by Rule 18a-3, as adopted. As discussed above, paragraph (c)(1)(i) of
Rule 18a-3, as adopted, requires a nonbank SBSD to calculate an initial
margin amount for each counterparty as of the close of each business
day. Under paragraph (d) of Rule 18a-3, the nonbank SBSD must use the
standardized or model-based approach, as applicable, to calculate the
initial margin amount. The fact that a nonbank SBSD uses a model to
perform the calculation and that the model uses third-party inputs does
not eliminate or diminish the firm's underlying obligation under the
rule to calculate an initial margin amount for each counterparty as of
the close of each business day. In light of the comment and the
Commission's response that third-party inputs may be used, the
Commission believes it would be appropriate to make explicit in the
rule that the nonbank SBSD retains responsibility for model-based
initial margin calculations. Accordingly, the Commission is modifying
the proposed rule text to make this clear.\406\
---------------------------------------------------------------------------

    \405\ See ISDA 2/5/2014 Letter; Markit Letter.
    \406\ See paragraph (d)(2)(i) of Rule 18a-3, as adopted. In the
final rule, the Commission inserted the phrase ``and be responsible
for'' after the phrase ``authorization to use.''
---------------------------------------------------------------------------

    In summary, the Commission is adopting the model-based approach to
calculating initial margin, with the

modifications discussed above. The final rule will require a nonbank
SBSD to calculate with respect to each account of a counterparty as of
the close of each business day: (1) The amount of the current exposure
in the account; and (2) the initial margin amount for the account.\407\
As discussed above, in response to comments, the Commission modified
paragraph (d) of Rule 18a-3 to establish a margin model authorization
process that is distinct from the net capital rule model authorization
process. This modification will provide flexibility to allow nonbank
SBSDs that do not use a model for purposes of the net capital rule to
seek authorization to use a model for purposes of the margin rule.\408\
It also will permit firms to use an industry standard model such as the
model currently being used to comply with the margin rules of the CFTC
and the prudential regulators.
---------------------------------------------------------------------------

    \407\ See paragraph (c)(1)(i) to Rule 18a-3, as adopted.
    \408\ See paragraph (d)(2) of Rule 18a-3, as adopted.
---------------------------------------------------------------------------

Comments and Final Requirements To Increase the Frequency of the
Calculations
    Two commenters supported the proposed requirement to perform more
frequent calculations under specified conditions.\409\ Another
commenter requested that the Commission clarify that the requirement
for a nonbank SBSD to perform calculations more frequently in specified
circumstances does not give rise to a regulatory requirement for the
nonbank SBSD to collect intra-day margin from its counterparties.\410\
The commenter argued that requiring a nonbank SBSD to collect margin
more frequently than daily would be operationally difficult and
contrary to current market practice.
---------------------------------------------------------------------------

    \409\ See Better Markets 7/22/2013 Letter; Markit Letter.
    \410\ See SIFMA AMG 2/22/2013 Letter.
---------------------------------------------------------------------------

    The Commission is adopting the requirement to increase the
frequency of the required calculations during periods of extreme
volatility and for accounts with concentrated positions, as proposed,
with some non-substantive modifications.\411\ In response to the
comment about collecting margin intra-day, the Commission clarifies
that the rule does not require a nonbank SBSD to collect intra-day
margin, although it may choose to do so (such as through a house margin
requirement). In addition, more frequent calculations are only required
during periods of extreme volatility and for accounts with concentrated
positions. However, nonbank SBSDs are subject to Rule 15c3-4, which
requires, among other things, that they have a system of internal
controls to assist in managing the risks associated with their business
activities, including credit risk. In designing a system of internal
controls pursuant to Rule 15c3-4, a nonbank SBSD generally should
consider whether there are circumstances where the collection of intra-
day margin in times of volatility and for accounts with concentrated
positions would be necessary to effectively manage credit risk. In
addition, a nonbank SBSD generally should consider these factors in its
risk monitoring procedures required under paragraph (e)(7) of Rule 18a-
3, as adopted, which is discussed below.
---------------------------------------------------------------------------

    \411\ See paragraph (c)(6) to Rule 18a-3, as adopted. Paragraph
(c)(7) of Rule 18a-3, as proposed to be adopted, was re-designated
paragraph (c)(6) in the final rule due to non-substantive amendments
made to the minimum transfer amount language.
---------------------------------------------------------------------------

ii. Nonbank MSBSPs
    As proposed, Rule 18a-3 required nonbank MSBSPs to collect
collateral from counterparties to which the nonbank MSBSP has current
exposure and provide collateral to counterparties that have current
exposure to the nonbank MSBSP.\412\ Consequently, a nonbank MSBSP
needed to calculate as of the close of business each day the amount of
equity in each account of a counterparty. Consistent with the proposal
for nonbank SBSDs, a nonbank MSBSP was required to increase the
frequency of its calculations during periods of extreme volatility and
for accounts with concentrated positions.
---------------------------------------------------------------------------

    \412\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70262-63.
---------------------------------------------------------------------------

    A commenter stated that it believed that nonbank MSBSPs should be
required to calculate initial margin for each counterparty and collect
or post initial margin because doing so would allow nonbank MSBSPs to
better measure and understand their aggregate counterparty risk.\413\
The commenter believed that nonbank MSBSPs should have the personnel
necessary to operate daily initial margin programs. Another commenter,
who supported bilateral margining for both variation and initial
margin, stated that not requiring the bilateral exchange of initial
margin is inconsistent with the BCBS/IOSCO Paper and the re-proposals
of the CFTC and the prudential regulators.\414\ A commenter supported
the proposal that nonbank MSBSPs should not have to collect initial
margin.\415\ Another commenter stated that MSBSPs should be provided
flexibility as to whether and to what extent they should be required to
pledge initial margin to financial firms.\416\
---------------------------------------------------------------------------

    \413\ See CFA Institute Letter.
    \414\ See ICI 5/11/2015 Letter.
    \415\ See Financial Services Roundtable Letter.
    \416\ See American Council of Life Insurers 2/22/2013 Letter.
---------------------------------------------------------------------------

    In response to comments that nonbank MSBSPs should calculate and
collect and post initial margin, the margin requirements for nonbank
MSBSPs are designed to ``neutralize'' the credit risk between a nonbank
MSBSP and its counterparty. This requirement is intended to account for
the fact that nonbank MSBSPs will be subject to less stringent capital
requirements than nonbank SBSDs. Consequently, in the case of a nonbank
MSBSP, the Commission believes it is more prudent to not require the
firm to collect initial margin from counterparties, as doing so would
increase the counterparties' exposures to the nonbank MSBSP. Therefore,
the Commission is not adopting requirements for nonbank MSBSPs to
calculate and post or deliver initial margin.
    The Commission acknowledges that the final rule, in this case, is
not consistent with the final margin rules of the CFTC and the
prudential regulators, which generally require nonbank major swap
participants, bank MSBSPs, and bank major swap participants to collect
and post initial margin from and to specified counterparties.\417\
However, the Commission believes that minimizing a counterparty
exposure to a nonbank MSBSP by not requiring it to deliver initial
margin is prudent, as these firms will not be subject to as robust a
capital framework as SBSDs or bank MSBSPs. Similarly, the Commission
believes it is prudent to limit the exposure of the nonbank MSBSP to
the counterparty by not requiring it to post initial margin, as the
counterparty may not be subject to any capital requirement. While the
final rule does not impose a requirement to post or deliver initial
margin, nonbank MSBSPs and their counterparties are permitted to agree
to the exchange of initial margin. For these reasons, the Commission is
adopting paragraph (c)(2)(i) of Rule 18a-3 substantially as
proposed.\418\
---------------------------------------------------------------------------

    \417\ See also BCBS/IOSCO Paper at 5 (``All financial firms and
systemically important non-financial entities (``covered entities'')
that engage in non-centrally cleared derivatives must exchange
initial and variation margin as appropriate to the counterparty
risks posed by such transactions.'').
    \418\ See paragraph (c)(2)(i) of Rule 18a-3, as adopted. In the
final rule, the Commission made several non-substantive
modifications. The word ``equity'' was replaced with the phrase
``the current exposure.'' The phrase ``with respect to each account
of a counterparty'' was inserted before the word ``calculate'' and
the word ``the'' replaced the word ``each'' to conform the language
in the paragraph more closely with the language in paragraph
(c)(1)(i) of the final rule.

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

b. Account Equity Requirements
i. Nonbank SBSDs
    As discussed above, a nonbank SBSD must calculate variation and
initial margin amounts with respect to the account of a counterparty as
of the close of each business day. Proposed Rule 18a-3: (1) Required a
nonbank SBSD to collect margin from the counterparty unless an
exception applied; (2) set forth the time frame for when that
collateral needed to be collected; (3) prescribed the types of assets
that could serve as eligible collateral; (4) prescribed additional
requirements for the collateral; (5) prescribed when collateral must be
liquidated; and (6) set forth certain exceptions to collecting the
collateral.\419\
---------------------------------------------------------------------------

    \419\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70263-69.
---------------------------------------------------------------------------

    More specifically, proposed Rule 18a-3 required that a nonbank SBSD
collect from the counterparty by noon of the following business day
cash, securities, and/or money market instruments in an amount at least
equal to the ``negative equity'' (current exposure) in the account plus
the initial margin amount unless an exception applied. Assets other
than cash, securities, and/or money market instruments were not
eligible collateral. The proposed rule further provided that the fair
market value of securities and money market instruments (``securities
collateral'') held in the account of a counterparty needed to be
reduced by the amount of the standardized haircuts the nonbank SBSD
would apply to the positions pursuant to the proposed capital rules for
the purpose of determining whether the level of equity in the account
met the minimum margin requirements. Securities collateral with no
``ready market'' or that could not be publicly offered or sold because
of statutory, regulatory, or contractual arrangements or other
restrictions effectively could not serve as collateral because it would
be subject to a 100% deduction pursuant to the standardized haircuts in
the proposed capital rules, which were to be used to take the
collateral deductions for the purposes of proposed Rule 18a-3.
    In addition, proposed Rule 18a-3 contained certain additional
requirements for cash and securities to be eligible as collateral.
These requirements were designed to ensure that the collateral was of
stable and predictable value, not linked to the value of the
transaction in any way, and capable of being sold quickly and easily if
the need arose. The requirements included that the collateral was: (1)
Subject to the physical possession or control of the nonbank SBSD; (2)
liquid and transferable; (3) capable of being liquidated promptly
without the intervention of a third party; (4) subject to a legally
enforceable collateral agreement, (5) not securities issued by the
counterparty or a party related to the counterparty or the nonbank
SBSD; and (6) a type of financial instrument for which the nonbank SBSD
could apply model-based haircuts if the nonbank SBSD was authorized to
use such haircuts. Proposed Rule 18a-3 also required a nonbank SBSD to
take prompt steps to liquidate collateral consisting of securities
collateral to the extent necessary to eliminate the account equity
deficiency.
    The Commission proposed five exceptions to the account equity
requirements. The first applied to counterparties that were commercial
end users. The second applied to counterparties that were nonbank
SBSDs. The third applied to counterparties that were not commercial end
users and that required their collateral to be segregated pursuant to
Section 3E(f) of the Exchange Act. The fourth proposed exception
applied to accounts of counterparties that were not commercial end
users and that held legacy non-cleared security-based swaps. The fifth
provided for a $100,000 minimum transfer amount with respect to a
particular counterparty.
Comments and Final Requirements Regarding the Collection and Posting of
Margin
    As noted above, proposed Rule 18a-3 required a nonbank SBSD to
collect margin from the counterparty by noon of the next business day
unless an exception applied.\420\ Generally, the comments on this
aspect of the proposal fell into two categories: (1) Comments
requesting that nonbank SBSDs be required to deliver margin (in
addition to collecting it); and (2) comments requesting that the
required time frame for collecting margin be lengthened.
---------------------------------------------------------------------------

    \420\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70264.
---------------------------------------------------------------------------

    In terms of requiring nonbank SBSDs to deliver margin, commenters
stated that doing so would promote consistency with the recommendations
in the BCBS/IOSCO Paper.\421\ Commenters also argued that bilateral
margining would help to reduce systemic risk.\422\ A commenter argued
that not requiring a nonbank SBSD to post margin could create an
incentive to avoid clearing security-based swaps counter to the Dodd-
Frank Act's objective of promoting central clearing.\423\ One commenter
stated that the Commission did not adequately consider the potential
for one-way margining to harm investors and the security-based swap
market.\424\ This commenter argued that making two-way margining
mandatory would provide important risk mitigation benefits to the
markets, and protect counterparties of all sizes, not just those large
enough to negotiate for two-way margining.\425\ Some commenters
suggested that the rule should permit the counterparty to require the
nonbank SBSD to deliver margin at the counterparty's discretion.\426\
Another commenter stated that nonbank SBSDs and financial end users
should have the flexibility to determine whether nonbank SBSDs should
be required to post initial margin to financial end users.\427\
---------------------------------------------------------------------------

