dealer A. Conversely, under omnibus segregation or waived segregation,
only one unit of collateral is required: The collateral posted by
dealer C is received by dealer B, who may then use the collateral
received to satisfy his posting obligation to dealer A.
    As noted earlier, nonbank SBSDs will be required to allocate
capital for their dealing activities in the market for non-cleared
security-based swaps. Importantly, uncollateralized exposures from
inter-dealer transactions require that these entities scale up their
minimum net capital by a factor proportional to the initial margin of
the exposure if the amount of the 2% margin factor equals or exceeds
the firm's fixed-dollar minimum net capital requirement. Furthermore,
dealers are required to take a capital deduction in lieu of margin or
credit risk charge for the uncollateralized inter-dealer potential
future exposures.
    Similarly, bank SBSDs will also have to allocate capital for their
exposures with other covered entities, including other dealers. The
capital that supports a bank SBSD's dealing activities in the

OTC markets is determined in accordance with the prudential regulators'
capital rules. These rules require that bank SBSDs calculate a risk
weight amount for each of their exposures, including exposure to non-
cleared security-based swaps. Furthermore, the rules require that bank
SBSDs calculate an additional risk weight amount for the exposure
created through the posting of initial margin to collateralize a non-
cleared security-based swap. However, both of these risk weight amounts
are likely to be small. The dealer's exposure to a covered-entity
counterparty is collateralized by the initial margin that the
counterparty has to post with a third-party custodian (for the benefit
of the dealer), and the risk weight of this exposure reflects almost
entirely the risk weight of the collateral--usually minimal. Similarly,
by posting initial margin, the dealer creates an exposure to the third-
party custodian holding the collateral. Custodian banks usually have
low risk weights.
    The capital that bank SBSDs have to allocate for their non-cleared
security-based swaps equals the sum of the two risk weight amounts
calculated above multiplied by a factor--usually 8%. Thus, the capital
that a bank SBSD has to allocate to support a non-cleared security-
based swap is relatively small, and likely of the same order of
magnitude as the capital that a nonbank SBSD would have to allocate for
a similar exposure. However, the bank SBSD must deliver initial margin
to certain counterparties. The posting of collateral will ``consume''
the bank SBSD's capital, and gives nonbank SBSD a comparative advantage
in terms of capital efficiency. However, this advantage will not exist
if a nonbank SBSD transacts with a bank SBSD because in this scenario
the bank SBSD will be required to collect initial margin from the
nonbank SBSD. It also will not exist if a counterparty demands initial
margin from the nonbank SBSD under the terms of an agreement between
the two parties. While collateral posting makes dealing under a bank
SBSD structure costly, the cost of funding such collateral is likely
smaller for these dealers compared to nonbank SBSDs. Unlike nonbank
SBSDs, bank SBSD may have access to low cost sources of collateral
funding, including deposits or a discount window with a central bank.
    Several commenters addressed the impact of the final rules on
competition between bank and nonbank SBSDs. One commenter stated that
the Commission's proposal would make nonbank SBSDs uncompetitive, and
that consistency with the CFTC's margin and capital rules is also
necessary for nonbank SBSDs to be competitive with bank SBSDs.\1296\
This commenter noted that bank SBSDs will be subject to a single set of
capital and margin rules for security-based swaps and swaps, but that
nonbank SBSDs that are also registered with the CFTC as swap dealers
would be subject to two sets of requirements with respect to these
instruments. This commenter believed that the proposal's
inconsistencies with other regulators' regimes would increase costs.
Another commenter stated that the proposed capital requirements would
result in a very different approach to capital for bank holding company
subsidiaries that are swap dealers (based on the CFTC's proposal to
apply the bank capital standard to these entities) and for such
subsidiaries that are SBSDs, again potentially preventing the
establishment of dually registered entities.\1297\ Similarly, other
commenters noted that the Commission's capital and margin rules would
increase costs and reduce efficiency due to their potential
inconsistency with the BCBS/IOSCO Paper, foreign requirements, and
other domestic regulators' rules.\1298\ One commenter argued that
several components of the proposed margin rules differ from the
recommended framework in the BCBS/IOSCO Paper and would generally make
nonbank SBSDs uncompetitive with bank SBSDs and foreign SBSDs.\1299\
The commenter argued that the Commission could best address these
differences by permitting OTC derivatives dealers and stand-alone SBSDs
to collect and maintain margin in a manner consistent with the
recommendations of the BCBS/IOSCO Paper.
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    \1296\ See SIFMA 2/22/2013 Letter.
    \1297\ See Financial Services Roundtable Letter.
    \1298\ See CFA Institute Letter; ISDA 1/23/2013 Letter; KfW
Bankengruppe Letter; Morgan 10/29/2014 Stanley Letter; SIFMA 2/22/
2013 Letter.
    \1299\ See SIFMA 11/19/2018 Letter.
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    As discussed above in section II.A. of this release, the Commission
has made two significant modifications to the final capital rules for
nonbank SBSDs that should mitigate some of these concerns raised by
commenters. First, as discussed above in section II.A.2.b.v. of this
release, the Commission has modified Rule 18a-1 so that it no longer
contains a portfolio concentration charge that is triggered when the
aggregate current exposure of the stand-alone SBSD to its derivatives
counterparties exceeds 50% of the firm's tentative net capital.\1300\
This means that stand-alone SBSDs that have been authorized to use
models will not be subject to this limit on applying the credit risk
charges to uncollateralized current exposures related to derivatives
transactions. This includes uncollateralized current exposures arising
from electing not to collect variation margin for non-cleared security-
based swap and swap transactions under exceptions in the margin rules
of the Commission and the CFTC. The credit risk charges are based on
the creditworthiness of the counterparty and can result in charges that
are substantially lower than deducting 100% of the amount of the
uncollateralized current exposure.\1301\ This approach to addressing
credit risk arising from uncollateralized current exposures related to
derivatives transactions is generally consistent with the treatment of
such exposures under the capital rules for banking institutions.\1302\
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    \1300\ See paragraph (e)(2) of Rule 18a-1, as adopted. See also
Capital, Margin, and Segregation Proposing Release, 77 FR at 70244
(proposing a portfolio concentration charge in Rule 18a-1 for stand-
alone SBSDs).
    \1301\ See paragraph (e)(2) of Rule 18a-1, as adopted.
    \1302\ See OTC Derivatives Dealers, 63 FR at 59384-87 (``[T]he
Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, and the Federal Deposit Insurance
Corporation (collectively, the ``U.S. Banking Agencies'') have
adopted rules implementing the Capital Accord for U.S. banks and
bank holding companies. Appendix F is generally consistent with the
U.S. Banking Agencies' rules, and incorporates the qualitative and
quantitative conditions imposed on-banking institutions.''). The use
of models to compute market risk charges in lieu of the standardized
haircuts (as nonbank SBSDs will be permitted to do under Rules 15c3-
1 and 18a-1) also is generally consistent with the capital rules for
banking institutions. Id.
---------------------------------------------------------------------------

    The second significant modification is an alternative compliance
mechanism. As discussed above in section II.D. of this release, the
alternative compliance mechanism will permit a stand-alone SBSD that is
registered as a swap dealer and that predominantly engages in a swaps
business to comply with the capital, margin, and segregation
requirements of the CEA and the CFTC's rules in lieu of complying with
the Commission's capital, margin, and segregation requirements.\1303\
The CFTC's proposed capital rules for swap dealers that are FCMs would
retain the existing capital framework for FCMs, which imposes a net
liquid assets test similar to the existing capital requirements for
broker-dealers.\1304\ However, under the CFTC's proposed capital rules,
swap dealers that are not FCMs would have the option of complying with:
(1) A capital standard based on the capital rules for banks; (2)

a capital standard based on the Commission's capital requirements in
Rule 18a-1; or (3) if the swap dealer is predominantly engaged in non-
financial activities, a capital standard based on a tangible net worth
requirement.
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    \1303\ See Rule 18a-10, as adopted.
    \1304\ See CFTC Capital Proposing Release, 81 FR 91252.
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    In addition, as discussed above in section II.B. of this release,
the Commission has made a number of modifications to the final margin
rule to more closely align the rule with the margin rules of the CFTC
and the prudential regulators.
    Nevertheless, to the extent that regulatory requirements differ
across regimes, the Commission acknowledges the potential for
registrants subject to more than one regulatory regime to face an
increased compliance burden, even if capital and margin requirements
are no more binding for dually-registered SBSDs than bank SBSDs. In
particular, the Commission acknowledges that dual registrants may need
to devote more resources towards compliance and regulatory monitoring.
Because of the similarity between single-name and index CDS, the
Commission expects that participants active in one market are likely to
be active in the other, and dual registrants may need to devote more
resources to ensure that the appropriate rules are applied to security-
based swap and swap transactions than a bank SBSD.
    However, as described above, the Commission expects that nonbank
SBSDs will engage in a securities business with respect to security-
based swaps that is more similar to the dealer activities of broker-
dealers than to the lending and deposit-taking activities of commercial
banks. Therefore, the Commission has modeled its capital, margin, and
segregation regime on the existing rules for broker-dealers, rather
than the rules of the CFTC and the prudential regulators. However, as
discussed throughout this release, the Commission has modified its
final rules in an effort to harmonize them, where appropriate, with the
rules of the CFTC and the prudential regulators.
c. Domestic and Foreign SBSDs
    The market for security-based swaps is a global market that
transcends traditional jurisdiction boundaries. As discussed above in
section VI.A.1. of this release, it is quite common for counterparties
to a security-based swap transaction to not be based in the same
jurisdiction. The specific regulatory requirements applicable in a
dealer's jurisdictions can create competitive advantages and
disadvantages for that dealer vis-[agrave]-vis dealers operating in
other jurisdictions. There exists the possibility that differences in
the capital, margin, and segregation rules eventually adopted by
foreign regulators and those of the Commission may create advantages or
disadvantage for U.S. registrants participating in this global market.
    The potential disadvantages to U.S. registrants were pointed out by
commenters. One commenter argued that because U.S. registrants must
structure their activities so as to margin non-cleared security-based
swaps and swaps separately from other non-centrally cleared
derivatives, U.S. registrants would be at a significant competitive
disadvantage to foreign competitors.\1305\ The commenter argued that
several components of the proposed margin rules differ from the
recommended framework in the BCBS/IOSCO Paper and would generally make
nonbank SBSDs uncompetitive with bank SBSDs and foreign SBSDs.\1306\
The commenter argued that the Commission could best address these
differences by permitting OTC derivatives dealers and stand-alone SBSDs
to collect and maintain margin in a manner consistent with the
recommendations of the BCBS/IOSCO Paper. Another commenter stated that
requiring the use of the Appendix A methodology (rather than internal
models) for initial margin calculations on non-cleared equity security-
based swaps would place U.S.-based nonbank SBSDs at a competitive
disadvantage in the market.\1307\ For example, the technical standards
published by the European regulators do not include similar provisions
precluding the use of internal models in the calculation of initial
margin for equity swaps. As discussed above in section VI.B.3. of this
release, while the Commission acknowledges that the Appendix A
methodology has certain limitations, the Commission believes that
permitting the use of internal models for equity swaps could lead to
inadequate margin levels in comparison to the broker-dealer margin
rules. However, the Commission has modified the final rule to permit
nonbank SBSDs that are not broker-dealers to apply to the Commission to
use internal models to compute initial margin for equity-based
security-based swaps.
---------------------------------------------------------------------------

