[Federal Register Volume 83, Number 203 (Friday, October 19, 2018)]
[Proposed Rules]
[Pages 53007-53020]
[FR Doc No: 2018-22531]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-84409; File No. S7-08-12]
RIN 3235-AL12

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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; reopening of comment period; request for
additional comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
reopening the comment period and requesting additional comment
(including potential modifications to proposed rule language) on the
following: Proposed amendments and new rules that would establish
capital and margin requirements for security-based swap dealers
(``SBSDs'') and major security-based swap participants (``MSBSPs'')
that do not have a prudential regulator, establish segregation
requirements for SBSDs, establish notification requirements for SBSDs
and MSBSPs relating to segregation, and raise minimum net capital
requirements and establish liquidity requirements for broker-dealers
permitted to use internal models when computing net capital (``ANC
broker-dealers''). The Commission also is reopening the comment period
and requesting additional comment on proposed amendments that would
establish the cross-border treatment of security-based swap capital,
margin, and segregation requirements; and a proposed amendment that
would establish an additional capital requirement for SBSDs that do not
have a prudential regulator.

DATES: The comment periods for portions of the proposed rules published
Nov. 23, 2012 (77 FR 70213); May 23, 2013 (78 FR 30967); and May 2,
2014 (79 FR 25193), are reopened. Comments should be submitted by
November 19, 2018.

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to [email protected]. Please include
File No. S7-08-12 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-12. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (http://www.sec.gov). Comments are
also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make publicly available.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Associate Director, at
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202)
551-5522; Sheila Dombal Swartz, Senior Special Counsel, at (202) 551-
5545; Timothy C. Fox, Branch Chief, at<PHONE_NUMBER>; Valentina Minak
Deng, Special Counsel, at<PHONE_NUMBER>; or Nina Kostyukovsky,
Attorney Advisor, at<PHONE_NUMBER>, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-7010.

SUPPLEMENTARY INFORMATION:

I. Background

    In October 2012, the Commission proposed amendments and new rules
to: (1) Establish capital and margin requirements for SBSDs and MSBSPs
that do not have a prudential regulator \1\ (``nonbank SBSDs'' and
``nonbank MSBSPs'', respectively); (2) establish segregation
requirements for SBSDs; (3) establish notification requirements for
SBSDs and MSBSPs relating to segregation; and (4) raise minimum net
capital requirements and establish liquidity requirements for ANC
broker-dealers.\2\ The Commission published the 2012 Proposals largely
pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Title VII of the Dodd-Frank Act''). The Commission
extended the comment period once,\3\ and reopened it once.\4\ The
Commission has received a number of comment letters in response to the
2012 Proposals.\5\
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    \1\ The term ``prudential regulator'' is defined in Section
1(a)(39) of the Commodity Exchange Act (7 U.S.C. 1(a)(39)) and that
definition is incorporated by reference in Section 3(a)(74) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act''). 15
U.S.C. 78c(a)(74). Pursuant to the definition, the Board of
Governors of the Federal Reserve System (``FRB''), the Office of the
Comptroller of the Currency (``OCC''), the Federal Deposit Insurance
Corporation (``FDIC''), the Farm Credit Administration (``FCA''), or
the Federal Housing Finance Agency (``FHFA'') (collectively, the
``prudential regulators'') is the ``prudential regulator'' of an
SBSD, MSBSP, swap participant, or major swap participant if the
entity is directly supervised by that agency.
    \2\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214 (Nov. 23, 2012)
(``2012 Proposals'').
    \3\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68660 (Jan. 15. 2013), 78 FR 4365 (Jan. 22, 2013).
    \4\ See Reopening of Comment Periods for Certain Rulemaking
Releases and Policy Statement Applicable to Security-Based Swaps
Proposed Pursuant to the Securities Exchange Act of 1934 and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange
Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013).
    \5\ The comment letters are available at http://www.sec.gov/comments/s7-08-12/s70812.shtml.
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    In addition, in May 2013, the Commission proposed provisions to
establish the cross-border treatment of security-based swap capital,
margin, and segregation requirements.\6\ The

Commission has received a number of comment letters in response to the
2013 Proposals.\7\
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    \6\ See Cross-Border Security-Based Swap Activities; Re-Proposal
of Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78
FR 30968 (May 23, 2013) (``2013 Proposals'').
    \7\ The comment letters are available at http://www.sec.gov/comments/s7-02-13/s70213.shtml.
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    Finally, in April 2014, the Commission proposed an additional
nonbank SBSD capital requirement.\8\ The Commission has received one
comment letter in response to the 2014 Proposal.\9\
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    \8\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and
Broker-Dealers; Capital Rule for Certain Security-Based Swap
Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR
25194, 25254 (May 2, 2014) (the ``2014 Proposal'' and together with
the 2012 Proposals and the 2013 Proposals, the ``Proposals'').
    \9\ The comment letter is available at: https://www.sec.gov/comments/s7-05-14/s70514.shtml.
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    In the releases publishing the Proposals, the Commission described
the statutory and regulatory background for the proposed amendments and
rules, the rationales for each of the proposed amendments and rules,
the potential economic consequences, including the baseline against
which the proposed amendments and rules may be evaluated, the potential
costs and benefits, reasonable alternatives, and the potential effects
on efficiency, competition, and capital formation.\10\
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    \10\ See Proposals.
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    Since publication of the 2012 Proposals, the Commission has adopted
other rules relating to the regulation of the over-the-counter
derivatives markets pursuant to Title VII of the Dodd-Frank Act.\11\ In
addition, the prudential regulators and the Commodity Futures Trading
Commission (``CFTC'') have adopted or proposed rules under Title VII of
the Dodd-Frank Act that are relevant to the Proposals.\12\
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    \11\ See Clearing Agency Standards, Exchange Act Release No.
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 11, 2012); Application of
``Security-Based Swap Dealer'' and ``Major Security-Based Swap
Participant'' Definitions to Cross-Border Security-Based Swap
Activities, Exchange Act Release No. 72472 (June 25, 2014), 79 FR
47278 (Aug. 12, 2014); Regulation SBSR--Reporting and Dissemination
of Security-Based Swap Information, Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015); Security-Based Swap
Data Repository Registration, Duties, and Core Principles, Exchange
Act Release No. 74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015);
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 75611
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015); Security-Based Swap
Transactions Connected with a Non-U.S. Person's Dealing Activity
That Are Arranged, Negotiated, or Executed By Personnel Located in a
U.S. Branch or Office or in a U.S. Branch or Office of an Agent;
Security-Based Swap Dealer De Minimis Exception, Exchange Act
Release No. 77104 (Feb. 10, 2016), 81 FR 8597 (Feb. 19, 2016);
Business Conduct Standards for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 77617
(Apr. 14, 2016), 81 FR 29960 (May 13, 2016); Trade Acknowledgment
and Verification of Security-Based Swap Transactions, Exchange Act
Release No. 78011 (June 8, 2016), 81 FR 39808 (June 17, 2016);
Regulation SBSR--Reporting and Dissemination of Security-Based Swap
Information, Exchange Act Release No. 78321 (July 14, 2016), 81 FR
53545 (Aug. 12, 2016); Access to Data Obtained by Security-Based
Swap Data Repositories, Exchange Act Release No. 78716 (Aug. 29,
2016), 81 FR 60585 (Sept. 2, 2016).
    \12\ See FRB, OCC, FDIC, FCA, FHFA, Margin and Capital
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015)
(adopting capital and margin requirements for bank swap dealers,
bank SBSDs, bank swap participants, and bank MSBSPs); CFTC, Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants, 81 FR 636 (Jan. 6, 2016) (adopting margin requirements
for nonbank swap dealers and nonbank major swap participants); CFTC,
Capital Requirements of Swap Dealers and Major Swap Participants, 81
FR 91252 (Dec. 16, 2016) (proposing capital requirements for nonbank
swap dealers and nonbank major swap participants).
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    The Commission has carefully considered the comment letters, and
the Commission believes it is prudent to reopen the comment period for
the Proposals in light of these comments and regulatory developments.
In addition, the Commission believes the public should have the
opportunity to provide comment on the potential economic effects of the
Proposals in light of regulatory and market developments since they
were published. Accordingly, the Commission is reopening the public
comment period for 30 days and seeking comment on all aspects of the
Proposals. The Commission also is seeking specific comment on certain
aspects of the Proposals where further information would be
particularly helpful to the Commission. In particular, the Commission
is seeking comment on potential rule language that would modify rule
text that was in the Proposals. This modified rule language would be
included in: (1) Existing rules 17 CFR 240.15c3-1 (``Rule 15c3-1''), 17
CFR 240.15c3-1a (``Appendix A to Rule 15c3-1''), 17 CFR 240.15c3-3
(``Rule 15c3-3''), and 17 CFR 240.3a71-6 (``Rule 3a71-6''); (2) new
rule 17 CFR 240.15c3-3b (``Exhibit B to Rule 15c3-3''); and (3) in
proposed rules 17 CFR 240.18a-1 (``Rule 18a-1''), 17 CFR 240.18a-1a
(``Appendix A to Rule 18a-1''), 17 CFR 240.18a-3 (``Rule 18a-3''), 17
CFR 240.18a-4 (``Rule 18a-4''), and 17 CFR 240.18a-4a (``Exhibit A to
Rule 18a-4''). Comment letters received by the Commission previously
need not be re-submitted as they will continue to be a part of the
public comment file for this rulemaking and considered by the
Commission.

