[Federal Register Volume 79, Number 85 (Friday, May 2, 2014)]
[Proposed Rules]
[Pages 25193-25386]
[FR Doc No: 2014-09108]

Vol. 79

Friday,

No. 85

May 2, 2014

Part II

Securities and Exchange Commission

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17 CFR Parts 240 and 249

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; Proposed Rules

Federal Register / Vol. 79 , No. 85 / Friday, May 2, 2014 / Proposed
Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-71958; File No. S7-05-14]
RIN 3235-AL45

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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed 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 proposing recordkeeping,
reporting, and notification requirements applicable to security-based
swap dealers (``SBSDs'') and major security-based swap participants
(``MSBSPs''), securities count requirements applicable to certain
SBSDs, and additional recordkeeping requirements applicable to broker-
dealers to account for their security-based swap and swap activities.
The Commission also is proposing an additional capital charge provision
that would be added to the proposed capital rule for certain SBSDs.
Finally, the Commission is proposing technical amendments to the
broker-dealer recordkeeping, reporting, and notification requirements.

DATES: Comments should be received on or before July 1, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-05-14 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Kevin M. O'Neill, Deputy Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090.

All submissions should refer to File Number S7-05-14. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments also are available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make publicly available.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Associate Director, at
(202) 551-5521; Randall W. Roy, Assistant Director, at<PHONE_NUMBER>;
Denise Landers, Senior Special Counsel, at<PHONE_NUMBER>; Raymond A.
Lombardo, Branch Chief, at<PHONE_NUMBER>; Timothy C. Fox, Special
Counsel at<PHONE_NUMBER>; or Valentina Minak Deng, Special Counsel, at
(202) 551-5778, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Proposed Rules and Rule Amendments
    A. Recordkeeping
    1. Introduction
    2. Records To Be Made and Kept Current
    3. Record Maintenance and Preservation Requirements
    B. Reporting
    1. Introduction
    2. Periodic Filing of Proposed Form SBS
    3. Filing of Annual Audited Financial Reports and Other Reports
    C. Notification
    1. Introduction
    2. Amendments to Rule 17a-11 and Proposed Rule 18a-8
    3. Additional Proposed Amendments to Rule 17a-11
    D. Quarterly Securities Count and Capital Charge for Unresolved
Securities Differences
    1. Introduction
    2. Proposed Rule 18a-9
    3. Capital Charge
III. General Request for Comment
IV. Paperwork Reduction Act
    A. Summary of Collections of Information Under the Proposed
Rules and Proposed Rule Amendments
    1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5
    2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6
    3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7
    4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8
    5. Proposed Rule 18a-9
    B. Proposed Use of Information
    C. Respondents
    D. Total Initial and Annual Recordkeeping and Reporting Burden
    1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5
    2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6
    3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7
    4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8
    5. Proposed Rule 18a-9
    E. Collection of Information Is Mandatory
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comment
V. Economic Analysis
    A. Introduction
    B. Baseline of Economic Analysis
    1. OTC Derivatives Market
    2. OTC Derivatives Market Participants and Broker-Dealers
    C. Analysis of the Proposed Program and Alternatives
    1. Overview--The Proposed Recordkeeping, Reporting,
Notification, and Securities Count Program
    2. Alternatives to the Proposed Recordkeeping, Reporting,
Notification, and Securities Count Rules
    3. Requirements To Make and Keep Records
    4. Requirements To Preserve Records
    5. Reporting
    6. Notification Requirements
    7. Quarterly Securities Count
    D. Impact on Efficiency, Competition, and Capital Formation
    E. Implementation Considerations
VI. Regulatory Flexibility Act Certification
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Basis and Text of the Proposed Amendments and New
Rules

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act into
law.\1\ Title VII of the Dodd-Frank Act (``Title VII'') established a
new regulatory framework for the over-the-counter (``OTC'') derivatives
markets.\2\ In this

regard, Title VII was enacted, among other reasons, to reduce risk,
increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and regulation of SBSDs and MSBSPs; (2) imposing clearing
and trade execution requirements on swaps and security-based swaps,
subject to certain exceptions; (3) creating recordkeeping and real-time
reporting regimes; and (4) enhancing the Commission's rulemaking and
enforcement authorities with respect to all registered entities and
intermediaries subject to the Commission's oversight.\3\
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.'' See Public Law 111-203, 701. The Dodd-Frank Act assigns
responsibility for the oversight of the U.S. OTC derivatives markets
to the Commission, the Commodity Futures Trading Commission
(``CFTC''), and certain prudential regulators. The term prudential
regulator is defined in section 1(a)(39) of the Commodity Exchange
Act (``CEA'') (7 U.S.C. 1(a)(39)) and that definition is
incorporated by reference in section 3(a)(74) of the Exchange Act
(15 U.S.C. 78c(a)(74)). 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. 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 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, among other
things, the terms swap, swap dealer, major swap participant,
security-based swap, security-based swap dealer, and major security-
based swap participant. 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)
(joint Commission/CFTC final rule); 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) (joint Commission/CFTC
final rule).
    \3\ See Public Law 111-203, 701 through 774.
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    Section 764 of the Dodd-Frank Act added section 15F to the Exchange
Act.\4\ Section 15F(f)(2) provides that the Commission shall adopt
rules governing reporting and recordkeeping for SBSDs and MSBSPs.\5\
Section 15F(f)(1)(A) provides that SBSDs and MSBSPs shall make such
reports as are required by the Commission, by rule or regulation,
regarding the transactions and positions and financial condition of the
SBSD or MSBSP.\6\ Section 15F(f)(1)(B)(ii) provides that SBSDs and
MSBSPs without a prudential regulator (respectively, ``nonbank SBSDs''
and ``nonbank MSBSPs'') shall keep books and records in such form and
manner and for such period as may be prescribed by the Commission by
rule or regulation.\7\ Section 15F(f)(1)(B)(i) provides that SBSDs and
MSBSPs for which there is a prudential regulator (respectively, ``bank
SBSDs'' and ``bank MSBSPs'') shall keep books and records of all
activities related to their business as an SBSD or MSBSP in such form
and manner and for such period as may be prescribed by the Commission
by rule or regulation.\8\ Section 15F(g) of the Exchange Act requires
SBSDs and MSBSPs to maintain daily trading records with respect to
security-based swaps and provides that the Commission shall adopt rules
governing daily trading records for SBSDs and MSBSPs.\9\ Finally,
section 15F(i)(2) of the Exchange Act provides that the Commission
shall adopt rules governing documentation standards for SBSDs and
MSBSPs.\10\
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    \4\ See Public Law 111-203, 764; 15 U.S.C. 78o-10.
    \5\ See 15 U.S.C. 78o-10(f)(2).
    \6\ See 15 U.S.C. 78o-10(f)(1).
    \7\ See 15 U.S.C. 78o-10(f)(1)(B)(ii). A nonbank SBSD or nonbank
MSBSP could be dually registered with the Commission as a broker-
dealer (respectively, a ``broker-dealer SBSD'' or ``broker-dealer
MSBSP'') or registered with the Commission only as an SBSD or MSBSP
(respectively, a ``stand-alone SBSD'' or ``stand-alone MSBSP''). Any
of these registrants or a bank SBSD or bank MSBSP also could
register with the CFTC as a futures commission merchant (``FCM''),
swap dealer, or major swap participant.
    \8\ See 15 U.S.C. 78o-10(f)(1)(B)(i).
    \9\ See 15 U.S.C. 78o-10(g).
    \10\ See 15 U.S.C. 78o-10(i).
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    The Commission anticipates that a number of broker-dealers will
register as SBSDs (broker-dealer SBSDs) or potentially as MSBSPs
(``broker-dealer MSBSPs).\11\ Further, the Commission expects that some
broker-dealers that are not registered as an SBSD or an MSBSP
nonetheless will engage in security-based swap and swap activities.\12\
The Commission has authority under section 17(a)(1) of the Exchange Act
to adopt rules requiring broker-dealers--which would include broker-
dealer SBSDs and broker-dealer MSBSPs--to make and keep for prescribed
periods such records, furnish such copies thereof, and make and
disseminate such reports as the Commission, by rule, prescribes as
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Exchange
Act.\13\ The Commission also is proposing largely technical amendments
to the broker-dealer recordkeeping, reporting, and notification
rules.\14\
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    \11\ While it is anticipated that some broker-dealers and banks
will register as SBSDs in order to engage in security-based swap
activities, it is unclear whether broker-dealers or banks will
register as MSBSPs. For example, a broker-dealer or bank may be
required to register as an MSBSP because of the nature of its
security-based swap activities. See 15 U.S.C. 78a(c)(67) (defining
the term major security-based swap participant); Further Definition
of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant'', 77 FR 30596 (further defining the
term major security-based swap participant). In this case, the
broker-dealer or bank may conclude that it is more efficient to
register as an SBSD in order to engage in security-based swap
activities permitted of an SBSD but not of an MSBSP. Nonetheless,
because a broker-dealer or bank could register as an MSBSP, the
proposed rules and the discussion in this release contemplate these
categories of registrants. A broker-dealer MSBSP would be subject to
all the securities laws applicable to a broker-dealer, including
capital, margin, segregation, recordkeeping, reporting,
notification, and securities count requirements, and to any
additional requirements that would be applicable only to MSBSPs.
Similarly, a bank MSBSP would be subject to all laws and regulations
applicable to a bank and to any additional requirements that would
be applicable only to MSBSPs.
    \12\ The term security-based swap dealer is defined in section
3(a)(71) of the Exchange Act. See 15 U.S.C. 78c(a)(71). The
definition excludes an entity that enters into security-based swaps
agreements for its own account, either individually or in a
fiduciary capacity, but not as a part of a regular business. See 15
U.S.C. 78c(a)(71)(C). Further, section 3(a)(71)(D) provides that the
Commission shall exempt from designation as an SBSD an entity that
engages in a de minimis quantity of security-based swap dealing in
connection with transactions with or on behalf of its customers and
that the Commission shall promulgate regulations to establish
factors with respect to the making of any determination to exempt.
See 15 U.S.C. 78c(a)(71)(D). The Commission has adopted Rule 3a71-2
to establish a de minimis exception under section 3(a)(71)(D) of the
Exchange Act. See 17 CFR 240.3a71-2; Further Definition of ``Swap
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant'', 77 FR 30635-30643.
    \13\ See 15 U.S.C. 78q(a)(1). Section 771 of the Dodd-Frank Act
states that unless otherwise provided by its terms, Subtitle B of
Title VII (relating to the regulation of the security-based swap
markets) does 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. See
Public Law 111-203, 771.
    \14\ See 17 CFR 240.17a-3 (``Rule 17a-3''); 17 CFR 240.17a-4
(``Rule 17a-4''); 17 CFR 240.17a-5 (``Rule 17a-5''); 17 CFR 240.17a-
11 (``Rule 17a-11''). The Dodd-Frank Act amended the definition of
security in section 3(a)(10) of the Exchange Act to include a
security-based swap. See Public Law 111-203, 761(a)(2); 15 U.S.C.
78c(a)(10). Therefore, the term security as used in Rules 17a-3,
17a-4, 17a-5, and 17a-11 includes a security-based swap, and any
requirement in those rules relating to a security applies to a
security-based swap. The Commission, however, has issued temporary
exemptive relief to address the effect that the amendment to the
definition of security would have on requirements in Exchange Act
provisions and rules that did not otherwise apply specifically to
security-based swaps prior to the amendment. See Order Granting
Temporary Exemptions under the Securities Exchange Act of 1934 in
Connection with the Pending Revision of the Definition of
``Security'' to Encompass Security-Based Swaps, and Request for
Comment, Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927
(July 7, 2011) (``[R]egistered broker-dealers will solely be exempt
from those provisions and rules to the extent that those provisions
or rules do not apply to the broker's or dealer's security-based
swap positions or activities as of July 15, 2011--the day before the
effectiveness of the change to the ``security'' definition. In other
words, during the exemptive period the application of current law
will remain unchanged, and those particular Exchange Act
requirements will continue to apply to registered broker-dealers'
security-based swap activities and positions to the same extent they
apply currently. This approach is intended to help avoid undue
market disruptions resulting from the change to the ``security''
definition, while at the same time preserving the current
application of those particular provisions or rules to security-
based swap activity by registered broker-dealers. Thus, under this
approach of preserving the status quo, no exemption will be provided
in connection with the [requirements in Exchange Act sections 17(a)
and 17(b) and Rules 17a-3, 17a-4, 17a-5, 17a-8, and 17a-13] under
the Exchange Act to the extent that those requirements currently
apply to registered broker-dealer activities or positions involving
instruments that will be security-based swaps (but registered
broker-dealers will be exempted in connection with those
requirements to the extent that the requirements do not already
apply to activities or positions involving those instruments.'');
Order Extending Temporary Exemptions under the Securities Exchange
Act of 1934 in Connection with the Revision of the Definition of
``Security'' to Encompass Security-Based Swaps, and Request for
Comment, Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218
(Feb. 13, 2013) (extending exemptive relief through February 11,
2014); Order Extending Temporary Exemptions under the Securities
Exchange Act of 1934 in Connection with the Revision of the
Definition of ``Security'' to Encompass Security-Based Swaps, and
Request for Comment, Exchange Release No. 71485 (Feb. 5, 2014)
(extending exemptive relief with respect to Rules 17a-3, 17a-4, 17a-
5, 17a-11, and 17a-13 until the earliest compliance date set forth
in any final rules regarding recordkeeping and reporting
requirements for SBSDs and MSBSPs). The Commission expects that the
adoption of the amendments contemplated herein would eliminate the
need for temporary exemptive relief from section 17(a) and section
17(b) of the Exchange Act and Rules 17a-3, 17a-4, 17a-5, 17a-11, and
17a-13 thereunder.