    \1305\ See SIFMA 3/12/2014 Letter.
    \1306\ See SIFMA 11/19/2018 Letter.
    \1307\ See ISDA 1/23/2013 Letter.
---------------------------------------------------------------------------

    Based on a review of proposals by European regulators, the
Commission does not believe that its capital, margin, and segregation
rules will place U.S. firms at a significant competitive disadvantage
in the security-based swap market. Although certain aspects of the
Commission's rules--such as the required use of Appendix A methodology
for calculating initial margin for equity security-based swaps for
broker-dealer SBSDs--are more restrictive than the corresponding
aspects of the European rules, other aspects are less restrictive. In
addition, foreign entities transacting with U.S. counterparties will,
absent Commission approval for substituted compliance (with respect to
capital and margin requirements) or transaction-based exceptions (with
respect to segregation requirements), be subject to the Commission's
rules. Thus, differences in foreign regulatory regimes are expected to
have only limited impact in terms of competition for the business of
domestic end users.
d. Nonbank MSBSPs
    Some of the considerations outlined above for SBSDs apply to the
analysis of the competitive effects on nonbank MSBSPs, although here
the impact on competition is likely to be even more limited. The key
characteristic distinguishing nonbank MSBSPs from nonbank SBSDs is that
the former do not engage in dealing activity. Thus, the population of
MSBSPs will likely consist of large financial non-dealing entities that
maintain significant non-cleared security-based swap exposures. Under
the final capital, margin, and segregation rules, such entities are
subject to less extensive requirements than nonbank SBSDs, and
consequently, the costs of compliance with these requirements is--other
things being equal--expected to be less significant.
    That said, the Commission acknowledges that some (non-dealing)
market participants' internal systems and processes may not be designed
to handle the new requirements. For example, under the new rules,
nonbank MSBSPs will in most cases be required to post and collect
variation margin on a daily basis. This requires back-office systems
and procedures capable of handling the daily exchange of collateral.
For certain participants in the non-cleared security-based swap market,
such a capability may be absent or inadequate. Similarly, under the new
capital provisions, nonbank MSBSPs will be required to ensure that
tangible net worth is positive at all times; again, certain non-cleared
security-based swap market participants may not currently possess
systems or procedures for tracking tangible net worth on a real-time
basis.\1308\
---------------------------------------------------------------------------

    \1308\ In determining net worth, all long and short positions in
security-based swaps, swaps, and related positions must be marked to
their market value. See Rule 18a-2, as adopted.

---------------------------------------------------------------------------

    Disparities in the ease with which potential nonbank MSBSPs could
comply with the Commission's new rules could rearrange the relative
competitive positions of these entities. However, the Commission
believes the registration thresholds for nonbank MSBSPs that the
Commission has previously adopted are sufficiently high to minimize
such disruptions. As discussed above in section VI.A. of this release,
the Commission expects that between zero and five entities will
initially register as MSBSPs, and that these entities will be operating
at a scale where prudent risk management practices already include much
of the infrastructure necessary to implement systems and procedures
that can satisfy the Commission's new requirements.

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \1309\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Pursuant to Section 605(b) of the RFA,\1310\ the
Commission certified in the proposing release and the cross-border
proposing release that proposed new Rules 3a71-6 and 18a-1 through 18a-
4, and the proposed amendments to Rules 15c3-1 and 15c3-3 would not
have a significant economic impact on any ``small entity'' \1311\ for
purposes of the RFA.\1312\ The Commission is also adopting Rule 18a-10
today.
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    \1309\ See 5 U.S.C. 601 et seq.
    \1310\ See 5 U.S.C. 605(b).
    \1311\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
rulemaking, are set forth in 17 CFR 240.0-10 (``Rule 0-10''). See
Statement of Management on Internal Accounting Control, Exchange Act
Release No. 18451, (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982).
    \1312\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers; Proposed
Rule, 77 FR at 70328-70329; Cross-Border Proposing Release, 78 FR at
31204-31205.
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less,\1313\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to paragraph (d) of Rule
17a-5,\1314\ or, if not required to file such statements, a broker-
dealer with total capital (net worth plus subordinated liabilities) of
less than $500,000 on the last day of the preceding fiscal year (or in
the time that it has been in business, if shorter); and is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\1315\ Under the standards adopted
by the Small Business Administration, small entities in the finance and
insurance industry include the following: (1) For entities in credit
intermediation and related activities,\1316\ firms with $175 million or
less in assets; (2) for non-depository credit intermediation and
certain other activities,\1317\ firms with $7 million or less in annual
receipts; (3) for entities in financial investments and related
activities,\1318\ firms with $7 million or less in annual receipts; (4)
for insurance carriers and entities in related activities,\1319\ firms
with $7 million or less in annual receipts; and (5) for funds, trusts,
and other financial vehicles,\1320\ firms with $7 million or less in
annual receipts.\1321\
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    \1313\ See 17 CFR 240.0-10(a).
    \1314\ See 17 CFR 240.17a-5(d).
    \1315\ See 17 CFR 240.0-10(c).
    \1316\ Including commercial banks, savings institutions, credit
unions, firms involved in other depository credit intermediation,
credit card issuing, sales financing, consumer lending, real estate
credit, and international trade financing.
    \1317\ Including firms involved in secondary market financing,
all other non-depository credit intermediation, mortgage and
nonmortgage loan brokers, financial transactions processing, reserve
and clearing house activities, and other activities related to
credit intermediation.
    \1318\ Including firms involved in investment banking and
securities dealing, securities brokerage, commodity contracts
dealing, commodity contracts brokerage, securities and commodity
exchanges, miscellaneous intermediation, portfolio management,
providing investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment activities.
    \1319\ Including direct life insurance carriers, direct health
and medical insurance carriers, direct property and casualty
insurance carriers, direct title insurance carriers, other direct
insurance (except life, health and medical) carriers, reinsurance
carriers, insurance agencies and brokerages, claims adjusting, third
party administration of insurance and pension funds, and all other
insurance related activities.
    \1320\ Including pension funds, health and welfare funds, other
insurance funds, open-end investment funds, trusts, estates, and
agency accounts, real estate investment trusts, and other financial
vehicles.
    \1321\ See 13 CFR 121.201.
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    With respect to nonbank SBSDs and MSBSPs, based on feedback from
market participants and the Commission's information about the
security-based swap market, the Commission continues to believe that:
(1) The types of entities that would engage in more than a de minimis
level of dealing activity involving security-based swaps--which
generally would be large financial institutions--would not be ``small
entities'' for purposes of the RFA; and (2) the types of entities that
may have security-based swap positions above the level required to
register as ``major security-based swap participants'' would not be
``small entities'' for purposes of the RFA. Thus, it is unlikely that
Rules 18a-1 through 18a-4, Rule 18a-10, and the amendments to Rules
15c3-1, 15c3-3, and 3a71-6 will have a significant economic impact on
any small entity.
    The Commission estimates that as of December 31, 2018, there were
approximately 996 broker-dealers that were ``small'' for the purposes
Rule 0-10. While certain amendments to Rules 15c3-1 and 15c3-3 will
apply to stand-alone broker-dealers, these amendments will not have any
impact on ``small'' broker-dealers, since few, if any, of these firms
engage in security-based swaps activities.\1322\
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    \1322\ The amendments are discussed in detail in sections I, II,
and III of this release. The Commission discusses the economic
impact, including the compliance costs and burdens, of the
amendments in section IV (PRA) and section VI (Economic Analysis) of
this release.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission certifies that new Rules
18a-1 through 18a-4, new Rule 18a-10, and the amendments to Rules 3a71-
6, 15c3-1, and 15c3-3 will not have a significant economic impact on a
substantial number of small entities for purposes of the RFA.

VIII. Statutory Basis

    Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and
particularly, Sections 3(b), 3E, 15, 15F, and 23(a) (15 U.S.C. 78c(b),
78c-5, 78o, 78o-10, and 78w(a)), thereof, the Commission is amending
Sec. Sec.  200.30-3, 240.3a71-6, 240.15c3-1, 240.15c3-1a, 240.15c3-1b,
240.15c3-1d, 240.15c3-1e, and 240.15c3-3, and adopting Sec. Sec.
240.15c3-3b, 240.18a-1, 240.18a-1a, 240.18a-1b, 240.18a-1c, 240.18a-1d,
240.18a-2, 240.18a-3, 240.18a-4, 240.18a-4a, and 240.18a-10 under the
Exchange Act.\1323\
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    \1323\ If any of the provisions of these rules, or the
application thereof to any person or circumstance, is held to be
invalid, such invalidity shall not affect other provisions or
application of such provisions to other persons or circumstances
that can be given effect without the invalid provision or
application.
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List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations
(Government agencies), Civil rights, Classified information, Conflicts
of interest, Environmental impact statements, Equal employment

opportunity, Federal buildings and facilities, Freedom of information,
Government securities, Organization and functions (Government
agencies), Privacy, Reporting and recordkeeping requirements, Sunshine
Act.

17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.

