[Federal Register Volume 84, Number 163 (Thursday, August 22, 2019)]
[Rules and Regulations]
[Pages 43872-44077]
[FR Doc No: 2019-13609]

Vol. 84

Thursday,

No. 163

August 22, 2019

Part II

 Securities and Exchange Commission

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17 CFR Parts 200 and 240

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

Federal Register / Vol. 84 , No. 163 / Thursday, August 22, 2019 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200 and 240

[Release No. 34-86175; File No. S7-08-12]
RIN 3235-AL12

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

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act''), the Securities and
Exchange Commission (``Commission''), pursuant to the Securities
Exchange Act of 1934 (``Exchange Act''), is adopting capital and margin
requirements for security-based swap dealers (``SBSDs'') and major
security-based swap participants (``MSBSPs''), segregation requirements
for SBSDs, and notification requirements with respect to segregation
for SBSDs and MSBSPs. The Commission also is increasing the minimum net
capital requirements for broker-dealers authorized to use internal
models to compute net capital (``ANC broker-dealers''), and prescribing
certain capital and segregation requirements for broker-dealers that
are not SBSDs to the extent they engage in security-based swap and swap
activity. The Commission also is making substituted compliance
available with respect to capital and margin requirements under Section
15F of the Exchange Act and the rules thereunder and adopting a rule
that specifies when a foreign SBSD or foreign MSBSP need not comply
with the segregation requirements of Section 3E of the Exchange Act and
the rules thereunder.

DATES:
    Effective date: October 21, 2019.
    Compliance date: The compliance date is discussed in section III.B
of this release.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Associate Director, at
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202)
551-5522; Raymond Lombardo, Assistant Director, at<PHONE_NUMBER>; Sheila
Dombal Swartz, Senior Special Counsel, at<PHONE_NUMBER>; Timothy C.
Fox, Branch Chief, at<PHONE_NUMBER>; Valentina Minak Deng, Special
Counsel, at<PHONE_NUMBER>; Rose Russo Wells, Senior Counsel, at (202)
551-5527; or Nina Kostyukovsky, Special Counsel, at<PHONE_NUMBER>,
Division of Trading and Markets, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Overview of the New Requirements
    1. Capital Requirements
    2. Margin Requirements for Non-Cleared Security-Based Swaps
    3. Segregation Requirements
    4. Alternative Compliance Mechanism
    5. Cross-Border Application
II. Final Rules and Rule Amendments
    A. Capital
    1. Introduction
    2. Capital Rules for Nonbank SBSDs
    3. Capital Rules for Nonbank MSBSPs
    4. OTC Derivatives Dealers
    B. Margin
    1. Introduction
    2. Margin Requirements for Nonbank SBSDs and Nonbank MSBSPs
    C. Segregation
    1. Background
    2. Exemption
    3. Segregation Requirements for Security-Based Swaps
    D. Alternative Compliance Mechanism
    E. Cross-Border Application of Capital, Margin, and Segregation
Requirements
    1. Capital and Margin Requirements
    2. Segregation Requirements
    F. Delegation of Authority
III. Explanation of Dates
    A. Effective Date
    B. Compliance Dates
    C. Effect on Existing Commission Exemptive Relief
    D. Application to Substituted Compliance
IV. Paperwork Reduction Act
    A. Summary of Collections of Information Under the Rules and
Rule Amendments
    1. Rule 18a-1 and Amendments to Rule 15c3-1
    2. Rule 18a-2
    3. Rule 18a-3
    4. Rule 18a-4 and Amendments to Rule 15c3-3
    5. Rule 18a-10
    6. Amendments to Rule 3a71-6
    B. Use of Information
    C. Respondents
    D. Total Initial and Annual Recordkeeping and Reporting Burden
    1. Rule 18a-1 and Amendments to Rule 15c3-1
    2. Rule 18a-2
    3. Rule 18a-3
    4. Rule 18a-4 and Amendments to Rule 15c3-3
    5. Rule 18a-10
    6. Rule 3a71-6
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Retention Period for Recordkeeping Requirements
V. Other Matters
VI. Economic Analysis
    A. Baseline
    1. Market Participants
    2. Counterparty Credit Risk Mitigation
    3. Global Regulatory Efforts
    4. Capital Regulation
    5. Margin Regulation
    6. Segregation
    7. Historical Pricing Data
    B. Analysis of the Final Rules and Alternatives
    1. The Capital Rules for Nonbank SBSDs--Rules 15c3-1 and 18a-1
    2. The Capital Rule for Nonbank MSBSPs--Rule 18a-2
    3. The Margin Rule--Rule 18a-3
    4. The Segregation Rules--Rules 15c3-3 and 18a-4
    5. Cross-Border Application
    6. Rule 18a-10
    C. Implementation Costs
    D. Effects on Efficiency, Competition, and Capital Formation
    1. Efficiency and Capital Formation
    2. Competition
VII. Regulatory Flexibility Act Certification
VIII. Statutory Basis

I. Introduction

A. Background

    Title VII of the Dodd-Frank Act (``Title VII'') established a new
regulatory framework for the U.S. over-the-counter (``OTC'')
derivatives markets.\1\ Section 764 of the Dodd-Frank Act added Section
15F to the Exchange Act.\2\ Section 15F(e)(1)(B) of the Exchange Act
provides that the Commission shall prescribe capital and margin
requirements for SBSDs and

MSBSPs that do not have a prudential regulator (respectively, ``nonbank
SBSDs'' and ``nonbank MSBSPs'').\3\ Section 763 of the Dodd-Frank Act
added Section 3E to the Exchange Act.\4\ Section 3E provides the
Commission with the authority to establish segregation requirements for
SBSDs and MSBSPs.\5\ The Commission also has separate and independent
authority under Section 15 of the Exchange Act to prescribe capital and
segregation requirements for broker-dealers.\6\
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    \1\ See Public Law 111-203, 701 through 774. The Dodd-Frank Act
assigns primary responsibility for the oversight of the U.S. OTC
derivatives markets to the Commission and the Commodity Futures
Trading Commission (``CFTC''). The Commission has oversight
authority with respect to a ``security-based swap'' as defined in
Section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)),
including to implement a registration and oversight program for a
``security-based swap dealer'' as defined in Section 3(a)(71) of the
Exchange Act (15 U.S.C. 78c(a)(71)) and a ``major security-based
swap participant'' as defined in Section 3(a)(67) of the Exchange
Act (15 U.S.C. 78c(a)(67)). The CFTC has oversight authority with
respect to a ``swap'' as defined in Section 1(a)(47) of the
Commodity Exchange Act (``CEA'') (7 U.S.C. 1(a)(47)), including to
implement a registration and oversight program for a ``swap dealer''
as defined in Section 1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) and a
``major swap participant'' as defined in Section 1(a)(33) of the CEA
(7 U.S.C. 1(a)(33)). The Commission and the CFTC jointly have
adopted rules to further define those terms. See Further Definition
of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR
48208 (Aug. 13, 2012) (``Product Definitions Adopting Release'');
Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant'', Exchange Act
Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012)
(``Entity Definitions Adopting Release'').
    \2\ 15 U.S.C. 78o-10 (``Section 15F of the Exchange Act'' or
``Section 15F'').
    \3\ Specifically, Section 15F(e)(1)(B) of the Exchange Act
provides that each registered SBSD and MSBSP for which there is not
a prudential regulator shall meet such minimum capital requirements
and minimum initial and variation margin requirements as the
Commission shall by rule or regulation prescribe. The term
``prudential regulator'' is defined in Section 1(a)(39) of the CEA
(7 U.S.C. 1(a)(39)) and that definition is incorporated by reference
in Section 3(a)(74) of the Exchange Act. Pursuant to the definition,
the Board of Governors of the Federal Reserve System (``Federal
Reserve''), the Office of the Comptroller of the Currency (``OCC''),
the Federal Deposit Insurance Corporation (``FDIC''), the Farm
Credit Administration, or the Federal Housing Finance Agency
(collectively, the ``prudential regulators'') is the ``prudential
regulator'' of an SBSD, MSBSP, swap participant, or major swap
participant if the entity is directly supervised by that agency.
    \4\ 15 U.S.C. 78c-5 (``Section 3E of the Exchange Act'' or
``Section 3E'').
    \5\ Section 3E of the Exchange Act does not distinguish between
bank and nonbank SBSDs and MSBSPs, and, consequently, provides the
Commission with the authority to establish segregation requirements
for SBSDs and MSBSPs (whether or not they have a prudential
regulator).
    \6\ Section 771 of the Dodd-Frank Act states that unless
otherwise provided by its terms, its provisions relating to the
regulation of the security-based swap market do not divest any
appropriate Federal banking agency, the Commission, the CFTC, or any
other Federal or State agency, of any authority derived from any
other provision of applicable law. In addition, Section 15F(e)(3)(B)
of the Exchange Act provides that nothing in Section 15F ``shall
limit, or be construed to limit, the authority'' of the Commission
``to set financial responsibility rules for a broker or dealer . . .
in accordance with Section 15(c)(3).''
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    Section 4s(e)(1)(B) of the CEA provides that the CFTC shall
prescribe capital and margin requirements for swap dealers and major
swap participants for which there is not a prudential regulator
(``nonbank swap dealers'' and ``nonbank swap participants'').\7\
Section 15F(e)(1)(A) of the Exchange Act provides that the prudential
regulators shall prescribe capital and margin requirements for SBSDs
and MSBSPs that have a prudential regulator (respectively, ``bank
SBSDs'' and ``bank MSBSPs''). Section 4s(e)(1)(A) of the CEA provides
that the prudential regulators shall prescribe capital and margin
requirements for swap dealers and major swap participants for which
there is a prudential regulator (respectively, ``bank swap dealers''
and ``bank swap participants'').\8\ The prudential regulators have
adopted capital and margin requirements for bank SBSDs and MSBSPs and
for bank swap dealers and major swap participants.\9\ The CFTC has
adopted margin requirements and proposed capital requirements for
nonbank swap dealers and major swap participants.\10\ The CFTC also has
adopted segregation requirements for cleared and non-cleared swaps.\11\
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    \7\ See 7 U.S.C. 6s(e)(1)(B).
    \8\ See 7 U.S.C. 6s(e)(1)(A).
    \9\ See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential Regulator Margin
and Capital Adopting Release''). The prudential regulators, as part
of their margin requirements for non-cleared security-based swaps,
adopted a segregation requirement for collateral received as margin.
    \10\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016)
(``CFTC Margin Adopting Release''); Capital Requirements of Swap
Dealers and Major Swap Participants, 81 FR 91252 (Dec. 16, 2016)
(``CFTC Capital Proposing Release'').
    \11\ See Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions, 77 FR 6336 (Feb. 7, 2012); Protection of Collateral of
Counterparties to Uncleared Swaps; Treatment of Securities in a
Portfolio Margining Account in a Commodity Broker Bankruptcy, 78 FR
66621 (Nov. 6, 2013); Segregation of Assets Held as Collateral in
Uncleared Swap Transactions, 84 FR 12894 (Apr. 3, 2019).
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    In October 2012, the Commission proposed: (1) Capital and margin
requirements for nonbank SBSDs and MSBSPs, segregation requirements for
SBSDs, and notification requirements relating to segregation for SBSDs
and MSBSPs; and (2) raising the minimum net capital requirements and
establishing liquidity requirements for ANC broker-dealers.\12\ The
Commission received a number of comment letters in response to the 2012
proposals.\13\ In May 2013, the Commission proposed provisions
regarding the cross-border treatment of security-based swap capital,
margin, and segregation requirements.\14\ The Commission received
comments on these proposals as well.\15\ In 2014, the Commission
proposed an additional capital requirement for nonbank SBSDs that was
inadvertently omitted from the 2012 proposals.\16\
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    \12\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68071, (Oct. 18, 2012), 77 FR 70214 (Nov. 23, 2012)
(``Capital, Margin, and Segregation Proposing Release'').
    \13\ The comment letters are available at https://www.sec.gov/comments/s7-08-12/s70812.shtml.
    \14\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, Exchange Act Release No. 69490 (May 1,
2013), 78 FR 30968 (May 23, 2013) (``Cross-Border Proposing
Release'').
    \15\ The comment letters are available at https://www.sec.gov/comments/s7-02-13/s70213.shtml.
    \16\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and
Broker-Dealers; Capital Rule for Certain Security-Based Swap
Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR
25194, 25254 (May 2, 2014). The Commission received one comment
addressing this proposal. See Letter from Suzanne H. Shatto (July 9,
2014) (``Shatto Letter''), available at https://www.sec.gov/comments/s7-05-14/s70514.shtml.
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    Finally, in 2018, the Commission reopened the comment period and
requested additional comment on the proposed rules and amendments
(including potential modifications to proposed rule language).\17\ Some
commenters supported the reopening of the comment period as a means to
help ensure that the final rules reflect current market conditions.\18\
One commenter stated that the publication of the potential
modifications to the proposed rule language provided important
transparency in the development of this rulemaking.\19\ Other
commenters stated that the Commission did not provide them with an
adequate basis upon which to comment, and argued that it was not
possible to fully assess the potential modifications to the proposed
rules without a full re-proposal.\20\ The Commission disagrees. The
potential modifications to the proposed rule language published in the
release described how the rule text proposed in 2012 could be changed,
including specific potential rule language. This approach provided the
public with a meaningful opportunity to comment on potential
modifications to the proposed rule text.
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    \17\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 84409 (Oct. 11, 2018), 83 FR 53007 (Oct. 19, 2018)
(``Capital, Margin, and Segregation Comment Reopening'').
    \18\ See Letter from Stephen John Berger, Managing Director,
Government & Regulatory Policy, Citadel Securities (Nov. 19, 2018)
(``Citadel 11/19/2018 Letter''); Letter from Bridget Polichene,
Chief Executive Officer, Institute of International Bankers (Nov.
19, 2018) (``IIB 11/19/2018 Letter'').
    \19\ See Letter from Sebastian Crapanzano and Soo-Mi Lee,
Managing Directors, Morgan Stanley (Nov. 19, 2018) (``Morgan Stanley
11/19/2018 Letter'').
    \20\ See, e.g., Letter from Carl B. Wilkerson, Vice President
and Chief Counsel, Securities, American Council of Life Insurers
(Nov. 19, 2018) (``American Council of Life Insurers 11/19/18
Letter''); Letter from Dennis M. Kelleher, President and Chief
Executive Officer, Better Markets, Inc. (Nov. 19, 2018) (``Better
Markets 11/19/2018 Letter''); Letter from Susan M. Olson, General
Counsel, Investment Company Institute (Nov. 19, 2018) (``ICI 11/19/
2018 Letter'').
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    Today, the Commission is amending existing rules and adopting new
rules. In particular, the Commission is amending existing rules 17 CFR
240.15c3-1 (``Rule 15c3-1''), 17 CFR