II. Request for Comment

    The Commission renews its request for comment on all aspects of the
Proposals and on the specific topics identified below. Commenters are
requested to provide empirical data in support of any arguments and
analyses. The Commission notes that comments are of the greatest
assistance to rulemaking initiatives when accompanied by supporting
data and analysis, and, if appropriate, accompanied by alternative
approaches and suggested language.

Capital

    1. The 2012 Proposals included a provision that would establish a
financial ratio-derived minimum net capital requirement for a nonbank
SBSD equal to eight percent (8%) of the firm's risk margin amount.\13\
The risk margin amount would be the sum of:
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    \13\ See 2012 Proposals, 77 FR at 70223-24. Minimum net capital
requirements would be the greater of a fixed-dollar amount and an
amount derived by applying a financial ratio. See id. at 70221.
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     The greater of the total margin required to be delivered
by the nonbank SBSD with respect to security-based swap transactions
cleared for security-based swap customers at a clearing agency or the
amount of the deductions (haircuts) that would apply to the cleared
security-based swap positions of the security-based swap customers
pursuant to the proposed capital requirements; and
     The total margin amount calculated by the nonbank SBSD
with respect to non-cleared security-based swaps pursuant to the
proposed margin rule.\14\
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    \14\ The ratio-based minimum net capital calculation shown as an
equation would be: MRNC = [max(IM\C\, HC\C\) + IM\NC\] x 8%. Where
MRNC is the ratio-based minimum net capital requirement, IM\C\ is
the amount of initial margin for cleared security-based swaps, HC\C\
is the amount of haircuts applied to the same cleared security-based
swaps, IM\NC\ is the amount of initial margin calculated for non-
cleared security-based swaps, and (max(IM\C\, HC\C\) + IM\NC\) is
the risk margin amount. For example, assume that IM\C\ is $10, HC\C\
is $15, and IM\NC\ is $25. In this simple hypothetical example, the
risk margin amount would equal $40 [max($10, $15) + $25], and the
ratio-based minimum net capital requirement would be $3.20 ($40 x
8%). As proposed, a stand-alone nonbank SBSD would be subject to
this ratio-based minimum net capital requirement, whereas a nonbank
SBSD dually registered as a broker-dealer would be subject to the
sum of this ratio-based minimum net capital requirement plus one of
the two existing financial ratio-based minimum net capital
requirements in Rule 15c3-1.

The total of these two amounts would be multiplied by eight percent
(8%) to determine the dollar amount of this ratio requirement (and the
nonbank SBSD's minimum net capital requirement would be the greater of
a