Text of Rules and Rule Amendments

    In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations is amended as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS

Subpart A--Organization and Program Management

0
1. The authority citation for part 200, subpart A, continues to read in
part as follows:

    Authority:  15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1,
78d-2, 78o-4, 78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et
seq., unless otherwise noted.
* * * * *
    Section 200.30-3 is also issued under 15 U.S.C. 78b, 78d, 78f,
78k-1, 78q, 78s, and 78eee.
* * * * *

0
2. Section 200.30-3 is amended by revising paragraphs (a)(7)
introductory text, (a)(7)(i) and (iv), (a)(7)(vi)(A) and (C) through
(F), (a)(7)(vii) and (a)(10)(i) to read as follows:

Sec.  200.30-3   Delegation of authority to Director of Division of
Trading and Markets.

* * * * *
    (a) * * *
    (7) Pursuant to Rule 15c3-1 (Sec.  240.15c3-1 of this chapter) and
Rule 18a-1 (Sec.  240.18a-1 of this chapter):
    (i) To approve lesser equity requirements in specialist or market
maker accounts pursuant to Rule 15c3-1(a)(6)(iii)(B) (Sec.  240.15c3-
1(a)(6)(iii)(B) of this chapter);
* * * * *
    (iv) To approve a change in election of the alternative capital
requirement pursuant to Rule 15c3-1(a)(1)(ii) (Sec.  240.15c3-
1(a)(1)(ii) of this chapter);
* * * * *
    (vi)(A) To review amendments to applications of brokers or dealers
and security-based swap dealers filed pursuant to Sec. Sec.  240.15c3-
1e, 240.15c3-1g, and 240.18a-1(d) of this chapter and to approve such
amendments, unconditionally or subject to specified terms and
conditions;
* * * * *
    (C) To impose additional conditions, pursuant to Sec. Sec.
240.15c3-1e(e) and 240.18a-1(d)(9)(iii) of this chapter, on a broker or
dealer that computes certain of its net capital deductions pursuant to
Sec.  240.15c3-1e of this chapter, or on an ultimate holding company of
the broker or dealer that is not an ultimate holding company that has a
principal regulator, as defined in Sec.  240.15c3-1(c)(13)(ii) of this
chapter, or on a security-based swap dealer that computes certain of
its net capital deductions pursuant to Sec.  240.18a-1(d) of this
chapter;
    (D) To require that a broker or dealer, or the ultimate holding
company of the broker or dealer, or a security-based swap dealer
provide information to the Commission pursuant to Sec. Sec.  240.15c3-
1e(a)(1)(viii)(G), 240.15c3-1e(a)(1)(ix)(C) and (a)(4), 240.18a-
1(d)(2), and 240.15c3-1g(b)(1)(i)(H), and (b)(2)(i)(C) of this chapter;
    (E) To determine, pursuant to Sec. Sec.  240.15c3-1e(a)(10)(ii) and
240.18a-1(d)(7)(ii), that the notice that a broker or dealer and
security-based swap dealer must provide to the Commission pursuant to
Sec. Sec.  240.15c3-1e(a)(10)(i) and 240.18a-1(d)(7)(i) of this chapter
will become effective for a shorter or longer period of time; and
    (F) To approve, pursuant to Sec. Sec.  240.15c3-1e(a)(7)(ii) and
240.18a-1(d)(5)(ii) of this chapter, the temporary use of a provisional
model, in whole or in part, unconditionally or subject to any
conditions or limitations;
    (vii)(A) To approve the prepayments of a subordinated loan
agreement of a security-based swap dealer pursuant to Sec.  240.18a-
1d(b)(6) of this chapter;
    (B) To approve a prepayment of a revolving subordinated loan
agreement of a security-based swap dealer pursuant to Sec.  240.18a-
1d(c)(4) of this chapter; and
    (C) To examine a proposed subordinated loan agreement filed by a
security-based swap dealer and to find it acceptable pursuant to Sec.
240.18a-1d(c)(5) of this chapter.
* * * * *
    (10)(i) Pursuant to Rule 15c3-3 (Sec.  240.15c3-3 of this chapter)
and Rule 18a-4 (Sec.  240.18a-4 of this chapter) to find and designate
as control locations for purposes of Rule 15c3-3(c)(7) (Sec.  240.15c3-
3(c)(7) of this chapter), Rule 15c3-3(p)(2)(ii)(E) (Sec.  240.15c3-
3(p)(2)(ii)(E) of this chapter), and Rule 18a-4(b)(2)(v) (Sec.
240.18a-4(b)(2)(v) of this chapter), certain broker-dealer and
security-based swap accounts which are adequate for the protection of
customer securities.
* * * * *

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

0
3. The general authority citation for part 240 is revised, the
sectional authorities for Sec. Sec.  240.15c3-1 and 240.15c3-3 are
revised, adding sectional authorities for Sec. Sec.  240.15c3-1a,
240.15c3-1e, 240.15c3-3, 240.18a-1, 240.18a-1a, 240.18a-1b, 240.18a-1c,
240.18a-1d, 240-18a-2, 240.18a-3 and 240.18a-4 in numerical order to
read as follows.

     Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.15c3-1 is also issued under 15 U.S.C. 78o(c)(3),
78o-10(d), and 78o-10(e).
    Section 240.15c3-3 is also issued under 15 U.S.C. 78c-5,
78o(c)(2), 78(c)(3), 78q(a), 78w(a); sec. 6(c), 84 Stat. 1652; 15
U.S.C. 78fff.
* * * * *
    Sections 240.18a-1, 240.18a-1a, 240.18a-1b, 240.18a-1c, 240.18a-
1d, 240.18a-2, 240.18a-3, and 240.18a-10 are also issued under 15
U.S.C. 78o-10(d) and 78o-10(e).
    Section 240.18a-4 is also issued under 15 U.S.C. 78c-5(f).
* * * * *

0
4. Section 240.3a71-6 is amended by adding paragraphs (d)(4) and (5) to
read as follows:

Sec.  240.3a71-6  Substituted compliance for security-based swap
dealers and major security-based swap participants.

* * * * *
    (d) * * *
    (4) Capital--(i) Security-based swap dealers. The capital
requirements of section 15F(e) of the Act (15 U.S.C. 78o-10(e)) and
Sec.  240.18a-1; provided, however, that prior to making such
substituted compliance determination, the Commission intends to
consider (in addition to any conditions imposed) whether the capital
requirements of the foreign financial regulatory system are designed to
help ensure the safety and soundness of registrants in a manner that is
comparable to the applicable provisions arising under the Act and its
rules and regulations.
    (ii) Major security-based swap participants. The capital
requirements of section 15F(e) of the Act (15 U.S.C. 78o-10(e)) and
Sec.  240.18a-2; provided,

however, that prior to making such substituted compliance
determination, the Commission intends to consider (in addition to any
conditions imposed) whether the capital requirements of the foreign
financial regulatory system are comparable to the applicable provisions
arising under the Act and its rules and regulations.
    (5) Margin--(i) Security-based swap dealers. The margin
requirements of section 15F(e) of the Act (15 U.S.C. 78o-10(e)) and
Sec.  240.18a-3; provided, however, that prior to making such
substituted compliance determination, the Commission intends to
consider (in addition to any conditions imposed) whether the foreign
financial regulatory system requires registrants to adequately cover
their current and potential future exposure to over-the-counter
derivatives counterparties, and ensures registrants' safety and
soundness, in a manner comparable to the applicable provisions arising
under the Act and its rules and regulations.
    (ii) Major security-based swap participants. The margin
requirements of section 15F(e) of the Act (15 U.S.C. 78o-10(e)) and
Sec.  240.18a-3; provided, however, that prior to making such
substituted compliance determination, the Commission intends to
consider (in addition to any conditions imposed) whether the foreign
financial regulatory system requires registrants to adequately cover
their current exposure to over-the-counter derivatives counterparties,
and ensures registrants' safety and soundness, in a manner comparable
to the applicable provisions arising under the Act and its rules and
regulations.

0
5. Section 240.15c3-1 is amended by:
0
 a. Redesignating paragraph (a)(5) as paragraph (a)(5)(i) and adding
paragraph (a)(5)(ii);
0
 b. Revising paragraph (a)(7)(i) and (ii) and the undesignated center
heading above paragraph (a)(7);
0
c. Adding paragraph (a)(10) with an undesignated center heading above
it;
0
d. Revising paragraph (c)(2)(iv)(E);
0
 e. Adding paragraphs (c)(2)(vi)(O) and (P);
0
 f. Redesignating paragraph (c)(2)(xii) as paragraph (c)(2)(xii)(A) and
adding paragraph (c)(2)(xii)(B);
0
 g. Adding paragraph (c)(2)(xv); and
0
 h. Adding paragraph (c)(17).
    The revisions and additions read as follows:

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

* * * * *
    (a) * * *
    (5) * * *
    (ii) An OTC derivatives dealer that is also registered as a
security-based swap dealer under section 15F of the Act (15 U.S.C. 78o-
10) is subject to the capital requirements in Sec. Sec.  240.18a-1,
240.18a-1a, 240.18a-1b, 240.18a-1c and 240.18a-1d instead of the
capital requirements of this section and its appendices.
* * * * *
    Alternative Net Capital Computation for Broker-Dealers Authorized
to Use Models
    (7) In accordance with Sec.  240.15c3-1e, the Commission may
approve, in whole or in part, an application or an amendment to an
application by a broker or dealer to calculate net capital using the
market risk standards of Sec.  240.15c3-1e to compute a deduction for
market risk on some or all of its positions, instead of the provisions
of paragraphs (c)(2)(vi) and (vii) of this section, and Sec.  240.15c3-
1b, and using the credit risk standards of Sec.  240.15c3-1e to compute
a deduction for credit risk on certain credit exposures arising from
transactions in derivatives instruments, instead of the provisions of
paragraphs (c)(2)(iv) and (c)(2)(xv)(A) and (B) of this section,
subject to any conditions or limitations on the broker or dealer the
Commission may require as necessary or appropriate in the public
interest or for the protection of investors. A broker or dealer that
has been approved to calculate its net capital under Sec.  240.15c3-1e
must:
    (i)(A) At all times maintain tentative net capital of not less than
$5 billion and net capital of not less than the greater of $1 billion
or the sum of the ratio requirement under paragraph (a)(1) of this
section and:
    (1) Two percent of the risk margin amount; or
    (2) Four percent or less of the risk margin amount if the
Commission issues an order raising the requirement to four percent or
less on or after the third anniversary of this section's compliance
date; or
    (3) Eight percent or less of the risk margin amount if the
Commission issues an order raising the requirement to eight percent or
less on or after the fifth anniversary of this section's compliance
date and the Commission had previously issued an order raising the
requirement under paragraph (a)(7)(i)(B) of this section;
    (B) If, after considering the capital and leverage levels of
brokers or dealers subject to paragraph (a)(7) of this section, as well
as the risks of their security-based swap positions, the Commission
determines that it may be appropriate to change the percentage pursuant
to paragraph (a)(7)(i)(A)(2) or (3) of this section, the Commission
will publish a notice of the potential change and subsequently will
issue an order regarding any such change.
    (ii) Provide notice that same day in accordance with Sec.  240.17a-
11(g) if the broker's or dealer's tentative net capital is less than $6
billion. The Commission may, upon written application, lower the
threshold at which notification is necessary under this paragraph
(a)(7)(ii), either unconditionally or on specified terms and
conditions, if a broker or dealer satisfies the Commission that
notification at the $6 billion threshold is unnecessary because of,
among other factors, the special nature of its business, its financial
position, its internal risk management system, or its compliance
history; and
* * * * *