240.15c3-1a (``Rule 15c3-1a''), 17 CFR 240.15c3-1b (``Rule 15c3-1b''),
17 CFR 240.15c3-1d (``Rule 15c3-1d''), 17 CFR 240.15c3-1e (``Rule 15c3-
1e''), 17 CFR 240.15c3-3 (``Rule 15c3-3'') and adopting new Rules 15c3-
3b, 18a-1, 18a-1a, 18a1b, 18a1c, 18a-1d, 18a-2, 18a-3, 18a-4, 18a-4a,
and 18a-10. The amendments and new rules establish capital and margin
requirements for nonbank SBSDs, including for: (1) Broker-dealers that
are registered as SBSDs (``broker-dealer SBSDs''); \21\ (2) broker-
dealers that are registered as MSBSPs (``broker-dealer MSBSPs''); (3)
nonbank SBSDs that are not registered as broker-dealers (``stand-alone
SBSDs''); and (4) nonbank MSBSPs that are not registered as broker-
dealers (``stand-alone MSBSPs''). They also establish segregation
requirements for SBSDs and notification requirements with respect to
segregation for SBSDs and MSBSPs. Further, the amendments provide that
a nonbank SBSD that is also registered as an OTC derivatives dealer is
subject to Rules 18a-1, 18a-1a, 18a-1b, 18a-1c, and 18a-1d rather than
Rule 15c3-1 and its appendices.
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    \21\ The term ``broker-dealer'' when used in this release
generally does not refer to an OTC derivatives dealer See 17 CFR
240.3b-12 (``Rule 3b-12'') (defining the term ``OTC derivatives
dealer''). Instead, this class of dealer is referred to as an ``OTC
derivatives dealer'' and, except when discussing the alternative
compliance mechanism of Rule 18a-10, the term ``stand-alone SBSD''
includes a nonbank SBSD that is also registered as an OTC
derivatives dealer. The alternative compliance mechanism is
discussed below in sections I.B.4., II.D., IV.A.6., IV.D.6., and
VI.B.1. of this release, among other sections. As discussed below,
the alternative compliance mechanism is not available to nonbank
SBSDs that are registered as either a broker-dealer or an OTC
derivatives dealer. Consequently, the term ``stand-alone SBSD,'' in
the context of discussing the alternative compliance mechanism,
refers to a stand-alone SBSD that is not also registered as an OTC
derivatives dealer.
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    The rule amendments also increase the minimum tentative net capital
and net capital requirements for ANC broker-dealers. In addition to the
new requirements for ANC broker-dealers, some of the amendments to
Rules 15c3-1 and 15c3-3 apply to broker-dealers that are not registered
as an SBSD or MSBSP (``stand-alone broker-dealers'') to the extent they
engage in security-based swap activities.
    Additionally, the Commission is amending its existing cross-border
rule to provide a mechanism to seek substituted compliance with respect
to the capital and margin requirements for foreign nonbank SBSDs and
MSBSPs and providing guidance on how it will evaluate requests for
substituted compliance.\22\ The Commission is adopting rule-based
requirements that address the application of the segregation
requirements to cross-border security-based swap transactions.
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    \22\ 17 CFR 240.3a71-6 (``Rule 3a71-6'').
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    The Commission also is amending its rules governing the delegation
of authority to provide the staff with delegated authority to take
certain actions with respect to some of the requirements.
    The Commission is not adopting the proposed liquidity stress test
requirements at this time.\23\ Instead, the Commission continues to
consider the comments received on those proposals.
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    \23\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70252-54.
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    The Commission staff consulted with the CFTC and the prudential
regulators in drafting the final rules and amendments.
    Finally, the Commission recognizes that the firms subject to the
requirements being adopted today are operating in a market that
continues to experience significant changes in response to market and
regulatory developments. Given the global nature of the security-based
swap and swap markets, the regulatory landscape will continue to shift
as U.S. and foreign regulators continue to implement and/or modify
relevant regulatory frameworks that apply to participants in these
markets and to their transactions. For example, the CFTC has proposed
but not yet finalized its own capital requirements that will apply to
swap dealers, some of which will also likely be registered with the
Commission as SBSDs. The Commission intends to monitor these
developments during the period before the compliance date for these
rules and may consider modifications to the requirements that it is
adopting today as circumstances dictate, such as the need to further
harmonize with other regulators to minimize the risk of unnecessary
market fragmentation, or to address other market developments.\24\
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    \24\ The compliance date for the amendments and rules being
adopted today is discussed below in section III.B. of this release.
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    In addition, the Commission intends to monitor the impact of the
capital, margin, and segregation requirements being adopted today using
data about the security-based swap and swap activities of stand-alone
broker-dealers and SBSDs once they are subject to these requirements.
The data will include the capital they maintain, the liquidity they
maintain, the leverage they employ, the scale of their security-based
swap and swap activities, the types and amounts of collateral they hold
to address credit exposures, and the risk management controls they
establish. The Commission may consider modifications to the
requirements in light of these data.

B. Overview of the New Requirements

1. Capital Requirements
a. SBSDs
    Broker-dealer SBSDs will be subject to the pre-existing
requirements of Rule 15c3-1, as amended, to account for security-based
swap and swap activities. Stand-alone SBSDs (including firms also
registered as OTC derivatives dealers) will be subject to Rule 18a-1.
Rule 18a-1 is structured similarly to Rule 15c3-1 and contains many
provisions that correspond to those in Rule 15c3-1, as amended.
    These rules prescribe minimum net capital requirements for nonbank
SBSDs that are the greater of a fixed-dollar amount and an amount
derived by applying a financial ratio. A broker-dealer SBSD must be an
ANC broker-dealer (``ANC broker-dealer SBSD'') in order to use models
to calculate market and credit risk charges in lieu of applying
standardized deductions (also known as haircuts) for certain approved
positions. An ANC broker-dealer, including an ANC broker-dealer SBSD,
will be subject to a minimum fixed-dollar tentative net capital
requirement of $5 billion and a minimum fixed-dollar net capital
requirement of $1 billion. Stand-alone SBSDs that use models will be
subject to a minimum fixed-dollar tentative net capital requirement of
$100 million and a minimum fixed-dollar net capital requirement of $20
million. Broker-dealer and stand-alone SBSDs not authorized to use
models will be subject to a fixed-dollar minimum net capital
requirement of $20 million but will not be subject to a fixed-dollar
tentative net capital requirement.
    The financial ratio-derived minimum net capital requirement
applicable to an ANC broker-dealer, including an ANC broker-dealer
SBSD, and a broker-dealer SBSD not authorized to use models will be the
amount computed using one of the two pre-existing (i.e., were part of
the rule before today's amendments) financial ratios in Rule 15c3-1
plus an amount computed using a new financial ratio tailored
specifically to the firm's security-based swap activities. This new
financial ratio requirement is 2% of an amount determined by
calculating the firm's exposures to its security-based swap customers
(``2% margin factor''). A stand-alone SBSD will be subject to the 2%
margin factor but will not be subject to either of the pre-existing
financial ratios in Rule 15c3-1. The 2% margin factor multiplier will
remain at 2% for 3 years after the compliance date of the

rule. After 3 years, the multiplier could increase to not more than 4%
by Commission order, and after 5 years the multiplier could increase to
not more than 8% by Commission order if the Commission had previously
issued an order raising the multiplier to 4% or less. The final rules
further provide that the Commission will consider the capital and
leverage levels of the firms subject to these requirements as well as
the risks of their security-based swap positions and will provide
notice before issuing an order raising the multiplier. This approach
will enable the Commission to analyze the impact of the new
requirement.
    The following table summarizes the minimum net capital requirements
applicable to nonbank SBSDs as of the compliance date of the rule.

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                                                                                Net capital
       Type of registrant                Rule            Tentative net   ---------------------------------------
                                                            capital          Fixed-dollar       Financial ratio
----------------------------------------------------------------------------------------------------------------
Stand-alone SBSD (not using       18a-1.............  N/A...............  $20 million.......  2% margin factor.
 internal models).
Stand-alone SBSD (using internal  18a-1.............  $100 million......  20 million........  2% margin factor.
 models)\1\.
Broker-dealer SBSD..............  15c3-1............  N/A...............  20 million........  2% margin factor +
(not using internal models).....                                                               Rule 15c3-1
                                                                                ratio.
Broker-dealer SBSD (using         15c3-1............  $5 billion........  1 billion.........  2% margin factor +
 internal models).                                                                             Rule 15c3-1
                                                                                ratio.
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\1\ Includes a stand-alone SBSD that also is an OTC derivatives dealer.