fixed-dollar amount and a ratio amount). The proposal for a ratio
amount relating to security-based swaps was designed to establish a
minimum net capital requirement that increases in tandem with an
increase in the risks associated with a nonbank SBSD's security-based
swap activities. This scaled ratio amount is separate from the fixed-
dollar amount that sets a floor to the minimum net capital
requirement.\15\
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    \15\ See id. at 70223-24.
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    a. The Commission requests comment and supporting data on the
potential minimum net capital amounts that would be required of nonbank
SBSDs as a result of the requirement, as proposed. How would those
potential minimum net capital amounts compare with the amounts of
capital currently maintained by entities that may register as nonbank
SBSDs?
    b. One commenter suggested that the Commission modify its proposed
definition of the risk margin amount to reflect the lower risk
associated with central clearing.\16\ In light of the comment and the
goals of this provision, the Commission requests comment on whether the
input to the risk margin amount for cleared security-based swaps should
be modified. Should the input to the risk margin amount for cleared
security-based swaps be determined solely by the total initial margin
required to be delivered by the nonbank SBSD with respect to security-
based swap transactions cleared for security-based swap customers at a
clearing agency (i.e., not be the greater of that amount or the amount
of the deductions (haircuts) that would apply to the cleared security-
based swap positions)? \17\ The purpose of this potential modification
would be to simplify the calculation, align it with the clearing agency
margin requirements, and more closely align it with the CFTC's existing
rules and proposals.\18\
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    \16\ See Letter from Stuart J. Kaswell, Executive Vice
President, Managing Director, and General Counsel, Managed Funds
Association (Feb. 22, 2013).
    \17\ The ratio-based minimum net capital calculation shown as an
equation would be: MRNC = (IM\C\ + IM\NC\) x 8%.
    \18\ Eliminating the haircut input to the risk margin amount for
cleared security-based swaps would more closely align it with the
CFTC's existing rules and proposals. For example, currently futures
commission merchants (``FCMs'') registered with the CFTC must
maintain adjusted net capital in excess of eight percent (8%) of the
risk margin on futures, foreign futures, and cleared swaps positions
carried in customer and noncustomer accounts. See 17 CFR 1.17. The
CFTC has proposed a similar requirement for swap dealers registered
as FCMs that also would generally include in the FCM's minimum net
capital requirement eight percent (8%) of the total initial margin
an FCM is required to post to a clearing agency for cleared
security-based swap positions (as well as the initial margin on
uncleared swap and security-based swap positions for which the FCM
is a counterparty). See Capital Requirements of Swap Dealers and
Major Swap Participants, 81 FR at 91266.
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    Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing the commenter's concern described above?
If not, please explain why and suggest alternative rule language that
could more effectively and efficiently strike the balance and achieve
the objective.
    The potential modifications to paragraph (c)(17) of Rule 15c3-1
would provide that the term risk margin amount means the sum of: (i)
The total initial margin required to be maintained by the broker or
dealer at each clearing agency with respect to security-based swap
transactions cleared for security-based swap customers; and (ii) the
total margin amount calculated by the broker or dealer with respect to
non-cleared security-based swaps pursuant to Sec.  240.18a-
3(c)(1)(i)(B).
    Similarly, the potential modifications to paragraph (c)(6) of Rule
18a-1 would provide that the term risk margin amount means the sum of:
(i) The total initial margin required to be maintained by the security-
based swap dealer at each clearing agency with respect to security-
based swap transactions cleared for security-based swap customers; and
(ii) the total margin amount calculated by the security-based swap
dealer with respect to non-cleared security-based swaps pursuant to
Sec.  240.18a-3(c)(1)(i)(B).
    2. The 2012 Proposals included a capital charge that would apply if
a nonbank SBSD collects an amount of margin from a counterparty to a
cleared security-based swap that is less than the deduction that would
apply to the security-based swap if it was a proprietary position of
the firm.\19\ This proposed requirement was designed to account for the
risk of the counterparty defaulting by requiring the nonbank SBSD to
maintain capital in the place of margin in an amount that is no less
than would be required for a proprietary position.\20\ It also was
designed to ensure that there is a standard minimum coverage for
exposure to cleared security-based swap counterparties apart from the
individual clearing agency margin requirements, which could vary among
clearing agencies and over time.\21\
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    \19\ See 2012 Proposals, 77 FR at 70245-46.
    \20\ See id. at 70246.
    \21\ See id.
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    One commenter opposed this proposal stating that the requirement
would ``harm customers because it would provide an incentive for the
collection of margin by nonbank SBSDs beyond the amount determined by
the clearing agency.'' \22\ In light of the comment and the goals of
this provision, the Commission requests comment on whether this
proposed capital charge should be modified to include a risk-based
threshold under which the proposed capital charge need not be taken.
Should the rule provide that the deduction need not be taken if the
difference between the clearing agency margin amount and the haircut is
less than one percent (1%) or some other percent of the nonbank SBSD's
tentative net capital \23\ and less than ten percent (10%) or some
other percent of the counterparty's net worth,\24\ and the aggregate
difference across all counterparties is less than twenty-five percent
(25%) or some other percent of the nonbank SBSD's tentative net
capital? \25\ The purpose of these thresholds would be to limit the
nonbank SBSD's exposure to a single counterparty as well as to
establish a concentration limit across all counterparties. In addition,
these thresholds would be scalable and have a more direct relation to
the risk to the nonbank SBSD arising from its security-based swap
activities.
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    \22\ See Letter from Kenneth E. Bentsen, Jr., Executive Vice
President, Securities Industry and Financial Markets Association
(Feb. 22, 2013) (``SIFMA 2/22/2013 Letter'').
    \23\ See, e.g., Order Granting Conditional Exemption Under the
Securities Exchange Act of 1934 in Connection with Portfolio
Margining of Swaps and Security-Based Swaps, Exchange Act Release
No. 68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012). Pursuant to
this order, Commission staff granted conditional temporary approval
to certain broker-dealers that are also registered as FCMs to
participate in a credit default swap (CDS) portfolio margining
program, subject to specified conditions. One condition requires a
firm to calculate its net credit exposure to a client and if the
client's net credit exposure is in excess of one percent (1%) of the
firm's tentative net capital, the firm is required to either collect
the net credit exposure above the one percent (1%) threshold in the
form of margin from its client or take a capital charge equal to
that amount. See, e.g., Letter to Keith Bailey, Barclays Capital
Inc. from Michael A. Macchiaroli, Division of Trading and Markets,
Commission (June 7, 2013).
    \24\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten
percent (10%) of tentative net capital threshold for the calculation
of undue concentration charges).
    \25\ See, e.g., 17 CFR 240.15c3-3a, Note E(5) (using a twenty-
five percent (25%) of tentative net capital threshold for when a
broker-dealer must reduce debits in the customer reserve formula).
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    Would rule language as described below effect this potential
modification

to the rule text in the 2012 Proposals? If not, please explain why and
suggest alternative rule language. If the Commission were to use the
language described below, would it strike an appropriate balance in
terms of achieving the objectives of the proposed rule and addressing
the commenter's concern described above? If not, please explain why and
suggest alternative rule language that could more effectively and
efficiently strike the balance and achieve the objective.
    The potential modifications to paragraph (c)(2)(xv)(A) of Rule
15c3-1 would provide the following deduction from net worth in lieu of
collecting collateral for cleared security-based swaps and swap
transactions: (1) Deducting the amount of the margin difference for
each account carried by the broker or dealer for another person that
holds cleared security-based swap or swap transactions. The margin
difference is the amount of the deductions to the positions in the
account calculated pursuant to paragraph (c)(2)(vi) of this section,
Sec.  240.15c3-1b, or Sec.  240.15c3-1e (as applicable), less the
margin value of collateral held in the account. (2) Exception. The
deduction required pursuant to paragraph (c)(2)(xv)(A)(1) of this
section need not be taken to the extent that: (i) The amount of the
margin difference for the account does not exceed the lesser of 1
percent (1%) of the tentative net capital of the broker or dealer or
ten percent (10%) of the net worth of the counterparty; and (ii) The
amount of the margin difference for all accounts that hold security-
based swaps or swaps does not exceed twenty-five percent (25%) of the
tentative net capital of the broker or dealer.
    Similarly, the potential modifications to paragraph (c)(1)(ix)(A)
of Rule 18a-1 would provide the following deduction from net worth in
lieu of collecting collateral for security-based swaps and swap
transactions: (1) Deducting the amount of the margin difference for
each account carried by the security-based swap dealer for another
person that holds cleared security-based swap or swap transactions. The
margin difference is the amount of the deductions to the positions in
the account calculated pursuant to paragraph (c)(1)(vi) or (vii) of
this section, Sec.  240.18a-1(d), or Sec.  240.18a-1b (as applicable),
less the margin value of collateral held in the account. (2) Exception.
The deduction required pursuant to paragraph (c)(1)(ix)(A)(1) of this
section need not be taken to the extent that: (i) The amount of the
margin difference for the account does not exceed the lesser of 1
percent (1%) of the tentative net capital of the security-based swap
dealer or ten percent (10%) of the net worth of the counterparty; and
(ii) The amount of the margin difference for all accounts that hold
security-based swaps or swaps does not exceed twenty-five percent (25%)
of the tentative net capital of the security-based swap dealer.
    3. The 2012 Proposals included a provision that a nonbank SBSD
would be required to take a 100 percent (100%) capital charge when it
does not collect variation or initial margin for non-cleared security-
based swaps because of an exception from collecting margin.\26\ The
proposed capital charge was intended to require a nonbank SBSD to set
aside net capital to address the risks that would otherwise be
mitigated through the collection of variation and initial margin.\27\
The set aside net capital would serve as an alternative to obtaining
margin.\28\ As an alternative to taking the 100 percent (100%) charge,
the Commission proposed that firms using internal models to calculate
net capital could take a credit risk charge if the uncollected margin
involved a transaction with a commercial end user.\29\
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    \26\ See 2012 Proposals, 77 FR at 70425-27.
    \27\ See id.
    \28\ See id.
    \29\ See id. at 70240-45.
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    a. Commenters requested that nonbank SBSDs be permitted to apply
the credit risk charge to other types of counterparties.\30\ In light
of the comments and the goals of this provision, the Commission
requests comment on whether the use of the credit risk charge should be
expanded to other types of counterparties and transactions. Should the
rule permit a firm to apply the credit risk charge for uncollected
initial margin for security-based swaps and swap transactions with any
type of counterparty and for uncollected variation margin for
transactions with a commercial end user only? The purpose of limiting
the application of the credit risk charge with respect to uncollected
variation margin to transactions with commercial end users would be to
reduce the types of unsecured receivables that qualify as allowable
assets for net capital purposes and, thereby, promote the liquidity of
the nonbank SBSD.
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    \30\ See, e.g., Letter from Anne-Marie Leroy, Senior Vice
President and Group General Counsel, and David Harris, Acting Vice
President and General Counsel, The World Bank (Feb. 21, 2013).
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    b. The Commission requests comment on whether the rule should
establish a threshold for uncollected margin above which the use of the
credit risk charge would not be permitted. Should there be a threshold
when the aggregate amount of uncollected margin across all
counterparties exceeds a level of the nonbank SBSD's tentative net
capital? Should the threshold apply to the aggregate amount of
uncollected initial and variation margin or just to the aggregate
amount of uncollected variation margin? The latter approach would focus
the threshold on unsecured receivables that result from not collecting
variation margin and, thereby, promote the liquidity of the nonbank
SBSD. Should there be a threshold with respect to uncollected variation
margin for security-based swap and swap transactions with commercial
end users and should that threshold be ten percent (10%) or some other
percent of the nonbank SBSD's tentative net capital? \31\ This
threshold would be designed to limit the nonbank SBSD's aggregate
exposure arising from not collecting variation margin from commercial
end users and would be scalable to the nonbank SBSD's financial
condition.
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    \31\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten
percent (10%) of tentative net capital threshold for the calculation
of undue concentration charges).
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    c. The potential modifications to the rule text in the 2012
Proposals discussed above in 3.a and 3.b would include: (1) Changing
the proposed rule to permit a nonbank SBSD to apply the credit risk
charge for uncollected initial margin for security-based swaps and
swaps from any type of counterparty and for uncollected variation
margin from a commercial end user; and (2) establishing a risk-based
threshold with respect to uncollected variation margin from commercial
end users. Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing commenters' requests to apply the credit
risk charge more broadly? If not, please explain why and suggest
alternative rule language that could more effectively and efficiently
strike the balance and achieve the objective.
    The potential modifications to paragraph (a)(7) of Rule 15c3-1
would provide: In accordance with Appendix E to this section (Sec.
240.15c3-1e), the Commission may approve, in whole or in part, an
application or an amendment to an application by a broker or dealer to
calculate net capital using the market risk standards of appendix E to
compute a deduction for market risk on some or