    \421\ See AIMA 2/22/2013 Letter; ICI 2/4/2013 Letter.
    \422\ See American Council of Life Insurers 11/19/2018 Letter;
ICI 2/4/2013 Letter; ICI 5/11/2015 Letter; ICI 11/19/2018 Letter;
SIFMA AMG 11/19/2018 Letter.
    \423\ See PIMCO Letter.
    \424\ See ICI 11/19/2018 Letter.
    \425\ See ICI 11/19/2018 Letter.
    \426\ See PIMCO Letter; SIFMA AMG 2/22/2013 Letter.
    \427\ See American Council of Life Insurers 2/22/2013 Letter;
American Council of Life Insurers 11/19/2018 Letter.
---------------------------------------------------------------------------

    In response to these comments, the Commission is persuaded that
requiring nonbank SBSDs to deliver variation margin to counterparties
would provide an important protection to the counterparties by reducing
their uncollateralized current exposure to SBSDs. The Commission also
believes it would be appropriate to require nonbank SBSDs to deliver
variation margin to counterparties in order to further harmonize Rule
18a-3 with the margin rules of the CFTC and the prudential
regulators.\428\ For these reasons, the Commission has modified the
final rule to require a nonbank SBSD to deliver variation margin to a
counterparty unless an exception applies. However, as discussed below,
the nonbank SBSD is not required to collect or deliver variation or
collect initial margin from a commercial end user, a security-based
swap legacy account, or a counterparty that is the BIS, the European
Stability Mechanism, or one of the multilateral development banks
identified in the rule.\429\
---------------------------------------------------------------------------

    \428\ See Prudential Regulator Margin and Capital Adopting
Release, 80 FR at 74903; CFTC Margin Adopting Release, 80 FR at 698.
    \429\ See paragraphs (c)(1)(ii)(A)(2) and (c)(1)(iii) of Rule
18a-3, as adopted. The Commission also made some non-substantive
changes to paragraph (c)(1)(ii) to accommodate the new requirement.
In the final rule, paragraph (c)(1)(ii)(A) of Rule 18a-3, as
proposed to be adopted, was re-designated paragraph
(c)(1)(ii)(A)(1).

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

    The Commission does not believe it would be appropriate to require
nonbank SBSDs to deliver initial margin and, therefore, the final rule
does not require it. Requiring nonbank SBSDs to deliver initial margin
could impact the liquidity of these firms. Delivering initial margin
would prevent this capital of the nonbank SBSD from being immediately
available to the firm to meet liquidity needs. If the delivering SBSD
is undergoing financial stress or the markets more generally are in a
period of financial turmoil, a nonbank SBSD may need to liquidate
assets to raise funds and reduce its leverage. Assets in the control of
a counterparty would not be available for this purpose. For these
reasons, under the net capital rule, most unsecured receivables must be
deducted from net worth when the nonbank SBSD computes net capital. The
final rule, however, does not prohibit a nonbank SBSD from delivering
initial margin. For example, a nonbank SBSD and its counterparty can
agree to commercial terms pursuant to which the nonbank SBSD will post
initial margin to the counterparty.
    In terms of lengthening the time frame for collecting margin, a
commenter requested flexibility for nonbank SBSDs to collect initial
margin on a different schedule and frequency than variation
margin.\430\ A second commenter sought clarification concerning how
often initial margin needed to be collected and noted that the overall
initial margin amount for a portfolio could change even if no new
transactions occur because existing transactions may mature or
significant market moves may impact values.\431\ A third commenter
suggested that the Commission require nonbank SBSDs to begin collecting
initial margin on a weekly basis and phase in more frequent
collections.\432\ Another commenter recommended that consistent with
the CFTC's and prudential regulators' margin rules, the Commission
should require an SBSD to collect margin by the end of the business day
following the day of execution and at the end of each business day
thereafter, with appropriate adjustments to address operational
difficulties associated with parties located in different time
zones.\433\
---------------------------------------------------------------------------

    \430\ See ISDA 1/23/2013 Letter; ISDA 2/5/2014 Letter.
    \431\ See Markit Letter.
    \432\ See SIFMA 3/12/2014 Letter.
    \433\ See SIFMA 11/19/2018 Letter.
---------------------------------------------------------------------------

    Other commenters recommended a longer time period than one business
day to collect margin, citing cross-border transactions as possibly
requiring more time.\434\ One commenter stated that the time zone
differences between the Unites States and certain jurisdictions will
cause major operational challenges, and could lead to delayed payments,
disputes, and broadly greater operational risk.\435\ Another commenter
noted that the settlement and delivery periods for securities to be
posted as collateral are longer than the time period for collection
under the proposed rule, particularly in a cross-border context.\436\ A
commenter stated that the proposed one business-day requirement did not
reflect the operational realities of security-based swap trading,
payment, and collateral transfer processes.\437\ The commenter argued
that the need for additional time was especially critical with respect
to transactions with counterparties in countries such as Japan and
Australia.
---------------------------------------------------------------------------

    \434\ See American Benefits Council, et al. 1/29/2013 Letter;
Letter from Angus D.W. Martowardojo, Governor of Bank Indonesia and
Chairman of the Executives Meeting of East Asia-Pacific Central
Banks (Aug. 31, 2016) (``EMEAP Letter''); Letter from Mary P.
Johannes, Senior Director and Head of ISDA WGMR Initiative,
International Swaps and Derivatives Association (Aug. 7, 2015)
(``ISDA 8/7/2015 Letter''); Letter from Mary P. Johannes, Senior
Director and Head of ISDA WGMR Initiative, International Swaps and
Derivatives Association (Sept. 24, 2015) (``ISDA 9/24/2015
Letter''); SIFMA AMG 2/22/2013 Letter.
    \435\ See EMEAP Letter.
    \436\ See ISDA 8/7/2015 Letter.
    \437\ See SIFMA AMG 2/22/2013 Letter.
---------------------------------------------------------------------------

    The Commission recognizes that it will take time for nonbank SBSDs
to implement processes to collect variation and initial margin on a
daily basis if the entity is not currently collecting margin at this
frequency. The Commission, therefore, is establishing compliance and
effective dates discussed below in section III.B. of this release
designed to give nonbank SBSDs and their counterparties a reasonable
period of time to implement the operational, legal, and other changes
necessary to come into compliance with requirements to collect and
deliver margin on a daily basis.
    In terms of lengthening the period to collect or deliver margin
beyond one business day, promptly obtaining collateral to cover credit
risk exposures is vitally important to promoting the financial
responsibility of nonbank SBSDs and protecting their counterparties.
Collateral protects the nonbank SBSD from consequences of the
counterparty's default and the counterparty from the consequences of
the nonbank SBSD's default. However, the Commission is modifying the
next-day collection requirement in two ways that should mitigate the
concerns of commenters. First, the Commission is lengthening time for
nonbank SBSDs and MSBSPs to collect or post required margin from noon
to the close of business on the next business day.\438\ Second, the
Commission is lengthening from one to two business days the time frame
in which the nonbank SBSD or MSBSP must collect or deliver required
margin if the counterparty is located in another country and more than
4 time zones away. These changes should mitigate the concerns of
commenters about cross-border transactions.
---------------------------------------------------------------------------

    \438\ See paragraphs (c)(1)(ii) and (c)(2)(ii) of Rule 18a-3, as
adopted.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission is adopting the proposed
requirements to collect variation and initial margin with the
modifications discussed above and with certain other non-substantive
modifications.\439\
---------------------------------------------------------------------------

    \439\ See paragraphs (c)(1)(ii) and (c)(1)(iii) of Rule 18a-3,
as adopted. References to cash, securities and/or money market
instruments were deleted throughout the rule text and replaced with
the term ``collateral'' as a result of other modifications to the
rule to expand the types of collateral permitted under the rule. The
defined term ``non-cleared security-based swap'' in paragraph (b)(5)
of Rule 18a-3, as adopted, is modified to add the phrase ``submitted
to and'' before the word ``cleared,'' and to add the phrase ``or by
a clearing agency that the Commission has exempted from registration
by rule or order pursuant to section 17A of the Act (15 U.S.C. 78q-
1)'' before the ``.''. The language regarding exemption from
registration was added to the final rule to align the definition
more closely with the definitions used in the margin rules of the
CFTC and prudential regulators.
---------------------------------------------------------------------------

Comments and Final Requirements for Collateral and Taking Deductions on
Collateral
    As noted above, proposed Rule 18a-3 permitted cash, securities, and
money market instruments to serve as collateral to meet variation and
initial margin requirements and, if securities or money market
instruments were used, required the nonbank SBSD to apply the
standardized haircuts in the capital rules to the collateral when
computing the equity in the account.\440\ Generally, comments
addressing these requirements fell into two categories: (1) Comments
requesting that the scope of assets qualifying as collateral be
broadened, or modified to conform with requirements of the prudential
regulators, the CFTC, or the recommendations in the BCBS/IOSCO Paper;
and (2) comments requesting that the deductions to securities or money
market instruments serving as collateral be calculated using methods
other than

the standardized haircuts in the capital rules.
---------------------------------------------------------------------------

    \440\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70264.
---------------------------------------------------------------------------

    In terms of the scope of eligible collateral, commenters supported
the broad categories of securities and money market instruments that
qualified under the proposal, but asked that the final rule be more
consistent with the recommendations in the BCBS/IOSCO Paper or the
rules of the CFTC and the prudential regulators.\441\ A commenter
stated that the Commission should define the term ``eligible
collateral,'' preferably by adopting the CFTC's ``forms of margin''
approach.\442\ A second commenter recommended that the Commission
carefully parallel the collateral approach recommended in the BCBS/
IOSCO Paper.\443\ This commenter noted that the examples of collateral
listed in the BCBS/IOSCO Paper were not exhaustive. Another commenter
suggested that regulators and market participants develop a set of
consistent definitions for the categories of eligible collateral.\444\
---------------------------------------------------------------------------

    \441\ See American Council of Life Insurers 2/22/2013 Letter;
American Council of Life Insurers 11/19/2018 Letter; CFA Institute
Letter; MFA 2/22/2013 Letter; SIFMA AMG 11/19/2018; SIFMA 3/12/2014
Letter; SIFMA 11/19/2019 Letter.
    \442\ See MFA 2/22/2013 Letter.
    \443\ See American Council of Life Insurers 2/22/2013 Letter;
American Council of Life Insurers 11/19/2018 Letter.
    \444\ See SIFMA 3/12/2014 Letter.
---------------------------------------------------------------------------

    In response to these comments, the BCBS/IOSCO Paper recommends that
national supervisors develop their own list of collateral assets,
taking into account the conditions of their own markets, and based on
the key principle that assets should be highly liquid and should, after
accounting for an appropriate haircut, be able to hold their value in a
time of financial stress.\445\ The examples of collateral in the BCBS/
IOSCO Paper are: (1) Cash; (2) high-quality government and central bank
securities; (3) high-quality corporate bonds; (4) high-quality covered
bonds; (5) equities included in major stock indices; and (6) gold.\446\
Eligible securities collateral under the margin rules of the CFTC and
the prudential regulators includes: (1) U.S. Treasury securities; (2)
certain securities guaranteed by the U.S.; (3) certain securities
issued or guaranteed by the European Central Bank, a sovereign entity,
or the BIS; (4) certain corporate debt securities; (5) certain equity
securities contained in major indices; and (6) certain redeemable
government bond funds.\447\ Under the Commission's proposed margin
rule, these types of securities would be permitted as collateral if
they had a ready market. The margin rules of the CFTC and the
prudential regulators also permit major foreign currencies, the
currency of settlement for the security-based swap, and gold to serve
as collateral. The Commission's proposed rule permitted ``cash'' but
did not permit foreign currencies to serve as collateral, and the
proposed rule did not permit gold to serve as collateral.
---------------------------------------------------------------------------

    \445\ See BCBS/IOSCO Paper at 16.
    \446\ Id. at 17-18.
    \447\ See Prudential Regulator Margin and Capital Adopting
Release, 80 FR at 74870; CFTC Margin Adopting Release, 81 FR at 701-
2.
---------------------------------------------------------------------------

    The Commission is modifying proposed Rule 18a-3 in response to
commenters' concerns about the rule excluding collateral types that are
permitted by the CFTC and the prudential regulators. Consequently, the
final rule permits cash, securities, money market instruments, a major
foreign currency, the settlement currency of the non-cleared security-
based swap, or gold to serve as eligible collateral.\448\ This will
avoid the operational burdens of having different sets of collateral
that may be used with respect to a counterparty depending on whether
the nonbank SBSD is entering into a security-based swap (subject to the
Commission's rule) or a swap (subject to the CFTC's rule) with the
counterparty. It also will avoid potential unintended competitive
effects of having different sets of collateral for non-cleared
security-based swaps under the margin rules for nonbank SBSDs and bank
SBSDs. Finally, by giving the option of aligning with the requirements
of the CFTC and the prudential regulators, the final rule should avoid
the necessity of amending existing collateral agreements that may
specifically reference the forms of margin permitted by those
requirements.
---------------------------------------------------------------------------