    Nonbank SBSDs will compute net capital by first determining their
net worth under U.S. generally accepted accounting principles
(``GAAP''). Next, the firms will need to deduct illiquid assets and
take other deductions from net worth, and may add qualified
subordinated loans. The deductions will be the same as required under
the pre-existing requirements of Rule 15c3-1.
    In addition, the Commission is prescribing new deductions tailored
specifically to security-based swaps and swaps. For example, stand-
alone broker-dealers and nonbank SBSDs will be required to take a
deduction for under-margined accounts because of a failure to collect
margin required under Commission, CFTC, clearing agency, derivatives
clearing organization (``DCO''), or designated examining authority
(``DEA'') rules (i.e., a failure to collect margin when there is no
exception from collecting margin). Nonbank SBSDs also will be required
to take deductions when they elect not to collect margin pursuant to
exceptions in the margin rules of the Commission and the CFTC for non-
cleared security-based swaps and swaps, respectively. These deductions
for electing not to collect margin must equal 100% of the amount of
margin that would have been required to be collected from the security-
based swap or swap counterparty in the absence of an exception (i.e.,
the size of the deduction will be computed using the standardized or
model-based approach prescribed in the margin rules of the Commission
or the CFTC, as applicable). These deductions can be reduced by the
value of collateral held in the account after applying applicable
haircuts to the value of the collateral. In addition, as discussed
below, nonbank SBSDs authorized to use models may take credit risk
charges instead of these deductions for electing not to collect margin
under exceptions in the margin rules of the Commission and the CFTC for
non-cleared security-based swaps and swaps.
    After taking these deductions and making other adjustments to net
worth, the amount remaining is defined as ``tentative net capital.''
The final steps a stand-alone broker-dealer or nonbank SBSD will need
to take in computing net capital are: (1) To deduct haircuts
(standardized or model-based) on their proprietary securities and
commodity positions; and (2) for firms authorized to use models, to
deduct credit risk charges computed using credit risk models.
    The haircuts for proprietary securities and commodity positions
will be determined using standardized or model-based haircuts. The
standardized haircuts for positions--other than security-based swaps
and swaps--generally are the pre-existing standardized haircuts
required by Rule 15c3-1. With respect to security-based swaps and
swaps, the Commission is prescribing standardized haircuts tailored to
those instruments. In the case of a cleared security-based swap or
swap, the standardized haircut is the applicable clearing agency or DCO
margin requirement. For a non-cleared credit default swap (``CDS''),
the standardized haircut is set forth in two grids (one for security-
based swaps and one for swaps) in which the amount of the deduction is
based on two variables: the length of time to maturity of the CDS
contract and the amount of the current offered basis point spread on
the CDS. For other types of non-cleared security-based swaps and swaps,
the standardized haircut generally is the percentage deduction of the
standardized haircut that applies to the underlying or referenced
position multiplied by the notional amount of the security-based swap
or swap.
    Instead of applying these standardized haircuts, stand-alone
broker-dealers and nonbank SBSDs may apply to the Commission to use a
model to calculate market and credit risk charges (model-based
haircuts) for their positions, including derivatives instruments such
as security-based swaps and swaps. The application and approval process
will be similar to the process used for stand-alone broker-dealers
applying to the Commission for authorization to use models under the
pre-existing provisions of Rules 15c3-1 and 15c3-1e (i.e., stand-alone
broker-dealers applying to become ANC broker-dealers). If approved, the
firm may compute market risk charges for certain of its proprietary
positions using a model.
    In addition, an ANC broker-dealer (including an ANC broker-dealer
SBSD) and a stand-alone SBSD approved to use models for capital
purposes can apply a credit risk charge with respect to
uncollateralized exposures arising from derivatives instruments,
including exposures arising from not collecting variation and/or
initial margin pursuant to exceptions in the non-cleared security-based
swap and swap margin rules of the Commission and CFTC, respectively.
Consequently, these credit risk charges may be taken instead of the
deductions described above when a nonbank SBSD does not collect
variation and/or initial margin pursuant to exceptions in these margin
rules.
    In applying the credit risk charges, an ANC broker-dealer
(including an ANC broker-dealer SBSD) is subject to a portfolio
concentration charge that has a threshold equal to 10% of the firm's
tentative net capital. Under the portfolio

concentration charge, the application of the credit risk charges to
uncollateralized current exposure across all counterparties arising
from derivatives transactions is limited to an amount of the current
exposure equal to no more than 10% of the firm's tentative net capital.
The firm must take a charge equal to 100% of the amount of the firm's
aggregate current exposure in excess of 10% of its tentative net
capital. Uncollateralized potential future exposures arising from
electing not to collect initial margin pursuant to exceptions in the
margin rules of the Commission and the CFTC are not subject to this
portfolio concentration charge. In addition, a stand-alone SBSD,
including an SBSD operating as an OTC derivatives dealer, is not
subject to a portfolio concentration charge with respect to
uncollateralized current exposure. However, all these entities (i.e.,
ANC broker-dealers, ANC broker-dealer SBSDs, stand-alone SBSDs, and
stand-alone SBSDs that also are registered as OTC derivatives dealers)
are subject to a concentration charge for large exposures to single a
counterparty that is calculated using the existing methodology in Rule
15c3-1e.\25\
---------------------------------------------------------------------------

    \25\ Stand-alone SBSDs (including firms that also are registered
as OTC derivatives dealers) are subject to Rule 18a-1, which
includes a counterparty concentration charge that parallels the
existing charge in Rule 15c3-1e.
---------------------------------------------------------------------------

    The following table summarizes the entities that are subject to the
portfolio concentration charge and/or the counterparty concentration
charge.

----------------------------------------------------------------------------------------------------------------
 Entity type  (must be approved to use     10% TNC portfolio concentration        Counterparty  concentration
                models)                                 charge                              charge
----------------------------------------------------------------------------------------------------------------
ANC broker-dealer......................  Yes................................  Yes.
ANC broker-dealer SBSD.................  Yes................................  Yes.
Stand-alone SBSD.......................  No.................................  Yes.
Stand-alone SBSD/OTC derivatives dealer  No.................................  Yes.
----------------------------------------------------------------------------------------------------------------

    Nonbank SBSDs also must comply with Rule 15c3-4. This rule will
require them to establish, document, and maintain a system of internal
risk management controls to assist in managing the risks associated
with their business activities, including market, credit, leverage,
liquidity, legal, and operational risks.
b. MSBSPs
    Rule 18a-2 prescribes the capital requirements for stand-alone
MSBSPs.\26\ Under this rule, stand-alone MSBSPs must at all times have
and maintain positive tangible net worth. The term ``tangible net
worth'' is defined to mean the stand-alone MSBSP's net worth as
determined in accordance with GAAP, excluding goodwill and other
intangible assets. All MSBSPs must comply with Rule 15c3-4 with respect
to their security-based swap and swap activities.
---------------------------------------------------------------------------

    \26\ A broker-dealer MSBSP will be subject to Rule 15c3-1.
---------------------------------------------------------------------------

2. Margin Requirements for Non-Cleared Security-Based Swaps
a. SBSDs
    Rule 18a-3 prescribes margin requirements for nonbank SBSDs with
respect to non-cleared security-based swaps. The rule requires a
nonbank SBSD to perform two calculations with respect to each account
of a counterparty as of the close of business each day: (1) The amount
of current exposure in the account of the counterparty (also known as
variation margin); and (2) the initial margin amount for the account of
the counterparty (also known as potential future exposure or initial
margin). Variation margin is calculated by marking the position to
market. Initial margin must be calculated by applying the standardized
haircuts prescribed in Rule 15c3-1 or 18a-1 (as applicable). However, a
nonbank SBSD may apply to the Commission for authorization to use a
model (including an industry standard model) to calculate initial
margin. Broker-dealer SBSDs must use the standardized haircuts (which
include the option to use the more risk sensitive methodology in Rule
15c3-1a) to compute initial margin for non-cleared equity security-
based swaps (even if the firm is approved to use a model to calculate
initial margin). Stand-alone SBSDs (including firms registered as OTC
derivatives dealers) may use a model to calculate initial margin for
non-cleared equity security-based swaps (and potentially equity swaps
if portfolio margining is implemented by the Commission and the CFTC),
provided the account of the counterparty does not hold equity security
positions other than equity security-based swaps (and potentially
equity swaps).
    Rule 18a-3 requires a nonbank SBSD to collect collateral from a
counterparty to cover a variation and/or initial margin requirement.
The rule also requires the nonbank SBSD to deliver collateral to the
counterparty to cover a variation margin requirement. The collateral
must be collected or delivered by the close of business on the next
business day following the day of the calculation, except that the
collateral can be collected or delivered by the close of business on
the second business day following the day of the calculation if the
counterparty is located in another country and more than 4 time zones
away. Further, collateral to meet a margin requirement must consist of
cash, securities, money market instruments, a major foreign currency,
the settlement currency of the non-cleared security-based swap, or
gold. The fair market value of collateral used to meet a margin
requirement must be reduced by the standardized haircuts in Rule 15c3-1
or 18a-1 (as applicable), or the nonbank SBSD can elect to apply the
standardized haircuts prescribed in the CFTC's margin rules. The value
of the collateral must meet or exceed the margin requirement after
applying the standardized haircuts. In addition, collateral being used
to meet a margin requirement must meet conditions specified in the
rule, including, for example, that it must have a ready market, be
readily transferable, and not consist of securities issued by the
nonbank SBSD or the counterparty.
    There are exceptions in Rule 18a-3 to the requirements to collect
initial and/or variation margin and to deliver variation margin. A
nonbank SBSD need not collect variation or initial margin from (or
deliver variation margin to) a counterparty that is a commercial end
user, the Bank for International Settlements (``BIS''), the European
Stability Mechanism, or a multilateral development bank identified in
the rule. Similarly, a nonbank SBSD need not collect variation or
initial margin (or deliver variation margin) with respect to a legacy
account (i.e., an account holding security-based swaps entered into
prior to the compliance date of the rule). Further, a nonbank SBSD need
not collect initial margin from a

counterparty that is a financial market intermediary (i.e., an SBSD, a
swap dealer, a broker-dealer, a futures commission merchant (``FCM''),
a bank, a foreign broker-dealer, or a foreign bank) or an affiliate. A
nonbank SBSD also need not hold initial margin directly if the
counterparty delivers the initial margin to an independent third-party
custodian. Further, a nonbank SBSD need not collect initial margin from
a counterparty that is a sovereign entity if the nonbank SBSD has
determined that the counterparty has only a minimal amount of credit
risk.
    The rule also has a threshold exception to the initial margin
requirement. Under this exception, a nonbank SBSD need not collect
initial margin to the extent that the initial margin amount when
aggregated with other security-based swap and swap exposures of the
nonbank SBSD and its affiliates to the counterparty and its affiliates
does not exceed $50 million. The rule also would permit a nonbank SBSD
to defer collecting initial margin from a counterparty for two months
after the month in which the counterparty does not qualify for the $50
million threshold exception for the first time. Finally, the rule has a
minimum transfer amount exception of $500,000. Under this exception, if
the combined amount of margin required to be collected from or
delivered to a counterparty is equal to or less than $500,000, the
nonbank SBSD need not collect or deliver the margin. If the initial and
variation margin requirements collectively or individually exceed
$500,000, collateral equal to the full amount of the margin requirement
must be collected or delivered.
    The following table summarizes the exceptions in Rule 18a-3 from
collecting initial and/or variation margin and from delivering
variation margin.

----------------------------------------------------------------------------------------------------------------
                                           Status of exception to collecting margin
              Exception               --------------------------------------------------  Status of exception to
                                                  VM                       IM                 delivering VM
----------------------------------------------------------------------------------------------------------------
Commercial End User..................  Need Not Collect.......  Need Not Collect.......  Need Not Deliver.
BIS or European Stability Mechanism..  Need Not Collect.......  Need Not Collect.......  Need Not Deliver.
Multilateral Development Bank........  Need Not Collect.......  Need Not Collect.......  Need Not Deliver.
Financial Market Intermediary........  Must Collect...........  Need Not Collect.......  Must Deliver.
Affiliate............................  Must Collect...........  Need Not Collect.......  Must Deliver.
Sovereign with Minimal Credit Risk...  Must Collect...........  Need Not Collect.......  Must Deliver.
Legacy Account.......................  Need Not Collect.......  Need Not Collect.......  Need Not Deliver.
IM Below $50 Million Threshold.......  Must Collect...........  Need Not Collect.......  Must Deliver.
Minimum Transfer Amount..............  Need Not Collect.......  Need Not Collect.......  Need Not Deliver.
----------------------------------------------------------------------------------------------------------------