all of its positions, instead of the provisions of paragraphs
(c)(2)(vi) and (c)(2)(vii) of this section, and Sec.  240.15c3-1b, and
using the credit risk standards of Appendix E to compute a deduction
for credit risk for certain security-based swap and swap transactions,
as specified in this paragraph, instead of the provisions of paragraphs
(c)(2)(iv), (c)(2)(xv)(B)(1), and (c)(2)(xv)(B)(2) of this section,
subject to any conditions or limitations on the broker or dealer the
Commission may require as necessary or appropriate in the public
interest or for the protection of investors. A broker or dealer may use
the credit risk standards of Appendix E to compute a deduction for
credit risk for security-based swap transactions with commercial end
users as that term is defined in Sec.  240.18a-3(b)(2), and swap
transactions in which a counterparty qualifies for an exception from
margin requirements pursuant to Section 4s(e)(4) of the Commodity
Exchange Act (7 U.S.C. 6s(e)(4)) instead of the provisions of paragraph
(c)(2)(iv) of this section, provided that the deductions, in the
aggregate, do not exceed ten percent (10%) of the tentative net capital
of the broker or dealer. A broker or dealer also may use the credit
risk standards of Appendix E to compute a deduction for credit risk for
security-based swap transactions that are subject to an initial margin
exception set forth in Sec.  240.18a-3(c)(1)(iii) instead of the
provisions of paragraph (c)(2)(xv)(B)(1) of this section, and for swap
transactions instead of the provisions of paragraph (c)(2)(xv)(B)(2) of
this section.
    Similarly, the potential modifications to paragraph (a)(2) of Rule
18a-1 would provide: In accordance with paragraph (d) of this section,
the Commission may approve, in whole or in part, an application or an
amendment to an application by a security-based swap dealer to
calculate net capital using the market risk standards of paragraph (d)
to compute a deduction for market risk on some or all of its positions,
instead of the provisions of paragraphs (c)(1)(iv), (vi), and (vii) of
this section, and Sec.  240.18a-1b, and using the credit risk standards
of paragraph (d) to compute a deduction for certain security-based swap
and swap transactions, as specified in this paragraph, instead of the
provisions of paragraphs (c)(1)(iii), (c)(1)(ix)(B)(1), and
(c)(1)(ix)(B)(2) of this section, subject to any conditions or
limitations on the security-based swap dealer the Commission may
require as necessary or appropriate in the public interest or for the
protection of investors. A security-based swap dealer may use the
credit risk standards of paragraph (d) to compute a deduction for
credit risk for security-based swap transactions with commercial end
users as that term is defined in Sec.  240.18a-3(b)(2), and swap
transactions in which a counterparty qualifies for an exception from
margin requirements pursuant to Section 4s(e)(4) of the Commodity
Exchange Act (7 U.S.C. 6s(e)(4)) instead of the provisions of paragraph
(c)(1)(iii) of this section, provided that the deductions, in the
aggregate, do not exceed ten percent (10%) of the tentative net capital
of security-based swap dealer. A security-based swap dealer also may
use the credit risk standards of paragraph (d) to compute a deduction
for credit risk for security-based swap transactions that are subject
to an initial margin exception set forth in Sec.  240.18a-3(c)(1)(iii)
instead of the provisions of paragraph (c)(1)(ix)(B)(1) of this
section, and for swap transactions instead of the provisions of
paragraph (c)(1)(ix)(B)(2) of this section.
    4. The 2012 Proposals included a capital charge for nonbank SBSDs
when a counterparty requires initial margin to be segregated pursuant
to Section 3E(f) of the Act, which among other things, provides that
the collateral must be carried by an independent third-party
custodian.\32\ Collateral held in this manner would not be in the
possession or control of the nonbank SBSD, nor would it would be
capable of being liquidated promptly by the nonbank SBSD without the
intervention of a third party.
---------------------------------------------------------------------------