    \448\ See paragraph (c)(4)(i)(C) of Rule 18a-3, as adopted. The
additional collateral requirements in the final rule are discussed
below.
---------------------------------------------------------------------------

    Commenters requested that certain types of assets be permitted to
serve as collateral when dealing with commercial end users and special
purpose vehicles.\449\ One commenter requested that the Commission
expand the collateral permitted under the rule to include shares of
affiliated registered funds or clarify that a fund of funds could post
shares of an affiliated registered fund to meet a margin requirement
under the rule.\450\ Another commenter requested that the Commission
adopt a definition of collateral that includes U.S. government money
market funds.\451\ In response to these comments, the final rule does
not specifically exclude any type of security provided it has a ready
market, is readily transferable, and does not consist of securities
and/or money market instruments issued by the counterparty or a party
related to the nonbank SBSD or MSBSP, or the counterparty.\452\
Generally, U.S. government money market funds should be able to serve
as collateral under these conditions.
---------------------------------------------------------------------------

    \449\ See Financial Services Roundtable Letter; MFA 2/22/2013
Letter; Sutherland Letter.
    \450\ See ICI 11/19/2018 Letter.
    \451\ See Letter from Lee A. Pickard, Esq., Pickard, Djinis and
Pisarri, on behalf of Federated Investors, Inc. (Nov. 15, 2018)
(``Federated 11/15/2018 Letter'').
    \452\ See paragraph (c)(4) of Rule 18a-3, as adopted.
---------------------------------------------------------------------------

    In terms of applying the standardized haircuts in the nonbank SBSD
capital rules to securities and money market instruments serving as
collateral, a commenter advocated aligning with the prudential
regulators' proposed rules for ease of application and consistency of
treatment across instruments, as well as to minimize the opportunity
for regulatory arbitrage.\453\ Comments received after the CFTC and the
prudential regulators adopted their final margin rules supported
aligning the haircuts in the Commission's margin rule with the
standardized haircuts adopted by the CFTC and the prudential
regulators.\454\
---------------------------------------------------------------------------

    \453\ See PIMCO Letter.
    \454\ See American Council of Life Insurers 11/19/2018 Letter;
SIFMA 11/19/2018 Letter.
---------------------------------------------------------------------------

    The haircuts in proposed Rule 18a-3 (i.e., the standardized
haircuts in the proposed nonbank SBSD capital rules) and the haircuts
in the margin rules of the CFTC and the prudential regulators (which
are based on the recommended standardized haircuts in the BCBS/IOSCO
Paper) are largely comparable.\455\ However, the Commission also
recognizes that there are differences. For example, the Commission's
standardized haircuts in some cases are more risk sensitive than those
required by final margin rules of the CFTC and the prudential
regulators.\456\
---------------------------------------------------------------------------

    \455\ See, e.g., paragraph (c)(2)(vi)(J) of Rule 15c3-1, as
amended (prescribing a haircut of 15% for equity securities), and
BCBS/IOSCO Paper, Appendix B, at 27 (prescribing a haircut of 15%
for equities included in major stock indices). See also paragraph
(c)(2)(vi)(A)(1) of Rule 15c3-1, as amended (prescribing a haircut
of 0.5% for securities issued or guaranteed by the United States or
any agency thereof with 3 months but less than 6 months to
maturity), and BCBS/IOSCO Paper, Appendix B, at 27 (prescribing a
haircut of 0.5% for high quality government and central bank
securities: Residual maturity less than one year).
    \456\ See, e.g., paragraph (c)(2)(vi)(A)(1) of Rule 15c3-1, as
amended (prescribing a range of four haircuts of 0% to 1% for
securities issued or guaranteed by the United States or any agency
thereof with less than 12 months to maturity), and BCBS/IOSCO Paper,
Appendix B, at 27 (prescribing a haircut of 0.5% for high-quality
and central bank securities: Residual maturity less than one year);
see also paragraph (c)(2)(vi)(F)(1) of Rule 15c3-1, as amended
(prescribing a range of three haircuts of 3% to 6% for
nonconvertible debt securities that mature in more than one year but
less than five years), and BCBS/IOSCO Paper, Appendix B, at 27
(prescribing a haircut of 4% for high-quality corporate/covered
bonds: Residual maturity greater than one year and less than five
years). The prudential regulators' and CFTC's final margin rules
each prescribe a collateral haircut schedule that is generally
consistent with the BCBS/IOSCO Paper. See Prudential Regulator
Margin and Capital Adopting Release, 80 FR at 74910; CFTC Margin
Adopting Release, 81 FR at 702.

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

    At the same time, the Commission believes it would be appropriate
to provide nonbank SBSDs the option either to use the standardized
haircuts in the nonbank SBSD capital rules as proposed or to use the
collateral haircuts in the CFTC's margin rules. Consequently, the final
margin rule provides nonbank SBSDs with the option of choosing to use
the standardized haircuts in the capital rules or the standardized
haircuts in the CFTC's margin rules.\457\ The final rule further
provides that if the nonbank SBSD uses the CFTC's standardized haircuts
it must apply them consistently with respect to the counterparty.\458\
This requirement is designed to prevent a nonbank SBSD from ``cherry
picking'' either the nonbank SBSD capital haircuts or the CFTC haircuts
at different points in time depending on which set provides the more
advantageous haircut.
---------------------------------------------------------------------------

    \457\ See paragraph (c)(3) of Rule 18a-3, as adopted.
    \458\ See paragraph (c)(3)(ii) of Rule 18a-3, as adopted. In the
final rule, paragraph (c)(3) of Rule 18a-3, as proposed, is re-
designated paragraph (c)(3)(i) of Rule 18a-3, as adopted, and a new
subparagraph (c)(3)(ii) is added to read: ``(ii) Notwithstanding
paragraph (c)(3)(i) of this section, the fair market value of assets
delivered as collateral by a counterparty or the security-based swap
dealer may be reduced by the amount of the standardized deductions
prescribed in 17 CFR 23.156 if the security-based swap dealer
applies these standardized deductions consistently with respect to
the particular counterparty.''
---------------------------------------------------------------------------

    Similar to aligning the sets of eligible collateral, giving the
option of aligning the collateral haircuts with the CFTC's collateral
haircuts will allow a firm to avoid the operational burdens of having
different haircut requirements with respect to a counterparty depending
on whether the nonbank SBSD is entering into a security-based swap
(subject to the Commission's rule) or a swap (subject to the CFTC's
rule) with the counterparty. This option also will avoid potential
unintended competitive effects of having different sets of collateral
for non-cleared security-based swaps under the margin rules for nonbank
SBSDs and bank SBSDs. Finally, by aligning with the requirements of the
CFTC and the prudential regulators, the final rule should reduce the
likelihood that SBSDs will seek to amend existing collateral agreements
that may specifically reference the haircuts in the margin rules of the
CFTC or prudential regulators.\459\
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    \459\ As discussed above in section II.B.1. of this release,
while paragraphs (c)(4) and (5) of Rule 18a-3, as adopted,
respectively require netting and collateral agreements to be in
place, the rule does not impose a specific margin documentation
requirement as do the margin rules of the CFTC and the prudential
regulators.
---------------------------------------------------------------------------

    With respect to the proposed collateral haircuts, a commenter
suggested that the deductions applicable to high-grade corporate debt
or liquid structured credit instruments be calculated using the option-
adjusted spread (``OAS'').\460\ A second commenter noted that the BCBS/
IOSCO Paper provides that the haircuts can be determined by a model
that is approved by a regulator, in addition to a standardized schedule
set forth in the BCBS/IOSCO Paper.\461\ In response to these comments,
the Commission believes that the simpler and more transparent approach
of using the standardized haircuts will establish appropriately
conservative discounts on eligible collateral. Moreover, using models
to determine haircuts on collateral would not be consistent with the
final rules of the CFTC and the prudential regulators.\462\
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    \460\ See PIMCO Letter. The commenter stated that OAS generally
measures a debt instrument's risk premium over benchmark rates
covering a variety of risks and net of any embedded options in the
instrument. See id. (citing Frank J. Fabozzi, The Handbook of Fixed
Income Securities, at 908-909 (7th ed. 2005)).
    \461\ See ISDA 1/23/2013 Letter; ISDA 2/5/2014 Letter. See also
BCBS/IOSCO Paper at 17-19, Appendix B.
    \462\ See Prudential Regulator Margin and Capital Adopting
Release, 80 FR at 74872; CFTC Margin Adopting Release, 81 FR at 702.
---------------------------------------------------------------------------

    Finally, a commenter recommended that the Commission apply a 100%
haircut to a structured product, asset-backed security, re-packaged
note, combination security, and any other complex instrument.\463\ In
response, the final margin rule requires margin collateral to have a
ready market.\464\ This is designed to exclude collateral that cannot
be promptly liquidated.
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    \463\ See Letter from William J. Harrington (Nov. 19, 2018)
(``Harrington 11/19/2018 Letter'').
    \464\ See paragraph (c)(4)(i)(A) of Rule 18a-3, as adopted.
---------------------------------------------------------------------------

    A nonbank SBSD must apply the collateral haircuts to collateral
used to meet a variation margin requirement and an initial margin
requirement as was proposed.\465\ However, the Commission is making a
conforming modification to require a nonbank SBSD to apply the
deductions prescribed in paragraph (c)(3)(i) or (ii) of Rule 18a-3 to
variation margin that the firm delivers to a counterparty to meet a
variation margin requirement. As discussed above, the final rule now
requires nonbank SBSDs to deliver variation margin to counterparties,
and applying the haircuts to collateral used for this purpose will
serve the same purpose of determining whether the level of equity in
the account met the minimum margin requirements, as applying them to
collateral collected by the nonbank SBSD. In addition, applying a
haircut to collateral delivered by the nonbank SBSD to a counterparty
is consistent with the requirements of the CFTC and the prudential
regulators.
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    \465\ See paragraph (c)(3) of Rule 18a-3, as adopted. In
addition to the changes to the final rule described above to permit
the use of the CFTC collateral haircut schedule, in the final rule,
the Commission inserted the word ``standardized'' before the word
``deductions'' and deleted the phrase ``determining whether the
level of equity in the account meets the requirements of'' to
clarify that only the use of standardized haircuts is permitted and
to make a conforming change as a result of changes made to the
definitions in paragraph (b) of the final rule. In the final rule,
the Commission also deleted the phrase ``securities and money market
instruments held in the account of'' and replaced it with
``collateral delivered by'' to clarify that the collateral in the
account was delivered by a counterparty to the nonbank SBSD.
Further, in the final rule, the title of the paragraphs reads:
``Deductions for collateral'' as a conforming change. In addition,
the phrase ``securities and money market instruments'' has been
replaced with the term ``collateral'' to conform to changes made to
other parts of the rule. Finally, the phrase ``or security-based
swap dealer'' is being added after the phrase ``collateral delivered
by a counterparty.'' These changes conform the modification to the
final rule requiring nonbank SBSDs to apply the standardized
haircuts to collateral they deliver to counterparties to meet a
variation margin requirement.
---------------------------------------------------------------------------

Comments and Final Requirements Regarding Additional Collateral and
Liquidation Requirements
    As noted above, proposed Rule 18a-3 prescribed additional
requirements for collateral (e.g., it must be liquid and transferable)
and required the prompt liquidation of the collateral to eliminate a
margin deficiency.\466\ A commenter requested that only ``excess
securities collateral'' as defined in proposed Rule 18a-4 for purposes
of the segregation requirements be subject to the possession or control
requirement in proposed Rule 18a-3.\467\ The commenter noted that the
proposed segregation requirements only required excess securities
collateral to be in the SBSD's possession or control. Thus, the
commenter argued that imposing a

possession or control requirement on a broader range of collateral
could impose ``serious'' funding costs on SBSDs by requiring them to
fund initial and variation margin payments for offsetting transactions
through their own resources rather than through the collateral posted
by security-based swap customers in accordance with proposed Rule 18a-
3. Another commenter requested that the Commission amend paragraph
(c)(4)(i) of proposed Rule 18a-3 to recognize initial margin collateral
that is held at an independent third-party custodian as being in the
control of the nonbank SBSD.\468\
---------------------------------------------------------------------------

    \466\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 7064-65.
    \467\ See SIFMA 2/22/2013 Letter.
    \468\ See SIFMA 11/19/2018 Letter.
---------------------------------------------------------------------------