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    Pursuant to sections 15F and 17(a) of the Exchange Act, the
Commission is proposing to amend Rules 17a-3, 17a-4, 17a-5, and 17a-11
to establish a recordkeeping, reporting, and notification program for
broker-dealer SBSDs and broker-dealer MSBSPs. The amendments to Rules
17a-3 and 17a-4 would establish additional recordkeeping requirements
applicable to broker-dealers that are not dually registered as an SBSD
or MSBSP to the extent they engage in security-based swap or swap
activities.
    Pursuant to section 15F of the Exchange Act, the Commission is
proposing new Rules 18a-5 through 18a-9.\15\ These new rules would
establish a recordkeeping, reporting, and notification program for
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, and
securities count requirements for stand-alone SBSDs.\16\ In addition,
pursuant to sections 15F and 17(a) of the Exchange Act, the Commission
is proposing new FOCUS Report Form SBS (``Form SBS'') that would be
used by all types of SBSDs and MSBSPs to report financial and
operational information and, in the case of broker-dealer SBSDs and
broker-dealer MSBSPs, replace their use of Part II, Part IIA, Part IIB,
or Part II CSE of the Financial and Operational Combined Uniform Single
Report (``FOCUS Report'').\17\
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    \15\ The Commission has proposed new Rules 18a-1 through 18a-4
to establish capital and margin requirements for SBSDs and MSBSPs,
segregation requirements for SBSDs, and notification requirements
with respect to segregation for SBSDs and MSBSPs. 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 70213 (Nov. 23, 2012).
    \16\ The Commission is not proposing securities count
requirements for stand-alone MSBSPs or bank SBSDs. Broker-dealer
SBSDs and broker-dealer MSBSPs would be subject to the existing
securities count rule applicable to broker-dealers--Rule 17a-13. 17
CFR 240.17a-13. The Commission is not proposing amendments to Rule
17a-13. While in this release Rule 17a-11 is referred to as a
notification rule and Rule 17a-13 is referred to as a securities
count rule, Rule 17a-11 can be viewed as a reporting rule and Rule
17a-13 can be viewed as a recordkeeping rule. See Prompt Notice of
Net Capital or Recordkeeping Violations, Exchange Act Release No.
9268 (July 29, 1971), 36 FR 14725 (Aug. 11, 1971) (adopting Rule
17a-11, in part, under section 17(a) of Exchange Act, which, as
discussed above, requires a broker-dealer to make and keep for
prescribed periods such records, furnish such copies thereof, and
make and disseminate such reports as the Commission, by rule,
prescribes as necessary or appropriate in the public interest, for
the protection of investors, or otherwise in furtherance of the
Exchange Act); Quarterly Securities Counts by Certain Exchange
Members, Brokers and Dealers, Exchange Act Release No. 9376 (Oct.
29, 1971), 36 FR 21178 (Nov. 4, 1971) (similarly adopting Rule 17a-
13, in part, under section 17(a) of Exchange Act).
    \17\ A broker-dealer must file the FOCUS Report Part II, Part
IIA, Part IIB, or Part II CSE depending on the type of broker-
dealer. A more detailed discussion of the FOCUS Report appears below
in section II.B.2. of this release.
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    The proposed new rules are modeled on broker-dealer Rules 17a-3,
17a-4, 17a-5, 17a-11, and 17a-13, and on the FOCUS Report.
Specifically: (1) Proposed Rules 18a-5 and 18a-6 (the new recordkeeping
rules) are modeled on Rules 17a-3 and 17a-4, respectively (the broker-
dealer recordkeeping rules); \18\ (2) proposed Rule 18a-7 and proposed
Form SBS (the new reporting rules) are modeled on Rule 17a-5 and on the
FOCUS Report, respectively (the broker-dealer reporting rules); \19\
(3) proposed Rule 18a-8 (the new notification rule) is modeled on Rule
17a-11 (the broker-dealer notification rule); \20\ and (4) proposed
Rule 18a-9 (the new securities count rule) is modeled on the Rule 17a-
13 (the broker-dealer securities count rule).\21\
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    \18\ Compare proposed Rule 18a-5, with 17 CFR 240.17a-3; compare
proposed Rule 18a-6, with 17 CFR 240.17a-4.
    \19\ Compare proposed Rule 18a-7, with 17 CFR 240.17a-5; compare
proposed Form SBS, with the FOCUS Report.
    \20\ Compare proposed Rule 18a-8, with 17 CFR 240.17a-11.
    \21\ Compare proposed Rule 18a-9, with 17 CFR 240.17a-13.
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    The broker-dealer recordkeeping, reporting, notification, and
security count requirements served as the model for the proposals
because SBSDs and MSBSPs are expected to operate in financial markets
and effect financial transactions that are similar to the financial
markets in which broker-dealers operate and the financial transactions
that broker-dealers effect.\22\ In addition, as discussed below, the
objectives of these broker-dealer requirements are similar to the
objectives underlying the proposals regarding security-based swaps.
Moreover, the broker-dealer requirements have existed for many years
and have established a system of recordkeeping for securities
transactions that reflect and support prudent business practices and
accountability of broker-dealers and have facilitated the ability of
securities regulators to review and monitor compliance with securities
laws.\23\ Consequently, the Commission preliminarily believes the
broker-dealer requirements provide an appropriate template on which to
model a recordkeeping, reporting, and notification program for SBSDs
and MSBSPs and a securities count program for SBSDs. Furthermore, as
discussed above, it is expected that some nonbank SBSDs will dually
register as broker-dealers in order to be able to offer customers a
broader range of securities-based services than would be permitted of a
nonbank SBSD.\24\ Therefore, establishing consistent requirements could
avoid potential competitive disparities between stand-alone SBSDs and
broker-dealer SBSDs with respect to their security-based swap business.
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    \22\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70216 (stating a similar rationale for basing the proposed capital,
margin, and segregation requirements for SBSDs on the broker-dealer
capital, margin, and segregation requirements).
    \23\ See, e.g., Commission Guidance to Broker-Dealers on the Use
of Electronic Storage Media Under the Electronic Signatures in
Global and National Commerce Act of 2000 With Respect to Rule 17a-
4(f), Exchange Act Release No. 44238 (May 1, 2001), 66 FR 22916 (May
7, 2001).
    \24\ Although a broker-dealer SBSD would be able to offer
customers a broader range of securities-based services than a bank
SBSD, bank SBSDs are not expected to register as broker-dealers
because of the regulatory burden associated with complying with the
requirements applicable to all three types of entities.
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    Additionally, in accordance with Title VII, the Commission recently
proposed, among other things, capital and margin

requirements applicable to nonbank SBSDs and nonbank MSBSPs, and
segregation requirements applicable to SBSDs.\25\ The capital, margin,
and segregation proposals that would be applicable to SBSDs were
modeled on the capital, margin, and segregation requirements that are
applicable to broker-dealers.\26\ The broker-dealer capital, margin,
segregation, recordkeeping, reporting, notification, and securities
count requirements are known collectively as the broker-dealer
financial responsibility rules.\27\ The financial responsibility rules
collectively establish a comprehensive regulatory program designed to
promote the prudent operation of broker-dealers and the safeguarding of
customer securities and funds held by broker-dealers. The
recordkeeping, reporting, notification, and securities count
requirements applicable to broker-dealers are an integral part of the
financial responsibility rules as they are designed to provide
transparency into the business activities of broker-dealers and to
assist the Commission and other securities regulators in reviewing and
monitoring compliance with the capital, margin, and segregation
requirements. Similarly, the proposed recordkeeping, reporting,
notification, and securities count requirements applicable to SBSDs and
MSBSPs along with the proposed capital, margin, and segregation
requirements for these registrants are designed to establish a
comprehensive financial responsibility program for SBSDs and MSBSPs.
Like the broker-dealer rules, the proposed recordkeeping, reporting,
notification, and securities count requirements applicable to SBSDs and
MSBSPs are designed to provide transparency into the business
activities of SBSDs and MSBSPs and assist the Commission in reviewing
and monitoring compliance with the proposed capital, margin, and
segregation requirements applicable to SBSDs and MSBSPs.
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    \25\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
    \26\ Id. See also 17 CFR 240.15c3-1 (the broker-dealer capital
rule); FINRA Rules 4210 through 4240 (certain broker-dealer margin
rules); 17 CFR 240.15c3-3 (the broker-dealer segregation rule).
    \27\ See 17 CFR 240.3a40-1.
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    While the proposed recordkeeping, reporting, notification, and
securities count rules are modeled on the broker-dealer rules, stand-
alone SBSDs and stand-alone MSBSPs will not engage in the same range of
activities permitted of broker-dealers. For example, broker-dealers are
permitted to act as dealers with respect to all types of securities,
whereas stand-alone SBSDs would be permitted to act as dealers only
with respect to security-based swaps and stand-alone MSBSPs would not
be permitted to act as dealers with respect to any types of securities.
Consequently, the proposed requirements in the new rules applicable to
stand-alone SBSDs and stand-alone MSBSPs reflect these differences and
are narrower in scope than those applicable to broker-dealer SBSDs and
broker-dealer MSBSPs. Further, the proposed requirements applicable to
bank SBSDs and bank MSBSPs are narrower in scope than those applicable
to stand-alone SBSDs and stand-alone MSBSPs for three reasons. First,
as noted above, the recordkeeping and reporting requirements for bank
SBSDs and bank MSBSPs--unlike those for nonbank SBSDs and nonbank
MSBSPs--must be related to their business as an SBSD or MSBSP.\28\
Second, as banks, these registrants are subject to existing
recordkeeping and reporting requirements administered by the prudential
regulators and therefore to avoid potentially duplicative or
conflicting requirements, the Commission has proposed fewer
requirements for these entities. Third, the prudential regulators--
rather than the Commission--will administer the capital, margin, and
other prudential requirements applicable to bank SBSDs and bank MSBSPs
and, as noted above, one of the purposes of the proposed recordkeeping
requirements is to assist the Commission in reviewing and monitoring
compliance with the proposed capital and margin rules applicable to
nonbank SBSDs and nonbank MSBSPs, which the Commission will
administer.\29\
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    \28\ Compare 15 U.S.C. 78o-10(f)(1)(B)(i), with 15 U.S.C. 78o-
10(f)(1)(B)(ii) and 15 U.S.C. 78q(a). As noted above, section
15F(f)(1)(B)(i) of the Exchange Act provides that each bank SBSD and
bank MSBSP shall keep books and records of all activities related to
the business as an SBSD or MSBSP in such form and manner and for
such period as may be prescribed by the Commission by rule or
regulation (emphasis added). See 15 U.S.C. 78o-10(f)(1)(B)(i).
Whereas, section 15F(f)(1)(B)(ii) of the Exchange Act provides that
each nonbank SBSD and nonbank MSBSP shall keep books and records in
such form and manner and for such period as may be prescribed by the
Commission by rule or regulation. See 15 U.S.C. 78o-10(f)(1)(B)(ii).
Further, section 17(a) of the Exchange Act provides that broker-
dealers shall make and keep for prescribed periods such records,
furnish such copies thereof, and make and disseminate such reports
as the Commission, by rule, prescribes as necessary or appropriate
in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Exchange Act. See 15
U.S.C. 78q(a).
    \29\ Section 15F(e)(1)(A) of the Exchange Act provides that the
prudential regulators shall prescribe capital and margin
requirements for bank SBSDs and bank MSBSPs, and 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 (``bank swap
dealers'' and ``bank swap participants''). See 15 U.S.C. 78o-
10(e)(1)(A); 7 U.S.C. 6s(e)(1)(A). The prudential regulators have
proposed capital and margin requirements for bank swap dealers, bank
SBSDs, bank swap participants, and bank MSBSPs. See Margin and
Capital Requirements for Covered Swap Entities, 76 FR 27564 (May 11,
2011).
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    The Commission recognizes that there may be alternative
recordkeeping, reporting, notification, and securities count programs
that could be used as a model to design a recordkeeping, reporting,
notification, and securities count program for SBSDs and MSBSPs.
Accordingly, in response to the requests for comment in this release,
interested parties are encouraged to consider whether alternative
approaches would be appropriate for SBSDs and MSBSPs generally as well
as for each type of potential registrant--broker-dealer SBSD, broker-
dealer MSBSP, stand-alone SBSD, stand-alone MSBSP, bank SBSD, and bank
MSBSP--taking into account the unique characteristics and activities of
each type of potential registrant.
    Some of the current rules that are proposed to be amended and the
proposed new rules prescribe recordkeeping or reporting requirements
based on requirements in other rules that have been proposed but not
yet adopted. For example, Rules 17a-3 and 17a-4, as proposed to be
amended, and proposed Rules 18a-5 and 18a-6 would directly or
indirectly cross-reference requirements in proposed Rule 901 of
Regulation SBSR and proposed Rules 15Fh-1 through 15Fh-6 and proposed
Rule 15Fk-1.\30\ Similarly, Rules 17a-3, 17a-4, 17a-5, and 17a-11, as
proposed to be amended, and proposed Rules 18a-5, 18a-6, 18a-7, and
18a-8 cross-reference requirements in the proposed capital, margin, and
segregation requirements for SBSDs and MSBSPs.\31\ If a cross-
referenced rule is modified from the proposal when adopted, the
Commission intends to make any necessary corresponding modifications to
the rules proposed in this release when they are adopted.
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    \30\ See section II.A. of this release.
    \31\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
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    Finally, the Commission also is proposing to add a capital charge
provision to proposed Rule 18a-1.\32\ Proposed Rule 18a-1 would
establish net capital requirements for stand-alone SBSDs and is modeled
on Rule 15c3-1