    \32\ See 2012 Proposals, 77 FR at 70246-47; 15 U.S.C. 78c-
5(f)(3).
---------------------------------------------------------------------------

    a. Commenters argued that the charge would discourage the use of
segregation under Section 3E(f) of the Act,\33\ that the charge would
create costs to the affected nonbank SBSD (which would be passed on to
customers),\34\ and that the parties could properly structure an
agreement to address the Commission's concern about the nonbank SBSD's
lack of control over the collateral.\35\ In light of the comments and
the goals of this provision, the Commission requests comment on whether
there should be an exception to taking the capital charge (whether 100
percent (100%) or a credit risk charge, as applicable) under conditions
that promote the SBSD's ability to promptly access the collateral if
needed. Should there be an exception with the following conditions: (1)
The custodian is a bank; (2) the nonbank SBSD enters into an agreement
with the custodian and the counterparty that provides the nonbank SBSD
with the same control over the collateral as would be the case if the
nonbank SBSD controlled the collateral directly; and (3) an opinion of
counsel deems the agreement enforceable? The purpose of these
conditions would be to provide the nonbank SBSD with the unfettered
ability to access the collateral in the event the counterparty defaults
and, thereby, promote the financial condition of the nonbank SBSD,
particularly in a time of market distress. Would this be a practical
exception? If not, please explain why.
---------------------------------------------------------------------------

    \33\ See, e.g., Letter from American Benefits Council, Committee
on Investment of Employee Benefit Assets, European Federation for
Retirement Provision, the European Association of Paritarian
Institutions, the National Coordinating Committee for Multiemployer
Plans, and the Pension Investment Association of Canada (May 19,
2014).
    \34\ See, e.g., Letter from Douglas M. Hodge, Managing Director
and Chief Operating Officer, Pacific Investment Management Company
LLC (Feb. 21, 2013).
    \35\ See, e.g., Letter from Karrie McMillan, General Counsel,
Investment Company Institute (Dec. 5, 2013).
---------------------------------------------------------------------------

    b. The Commission is considering providing guidance on ways a
nonbank SBSD could structure the account control agreement to meet a
requirement that the nonbank SBSD have the same control over the
collateral as would be the case if the nonbank SBSD controlled the
collateral directly. In developing the guidance on ways this
requirement could be met, the Commission asks commenters to address
whether the agreement between the nonbank SBSD, counterparty, and the
third-party custodian should: (1) Provide that the collateral will be
released promptly and directed in accordance with the instructions of
the nonbank SBSD upon the receipt of an effective notice from the
nonbank SBSD; (2) provide that when the counterparty provides an
effective notice to access the collateral the nonbank SBSD will have
sufficient time to challenge the notice in good faith and that the
collateral will not be released until a prior agreed-upon condition
among the three parties has occurred; and (3) give priority to an
effective notice from the nonbank SBSD over an effective notice from
the counterparty, as well as priority to the nonbank SBSD's instruction
about how to transfer the collateral in the event the custodian
terminates the account control agreement? Are there any other
provisions regarding the account control agreement that the Commission
should address to assist nonbank SBSDs in structuring the agreements to
meet a requirement in a rule that the nonbank SBSD have the same
control over the collateral as would be the case if the nonbank SBSD
controlled the collateral directly?
    c. The potential modification to the rule text in the 2012
Proposals

discussed above in 4.a would establish conditions under which a nonbank
SBSD could avoid the capital charge that applies when a counterparty
requires initial margin to be segregated pursuant to Section 3E(f) of
the Act. Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing the commenters' concerns about the impact
of the capital charge? If not, please explain why and suggest
alternative rule language that could more effectively and efficiently
strike the balance and achieve the objective.
    The potential modifications to paragraph (c)(2)(xv)(B) of Rule
15c3-1 would provide the following deductions from net worth in lieu of
collecting collateral for security-based swap and swap transactions:
(1) Security-based swaps. Deducting the amounts calculated pursuant to
Sec.  240.18a-3(c)(1)(i)(B) for the account of a counterparty at the
broker or dealer that is subject to an initial margin exception set
forth in Sec.  240.18a-3(c)(1)(iii), less the margin value of
collateral held in the account of the counterparty at the broker or
dealer. (2) Swaps. Deducting the initial margin calculated pursuant to
Sec.  240.18a-3(d)(2) for swaps other than equity swaps, or Sec.
240.15c3-1b, as applicable, in the account of a counterparty at the
broker or dealer, less the margin value of collateral held in the
account of the counterparty at the broker or dealer. (3) Treatment of
collateral held at a third-party custodian. For the purposes of the
deductions required pursuant to paragraphs (c)(2)(xv)(B)(1) and (2) of
this section, collateral held by an independent third-party custodian
as initial margin pursuant to Section 3E(f) of the Act or Section 4s(l)
of the Commodity Exchange Act may be treated as collateral held in the
account of the counterparty at the broker or dealer if: (a) The
independent third-party custodian is a bank as defined in Section
3(a)(6) of the Act that is not affiliated with the counterparty; (b)
The broker or dealer, the independent third-party custodian, and the
counterparty that delivered the collateral to the custodian have
executed an account control agreement governing the terms under which
the custodian holds and releases collateral pledged by the counterparty
as initial margin that provides the broker or dealer with the same
control over the collateral as would be the case if the broker or
dealer controlled the collateral directly; and (c) The broker or dealer
obtains a written opinion from outside counsel that the account control
agreement is legally valid, binding, and enforceable in all material
respects, including in the event of bankruptcy, insolvency, or a
similar proceeding.
    Similarly, the potential modifications to paragraph (c)(1)(ix) of
Rule 18a-1 would provide the following deductions from net worth in
lieu of collecting collateral for security-based swap and swap
transactions: (1) Security-based swaps. Deducting the amounts
calculated pursuant to Sec.  240.18a-3(c)(1)(i)(B) for the account of a
counterparty at the security-based swap dealer that is subject to an
initial margin exception set forth in Sec.  240.18a-3(c)(1)(iii), less
the margin value of collateral held in the account of the counterparty
at the security-based swap dealer. (2) Swaps. Deducting the initial
margin calculated pursuant to Sec.  240.18a-3(d)(2) for swaps other
than equity swaps, or Sec.  240.18a-1b, as applicable, in the account
of a counterparty at the security-based swap dealer, less the margin
value of collateral held in the account of the counterparty at the
security-based swap dealer. (3) Treatment of collateral held at a
third-party custodian. For the purposes of the deductions required
pursuant to paragraphs (c)(1)(ix)(B)(1) and (2) of this section,
collateral held by an independent third-party custodian as initial
margin pursuant to Section 3E(f) of the Act or Section 4s(l) of the
Commodity Exchange Act may be treated as collateral held in the account
of the counterparty at the security-based swap dealer if: (a) The
independent third-party custodian is a bank as defined in Section
3(a)(6) of the Act that is not affiliated with the counterparty; (b)
The security-based swap dealer, the independent third-party custodian,
and the counterparty that delivered the collateral to the custodian
have executed an account control agreement governing the terms under
which the custodian holds and releases collateral pledged by the
counterparty as initial margin that provides the security-based swap
dealer with the same control over the collateral as would be the case
if the security-based swap dealer controlled the collateral directly;
and (c) The security-based swap dealer obtains a written opinion from
outside counsel that the account control agreement is legally valid,
binding, and enforceable in all material respects, including in the
event of bankruptcy, insolvency, or a similar proceeding.
    5. The 2012 Proposals noted that a nonbank SBSD would need to
deduct from net worth the value of initial margin delivered to a
counterparty when computing net capital.\36\ A comment letter \37\
encouraged the Commission to provide a means for nonbank SBSDs to post
initial margin to SBSDs and other types of counterparties without
incurring the capital charge. If the Commission adopts capital and
margin rules applicable to SBSDs, should the Commission provide a means
for a nonbank SBSD to avoid this deduction if the following conditions
are met: (1) The initial margin requirement is funded by a fully
executed written loan agreement with an affiliate of the broker-dealer;
(2) the loan agreement provides that the lender waives re-payment of
the loan until the initial margin is returned to the broker-dealer; and
(3) the broker-dealer's liability to the lender can be fully satisfied
by delivering the collateral serving as initial margin to the lender?
\38\ A Commission action providing this relief would be styled after
the Staff Letter. Would this approach provide a practical solution with
respect to avoiding this capital charge? If not, please explain why.
Should the Commission by rule permit this approach? Are there
alternatives that would more effectively and efficiently achieve this
objective? If so, what are they?
---------------------------------------------------------------------------