    Finally, nonbank SBSDs must monitor the risk of each account, and
establish, maintain, and document procedures and guidelines for
monitoring the risk.
MSBSPs
    Rule 18a-3 also prescribes margin requirements for nonbank MSBSPs
with respect to non-cleared security-based swaps. The rule requires a
nonbank MSBSP to calculate variation margin for the account of each
counterparty as of the close of each business day. The rule requires
the nonbank MSBSP to collect collateral from (or deliver collateral to)
a counterparty to cover a variation margin requirement. The collateral
must be collected or delivered by the close of business on the next
business day following the day of the calculation, except that the
collateral can be collected or delivered by the close of business on
the second business day following the day of the calculation if the
counterparty is located in another country and more than 4 time zones
away. Further, the variation margin must consist of cash, securities,
money market instruments, a major foreign currency, the security of
settlement of the non-cleared security-based swap, or gold. The rule
has an exception pursuant to which the nonbank MSBSP need not collect
variation margin if the counterparty is a commercial end user, the BIS,
the European Stability Mechanism, or one of the multilateral
development banks identified in the rule (there is no exception from
delivering variation margin to these types of counterparties). The rule
also has an exception pursuant to which the nonbank MSBSP need not
collect or deliver variation margin with respect to a legacy account.
Finally, there is a $500,000 minimum transfer amount exception to the
collection and delivery requirements for nonbank MSBSPs.
3. Segregation Requirements
    Section 3E(b) of the Exchange Act provides that, for cleared
security-based swaps, the money, securities, and property of a
security-based swap customer shall be separately accounted for and
shall not be commingled with the funds of the broker, dealer, or SBSD
or used to margin, secure, or guarantee any trades or contracts of any
security-based swap customer or person other than the person for whom
the money, securities, or property are held. However, Section 3E(c)(1)
of the Exchange Act also provides, that for cleared security-based
swaps, customers' money, securities, and property may, for convenience,
be commingled and deposited in the same one or more accounts with any
bank, trust company, or clearing agency. Section 3E(c)(2) further
provides that, notwithstanding Section 3E(b), in accordance with such
terms and conditions as the Commission may prescribe by rule,
regulation, or order, any money, securities, or property of the
security-based swaps customer of a broker, dealer, or security-based
swap dealer described in Section 3E(b) may be commingled and deposited
as provided in Section 3E with any other money, securities, or property
received by the broker, dealer, or security-based swap dealer and
required by the Commission to be separately accounted for and treated
and dealt with as belonging to the security-based swaps customer of the
broker, dealer, or security-based swap dealer.
    Section 3E(f) of the Exchange Act establishes a program by which a
counterparty to non-cleared security-based swaps with an SBSD or MSBSP
can elect to have initial margin held at an independent third-party
custodian (``individual segregation''). Section 3E(f)(4) provides that
if the counterparty does not choose to require segregation of funds or
other property (i.e., waives segregation), the SBSD or MSBSP shall send
a report to the counterparty on a quarterly basis stating that the
firm's back office procedures relating to margin and collateral
requirements are in compliance with the agreement of the
counterparties. The statutory provisions of Sections 3E(b) and (f) are
self-executing.
    The Commission is adopting segregation rules pursuant to which
money, securities, and property of a

security-based swap customer relating to cleared and non-cleared
security-based swaps must be segregated but can be commingled with
money, securities, or property of other customers (``omnibus
segregation''). The omnibus segregation requirements for stand-alone
broker-dealers and broker-dealer SBSDs are codified in amendments to
Rule 15c3-3. The omnibus segregation requirements for stand-alone SBSDs
(including firms registered as OTC derivatives dealers) and bank SBSDs
are codified in Rule 18a-4.
    The omnibus segregation requirements are mandatory with respect to
money, securities, or other property relating to cleared security-based
swaps that is held by a stand-alone broker-dealer or SBSD (i.e.,
customers cannot waive segregation). With respect to non-cleared
security-based swap transactions, the omnibus segregation requirements
are an alternative to the statutory provisions discussed above pursuant
to which a counterparty can elect to have initial margin individually
segregated or to waive segregation. However, under the final omnibus
segregation rules for stand-alone broker-dealers and broker-dealer
SBSDs codified in Rule 15c3-3, counterparties that are not an affiliate
of the firm cannot waive segregation. Affiliated counterparties of a
stand-alone broker-dealer or broker-dealer SBSD can waive segregation.
Under Section 3E(f) of the Exchange Act and Rule 18a-4, all
counterparties (affiliated and non-affiliated) to a non-cleared
security-based swap transaction with a stand-alone or bank SBSD can
waive segregation. The omnibus segregation requirements are the
``default'' requirement if the counterparty does not elect individual
segregation or to waive segregation (in the cases where a counterparty
is permitted to waive segregation). Rule 18a-4 also has exceptions
pursuant to which a foreign stand-alone or bank SBSD or MSBSP need not
comply with the segregation requirements (including the omnibus
segregation requirements) for certain transactions.
    Under the omnibus segregation requirements, an SBSD or stand-alone
broker-dealer must maintain possession or control over excess
securities collateral carried for the accounts of security-based swap
customers. Generally, excess securities collateral means securities and
money market instruments that are not being used to meet a variation
margin requirement of the counterparty. In the context of security-
based swap transactions, excess securities collateral means collateral
delivered to the SBSD or stand-alone broker-dealer to meet an initial
margin requirement of the counterparty as well as collateral held by
the SBSD or stand-alone broker-dealer in excess of any applicable
initial margin requirement (and that is not being used to meet a
variation margin requirement). There are two exceptions under which
excess securities collateral can be held in a manner that is not in the
possession or control of the SBSD or stand-alone broker-dealer: (1) It
is being used to meet a margin requirement of a clearing agency
resulting from a cleared security-based swap transaction of the
security-based swap customer; or (2) it is being used to meet a margin
requirement of an SBSD resulting from the first SBSD or stand-alone
broker-dealer entering into a non-cleared security-based swap
transaction with the SBSD to offset the risk of a non-cleared security-
based swap transaction between the first SBSD or broker-dealer and the
security-based swap customer.
    Under the omnibus segregation requirements, an SBSD or stand-alone
broker-dealer must maintain a security-based swap customer reserve
account to segregate cash and/or qualified securities in an amount
equal to the net cash owed to security-based swap customers. The SBSD
or stand-alone broker-dealer must at all times maintain, through
deposits into the account, cash and/or qualified securities in amounts
computed weekly in accordance with the formula set forth in Rules 15c3-
3b or 18a-4a. In the case of a broker-dealer SBSD or stand-alone
broker-dealer, this account must be separate from the reserve accounts
the firm maintains for ``traditional'' securities customers and other
broker-dealers under pre-existing requirements of Rule 15c3-3.
    The formula in Rules 15c3-3b and 18a-4a is modeled on the pre-
existing reserve formula in Exhibit A to Rule 15c3-3 (``Rule 15c3-
3a''). The security-based swap customer reserve formula requires the
SBSD or stand-alone broker-dealer to add up various credit items
(amounts owed to security-based swap customers) and debit items
(amounts owed by security-based swap customers). If, under the formula,
credit items exceed debit items, the SBSD or stand-alone broker-dealer
must maintain cash and/or qualified securities in that net amount in
the security-based swap customer reserve account. For purposes of the
security-based swap reserve account requirement, qualified securities
are: (1) Obligations of the United States; (2) obligations fully
guaranteed as to principal and interest by the United States; and (3)
subject to certain conditions and limitations, general obligations of
any state or a political subdivision of a state that are not traded
flat and are not in default, are part of an initial offering of $500
million or greater, and are issued by an issuer that has published
audited financial statements within 120 days of its most recent fiscal
year end.
    With respect to non-cleared security-based swaps, Section
3E(f)(1)(A) of the Exchange Act provides that an SBSD and an MSBSP
shall be required to notify a counterparty of the SBSD or MSBSP at the
beginning of a non-cleared security-based swap transaction that the
counterparty has the right to require the segregation of the funds or
other property supplied to margin, guarantee, or secure the obligations
of the counterparty. SBSDs and MSBSPs must provide this notice 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 the rule. SBSDs also must obtain
subordination agreements from a counterparty that affirmatively elects
to have initial margin held at a third-party custodian or that waives
segregation. Finally, a stand-alone or bank SBSD will be exempt from
the requirements of Rule 18a-4 if the firm meets certain conditions,
including that the firm: (1) Does not clear security-based swap
transactions for other persons; (2) provides notice to the counterparty
regarding the right to segregate initial margin at an independent
third-party custodian; (3) discloses to the counterparty in writing
that any collateral received by the SBSD will not be subject to a
segregation requirement; and (4) discloses to the counterparty how a
claim of the counterparty for the collateral would be treated in a
bankruptcy or other formal liquidation proceeding of the SBSD.
4. Alternative Compliance Mechanism
    The Commission is adopting an alternative compliance mechanism in
Rule 18a-10 pursuant to which a stand-alone SBSD that is registered as
a swap dealer and predominantly engages in a swaps business may elect
to comply with the capital, margin, and segregation requirements of the
CEA and the CFTC's rules in lieu of complying with Rules 18a-1, 18a-3,
and 18a-4. In order to qualify to operate pursuant to Rule 18a-10, the
stand-alone SBSD cannot be registered as a broker-dealer or an OTC
derivatives dealer. Moreover, in addition to other conditions, the
aggregate gross notional amount of the firm's security-based swap
positions must not exceed the lesser of a maximum fixed-dollar amount
or 10% of the combined

aggregate gross notional amount of the firm's security-based swap and
swap positions. The maximum fixed-dollar amount is set at a
transitional level of $250 billion for the first 3 years after the
compliance date of the rule and then drops to $50 billion thereafter
unless the Commission issues an order: (1) Maintaining the $250 billion
maximum fixed-dollar amount for an additional period of time or
indefinitely; or (2) lowering the maximum fixed-dollar amount to an
amount between $250 billion and $50 billion. The final rule further
provides that the Commission will consider the levels of security-based
swap activity of the stand-alone SBSDs operating under the alternative
compliance mechanism and provide notice before issuing such an order.
5. Cross-Border Application
    As adopted, the Commission is treating capital and margin
requirements under Section 15F(e) of the Exchange Act and Rules 18a-1,
18a-2, and 18a-3 thereunder as entity-level requirements that are
applicable to the entirety of the business of an SBSD or MSBSP. Foreign
SBSDs and MSBSPs have the potential to avail themselves of substituted
compliance to satisfy the capital and margin requirements under Section
15F of the Exchange Act and Rules 18a-1 and 18a-2, and 18a-3
thereunder. The segregation requirements are deemed transaction-level
requirements and substituted compliance is not available for them.
However, Rule 18a-4 has exceptions pursuant to which a foreign stand-
alone or bank SBSD or MSBSP need not comply with the segregation
requirements for certain transactions. There are no exceptions from the
segregation requirements for cross-border transactions of a stand-alone
broker-dealer or a broker-dealer SBSD or MSBSP.

II. Final Rules and Rule Amendments

A. Capital

1. Introduction
    The Commission is adopting capital requirements for nonbank SBSDs
and MSBSPs pursuant to Sections 15 and 15F of the Exchange Act. More
specifically, the Commission is adopting amendments to Rule 15c3-1 and
certain of its appendices to address broker-dealer SBSDs and the
security-based swap activities of stand-alone broker-dealers. In
addition, the Commission is adopting Rule 18a-1, Rules 18a-1a, 18a-1b,
18a-1c and 18a-1d to establish capital requirements for stand-alone
SBSDs, including for stand-alone SBSDs that are also registered as OTC
derivatives dealers. Rule 18a-1 and its related rules are structured
similarly to Rule 15c3-1 and its appendices and contain many provisions
that correspond to those in Rule 15c3-1 and its appendices.\27\
---------------------------------------------------------------------------

    \27\ Rule 18a-1a, Rule18a-1b, Rule 18a-1c, and Rule 18a-1d
correspond to the following appendices to Rule 15c3-1: Rule 15c3-1a
(Options); Rule 15c3-1b (Adjustments to net worth and aggregate
indebtedness for certain commodities transactions); 17 CFR 240.15c3-
1c (``Rule 15c3-1c'') (Consolidated computations of net capital and
aggregate indebtedness for certain subsidiaries and affiliates); and
Rule 15c3-1d (Satisfactory subordination agreements).
---------------------------------------------------------------------------

    As discussed in the proposing release, Rule 15c3-1 imposes a net
liquid assets test that is designed to promote liquidity within broker-
dealers.\28\ For example, paragraph (c)(2)(iv) of Rule 15c3-1 does not
permit most unsecured receivables to count as allowable net capital.
This aspect of the rule severely limits the ability of broker-dealers
to engage in activities that generate unsecured receivables (e.g., as
unsecured lending). The rule also does not permit fixed assets or other
illiquid assets to count as allowable net capital, which creates
disincentives for broker-dealers to own real estate and other fixed
assets that cannot be readily converted into cash. For these reasons,
Rule 15c3-1 incentivizes broker-dealers to confine their business
activities and devote capital to activities such as underwriting,
market making, and advising on and facilitating customer securities
transactions.
---------------------------------------------------------------------------

    \28\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70217-20.
---------------------------------------------------------------------------

    Rule 15c3-1 permits a broker-dealer to engage in activities that
are part of conducting a securities business (e.g., taking securities
positions) but in a manner that leaves the firm holding at all times
more than one dollar of highly liquid assets for each dollar of
unsubordinated liabilities (e.g., money owed to customers,
counterparties, and creditors). The objective of Rule 15c3-1 is to
require a broker-dealer to maintain sufficient liquid assets to meet
all liabilities, including obligations to customers, counterparties,
and other creditors and to have adequate additional resources to wind-
down its business in an orderly manner without the need for a formal
proceeding if the firm fails financially.\29\ The business of trading
securities is one in which success, both for the firms and the
investing public, is strongly dependent upon confidence, continuity,
and commitment.\30\ Generally, almost all trading-related liabilities
are payable upon demand and represent a major portion of the firm's
liabilities. Emphasis on liquidity helps to ensure that the liquidation
of a firm will not result in excessive delay in repayment of the firm's
obligations to customers, broker-dealers, and other creditors and
therefore assures the continued liquidity of the securities markets.
Rule 15c3-1 has been the capital standard for broker-dealers since
1975. Generally, the rule has promoted the maintenance of prudent
levels of capital.\31\
---------------------------------------------------------------------------