under the Exchange Act (the broker-dealer net capital rule) (``Rule
15c3-1'').\33\ The capital charge provision that would be added to
proposed Rule 18a-1, which is modeled on a provision in Rule 15c3-1,
was inadvertently omitted from proposed Rule 18a-1 when originally
proposed. The Commission preliminarily believes that proposed Rule 18a-
1 should include a provision that parallels the capital charge in Rule
15c3-1.
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    \32\ This proposal is discussed below in greater detail in
section II.D.3. of this release.
    \33\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70217-70257.
---------------------------------------------------------------------------

    The Commission staff consulted with staff from the prudential
regulators and the CFTC in drafting the proposals discussed in this
release.\34\ In addition, the proposals of the CFTC were considered in
developing the Commission's proposed recordkeeping, reporting,
notification and securities count rules for SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \34\ See Public Law 111-203, 712(a)(2). The CFTC has adopted
recordkeeping and reporting rules for swap dealers and major swap
participants. See Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules; Futures Commission
Merchant and Introducing Broker Conflicts of Interest Rules; and
Chief Compliance Officer Rules for Swap Dealers, Major Swap
Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3,
2012).
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Request for Comment

    The Commission requests comment on the general approach that would
require SBSDs and MSBSPs to comply with recordkeeping, reporting,
notification, and securities count rules modeled on the broker-dealer
recordkeeping, reporting, notification, and securities count rules. In
addition, the Commission requests comment, including empirical data in
support of comments, in response to the following questions:
    1. Will the entities that register as nonbank SBSDs engage in a
securities business with respect to security-based swaps that is
similar to the securities business conducted by broker-dealers? If not,
describe how the securities activities of nonbank SBSDs will differ
from the securities activities of broker-dealers.
    2. Will the entities that register as bank SBSDs engage in a
securities business with respect to security-based swaps that is
similar to the securities business conducted by broker-dealers? If not,
describe how the securities activities of bank SBSDs will differ from
the securities activities of broker-dealers.
    3. How many broker-dealers will register as SBSDs? Describe the
types of broker-dealers that will register as SBSDs and the types of
activities these broker-dealers currently engage in? How many banks
will register as SBSDs? Describe the types of banks that will register
as SBSDs and the types of activities these banks currently engage in?
    4. How many entities will register as MSBSPs? What types of
entities? How many broker-dealers will register as MSBSPs? How many
banks will register as MSBSPs?
    5. Are there requirements in these proposed rules applicable to
broker-dealer SBSDs and broker-dealer MSBSPs but currently not
applicable to stand-alone SBSDs or stand-alone MSBSPs that should be
applicable to standalone SBSDs or stand-alone MSBSPs, or vice versa?
    6. Are there requirements in these proposed rules applicable to
broker-dealer SBSDs and broker-dealer MSBSPs but currently not
applicable to bank SBSDs or bank MSBSPs that should be applicable to
bank SBSDs or bank MSBSPs, or vice versa?
    7. Are there provisions in the rules that the CFTC adopted
governing recordkeeping and reporting obligations of swap dealers and
major swap participants that the Commission should consider
incorporating into the recordkeeping and reporting requirements for
SBSDs and MSBSPs? If so, please identify the specific provision and
explain why the Commission should incorporate it.
    8. In the release adopting a further definition of major security-
based swap participant, the Commission stated that an entity's
security-based swap positions in general would be attributed to a
parent, other affiliate, or guarantor for purposes of the MSBSP
analysis to the extent that the counterparties to those positions would
have recourse to that other entity in connection with the position.\35\
The Commission further stated that an entity that becomes an MSBSP by
virtue of security-based swaps directly entered into by others must be
responsible for compliance with all applicable requirements with
respect to those security-based swaps (and must be liable for failures
to comply), but may delegate operational compliance with transaction-
focused requirements to entities that directly are party to the
transactions.\36\ The Commission stated its preliminary belief that the
same approach should apply in the cross-border context when the
guarantor and the guaranteed persons are located in different
jurisdictions.\37\ The Commission preliminarily believes that certain
of the recordkeeping requirements that would be applicable to MSBSPs
under the proposed amendments are transaction-focused and, therefore,
that an MSBSP may delegate operational compliance with them to the
entities that are directly a party to the transaction.\38\ For example,
the Commission preliminarily believes that the proposed requirements
discussed below in section II.A.2. of this release under which MSBSPs
would need to make and keep current memoranda of proprietary orders,
confirmations, accountholder information, and records relating to
certain business conduct standards are transaction-focused. Similarly,
the proposed requirements to retain communications relating to the
MSBSP's ``business as such'' are transaction-focused. On the other
hand, the Commission preliminarily believes that other recordkeeping
requirements proposed for MSBSPs are entity-level requirements and,
therefore an MSBSP would not be permitted to delegate operational
compliance with respect to these requirements to other entities. For
example, the Commission preliminarily believes that the proposed
requirement that an MSBSP make and keep current a general ledger (or
other records) reflecting all assets and liabilities, income and
expense, and capital accounts is an entity-level requirement.
Commenters are asked to identify which of the recordkeeping
requirements applicable to MSBSPs in proposed new Rules 18a-5 and 18a-6
that they believe are transaction-focused and to explain their reasons
for identifying them as such. Commenters also are asked to identify any
operational compliance challenges with respect to the proposed
recordkeeping requirements raised by attributing guaranteed security-
based swap positions to an MSBSP.
---------------------------------------------------------------------------

    \35\ See Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant'', 77 FR
30689.
    \36\ Id.
    \37\ 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, 31034 (May 23, 2013).
    \38\ The Commission preliminarily believes that the proposed
reporting and notification requirements that would be applicable to
MSBSPs are not transaction-focused and, therefore, the MSBSP could
not delegate operation compliance with respect to these requirements
to other entities.

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II. Proposed Rules and Rule Amendments

A. Recordkeeping

1. Introduction
    As discussed above in section I. of this release, section 15F(f)(2)
of the Exchange Act provides that the Commission shall adopt rules
governing recordkeeping for SBSDs and MSBSPs.\39\ The Commission also
has concurrent authority under section 17(a)(1) of the Exchange Act to
prescribe recordkeeping requirements for broker-dealers.\40\ Further,
section 15F(f)(1)(B)(i) of the Exchange Act provides that each bank
SBSD and bank MSBSP shall keep books and records of all activities
related to its business as an SBSD or MSBSP in such form and manner and
for such period as may be prescribed by the Commission by rule or
regulation.\41\ Section 15F(f)(1)(B)(ii) provides that each nonbank
SBSD and nonbank MSBSP shall keep books and records in such form and
manner and for such period as may be prescribed by the Commission by
rule or regulation.\42\
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    \39\ See 15 U.S.C. 78o-10(f)(2).
    \40\ See 15 U.S.C. 78q(a)(1).
    \41\ See 15 U.S.C. 78o-10(f)(1)(B)(i).
    \42\ See 15 U.S.C. 78o-10(f)(1)(B)(ii).
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    Section 15F(g) of the Exchange Act prescribes statutory
recordkeeping requirements applicable to SBSDs and MSBSPs and requires
the Commission to adopt rules with respect to these statutory
requirements.\43\ In particular, section 15F(g)(1) provides that each
registered SBSD and MSBSP shall maintain daily trading records of the
security-based swaps of the registered SBSD and MSBSP and all related
records (including related cash or forward transactions) and recorded
communications, including electronic mail, instant messages, and
recordings of telephone calls, for such period as may be required by
the Commission by rule or regulation.\44\ Section 15F(g)(2) provides
that the daily trading records shall include such information as the
Commission shall require by rule or regulation.\45\ Section 15F(g)(3)
provides that each registered SBSD and MSBSP shall maintain daily
trading records for each counterparty in a manner and form that is
identifiable with each security-based swap transaction.\46\ Section
15F(g)(4) provides that each registered SBSD and MSBSP shall maintain a
complete audit trail for conducting comprehensive and accurate trade
reconstructions.\47\ Finally, section 15F(g)(5) provides that the
Commission shall adopt rules governing daily trading records for SBSDs
and MSBSPs.\48\
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    \43\ See 15 U.S.C. 78o-10(g).
    \44\ See 15 U.S.C. 78o-10(g)(1).
    \45\ See 15 U.S.C. 78o-10(g)(2).
    \46\ See 15 U.S.C. 78o-10(g)(3).
    \47\ See 15 U.S.C. 78o-10(g)(4).
    \48\ See 15 U.S.C. 78o-10(g)(5).
---------------------------------------------------------------------------

    Section 15F(i)(1) of the Exchange Act provides that each registered
SBSD and MSBSP shall conform with such standards as may be prescribed
by the Commission, by rule or regulation, that relate to timely and
accurate confirmation, processing, netting, documentation, and
valuation of all security-based swaps.\49\ Section 15F(i)(2) provides
that the Commission shall adopt rules governing documentation standards
for SBSDs and MSBSPs.\50\
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    \49\ See 15 U.S.C. 78o-10(i)(1).
    \50\ See 15 U.S.C. 78o-10(i)(2). Pursuant to section 15F(i) of
the Exchange Act, the Commission has proposed Rule 15Fi-1 that would
prescribe standards related to timely and accurate confirmation and
documentation of security-based swaps. See Trade Acknowledgment and
Verification of Security-Based Swap Transactions, Exchange Act
Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011).
---------------------------------------------------------------------------

    After considering the anticipated business activities of SBSDs and
MSBSPs, the Commission is proposing to establish a recordkeeping
program for these registrants under sections 15F and 17(a) of the
Exchange Act that is modeled on the recordkeeping program for broker-
dealers codified in Rules 17a-3 and 17a-4.\51\ Rules 17a-3 and 17a-4
specify requirements with respect to the records that a broker-dealer
must make and keep current, as well as how long and, the manner in
which, these records and other records relating to a broker-dealer's
business must be maintained and preserved.\52\
---------------------------------------------------------------------------