    \36\ See 2012 Proposals, 77 FR at 70267.
    \37\ See Letter from Institute of International Bankers and
Securities Industry and Financial Markets Association (June 21,
2018).
    \38\ In this regard, although not binding, the staff of the
Division of Trading and Markets issued a no-action letter (in the
context of margin collateral posted by a broker-dealer to a swap
dealer or other counterparty for a non-cleared swap) that stated
that the staff would not recommend enforcement action to the
Commission if a broker-dealer did not take this deduction but met
certain conditions. The conditions include that: (1) The initial
margin requirement is funded by a fully executed written loan
agreement with an affiliate of the broker-dealer; (2) the loan
agreement provides that the lender waives re-payment of the loan
until the initial margin is returned to the broker-dealer; and (3)
the broker-dealer's liability to the lender can be fully satisfied
by delivering the collateral serving as initial margin to the
lender. See Letter from Michael A. Macchiaroli, Associate Director,
Division of Trading and Markets, Commission, to Kris Dailey, Vice
President, Risk Oversight and Regulation, FINRA (Aug. 19, 2016)
(``Staff Letter'').
---------------------------------------------------------------------------

Margin

    6. The 2012 Proposals included a provision that would require a
nonbank SBSD to calculate a daily initial margin amount for each
counterparty.\39\ The nonbank SBSD could use the standardized or model-
based deductions

prescribed in the proposed capital rule for nonbank SBSDs to calculate
the initial margin amount, except that initial margin for equity
security-based swaps would need to be determined exclusively using the
standardized deductions.
---------------------------------------------------------------------------

    \39\ See 2012 Proposals, 77 FR at 70261.
---------------------------------------------------------------------------

    Some commenters argued that the Commission should approve a uniform
initial margin model because it would reduce counterparty disputes and
increase efficiency.\40\ Since the publication of the 2012 Proposals,
the prudential regulators and the CFTC adopted final margin rules that
permit the use of a model to calculate initial margin subject to the
approval of the CFTC or a firm's prudential regulator.\41\ The
Commission understands that the firms subject to these final rules have
widely adopted the use of an industry-developed uniform model to
compute initial margin.\42\ In light of the comments and the goals of
this provision, the Commission requests comment on whether the margin
rule should permit nonbank SBSDs to apply to use models other than
proprietary capital models to compute initial margin, including
applying to use a standard industry model. The purpose would be to
provide flexibility to nonbank SBSDs to apply to the Commission for
authorization to use a proprietary or other model to compute initial
margin, and, with respect to an industry standard model, to increase
transparency and decrease margin disputes among counterparties.
---------------------------------------------------------------------------

    \40\ See, e.g., Letter from Robert Pickel, Chief Executive
Officer, International Swaps and Derivatives Association (Feb. 5,
2014) (``ISDA 2/5/2014 Letter'').
    \41\ See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74840; Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants, 81 FR 636.
    \42\ See, e.g., ISDA, ISDA SIMM\TM\ Deployed Today; New Industry
Standard for Calculating Initial Margin Widely Adopted by Market
Participants (Sept. 1, 2016), available at: https://www.isda.org/2016/09/01/isda-simm-deployed-today-new-industry-standard-for-calculating-initial-margin-widely-adopted-by-market-participants/.
---------------------------------------------------------------------------

    Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing commenters' requests for more flexibility?
If not, please explain why and suggest alternative rule language that
could more effectively and efficiently strike the balance and achieve
the objective.
    The potential modifications to paragraph (d)(2)(i) of Rule 18a-3
would provide: For security-based swaps other than equity security-
based swaps, a security-based swap dealer may apply to the Commission
for authorization to use a model to compute the margin amount required
by paragraph (c)(1)(i)(B) of this section and to compute the deductions
required by paragraph Sec.  240.15c3-1(c)(2)(xv) or Sec.  240.18a-
1(c)(1)(ix), as applicable, subject to the application process in Sec.
240.15c3-1e or Sec.  240.18a-1(d), as applicable. The model must use a
ninety-nine percent (99%), one-tailed confidence level with price
changes equivalent to a ten business-day movement in rates and prices,
and must use risk factors sufficient to cover all the material price
risks inherent in the positions for which the margin amount or
deductions are being calculated, including foreign exchange or interest
rate risk, credit risk, equity risk, and commodity risk, as
appropriate. Empirical correlations may be recognized by the model
within each broad risk category, but not across broad risk categories.
    7. The 2012 Proposals included a requirement that a nonbank SBSD
would need to collect initial and variation margin from each
counterparty unless an exception applies.\43\ The proposed rule
contained four exceptions under which variation and/or initial margin
need not be collected: (1) When the counterparty is a commercial end
user; (2) when the counterparty is another SBSD; (3) when the
counterparty requires segregation pursuant to Section 3E(f) of the Act;
and (4) when the counterparty's account holds only legacy
transactions.\44\
---------------------------------------------------------------------------

    \43\ See 2012 Proposals, 77 FR at 70263-69.
    \44\ See id.
---------------------------------------------------------------------------

    Some commenters encouraged the Commission to adopt a threshold
below which initial margin need not be collected and noted that the
prudential regulators and the CFTC established a $50 million threshold
(consistent with the recommendation of an international standard
setting body).\45\ In light of the comments and the goals of this
provision, the Commission requests comment on whether it would be
appropriate to establish a risk-based threshold. 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. Should
a risk-based threshold take into account the financial condition of the
SBSD and the counterparty by providing that initial margin need not be
collected from a counterparty when the amount is less than one percent
(1%) or some other percent of a nonbank SBSD's tentative net capital
\46\ and is less than ten percent (10%) or some other percent \47\ of
the counterparty's net worth (in which case, only the amount above the
threshold would need to be collected)? The purpose of these financial
metrics 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.
---------------------------------------------------------------------------

    \45\ See, e.g., Letter from Karrie McMillan, General Counsel,
Investment Company Institute (Feb. 4, 2013). See also BCBS, IOSCO,
Margin Requirements for Non-centrally Cleared Derivatives (Mar.
2015), available at: http://www.bis.org/bcbs/publ/d317.pdf.
    \46\ See, e.g., 17 CFR 240.15c3-3a, Note E(5) (using a twenty-
five percent (25%) of tentative net capital threshold for when a
broker-dealer must reduce debits in the customer reserve formula).
    \47\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(M)(1) (using a ten
percent (10%) of tentative net capital threshold for the calculation
of undue concentration charges).
---------------------------------------------------------------------------

    Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and addressing commenters' requests for a threshold? If
not, please explain why and suggest alternative rule language that
could more effectively and efficiently strike the balance and achieve
the objective.
    The potential modifications to paragraph (c)(1)(iii)(E) of Rule
18a-3 would provide that an SBSD may elect not to collect the amount
required under paragraph (c)(1)(ii)(B) of this section to the extent
that the amount does not exceed the lesser of: (1) 1 percent (1%) of
the security-based swap dealer's tentative net capital; or (2) ten
percent (10%) of the net worth of the counterparty.
    8. As noted above, the 2012 Proposals included an exception from
collecting margin when the counterparty is another SBSD.\48\ In
particular, the Commission proposed two alternatives with respect to
SBSD counterparties.\49\ Under the first alternative, a nonbank SBSD
would not need to collect initial margin if the counterparty is another
SBSD (``Alternative A''). This approach is consistent with the broker-
dealer margin rules, which generally do not require a broker-dealer to
collect margin

from another broker-dealer.\50\ Under the proposed second alternative,
a nonbank SBSD would be required to collect initial margin from another
SBSD and the initial margin would need to be segregated pursuant to
Section 3E(f) of the Act (``Alternative B'').\51\
---------------------------------------------------------------------------

    \48\ See 2012 Proposals, 77 FR at 70267-68.
    \49\ See id.
    \50\ See id.
    \51\ See id.
---------------------------------------------------------------------------

    A commenter argued that Alternative A was the preferred approach
because requiring SBSDs to collect initial margin from other SBSDs
would curtail the use of non-cleared security-based swaps for hedging,
which would disrupt key financial services, such as those that
facilitate the availability of home loans and corporate finance.\52\
This commenter also 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.\53\ Other commenters supported Alternative B stating that
Alternative A would permit an inappropriate build-up of systemic risk
for transactions within the financial system.\54\
---------------------------------------------------------------------------

    \52\ See Letter from Robert Pickel, Chief Executive Officer,
International Swaps and Derivatives Association (Jan. 23, 2013)
(``ISDA 1/23/2013 Letter'').
    \53\ See id.
    \54\ See, e.g., Letter from Americans for Financial Reform (Feb.
22, 2013).
---------------------------------------------------------------------------

    a. The Commission requests comment and supporting data that would
assist in the quantification of the economic impacts of Alternatives A
and B. The 2012 Proposals discussed the potential for increased use of
leverage, the potential for a nonbank SBSD to fail, and the potential
that a default by a nonbank SBSD could translate to defaults of
counterparty SBSDs.\55\ The 2012 Proposals also noted that the
likelihood of these potential events occurring would be smaller under
Alternative B than under Alternative A.\56\ Would the proposed capital
requirements complement Alternative A to reduce the potential for
increased use of leverage, the potential for a nonbank SBSD to fail,
and the potential that a default by a nonbank SBSD could translate to a
default of counterparty SBSDs caused by exposure to credit risk in
inter-dealer positions? Would there be situations where the proposed
capital requirements and Alternative A would not prevent a failure of a
nonbank SBSD caused by security-based swap trading losses? Would there
be situations where the proposed capital requirements and Alternative A
would avoid a failure of a nonbank SBSD by not imposing pro-cyclical
collateral demands?
---------------------------------------------------------------------------

    \55\ See 2012 Proposals, 77 FR at 70267, 70322.
    \56\ See id.
---------------------------------------------------------------------------

    The 2012 Proposals also noted that in comparison to Alternative A
or current practices, Alternative B could have a more significant
negative impact on the liquidity of nonbank SBSDs and their ability to
trade in security-based swaps.\57\ If Alternative B is adopted, how
much initial margin would be segregated at third-party custodians and
how would it impact the liquidity of nonbank SBSDs? If Alternative B is
adopted, would the proposed margin requirements limit the ability of
nonbank SBSDs to trade in security-based swaps?
---------------------------------------------------------------------------

    \57\ See id. at 70322.
---------------------------------------------------------------------------

    Finally, the 2012 Proposals noted that depending on whether
Alternative A or B is adopted, the proposed margin requirements may
create the potential for regulatory arbitrage.\58\ In particular, the
2012 Proposals noted that if the Commission does not require nonbank
SBSDs to collect initial margin in their inter-dealer transactions (as
proposed in Alternative A), while the prudential regulators require the
collection of initial margin for the same transactions, intermediaries
could have an incentive to conduct business through nonbank
entities.\59\ Would Alternative A create more opportunities for
regulatory arbitrage than Alternative B, and would these regulatory
arbitrage opportunities have a significant economic impact? If so,
please explain how. In addition, Alternative A would differ in some
respects from an international policy framework establishing
recommended minimum standards for margin requirements for non-centrally
cleared derivatives.\60\ Would these or other differences create
opportunities for regulatory arbitrage, impede transactions with other
market participants, or have an impact on substituted compliance
determinations?
---------------------------------------------------------------------------

    \58\ See id. at 70305-06.
    \59\ See id.
    \60\ See BCBS, IOSCO, Margin Requirements for Non-centrally
Cleared Derivatives (Mar. 2015).
---------------------------------------------------------------------------

    b. If Alternative A is adopted, should the exception apply to a
broader class of entities than just other SBSDs? Should it apply if the
nonbank SBSD's counterparty is an SBSD, broker-dealer, bank, futures
commission merchant, foreign bank, or foreign dealer? The purpose of
adopting Alternative A with a modification to apply the exception to a
broader class of counterparties would be to promote the liquidity of
nonbank SBSDs and other market participants by reducing the amount of
capital they must post as initial margin to counterparties.
    Would rule language as described below effect Alternative A with
the potential modification to expand the range of entities from which
initial margin need not be collected? If not, please explain why and
suggest alternative rule language. If the Commission were to use the
language described below, would it strike an appropriate balance in
terms of promoting the liquidity of nonbank SBSDs and other market
participants and addressing commenters' concerns about building up
systemic risk? If not, please explain why and suggest alternative rule
language that could more effectively and efficiently strike the balance
and achieve the objective.
    The potential modifications to paragraph (c)(1)(iii)(B) of Rule
18a-3 would provide that the requirements of paragraph (c)(1)(ii)(B) of
this section do not apply to an account of a counterparty that is a
security-based swap dealer, swap dealer, broker or dealer, futures
commission merchant, bank, foreign bank, or a foreign broker or dealer.
    9. In response to the 2012 Proposals, commenters argued that the
requirements adopted pursuant to Title VII of the Dodd-Frank Act should
permit the portfolio margining of security-based swaps, swaps, and
related positions.\61\ Portfolio margining of security-based swaps,
swaps, and related positions can offer benefits to investors and the
markets, including aligning margin requirements more closely with the
overall risks of a customer's portfolio. Further, portfolio margining
may help to improve cash flows and liquidity, and reduce volatility.
---------------------------------------------------------------------------