    \29\ See Net Capital Rule, Exchange Act Release No. 38248 (Feb.
6, 1997), 62 FR 6474, 6475 (Feb. 12, 1997) (``Rule 15c3-1 requires
registered broker-dealers to maintain sufficient liquid assets to
enable those firms that fall below the minimum net capital
requirements to liquidate in an orderly fashion without the need for
a formal proceeding.'').
    \30\ See Net Capital Rule, Exchange Act Release No. 27249 (Sept.
15, 1989), 54 FR 40395, 40396 (Oct. 2, 1989).
    \31\ See Securities Investor Protection Corporation (``SIPC''),
Annual Report (2018), available at https://www.sipc.org/media/annual-reports/2018-annual-report.pdf. SIPC's 2018 annual report
states that the annual average of new broker-dealer liquidations
under the Securities Investor Protection Act of 1970 (``SIPA'') for
the last 10-year period was 0.8 firms per year. It also states that
there have been 330 broker-dealers liquidated in a SIPA proceeding
since SIPC's inception in 1970, which amounts to less than 1% of
approximately 40,000 broker-dealers that have been SIPC members
during that time period. Moreover, it states that over that time
period the value of cash and securities of SIPA liquidated broker-
dealers returned to customers totaled approximately $139.8 billion
and, of that amount, approximately $138.9 billion came from the
estates of the failed broker-dealers, and approximately $1 billion
came from the SIPC fund. It further states that, of the
approximately 770,400 claims satisfied in completed or substantially
completed cases as of December 31, 2018, a total of 356 were for
cash and securities whose value was greater than limits of
protection afforded by SIPA.
---------------------------------------------------------------------------

    Some commenters supported the Commission's proposal to model the
nonbank SBSD capital requirements on the broker-dealer capital
requirements. A commenter stated that separate standards for stand-
alone broker-dealers and nonbank SBSDs would complicate the regulatory
framework.\32\ A second commenter argued that there should be no
difference in the manner in which capital standards are applied to
nonbank SBSDs, regardless of whether they are registered as broker-
dealers or are affiliated with a bank holding company.\33\ A third
commenter expressed general support for the approach.\34\
---------------------------------------------------------------------------

    \32\ See Letter from Dennis M. Kelleher, President and Chief
Executive Officer, Better Markets, Inc. (Feb. 22, 2013) (``Better
Markets 2/22/2013 Letter''); Letter from Dennis M. Kelleher,
President and Chief Executive Officer, Better Markets, Inc. (July
22, 2013) (``Better Markets 7/22/2013 Letter'').
    \33\ See Letter from Kurt N. Schacht, Managing Director, and
Beth Kaiser, Director, CFA Institute (Feb. 22, 2013) (``CFA
Institute Letter'').
    \34\ See Letter from Thomas G. McCabe, Chief Operating Officer,
OneChicago, LLC (Feb. 19, 2013) (``OneChicago 2/19/2013 Letter'').
---------------------------------------------------------------------------

    Other commenters expressed concerns with regard to the proposed

approach or encouraged the Commission to harmonize its final rules with
those of international standard setters and domestic regulators that
have finalized capital and margin requirements.\35\ A commenter stated
that the Commission's proposed approach would result in very different
capital requirements for nonbank SBSDs as compared to nonbank swap
dealers subject to CFTC oversight, and that this could potentially
prevent entities from dually registering as nonbank SBSDs and swap
dealers.\36\ The commenter also stated that requiring a multi-
registered entity--such as an entity registered as a broker-dealer,
FCM, SBSD, and swap dealer--to calculate regulatory capital under the
rules of both the Commission and the CFTC and adhere to the greater
minimum requirement would provide a strong disincentive to seeking the
operational and risk management efficiencies of a consolidated business
entity, and would be anticompetitive.
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    \35\ See Letter from Tom Quaadman, Executive Vice President,
Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
(Nov. 19, 2018) (``Center for Capital Markets Competitiveness,
Chamber of Commerce 11/19/2018 Letter''); Citadel 11/19/2018 Letter;
Letter from Walt L. Lukken, President and Chief Executive Officer,
Futures Industry Association (Nov. 19, 2018) (``FIA 11/19/2018
Letter''); ICI 11/19/2018 Letter; Letter from Laura Harper Powell,
Associate General Counsel, Managed Funds Association, and Adam
Jacobs-Dean, Managing Director, Global Head of Markets Regulation,
Alternative Investment Management Association (Nov. 19, 2018)
(``MFA/AIMA 11/19/2018 Letter''); Adam Hopkins, Managing Director,
Legal Department, Mizuho Capital Markets LLC, Marcy S. Cohen,
General Counsel and Managing Director, ING Capital Markets LLC, and
Michael Baudo, President and CEO, ING Capital Markets LLC (Nov. 16,
2018) (``Mizuho/ING Letter''); Letter from Sebastian Crapanzano and
Soo-Mi Lee, Managing Directors, Morgan Stanley (Feb. 22, 2013)
(``Morgan Stanley 2/22/2013 Letter'').
    \36\ See Letter from Richard M. Whiting, Executive Director and
General Counsel, The Financial Services Roundtable (Feb. 22, 2013)
(``Financial Services Roundtable Letter'').
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    Several commenters encouraged the Commission and CFTC to harmonize
their proposed capital rules.\37\ A commenter suggested that the
Commission coordinate with the CFTC and, as appropriate, the prudential
regulators to assure that each agency's respective capital rules are
harmonized and do not have the unintended effect of impairing the
ability of broker-dealers that are dually registered as FCMs to provide
clearing services for security-based swaps and swaps.\38\ Another
commenter was concerned that the proposed capital requirements for
nonbank SBSDs were not comparable to those proposed by other U.S.
regulators and that modeling the proposed rules on the broker-dealer
capital standard was not appropriate.\39\ This commenter argued that
the bank capital standard is risk-based, whereas the broker-dealer
capital standard is transaction volume-based, and that SBSDs and swap
dealers operate in the same markets with the same counterparties and
should be subject to comparable capital requirements. Commenters also
referenced Section 15F(e)(3)(D)(ii) of the Exchange Act, which provides
that the Commission, the prudential regulators, and the CFTC ``shall,
to the maximum extent practicable, establish and maintain comparable
minimum capital requirements. . . .'' \40\ One commenter argued that
divergence of bank and nonbank regulation is leading to some migration
of risk to nonbank broker-dealers.\41\ A commenter suggested that to
avoid undermining the de minimis exception for SBSDs or inhibiting
hedging activities by broker-dealers not registered as SBSDs, the
Commission should limit the application of the proposed amendments to
Rule 15c3-1 to broker-dealers that register as SBSDs.\42\ Another
commenter stated that a positive tangible net worth test would be more
appropriate for nonbank SBSDs.\43\
---------------------------------------------------------------------------

    \37\ See Citadel 11/19/18 Letter; Financial Services Roundtable
Letter; FIA 11/19/2018 Letter; Morgan Stanley 11/19/2018 Letter.
    \38\ See FIA 11/19/2018 Letter.
    \39\ See Morgan Stanley 2/22/2013 Letter.
    \40\ See Letter from Robert Pickel, Chief Executive Officer,
International Swaps and Derivatives Association (``ISDA'') (Feb. 5,
2014) (``ISDA 2/5/2014 Letter''); Morgan Stanley 2/22/2013 Letter.
    \41\ See Letter from Robert Rutkowski (Nov. 20, 2018)
(``Rutkowski 11/20/2018 Letter'').
    \42\ See Letter from Kenneth E. Bentsen, Jr., President and CEO,
Securities Industry and Financial Markets Association (Nov. 19,
2018) (``SIFMA 11/19/2018 Letter''); Morgan Stanley 11/19/2018
Letter.
    \43\ See Letter from David T. McIndoe, Alexander S. Holtan, and
Cheryl I. Aaron, Counsels, Sutherland Asbill & Brennan LLP on behalf
of The Commercial Energy Working Group (Feb. 14, 2013) (``Sutherland
Letter'').
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    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 below 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.\44\ 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.\45\ 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.\46\
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    \44\ 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).
    \45\ See paragraph (e)(2) of Rule 18a-1, as adopted.
    \46\ See OTC Derivatives Dealers, Exchange Act Release No. 40594
(Oct. 23, 1998), 63 FR 59362, 59384-87 (Nov. 3, 1998) (``[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. See also section VI.A.4.b. of this release
(discussing bank capital regulations).
---------------------------------------------------------------------------

    The second significant modification is an alternative compliance
mechanism. As discussed below 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.\47\ 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
stand-alone broker-dealers.\48\ 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.
---------------------------------------------------------------------------

    \47\ See Rule 18a-10, as adopted.
    \48\ See CFTC Capital Proposing Release, 81 FR 91252.
---------------------------------------------------------------------------

    The Commission acknowledges that under these two modifications a
stand-alone SBSD will be subject to: (1) A capital standard that is
less rigid than Rule 15c3-1 in terms of imposing a net liquid assets
test (in the case of firms that will comply with Rule 18a-1); or (2) a
capital standard that potentially does not impose a net liquid assets
test (in the case of firms that will operate under the alternative
compliance mechanism and, therefore, comply with the CFTC's capital
rules). This will decrease the liquidity of these firms and therefore
decrease their self-sufficiency. As a result, the risk that a stand-
alone SBSD may not be able to self-liquidate in an orderly manner will
be increased.
    However, stand-alone SBSDs will engage in a more limited business
than stand-alone broker-dealers and broker-dealer SBSDs. Thus, they
will be less significant participants in the overall securities
markets. For example, they will not be dealers in the cash securities
markets or the markets for listed options and they will not maintain
custody of cash or securities for retail investors in those markets.
Given their limited role, the Commission believes that it is
appropriate to more closely align the requirements for stand-alone
SBSDs with the requirements of the CFTC and the prudential regulators.
These modifications to more closely harmonize the rules are designed to
address the concerns of commenters noted above about the potential
consequences of imposing different capital standards. They also take
into account Section 15F(e)(3)(D)(ii) of the Exchange Act, which
provides that the Commission, the prudential regulators, and the CFTC
``shall, to the maximum extent practicable, establish and maintain
comparable minimum capital requirements . . .''
    Notwithstanding the modification to Rule 18a-1 described above, the
rule continues to be modeled in large part on the broker-dealer capital
rule. For example, as is the case with Rule 15c3-1, most unsecured
receivables (aside from uncollateralized current exposures relating to
derivatives transactions) will not count as allowable capital.
Moreover, fixed assets and other illiquid assets will not count as
allowable capital. Consequently, stand-alone SBSDs subject to Rule 18a-
1 (i.e., firms that do not operate under the alternative compliance
mechanism) will remain subject to certain requirements modeled on
requirements of Rule 15c3-1 that are designed to promote their
liquidity.
    Additionally, broker-dealer SBSDs will be subject to Rule 15c3-1
and the stricter (as compared to Rule 18a-1) net liquid assets test it
imposes. For example, as discussed below in section II.A.2.b.v. of this
release, Rule 15c3-1e, as amended, modifies the existing portfolio
concentration charge so that it equals 10% of an ANC broker-dealer's
tentative net capital (a reduction from 50% of the firm's tentative net
capital).\49\ Thus, the ability of these firms to apply the credit risk
charges to uncollateralized current exposures arising from derivatives
transactions will be more restricted. In addition, as discussed below,
broker-dealer and stand-alone SBSDs will be subject to a 100% capital
charge for initial margin they post to counterparties because, for
example, the counterparty is subject to the margin rules of the CFTC or
the prudential regulators.
---------------------------------------------------------------------------

    \49\ See paragraph (c)(3) of Rule 15c3-1e, as adopted.
---------------------------------------------------------------------------