    \51\ See 17 CFR 240.17a-3; 17 CFR 240.17a-4.
    \52\ See 17 CFR 240.17a-3; 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    In particular, Rule 17a-3 requires a broker-dealer to make and keep
current certain books and records.\53\ The required records include,
among other records: Blotters containing an itemized daily record of
all purchases and sales of securities; ledgers reflecting all assets
and liabilities, income and expense, and capital accounts; a securities
record or ledger reflecting separately for each security as of the
clearance dates all ``long'' or ``short'' positions; a memorandum of
each brokerage order; a memorandum of each purchase or sale of a
security for the account of the broker-dealer; and copies of
confirmations.\54\
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    \53\ See 17 CFR 240.17a-3.
    \54\ Id. As noted above in section I. of this release, the Dodd-
Frank Act amended the definition of security in section 3(a)(10) of
the Exchange Act to include a security-based swap. See Public Law
111-203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, each reference
in Rules 17a-3 and 17a-4 to a security includes a security-based
swap. The Commission, however, has issued temporary exemptive relief
excluding security-based swaps from the definition of security to
the extent Commission rules did not otherwise apply specifically to
security-based swaps prior to the amendment. See Order Granting
Temporary Exemptions under the Securities Exchange Act of 1934 in
Connection with the Pending Revision of the Definition of
``Security'' to Encompass Security-Based Swaps, and Request for
Comment, 76 FR 39927.
---------------------------------------------------------------------------

    Rule 17a-4 requires a broker-dealer to preserve additional records
if the broker-dealer makes or receives the type of record.\55\ The
categories of records include, among other records, check books, bank
statements, bills receivable or payable, communications relating to the
broker-dealer's business as such, and written agreements.\56\ The rule
also establishes retention periods for all records required to be made
and kept current under Rule 17a-3 and preserved under Rule 17a-4, and
prescribes, among other things, how the records must be retained,
including requirements for firms that preserve their records
electronically.\57\
---------------------------------------------------------------------------

    \55\ See 17 CFR 240.17a-4.
    \56\ Id.
    \57\ Id.
---------------------------------------------------------------------------

    The recordkeeping program codified in Rules 17a-3 and 17a-4 is
designed, among other things, to promote the prudent operation of
broker-dealers and assist the Commission, self-regulatory organizations
(``SROs''), and state securities regulators in conducting effective
examinations of broker-dealers.\58\ As the Commission has stated,
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    \58\ See, e.g., See Commission Guidance to Broker-Dealers on the
Use of Electronic Storage Media under the Electronic Signatures in
Global and National Commerce Act of 2000 with Respect to Rule 17a-
4(f), 66 FR 22916; Books and Records Requirements for Brokers and
Dealers Under the Securities Exchange Act of 1934, Exchange Act
Release No. 44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (``The
Commission has required that broker-dealers create and maintain
certain records so that, among other things, the Commission, [SROs],
and State Securities Regulators . . . may conduct effective
examinations of broker-dealers.'') (footnote omitted).

    In combination, Rules 17a-3 and 17a-4 require broker-dealers to
create, and preserve in an accessible manner, a comprehensive record
of each securities transaction they effect and of their securities
business in general. These rules impose minimum recordkeeping
requirements that are based on standards a prudent broker-dealer
should follow in the normal course of business. The requirements are
an integral part of the investor protection function of the
Commission, and other securities regulators, in that the preserved
records are the primary means of monitoring compliance with
applicable securities laws, including antifraud provisions and
---------------------------------------------------------------------------
financial responsibility standards.\59\

    \59\ See Commission Guidance to Broker-Dealers on the Use of
Electronic Storage Media under the Electronic Signatures in Global
and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66
FR 22917.

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

    Under the proposed recordkeeping program for SBSDs and MSBSPs,
broker-dealer SBSDs and broker-dealer MSBSPs--as broker-dealers--would
be subject to Rules 17a-3 and 17a-4.\60\ The Commission is proposing
amendments to these rules to account for the security-based swap and
swap activities of broker-dealers, including broker-dealers registered
as SBSDs and MSBSPs, as well as to implement the specific recordkeeping
requirements mandated under the Dodd-Frank Act.\61\ Stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would be subject to
proposed Rules 18a-5 and 18a-6, which are modeled on Rules 17a-3 and
17a-4, respectively, as these rules are proposed to be amended.
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    \60\ See 17 CFR 240.17a-3; 17 CFR 240.17a-4.
    \61\ As discussed in more detail below, the Commission also is
proposing additional largely technical amendments to Rules 17a-3 and
17a-4.
---------------------------------------------------------------------------

    Proposed Rules 18a-5 and 18a-6 would not include a parallel
requirement for every requirement in Rules 17a-3 and 17a-4 because some
of the requirements in Rules 17a-3 and 17a-4 relate to activities that
are not expected or permitted of SBSDs and MSBSPs. Further, the
proposed recordkeeping requirements that would be applicable to bank
SBSDs and bank MSBSPs are more limited in scope because, as discussed
above in section I. of this release: (1) The Commission's authority
under section 15F(f)(1)(B)(i) of the Exchange Act is tied to activities
related to the conduct of business as an SBSD or MSBSP; (2) bank SBSDs
and bank MSBSPs are subject to recordkeeping requirements applicable to
banks; and (3) the prudential regulators--rather than the Commission--
are responsible for capital, margin, and other prudential requirements
applicable to bank SBSDs and bank MSBSPs. For these reasons, the
proposed recordkeeping requirements that would be applicable to bank
SBSDs and bank MSBSPs are designed to be tailored more specifically to
their security-based swap activities as an SBSD or an MSBSP.\62\
---------------------------------------------------------------------------

    \62\ As discussed below in section II.B.2. of this release, the
Commission is proposing that bank SBSDs and bank MSBSPs be subject
to a limited reporting program of general information about their
overall financial condition based on discrete elements of the
reporting program the prudential regulators have established for
banks.
---------------------------------------------------------------------------

2. Records To Be Made and Kept Current
    As discussed above, Rule 17a-3 requires a broker-dealer to make and
keep current certain records.\63\ The Commission is proposing to amend
this rule to account for the security-based swap and swap activities of
broker-dealers, including broker-dealer SBSDs and broker-dealer
MSBSPs.\64\ The Commission also is proposing additional largely
technical amendments to Rule 17a-3.\65\ With respect to stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the Commission
is proposing new Rule 18a-5--which is modeled on Rule 17a-3, as
proposed to be amended--to require these registrants to make and keep
current certain records.\66\ For the reasons discussed above, proposed
Rule 18a-5 does not include a parallel requirement for every
requirement in Rule 17a-3.\67\ In addition, paragraph (a) of proposed
Rule 18a-5 contains one set of recordkeeping requirements applicable to
stand-alone SBSDs and stand-alone MSBSPs and paragraph (b) of proposed
Rule 18a-5 contains a separate set of recordkeeping requirements
applicable to bank SBSDs and bank MSBSPs that are more limited in
scope.\68\
---------------------------------------------------------------------------

    \63\ See 17 CFR 240.17a-3.
    \64\ Broker-dealer SBSDs and broker-dealer MSBSPs would be
required to make and keep current all the records required of
broker-dealers under Rule 17a-3, as proposed to be amended, plus the
additional records required specifically of an SBSD or MSBSP.
    \65\ The proposed technical amendments are discussed below in
section II.A.2.b. of this release.
    \66\ See proposed Rule 18a-5.
    \67\ The Commission is not proposing to include in proposed Rule
18a-5 requirements that would parallel requirements in paragraphs
(a)(4), (a)(13), (a)(14), (a)(15), and (a)(16) of Rule 17a-3. These
paragraphs require broker-dealers to make and keep current records
with respect to activities that stand-alone SBSDs and stand-alone
MSBSPs would not be expected or permitted to engage in or would not
relate to a bank's business as an SBSD or MSBSP, or relate to rules
that would not apply to stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs. Further, the Commission is not proposing to
include in proposed Rule 18a-5 requirements that would parallel
requirements in paragraphs (a)(17), (a)(18), (a)(19), and (a)(20) of
Rule 17a-3. These requirements are designed to enhance the ability
of regulators, particularly State securities regulators, to conduct
effective and efficient sales practice examinations. See Books and
Records Requirements for Brokers and Dealers Under the Securities
Exchange Act of 1934, 66 FR 55818. By adopting these requirements,
the Commission enabled States to adopt and enforce similar rules on
the State level under the National Securities Market Improvement Act
of 1996. See National Securities Markets Improvement Act of 1996,
Public Law 104-290, 110 Stat. 3416 (1996). As discussed below, the
Commission has proposed external business conduct rules for SBSDs
and MSBSPs and, as discussed below, the Commission is proposing
recordkeeping requirements to support examinations for compliance
with these proposed external business conduct rules.
    \68\ Compare paragraph (a), with paragraph (b) of proposed new
Rule 18a-5.
---------------------------------------------------------------------------

    As discussed above, section 15F(g) of the Exchange Act provides,
among other things, that each registered SBSD and MSBSP shall maintain:
(1) Daily trading records of the security-based swaps of the registered
SBSD and MSBSP; (2) daily trading records for each counterparty in a
manner and form that is identifiable with each security-based swap
transaction; and (3) a complete audit trail for conducting
comprehensive and accurate trade reconstructions.\69\ Further, section
15F(g)(2) provides that the daily trading records shall include such
information as the Commission shall require by rule or regulation.\70\
To implement section 15F(g) of the Exchange Act, Rule 17a-3, as
proposed to be amended, and proposed Rule 18a-5 include provisions
that, among other things, are designed to require information that
would facilitate a comprehensive and accurate trade reconstruction for
each security-based swap transaction.
---------------------------------------------------------------------------

    \69\ See 15 U.S.C. 78o-10(g)(1), (3), and (4).
    \70\ See 15 U.S.C. 78o-10(g)(2).
---------------------------------------------------------------------------

    In this regard, the amendments to Rule 17a-3 and proposed Rule 18a-
5 would require broker-dealers, SBSDs, and MSBSPs to make and keep
current daily trading records,\71\ ledger accounts,\72\ a securities
record,\73\ memoranda of brokerage orders,\74\ and/or memoranda of
proprietary trades \75\ with respect to security-based swap activity.
The Commission has proposed Rule 901 of Regulation SBSR, which would
require market participants, including broker-dealers, SBSDs, and
MSBSPs, to report certain data elements to security-based swap data
repositories.\76\
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    \71\ See paragraph (a)(1) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5.
    \72\ See paragraph (a)(3) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(3) and (b)(2) of proposed Rule 18a-5.
    \73\ See paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(4)(ii) and (b)(3)(ii) of proposed Rule 18a-
5.
    \74\ See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be
amended; paragraph (b)(4) of proposed Rule 18a-5.
    \75\ See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5.
    \76\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Securities Exchange Act Release No.
63346 (Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010). See also 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, 78 FR 30968 (re-proposing certain aspects of
Regulation SBSR).
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    The following data elements that would be required to be reported
under proposed Rule 901 also would need to be documented in the daily
trading records, ledger accounts, memoranda of brokerage orders, and/or
memoranda of