Broker-Dealers Registered as Security-Based Swap Dealers

    (10) A broker or dealer registered with the Commission as a
security-based swap dealer, other than a broker or dealer subject to
the provisions of paragraph (a)(7) of this section, must:
    (i)(A) At all times maintain net capital of not less than the
greater of $20 million or the sum of the ratio requirement under
paragraph (a)(1) of this section and:
    (1) Two percent of the risk margin amount; or
    (2) Four percent or less of the risk margin amount if the
Commission issues an order raising the requirement to four percent or
less on or after the third anniversary of this section's compliance
date; or
    (3) Eight percent or less of the risk margin amount if the
Commission issues an order raising the requirement to eight percent or
less on or after the fifth anniversary of this section's compliance
date and the Commission had previously issued an order raising the
requirement under paragraph (a)(10)(i)(B) of this section;
    (B) If, after considering the capital and leverage levels of
brokers or dealers subject to paragraph (a)(10) of this section, as
well as the risks of their security-based swap positions, the
Commission determines that it may be appropriate to change the
percentage pursuant to paragraph (a)(10)(i)(A)(2) or (3) of this
section, the Commission will publish a notice of the potential change
and subsequently will issue an order regarding any such change; and
    (ii) Comply with Sec.  240.15c3-4 as though it were an OTC
derivatives dealer with respect to all of its business activities,
except that paragraphs (c)(5)(xiii) and (xiv), and (d)(8) and (9) of
Sec.  240.15c3-4 shall not apply.
* * * * *

    (c) * * *
    (2) * * *
    (iv) * * *
    (E) Other deductions. All other unsecured receivables; all assets
doubtful of collection less any reserves established therefor; 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 the following need not be deducted:
    (1) Any amounts deposited in a Customer Reserve Bank Account or PAB
Reserve Bank Account pursuant to Sec.  240.15c3-3(e) or in the
``special reserve account for the exclusive benefit of security-based
swap customers'' established pursuant to Sec.  240.15c3-3(p)(3),
    (2) Cash and securities held in a securities account at a carrying
broker or dealer (except where the account has been subordinated to the
claims of creditors of the carrying broker or dealer), and
    (3) Clearing deposits.
* * * * *
    (vi) * * *
    (O) Cleared security-based swaps. In the case of a cleared
security-based swap held in a proprietary account of the broker or
dealer, deducting the amount of the applicable margin requirement of
the clearing agency or, if the security-based swap references an equity
security, the broker or dealer may take a deduction using the method
specified in Sec.  240.15c3-1a.
    (P) 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.  240.15c3-
1(c)(2)(vi)(P)(1)(i):

                                                    Table 1 to Sec.   240.15c3-1(c)(2)(vi)(P)(1)(i )
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Basis point spread
    Length of time to maturity of credit default swap    -----------------------------------------------------------------------------------------------
                        contract                          100 or less  %    101-300  %      301-400  %      401-500  %      501-699  %    700 or more  %
--------------------------------------------------------------------------------------------------------------------------------------------------------
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)(2)(vi)(P)(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)(2)(vi)(P)(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)(2)(vi)(P)(1)(i) of this
section, deducting 50 percent of the amount required by paragraph
(c)(2)(vi)(P)(1)(i) of this section on the short position plus the
deduction required by paragraph (c)(2)(vi)(P)(1)(ii) of this section on
the excess long position, if any. For the purposes of this section, the
broker or dealer must use an industry sector classification system that
is reasonable in terms of grouping types of companies with similar
business activities and risk characteristics and the broker or 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 broker or dealer is long the same
debt security, deducting 50 percent of the amount specified in
paragraph (c)(2)(vi) or (vii) of this section for the debt security,
provided that the broker or dealer can deliver the debt security to
satisfy the obligation of the broker or dealer on the credit default
swap.
    (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 broker or
dealer is short the debt security or a debt security issued by the
corporate entity, deducting the amount specified in paragraph
(c)(2)(vi) or (vii) of this section 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 broker or dealer is
short the asset-backed security, deducting the amount specified in
paragraph (c)(2)(vi) or (vii)

of this section for the asset-backed security.
    (2) Non-cleared security-based swaps that are not credit default
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 paragraph (c)(2)(vi) of this section applicable to the reference
security. A broker or dealer may reduce the deduction under this
paragraph (c)(2)(vi)(P)(2) by an amount equal to any reduction
recognized for a comparable long or short position in the reference
security under paragraph (c)(2)(vi) of this section and, in the case of
a security-based swap referencing an equity security, the method
specified in Sec.  240.15c3-1a.
* * * * *
    (xii) * * *
    (B) Deducting the amount of cash required in the account of each
security-based swap and swap customer to meet the margin requirements
of a clearing agency, Examining Authority, 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.
* * * * *
    (xv) 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
broker or 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 broker or 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)(2)(xv)(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 broker or
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 broker or dealer, the independent third-party custodian,
and the counterparty that delivered the collateral to the custodian
have executed an account control agreement governing the terms under
which the custodian holds and releases collateral pledged by the
counterparty as initial margin that 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 broker or dealer with the right to access the collateral to satisfy
the counterparty's obligations to the broker or dealer arising from
transactions in the account of the counterparty; and
    (3) The broker or 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.
* * * * *
    (17) The term risk margin amount means the sum of:
    (i) The total initial margin required to be maintained by the
broker or dealer at each clearing agency with respect to security-based
swap transactions cleared for security-based swap customers; and
    (ii) The total initial margin amount calculated by the broker or
dealer with respect to non-cleared security-based swaps pursuant to
Sec.  240.18a-3(c)(1)(i)(B).
* * * * *

0
6. Section 240.15c3-1a is amended by revising paragraphs (a)(3) and (4)
and (b)(1)(v)(C)(3) and (4) and adding paragraph (b)(1)(v)(C)(5) to
read as follows:

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

    (a) * * *
    (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
section, 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.
* * * * *
    (b) * * *
    (1) * * *
    (v) * * *
    (C) * * *
    (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
7. Section 240.15c3-1b is amended:
0
a. In paragraph (a)(3)(iii)(C) by adding the phrase ``cleared swap
transactions or,'' before the phrase ``commodity futures or options
transactions''; and
0
b. By adding paragraph (b).

    The addition reads as follows:

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

* * * * *
    (b) Every broker or dealer in computing net capital pursuant to
Sec.  240.15c3-1 must comply with the following:
    (1) Cleared swaps. In the case of a cleared swap held in a
proprietary account of the broker or dealer, deducting the amount of
the applicable margin requirement of the derivatives clearing
organization or, if the swap references an equity security index, the
broker or dealer may take a deduction using the method specified in
Sec.  240.15c3-1a.
    (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.  240.15c3-1e 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 table 1 to
Sec.  240.15c3-1a(b)(2)(i)(A):

                                                        Table 1 to Sec.   240.15c3-1a(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 broker or 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
broker or dealer can deliver the component securities to satisfy the
obligation of the broker or 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 broker or 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 a non-cleared swap that is
not a credit default swap for which the deductions in Sec.  240.15c3-1e
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 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 broker or dealer may reduce the deduction under paragraph
(b)(2)(ii)(A) by an amount equal to any reduction recognized for a
comparable long or short position in the reference asset or interest
rate under Sec.  240.15c3-1 or 17 CFR 1.17.
* * * * *

0
8. Section 240.15c3-1d is amended by revising paragraphs (b)(7) and
(8), (b)(10)(ii)(B), (c)(2), and (c)(5)(i)(B) to read as follows:

Sec.  240.15c3-1d  Satisfactory subordination agreements (Appendix D to
17 CFR 240.15c3-1).

* * * * *
    (b) * * *
    (7) A broker or dealer at its option but not at the option of the
lender may, if the subordination 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 subordination
agreement became effective. This restriction shall not apply to
temporary subordination agreements that comply with the provisions of
paragraph (c)(5) of this section. No Prepayment shall be made, if,
after