    The Commission did not intend the possession or control requirement
in proposed Rule 18a-3 to conflict with the proposed possession or
control requirement in Rule 18a-4. More specifically, under Rule 18a-4,
as proposed, a nonbank SBSD could re-hypothecate collateral received as
initial margin pursuant to Rule 18a-3 in limited circumstances and
subject to certain conditions. The Commission clarifies that under Rule
18a-3, as adopted, initial margin that is held at a clearing agency to
meet a margin requirement of the customer is in the control of the
nonbank SBSD for purposes of the rule. Additionally, as discussed above
in sections II.A.2.b.ii. and II.A.2.b.v. of this release, the
Commission has adopted final capital rules for stand-alone broker-
dealers and nonbank SBSDs that permit them to recognize collateral held
at a third-party custodian for purposes of: (1) The exception from
taking the capital charge when initial margin is held at a third-party
custodian; \469\ and (2) computing credit risk charges.\470\ In each
case, the collateral can be recognized if the custodian is a bank as
defined in Section 3(a)(6) of the Exchange Act or a registered U.S.
clearing organization or depository that is not affiliated with the
counterparty or, if the collateral consists of foreign securities or
currencies, a supervised foreign bank, clearing organization, or
depository that is not affiliated with the counterparty and that
customarily maintains custody of such foreign securities or currencies.
---------------------------------------------------------------------------

    \469\ See paragraph (c)(2)(xv)(C)(1) of Rule 15c3-1, as amended;
paragraph (c)(1)(ix)(C)(1) of Rule 18a-1, as adopted.
    \470\ See paragraph (c)(4)(v)(B) of Rule 15c3-1e, as amended;
paragraph (e)(2)(iii)(E)(2) of Rule 18a-1, as adopted.
---------------------------------------------------------------------------

    The Commission believes collateral held at a third-party custodian
also should be recognized for the purposes of determining the account
equity requirements in Rule 18a-3. Consequently, the Commission is
modifying paragraph (c)(4) in the final rule to provide that the
collateral must be either: (1) Subject to the physical possession or
control of the nonbank SBSD or MSBSP and may be liquidated promptly by
the firm without intervention by any other party (as was proposed); or
(2) carried by an independent third-party custodian that is a bank as
defined in Section 3(a)(6) of the Exchange Act or a registered U.S.
clearing organization or depository that is not affiliated with the
counterparty or, if the collateral consists of foreign securities or
currencies, a supervised foreign bank, clearing organization, or
depository that is not affiliated with the counterparty and that
customarily maintains custody of such foreign securities or
currencies.\471\ This will address the second commenter's concern about
recognizing collateral that is held at a third-party custodian.
---------------------------------------------------------------------------

    \471\ See paragraph (c)(4)(ii)(A) and (B) of Rule 18a-3, as
adopted.
---------------------------------------------------------------------------

    As discussed above, the Commission has modified proposed Rule 18a-3
to provide a nonbank SBSD with the option to use the collateral
haircuts required by the CFTC's rules.\472\ In light of this
modification, the Commission is modifying the final margin rule to
explicitly require that the collateral have a ready market.\473\ The
requirement that the collateral have a ready market was incorporated
into the proposed rule because, as discussed above, the nonbank SBSD
was required to use the standardized haircuts in the proposed capital
rules for purposes of the collateral deductions. The proposed nonbank
SBSD capital rules required the firm to take a 100% deduction for a
security or money market instrument that does not have a ready market
(as do the final capital rules). Consequently, by incorporating those
standardized haircuts into proposed Rule 18a-3, a nonbank SBSD would
need to deduct 100% of the value of a security or money market
instrument it received as margin if the security or money market
instrument did not have a ready market. In other words, the security or
money market instrument would have no collateral value for purposes of
meeting the account equity requirements in proposed Rule 18a-3. The
Commission's modification will retain the proposed requirement that
collateral without a ready market has no collateral value and, in
particular, will apply that requirement when the standardized haircuts
of the CFTC are used, as they do not explicitly impose a ready market
test. However, the CFTC, in describing its requirements for collateral,
stated that margin assets should share the following fundamental
characteristics: They ``should be liquid and, with haircuts, hold their
value in times of financial stress.'' \474\ The CFTC further stated in
describing collateral permitted under its rule that it consists of
``assets for which there are deep and liquid markets and, therefore,
assets that can be readily valued and easily liquidated.'' The
Commission believes that modifying the final rule to make explicit that
the ready market test applies when the CFTC's standardized haircuts are
used is consistent with these statements by the CFTC about collateral
permitted under its margin rule.
---------------------------------------------------------------------------

    \472\ See paragraph (c)(4)(i)(C) of Rule 18a-3, as adopted.
    \473\ See paragraph (c)(4)(i)(A) of Rule 18a-3, as adopted. The
modification replaces paragraph (4)(i) of proposed Rule 18a-3 (which
provided that ``The collateral is liquid and transferable'') with
paragraph (4)(i)(A) of Rule 18a-3, as adopted (which provides that
the collateral ``Has a ready market'') and paragraph (4)(i)(B) of
Rule 18a-3, as adopted (which provides that the collateral ``Is
readily transferable'').
    \474\ See CFTC Margin Adopting Release, 81 FR at 665.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission is adopting the proposed
collateral requirements with the modifications discussed above and
certain additional non-substantive modifications.\475\
---------------------------------------------------------------------------

    \475\ See paragraph (c)(4) of Rule 18a-3, as adopted. As a
consequence of the modifications discussed above, paragraph
(c)(4)(i) is re-designated paragraph (c)(4)(i)(A) through (E),
paragraph (c)(4)(ii) is re-designated paragraph (c)(4)(ii)(A) and
(B), and paragraphs (c)(4)(iii), (iv), and (v) are deleted. The
Commission made the following additional non-substantive
modifications to paragraph (c)(4) of Rule 18a-3, as adopted: (1) The
phrase ``A security-based swap dealer and'' in the preface of the
paragraph (c)(4) is changed to ``A security-based swap dealer or'';
(2) the phrases ``cash and,'' ``securities and money market
instruments,'' and ``delivered as collateral'' in the preface to
paragraph (c)(4) are deleted and replaced with the phrase
``collateral delivered''; (3) the phrase ``The collateral is subject
to the physical possession or control of the security-based swap
dealer or the major security-based swap participant'' is deleted
from paragraph (c)(4)(i) and replaced with the phrase ``The
collateral:,'' and the phrase ``Subject to the physical possession
or control of the security-based swap dealer or the major security-
based swap participant'' is added to re-designated paragraph
(c)(4)(ii)(A); (4) the phrase ``The collateral does not consist of
securities and/or money market instruments issued by the
counterparty or a party related to the security-based swap dealer,
the major security-based swap participant, or to the counterparty.''
is deleted along in paragraph (c)(4)(v) and the phrase ``Does not
consist of securities and/or money market instruments issued by the
counterparty or a party related to the security-based swap dealer,
the major security-based swap participant, or the counterparty;
and'' is added to new paragraph (c)(4)(i)(D); (5) the phrase ``The
collateral agreement between the security-based swap dealer or the
major security-based swap participant and the counterparty is
legally enforceable by the security-based swap dealer or the major
security-based swap participant against the counterparty and any
other parties to the agreement; and'' is deleted in paragraph
(c)(4)(iv) and the phrase ``Is subject to an agreement between the
security-based swap dealer or the major security-based swap
participant and the counterparty that is legally enforceable by the
security-based swap dealer or the major security-based swap
participant against the counterparty and any other parties to the
agreement; and'' is added to re-designated paragraph (c)(4)(i)(E);
(6) the phrase ``The collateral is liquid and transferable'' is
deleted from paragraph (c)(4)(ii) and replaced with the phrase ``The
collateral is either''; and (7) the phrase ``The collateral may be
liquidated promptly by the security-based swap dealer or the major
security-based swap participant without intervention by any other
party''; is deleted from paragraph (c)(4)(iii) and the phrase ``and
may be liquidated promptly by the security-based swap dealer or the
major security-based swap participant without intervention by any
other party; or'' is added to re-designated paragraph (c)(4)(ii)(A)
after the phrase ``Subject to the physical possession or control of
the security-based swap dealer or the major security-based swap
participant.''

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

    Finally, the Commission did not receive any comments addressing the
prompt liquidation requirement and is adopting it with several non-
substantive modifications.\476\
---------------------------------------------------------------------------

    \476\ See paragraph (c)(7) of Rule 18a-3, as adopted. This
paragraph was re-numbered in the final rule as a result of changes
made to other paragraphs in the rule. In the final rule, the word
``and'' was replaced with ``or'' between the phrase ``A security-
based swap dealer'' and the phrase ``major security-based swap
participant''; the phrase ``securities and money market
instruments'' was replaced with the word ``positions''; and the
phrase ``account equity'' was replaced with the word ``margin'' in
two places. These changes to the rule were non-substantive
amendments to conform the final rule text with changes made to other
parts of the rule.
---------------------------------------------------------------------------

Comments and Final Requirements Regarding Exceptions to Collecting
Margin
    Commercial End Users. As noted above, the Commission proposed five
exceptions to the account equity requirements, and the first exception
applied to counterparties that are commercial end users.\477\ This
exception provided that a nonbank SBSD need not collect variation or
initial margin from a counterparty that was a commercial end user. A
commenter opposed any exceptions in the rule, stating that failing to
collect and deliver margin contributed significantly to the 2008
financial crisis.\478\ Another commenter argued that commercial end
users carry market risk and can default on their obligations to the
nonbank SBSD, which may then be faced with liquidity challenges.\479\
This commenter stated that the lack of margin from these market
participants can be a source of systemic risk that can ``ripple through
the financial market ecosystem.''
---------------------------------------------------------------------------

    \477\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70265-66.
    \478\ See CFA Institute Letter.
    \479\ See OneChicago 2/19/2013 Letter.
---------------------------------------------------------------------------

    After Rule 18a-3 was proposed, the Terrorism Risk Insurance Program
Reauthorization Act of 2015 (``TRIPRA'') was enacted.\480\ Title III of
TRIPRA amended Section 15F(e) of the Exchange Act to provide that the
requirements of Section 15F(e)(2)(B)(ii) (which requires the Commission
to adopt margin requirements for nonbank SBSDs with respect to non-
cleared security-based swaps) shall not apply to a security-based swap
in which a counterparty qualifies for an exception under Section
3C(g)(1) of the Exchange Act or that satisfies the criteria in Section
3C(g)(4) of the Exchange Act (the exceptions from mandatory clearing
for commercial end users). Consequently, Congress mandated an exception
for commercial end users from the Commission's margin rules for non-
cleared security-based swaps.\481\ While the statutory provision
establishes a commercial end user exception, defining the term
``commercial end user'' will serve an important purpose. In particular,
the definition will implement the statutory provision and serve as a
cross-reference for the term ``commercial end user,'' which is
referenced in other parts of the Commission's rules. Consequently, the
Commission is adopting the exception and related definition with
modifications to conform the definition to the statutory text.\482\ In
the final rule, the term ``commercial end user'' is defined to mean a
counterparty that qualifies for an exception from clearing under
section 3C(g)(1) of the Exchange Act and implementing regulations or
satisfies the criteria in Section 3C(g)(4) of the Exchange Act and
implementing regulations.\483\
---------------------------------------------------------------------------

    \480\ See Public Law 114-1, 129 Stat. 3 (2015).
    \481\ Section 3C(g) of the Exchange Act provides that the
Commission shall consider whether to exempt small banks, savings
associations, Farm Credit System institutions, and credit unions
with total assets of $10 billion or less. 15 U.S.C. 78c-3(g)(3)(B).
If the Commission implements an exclusion for such entities from
clearing, those entities would be encompassed within the definition
of commercial end user under the rule. See End-User Exception to
Mandatory Clearing of Security-Based Swaps; Proposed Rule, Exchange
Act Release No. 63556 (Dec. 15, 2010), 75 FR 79992 (Dec. 21, 2010).
    \482\ See paragraphs (b)(2) and (c)(1)(iii)(A) of Rule 18a-3, as
adopted.
    \483\ See paragraph (b)(2) of Rule 18a-3, as adopted. This
language is consistent with the final rule adopted by the prudential
regulators to implement Title III of TRIPRA and the CFTC's final
margin rule. See Margin and Capital Requirements for Covered Swap
Entities, 81 FR 50605 (Aug. 2, 2016); CFTC Margin Adopting Release,
81 FR at 677-79.
---------------------------------------------------------------------------

    In response to the concerns raised by the commenters regarding the
exception, a nonbank SBSD will be required to take a capital deduction
in lieu of margin or credit risk charge if it does not collect margin
from a commercial end user counterparty. The capital deduction or
charge is intended to require a nonbank SBSD to set aside net capital
to address the risks that would be mitigated through the collection of
initial margin.\484\ The set-aside net capital will serve as an
alternative to obtaining collateral for this purpose. Consequently, the
final capital rules and amendments work in tandem with the margin rules
to require capital deductions or credit risk charges that will require
nonbank SBSDs to allocate capital against the market and credit
exposures resulting from transactions with commercial end users, which
may not be fully collateralized.
---------------------------------------------------------------------------

    \484\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70245.
---------------------------------------------------------------------------

    In addition, as discussed below, a nonbank SBSD will be required to
establish, maintain, and document procedures and guidelines for
monitoring the risk of accounts holding non-cleared security-based
swaps. Among other things, a nonbank SBSD will be required to have
procedures and guidelines for determining, approving, and periodically
reviewing credit limits for each counterparty to a non-cleared
security-based swap.\485\ Consequently, nonbank SBSDs that do not
collect variation and/or initial margin from a commercial end user will
need to establish a credit limit for the end user and periodically
review the credit limit in accordance with their risk monitoring
guidelines.\486\ The final rule also does not prohibit a nonbank SBSD
from requiring a commercial end user to post variation and initial
margin under its own house margin requirements.
---------------------------------------------------------------------------