proprietary trades of security-based swap transactions required under
the proposed amendments to Rule 17a-3 and proposed Rule 18a-5: (1) The
type of security-based swap; \77\ (2) the reference security, index, or
obligor; \78\ (3) the date and time of execution; \79\ (4) the
effective date; \80\ (5) the termination or maturity date; \81\ (6) the
notional amount; \82\ (7) the unique transaction identifier; \83\ and
(8) the unique counterparty identifier.\84\ The following data elements
that would be required to be reported under proposed Rule 901 would
also need to be documented in the securities record of security-based
swap transactions required under the proposed amendments to Rule 17a-3
and proposed Rule 18a-5: (1) The reference security, index, or obligor;
\85\ (2) the unique transaction identifier; \86\ (3) the unique
counterparty identifier; \87\ (4) whether the security-based swap is
cleared or not cleared; \88\ and (5) if cleared, identification of the
clearing agency where the security-based swap is cleared.\89\ In
addition, the securities record for security-based swaps would parallel
the securities record for securities by requiring a record of whether
the security-based swap is a ``long'' or ``short'' position.\90\
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    \77\ Regulation SBSR--Reporting and Dissemination of Security-
Based Swap Information, 75 FR 75213 (discussing the requirement in
paragraph (c)(1) of proposed Rule 901 to report the asset class of
the security-based swap).
    \78\ See id. at 75214 (discussing the requirement in paragraph
(c)(2) of proposed Rule 901 to report the specific assets or issuers
of any securities upon which the security-based swap is based).
    \79\ See id. at 75213 (discussing the requirement in paragraph
(c)(4) of proposed Rule 901 to report the time and date of execution
of the security-based swap).
    \80\ See id. at 75214 (discussing the requirement in paragraph
(c)(5) of proposed Rule 901 to report the effective date of the
security-based swap).
    \81\ See id. at 75214 (discussing the requirement in paragraph
(c)(6) to of proposed Rule 901 to report the scheduled termination
date of the security-based swap).
    \82\ See id. at 75214 (discussing the requirement in paragraph
(c)(3) of proposed Rule 901 to report the notional amount of the
security-based swap).
    \83\ See id. at 75221 (discussing the requirement in paragraph
(g) of proposed Rule 901 to report the unique transaction identifier
for the security-based swap).
    \84\ See id. at 75217-75218, 75221-75222 (discussing the
requirement in paragraph (d) of proposed Rule 901 to report the
unique identifier of the counterparty to the security-swap
transaction).
    \85\ See id. at 75214 (discussing the requirement in paragraph
(c)(2) of proposed Rule 901 to report the specific assets or issuers
of any securities upon which the security-based swap is based).
    \86\ See id. at 75221 (discussing the requirement in paragraph
(g) of proposed Rule 901 to report the unique transaction identifier
for the security-based swap).
    \87\ See id. at 75217-75218, 75221-75222 (discussing the
requirement in paragraph (d)(1)(i) of proposed Rule 901 to report
the participant ID of the counterparty to the security-swap
transaction).
    \88\ See id. at 75214 (discussing the requirement in paragraph
(c)(9) of proposed Rule 901 to report the whether or not the
security-based swap will be cleared by a clearing agency).
    \89\ See id. at 75218 (discussing the requirement in paragraph
(d)(1)(vi) of proposed Rule 901 to report the name of the clearing
agency if the security-based swap will be cleared).
    \90\ Compare 17 CFR 240.17a-3(a)(5), with paragraph (a)(5)(ii)
of Rule 17a-3, as proposed to be amended, and paragraphs (a)(4)(ii)
and (b)(3)(ii) of proposed Rule 18a-5.
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    Where a data element that would need to be documented in the daily
trading records of security-based swap transactions under the proposed
amendments to Rule 17a-3 or proposed Rule 18a-5 is substantively the
same as a data element that would need to be reported under proposed
Rule 901, the Commission preliminarily believes that the type of
information that would need to be documented in the daily trading
records could be the same data element reported under proposed Rule
901.\91\
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    \91\ Proposed Rule 901 may be modified when adopted, which could
include changing or eliminating certain data elements required to be
reported under the rule. Any such modifications to the data elements
could change the Commission's preliminary view on the comparability
of the information to be recorded in the daily trading records and
the information to be reported pursuant to proposed Rule 901.
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a. Amendments to Rule 17a-3 and Proposed Rule 18a-5
Undesignated Introductory Paragraph
    Rule 17a-3, as proposed to be amended, would contain an
undesignated introductory paragraph explaining that the rule applies to
a broker-dealer, including a broker-dealer dually registered with the
Commission as an SBSD or MSBSP.\92\ The note further explains that an
SBSD or MSBSP that is not dually registered as a broker-dealer (i.e., a
stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP) is
subject to the books and records requirements under proposed Rule 18a-
5.\93\
---------------------------------------------------------------------------

    \92\ See undesignated introductory paragraph of Rule 17a-3, as
proposed to be amended.
    \93\ Id.
---------------------------------------------------------------------------

    Similarly, proposed Rule 18a-5 would contain an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
an MSBSP that is not dually registered as a broker-dealer.\94\ The note
further explains that a broker-dealer that is dually registered as an
SBSD or MSBSP is subject to the books and records requirements under
Rule 17a-3.\95\
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    \94\ See undesignated introductory paragraph of proposed Rule
18a-5.
    \95\ Id.
---------------------------------------------------------------------------

Trade Blotters
    Paragraph (a)(1) of Rule 17a-3 requires broker-dealers to make and
keep current trade blotters (or other records of original entry)
containing an itemized daily record of all transactions in securities,
all receipts and deliveries of securities, all receipts and
disbursements of cash, and all other debits and credits.\96\ The
Commission is proposing to amend paragraph (a)(1) of Rule 17a-3 to
require that the blotters specifically account for security-based
swaps, and proposing to include parallel blotter requirements in
paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5 that are modeled on
paragraph (a)(1) of Rule 17a-3, as proposed to be amended.\97\ In
particular, paragraph (a)(1) of Rule 17a-3, as proposed to be amended,
would require broker-dealers, including broker-dealer SBSDs and broker-
dealer MSBSPs, to make and keep current blotters containing an itemized
daily record of all transactions in securities, including security-
based swaps, all receipts and deliveries of securities, all receipts
and disbursements of cash, and all other debits and credits.\98\ In
order to document the attributes of security-based swaps, the proposed
amendments also would require that such records show the contract price
of the security-based swap, and include for each purchase and sale, the
following information: (1) The type of security-based swap; (2) the
reference security, index, or obligor; (3) the date and time of
execution; (4) the effective date; (5) the termination or maturity
date; (6) the notional amount; (7) the unique transaction identifier;
and (8) the unique counterparty identifier.\99\
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    \96\ See 17 CFR 240.17a-3(a)(1).
    \97\ See paragraph (a)(1) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5.
    \98\ See paragraph (a)(1) of Rule 17a-3, as proposed to be
amended.
    \99\ See id.
---------------------------------------------------------------------------

    Paragraph (a)(1) of proposed Rule 18a-5 mirrors paragraph (a)(1) of
Rule 17a-3, as proposed to be amended, and therefore, stand-alone SBSDs
and stand-alone MSBSPs would be required to make and keep current the
same types of blotters as broker-dealers.\100\ Paragraph (b)(1) of
proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs
to make and keep current the same types of blotters but only with
respect to their security-based swap activities.\101\
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    \100\ Compare paragraph (a)(1) of Rule 17a-3, as proposed to be
amended, with paragraph (a)(1) of proposed Rule 18a-5.
    \101\ See paragraph (b)(1) of proposed Rule 18a-5.
---------------------------------------------------------------------------

General Ledger
    Paragraph (a)(2) of Rule 17a-3 requires broker-dealers to make and

keep current ledgers (or other records) reflecting all assets and
liabilities, income and expense, and capital accounts.\102\ These
records reflect the overall financial condition of the broker-dealer
and in the Commission's view can incorporate security-based swap
activities without the need for a clarifying amendment. Because the
overall financial condition of stand-alone SBSDs and stand-alone MSBSPs
is a matter of regulatory concern for the Commission, the Commission is
proposing to include a parallel provision in paragraph (a)(2) of
proposed Rule 18a-5 that mirrors paragraph (a)(2) of Rule 17a-3.\103\
Consequently, stand-alone SBSDs and stand-alone MSBSPs would be
required to make and keep current the same types of general
ledgers.\104\
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    \102\ See 17 CFR 240.17a-3(a)(2).
    \103\ Compare 17 CFR 240.17a-3(a)(2), with paragraph (a)(2) of
proposed Rule 18a-5.
    \104\ See paragraph (a)(2) of proposed Rule 18a-5.
---------------------------------------------------------------------------

Ledgers for Customer and Non-Customer Accounts
    Paragraph (a)(3) of Rule 17a-3 requires broker-dealers to make and
keep current certain ledger accounts (or other records) relating to
securities and commodities transactions in customer and non-customer
cash and margin accounts.\105\ The Commission is proposing to amend
paragraph (a)(3) of Rule 17a-3 to require that the ledgers (or other
records) specifically account for security-based swaps, and to include
parallel ledger requirements in paragraphs (a) and (b) of proposed Rule
18a-5 that are modeled on paragraph (a)(3) of Rule 17a-3, as proposed
to be amended.\106\ In particular, paragraph (a)(3) of Rule 17a-3 would
be amended to include a requirement that broker-dealers, including
broker-dealer SBSDs and broker-dealer MSBSPs, make and keep current
ledger accounts (or other records) itemizing separately as to each
security-based swap: (1) The type of security-based swap; (2) the
reference security, index, or obligor; (3) date and time of execution;
(4) the effective date; (5) the termination or maturity date; (6) the
notional amount; (7) the unique transaction identifier; and (8) the
unique counterparty identifier.\107\
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    \105\ See 17 CFR 240.17a-3(a)(3).
    \106\ See paragraph (a)(3) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(3) and (b)(2) of proposed Rule 18a-5.
    \107\ See paragraph (a)(3) of Rule 17a-3, as proposed to be
amended.
---------------------------------------------------------------------------

    Paragraph (a)(3) of Rule 18a-5 is modeled on paragraph (a)(3) of
Rule 17a-3, as proposed to be amended, and therefore, stand-alone SBSDs
and stand-alone MSBSPs would be required to make and keep current the
same types of ledgers (or other records).\108\ Unlike paragraph (a)(3)
of Rule 17a-3, paragraph (a)(3) of proposed Rule 18a-5 would not refer
to ``cash and margin accounts'' as these types of accounts involve
activities that would not be permitted of stand-alone SBSDs and stand-
alone MSBSPs because they are not registered as broker-dealers.\109\
Paragraph (b)(2) of proposed Rule 18a-5 similarly would require bank
SBSDs and bank MSBSPs to make and keep current ledger accounts (or
other records) relating to securities and commodity transactions but
only with respect to their security-based swap customers and non-
customers.\110\
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    \108\ Compare paragraph (a)(3) of Rule 17a-3, as proposed to be
amended, with paragraph (a)(3) of proposed Rule 18a-5.
    \109\ See id.
    \110\ See paragraph (b)(2) of proposed Rule 18a-5. The
Commission has proposed a definition of security-based swap customer
for the purposes of proposed Rule 18a-4. See Capital, Margin, and
Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70278. Proposed Rule 18a-4--which is modeled
on Rule 15c3-3--would establish segregation requirements for SBSDs
with respect to their security-based swap customers. Id. at 70274-
70288. The term security-based swap customer would be defined in
proposed Rule 18a-4 to mean any person from whom or on whose behalf
the SBSD has received or acquired or holds funds or other property
for the account of the person with respect to a cleared or non-
cleared security-based swap transaction. Id. at 70278. The
definition would exclude a person to the extent that person has a
claim for funds or other property which by contract, agreement or
understanding, or by operation of law, is part of the capital of the
SBSD or is subordinated to all claims of security-based swap
customers of the SBSD. Id.
---------------------------------------------------------------------------

Stock Record
    Paragraph (a)(5) of Rule 17a-3 requires broker-dealers to make and
keep current a securities record (also referred to as a ``stock
record'').\111\ This is a record of the broker-dealer's custody and
movement of securities. The ``long'' side of the record accounts for
the broker-dealer's responsibility as a custodian of securities and
shows, for example, the securities the firm has received from customers
and securities owned by the broker-dealer. The ``short'' side of the
record shows where the securities are located such as at a securities
depository.
---------------------------------------------------------------------------

    \111\ See 17 CFR 240.17a-3(a)(5).
---------------------------------------------------------------------------

    The Commission is proposing to amend paragraph (a)(5) of Rule 17a-3
to require that the securities record specifically account for
security-based swaps, and to include parallel securities record
requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are
modeled on paragraph (a)(5) of Rule 17a-3, as proposed to be
amended.\112\ Paragraph (a)(5) of Rule 17a-3, as proposed to be
amended, would contain separate provisions: One for securities other
than security-based swaps and one for security-based swaps.\113\
Specifically, paragraph (a)(5)(i) would apply to securities other than
security-based swaps and largely mirror the current text of paragraph
(a)(5) of Rule 17a-3.\114\ Paragraph (a)(5)(ii) would apply to
security-based swaps.\115\ This paragraph would require a broker-
dealer, including a broker-dealer SBSD and broker-dealer MSBSP, to make
and keep current a securities record or ledger reflecting separately
for each security-based swap: (1) The reference security, index, or
obligor; (2) the unique transaction identifier; (3) the unique
counterparty identifier; (4) whether it is a ``long'' or ``short''
position in the security-based swap; (5) whether the security-based
swap is cleared or not cleared; and (6) if cleared, identification of
the clearing agency where the security-based swap is cleared.\116\
---------------------------------------------------------------------------

    \112\ See paragraph (a)(5) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(4) and (b)(3) of proposed Rule 18a-5.
    \113\ See paragraphs (a)(5)(i)-(ii) of Rule 17a-3, as proposed
to be amended.
    \114\ Compare 17 CFR 240.17a-3(a)(5), with paragraph (a)(5)(i)
of Rule 17a-3, as proposed to be amended.
    \115\ See paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be
amended.
    \116\ See id.
---------------------------------------------------------------------------

    Paragraph (a)(4) of proposed Rule 18a-5 mirrors paragraph (a)(5) of
Rule 17a-3 as proposed to be amended, and therefore, stand-alone SBSDs
and stand-alone MSBSPs would be required to make and keep current the
same type of securities record.\117\ Paragraph (b)(3) of proposed Rule
18a-5 similarly would require bank SBSDs and bank MSBSPs to make and
keep current a securities record of the firm's securities positions but
only with respect to positions related to their business as an SBSD or
MSBSP.\118\
---------------------------------------------------------------------------