giving effect thereto (and to all Payments of Payment Obligations under
any other subordinated 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 broker or dealer, either aggregate
indebtedness of the broker or dealer would exceed 1000 percent of its
net capital or its net capital would be less than 120 percent of the
minimum dollar amount required by Sec.  240.15c3-1 or, in the case of a
broker or dealer operating pursuant to Sec.  240.15c3-1(a)(1)(ii), its
net capital would be less than 5 percent of its aggregate debit items
computed in accordance with Sec.  240.15c3-3a, or if registered as a
futures commission merchant, 7 percent of the funds required to be
segregated pursuant to the Commodity Exchange Act and the regulations
thereunder (less the market value of commodity options purchased by
option customers subject to the rules of a contract market, each such
deduction not to exceed the amount of funds in the option customer's
account), if greater, or its net capital would be less than 120 percent
of the minimum dollar amount required by Sec.  240.15c3-1(a)(1)(ii), or
if, in the case of a broker or dealer operating pursuant to Sec.
240.15c3-1(a)(10), its net capital would be less than 120 percent of
its minimum requirement.
    (8)(i) The Payment Obligation of the broker or dealer in respect of
any subordination 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 broker or dealer under any
other subordination agreement(s) then outstanding that are scheduled to
mature on or before such Payment Obligation) either:
    (A) The aggregate indebtedness of the broker or dealer would exceed
1200 percent of its net capital, or in the case of a broker or dealer
operating pursuant to Sec.  240.15c3-1(a)(1)(ii), its net capital would
be less than 5 percent of aggregate debit items computed in accordance
with Sec.  240.15c3-3a or, if registered as a futures commission
merchant, 6 percent of the funds required to be segregated pursuant to
the Commodity Exchange Act and the regulations thereunder (less the
market value of commodity options purchased by option customers on or
subject to the rules of a contract market, each such deduction not to
exceed the amount of funds in the option customer's account), if
greater, or, in the case of a broker or dealer operating pursuant to
Sec.  240.15c3-1(a)(10), its net capital would be less than 120 percent
of its minimum requirement; or
    (B) Its net capital would be less than 120 percent of the minimum
dollar amount required by Sec.  240.15c3-1 including paragraph
(a)(1)(ii), if applicable. The subordination agreement may provide that
if the Payment Obligation of the broker or dealer thereunder does not
mature and is suspended as a result of the requirement of this
paragraph (b)(8) for a period of not less than six months, the broker
or 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.  240.15c3-1 and 240.15c3-1d.
    (ii) [Reserved]
* * * * *
    (10) * * *
    (ii) * * *
    (B) The aggregate indebtedness of the broker or dealer exceeding
1500 percent of its net capital or, in the case of a broker or dealer
that has elected to operate under Sec.  240.15c3-1(a)(1)(ii), its net
capital computed in accordance therewith is less than two percent of
its aggregate debit items computed in accordance with Sec.  240.15c3-3a
or, if registered as a futures commission merchant, four percent of the
funds required to be segregated pursuant to the Commodity Exchange Act
and the regulations thereunder (less the market value of commodity
options purchased by option customers on or subject to the rules of a
contract market, each such deduction not to exceed the amount of funds
in the option customer's account), if greater, or, in the case of a
broker or dealer operating pursuant to Sec.  240.15c3-1(a)(10), its net
capital is less than its minimum requirement, throughout a period of 15
consecutive business days, commencing on the day the broker or dealer
first determines and notifies the Examining Authority for the broker or
dealer, or the Examining Authority or the Commission first determines
and notifies the broker or dealer of such fact;
* * * * *
    (c) * * *
    (2) Every broker or dealer shall immediately notify the Examining
Authority for such broker or dealer if, after giving effect to all
Payments of Payment Obligations under subordination agreements then
outstanding that are then due or mature within the following six months
without reference to any projected profit or loss of the broker or
dealer either the aggregate indebtedness of the broker or dealer would
exceed 1200 percent of its net capital or its net capital would be less
than 120 percent of the minimum dollar amount required by Sec.
240.15c3-1, or, in the case of a broker or dealer operating pursuant to
Sec.  240.15c3-1(a)(1)(ii), its net capital would be less than 5
percent of aggregate debit items computed in accordance with Sec.
240.15c3-3a, or, if registered as a futures commission merchant, 6
percent of the funds required to be segregated pursuant to the
Commodity Exchange Act and the regulations thereunder (less the market
value of commodity options purchased by option customers on or subject
to the rules of a contract market, each such deduction not to exceed
the amount of funds in the option customer's account), if greater, or
less than 120 percent of the minimum dollar amount required by Sec.
240.15c3-1(a)(1)(ii), or, in the case of a broker or dealer operating
pursuant to Sec.  240.15c3-1(a)(10), its net capital would be less than
120 percent of its minimum requirement.
* * * * *
    (5)(i) * * *
    (B) In the case of a broker or dealer operating pursuant to Sec.
240.15c3-1(a)(1)(ii), its net capital is less than 5 percent of
aggregate debits computed in accordance with Sec.  240.15c3-1, or, if
registered as a futures commission merchant, less than 7 percent of the
funds required to be segregated pursuant to the Commodity Exchange Act
and the regulations thereunder (less the market value of commodity
options purchased by option customers on or subject to the rules of a
contract market, each such deduction not to exceed the amount of funds
in the option customer's account), if greater, or less than 120 percent
of the minimum dollar amount required by paragraph (a)(1)(ii) of this
section, or, in the case of a broker or dealer operating pursuant to
Sec.  240.15c3-1(a)(10), its net capital would be less than 120 percent
of its minimum requirement, or
* * * * *

0
9. Section 240.15c3-1e is amended by:
0
a. Redesignating the Preliminary Note as introductory text and revising
it;
0
b. Revising paragraph (a) introductory text;
0
c. Redesignating paragraph (a)(7) as paragraph (a)(7)(i) and adding
paragraph (a)(7)(ii);

0
d. Revising paragraph (c)(3);
0
e. Adding paragraphs (c)(4)(v)(B)(1) and (2);
0
f. Removing paragraph (c)(4)(v)(D) and redesignating paragraphs
(c)(4)(v)(E) through (H) as paragraphs (c)(4)(v)(D) through (G);
0
g. In paragraph (e) introductory text by removing the phrase ``Sec.
240.15c3-1(c)(2)(vi), (c)(2)(vii), and (c)(2)(iv), as appropriate'' and
adding in its place ``Sec.  240.15c3-1(c)(2)(iv), (vi), and (vii),
(c)(2)(xv)(A) and (B), as appropriate, and Sec.  240.15c-1b, as
appropriate''; and
0
h. Revising paragraph (e)(1).
    The revisions read as follows:

Sec.  240.15c3-1e  Deductions for market and credit risk for certain
brokers or dealers (Appendix E to 17 CFR 240.15c3-1).

    Sections 240.15c3-1e and 240.15c3-1g set forth a program that
allows a broker or dealer to use an alternative approach to computing
net capital deductions, subject to the conditions described in
Sec. Sec.  240.15c3-1e and 240.15c3-1g, including supervision of the
broker's or dealer's ultimate holding company under the program. The
program is designed to reduce the likelihood that financial and
operational weakness in the holding company will destabilize the broker
or dealer, or the broader financial system. The focus of this
supervision of the ultimate holding company is its financial and
operational condition and its risk management controls and
methodologies.
    (a) A broker or dealer may apply to the Commission for
authorization to compute deductions for market risk pursuant to this
section in lieu of computing deductions pursuant to Sec. Sec.
240.15c3-1(c)(2)(vi) and (vii) and 240.15c3-1b, and to compute
deductions for credit risk pursuant to this section on credit exposures
arising from transactions in derivatives instruments (if this section
is used to calculate deductions for market risk on these instruments)
in lieu of computing deductions pursuant to Sec.  240.15c3-1(c)(2)(iv)
and (c)(2)(xv)(A) and (B):
* * * * *
    (7) * * *
    (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 broker or 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.
* * * * *
    (c) * * *
    (3) A portfolio concentration charge of 100 percent of the amount
of the broker's or dealer's aggregate current exposure for all
counterparties in excess of 10 percent of the tentative net capital of
the broker or dealer;
    (4) * * *
    (v) * * *
    (B) * * *
    (1) The collateral is subject to the broker's or dealer's physical
possession or control and may be liquidated promptly by the firm
without intervention by any other party; or
    (2) 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;
* * * * *
    (e) * * *
    (1) The broker or dealer is required by Sec.  240.15c3-1(a)(7)(ii)
to provide notice to the Commission that the broker's or dealer's
tentative net capital is less than $6 billion;
* * * * *

0
10. Section 240.15c3-3 is amended by adding introductory text and
paragraph (p) to read as follows:

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

    Except where otherwise noted, Sec.  240.15c3-3 applies to a broker
or dealer registered under section 15(b) of the Act (15 U.S.C. 78o(b)),
including a broker or dealer also registered as a security-based swap
dealer or major security-based swap participant under section 15F(b) of
the Act (15 U.S.C. 78o-10(b)). A security-based swap dealer or major
security-based swap participant registered under section 15F(b) of the
Act that is not also registered as a broker or dealer under section
15(b) of the Act is subject to the requirements under Sec.  240.18a-4.
* * * * *
    (p) Segregation requirements for security-based swaps. The
following requirements apply to the security-based swap activities of a
broker or dealer.
    (1) Definitions. For the purposes of this paragraph:
    (i) The term cleared security-based swap means a security-based
swap that is, directly or indirectly, submitted to and cleared by a
clearing agency registered with the Commission pursuant to section 17A
of the Act (15 U.S.C. 78q-1);
    (ii) The term excess securities collateral means securities and
money market instruments carried for the account of a security-based
swap customer that have a market value in excess of the current
exposure of the broker or dealer (after reducing the current exposure
by the amount of cash in the account) to the security-based swap
customer, excluding:
    (A) Securities and money market instruments held in a qualified
clearing agency account but only to the extent the securities and money
market instruments are being used to meet a margin requirement of the
clearing agency resulting from a security-based swap transaction of the
security-based swap customer; and
    (B) Securities and money market instruments held in a qualified
registered security-based swap dealer account or in a third-party
custodial account but only to the extent the securities and money
market instruments are being used to meet a regulatory margin
requirement of a security-based swap dealer resulting from the broker
or dealer entering into a non-cleared security-based swap transaction
with the security-based swap dealer to offset the risk of a non-cleared
security-based swap transaction between the broker or dealer and the
security-based swap customer;
    (iii) The term qualified clearing agency account means an account
of a broker or dealer at a clearing agency registered with the
Commission pursuant to section 17A of the Act (15