    \485\ See paragraph (e)(2) of Rule 18a-3, as adopted.
    \486\ See Prudential Regulator Margin and Capital Adopting
Release, 80 FR at 74848-49 (``Finally, the Agencies note that the
exception or exemption of a transaction from the margin requirements
in no way prohibits a covered swap entity from requiring initial
and/or variation margin on such transactions but does not impose
initial or variation margin requirements as a regulatory matter.'');
see also CFTC Margin Adopting Release, 81 FR at 648 (``The
Commission has other requirements [17 CFR 23.600 (Risk Management
Program for swap dealers and major swap participants)] that should
address the monitoring of risk exposures for those entities'').
---------------------------------------------------------------------------

    Financial Market Intermediaries. The second exception to collecting
margin applied when the counterparty was another SBSD.\487\ More
specifically, the Commission proposed two alternatives with respect to
SBSD counterparties. Under the first alternative, a nonbank SBSD would
need to collect variation margin but not initial margin from the other
SBSD (``Alternative A''). Under the second alternative, a nonbank SBSD
would be required to collect variation and initial margin from the
other SBSD

and the initial margin needed to be held at a third-party custodian
(``Alternative B'').\488\
---------------------------------------------------------------------------

    \487\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70267-68.
    \488\ Alternative B would not be an exception to the account
equity requirements in Rule 18a-3 because it would require the
nonbank SBSD to collect variation and initial margin from another
SBSD. However, the proposed exception related to how the collateral
must be held--at an independent third-party custodian on behalf of
the counterparty--and, therefore, not in the possession or control
of the nonbank SBSD.
---------------------------------------------------------------------------

    Some commenters supported Alternative A. One of these commenters
argued that the requirement to collect initial margin from other SBSDs
under Alternative B would severely curtail the use of non-cleared
security-based swaps for hedging.\489\ The commenter argued that this
result would disrupt key financial services, such as those that
facilitate the availability of home loans and corporate finance. The
commenter argued that the requirement to collect initial margin from
another SBSD would have detrimental pro-cyclical effects because it
would increase collateral demands in times of market stress. A second
commenter believed that Alternative B could limit credit availability,
be destabilizing, and have undesirable pro-cyclical effects.\490\ While
generally supporting harmonization of the Commission's margin rules
with the recommendations of the BCBS/IOSCO Paper, this commenter
supported Alternative A. The commenter stated that harmonization in
this case is not appropriate because it would put stress on the funding
models of U.S. nonbank SBSDs if they were required to post initial
margin to other SBSDs.\491\ A third commenter argued that the proposal
to require the exchange of large amounts of liquid initial margin come
at a time when other regulators and regulations are also focusing on
and imposing new requirements with respect to liquidity in the
financial sector.\492\ This commenter urged the Commission to evaluate
initial margin requirements in light of the changing financial
regulatory environment and to establish regulations that will support
capital growth and customer protection while minimizing systemic risk.
Some commenters also supported expanding the Alternative A approach so
that nonbank SBSDs would not be required to collect initial margin from
swap dealers, stand-alone broker-dealers, banks, foreign banks, and
foreign broker-dealers.\493\
---------------------------------------------------------------------------

    \489\ See ISDA 1/23/2013 Letter.
    \490\ See SIFMA 2/22/2013 Letter.
    \491\ See SIFMA Letter 11/19/2018. See also ISDA 11/19/2018
Letter.
    \492\ See Financial Services Roundtable Letter. See also Letter
from Robert Rozell (Nov. 8, 2018) (``Rozell Letter'').
    \493\ See Capital, Margin, and Segregation Comment Reopening, 83
FR 53013-14; SIFMA 11/19/2018 Letter.
---------------------------------------------------------------------------

    Other commenters supported Alternative B, arguing that it was more
consistent with the intent of the Dodd-Frank Act and that Alternative A
would permit an inappropriate build-up of systemic risk within the
financial system.\494\ One commenter argued that the Commission should
not be swayed by claims that Alternative B would make it difficult for
nonbank SBSDs to hedge transactions, or that it would shrink the size
of the global security-based swap market.\495\ Another commenter argued
that it would be inappropriate to allow a nonbank SBSD to have non-
cleared security-based swap exposure to another SBSD without any
requirement to collect initial margin or to take a capital charge to
address the risk of the non-cleared security-based swap.\496\ Some
commenters noted that the CFTC and the prudential regulators require
the exchange of initial margin between SBSDs and swap dealers, and the
Commission should do so as well in order to harmonize its rules with
the rules of the CFTC and the prudential regulators.\497\ One commenter
argued that a lack of harmonization would reduce the likelihood of
achieving substituted compliance determinations.\498\ Finally, a
commenter responding to the 2018 comment reopening argued that the
proposed rule text modifications were made despite the fact that
insufficient margin and capital were two of the triggers of the
financial crisis.\499\
---------------------------------------------------------------------------

    \494\ See Americans for Financial Reform Education Fund Letter;
Barnard Letter; Citadel 11/19/2018 Letter; Letter from Jeffrey P.
Mahoney, General Counsel, Council of Institutional Investors (Nov.
8, 2018) (``Council of Institutional Investors Letter'').
    \495\ See Americans for Financial Reform Letter.
    \496\ See OneChicago 2/19/2013 Letter.
    \497\ See Americans for Financial Reform Education Fund Letter;
Citadel 11/19/2018 Letter; Rutkowski Letter.
    \498\ See Citadel 11/19/2018 Letter.
    \499\ See Better Markets 11/19/2018 Letter.
---------------------------------------------------------------------------

    In the Commission's judgment, Alternative A is the prudent approach
because it will promote the liquidity of nonbank SBSDs by not requiring
them to deliver initial margin to other SBSDs. As discussed above,
delivering initial margin would prevent this capital of the nonbank
SBSD from being immediately available to be used by the firm. If the
delivering SBSD is undergoing financial stress or the markets more
generally are in a period of financial turmoil, a nonbank SBSD may need
to liquidate assets to raise funds and reduce its leverage. However, if
assets are in the control of another SBSD, they would not be available
for this purpose. For these reasons, the nonbank SBSD capital rule
treats most unsecured receivables as assets that must be deducted from
net worth when the firm computes net capital.
    In addition, the Commission believes that nonbank SBSDs serve an
important function in the non-cleared security-based swap market by
providing liquidity to market participants and by performing important
market making functions. Thus, the Commission believes its margin rule
for non-cleared security-based swaps should promote the liquidity of
these entities, which, in turn, will help ensure their safety and
soundness. Further, the Commission believes these considerations
support expanding the exception beyond SBSD counterparties to include
other financial market intermediary counterparties such as swap
dealers, FCMs, stand-alone broker-dealers, banks, foreign banks, and
foreign broker-dealers.\500\ The Commission believes it is appropriate
to expand the list given their importance to the securities markets,
the liquidity impact on these entities if they are required to post
initial margin, and the fact that these entities will be subject to a
regulatory capital standard that would incentivize them to
collateralize exposures to their security-based swap counterparties.
---------------------------------------------------------------------------

    \500\ See Capital, Margin, and Segregation Comment Reopening, 83
FR at 53013-14 (soliciting comment on whether the dealer to dealer
initial margin exception should be expanded to other types of
financial market intermediaries).
---------------------------------------------------------------------------

    A nonbank SBSD will be required to take a capital deduction in lieu
of margin or credit risk charge if it does not collect initial margin
from a counterparty that is a financial market intermediary. As
discussed above, the capital deduction or credit risk charge is
intended to require a nonbank SBSD to set aside net capital to address
the risks that are mitigated through the collection of initial margin.
Furthermore, the nonbank SBSD will be required to establish, maintain,
and document procedures and guidelines for monitoring the risk of
accounts holding non-cleared security-based swaps.\501\ These include
procedures for determining, approving, and periodically reviewing
credit limits for each counterparty. Consequently, a nonbank SBSD will
need to establish credit limits for each counterparty to a non-cleared
security-based swap, including counterparties that are financial market
intermediaries.
---------------------------------------------------------------------------

    \501\ See paragraph (e) of Rule 18a-3, as adopted.
---------------------------------------------------------------------------

    While Alternative A is not consistent with the final rules of the
CFTC and the

prudential regulators, the rule does not prohibit nonbank SBSDs from
collecting initial margin from another financial intermediary as a
house margin requirement or by agreement. In addition, the adoption of
Alternative A as one requirement in the margin rule should not
negatively affect potential substituted compliance determinations
because the Commission expects regulators will focus on regulatory
outcomes as a whole rather than on requirement-by-requirement
similarity.\502\ Finally, the adoption of Alternative A with
modifications discussed above should alleviate commenters' concerns
that imposing initial margin requirements would severely curtail the
use of non-cleared security-based swaps for hedging.
---------------------------------------------------------------------------

    \502\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 30078-
30079.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Alternative A with
the modifications discussed above.\503\
---------------------------------------------------------------------------

    \503\ See paragraph (c)(1)(iii)(B) of Rule 18a-3, as adopted.
The text of the final rule is modified to add swap dealers, broker-
dealers, FCMs, banks, foreign banks, and foreign broker-dealers to
the list of counterparties covered by the exception.
---------------------------------------------------------------------------

    Counterparties that Use Third-Party Custodians. The third proposed
exception applied to counterparties that are not commercial end users
and that elect to have their initial margin segregated pursuant to
Section 3E(f) of the Exchange Act.\504\ Among other things, Section
3E(f) provides that a counterparty may elect to have its initial margin
segregated in an account carried by an independent third-party
custodian. Under the proposed exception, the nonbank SBSD did not need
to directly hold the initial margin required from the counterparty.
This accommodated the counterparty's right under Section 3E(f) to elect
to have the third-party custodian hold the initial margin. The
Commission did not receive any comments specifically addressing this
provision but is modifying it to remove the reference to Section 3E(f)
to address the potential that the initial margin might be held at a
third-party custodian pursuant to other provisions. For the foregoing
reasons, the Commission is adopting this exception with the
modification described above and certain non-substantive
modifications.\505\
---------------------------------------------------------------------------

    \504\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70268-69.
    \505\ In the final rule, this exception is contained in
paragraph (c)(1)(iii)(C) of Rule 18a-3, as adopted. This paragraph
states ``The requirements of paragraph (c)(1)(ii)(B) of this section
do not apply to an account of a counterparty that delivers the
collateral to meet the initial margin amount to an independent
third-party custodian.''
---------------------------------------------------------------------------

    Legacy Accounts. The fourth proposed exception applied to accounts
of counterparties that are not commercial end users and that hold
legacy non-cleared security-based swaps.\506\ Under this proposed
exception, the nonbank SBSD did not need to collect variation or
initial margin from the counterparty.
---------------------------------------------------------------------------

    \506\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70269.
---------------------------------------------------------------------------

    Some commenters expressed support for this exception. One of these
commenters suggested that the Commission except legacy transactions,
unless both counterparties agree that margin should be exchanged.\507\
A second commenter suggested that legacy trades be excepted unless the
nonbank SBSD includes them in a netting set with new transactions.\508\
Some commenters also provided suggestions as to what should be deemed a
legacy transaction, citing novated contracts and existing legacy
security-based swaps that have been modified for loss mitigation
purposes, or contracts that have been amended to replace references to
the London Inter-bank Offered Rate (``LIBOR'').\509\ Commenters also
requested clarification as to whether the legacy account exception for
nonbank SBSDs applies to both variation and initial margin or to
initial margin only.\510\ A commenter argued that initial margin
requirements should not apply to legacy security-based swaps, but that
the exception should only apply until the legacy contracts expire or
are revised.\511\ This commenter further argued that the exception
should not apply to variation margin because, without this type of
protection, counterparties are exposed to potential losses as a
consequence of the default of trading partners.
---------------------------------------------------------------------------

    \507\ See PIMCO Letter.
    \508\ See SIFMA 3/12/2014 Letter.
    \509\ See Letter from the Alternative Reference Rates Committee
(Jul. 12, 2018) (``ARRC Letter''); AFGI 2/15/2013 Letter; SIFMA 2/
22/2013 Letter.
    \510\ See Financial Services Roundtable Letter; ISDA 1/23/2013
Letter.
    \511\ See CFA Institute Letter.
---------------------------------------------------------------------------

    The Commission is adopting the proposed exception for accounts
holding legacy security-based swaps \512\ with a modification to make
explicit that the exception applies to variation and initial margin in
response to comments seeking clarification on that point.\513\ Under
the final rule, nonbank SBSDs can collect variation or initial margin
with respect to legacy transactions pursuant to house requirements or
agreement.
---------------------------------------------------------------------------