    \117\ Compare paragraph (a)(5) of Rule 17a-3, as proposed to be
amended, with paragraph (a)(4) of proposed Rule 18a-5.
    \118\ See paragraph (b)(3) of proposed Rule 18a-5.
---------------------------------------------------------------------------

Memoranda of Brokerage Orders
    Paragraph (a)(6) of Rule 17a-3 requires broker-dealers to make and
keep current a memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security.
The memorandum must show the terms and conditions of each brokerage
order.\119\ The Commission is proposing to amend paragraph (a)(6) of
Rule 17a-3 to require

broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs,
to make and keep current a memorandum of each brokerage order, given or
received for the purchase or sale of a security-based swap.\120\ The
Commission is not proposing to include a parallel provision in
paragraph (a) of proposed Rule 18a-5 applicable to stand-alone SBSDs
and stand-alone MSBSPs because these registrants would not be permitted
to engage in the business of effecting brokerage orders in security-
based swaps without registering as a broker-dealer or a bank.\121\ The
Commission is proposing to include a parallel provision that would be
applicable to bank SBSDs and bank MSBSPs in paragraph (b) of proposed
Rule 18a-5 that is modeled on paragraph (a)(6) of Rule 17a-3, as
proposed to be amended.\122\
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    \119\ See 17 CFR 240.17a-3(a)(6).
    \120\ See paragraph (a)(6) of Rule 17a-3, as proposed to be
amended.
    \121\ Generally, persons engaged in brokerage activities are
required to register as brokers under section 15(b) of the Exchange
Act. See 15 U.S.C. 78o(b). Banks are permitted to engage in certain
limited securities brokerage activities. Specifically, section
3(a)(4) of the Exchange Act provides eleven exceptions to broker-
dealer registration for banks. See 15 U.S.C. 78c(a)(4). In addition,
the Commission and the Federal Reserve promulgated joint rules
establishing further exemptions permitting banks to engage in
certain securities brokerage activities without registering as a
broker-dealer. See Definitions of Terms and Exemptions Relating to
the ``Broker'' Exceptions for Banks, Exchange Act Release No. 56501
(Sept. 24, 2007), 72 FR 56514 (Oct. 3, 2007); 17 CFR 247.100-781.
These exceptions and exemptions permit a bank to act as a broker or
agent in securities transactions provided they satisfy certain
conditions. Section 716 of the Dodd-Frank Act (``Swap Push-Out
Provision'') generally prohibits providing certain types of federal
assistance, including FDIC insurance, to SBSDs and MSBSPs with
respect to any swap, security-based swap, or other activity of the
SBSD or MSBSP. See Public Law 111-203, 716. The Swap Push-Out
Provision excludes MSBSPs that are insured depository institutions.
See Public Law 111-203, 716(b)(2)(B). Further, SBSDs that are
insured depository institutions are permitted to engage in certain
swap and security-based swap activities under certain conditions and
still qualify for federal assistance. See Public Law 111-203, 716(d)
through (f). Thus, a bank SBSD or bank MSBSP may act as a broker or
agent in a security-based swap transaction. In such instances, the
brokerage order record requirements of paragraph (b)(4) of proposed
Rule 18a-5 would apply.
    \122\ See paragraph (b)(4) of proposed Rule 18a-5.
---------------------------------------------------------------------------

    Paragraph (a)(6) of Rule 17a-3, as proposed to be amended, would
contain separate provisions: One for brokerage orders involving
securities other than security-based swaps and one for brokerage orders
involving security-based swaps.\123\ Specifically, proposed paragraphs
(a)(6)(i)(A) and (B) would apply to securities other than security-
based swaps and largely mirror the current text of paragraph (a)(6) of
Rule 17a-3.\124\ Proposed paragraph (a)(6)(ii) would apply to brokerage
orders involving security-based swaps.\125\ This paragraph would
require a broker-dealer, including a broker-dealer SBSD and broker-
dealer MSBSP, to make and keep current a memorandum of each brokerage
order, and of any other instruction, given or received for the purchase
or sale of a security-based swap, whether executed or unexecuted. The
memorandum would need to include information that is similar to the
information currently required under Rule 17a-3 for brokerage
orders.\126\ In addition, to account for the attributes of security-
based swaps, the memorandum would need to include: (1) The type of
security-based swap; (2) the reference security, index, or obligor; (3)
the date and time of execution; (4) the effective date; (5) the
termination or maturity date; (6) the notional amount; (7) the unique
transaction identifier; and (8) the unique counterparty
identifier.\127\
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    \123\ See paragraph (a)(6) of Rule 17a-3, as proposed to be
amended. Rule 17a-3 currently contains paragraphs (a)(6)(i) and
(ii). See 17 CFR 240.17a-3(a)(6)(i) and (ii). Under the amendments,
paragraph (a)(6)(i) of Rule 17a-3 would be redesignated as paragraph
(a)(6)(i)(A) and paragraph (a)(6)(ii) would be redesignated as
paragraph (a)(6)(i)(B). The new requirement to make and keep current
a memorandum of each security-based swap brokerage order would be
contained in paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be
amended.
    \124\ Compare 17 CFR 240.17a-3(a)(6)(i) and (ii), with
paragraphs (a)(6)(i)(A) and (B) of Rule 17a-3, as proposed to be
amended.
    \125\ See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be
amended.
    \126\ Compare 17 CFR 240.17a-3(a)(6)(i), with paragraph
(a)(6)(ii) of Rule 17a-3, as proposed to be amended.
    \127\ See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be
amended.
---------------------------------------------------------------------------

    Paragraph (b)(4) of proposed Rule 18a-5 similarly would require
bank SBSDs and bank MSBSPs to document key terms of brokerage orders
but only with respect to security-based swaps.\128\ Consequently,
proposed paragraph (b)(4) would not contain a provision for securities
that are not security-based swaps.\129\ Instead, the entire paragraph
mirrors paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended,
which, as discussed above, relates solely to security-based swaps.\130\
---------------------------------------------------------------------------

    \128\ See paragraph (b)(4) of proposed Rule 18a-5.
    \129\ See id.
    \130\ Compare paragraph (a)(6)(ii) of Rule 17a-3, as proposed to
be amended, with paragraph (b)(4) of proposed Rule 18a-5.
---------------------------------------------------------------------------

Memoranda of Proprietary Orders
    Paragraph (a)(7) of Rule 17a-3 requires broker-dealers to make and
keep current a memorandum of each purchase and sale for the account of
the broker-dealer.\131\ Generally, paragraph (a)(7) of Rule 17a-3
requires broker-dealers to document the terms of securities
transactions where they are acting as a dealer or otherwise trading for
their own account. The Commission is proposing to amend paragraph
(a)(7) of Rule 17a-3 to require the terms of security-based swap
transactions to be documented, and to include parallel memorandum
requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are
modeled on paragraph (a)(7) of Rule 17a-3, as proposed to be
amended.\132\ Paragraph (a)(7) of Rule 17a-3, as proposed to be
amended, would contain two separate provisions: One for securities
other than security-based swaps and one for security-based swaps.\133\
Specifically, proposed paragraph (a)(7)(i) would apply to securities
other than security-based swaps and largely would mirror the current
text of paragraph (a)(7) of Rule 17a-3.\134\ Paragraph (a)(7)(ii) would
apply to security-based swaps.\135\ This paragraph would require
broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs,
to make and keep current a memorandum documenting each security-based
swap transaction for the account of the broker-dealer. The memorandum
would need to include certain information regarding the purchase or
sale of a security-based swap for the account of the broker-dealer that
is similar to the information currently required under paragraph (a)(7)
of Rule 17a-3.\136\ In addition, to account for the attributes of
security-based swaps, the memorandum would need to include: (1) The
type of security-based swap; (2) the reference security, index, or
obligor; (3) the date and time of execution; (4) the effective date;
(5) the termination or maturity date; (6) the notional amount; (7) the
unique transaction identifier; and (8) the unique counterparty
identifier.\137\
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    \131\ See 17 CFR 240.17a-3(a)(7).
    \132\ See paragraph (a)(7) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5.
    \133\ See paragraphs (a)(7)(i) and (ii) of Rule 17a-3, as
proposed to be amended.
    \134\ Compare 17 CFR 240.17a-3(a)(7), with paragraph (a)(7)(i)
of Rule 17a-3, as proposed to be amended.
    \135\ See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be
amended.
    \136\ Compare 17 CFR 240.17a-3(a)(7), with paragraph (a)(7)(ii)
of Rule 17a-3, as proposed to be amended.
    \137\ See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be
amended.
---------------------------------------------------------------------------

    Paragraph (a)(5) of proposed Rule 18a-5 would require stand-alone
SBSDs and stand-alone MSBSPs to make memoranda of proprietary
transactions but only with respect to security-based swaps.\138\ This
is because a stand-alone SBSD or a stand-alone MSBSP would need to be
registered as a broker-dealer

(and therefore would be subject to Rule 17a-3) (or, in certain
circumstances, a bank) to deal in securities other than security-based
swaps. Paragraph (b)(5) of proposed Rule 18a-5 would require bank SBSDs
and bank MSBSPs to make memoranda of proprietary transactions but also
only with respect to security-based swaps.\139\
---------------------------------------------------------------------------

    \138\ See paragraph (a)(5) of proposed Rule 18a-5.
    \139\ See paragraph (b)(5) of proposed Rule 18a-5.
---------------------------------------------------------------------------

Confirmations
    Paragraph (a)(8) of Rule 17a-3 requires broker-dealers to make and
keep current copies of confirmations of purchases and sales of
securities.\140\ The Commission is proposing to amend paragraph (a)(8)
to require that confirmations of security-based swaps be documented,
and to include analogous confirmation requirements in paragraphs (a)
and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(8) of
Rule 17a-3, as proposed to be amended.\141\ Paragraph (a)(8) of Rule
17a-3, as proposed to be amended, would contain separate provisions:
One for securities other than security-based swaps and one for
security-based swaps.\142\ Specifically, proposed paragraph (a)(8)(i)
would apply to confirmations of securities transactions other than
security-based swap transactions and largely mirror the current text of
paragraph (a)(8) of Rule 17a-3.\143\ Proposed paragraph (a)(8)(ii)
would apply to confirmations of security-based swap transactions.\144\
As discussed above, section 15F(i)(2) of the Exchange Act provides that
the Commission shall adopt rules governing documentation standards for
SBSDs and MSBSPs.\145\ Pursuant to section 15F(i)(2), the Commission
proposed Rule 15Fi-1 under the Exchange Act (``Rule 15Fi-1'') to
prescribe standards related to timely and accurate confirmation and
documentation of security-based swaps.\146\ Under this proposed rule,
SBSDs and MSBSPs would be required to acknowledge and, thereafter,
verify security-based swap transactions.\147\ Consequently, paragraph
(a)(8)(ii) of Rule 17a-3 would require broker-dealers, including
broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current
copies of the security-based swap trade acknowledgments and
verifications made pursuant to proposed Rule 15Fi-1.\148\
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    \140\ See 17 CFR 240.17a-3(a)(8). See also 17 CFR 240.10b-10 (a
requirement that broker-dealers disclose specified information to
customers at or before completion of a securities transaction).
    \141\ See paragraph (a)(8) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(6) and (b)(6) of proposed Rule 18a-5.
    \142\ See paragraphs (a)(8)(i) and (a)(8)(ii) of Rule 17a-3, as
proposed to be amended.
    \143\ Compare paragraph (a)(8)(i) of Rule 17a-3, as proposed to
be amended, with 17 CFR 240.17a-3(a)(8).
    \144\ See paragraph (a)(8)(ii) of Rule 17a-3, as proposed to be
amended.
    \145\ See 15 U.S.C. 78o-10(i)(2).
    \146\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 76 FR 3859.
    \147\ Id.
    \148\ See paragraph (a)(8)(ii) of Rule 17a-3, as proposed to be
amended.
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    Paragraph (a)(6) of proposed Rule 18a-5 would require stand-alone
SBSDs and stand-alone MSBSPs to make and keep current copies of
confirmations of all purchases or sales of securities, which would
include securities other than security-based swaps.\149\ Paragraph
(a)(6) also would specify that, for security-based swap transactions,
stand-alone SBSDs and stand-alone MSBSPs would need to make and keep
current copies of the security-based swap trade acknowledgments and
verifications made pursuant to proposed Rule 15Fi-1.\150\ Paragraph
(b)(6) would require bank SBSDs and bank MSBSPs to make and keep
current copies of all confirmations of purchases and sales of
securities but only if related to their business as an SBSD or
MSBSP.\151\ This would require a bank SBSD or bank MSBSP to make and
keep current copies of confirmations relating to transactions in
securities, other than security-based swaps, if the transaction was
related to their business as an SBSD or MSBSP. For example, this
requirement would apply if the bank SBSD or bank MSBSP entered into a
transaction in the security underlying a security-based swap to hedge
the risk of the security-based swap. Paragraph (b)(6) also would
specify that, for security-based swap transactions, bank SBSDs and bank
MSBSPs would need to make and keep current copies of the security-based
swap trade acknowledgments and verifications made pursuant to proposed
Rule 15Fi-1.\152\
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    \149\ See paragraph (a)(6) of proposed Rule 18a-5.
    \150\ Id.
    \151\ See paragraph (b)(6) of proposed Rule 18a-5.
    \152\ Id.
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Accountholder Information
    Paragraph (a)(9) of Rule 17a-3 requires broker-dealers to make and
keep current certain information with respect to each securities
accountholder.\153\ The Commission is proposing to amend paragraph
(a)(9) to require certain information with respect to security-based
swap accountholders, and to include similar requirements in paragraphs
(a) and (b) of proposed Rule 18a-5.\154\ The amendments to Rule 17a-3
would add a new paragraph (a)(9)(iv).\155\ This paragraph would require
broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs,
to make and keep current, in the case of a security-based swap account:
(1) A record of the unique counterparty identifier of the
accountholder; (2) the name and address of accountholder; and (3) the
signature of each person authorized to transact business in the
security-based swap account.\156\ Consequently, in the case of accounts
of legal entities (e.g., a corporation, partnership, or trust),
signatures would be required from persons authorized by the entity to
transact business in the account.
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    \153\ See 17 CFR 240.17a-3(a)(9).
    \154\ See paragraph (a)(9) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(7) and (b)(7) of proposed Rule 18a-5.
    \155\ See paragraph (a)(9)(iv) of Rule 17a-3, as proposed to be
amended.
    \156\ Id.
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    Paragraphs (a)(7) and (b)(7) of proposed Rule 18a-5 mirror
paragraph (a)(9)(iv) of Rule 17a-3, as proposed to be amended.\157\
Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs would be required to make and keep current the same types
of records with respect to security-based swap accountholders.
---------------------------------------------------------------------------