U.S.C. 78q-1) that holds funds and other property in order to margin,
guarantee, or secure cleared security-based swap transactions for the
security-based swap customers of the broker or dealer that meets the
following conditions:
    (A) The account is designated ``Special Clearing Account for the
Exclusive Benefit of the Cleared Security-Based Swap Customers of [name
of broker or dealer]'';
    (B) The clearing agency has acknowledged in a written notice
provided to and retained by the broker or dealer that the funds and
other property in the account are being held by the clearing agency for
the exclusive benefit of the security-based swap customers of the
broker or dealer in accordance with the regulations of the Commission
and are being kept separate from any other accounts maintained by the
broker or dealer with the clearing agency; and
    (C) The account is subject to a written contract between the broker
or dealer and the clearing agency which provides that the funds and
other property in the account shall be subject to no right, charge,
security interest, lien, or claim of any kind in favor of the clearing
agency or any person claiming through the clearing agency, except a
right, charge, security interest, lien, or claim resulting from a
cleared security-based swap transaction effected in the account.
    (iv) The term qualified registered security-based swap dealer
account means an account at a security-based swap dealer that is
registered with the Commission pursuant to section 15F of the Act that
meets the following conditions:
    (A) The account is designated ``Special Reserve Account for the
Exclusive Benefit of the Security-Based Swap Customers of [name of
broker or dealer]'';
    (B) The security-based swap dealer has acknowledged in a written
notice provided to and retained by the broker or dealer that the funds
and other property held in the account are being held by the security-
based swap dealer for the exclusive benefit of the security-based swap
customers of the broker or dealer in accordance with the regulations of
the Commission and are being kept separate from any other accounts
maintained by the broker or dealer with the security-based swap dealer;
    (C) The account is subject to a written contract between the broker
or dealer and the security-based swap dealer which provides that the
funds and other property in the account shall be subject to no right,
charge, security interest, lien, or claim of any kind in favor of the
security-based swap dealer or any person claiming through the security-
based swap dealer, except a right, charge, security interest, lien, or
claim resulting from a non-cleared security-based swap transaction
effected in the account; and
    (D) The account and the assets in the account are not subject to
any type of subordination agreement between the broker or dealer and
the security-based swap dealer.
    (v) The term qualified security means:
    (A) Obligations of the United States;
    (B) Obligations fully guaranteed as to principal and interest by
the United States; and
    (C) General obligations of any State or a political subdivision of
a State that:
    (1) Are not traded flat and are not in default;
    (2) Were part of an initial offering of $500 million or greater;
and
    (3) Were issued by an issuer that has published audited financial
statements within 120 days of its most recent fiscal year end.
    (vi) The term security-based swap customer means any person from
whom or on whose behalf the broker or dealer has received or acquired
or holds funds or other property for the account of the person with
respect to a cleared or non-cleared security-based swap transaction.
The term does not include a person to the extent that person has a
claim for funds or other property which by contract, agreement or
understanding, or by operation of law, is part of the capital of the
broker or dealer or, in the case of an affiliate of the broker or
dealer, is subordinated to all claims of customers (including PAB
customers) and security-based swap customers of the broker or dealer.
    (vii) The term special reserve account for the exclusive benefit of
security-based swap customers means an account at a bank that meets the
following conditions:
    (A) The account is designated ``Special Reserve Account for the
Exclusive Benefit of the Security-Based Swap Customers of [name of
broker or dealer]'';
    (B) The account is subject to a written acknowledgement by the bank
provided to and retained by the broker or dealer that the funds and
other property held in the account are being held by the bank for the
exclusive benefit of the security-based swap customers of the broker or
dealer in accordance with the regulations of the Commission and are
being kept separate from any other accounts maintained by the broker or
dealer with the bank; and
    (C) The account is subject to a written contract between the broker
or dealer and the bank which provides that the funds and other property
in the account shall at no time be used directly or indirectly as
security for a loan or other extension of credit to the broker or
dealer by the bank and, shall be subject to no right, charge, security
interest, lien, or claim of any kind in favor of the bank or any person
claiming through the bank.
    (viii) The term third-party custodial account means an account
carried by an independent third-party custodian that meets the
following conditions:
    (A) The account is established for the purposes of meeting
regulatory margin requirements of another security-based swap dealer;
    (B) The account is carried by a bank as defined in section 3(a)(6)
of the Act or a registered U.S. clearing organization or depository or,
if the collateral to be held in the account consists of foreign
securities or currencies, a supervised foreign bank, clearing
organization, or depository that customarily maintains custody of such
foreign securities or currencies;
    (C) The account is designated for and on behalf of the broker or
dealer for the benefit of its security-based swap customers and the
account is subject to a written acknowledgement by the bank, clearing
organization, or depository provided to and retained by the broker or
dealer that the funds and other property held in the account are being
held by the bank, clearing organization, or depository for the
exclusive benefit of the security-based swap customers of the broker or
dealer and are being kept separate from any other accounts maintained
by the broker or dealer with the bank, clearing organization, or
depository; and
    (D) The account is subject to a written contract between the broker
or dealer and the bank, clearing organization, or depository which
provides that the funds and other property in the account shall at no
time be used directly or indirectly as security for a loan or other
extension of credit to the security-based swap dealer by the bank,
clearing organization, or depository and, shall be subject to no right,
charge, security interest, lien, or claim of any kind in favor of the
bank, clearing organization, or depository or any person claiming
through the bank, clearing organization, or depository.
    (2) Physical possession or control of excess securities collateral.
(i) A broker or dealer must promptly obtain and thereafter maintain
physical possession or control of all excess securities collateral
carried for the security-based

swap accounts of security-based swap customers.
    (ii) A broker or dealer has control of excess securities collateral
only if the securities and money market instruments:
    (A) Are represented by one or more certificates in the custody or
control of a clearing corporation or other subsidiary organization of
either national securities exchanges, or of a custodian bank in
accordance with a system for the central handling of securities
complying with the provisions of Sec. Sec.  240.8c-1(g) and 240.15c2-
1(g) the delivery of which certificates to the broker or dealer does
not require the payment of money or value, and if the books or records
of the broker or dealer identify the security-based swap customers
entitled to receive specified quantities or units of the securities so
held for such security-based swap customers collectively;
    (B) Are the subject of bona fide items of transfer; provided that
securities and money market instruments shall be deemed not to be the
subject of bona fide items of transfer if, within 40 calendar days
after they have been transmitted for transfer by the broker or dealer
to the issuer or its transfer agent, new certificates conforming to the
instructions of the broker or dealer have not been received by the
broker or dealer, the broker or dealer has not received a written
statement by the issuer or its transfer agent acknowledging the
transfer instructions and the possession of the securities or money
market instruments, or the broker or dealer has not obtained a
revalidation of a window ticket from a transfer agent with respect to
the certificate delivered for transfer;
    (C) Are in the custody or control of a bank as defined in section
3(a)(6) of the Act, the delivery of which securities or money market
instruments to the broker or dealer does not require the payment of
money or value and the bank having acknowledged in writing that the
securities and money market instruments in its custody or control are
not subject to any right, charge, security interest, lien or claim of
any kind in favor of a bank or any person claiming through the bank;
    (D)(1) Are held in or are in transit between offices of the broker
or dealer; or
    (2) Are held by a corporate subsidiary if the broker or dealer owns
and exercises a majority of the voting rights of all of the voting
securities of such subsidiary, assumes or guarantees all of the
subsidiary's obligations and liabilities, operates the subsidiary as a
branch office of the broker or dealer, and assumes full responsibility
for compliance by the subsidiary and all of its associated persons with
the provisions of the Federal securities laws as well as for all of the
other acts of the subsidiary and such associated persons; or
    (E) Are held in such other locations as the Commission shall upon
application from a broker or dealer find and designate to be adequate
for the protection of security-based swap customer securities.
    (iii) Each business day the broker or dealer must determine from
its books and records the quantity of excess securities collateral in
its possession or control as of the close of the previous business day
and the quantity of excess securities collateral not in its possession
or control as of the previous business day. If the broker or dealer did
not obtain possession or control of all excess securities collateral on
the previous business day as required by this section and there are
securities or money market instruments of the same issue and class in
any of the following non-control locations:
    (A) Securities or money market instruments subject to a lien
securing an obligation of the broker or dealer, then the broker or
dealer, not later than the next business day on which the determination
is made, must issue instructions for the release of the securities or
money market instruments from the lien and must obtain physical
possession or control of the securities or money market instruments
within two business days following the date of the instructions;
    (B) Securities or money market instruments held in a qualified
clearing agency account, then the broker or dealer, not later than the
next business day on which the determination is made, must issue
instructions for the release of the securities or money market
instruments by the clearing agency and must obtain physical possession
or control of the securities or money market instruments within two
business days following the date of the instructions;
    (C) Securities or money market instruments held in a qualified
registered security-based swap dealer account maintained by another
security-based swap dealer or in a third-party custodial account, then
the broker or dealer, not later than the next business day on which the
determination is made, must issue instructions for the release of the
securities or money market instruments by the security-based swap
dealer or the third-party custodian and must obtain physical possession
or control of the securities or money market instruments within two
business days following the date of the instructions;
    (D) Securities or money market instruments loaned by the broker or
dealer, then the broker or dealer, not later than the next business day
on which the determination is made, must issue instructions for the
return of the loaned securities or money market instruments and must
obtain physical possession or control of the securities or money market
instruments within five business days following the date of the
instructions;
    (E) Securities or money market instruments failed to receive more
than 30 calendar days, then the broker or dealer, not later than the
next business day on which the determination is made, must take prompt
steps to obtain physical possession or control of the securities or
money market instruments through a buy-in procedure or otherwise;
    (F) Securities or money market instruments receivable by the broker
or dealer as a security dividend, stock split or similar distribution
for more than 45 calendar days, then the broker or dealer, not later
than the next business day on which the determination is made, must
take prompt steps to obtain physical possession or control of the
securities or money market instruments through a buy-in procedure or
otherwise; or
    (G) Securities or money market instruments included on the broker's
or dealer's books or records that allocate to a short position of the
broker or dealer or a short position for another person, for more than
30 calendar days, then the broker or dealer must, not later than the
business day following the day on which the determination is made, take
prompt steps to obtain physical possession or control of such
securities or money market instruments.
    (3) Deposit requirement for special reserve account for the
exclusive benefit of security-based swap customers. (i) A broker or
dealer must maintain a special reserve account for the exclusive
benefit of security-based swap customers that is separate from any
other bank account of the broker or dealer. The broker or dealer must
at all times maintain in the special reserve account for the exclusive
benefit of security-based swap customers, through deposits into the
account, cash and/or qualified securities in amounts computed in
accordance with the formula set forth in Sec.  240.15c3-3b. In
determining the amount maintained in a special reserve account for the
exclusive benefit of security-based swap customers, the broker or
dealer must deduct:

    (A) The percentage of the value of a general obligation of a State
or a political subdivision of a State specified in Sec.  240.15c3-
1(c)(2)(vi);
    (B) The aggregate value of general obligations of a State or a
political subdivision of a State to the extent the amount of the
obligations of a single issuer (after applying the deduction in
paragraph (p)(3)(i)(A) of this section) exceeds two percent of the
amount required to be maintained in the special reserve account for the
exclusive benefit of security-based swap customers;
    (C) The aggregate value of all general obligations of States or
political subdivisions of States to the extent the amount of the
obligations (after applying the deduction in paragraph (p)(3)(i)(A) of
this section) exceeds 10 percent of the amount required to be
maintained in the special reserve account for the exclusive benefit of
security-based swap customers;
    (D) The amount of cash deposited with a single non-affiliated bank
to the extent the amount exceeds 15 percent of the equity capital of
the bank as reported by the bank in its most recent Call Report or any
successor form the bank is required to file by its appropriate federal
banking agency (as defined by section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813)); and
    (E) The total amount of cash deposited with an affiliated bank.
    (ii) A broker or dealer must not accept or use credits identified
in the items of the formula set forth in Sec.  240.15c3-3b except for
the specified purposes indicated under items comprising Total Debits
under the formula, and, to the extent Total Credits exceed Total
Debits, at least the net amount thereof must be maintained in the
Special Reserve Account pursuant to paragraph (p)(3)(i) of this
section.
    (iii)(A) The computations necessary to determine the amount
required to be maintained in the special reserve account for the
exclusive benefit of security-based swap customers must be made weekly
as of the close of the last business day of the week and any deposit
required to be made into the account must be made no later than one
hour after the opening of banking business on the second following
business day. The broker or dealer may make a withdrawal from the
special reserve account for the exclusive benefit of security-based
swap customers only if the amount remaining in the account after the
withdrawal is equal to or exceeds the amount required to be maintained
in the account pursuant to paragraph (p)(3) of this section.
    (ii) (B) Computations in addition to the computations required
pursuant to paragraph (p)(3)(iii)(A) of this section may be made as of
the close of any business day, and deposits so computed must be made no
later than one hour after the open of banking business on the second
following business day.
    (iv) A broker or dealer must promptly deposit into a special
reserve account for the exclusive benefit of security-based swap
customers cash and/or qualified securities of the broker or dealer if
the amount of cash and/or qualified securities in one or more special
reserve accounts for the exclusive benefit of security-based swap
customers falls below the amount required to be maintained pursuant to
this section.
    (4) Requirements for non-cleared security-based swaps--(i) Notice.
A broker or dealer registered under section 15F(b) of the Act (15
U.S.C. 78o-10(b)) as a security-based swap dealer or major security-
based swap participant must provide the notice required pursuant to
section 3E(f)(1)(A) of the Act (15 U.S.C. 78c-5(f)) in writing to a
duly authorized individual prior to the execution of the first non-
cleared security-based swap transaction with the counterparty occurring
after the compliance date of this section.
    (ii) Subordination--(A) Counterparty that elects to have individual
segregation at an independent third-party custodian. A broker or dealer
must obtain an agreement from a counterparty whose funds or other
property to meet a margin requirement of the broker or dealer are held
at a third-party custodian in which the counterparty agrees to
subordinate its claims against the broker or dealer for the funds or
other property held at the third-party custodian to the claims of
customers (including PAB customers) and security-based swap customers
of the broker or dealer but only to the extent that funds or other
property provided by the counterparty to the independent third-party
custodian are not treated as customer property as that term is defined
in 11 U.S.C. 741 or customer property as defined in 15 U.S.C. 78lll(4)
in a liquidation of the broker or dealer.
    (B) Counterparty that elects to have no segregation. A broker or
dealer registered under section 15F(b) of the Act as a security-based
swap dealer must obtain an agreement from a counterparty that is an
affiliate of the broker or dealer that affirmatively chooses not to
require segregation of funds or other property pursuant to section
3E(f) of the Act (15 U.S.C. 78c-5(f)) in which the counterparty agrees
to subordinate all of its claims against the broker or dealer to the
claims of customers (including PAB customers) and security-based swap
customers of the broker or dealer.

0
 11. Section 240.15c3-3b is added to read as follows:

Sec.  240.15c3-3b  Exhibit B--Formula for determination of security-
based swap customer reserve requirements of brokers and dealers under
Sec.  240.15c3-3.

------------------------------------------------------------------------
                                              Credits         Debits
------------------------------------------------------------------------
1. Free credit balances and other credit            $___  ..............
 balances in the accounts carried for
 security-based swap customers (See Note
 A).....................................
2. Monies borrowed collateralized by                $___  ..............
 securities in accounts carried for
 security-based swap customers (See Note
 B).....................................
3. Monies payable against security-based            $___  ..............
 swap customers' securities loaned (See
 Note C)................................
4. Security-based swap customers'                   $___  ..............
 securities failed to receive (See Note
 D).....................................
5. Credit balances in firm accounts                 $___  ..............
 which are attributable to principal
 sales to security-based swap customers.
6. Market value of stock dividends,                 $___  ..............
 stock splits and similar distributions
 receivable outstanding over 30 calendar
 days...................................
7. Market value of short security count             $___  ..............
 differences over 30 calendar days old..
8. Market value of short securities and             $___  ..............
 credits (not to be offset by longs or
 by debits) in all suspense accounts
 over 30 calendar days..................
9. Market value of securities which are             $___  ..............
 in transfer in excess of 40 calendar
 days and have not been confirmed to be
 in transfer by the transfer agent or
 the issuer during the 40 days..........
10. Debit balances in accounts carried    ..............            $___
 for security-based swap customers,
 excluding unsecured accounts and
 accounts doubtful of collection (See
 Note E)................................
11. Securities borrowed to effectuate     ..............            $___
 short sales by security-based swap
 customers and securities borrowed to
 make delivery on security-based swap
 customers' securities failed to deliver

12. Failed to deliver of security-based   ..............            $___
 swap customers' securities not older
 than 30 calendar days..................
13. Margin required and on deposit with   ..............            $___
 the Options Clearing Corporation for
 all option contracts written or
 purchased in accounts carried for
 security-based swap customers (See Note
 F).....................................
14. Margin related to security futures    ..............            $___
 products written, purchased or sold in
 accounts carried for security-based
 swap customers required and on deposit
 in a qualified clearing agency account
 at a clearing agency registered with
 the Commission under section 17A of the
 Act (15 U.S.C. 78q-1) or a derivatives
 clearing organization registered with
 the Commodity Futures Trading
 Commission under section 5b of the
 Commodity Exchange Act (7 U.S.C. 7a-1)
 (See Note G)...........................
15. Margin related to cleared security-   ..............            $___
 based swap transactions in accounts
 carried for security-based swap
 customers required and on deposit in a
 qualified clearing agency account at a
 clearing agency registered with the
 Commission pursuant to section 17A of
 the Act (15 U.S.C. 78q-1)..............
16. Margin related to non-cleared         ..............            $___
 security-based swap transactions in
 accounts carried for security-based
 swap customers required and held in a
 qualified registered security-based
 swap dealer account at a security-based
 swap dealer or at a third-party
 custodial account......................
                                         -------------------------------
    Total Credits.......................            $___  ..............
    1Total Debits.......................  ..............            $___
    Excess of Credits over Debits.......            $___  ..............
------------------------------------------------------------------------
Note A. Item 1 must include all outstanding drafts payable to security-
  based swap customers which have been applied against free credit
  balances or other credit balances and must also include checks drawn
  in excess of bank balances per the records of the broker or dealer.
Note B. Item 2 must include the amount of options-related or security
  futures product-related Letters of Credit obtained by a member of a
  registered clearing agency or a derivatives clearing organization
  which are collateralized by security-based swap customers' securities,
  to the extent of the member's margin requirement at the registered
  clearing agency or derivatives clearing organization.
Note C. Item 3 must include in addition to monies payable against
  security-based swap customers' securities loaned the amount by which
  the market value of securities loaned exceeds the collateral value
  received from the lending of such securities.
Note D. Item 4 must include in addition to security-based swap
  customers' securities failed to receive the amount by which the market
  value of securities failed to receive and outstanding more than thirty
  (30) calendar days exceeds their contract value.
Note E. (1) Debit balances in accounts carried for security-based swap
  customers must be reduced by the amount by which a specific security
  (other than an exempted security) which is collateral for margin
  requirements exceeds in aggregate value 15 percent of the aggregate
  value of all securities which collateralize all accounts receivable;
  provided, however, the required reduction must not be in excess of the
  amount of the debit balance required to be excluded because of this
  concentration rule. A specified security is deemed to be collateral
  for an account only to the extent it is not an excess margin security.
(2) Debit balances in special omnibus accounts, maintained in compliance
  with the requirements of section 4(b) of Regulation T under the Act
  (12 CFR 220.4(b)) or similar accounts carried on behalf of a security-
  based swap dealer, must be reduced by any deficits in such accounts
  (or if a credit, such credit must be increased) less any calls for
  margin, marks to the market, or other required deposits which are
  outstanding 5 business days or less.
(3) Debit balances in security-based swap customers' accounts included
  in the formula under item 10 must be reduced by an amount equal to 1
  percent of their aggregate value.
(4) Debit balances in accounts of household members and other persons
  related to principals of a broker or dealer and debit balances in
  accounts of affiliated persons of a broker or dealer must be excluded
  from the reserve formula, unless the broker or dealer can demonstrate
  that such debit balances are directly related to credit items in the
  formula.
(5) Debit balances in accounts (other than omnibus accounts) must be
  reduced by the amount by which any single security-based swap
  customer's debit balance exceeds 25 percent (to the extent such amount
  is greater than $50,000) of the broker's or dealer's tentative net
  capital (i.e., net capital prior to securities haircuts) unless the
  broker or dealer can demonstrate that the debit balance is directly
  related to credit items in the Reserve Formula. Related accounts
  (e.g., the separate accounts of an individual, accounts under common
  control or subject to cross guarantees) will be deemed to be a single
  security-based swap customer's account for purposes of this provision.
If the registered national securities exchange or the registered
  national securities association having responsibility for examining
  the broker or dealer (``designated examining authority'') is
  satisfied, after taking into account the circumstances of the
  concentrated account including the quality, diversity, and
  marketability of the collateral securing the debit balances in
  accounts subject to this provision, that the concentration of debit
  balances is appropriate, then such designated examining authority may,
  by order, grant a partial or plenary exception from this provision.
  The debit balance may be included in the reserve formula computation
  for five business days from the day the request is made.
(6) Debit balances of joint accounts, custodian accounts, participations
  in hedge funds or limited partnerships or similar type accounts or
  arrangements that include both assets of a person who would be
  excluded from the definition of security-based swap customer (``non-
  security-based swap customer'') and assets of a person or persons
  includible in the definition of security-based swap customer must be
  included in the Reserve Formula in the following manner: if the
  percentage ownership of the non-security-based swap customer is less
  than 5 percent then the entire debit balance shall be included in the
  formula; if such percentage ownership is between 5 percent and 50
  percent then the portion of the debit balance attributable to the non-
  security-based swap customer must be excluded from the formula unless
  the broker or dealer can demonstrate that the debit balance is
  directly related to credit items in the formula; if such percentage
  ownership is greater than 50 percent, then the entire debit balance
  must be excluded from the formula unless the broker or dealer can
  demonstrate that the debit balance is directly related to credit items
  in the formula.
Note F. Item 13 must include the amount of margin required and on
  deposit with Options Clearing Corporation to the extent such margin is
  represented by cash, proprietary qualified securities, and letters of
  credit collateralized by security-based swap customers' securities.
Note G. (a) Item 14 must include the amount of margin required and on
  deposit with a clearing agency registered with the Commission under
  section 17A of the Act (15 U.S.C. 78q-1) or a derivatives clearing
  organization registered with the Commodity Futures Trading Commission
  under section 5b of the Commodity Exchange Act (7 U.S.C. 7a-1) for
  security-based swap customer accounts to the extent that the margin is
  represented by cash, proprietary qualified securities, and letters of
  credit collateralized by security-based swap customers' securities.
(b) Item 14 will apply only if the broker or dealer has the margin
  related to security futures products on deposit with:
(1) A registered clearing agency or derivatives clearing organization
  that:
(i) Maintains security deposits from clearing members in connection with
  regulated options or futures transactions and assessment power over
  member firms that equal a combined total of at least $2 billion, at
  least $500 million of which must be in the form of security deposits.
  For purposes of this Note G, the term ``security deposits'' refers to
  a general fund, other than margin deposits or their equivalent, that
  consists of cash or securities held by a registered clearing agency or
  derivative clearing organization;
(ii) Maintains at least $3 billion in margin deposits; or
(iii) Does not meet the requirements of paragraphs (b)(1)(i) through
  (b)(1)(ii) of this Note G, if the Commission has determined, upon a
  written request for exemption by or for the benefit of the broker or
  dealer, that the broker or dealer may utilize such a registered
  clearing agency or derivatives clearing organization. The Commission
  may, in its sole discretion, grant such an exemption subject to such
  conditions as are appropriate under the circumstances, if the
  Commission determines that such conditional or unconditional exemption
  is necessary or appropriate in the public interest, and is consistent
  with the protection of investors; and