    \512\ See paragraph (c)(1)(iii)(D) of Rule 18a-3, as adopted. In
the final rule, the Commission modified the defined term ``security-
based swap legacy account'' by replacing the word ``effective'' in
two places with the word ``compliance.'' See paragraph (b)(6) of
Rule 18a-3, as adopted. The Commission made these modifications to
link the legacy account exception to the compliance date of Rule
18a-3 (i.e., the date when nonbank SBSDs must begin complying with
the rules) as opposed to the effective date, which will occur before
these entities are required to register as SBSDs and comply with the
rule. The term security-based swap legacy account was re-designated
subparagraph (b)(6) of the rule due to non-substantive changes made
to other parts of the rule. Finally, the phrase ``one or more'' was
inserted after the phrase ``is used to hold.''
    \513\ See paragraph (c)(1)(iii)(D) of Rule 18a-3, as adopted.
See also See Capital, Margin, and Segregation Proposing Release, 77
FR 70269. The Commission's intent was to propose an exception that
applied to both variation and initial margin. See Capital, Margin,
and Segregation Proposing Release, 77 FR at 70269 (``Under the
fourth exception to the account equity requirements in proposed Rule
18a-3, a nonbank SBSD would not be required to collect cash,
securities, and/or money market instruments to cover the negative
equity (current exposure) or margin amount (potential future
exposure) in a security-based swap legacy account.''). The proposed
rule text, however, inadvertently limited the exception to the
collection of initial margin. In the final rule, the Commission also
deleted the phrase ``of a counterparty that is not a commercial end
user'' from this subsection because it is redundant, as commercial
end users are subject to an exception from the rule under paragraph
(c)(1)(iii)(A) of Rule 18a-3. Finally, the word ``legacy'' was moved
to before the word ``account'' to conform the language with the
definition of security-based swap legacy account in paragraph (b)(6)
of the rule. See paragraph (c)(1)(iii)(D) of Rule 18a-3, as adopted.
---------------------------------------------------------------------------

    With regard to the comment that counterparties should be required
to post variation margin since they may be exposed to potential losses,
a nonbank SBSD will be required to take a capital deduction in lieu of
margin or credit risk charge if it does not collect variation and/or
initial margin with respect to a legacy account. Furthermore, the
nonbank SBSD will be required to establish, maintain, and document
procedures and guidelines for monitoring the risk of legacy accounts.
With respect to the comment about the effect of the replacement of
references to LIBOR in security-based swap contracts, the Commission
intends to consult and coordinate with other regulators on this
question.
    Minimum Transfer Amount. The fifth exception established a minimum
transfer amount.\514\ Under this provision, a nonbank SBSD was not
required to collect margin if the total amount of the requirement was
equal to or less than $100,000. If this amount was exceeded, the
nonbank SBSD needed to collect margin to cover the entire amount of the
requirement, not just the amount that exceeded $100,000.
---------------------------------------------------------------------------

    \514\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70272.
---------------------------------------------------------------------------

    Several commenters supported this exception, or supported
increasing it to amounts that ranged from $250,000 to

$500,000.\515\ Commenters also asked the Commission to clarify whether
the proposed minimum transfer amount applies to both initial and
variation margin, and recommended that different jurisdictions use the
same currency to designate thresholds.\516\ A commenter also supported
consistent minimum transfer amounts across domestic regulators.\517\
The CFTC and the prudential regulators adopted a minimum transfer
amount of $500,000.\518\ One commenter opposed a minimum transfer
amount for variation margin.\519\
---------------------------------------------------------------------------

    \515\ See American Council of Life Insurers 2/22/2013 Letter;
American Council of Life Insurers, et al. 1/29/2013 Letter; ICI 11/
19/2018 Letter; ISDA 11/19/2018 Letter; Markit Letter; SIFMA AMG 2/
22/2013 Letter; SIFMA AMG 11/19/2018 Letter; SIFMA 3/12/14 Letter;
SIFMA 11/19/2018 Letter.
    \516\ See ISDA 2/5/2014 Letter; SIFMA 3/12/14 Letter.
    \517\ See American Council of Life Insurers 2/22/2013 Letter.
    \518\ See Prudential Regulator Margin and Capital Adopting
Release, 80 FR at 74903; CFTC Margin Adopting Release, 81 FR at 697.
See also BCBS/IOSCO Paper at 10 (recommending a minimum transfer
amount of [euro]500,000).
    \519\ See Harrington 11/19/2018 Letter.
---------------------------------------------------------------------------

    The Commission agrees with commenters that the minimum transfer
amount should be increased to $500,000. This will reduce operational
burdens for nonbank SBSDs and their counterparties by not requiring
them to transfer small amounts of collateral on a daily basis. It also
will align the rule with the minimum transfer amount adopted by the
CFTC and the prudential regulators and, thereby, reduce potential
operational burdens and competitive impacts that could result from
inconsistent requirements.
    In response to the commenter concerned about applying the minimum
transfer amount to variation margin, a nonbank SBSD will be required to
take a capital deduction in lieu of margin or credit risk charge if it
does not collect variation and/or initial margin pursuant to the
minimum transfer amount exception.
    For these reasons, the Commission is adopting the minimum transfer
amount exception with an increase to $500,000, and with minor
modifications.\520\
---------------------------------------------------------------------------

    \520\ See paragraph (c)(1)(iii)(I) and (c)(2)(iii)(D) of Rule
18a-3, as adopted. In the final rule the minimum transfer amount
paragraph was moved to the exceptions section of the rule as a non-
substantive change to facilitate cross-references to the capital
rules related to capital charges in lieu of margin and credit risk
charges. This modification also will improve the overall consistency
and structure of the margin rule. Therefore, the exception appears
twice in the final rule text, rather than once, as proposed, with
references to both nonbank SBSDs and MSBSPs. See paragraph
(c)(1)(iii)(I) and (c)(2)(iii)(D) of Rule 18a-3, as adopted.
Finally, the phrase ``cash, securities, and money market
instruments'' has been replaced with the term ``collateral'' as a
result of changes made to other paragraphs of the rule.
---------------------------------------------------------------------------

    The Commission also clarifies that the minimum transfer amount
applies to both initial and variation margin. Thus, required initial
and variation margin need not be collected if the combined requirements
are below $500,000. However, if the $500,000 level is exceeded, the
entire amount must be collected (i.e., not the just amount that exceeds
$500,000). Finally, in response to a comment, nonbank SBSDs may
negotiate a lower ``house'' minimum transfer amount with their
counterparties.
    Initial Margin Threshold. The CFTC and the prudential regulators
have adopted a fixed-dollar $50 million threshold under which initial
margin need not be collected.\521\ The CFTC defines its initial margin
threshold amount to mean an aggregate credit exposure of $50 million
resulting from all non-cleared swaps of a swap dealer and its
affiliates with a counterparty and its affiliates.\522\ The prudential
regulators adopted a similar threshold, except that it covers aggregate
credit exposure resulting from all non-cleared security-based swaps and
swaps.\523\
---------------------------------------------------------------------------

    \521\ See CFTC Margin Adopting Release, 81 FR at 652; Prudential
Regulator Margin and Capital Adopting Release, 80 FR at 74863; see
also BCBS/IOSCO Paper, principle 2.1 (providing that covered
entities must exchange initial margin with a threshold not to exceed
[euro]50 million).
    \522\ See CFTC Margin Adopting Release, 81 FR at 697.
    \523\ Prudential Regulator Margin and Capital Adopting Release,
80 FR at 74901.
---------------------------------------------------------------------------

    Some commenters requested that the Commission adopt a threshold
consistent with the thresholds adopted by the CFTC and the prudential
regulators, and with the recommendations in the BCBS/IOSCO Paper.\524\
A commenter stated that initial margin thresholds can be a useful means
for reducing the aggregate liquidity impact of mandatory initial margin
requirements while still protecting an SBSD from large uncollateralized
potential future exposures to counterparties.\525\ Another commenter
suggested that if pension plans are subject to initial margin
requirements, then dealers should be able to set initial margin
thresholds for them on a case-by-case basis.\526\ A third commenter
suggested that low-risk financial end users should be allowed an
uncollateralized threshold of $100 million.\527\ Other commenters
raised concerns about the consequences of breaching the threshold and
noted that doing so would trigger the need to execute agreements to
address the posting of initial margin.\528\
---------------------------------------------------------------------------

    \524\ See, e.g., ICI 5/11/2015 Letter; Ropes & Gray Letter;
SIFMA 3/12/2014 Letter.
    \525\ See SIFMA 2/22/2013 Letter.
    \526\ See American Benefits Council Letter, et al., 1/29/2013
Letter.
    \527\ See PIMCO Letter.
    \528\ See Letter from Scott O'Malia, Chief Executive Officer,
International Swaps and Derivatives Association, Kenneth E. Bentsen,
Jr., President & CEO, Securities Industry and Financial Markets
Association, Ananda Radhakrishnan, Vice President, Center for Bank
Derivatives Policy, American Bankers Association, James Kemp,
Managing Director, Global Foreign Exchange Division, GFMA, and
Briget Polichene, Chief Executive Officer, Institute of
International Bankers (Sept. 12, 2018) (``ISDA, SIFMA, ABA, et al.
9/12/18 Letter'').
---------------------------------------------------------------------------

    In the 2018 comment reopening, the Commission asked whether it
would be appropriate to establish a risk-based threshold where, for
example, a nonbank SBSD would not be required to collect initial margin
to the extent the amount does not exceed the lesser of: (1) 1% of the
SBSD's tentative net capital; or (2) 10% of the net worth of the
counterparty.\529\ The Commission stated that the purpose would be to
establish a threshold that is scalable and has a more direct relation
to the risk to the nonbank SBSD arising from its security-based swap
activities. The Commission also stated that a fixed-dollar threshold,
depending on the size and activities of the nonbank SBSD, could either
be too large and, therefore, not adequately address the risk, or too
small and, therefore, overcompensate for the risk.
---------------------------------------------------------------------------

    \529\ See Capital, Margin, and Segregation Comment Reopening, 83
FR at 53013.
---------------------------------------------------------------------------

    In response to the potential risk-based threshold discussed in the
comment period reopening, most commenters argued that the Commission
should adopt a fixed-dollar $50 million threshold consistent with the
final margin rules of the CFTC and the prudential regulators.\530\ A
commenter suggested that this would result in benefits such as
predictability and transparency.\531\ This commenter also argued that a
threshold harmonized with that of other regulators would prevent
opportunities for counterparties to engage in regulatory arbitrage, and
recommended that any drawbacks (such as the threshold being too large
in relation to a nonbank SBSD's net capital) be addressed through
additional capital charges.\532\ A commenter raised concerns that a
different threshold

would result in significant compliance challenges if trading desks that
trade both security-based swaps and swaps were required to apply
different standards to the same counterparty.\533\ Another commenter
believed that a scalable threshold would cause significant operational
challenges and inefficiencies by subjecting individual SBSDs to
different thresholds for the collection of initial margin.\534\
---------------------------------------------------------------------------

    \530\ See Center for Capital Markets Competitiveness, Chamber of
Commerce 11/19/2018 Letter; ICI 11/19/2018 Letter; ISDA 11/19/2018
Letter.
    \531\ See SIFMA 11/19/2018 Letter. This commenter recommended
that the Commission adopt a $50 million initial margin threshold,
but recommended that the drawbacks of the fixed-dollar threshold
could be addressed through additional capital charges, such as
credit concentration capital charges.
    \532\ See SIFMA 11/19/2018 Letter.
    \533\ See ICI 11/19/2018 Letter.
    \534\ See ISDA 11/29/2018 Letter.
---------------------------------------------------------------------------

    Several commenters argued against including an initial margin
threshold in the final rule. Two stated that there is no threshold in
the margin rules for cleared security-based swaps, and establishing one
for non-cleared security-based swaps would increase systemic risk.\535\
One commenter argued that the Commission did not explain its views on
why a counterparty specific threshold (e.g., $50 million) should be
rejected in favor of a measure that would be tied to a percentage of
the nonbank SBSD's tentative net capital.\536\
---------------------------------------------------------------------------

    \535\ See Better Markets 11/19/2018 Letter; OneChicago 11/19/
2018 Letter.
    \536\ See Better Markets 11/19/2018 Letter.
---------------------------------------------------------------------------

    In response to comments, the Commission believes that it would be
appropriate to establish a threshold that is more consistent with the
thresholds adopted by the CFTC and the prudential regulators. This will
eliminate potential competitive disparities and address operational
concerns raised by commenters. For these reasons, the Commission is
adopting a fixed-dollar $50 million initial margin threshold below
which initial margin need not be collected.\537\ As discussed below,
the threshold in the Commission's final margin rule is consistent with
the threshold in the prudential regulators' margin rules.
---------------------------------------------------------------------------

    \537\ See paragraph (c)(1)(iii)(H)(1) of Rule 18a-3, as adopted.
---------------------------------------------------------------------------