    \157\ Compare paragraph (a)(9)(iv) of Rule 17a-3, as proposed to
be amended, with paragraphs (a)(7) and (b)(7) of proposed Rule 18a-
5.
---------------------------------------------------------------------------

Options Positions
    Paragraph (a)(10) of Rule 17a-3 requires broker-dealers to make and
keep current a record of all options positions.\158\ The Commission is
not proposing to amend paragraph (a)(10) of Rule 17a-3 to account for
security-based swaps.\159\ In addition, because the records required
under this paragraph are not specific to security-based swaps, the
Commission is not proposing to include an analogous provision in
paragraph (b) applicable to bank SBSDs and bank MSBSPs. However, in
order to facilitate the monitoring of the financial condition of stand-
alone SBSDs and stand-alone MSBSPs, the Commission is proposing to
include a parallel provision in paragraph (a)(8) of proposed Rule 18a-5
applicable to stand-alone SBSDs and stand-alone MSBSPs.\160\
Consequently, under the

proposed rule, these registrants would be required to make and keep
current the same type of records broker-dealers must keep: A record of
all puts, calls, spreads, straddles, and other options in which the
stand-alone SBSD or stand-alone MSBSP has any direct or indirect
interest or which the stand-alone SBSD or stand-alone MSBSP has granted
or guaranteed, containing, at a minimum, an identification of the
security and the number of units involved.\161\
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    \158\ See 17 CFR 240.17a-3(a)(10).
    \159\ As discussed below in section II.A.2.b. of this release,
the Commission is proposing technical amendments to paragraph
(a)(10) of Rule 17a-3.
    \160\ See paragraph (a)(8) of proposed Rule 18a-5. The second
sentence of paragraph (a)(10) of Rule 17a-3 applies only to a
special class of broker-dealers that limit their activities to
dealing in OTC derivatives (``OTC derivatives dealers''). See 17 CFR
240.17a-3(a)(10); OTC Derivatives Dealers, Exchange Act Release No.
40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998). Consequently, it
is not included in paragraph (a)(8) of proposed Rule 18a-5.
    \161\ See paragraph (a)(8) of proposed Rule 18a-5.
---------------------------------------------------------------------------

Trial Balances and Computation of Net Capital
    Paragraph (a)(11) of Rule 17a-3 requires broker-dealers to make and
keep current a record of the proof of money balances of all ledger
accounts in the form of trial balances and certain records relating to
the computation of aggregate indebtedness and net capital under Rule
15c3-1.\162\ The Commission is not proposing to amend paragraph (a)(11)
to account for security-based swaps because the impact of security-
based swaps on those computations is reflected in the amendments to the
capital rules that have been proposed by the Commission to apply to
broker-dealer SBSDs and stand-alone SBSDs.\163\ In addition, because
the records required under the rule are not specific to security-based
swaps and because bank SBSDs and bank MSBSPs will be subject to capital
requirements administered by the prudential regulators, the Commission
is not proposing to include a parallel provision in paragraph (b) of
proposed Rule 18a-5 applicable to these types of registrants.
---------------------------------------------------------------------------

    \162\ See 17 CFR 240.17a-3(a)(11).
    \163\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70217-70257. As discussed below in section II.A.2.b. of this
release, the Commission is proposing technical amendments to
paragraph (a)(11) of Rule 17a-3.
---------------------------------------------------------------------------

    The Commission, however, is proposing to include a parallel
requirement in paragraph (a)(9) of proposed Rule 18a-5 applicable to
stand-alone SBSDs and stand-alone MSBSPs because the types of records
required under paragraph (a)(11) of Rule 17a-3 would facilitate the
review and monitoring of the financial condition and regulatory capital
of stand-alone SBSDs and stand-alone MSBSPs. As noted above, the
Commission will administer the capital rules applicable to stand-alone
SBSDs and stand-alone MSBSPs.\164\ Under Paragraph (a)(9) of proposed
Rule 18a-5, stand-alone SBSDs and stand-alone MSBSPs would be required
to make and keep current similar records to those required under
paragraph (a)(11) of Rule 17a-3 but in relation to the proposed capital
rules for these entities: (1) Proposed Rule 18a-1 in the case of stand-
alone SBSDs; and (2) proposed Rule 18a-2 in the case of stand-alone
MSBSPs.\165\ Specifically, paragraph (a)(9) would require stand-alone
SBSDs and stand-alone MSBSPs to make and keep current a record of the
proof of money balances of all ledger accounts in the form of trial
balances, and a record as of the trial balance date of the computation
of net capital pursuant to proposed Rule 18a-1 or the computation of
tangible net worth pursuant to proposed Rule 18a-2. The trial balances
and computations would need to be prepared at least once a month in
relation to the financial reporting on Form SBS that the Commission is
proposing for these registrants under proposed Rule 18a-7.\166\
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    \164\ See paragraph (a)(9) of proposed Rule 18a-5.
    \165\ See id. See also Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70213 (proposing Rule 18a-1 applicable to stand-alone SBSDs
and Rule 18a-2 applicable to nonbank MSBSPs that would establish
capital standards for these registrants).
    \166\ The proposed requirements to file Form SBS are discussed
below in section II.B.2. of this release.
---------------------------------------------------------------------------

Associated Persons
    Paragraph (a)(12) of Rule 17a-3 requires broker-dealers to make and
keep current records of information about associated persons of the
broker-dealer.\167\ This requirement will apply to broker-dealer SBSDs
and broker-dealer MSBSPs and, therefore, the Commission is not
proposing to amend paragraph (a)(12) to account for security-based
swaps.\168\ The Commission, however, is proposing to include parallel
provisions in paragraphs (a) and (b) of proposed Rule 18a-5.\169\
Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs would be required to make and keep current a questionnaire
or application for employment for each associated person, which must
include the associated person's identifying information, business
affiliations for the past ten years, relevant disciplinary history,
relevant criminal record, and place of business, among other
things.\170\
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    \167\ See 17 CFR 240.17a-3(a)(12).
    \168\ As discussed below in section II.A.2.b. of this release,
the Commission is proposing technical amendments to paragraph
(a)(12) of Rule 17a-3.
    \169\ Compare 17 CFR 240.17a-3(a)(12), with paragraphs (a)(10)
and (b)(8) of proposed Rule 18a-5.
    \170\ See paragraph (a)(10) and (b)(8) of proposed Rule 18a-5.
Unlike paragraph (a)(12) of Rule 17a-3, paragraphs (a)(10) and
(b)(8) do not permit applications of registration made by the
associated person to an SRO to satisfy the requirements because the
Dodd-Frank Act did not establish SROs for SBSDs and MSBSPs. Compare
17 CFR 240.17a-3(a)(12), with paragraph (a)(10) and (b)(8) of
proposed Rule 18a-5.
---------------------------------------------------------------------------

    Further, the Commission is proposing to amend the definition of
associated person in Rule 17a-3 to include in the definition a person
associated with an SBSD or MSBSP as defined under section 3(a)(70) of
the Exchange Act.\171\ Section 761 of the Dodd-Frank Act added section
3(a)(70) to the Exchange Act to define the terms person associated with
a security-based swap dealer or major security-based swap participant
and associated person of a security-based swap dealer or major
security-based swap participant.\172\ Paragraph (c)(1) of proposed Rule
18a-5 similarly would provide that the term associated person means for
the purposes of proposed Rule 18a-5 a person associated with an SBSD or
MSBSP as defined under section 3(a)(70) of the Exchange Act.\173\
Paragraph (c)(2) of proposed Rule 18a-5 would limit the definition of
the term associated person for purposes of the rule and with respect to
bank SBSDs and bank MSBSPs to persons whose activities relate to the
conduct of business as an SBSD or MSBSP.\174\
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    \171\ See paragraph (f)(4) of Rule 17a-3, as proposed to be
amended; 15 U.S.C. 78c(a)(70).
    \172\ See Public Law 111-203, 761; 15 U.S.C. 78c(a)(70).
    \173\ See paragraph (c)(1) of proposed Rule 18a-5.
    \174\ See paragraph (c)(2) of proposed Rule 18a-5.
---------------------------------------------------------------------------

Liquidity Stress Test
    Funding liquidity risk has been defined as the risk that a firm
will not be able to efficiently meet both expected and unexpected
current and future cash flow and collateral needs without adversely
impacting either the daily operations or the financial condition of the
firm.\175\ The financial crisis of 2008

demonstrated that the funding liquidity risk management practices of
certain individual financial institutions were not sufficient to handle
a liquidity stress event of that magnitude.\176\ In particular, it has
been observed that the stress tests utilized at the time by financial
institutions had weaknesses \177\ and the amount of contingent
liquidity they maintained to replace external sources of funding was
insufficient to cover the institutions' liquidity needs.\178\
---------------------------------------------------------------------------

    \175\ See Joint Forum, Bank for International Settlements, The
management of liquidity risk in financial groups, 1 n.1 (May 2006),
available at http://www.bis.org/publ/joint16.pdf. See also Basel
Committee on Banking Supervision, Bank for International
Settlements, Principles for Sound Liquidity Risk Management and
Supervision, n.2 (Sept. 2008), available at http://www.bis.org/publ/bcbs144.pdf (``Funding liquidity risk is the risk that the firm will
not be able to meet efficiently both expected and unexpected current
and future cash flow and collateral needs without affecting either
daily operations or the financial condition of the firm. Market
liquidity risk is the risk that a firm cannot easily offset or
eliminate a position at the market price because of inadequate
market depth or market disruption.''); Amendments to Financial
Responsibility Rules for Broker-Dealers, Exchange Act Release No.
55432 (Mar. 9, 2007), 72 FR 12862, 12870 n.72 (Mar. 19, 2007)
(``Liquidity risk includes the risk that a firm will not be able to
unwind or hedge a position or meet cash demands as they become
due.''); Enhanced Prudential Standards and Early Remediation
Requirements for Covered Companies, Federal Reserve, 77 FR 594 (Jan.
5, 2012) (proposing a rule to require certain large financial
institutions to conduct liquidity stress testing at least monthly).
    \176\ See Senior Supervisors Group, Risk Management Lessons from
the Global Bank Crisis of 2008, (Oct. 21, 2009), available at http://www.sec.gov/news/press/2009/report102109.pdf.
    \177\ Id. at 14 (``Market conditions and the deteriorating
financial state of firms exposed weaknesses in firms' approaches to
liquidity stress testing, particularly with respect to secured
borrowing and contingent funding needs. These deteriorating
conditions underscored the need for greater consideration of the
overlap between systemic and firm-specific events and longer time
horizons, and the connection between stress tests and business-as-
usual liquidity management.'').
    \178\ Id. at 15 (``Interviewed firms typically calculated and
maintained a measurable funding cushion, such as `months of
coverage,' which is conceptually similar to rating agencies' twelve-
month liquidity alternatives analyses. Some institutions were
required to maintain a liquidity cushion that could withstand the
loss of unsecured funding for one year. Many institutions found that
this metric did not capture important elements of stress that the
organizations faced, such as the loss of secured funding and demands
for collateral to support clearing and settlement activity and to
mitigate the risks of accepting novations.'') (emphasis in the
original).
---------------------------------------------------------------------------