    Consequently, while the two modifications discussed above with
respect to stand-alone SBSDs should mitigate commenters' concerns,
there likely will be significant differences between the capital
requirements for nonbank SBSDs and the capital requirements for bank
SBSDs and bank and nonbank swap dealers. In this regard, the Commission
has balanced the concerns raised by commenters about inconsistent
requirements with the objective of promoting the liquidity of nonbank
SBSDs. The Commission believes that the broker-dealer capital standard
is the most appropriate alternative for nonbank SBSDs, given the nature
of their business activities and the Commission's experience
administering the standard with respect to broker-dealers. The
objective of the broker-dealer capital standard is to protect customers
and counterparties and to mitigate the consequences of a firm's failure
by promoting the ability of these entities to absorb financial shocks
and, if necessary, to self-liquidate in an orderly manner.
    Moreover, certain operational, policy, and legal differences
support the distinction between nonbank SBSDs and bank SBSDs. First,
based on the Commission staff's understanding of the activities of
nonbank dealers in the OTC derivatives markets, nonbank SBSDs are
expected to 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 activities of banks, which--unlike broker-dealers--
are in the business of making loans and taking deposits. Similar to
stand-alone broker-dealers, nonbank SBSDs will not be lending or
deposit-taking institutions and will focus their activities on dealing
in securities (i.e., security-based swaps).
    Second, existing capital standards for banks and broker-dealers
reflect, in part, differences in their funding models and access to
certain types of financial support. Those same differences also will
exist between bank SBSDs and nonbank SBSDs. For example, in general,
banks obtain much of their funding through customer deposits (a
relatively inexpensive source of funding) and can obtain liquidity
through the Federal Reserve's discount window. Broker-dealers do not--
and nonbank SBSDs will not--have access to these sources of funding and
liquidity. Consequently, in the Commission's judgment, the broker-
dealer capital standard is the appropriate standard for nonbank SBSDs
because it is designed to promote a firm's liquidity and self-
sufficiency (in other words, to account for the lack of inexpensive
funding sources that are available to banks, such as deposits and
central bank support).
    The rules governing ANC broker-dealers and OTC derivatives dealers
currently contain provisions designed to address dealing in OTC
derivatives by broker-dealers and, therefore, to some extent are
tailored to address security-based swap activities of broker-dealers.
However, as discussed below, the amendments to Rule 15c3-1 are designed
to more specifically address the risks of security-based swaps and
swaps and the potential for the increased involvement of broker-dealers
in these markets.\50\ Moreover, most stand-alone broker-dealers are not
subject to Rules 15c3-1e and 15c3-1f and thus will need to take
standardized haircuts in calculating their net capital. Therefore, in
response to comments, the Commission believes it is appropriate for the
amendments to Rule 15c3-1 to apply to broker-dealers irrespective of
whether they are registered as SBSDs. This approach will establish
requirements (such as standardized haircuts for security-based swaps)
that are specifically tailored to security-based swap activities across
all broker-dealers (i.e., broker-dealer SBSDs and stand-alone broker-
dealers that engage in a de minimis level of security-based swap
activities).
---------------------------------------------------------------------------

    \50\ See Alternative Net Capital Requirements for Broker-Dealers
That Are Part of Consolidated Supervised Entities, Exchange Act
Release No. 49830 (June 8, 2004), 69 FR 34428 (June 21, 2004); OTC
Derivatives Dealers, 63 FR 59362.
---------------------------------------------------------------------------

    The Commission disagrees with the comment that the broker-dealer
capital standard is not risk-based. The ratio-

based minimum net capital requirement being adopted today is tied
directly to the risk of the firm's customer exposures. Further, the
standardized and model-based haircuts that will be used by nonbank
SBSDs are tied directly to the market and credit risk of the firm's
positions.
    For these reasons, Rules 15c3-1, as amended, and 18a-1, as adopted,
establish capital requirements for nonbank SBSDs that differ from the
capital requirements adopted by the prudential regulators and certain
of the capital requirements the CFTC proposed for nonbank swap
dealers.\51\ The Commission considered these alternative approaches in
light of Section 15F(e)(3)(D)(ii) of the Exchange Act, which provides--
as discussed above--that the Commission, prudential regulators, and the
CFTC to the maximum extent practicable, establish and maintain
comparable minimum capital requirements. However, as discussed above,
the Commission believes that the capital requirements for nonbank SBSDs
should take into account key differences between banks (which are
lending institutions) and nonbank SBSDs (which will focus primarily on
securities activities). Therefore, the Commission does not believe it
would be appropriate to model the Commission's capital requirements for
nonbank SBSDs on the bank capital standard.\52\
---------------------------------------------------------------------------

    \51\ As noted above, the prudential regulators similarly adopted
capital standards for bank SBSDs based on the capital standards for
banks. See Prudential Regulator Margin and Capital Adopting Release,
80 FR at 74889. As discussed above, the CFTC has proposed different
capital standards for nonbank swap dealers depending on whether the
registrant is an FCM and whether the registrant is predominantly
engaged in non-financial activities. See CFTC Capital Proposing
Release, 81 FR 91252.
    \52\ As discussed above and in section II.D. of this release,
stand-alone SBSDs (excluding firms registered as OTC derivatives
dealers) will be able to operate pursuant to the alternative
compliance mechanism of Rule 18a-10 if they meet the conditions in
the rule. Stand-alone SBSDs operating pursuant to this mechanism
will be permitted to comply with the capital, margin, and
segregation requirements of the CEA and the CFTC's rules instead of
the capital, margin, and segregation requirements of Rules 18a-1,
18a-3, and 18a-4. As noted above, the CFTC's proposed capital rule
for swap dealers included an option for certain firms to adhere to a
bank-like capital standard. As discussed below in section II.D. of
this release, the Commission believes stand-alone SBSDs that meet
the conditions of Rule 18a-10 should be permitted to adhere to
capital, margin, and segregation requirements of the CEA and the
CFTC's rules (which, potentially, could include a bank-like capital
standard) because, among other reasons, they will be predominantly
engaging in a swaps business and, therefore, the CFTC will have a
heightened regulatory interest in these firms as compared to the
Commission's regulatory interest.
---------------------------------------------------------------------------

    Further, the Commission does not believe it is necessary to apply a
tangible net worth test to nonbank SBSDs, as suggested by a commenter.
The CFTC proposed a tangible net worth requirement for swap dealers
that are predominately engaged in non-financial activities (e.g.,
agriculture or energy) because of the potential that some of these
entities may need to register as swap dealers due to their use of swaps
as part of their non-financial activities.\53\ The application of a
broker-dealer-based or a bank-based capital approach to entities
engaged in non-financial activities could result in inappropriate
capital requirements that would not be proportionate to the risk
associated with these types of firms. The Commission does not believe
that entities predominantly engaged in non-financial activities are
likely to deal in security-based swaps to an extent that would trigger
registration with the Commission because, for example, the swap market
is significantly larger than the security-based swap market and has
many more active participants that are non-financial entities.\54\
Moreover, a tangible net worth standard would not promote liquidity, as
it treats all tangible assets equally, and therefore could incentivize
a firm to hold illiquid but higher yielding assets.
---------------------------------------------------------------------------

    \53\ See CFTC Capital Proposing Release, 81 FR at 91264-65.
    \54\ See BIS, OTC derivatives statistics at end December 2018
(May 2019). The BIS statistical releases cited in this release are
available at https://www.bis.org/list/statistics/index.htm.
---------------------------------------------------------------------------

    Based on staff experience, it is expected that financial
institutions will comprise a large segment of the security-based swap
market as is currently the case and that these entities are more likely
to have affiliates dedicated to OTC derivatives trading and affiliates
that are broker-dealers registered with the Commission. Consequently,
these affiliates--because their capital structures are geared towards
securities trading or because they already are broker-dealers--will not
face the types of practical issues that non-financial entities would
face if they had to adhere to a capital standard modeled on the broker-
dealer capital standard. In addition, many broker-dealers currently are
affiliates of bank holding companies. Consequently, these broker-
dealers are subject to Rule 15c3-1, while their parent and bank
affiliates are subject to bank capital standards. For these reasons,
the Commission does not believe it is necessary to adopt a different
capital standard to accommodate entities that are predominantly engaged
in non-financial activities as was proposed by the CFTC.\55\
---------------------------------------------------------------------------

    \55\ As discussed above and in section II.D. of this release,
stand-alone SBSDs (excluding firms registered as OTC derivatives
dealers) will be able to adhere to the capital, margin, and
segregation requirements of the CEA and the CFTC's rules instead of
Rules 18a-1, 18a-3, and 18a-4 if they meet the conditions in Rule
18a-10. As noted above, the CFTC's proposed capital rule for swap
dealers included an option for certain firms to adhere to a tangible
net worth capital standard. As also noted above, the Commission does
not expect that entities predominantly engaged in non-financial
activities are likely to register as SBSDs. Accordingly, it is
unlikely that stand-alone SBSDs adhering to CFTC requirements in
accordance with Rule 18a-10 will be subject to the CFTC's tangible
net worth capital standard. To the extent that they are, however,
the Commission believes stand-alone SBSDs that meet the conditions
of Rule 18a-10 should be permitted to adhere to capital, margin, and
segregation requirements of the CEA and the CFTC's rules (which,
potentially, could include a tangible net worth capital standard)
because, among other reasons, they will be predominantly engaging in
a swaps business and, therefore, the CFTC will have a heightened
regulatory interest in these firms as compared to the Commission's
regulatory interest.
---------------------------------------------------------------------------

    The Commission acknowledges that not adopting the CFTC's proposed
alternative-capital-standards approach could require nonbank SBSDs that
are also registered with the CFTC as swap dealers to, in some cases,
perform two different capital calculations. This could cause some firms
to separate their nonbank SBSDs and their nonbank swap dealers into
separate entities. For nonbank SBSDs that are predominantly swap
dealers, the alternative compliance mechanism will avoid this outcome.
In addition, the modification to Rule 18a-1 more closely aligns the
treatment of uncollateralized current exposures arising from
derivatives transactions with the treatment of such exposures under the
bank capital rules. The Commission, however, does not believe it would
be appropriate to further address this potential consequence by
modifying its proposed capital requirements for nonbank SBSDs to permit
firms to apply a bank capital standard or tangible net worth test for
the reasons discussed above.
    In response to commenters' requests that the Commission and CFTC
work together and harmonize their respective capital rules, as
appropriate, Commission staff has consulted with the CFTC, among
others, in drafting the proposals and the amendments and rules being
adopted today, and as discussed further below, has sought to make the
Commission's capital rule more consistent with the CFTC's proposed
capital rules, as appropriate.
    For these reasons, the Commission is modeling the capital
requirements for nonbank SBSDs on the broker-dealer capital standard in
Rule 15c3-1, as

proposed, but with the two significant modifications discussed above
with respect to the capital requirements for stand-alone SBSDs.
    The Commission is adopting a positive tangible net worth capital
standard for stand-alone MSBSPs pursuant to Section 15F of the Exchange
Act. As discussed in more detail below, the Commission did not receive
comments that specifically objected to this standard for these
entities.
2. Capital Rules for Nonbank SBSDs
a. Computing Required Minimum Net Capital
    Rule 15c3-1 requires a broker-dealer to maintain a minimum level of
net capital (meaning highly liquid capital) at all times. Paragraph (a)
of the rule requires the broker-dealer to perform two calculations: (1)
A computation of the minimum amount of net capital the broker-dealer
must maintain; and (2) a computation of the amount of net capital the
broker-dealer is maintaining. The minimum net capital requirement is
the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying one of two financial ratios: The 15-to-1
aggregate indebtedness to net capital ratio (``15-to-1 ratio'') or the
2% of aggregate debit items ratio (``2% debit item ratio''). The
Commission proposed that nonbank SBSDs be subject to similarly
structured minimum net capital requirements that varied depending on
the type of entity. More specifically, proposed Rule 18a-1 required a
stand-alone SBSD not authorized to use internal models when computing
net capital to maintain minimum net capital of not less than the
greater of $20 million or 8% of the firm's ``risk margin amount'' as
that term was defined in the rule.\56\ The risk margin amount was
calculated as the sum of:
---------------------------------------------------------------------------

    \56\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70221-24.
---------------------------------------------------------------------------

     The greater of: (1) The total margin required to be
delivered by the stand-alone SBSD with respect to security-based swap
transactions cleared for security-based swap customers at a clearing
agency: Or (2) the amount of the deductions that would apply to the
cleared security-based swap positions of the security-based swap
customers pursuant to proposed Rule 18a-1; and
     The total initial margin calculated by the stand-alone
SBSD with respect to non-cleared security-based swaps pursuant to
proposed Rule 18a-3.
    The total of these two amounts--i.e., the risk margin amount--would
be multiplied by 8% to determine the ratio-based minimum net capital
requirement (``8% margin factor''). In the 2018 comment reopening, the
Commission asked whether the input to the risk margin amount for
cleared security-based swaps should be determined solely by the total
initial margin required to be delivered by the nonbank SBSD with
respect to transactions cleared for security-based swap customers at a
clearing agency.\57\
---------------------------------------------------------------------------