    Pursuant to the threshold, an SBSD need not collect the calculated
amount of initial margin to the extent that the sum of that amount plus
all other credit exposures resulting from non-cleared security-based
swaps and swaps of the nonbank SBSD and its affiliates with the
counterparty and its affiliates does not exceed $50 million. The
threshold will be calculated across all non-cleared security-based
swaps and swaps of the nonbank SBSD and its affiliates with the
counterparty and its affiliates, with the exception that non-cleared
security-based swap transactions with commercial end users and non-
cleared swap transactions that are exempted under Section 4s(e)(4) of
the CEA need not be included in the calculation. The margin rules of
the CFTC and the prudential regulators similarly exclude transactions
with commercial end users from their respective fixed-dollar $50
million thresholds. Moreover, as discussed above, the TRIPRA statute
precludes the Commission from adopting margin requirements for
commercial end users.
    The Commission's fixed-dollar $50 million threshold is consistent
with the threshold established by the prudential regulators in that the
calculation includes both non-cleared security-based swaps and swaps
(in contrast to the CFTC's threshold, which includes only swaps in the
calculation). Including both non-cleared security-based swaps and swaps
in the calculation will result in a more prudent requirement that takes
into account a broader range of exposures. Further, because bank SBSDs
can deal in security-based swaps, aligning the nonbank SBSD threshold
with the bank threshold will eliminate a potential competitive
disparity between the two types of U.S. entities that deal in security-
based swaps. Also, if the calculation of the Commission's threshold
were limited to security-based swaps, SBSDs and counterparties
potentially would need to make 3 threshold calculations: One for the
Commission's rule (security-based swaps only), one for the CFTC's rule
(swaps only), and one for the prudential regulators' rule (security-
based swaps and swaps). By conforming to the prudential regulator's
rule, SBSDs and counterparties need only make two calculations (the
Commission/prudential regulator threshold and the CFTC threshold).
Further, a counterparty that breaches the Commission's fixed-dollar $50
million threshold will not necessarily breach the CFTC's fixed-dollar
$50 million threshold exception given that the former calculation
includes security-based swap and swap exposures and the latter includes
only swap exposures.
    The Commission recognizes that a fixed-dollar threshold (as opposed
to a scalable threshold) does not necessarily bear a relation to the
financial condition of the nonbank SBSD and its counterparty. To
address this issue, as discussed above, and as suggested by a
commenter, a nonbank SBSD will be required to take a capital deduction
in lieu of margin or a credit risk charge if it does not collect
initial margin pursuant to the fixed-dollar $50 million threshold
exception. Furthermore, the nonbank SBSD will be required to establish,
maintain, and document procedures and guidelines for monitoring
counterparty risk. Consequently, the Commission does not believe the
fixed-dollar $50 million threshold exception will unduly increase
systemic risk as suggested by a commenter. For these reasons, the
Commission believes it is appropriate to adopt the exception to promote
greater consistency with the margin requirements of the prudential
regulators.
    Finally, commenters raised concerns about the consequences of
breaching a fixed-dollar $50 million threshold and noted that doing so
would trigger the need to execute agreements to address the posting of
initial margin.\538\ The Commission recognizes that after a breach
counterparties may need time to execute agreements, establish processes
for exchanging initial margin, and take other steps to comply with the
initial margin requirement.\539\ Therefore, the Commission is modifying
the final rule to permit a nonbank SBSD to defer collecting the initial
margin amount for up to two months following the month in which a
counterparty no longer qualifies for the fixed-dollar $50 million
threshold exception for the first time.\540\ This is designed to
provide the counterparty with sufficient time to take the steps
necessary to begin posting initial margin pursuant to the final rule.
---------------------------------------------------------------------------

    \538\ See ISDA, SIFMA, American Bankers Association, et al 9/12/
2018 Letter.
    \539\ As discussed above in section II.B.1. of this release,
while paragraphs (c)(4) and (5) of Rule 18a-3, as adopted,
respectively require netting and collateral agreements to be in
place, the rule does not impose a specific margin documentation
requirement as do the margin rules of the CFTC and the prudential
regulators.
    \540\ See paragraph (c)(1)(iii)(H)(2) of Rule 18a-4, as adopted.
Paragraph (c)(1)(iii)(H)(2) of the final rule states
``Notwithstanding paragraph (c)(1)(iii)(H)(1) of this section, a
security-based swap dealer may defer collecting the amount required
under paragraph (c)(1)(ii)(B) of this section for up to two months
following the month in which a counterparty no longer qualifies for
this threshold exception for the first time.''
---------------------------------------------------------------------------

    Affiliates. The margin rules of the CFTC and the prudential
regulators have exceptions for counterparties that are affiliates.\541\
Some commenters requested that the Commission also adopt exceptions for
affiliates.\542\ One

commenter stated that inter-affiliate transactions do not increase the
overall risk profile or leverage of the SBSD.\543\ Another commenter
noted that some affiliates enter into security-based swap transactions
with their nonbank SBSD affiliates, either for individual hedging
purposes or as part of the consolidated group's broader risk
strategy.\544\
---------------------------------------------------------------------------

    \541\ See CFTC Margin Adopting Release, 81 FR at 673-674;
Prudential Regulator Margin and Capital Adopting Release, 80 FR at
74887-90.
    \542\ See Letter from Representative Ted Budd, Representative
Patrick McHenry et. al. (May 14, 2019); Letter from John Court,
Managing Director and Senior Associate General Counsel, The Clearing
House, Cecelia A. Calaby, Executive Director and General Counsel,
American Bankers Association Securities Association, and Jason
Shafer, Vice President, American Bankers Association (Nov. 24, 2014)
(``Clearing House 11/24/14 Letter''); Letter from John Court,
Managing Director/Deputy General Counsel, The Clearing House,
Cecelia A. Calaby, Senior Vice President, Office of Regulatory
Policy, American Bankers Association and Executive Director and
General Counsel, American Bankers Association Securities
Association, and Kyle Brandon, Managing Director, Director of
Research, SIFMA (June 1, 2015) (``Clearing House 6/1/15 Letter'');
Letter from Coalition for Derivatives End-Users (Feb. 22, 2013)
(``Coalition for Derivatives End-Users 2/22/2013 Letter'');
Financial Services Roundtable Letter; ISDA 1/23/2013 Letter; ISDA 2/
5/2014 Letter; ISDA 11/19/2018 Letter; SIFMA 2/22/2013 Letter; SIFMA
3/12/2014 Letter; SIFMA 11/19/2019 Letter. The Clearing House
proposed two alternatives for initial margin: A requirement that a
nonbank SBSD collect initial margin from less regulated affiliates
and segregate it, and not collect (or post) initial margin from
highly regulated affiliates. Variation margin would still be
collected under this proposal. In lieu of these proposals, The
Clearing House also proposed a pooled segregated collateral account
held at the parent company level. See Clearing House 6/1/15 Letter.
One commenter recommended that variation margin requirements apply
to an inter-affiliate transaction only when an SBSD is transacting
with an unregulated/non-prudentially supervised affiliate. See SIFMA
2/22/2013 Letter. This commenter also recommended that the
Commission should not require nonbank SBSDs to collect initial
margin from affiliates that are subject to the same centralized risk
management program as the nonbank SBSD. See SIFMA 11/19/2018 Letter.
    \543\ See ISDA 11/19/2018 Letter.
    \544\ See SIFMA 11/19/2018 Letter.
---------------------------------------------------------------------------

    Other commenters opposed an exception for affiliates.\545\ One of
these commenters urged the Commission to impose strong margin
requirements for security-based swaps between bank affiliates and other
entities under the Commission's authority.\546\
---------------------------------------------------------------------------

    \545\ See CFA Institute Letter; Letter from Elijah E. Cummings,
Ranking Member, Committee on Oversight and Government Reform and
Elizabeth Warren, Ranking Member, Subcommittee on Economic Policy
(Nov. 10, 2015) (``Cummings and Warren Letter'').
    \546\ See Cummings and Warren Letter.
---------------------------------------------------------------------------

    The Commission is persuaded that there should an exception for
affiliates in order to reduce potential competitive disparities, and to
promote consistency with the margin requirements of the CFTC.
Therefore, the Commission is modifying the final rule to establish an
initial margin exception when the counterparty is an affiliate of the
SBSD.\547\
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    \547\ See paragraph (c)(1)(iii)(G) of Rule 18a-3, as adopted.
This paragraph in the final rule will read: [t]he requirements of
paragraph (c)(1)(ii)(B) of this section do not apply to an account
of a counterparty that is an affiliate of the security-based swap
dealer.
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    Although they will not be required to collect initial margin from
affiliates, a nonbank SBSD must collect variation margin from them. In
addition, as discussed above, a nonbank SBSD will be required to take a
capital deduction in lieu of margin or credit risk charge if it does
not collect initial margin from an affiliate. The nonbank SBSD also
will be required to establish, maintain, and document procedures and
guidelines for monitoring the risk of affiliates. Moreover, the final
rule does not prohibit a nonbank SBSD from requiring an affiliate to
post initial margin under its own house margin requirements.
    The BIS, European Stability Mechanism, Multilateral Development
Banks, and Sovereigns. The margin rules of the CFTC and the prudential
regulators have exceptions for counterparties that are not a financial
end user as that term is defined in their rules.\548\ Their definitions
of financial end user exclude the BIS, multilateral development banks,
and sovereign entities.\549\
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    \548\ See CFTC Margin Adopting Release, 81 FR at 642; Prudential
Regulator Margin and Capital Adopting Release, 80 FR at 74855.
    \549\ See CFTC Margin Adopting Release, 81 FR at 642; Prudential
Regulator Margin and Capital Adopting Release, 80 FR at 74855. See
also BCBS/IOSCO Paper, paragraph 2(c) (recommending that margin
standards should not be applied in such a way that would require
sovereigns, central banks, multilateral development banks, or the
BIS to either collect or post margin).
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    Some commenters requested that the Commission adopt exceptions for
these types of entities to be consistent with the margin rules of the
CFTC and the prudential regulators, and with the recommendations in the
BCBS/IOSCO Paper.\550\ One of these commenters argued that
international consistency among covered entities subject to margin
requirements, including the definition of public sector entities, is
critical to competitive parity and comity.\551\ Another commenter
argued that the approach to margin for foreign sovereign governments,
central banks, and multilateral lending or development organizations
should be determined through international consensus.\552\ A commenter
recommended that the Commission adopt a definition of ``financial end
user'' consistent with the margin rules of the CFTC and the prudential
regulators, which--as noted above--results in exceptions for sovereign
entities, multilateral development banks, and the BIS.\553\ The
commenter argued that different treatment of these entities will create
unnecessary competitive disparities.
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    \550\ See Financial Services Roundtable Letter; SIFMA 2/22/2013
Letter; SIFMA 3/12/2014 Letter; SIFMA 11/19/2018 Letter.
    \551\ See SIFMA 3/12/2014 Letter.
    \552\ See Financial Services Roundtable Letter.
    \553\ See SIFMA 11/19/2018 Letter.
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    The Commission is persuaded that there should be some exceptions
for these types of entities in order to reduce potential competitive
disparities. However, the Commission also believes that the exception
for sovereign entities should be more limited, given the wide range of
potential counterparties that would be within this category and their
differing levels of creditworthiness. Limiting the exception for
sovereign entities will help ensure the safety and soundness of nonbank
SBSDs.
    For these reasons, the Commission is adopting an exception from
collecting variation and initial margin if the counterparty is the BIS,
the European Stability Mechanism, or one of a number of multilateral
development banks identified in the rule.\554\ These multilateral
development banks are the International Bank for Reconstruction and
Development, the Multilateral Investment Guarantee Agency, the
International Finance Corporation, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the European
Bank for Reconstruction and Development, the European Investment Bank,
the European Investment Fund, the Nordic Investment Bank, the Caribbean
Development Bank, the Islamic Development Bank, the Council of Europe
Development Bank, and any other multilateral development bank that
provides financing for national or regional development in which the
U.S. government is a shareholder or contributing member. These specific
counterparties also are not required to collect and/or post variation
margin under the final margin rules of the CFTC and/or the prudential
regulators.\555\ The Commission believes these counterparties pose
minimal credit risk and, therefore, it is an appropriate trade-off to
except them from the margin requirements (which are designed to protect
the nonbank SBSD from counterparty risk) in order to eliminate the
potential competitive disparities and operational burdens of treating
them differently than under the rules of the CFTC and the prudential
regulators.\556\
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    \554\ See paragraph (c)(1)(iii)(E) of Rule 18a-3, as adopted.
    \555\ See CFTC Margin Adopting Release, 81 FR at 642; Prudential
Regulator Margin and Capital Adopting Release, 80 FR at 74855. See
also BCBS/IOSCO Paper at 10. The CFTC's approach generally treats
the European Stability Mechanism consistent with the treatment of a
multilateral development bank for purposes of the CFTC margin rule.
See CFTC Letter No. 17-34 (Jul. 24, 2017).
    \556\ See CFTC Margin Adopting Release, 81 FR at 642; Prudential
Regulator Margin and Capital Adopting Release, 80 FR at 74855.
---------------------------------------------------------------------------