(2) A registered clearing agency or derivatives clearing organization
  that, if it holds funds or securities deposited as margin for security
  futures products in a bank, as defined in section 3(a)(6) of the Act
  (15 U.S.C. 78c(a)(6)), obtains and preserves written notification from
  the bank at which it holds such funds and securities or at which such
  funds and securities are held on its behalf. The written notification
  will state that all funds and/or securities deposited with the bank as
  margin (including security-based swap customer security futures
  products margin), or held by the bank and pledged to such registered
  clearing agency or derivatives clearing agency as margin, are being
  held by the bank for the exclusive benefit of clearing members of the
  registered clearing agency or derivatives clearing organization
  (subject to the interest of such registered clearing agency or
  derivatives clearing organization therein), and are being kept
  separate from any other accounts maintained by the registered clearing
  agency or derivatives clearing organization with the bank. The written
  notification also will provide that such funds and/or securities will
  at no time be used directly or indirectly as security for a loan to
  the registered clearing agency or derivatives clearing organization by
  the bank, and will be subject to no right, charge, security interest,
  lien, or claim of any kind in favor of the bank or any person claiming
  through the bank. This provision, however, will not prohibit a
  registered clearing agency or derivatives clearing organization from
  pledging security-based swap customer funds or securities as
  collateral to a bank for any purpose that the rules of the Commission
  or the registered clearing agency or derivatives clearing organization
  otherwise permit; and
(3) A registered clearing agency or derivatives clearing organization
  that establishes, documents, and maintains:
(i) Safeguards in the handling, transfer, and delivery of cash and
  securities;
(ii) Fidelity bond coverage for its employees and agents who handle
  security-based swap customer funds or securities. In the case of
  agents of a registered clearing agency or derivatives clearing
  organization, the agent may provide the fidelity bond coverage; and
(iii) Provisions for periodic examination by independent public
  accountants; and
(4) A derivatives clearing organization that, if it is not otherwise
  registered with the Commission, has provided the Commission with a
  written undertaking, in a form acceptable to the Commission, executed
  by a duly authorized person at the derivatives clearing organization,
  to the effect that, with respect to the clearance and settlement of
  the security-based swap customer security futures products of the
  broker or dealer, the derivatives clearing organization will permit
  the Commission to examine the books and records of the derivatives
  clearing organization for compliance with the requirements set forth
  in Sec.   240.15c3-3a, Note G. (b)(1) through (3).
(c) Item 14 will apply only if a broker or dealer determines, at least
  annually, that the registered clearing agency or derivatives clearing
  organization with which the broker or dealer has on deposit margin
  related to security futures products meets the conditions of this Note
  G.

0
12. An undesignated center heading and Sec.  240.18a-1 are added to
read as follows:

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

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

    Sections 240.18a-1, 240.18a-1a, 240.18a-1b, 240.18a-1c, and
240.18a-1d apply to a security-based swap dealer registered under
section 15F of the Act (15 U.S.C. 78o-10), including a security-based
swap dealer that is an OTC derivatives dealer as that term is defined
in Sec.  240.3b-12. A security-based swap dealer registered under
section 15F of the Act (15 U.S.C. 78o-10) that is also a broker or
dealer registered under section 15 of the Act (15 U.S.C. 78o), other
than an OTC derivatives dealer, is subject to the net capital
requirements in Sec.  240.15c3-1 and its appendices. A security-based
swap dealer registered under section 15F of the Act that has a
prudential regulator is not subject to Sec.  240.18a-1, 240.18a-1a,
240.18a-1b, 240.18a-1c, and 240.18a-1d.
    (a) Minimum requirements. Every registered security-based swap
dealer must at all times have and maintain net capital no less than the
greater of the highest minimum requirements applicable to its business
under paragraph (a)(1) or (2) of this section, and tentative net
capital no less than the minimum requirement under paragraph (a)(2) of
this section.
    (1)(i) A security-based swap dealer must at all times maintain net
capital of not less than the greater of $20 million or:
    (A) Two percent of the risk margin amount; or
    (B) Four percent or less of the risk margin amount if the
Commission issues an order raising the requirement to four percent or
less on or after the third anniversary of this section's compliance
date; or
    (C) Eight percent or less of the risk margin amount if the
Commission issues an order raising the requirement to eight percent or
less on or after the fifth anniversary of this section's compliance
date and the Commission had previously issued an order raising the
requirement under paragraph (a)(1)(ii) of this section;
    (ii) If, after considering the capital and leverage levels of
security-based swap dealers subject to this paragraph (a)(1), as well
as the risks of their security-based swap positions, the Commission
determines that it may be appropriate to change the percentage pursuant
to paragraph (a)(1)(i)(B) or (C) of this section, the Commission will
publish a notice of the potential change and subsequently will issue an
order regarding any such change.
    (2) In accordance with paragraph (d) of this section, the
Commission may approve, in whole or in part, an application or an
amendment to an application by a security-based swap dealer to
calculate net capital using the market risk standards of paragraph (d)
to compute a deduction for market risk on some or all of its positions,
instead of the provisions of paragraphs (c)(1)(iv), (vi), and (vii) of
this section, and Sec.  240.18a-1b, and using the credit risk standards
of paragraph (d) to compute a deduction for credit risk on certain
credit exposures arising from transactions in derivatives instruments,
instead of the provisions of paragraphs (c)(1)(iii) and (c)(1)(ix)(A)
and (B) of this section, subject to any conditions or limitations on
the security-based swap dealer the Commission may require as necessary
or appropriate in the public interest or for the protection of
investors. A security-based swap dealer that has been approved to
calculate its net capital under paragraph (d) of this section must at
all times maintain tentative net capital of not less than $100 million
and net capital of not less than the greater of $20 million or:
    (i)(A) Two percent of the risk margin amount;
    (B) Four percent or less of the risk margin amount if the
Commission issues an order raising the requirement to four percent or
less on or after the third anniversary of this section's compliance
date; or
    (C) Eight percent or less of the risk margin amount if the
Commission issues an order raising the requirement to eight percent or
less on or after the fifth anniversary of this section's compliance
date and the Commission had previously issued an order raising the
requirement under paragraph (a)(2)(ii) of this section;
    (ii) If, after considering the capital and leverage levels of
security-based swap dealers subject to this paragraph (a)(2), as well
as the risks of their security-based swap positions, the Commission
determines that it may be appropriate to change the percentage pursuant
to paragraph (a)(2)(i)(B) or (C) of this section, the Commission will
publish a notice of the potential change and subsequently will issue an
order regarding any such change; and
    (b) A security-based swap dealer must at all times maintain net
capital in addition to the amounts required under paragraph (a)(1) or
(2) of this section, as applicable, in an amount equal to 10 percent
of:
    (1) The excess of the market value of United States Treasury Bills,
Bonds and

Notes subject to reverse repurchase agreements with any one party over
105 percent of the contract prices (including accrued interest) for
reverse repurchase agreements with that party;
    (2) The excess of the market value of securities issued or
guaranteed as to principal or interest by an agency of the United
States or mortgage related securities as defined in section 3(a)(41) of
the Act subject to reverse repurchase agreements with any one party
over 110 percent of the contract prices (including accrued interest)
for reverse repurchase agreements with that party; and
    (3) The excess of the market value of other securities subject to
reverse repurchase agreements with any one party over 120 percent of
the contract prices (including accrued interest) for reverse repurchase
agreements with that party.
    (c) Definitions. For purpose of this section:
    (1) Net capital. The term net capital shall be deemed to mean the
net worth of a security-based swap dealer, adjusted by:
    (i) Adjustments to net worth related to unrealized profit or loss
and deferred tax provisions.
    (A) Adding unrealized profits (or deducting unrealized losses) in
the accounts of the security-based swap dealer;
    (B)(1) In determining net worth, all long and all short positions
in listed options shall be marked to their market value and all long
and all short securities and commodities positions shall be marked to
their market value.
    (2) In determining net worth, the value attributed to any unlisted
option shall be the difference between the option's exercise value and
the market value of the underlying security. In the case of an unlisted
call, if the market value of the underlying security is less than the