    \57\ See Capital, Margin, and Segregation Comment Reopening, 83
FR at 53009. The release also sought comment and supporting data on
the potential minimum net capital amounts that would be required of
nonbank SBSDs. Id.
---------------------------------------------------------------------------

    Proposed Rule 18a-1 permitted a stand-alone SBSD to apply to the
Commission to use model-based haircuts.\58\ The rule required a stand-
alone SBSD authorized to use models to maintain: (1) Minimum tentative
net capital of not less than $100 million; and (2) minimum net capital
of not less than the greater of $20 million or the 8% margin
factor.\59\ The proposed rule defined ``tentative net capital'' to
mean, in pertinent part, the amount of net capital maintained by the
nonbank SBSD before deducting haircuts (standardized or model-based)
with respect to the firm's proprietary positions and, for firms
authorized to use models, before deducting the credit risk charges
discussed below in section II.A.2.b.v. of this release. The minimum
tentative net capital requirement was designed to account for the fact
that model-based haircuts, while more risk sensitive than standardized
haircuts, tend to substantially reduce the amount of the deductions to
tentative net capital in comparison to the standardized haircuts. It
also was designed to account for the fact that models may miscalculate
risks or not capture all risks (e.g., extraordinary losses or decreases
in liquidity during times of stress that are not incorporated into the
models).
---------------------------------------------------------------------------

    \58\ Capital, Margin, and Segregation Proposing Release, 77 FR
at 70226-27, 70237-40.
    \59\ 77 FR at 70221-24.
---------------------------------------------------------------------------

    The proposed amendments to Rule 15c3-1 established minimum net
capital requirements for a broker-dealer SBSD not authorized to use
model-based haircuts.\60\ The proposed amendments required these
entities to maintain minimum net capital equal of the greater of $20
million or the sum of: (1) The 8% margin factor; and (2) the amount of
the financial ratio requirement that applied to the broker-dealer under
pre-existing requirements in Rule 15c3-1 (i.e., either the 15-to-1
ratio or 2% debit item ratio).
---------------------------------------------------------------------------

    \60\ 77 FR at 70225-26.
---------------------------------------------------------------------------

    Under Rule 15c3-1e, a broker-dealer must apply to the Commission
for authorization to use the alternative net capital (ANC) computation
that permits models to be used to compute haircuts and credit risk
charges. Broker-dealers with that authorization--ANC broker-dealers--
are subject to minimum net capital requirements specific to these
entities. In particular, before today's amendments, paragraph (a)(7)(i)
of Rule 15c3-1 required an ANC broker-dealer to maintain minimum
tentative net capital of at least $1 billion and minimum net capital of
at least $500 million. In addition, paragraph (a)(7)(ii) of Rule 15c3-1
required an ANC broker-dealer to provide the Commission with an ``early
warning'' notice when its tentative net capital fell below $5 billion.
    As proposed, a broker-dealer SBSD authorized to use models was
subject to the minimum net capital requirements for an ANC broker-
dealer, which the Commission proposed increasing.\61\ Consequently,
under the proposed amendments to Rule 15c3-1, an ANC broker-dealer,
including an ANC broker-dealer SBSD, was required to maintain: (1)
Tentative net capital of not less than $5 billion; and (2) net capital
of not less than the greater of $1 billion, or the amount of the 15-to-
1 ratio or 2% debit item ratio (as applicable) plus the 8% margin
factor. The Commission also proposed increasing the early warning
notification requirement for ANC broker-dealers from $5 billion to $6
billion.
---------------------------------------------------------------------------

    \61\ 77 FR at 70227-29.
---------------------------------------------------------------------------

    The Commission explained in the proposing release that while
raising the tentative net capital requirement under Rule 15c3-1 from $1
billion to $5 billion would be a significant increase, the existing
early warning notice requirement for ANC broker-dealers was $5
billion.\62\ This $5 billion ``early warning'' threshold acted as a de
facto minimum tentative net capital requirement since ANC broker-
dealers seek to maintain sufficient levels of tentative net capital to
avoid the necessity of providing this regulatory notice. Accordingly,
the objective in raising the minimum capital requirements for ANC
broker-dealers was not to require the existing ANC broker-dealers to
increase their current capital levels (as they already maintained
tentative net capital in excess of $5 billion).\63\ Rather, the goal

was to establish new higher minimum requirements designed to ensure
that the ANC broker-dealers continue to maintain high capital levels
and that any new ANC broker-dealer entrants maintain capital levels
commensurate with their peers.
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    \62\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70228.
    \63\ The ANC broker-dealers continue to maintain tentative net
capital in excess of the proposed $6 billion early warning level.
See also section VI of this release (discussing costs and benefits
of the increases in the capital requirements for ANC broker-
dealers).
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Comments and Final Fixed-Dollar Minimum Net Capital Requirements
    Some commenters expressed support for the proposed fixed-dollar
minimum tentative net capital and net capital requirements. A commenter
stated that the requirements were consistent with pre-existing
requirements and practices for OTC derivatives dealers and ANC broker-
dealers that have not proven to produce significant disparities with
other capital regimes.\64\ A second commenter stated that the proposal
to require an ANC broker-dealer to provide notification to the
Commission if the firm's tentative net capital fell below $6 billion
would improve the Commission's monitoring of these key market
participants.\65\
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    \64\ See Letter from Kenneth E. Bentsen, Jr., Executive Vice
President, Securities Industry and Financial Markets Association
(Feb. 22, 2013) (``SIFMA 2/22/2013 Letter'').
    \65\ See Letter from Stuart J. Kaswell, Executive Vice
President, Managing Director, and General Counsel, Managed Funds
Association (Feb. 22, 2013) (``MFA 2/22/2013 Letter'').
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    One commenter asked the Commission to reconsider the proposed $100
million minimum fixed-dollar tentative net capital requirement for
stand-alone SBSDs authorized to use models, particularly for a nonbank
SBSD that trades only in cleared security-based swaps.\66\ The
commenter stated that dealing in cleared security-based swaps should
not implicate the same concerns about the use of models that led to the
establishment of a higher threshold for other Commission registrants.
The Commission believes that the same risks exist with respect to the
use of models whether an SBSD is trading cleared or non-cleared
security-based swaps. In particular, the minimum tentative net capital
requirement is designed to address the possibility that the model might
miscalculate risk irrespective of the relative level of risk of the
positions (e.g., cleared versus non-cleared security-based swaps) being
input into the model.
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    \66\ See Letter from Stephen John Berger, Managing Director,
Government & Regulatory Policy, Citadel Securities (May 15, 2017)
(``Citadel 5/15/2017 Letter'').
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    For these reasons, the Commission is adopting the proposed minimum
fixed-dollar tentative net capital and net capital requirements as
proposed as well as the $6 billion early warning notification
requirement as proposed.\67\ Consequently, under the final rules: (1) A
stand-alone SBSD not approved to use internal models has a $20 million
fixed-dollar minimum net capital requirement; \68\ (2) a stand-alone
SBSD authorized to use internal models (including a firm registered as
an OTC derivatives dealer) has a $100 million fixed-dollar minimum
tentative net capital requirement and a $20 million fixed-dollar
minimum net capital requirement; \69\ (3) a broker-dealer SBSD not
authorized to use internal models has a $20 million fixed-dollar
minimum net capital requirement; \70\ and (4) an ANC broker-dealer,
including an ANC broker-dealer SBSD, has a $6 billion fixed-dollar
early warning notification requirement, a $5 billion fixed-dollar
minimum tentative net capital requirement, and a $1 billion fixed-
dollar minimum net capital requirement.\71\
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    \67\ See paragraphs (a)(7)(i) and (a)(10)(i) of Rule 15c3-1, as
amended; paragraphs (a)(1) and (2) of Rule 18a-1, as adopted. In the
final rule, the Commission made non-substantive amendments to the
term of ``tentative net capital'' in Rule 18a-1, as adopted, to
align the language more closely to the definition in Rule 15c3-1.
See paragraph (c)(5) of Rule 18a-1, as adopted.
    \68\ See paragraph (a)(1) of Rule 18a-1, as adopted.
    \69\ See paragraph (a)(2) of Rule 18a-1, as adopted.
    \70\ See paragraph (a)(10)(i) of Rule 15c3-1, as amended.
    \71\ See paragraph (a)(7)(i) and (ii) of Rule 15c3-1, as
amended.
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Comments and Final Ratio-Based Minimum Net Capital Requirements
    As noted above, the Commission proposed a ratio-based minimum net
capital requirement that for a broker-dealer SBSD was the 15-to-1 ratio
or 2% debit item ratio (as applicable) plus the proposed 8% margin
factor, and for a stand-alone SBSD was only the proposed 8% margin
factor.\72\ Commenters raised concerns about the proposed 8% margin
factor. One commenter suggested that the Commission require broker-
dealer SBSDs to comply with a ratio that is modeled on the 2% debit
item ratio in Rule 15c3-1.\73\ Another commenter stated that a minimum
capital requirement that is scalable to the volume, size, and risk of a
nonbank SBSD's activities would be consistent with the safety and
soundness standards mandated by the Dodd-Frank Act and the Basel
Accords and would be comparable to the requirements established by the
CFTC and the prudential regulators.\74\ The commenter, however,
expressed concerns that the proposed 8% margin factor was not
appropriately risk-based.\75\
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    \72\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70225-26.
    \73\ See SIFMA 11/19/18 Letter. This commenter suggested that
the Commission not apply the proposed 8% margin factor to full-
purpose broker-dealers, and modify the customer reserve requirements
to include security-based swap credits and debits, thereby covering
security-based swaps in the existing 2% debit item ratio, under
existing Rule 15c3-1. For stand-alone SBSDs, the commenter
recommended replacing the proposed 8% margin factor with a 2%
minimum capital requirement, based on a calculation consistent with
the proposed risk margin amount.
    \74\ See SIFMA 2/22/2013 Letter.
    \75\ The commenter suggested two approaches: one for nonbank
SBSDs authorized to use models and one for nonbank SBSDs not
authorized to use models. Under the first approach, the risk margin
amount would be a percent of the firm's aggregate model-based
haircuts. The second approach was a credit quality adjusted version
of the proposed 8% margin factor.
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    A commenter suggested that, if the proposed 8% margin factor is
adopted, the Commission should exclude security-based swaps that are
portfolio margined with swaps or futures in a CFTC-supervised
account.\76\ Another commenter believed that a broker-dealer dually
registered as an FCM should be subject to a single risk margin amount
calculated pursuant to the CFTC's rules, since the CFTC's proposed
calculation incorporates both security-based swaps and swaps.\77\ A
commenter suggested modifying the proposed definition of ``risk margin
amount'' to reflect the lower risk associated with central clearing by
ensuring that capital requirements for cleared security-based swaps are
lower than the requirements for equivalent non-cleared security-based
swaps.\78\
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    \76\ See SIFMA 11/19/18 Letter.
    \77\ See Morgan Stanley 11/19/2018 Letter. This commenter also
argued that a stand-alone broker-dealer should not be subject to the
proposed 8% margin factor minimum ratio requirement. Stand-alone
broker-dealers--other than ANC broker-dealers--do not have to
incorporate the 2% margin factor into their net capital calculation
under Rule 15c3-1, as amended.
    \78\ See MFA 2/22/2013 Letter. See also Letter from Thomas G.
McCabe, Chief Regulatory Officer, OneChicago (Nov. 19, 2018)
(``OneChicago 11/19/2018 Letter'').
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    Commenters also addressed the modifications to the proposed rule
text in the 2018 comment reopening pursuant to which the input for
cleared security-based swaps in the risk margin amount would be
determined solely by reference to the amount of initial margin required
by clearing agencies (i.e., not be the greater of those amounts or the
amount of the haircuts that would apply to the cleared security-based
swap positions). Some commenters supported the potential rule language
modifications.\79\ Other commenters