    The exception for sovereign entities is more limited. Specifically,
the final rule excepts a nonbank SBSD from collecting initial margin
from a counterparty that is a sovereign entity if the nonbank SBSD has
determined that the

counterparty has only a minimal amount of credit risk pursuant to
policies and procedures or credit risk models established under
applicable net capital rules for nonbank SBSDs.\557\ The final capital
rules for nonbank SBSDs require these entities to have policies and
procedures for assessing the creditworthiness of certain types of
securities or money market instruments for purposes of applying
standardized haircuts.\558\ The rules also require firms authorized to
use models to compute haircuts to have a model for determining credit
risk charges. The firms will need to use these policies and procedures
or models (as applicable) to determine whether a sovereign entity has a
minimal amount of credit risk in order to apply this exception. A
sovereign entity that the nonbank SBSD has determined has a minimal
amount of credit risk for purposes of the nonbank capital rules would
qualify for the initial margin exception in Rule 18a-3.
---------------------------------------------------------------------------

    \557\ See paragraph (c)(1)(iii)(F) of Rule 18a-3, as adopted.
The exception applies to a counterparty that is a central government
(including the U.S. government) or an agency, department, ministry,
or central bank of a central government if the security-based swap
dealer has determined that the counterparty has only a minimal
amount of credit risk pursuant to policies and procedures
established pursuant to Rule 15c3-1 or 18a-1 (as applicable).
    \558\ See Removal of Certain References to Credit Ratings Under
the Securities Exchange Act of 1934, Exchange Act Release No. 71194
(Dec. 27, 2013), 79 FR 1522 (Jan. 8, 2014) (discussing the ``minimal
amount of credit risk'' standard). See also paragraph (c)(2)(vi)(I)
of Rule 15c3-1.
---------------------------------------------------------------------------

    Nonbank SBSDs must collect variation margin from and deliver
variation margin to counterparties that are sovereign entities under
the final rule. In contrast, the final margin rules of the CFTC and the
prudential regulators do not require an SBSD or swap dealer to exchange
variation margin with a counterparty that is a sovereign entity.\559\
Collecting variation margin from sovereign entity counterparties is an
important means of managing credit exposure to these entities and
limiting the amount of unsecured receivables that comprise the firm's
capital. As discussed above, in contrast to the multilateral
development banks identified in the rule, the Commission believes that
the exception for sovereign entities should be more limited given the
wide range of potential counterparties in this category and their
differing levels of creditworthiness. Limiting the exception for
sovereign entities and requiring that these counterparties post
variation margin will help ensure the safety and soundness of nonbank
SBSDs. Therefore, the Commission does not believe it is appropriate to
except such counterparties from the variation margin requirements of
the final rule.
---------------------------------------------------------------------------

    \559\ See CFTC Margin Adopting Release, 81 FR at 642; Prudential
Regulator Margin and Capital Adopting Release, 80 FR at 74855.
---------------------------------------------------------------------------

Requests for Other Exceptions
    Commenters suggested that the Commission except other
counterparties from the margin requirements in Rule 18a-3. The proposed
exceptions included: Pension plans; \560\ securitization and similar
special purpose vehicles; \561\ state and municipal government
entities; \562\ low risk financial end users; \563\ financial end users
such as captive financial affiliates and mutual life insurance
companies; \564\ emerging market counterparties that constitute only a
certain percentage of a nonbank SBSD's volume; \565\ and counterparties
trading non-cleared derivatives below a certain notional amount (e.g.,
financial end users without material swaps exposure).\566\ Other
commenters suggested that the Commission adopt exceptions to the margin
requirements recommended in the BCBS/IOSCO Paper, including for
entities that have less than a specified gross notional amount of
outstanding non-centrally cleared swaps.\567\
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    \560\ See American Benefits Council, et al. 1/29/2013 Letter.
    \561\ See Financial Services Roundtable Letter; ISDA 1/23/2013
Letter; ISDA 2/5/2014 Letter; SIFMA 2/22/2013 Letter; SIFMA 3/12/
2014 Letter.
    \562\ See Financial Services Roundtable Letter; ISDA 1/23/2013
Letter.
    \563\ See SIFMA AMG 2/22/2013 Letter.
    \564\ See Coalition for Derivatives End-Users 2/22/2013 Letter.
    \565\ See SIFMA 3/12/2014 Letter.
    \566\ See ICI 11/19/2018 Letter; ISDA 11/19/2018 Letter; ISDA,
SIFMA, American Bankers Association, et al. 9/12/18 Letter; SIFMA
11/19/2018 Letter; SIFMA AMG 11/19/2018 Letter. These commenters
generally supported that the Commission only require counterparties
with ``material swaps exposure'' to post initial margin.
    \567\ See Financial Services Roundtable Letter; ISDA 2/5/2014
Letter; Letter from Lutz-Christian Funke, Senior Vice President, and
Frank Czichowski, Senior Vice President and Treasurer, KfW
Bankengruppe (Dec. 19, 2012) (``KfW Bankengruppe Letter''); SIFMA 2/
22/2013 Letter; SIFMA 3/12/2014 Letter; World Bank Letter.
---------------------------------------------------------------------------

    A commenter opposed any exceptions, arguing that exceptions for
certain market participants were a significant contributor to the
systemic risk disruptions during the 2008 financial crisis.\568\ A
commenter specifically opposed exceptions for asset-backed security
issuers.\569\
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    \568\ See CFA Institute Letter. This commenter specifically
opposed exceptions for small banks, savings associations, farm
credit system institutions, credit unions and foreign governments.
    \569\ See Letter from William J. Harrington (May 12, 2015)
(``Harrington 5/12/2015 Letter'').
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    The Commission does not believe it is necessary or prudent to
establish special exceptions for these specific types of
counterparties. The Commission acknowledges that not establishing
special exceptions for some of these types of counterparties may lead
to different margin requirements across both foreign and domestic
regulators. On balance, however, the Commission believes that, given
the funding profiles of nonbank SBSDs and the role of margin in
promoting liquidity and self-sufficiency and managing credit exposure,
the expansion of the exceptions in the manner suggested by commenters
would not be prudent. The addition of the fixed-dollar $50 million
threshold exception should provide relief to many of these
counterparties from the requirement to deliver initial margin.
Moreover, as discussed above, the Commission is providing SBSDs with a
deferral period that should provide sufficient time for them and their
counterparties to implement any documentation, custodial, or
operational arrangements that they deem necessary to comply with Rule
18a-3.\570\
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    \570\ As discussed above, while paragraphs (c)(4) and (5) of
Rule 18a-3, as adopted, respectively require netting and collateral
agreements to be in place, the rule does not impose a specific
margin documentation requirement as do the margin rules of the CFTC
and the prudential regulators. Consequently, an existing netting or
collateral agreement with a counterparty that was entered into by
the nonbank SBSD in order to comply with the margin documentation
requirements of the CFTC or the prudential regulators will suffice
for the purposes of Rule 18a 3, as adopted, if the agreement meets
the requirements of paragraph (c)(4) or (5), as applicable.
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ii. Nonbank MSBSPs
    As discussed earlier, proposed Rule 18a-3 required a nonbank MSBSP
to calculate as of the close of each business day the amount of equity
in the account of each counterparty to a non-cleared security-based
swap.\571\ By noon of the next business day, the nonbank MSBSP was
required to either collect or deliver cash, securities, and/or money
market instruments to the counterparty depending on whether there was
negative or positive equity in the account of the counterparty.\572\ In
other words, the nonbank MSBSP was required to either collect or
deliver variation margin but not required to collect or deliver initial
margin. The proposed rule did not require the nonbank MSBSP to apply
the

standardized haircuts to securities or money market instruments when
calculating the variation margin requirement for an account because the
proposed capital rule for these entities did not use standardized
haircuts (or model-based haircuts).
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    \571\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70270-71.
    \572\ The nonbank MSBSP would need to deliver cash, securities,
and/or money market instruments and, consequently, under the
proposal, other types of assets would not be eligible as collateral.
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    Under the proposal, a nonbank MSBSP was subject to certain of the
account equity requirements that applied to nonbank SBSDs and were
discussed above. First, the types of assets that could be used to meet
the nonbank MSBSP's obligation to either collect or deliver variation
margin were limited to cash, securities, or money market instruments.
Second, the nonbank MSBSP was subject to the additional collateral
requirements designed to ensure that the collateral was of stable and
predictable value, not linked to the value of the transaction in any
way, and capable of being sold quickly and easily if the need arises.
Third, the nonbank MSBSP was subject to the requirement to take prompt
steps to liquidate collateral consisting of securities or money market
instruments to the extent necessary to eliminate an account equity
deficiency (though the measure of a deficiency related solely to
required variation margin, as these entities were not required to
collect initial margin).
    Proposed Rule 18a-3 also provided exceptions under which a nonbank
MSBSP was not required to collect and, in some cases, deliver variation
margin. The first exception applied to counterparties that were
commercial end users. Under this exception, the nonbank MSBSP was not
required to collect variation margin from the commercial end user. The
second exception applied to counterparties that were SBSDs. Under this
exception, the nonbank MSBSP was not required to collect variation
margin from the SBSD. However, under proposed Rule 18a-3, a nonbank
SBSD was required to collect variation and initial margin from an
MSBSP. The third exception applied to legacy accounts. Under this
exception, the nonbank MSBSP was not required to collect or deliver
variation margin with respect to positions in a legacy account. The
fourth exception was the $100,000 minimum transfer amount provision.
Under this exception, the nonbank MSBSP was not required to collect or
deliver variation margin if the margin requirement was less than
$100,000.
Comments and Final Account Equity Requirements for Nonbank MSBSPs
    A commenter stated that nonbank MSBSPs should be required to apply
haircuts to the value of securities and money market instruments when
determining whether the level of equity in the account meets the
minimum requirement.\573\ Under the final rules being adopted today,
nonbank MSBSPs are not subject to a capital standard that uses
standardized or model based haircuts. Consequently, the Commission
believes it would not be appropriate to require these firms to apply
the standardized haircuts to the variation margin they receive from
counterparties.
---------------------------------------------------------------------------

    \573\ See CFA Institute Letter.
---------------------------------------------------------------------------

    The Commission did not receive any specific comments on the
commercial end user exception and is adopting it as proposed, with a
non-substantive modification.\574\ As discussed above, however, the
Commission modified the definition of ``commercial end user'' as a
result of amendments to Section 15F(e) of the Exchange Act.
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    \574\ See paragraph (c)(2)(iii)(A) of Rule 18a-3, as adopted. In
the final rule, the phrase ``an account of'' was inserted before the
phrase ``a counterparty'' to more closely align the text with
paragraph (c)(1)(iii)(A) of the final rul.
---------------------------------------------------------------------------

    The Commission did not receive any specific comments on the
exception for SBSD counterparties. The Commission, however, is removing
this exception from the final rule because it is unnecessary. The final
rule requires nonbank SBSDs to collect and post variation margin with
respect to most counterparties including nonbank MSBSPs, and,
consequently, a specific exception from collecting variation margin
from nonbank SBSDs would be inconsistent with the requirement that they
deliver variation margin to counterparties, including nonbank MSBSPs.
    Several commenters supported the Commission's proposed legacy
account exception for nonbank MSBSPs.\575\ Commenters stated that
applying the new rules to legacy accounts would be highly disruptive as
the underlying agreements were negotiated based on the law in effect at
the time of execution, and that, specifically, financial guarantee
insurers are subject to extensive regulation by state insurance
companies, and their security-based swap guarantees reflect the
restrictions and obligations imposed by those regimes.\576\ The
Commission is adopting the legacy account exception for nonbank MSBSPs
substantially as proposed.\577\
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    \575\ See AFGI 2/15/2013 Letter; AFGI 7/22/2013 Letter.
    \576\ See AFGI 2/15/2013 Letter; AFGI 7/22/2013 Letter.
    \577\ See paragraph (c)(2)(iii)(B) of Rule 18a-3, as adopted. In
the final rule, the Commission deleted the phrase ``of a
counterparty that is not a commercial end user'' from this paragraph
because the phrase is redundant, as an exception for commercial end
users is contained in paragraph (c)(2)(iii)(A) of Rule 18a-3, as
adopted. The exception for legacy accounts has been re-designated
paragraph (c)(2)(iii)(B) of Rule 18a-3, as adopted, since the
exception for SBSDs was deleted from the final rule. Finally, the
word ``legacy'' was moved to before the word ``account'' to align
the phrase with the definition in paragraph (b)(6) of Rule 18a-3, as
adopted.
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    The Commission is making several conforming modifications to the
account equity requirements for nonbank MSBSPs in light of
modifications made to the account equity requirements for nonbank SBSDs
discussed above in section II.B.2.i. of this release. First, the final
rule provides that the nonbank MSBSP must collect or deliver variation
margin by the close of business on the next business day following the
day of the calculation, except that the collateral can be collected or
delivered by the close of business on the second business day following
the day of the calculation if the counterparty is located in another
country and more than four time zones away.\578\ Second, the