    The Commission has proposed that certain broker-dealers, including
broker-dealer SBSDs, and certain stand-alone SBSDs be subject to
liquidity stress test requirements.\179\ In particular, the Commission
has proposed amendments to Rule 15c3-1 that would establish liquidity
stress test requirements for broker-dealers that have been approved to
use internal models to calculate market and credit risk charges when
computing net capital (``ANC broker-dealers''), which would include
broker-dealer SBSDs approved to use internal models for this purpose
(``ANC broker-dealer SBSDS'').\180\ The Commission has proposed
identical liquidity stress test requirements for stand-alone SBSDs that
are approved to use internal models to calculate market and credit risk
charges when computing net capital under proposed Rule 18a-1 (``stand-
alone ANC SBSDs'').\181\ Under the proposed liquidity stress test
requirements, ANC broker-dealers and stand-alone ANC SBSDs would be
required, among other things, to conduct a liquidity stress test at
least monthly that takes into account certain assumed conditions
lasting for thirty consecutive days and to establish a written
contingency funding plan.
---------------------------------------------------------------------------

    \179\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254 (proposing funding liquidity stress test requirements).
    \180\ Id. Rule 15c3-1 requires that a broker-dealer perform two
calculations: (1) A computation of the minimum amount of net capital
the firm must maintain; and (2) a computation of the amount of net
capital the firm is maintaining. See 17 CFR 240.15c3-1. In computing
net capital, a broker-dealer must, among other things, make certain
adjustments to net worth such as deducting illiquid assets and
taking other capital charges and adding qualifying subordinated
loans. See 17 CFR 240.15c3-1(c)(2)(i) through (xiii). The amount
remaining after these deductions is defined as tentative net
capital. See 17 CFR 240.15c3-1(c)(15). The final step in computing
net capital is to take prescribed percentage deductions
(``standardized haircuts'') from the mark-to-market value of the
proprietary positions (e.g., securities, money market instruments,
and commodities) that are included in tentative net capital. See 17
CFR 240.15c3-1(c)(2)(vi). The standardized haircuts are designed to
account for the market risk inherent in these positions and to
create a buffer of liquidity to protect against other risks
associated with the securities business. ANC broker-dealers and OTC
derivatives dealers are permitted, with Commission approval, to
calculate net capital using internal models as the basis for taking
market risk and credit risk charges in lieu of the standardized
haircuts for classes of positions for which they have been approved
to use models. See 17 CFR 240.15c3-1(a)(5) and (a)(7); 17 CFR
240.15c3-1e; 17 CFR 240.15c3-1f. Broker-dealer SBSDs that seek to
use internal models to calculate market and credit risk charges when
computing net capital would need to be approved to operate as ANC
broker-dealers. See Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70217-70256. Theoretically, a broker-dealer MSBSP could be
authorized to operate as an ANC broker-dealer, in which case it
would be subject to the liquidity stress test requirement.
    \181\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254.
---------------------------------------------------------------------------

    To promote compliance with these proposed requirements and the risk
management practices of ANC broker-dealers, the Commission is proposing
to amend Rule 17a-3 to add a requirement that ANC broker-dealers,
including ANC broker-dealer SBSDs, make and keep current a report of
the results of the monthly liquidity stress test, a record of the
assumptions underlying the liquidity stress test, and the liquidity
funding plan required under the proposed amendments to Rule 15c3-
1.\182\ The Commission is not proposing to include a similar provision
in paragraph (b) of proposed Rule 18a-5 applicable to bank SBSDs
because these registrants would not be subject to the Commission's
capital requirements, including the funding liquidity stress test
requirement. However, the Commission is proposing to include a parallel
provision applicable to stand-alone SBSDs in paragraph (a) of proposed
Rule 18a-5 that is modeled on the requirement that would be added to
Rule 17a-3, as proposed to be amended.\183\ Consequently, stand-alone
ANC SBSDs would be required to make and keep current a report of the
results of the monthly liquidity stress test, a record of the
assumptions underlying the liquidity stress test, and the liquidity
funding plan.\184\
---------------------------------------------------------------------------

    \182\ See paragraph (a)(24) of Rule 17a-3, as proposed to be
amended.
    \183\ Compare paragraph (a)(24) of Rule 17a-3, as proposed to be
amended, with paragraph (a)(11) of proposed Rule 18a-5.
    \184\ See paragraph (a)(11) of proposed Rule 18a-5.
---------------------------------------------------------------------------

Account Equity and Margin Calculations Under Proposed Rule 18a-3
    The Commission has proposed Rule 18a-3, which would establish
margin requirements with respect to non-cleared security-based swaps
applicable to nonbank SBSDs and nonbank MSBSPs.\185\ Proposed Rule 18a-
3 would require nonbank SBSDs, among other things, to perform two daily
calculations for each security-based swap account: The amount of equity
in the account and a margin amount for the account.\186\ Nonbank MSBSPs
would be required to calculate only the equity in the account.\187\ The
Commission is proposing to require that nonbank SBSDs and nonbank
MSBSPs make and keep current a record of the daily calculations that
would be required under Rule 18a-3 by amending Rule 17a-3 and including
a parallel provision in paragraph (a) of proposed Rule 18a-5.\188\ The
objective of these requirements is to promote compliance with proposed
Rule 18a-3, to require records to assist nonbank SBSDs and nonbank
MSBSPs in managing their credit risk to security-based swap
counterparties, and to assist Commission examiners in reviewing

compliance with those rule requirements.\189\
---------------------------------------------------------------------------

    \185\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70257-70274.
    \186\ Id. at 70260-70262.
    \187\ Id. at 70262-70263.
    \188\ See paragraph (a)(25) of Rule 17a-3, as proposed to be
amended; paragraph (a)(12) of proposed Rule 18a-5. See also Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70257-70274.
    \189\ As discussed above in section I. of this release, section
15F(e)(1)(A) of the Exchange Act provides that the prudential
regulators shall prescribe capital and margin requirements for bank
SBSDs and bank MSBSPs. See 15 U.S.C. 78o-10(e)(1)(A).
---------------------------------------------------------------------------

Possession or Control Requirements Under Proposed Rule 18a-4
    Rule 15c3-3 under the Exchange Act (``Rule 15c3-3'') requires a
broker-dealer that carries customer securities or cash (a ``carrying
broker-dealer'') to maintain physical possession or control over
customers' fully paid and excess margin securities.\190\ Physical
possession or control means the carrying broker-dealer must hold these
securities in one of several locations specified in Rule 15c3-3 and
free of liens or any other interest that could be exercised by a third
party to secure an obligation of the broker-dealer.\191\ Permissible
locations include a bank, as defined in section 3(a)(6) of the Exchange
Act, and a clearing agency.\192\ The Commission has proposed Rule 18a-4
to establish security-based swap customer protection requirements that
are modeled on the requirements in Rule 15c3-3.\193\ Paragraph (b)(1)
of proposed Rule 18a-4 would require an SBSD to promptly obtain and
thereafter maintain physical possession or control of all excess
securities collateral carried for the accounts of security-based swap
customers.\194\ The physical possession or control requirement of
paragraph (b)(1) of proposed Rule 18a-4 would prohibit SBSDs from
lending or hypothecating excess securities collateral of security-based
swap customers, and would require SBSDs to either physically hold
excess securities collateral or to custody the collateral in a
satisfactory control location.\195\ Paragraph (b)(2) of proposed new
Rule 18a-4 would identify five satisfactory control locations for
excess securities collateral.\196\ Paragraph (b)(3) of Rule 18a-4 would
require that each business day the SBSD must determine from its books
and records the quantity of excess securities collateral that the firm
had in its possession or control as of the close of the previous
business day and the quantity of excess securities collateral the firm
did not have in its possession or control on that day.\197\ The
paragraph would provide further that the SBSD must take steps to
retrieve excess securities collateral from certain specifically
identified non-control locations if securities and money market
instruments of the same issue and class are at these locations.\198\
---------------------------------------------------------------------------

    \190\ See 17 CFR 240.15c3-3(d). The term fully paid securities
includes all securities carried for the account of a customer in a
special cash account as defined in Regulation T promulgated by the
Federal Reserve, as well as margin equity securities within the
meaning of Regulation T which are carried for the account of a
customer in a general account or any special account under
Regulation T during any period when section 8 of Regulation T (12
CFR 220.8) specifies that margin equity securities shall have no
loan value in a general account or special convertible debt security
account, and all such margin equity securities in such account if
they are fully paid: provided, however, that the term fully paid
securities shall not apply to any securities which are purchased in
transactions for which the customer has not made full payment. See
17 CFR 240.15c3-3(a)(3). The term margin securities means those
securities carried for the account of a customer in a general
account as defined in Regulation T, as well as securities carried in
any special account other than the securities referred to in
paragraph (a)(3) of Rule 15c3-3. See 17 CFR 240.15c3-3(a)(4). The
term excess margin securities means those securities referred to in
paragraph (a)(4) of Rule 15c3-3 carried for the account of a
customer having a market value in excess of 140% of the total of the
debit balances in the customer's account or accounts encompassed by
paragraph (a)(4) of Rule 15c3-3 which the broker-dealer identifies
as not constituting margin securities. See 17 CFR 240.15c3-3(a)(5).
    \191\ See 17 CFR 240.15c3-3(c). Customer securities held by the
carrying broker-dealer are not assets of the firm. Rather, the
carrying broker-dealer holds them in a custodial capacity and the
possession or control requirement is designed to ensure that the
carrying broker-dealer treats them in a manner that allows for their
prompt return.
    \192\ Id.
    \193\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70274-70288. As broker-dealers, broker-dealer SBSDs and broker-
dealer MSBSPs would be subject to Rule 15c3-3 with respect to
customers that are not security-based swap customers and, in the
case of a broker-dealer SBSD, Rule 18a-4 with respect to security-
based swap customers. Id. at 70277 (``A broker-dealer SBSD would
need to treat security-based swap accounts separately from other
securities accounts and, consequently, would need to perform
separate possession or control and reserve account computations for
security-based swap accounts and other securities accounts. The
former would be subject to the possession or control and reserve
account requirements in proposed new Rule 18a-4 and the latter would
continue to be subject to the analogous requirements in Rule 15c3-3.
This would keep separate the segregated customer property related to
security-based swaps from customer property related to other
securities, including property of retail securities customers.'').
    \194\ Under proposed Rule 18a-4, the term excess securities
collateral would be defined to mean securities and money market
instruments carried for the account of a security-based swap
customer that have a market value in excess of the current exposure
of the SBSD to the customer, excluding, under certain specified
conditions, securities or money market instruments used to meet a
margin requirement of a registered security-based swap clearing
agency or of another SBSD. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70279. As noted above, the term security-based swap customer
would be defined to mean any person from whom or on whose behalf the
SBSD has received or acquired or holds funds or other property for
the account of the person with respect to a cleared or non-cleared
security-based swap transaction. Id. at 70278. The definition would
exclude a person to the extent that person has a claim for funds or
other property which by contract, agreement or understanding, or by
operation of law, is part of the capital of the SBSD or is
subordinated to all claims of security-based swap customers of the
SBSD. Id.
    \195\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70278.
    \196\ Id. at 70280-70281.
    \197\ Id. at 70281-70282.
    \198\ Id. at 70281.
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    The Commission is proposing to require that all SBSDs make and keep
current a record of compliance with the possession or control
requirement under proposed Rule 18a-4 by amending Rule 17a-3 to add
this new requirement and including parallel requirements in paragraphs
(a) and (b) of proposed Rule 18a-5.\199\ Consequently, this new
recordkeeping requirement would apply to broker-dealer SBSDs, stand-
alone SBSDs, and bank SBSDs.\200\ The records required under this
proposal would need to document that each business day the firm took
the steps required under paragraph (b) of proposed Rule 18a-3 described
above. The objective of this new recordkeeping requirement would be to
promote compliance with the possession or control requirements of