opposed them.\80\ One commenter opposing the modifications stated that
the ``greater of'' provision creates a backstop to protect against the
possibility that varying margin requirements across clearing agencies
and over time could be insufficient to reflect the true risk to a
nonbank SBSD arising from its customers' positions.\81\ Another
commenter stated that eliminating the haircut requirement may
incentivize clearing agencies to compete on the basis of margin
requirements.\82\
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    \79\ See ICI 11/19/18 Letter; MFA/AIMA 11/19/2019 Letter; SIFMA
11/19/2018 Letter.
    \80\ See Letter from Americans for Financial Reform (Nov. 19,
2018) (``Americans for Financial Reform Education Fund Letter'');
Better Markets 11/19/2018 Letter; Rutkowski 11/20/2018 Letter.
    \81\ See Better Markets 11/19/2018 Letter.
    \82\ See Americans for Financial Reform Education Fund Letter.
See also Rutkowski 11/20/2018 Letter.
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    The Commission continues to believe a margin factor ratio is the
right approach to setting a scalable minimum net capital requirement.
The calculation is based on the initial margin required to be posted by
an ANC broker-dealer or nonbank SBSD to a clearing agency for cleared
security-based swaps and on the initial margin calculated by a nonbank
SBSD for a counterparty for non-cleared security-based swaps.\83\
Margin requirements generally are scaled to the risk of the positions,
with riskier positions requiring higher levels of margin. Therefore,
the amount of the ratio-based minimum net capital requirement will be
linked to the volume, size, and risk of the firm's cleared and non-
cleared security-based swap transactions.
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    \83\ An ANC broker-dealer will not be subject to the final
margin rule for non-cleared security-based swaps if it is not also
registered as an SBSD. Therefore, its calculation of the 2% margin
factor will only account for cleared security-based swaps.
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    However, in response to comments raising concerns about the
potential impact of the proposed 8% margin factor, the Commission
believes it would be appropriate to adopt, at least initially, a lower
margin factor and create a process through which the percent multiplier
can potentially (but not necessarily) be increased over time (i.e.,
starting at 2% and potentially transitioning from 2% to 8% or less over
the course of at least 5 years). Initially using a 2% multiplier could
provide ANC broker-dealers and nonbank SBSDs with time to adjust to the
requirement if it incrementally increases. The final rule sets strict
limits in terms of how quickly the multiplier can be raised and the
amount by which it can be raised through the process in the rule
because market participants should know when a potential increase in
the multiplier using the process could first occur and how much the
multiplier could be increased at that time or thereafter. The
Commission's objective is to establish an efficient and flexible
process, while providing market participants with notice about the
potential timing and magnitude of an increase so that they can make
informed decisions about how to structure their businesses.
    Consequently, under the process set forth in the final rules, the
percent multiplier will be 2% for at least 3 years after the compliance
date of the rule.\84\ After 3 years, the multiplier could increase to
not more than 4% by Commission order, and after 5 years the multiplier
could increase to not more than 8% by Commission order if the
Commission had previously issued an order raising the multiplier to 4%
or less. The process sets an upper limit for the multiplier of 8% (the
day-1 multiplier under the proposed rules) and requires the issuance of
two successive orders to raise the multiplier to as much as 8% (or an
amount between 4% and 8%). The first order can be issued no earlier
than 3 years after the compliance date of the rules, and the second
order can be issued no earlier than 5 years after the compliance date.
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    \84\ As discussed below in section II.D. of this release, Rule
18a-10 contains a process through which the maximum fixed-dollar
amount is set at a transitional level of $250 billion for the first
3 years after the compliance date of the rule and then drops to $50
billion thereafter unless the Commission issues an order: (1)
Maintaining the $250 billion maximum fixed-dollar amount for an
additional period of time or indefinitely; or (2) lowering the
maximum fixed-dollar amount to an amount between $250 billion and
$50 billion.
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    The process in the final rules provides that, before issuing an
order to raise the multiplier, the Commission will consider the capital
and leverage levels of the firms subject to the ratio-based minimum net
capital requirement as well as the risks of their security-based swap
positions. After the rule is adopted, the Commission will gather data
on how the ratio-based minimum net capital requirement using the 2%
multiplier (``2% margin factor'') compares to the levels of excess net
capital these firms maintain, the risks of their security-based swap
positions, and the leverage they employ.\85\ This information will
assist the Commission in analyzing whether the ratio-based minimum net
capital requirement is operating in practice as the Commission intends
(i.e., a requirement that sets a prudent level of minimum net capital
given the volume, size, and risk of the firm's security-based swap
positions). In determining whether to issue an order raising the
multiplier, the Commission may also consider, for example, whether
further data is necessary to analyze the appropriate level of the
ratio-based minimum net capital requirement.
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    \85\ See section VI of this release (providing analysis of
initial margin estimated for inter-dealer CDS positions, and using
this to provide a range of estimates for the potential costs of
complying with the 2% margin factor requirement, under certain
assumptions).
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    Finally, the process in the final rules provides that the
Commission will publish notice of the potential change to the
multiplier and subsequently issue an order regarding the change. The
Commission intends to provide such notice sufficiently in advance of
the order for the public to be aware of the potential change.
    As discussed above, a commenter suggested that broker-dealer SBSDs
should be subject to a ratio that is modeled on the 2% debit item ratio
in Rule 15c3-1. The Commission does not believe there is a compelling
reason to adopt a different standard for broker-dealer SBSDs. The
standard being adopted today is based on initial margin calculations
for cleared and non-cleared security-based swaps. Modeling a
requirement on the 2% debit item ratio would require a calculation
based on the segregation requirements for security-based swaps. This
could result in firms with similar risk profiles in terms of their
customers' security-based swap positions having different minimum net
capital requirements because for stand-alone SBSDs the requirement
would be based on margin calculations and for ANC broker-dealers and
broker-dealer SBSDs the requirement would be based on segregation
requirements. The Commission believes the more prudent approach is to
require all firms subject to this requirement to comply with the same
standard in order to avoid the potential competitive impacts of
imposing different standards, particularly when the rationale for
applying the different standard advocated by the commenter is not
grounded in promoting the safety and soundness of the firms.
    Similarly, the Commission is not establishing two alternative
methods for calculating the 2% margin factor--one for firms that use
models and the other for firms that do not use models--as suggested by
the commenter. To a certain extent, the 2% margin factor calculation by
a nonbank SBSD authorized to use models to calculate initial margin
requirements for non-cleared security-based swap transactions will be
more risk sensitive than the calculation by nonbank SBSDs that will use
the standardized approach to calculate initial margin (i.e., the
standardized haircuts). Models generally are more risk sensitive and
therefore will result in lower initial

margin requirements than approaches using standardized haircuts. Thus,
the firms that use models to calculate initial margin for non-cleared
security-based swaps generally will employ a more risk-sensitive
approach when calculating the 2% margin factor than firms that do not
use models. Further, the Commission believes that most nonbank SBSDs
will use models to calculate initial margin to the extent permitted
under the final margin rules.
    Moreover, a standard based on a firm's aggregate model-based
haircuts--the commenter's first suggested alternative--could result in
a substantially lower minimum net capital requirement. The Commission's
approach requires the firm to calculate the risk margin amount using
the initial margin amount calculated for each counterparty's cleared
and non-cleared security-based swap positions. The commenter's
alternative of using the model-based haircut calculations would net
proprietary positions resulting in a lower minimum net capital
requirement. The Commission believes the more prudent approach is to
base the minimum net capital requirement on the margin calculations for
each counterparty's security-based swap positions. For similar reasons,
the Commission believes nonbank SBSDs not authorized to use models
should base the calculation of the risk margin amount on the
standardized margin calculations for their counterparties (rather than
the standardized haircut calculation that can be taken for proprietary
positions, which permits certain netting of long and short positions).
This will be simpler and more consistent with the requirements of Rule
18a-3, as adopted, than the commenter's suggested credit quality
approach for nonbank SBSDs that do not use models.
    Moreover, as discussed below in section II.A.2.b.v. of this
release, the final capital rules for ANC broker-dealers and nonbank
SBSDs broaden the application of the credit risk charges as compared to
the proposed rules. This should significantly reduce the amount of net
capital an ANC broker-dealer or nonbank SBSD will need to maintain with
respect to its security-based swap positions (as compared to the
treatment of these positions under the proposed rules).\86\ Therefore,
the Commission believes that largely retaining the proposed approaches
to calculating the risk margin amount (and, therefore, the 2% margin
factor) is an appropriate trade-off to reducing the application of the
capital deductions in lieu of margin.
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    \86\ See SIFMA 2/22/2013 Letter (raising concerns that the
proposed 8% margin factor and the capital charges in lieu of margin
could result in duplicative charges).
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    In response to comments that the Commission exclude security-based
swaps that are being portfolio margined under a CFTC-supervised
account, the Commission will need to coordinate with the CFTC to
implement portfolio margining.\87\ A part of any such coordination
would be to resolve the question of how to incorporate accounts that
are portfolio margined into the minimum net capital requirements under
the capital rules of the Commission and the CFTC.
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    \87\ See, e.g., Order Granting Conditional Exemption Under the
Securities Exchange Act of 1934 in Connection with Portfolio
Margining of Swaps and Security-Based Swaps, Exchange Act Release
No. 68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012).
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    In response to comments, the Commission does not believe it would
be appropriate to treat cleared security-based swaps more favorably
than non-cleared security-based swaps for purposes of calculating the
2% margin factor. The 2% margin factor is consistent with an existing
requirement in the CFTC's net capital rule for FCMs.\88\ Currently,
FCMs must maintain adjusted net capital in excess of 8% of the risk
margin on futures, foreign futures, and cleared swaps positions carried
in customer and noncustomer accounts. Moreover, the CFTC has proposed a
similar requirement for swap dealers and major swap participants
registered as FCMs.\89\ The CFTC's proposed minimum capital requirement
is 8% of the initial margin for non-cleared swap and security-based
swap positions, and the total initial margin the firm is required to
post to a clearing agency or broker-dealer for cleared swap and
security-based swap positions. Thus, the CFTC's proposed rule does not
treat cleared positions more favorably than non-cleared positions (both
are based on initial margin calculations).
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    \88\ See 17 CFR 1.17(a)(1)(i)(B) and (b)(8).
    \89\ See CFTC Capital Proposing Release, 81 FR at 91266.
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    However, in response to comments, the Commission has modified the
final rule so that for cleared security-based swaps the calculation of
the risk margin amount is based on the initial margin required to be
posted to a clearing agency rather than the greater of that amount or
the haircuts that would apply to the positions (as was proposed).\90\
Thus, for purposes of the 2% margin factor, the risk of cleared
security-based swaps is measured by the amount of initial margin the
clearing agency's margin rule requires. This more closely aligns the
Commission's rule with the CFTC's proposed rule (as requested by
commenters).
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    \90\ See paragraph (c)(17) of Rule 15c3-1, as amended; paragraph
(c)(6) of Rule 18a-1, as adopted.
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    In response to commenters who opposed this modification, the
Commission recognizes that it will eliminate a component of the
proposed rule that was designed to address the potential that clearing
agencies might set margin requirements that were lower than the
applicable haircuts that would apply to the positions. However,
retaining the requirement could have created a disincentive to clear
security-based swap transactions. Moreover, eliminating it will
simplify the calculation and more closely align the requirement with
the CFTC's proposed capital rule. The Commission has weighed these
competing considerations and believes that the modification is
appropriate.
    The Commission does not believe further modifications to
distinguish the risk of cleared security-based swaps from non-cleared
security-based swaps are necessary. Cleared security-based swaps
generally will be less complex than non-cleared security-based swaps.
Further, cleared security-based swaps will be more liquid than non-
cleared security-based swaps in terms of how long it will take to close
them out. These attributes may factor into the margin calculations of
the clearing agencies and, consequently, into the risk margin amount.
Therefore, the potentially lower risk characteristics of cleared
security-based swaps as compared to non-cleared security-based swaps
could be incorporated into the 2% margin factor by virtue of relying
solely on the clearing agency margin requirements.
    For these reasons, the Commission is adopting the 2% margin factor
with modifications to the term ``risk margin amount'' and the potential
phase-in of the percent multiplier, as discussed above.\91\ Stand-alone
SBSDs will need to calculate the 2% margin factor to determine their
ratio-based minimum net capital requirement. ANC broker-dealers and
broker-dealer SBSDs will need to calculate the 2% margin factor and the
15-to-1 ratio or 2% debit item ratio (as applicable) to determine their
ratio-based minimum net capital requirement.
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    \91\ See paragraphs (a)(7)(i) and (a)(10)(i) of Rule 15c3-1, as
amended; paragraphs (a)(1) and (2) of Rule 18a-1, as adopted.
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b. Computing Net Capital
    The Commission proposed the net liquid assets test embodied in Rule
15c3-1 as the regulatory capital

standard for all nonbank SBSDs. The standard (maintaining net liquid
assets) is imposed through the computation requirements set forth in
paragraph (c)(2) of Rule 15c3-1, which defines the term ``net
capital.'' The first step in a net capital calculation is to compute
the broker-dealer's net worth under GAAP. Next, the broker-dealer must
make certain adjustments to its net worth. These adjustments are