    \61\ See, e.g., Letter from Adam Jacobs, Director of Markets
Regulation, Alternative Investment Management Association (Feb. 22,
2013) (``AIMA 2/22/2013 Letter'').
---------------------------------------------------------------------------

    a. The Commission requests comment on whether swaps should be
permitted to be held in a security-based swap account at an entity that
is registered as a broker-dealer, nonbank SBSD, and swap dealer to
provide a means to portfolio margin security-based swaps with swaps and
related cash market and listed options positions. The Commission also
requests comment on whether security-based swaps should be permitted to
be held in a swap account at an entity that is registered as an FCM,
swap dealer, and nonbank SBSD to provide a means to portfolio margin
security-based swaps with swaps and related futures positions.
    b. The Commission requests comment on whether swaps should be
permitted to be held in a security-based swap

account at an entity that is registered as a nonbank SBSD and swap
dealer (but not as a broker-dealer or FCM) to provide a means to
portfolio margin security-based swaps and swaps in a security-based
swap account. The Commission also requests comment on whether security-
based swaps should be permitted to be held in a swap account at an
entity that is registered as a swap dealer and SBSD (but not as an FCM
or broker-dealer) to provide a means to portfolio margin security-based
swaps and swaps in a swap account. If so, should such portfolio
margining be subject to conditions similar to those set forth in the
Commission's exemptive order permitting portfolio margining of credit
default swaps (e.g., conditions regarding subordination agreements and
disclosures)? \62\ In either scenario identified in this paragraph,
should the SBSD dually registered as a swap dealer be permitted to use
a model to determine portfolio margin requirements for security-based
swaps and swaps that reference equity securities, provided the accounts
do not hold cash market equity and listed options positions?
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    \62\ See Order Granting Conditional Exemptions Under the
Securities Exchange Act of 1934 in Connection with Portfolio
Margining of Swaps and Security-Based Swaps, Exchange Act Release
No. 68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012).
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    c. The Commission requests comment on how security-based swaps,
swaps, cash market and listed options positions, and collateral held in
a security-based swap account at an entity registered as a broker-
dealer, nonbank SBSD, and swap dealer would be treated in a liquidation
proceeding. The Commission requests comment on how security-based
swaps, swaps, futures positions, and collateral held in a swap account
at an entity registered as an FCM, swap dealer, and nonbank SBSD would
be treated in a liquidation proceeding. Would the treatment be
different if the entity was also registered as a broker-dealer? The
Commission requests comment on how swaps and security-based swaps held
in a security-based swap account at an entity registered as an SBSD and
swap dealer would be treated in a liquidation proceeding and how
security-based swaps and swaps held in a swap account at such an entity
would be treated in a liquidation proceeding.
    For each of the four scenarios described above, what steps should
be taken to provide protections to the accountholders? What rights
(including rights under the bankruptcy laws) might accountholders have
to waive? Should there be limits on the types of counterparties that
would be permitted to waive these rights? Should the rule require the
nonbank SBSD to provide complete and accurate disclosures about the
treatment of assets in a liquidation, bankruptcy, or similar proceeding
under each of the scenarios described above so that accountholders and
prospective accountholders can make informed decisions about the type
of portfolio margin account they want to use and about waiving any
rights with respect to the account?
    d. The scenarios described above include permitting: (1) An entity
registered as a broker-dealer, nonbank SBSD, and swap dealer to hold
swaps in a security-based swap account to provide a means to portfolio
margin security-based swaps with swaps and related cash market and
listed options positions; and (2) an entity that is registered as an
SBSD and swap dealer (but not as an FCM or broker-dealer) to hold swaps
in a security-based swap account to provide a means to portfolio margin
security-based swaps and swaps in a security-based swap account and to
use a model to determine portfolio margin requirements for security-
based swaps and swaps that reference equity securities, provided the
accounts do not hold cash market equity and listed options positions.
    Would rule language as described below effect these approaches to
implement portfolio margining of swaps in a security-based swap
account? If not, please explain why and suggest alternative rule
language. If the Commission were to use the language described below,
would it strike an appropriate balance in terms of achieving the
objectives of the proposed rules and addressing commenters' requests to
permit portfolio margining of swaps and security-based swaps? If not,
please explain why and suggest alternative rule language that could
more effectively and efficiently strike the balance and achieve the
objective.
    The potential modifications to paragraph (a)(3) of Appendix A to
Rule 15c3-1 would provide: The term related instrument within an option
class or product group refers to futures contracts, options on futures
contracts, and swaps covering the same underlying instrument. In
relation to options on foreign currencies a related instrument within
an option class also shall include forward contracts on the same
underlying currency.
    The potential modifications to paragraph (a)(4) of Appendix A to
Rule 15c3-1 would also provide: The term underlying instrument refers
to long and short positions, as appropriate, covering the same foreign
currency, the same security, security future, security-based swap, or a
security which is exchangeable for or convertible into the underlying
security within a period of 90 days. If the exchange or conversion
requires the payment of money or results in a loss upon conversion at
the time when the security is deemed an underlying instrument for
purposes of this Appendix A, the broker or dealer will deduct from net
worth the full amount of the conversion loss. The term underlying
instrument shall not be deemed to include securities options, futures
contracts, options on futures contracts, qualified stock baskets,
unlisted instruments (other than security-based swaps), or swaps.
    The potential modifications to paragraph (a)(3) of Appendix A to
Rule 18a-1 would provide: The term related instrument within an option
class or product group refers to futures contracts, options on futures
contracts, and swaps covering the same underlying instrument. In
relation to options on foreign currencies, a related instrument within
an option class also shall include forward contracts on the same
underlying currency.
    The potential modifications to paragraph (a)(4) of Appendix A to
Rule 18a-1 would provide: The term underlying instrument refers to long
and short positions, as appropriate, covering the same foreign
currency, the same security, security future, security-based swap, or a
security which is exchangeable for or convertible into the underlying
security within a period of 90 days. If the exchange or conversion
requires the payment of money or results in a loss upon conversion at
the time when the security is deemed an underlying instrument for
purposes of this Appendix A, the security-based swap dealer will deduct
from net worth the full amount of the conversion loss. The term
underlying instrument shall not be deemed to include securities
options, futures contracts, options on futures contracts, qualified
stock baskets, unlisted instruments (other than security-based swaps),
or swaps.
    The potential modifications to paragraph (d)(2)(ii) of Rule 18a-3
would provide: Notwithstanding paragraph (d)(2)(i) of this section, a
security-based swap dealer that is not registered as a broker or dealer
pursuant to Section 15(b) of the Act (15 U.S.C. 78o(b)) may apply to
the Commission for authorization to use a model to compute the margin
amount required by paragraph (c)(1)(i)(B) of this section and to
compute the deductions required by paragraph Sec.  240.18a-1(c)(1)(ix)
for equity security-based swaps and equity swaps, subject to the
application process and model requirements of

paragraph (d)(2)(i) of this section; provided, however, the account of
the counterparty subject to the requirements of this paragraph may not
hold equity securities or listed options.

Segregation

    10. Section 3E(f) of the Act provides that a counterparty to a non-
cleared security-based swap with an SBSD can require that initial
margin be segregated at a third-party custodian or waive
segregation.\63\ The 2012 Proposals included a third alternative under
which the initial margin for the non-cleared security-based swap could
be held by the SBSD and subject to requirements modeled on the broker-
dealer customer protection rule but tailored to security-based swaps
(``omnibus segregation requirements'').\64\ The omnibus segregation
requirements would be mandatory for initial margin held by the SBSD for
cleared security-based swaps.
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    \63\ See 15 U.S.C. 78c-5(f)(3).
    \64\ See 2012 Proposals, 77 FR at 70274-88; 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

    a. The Commission received a number of comments asking technical
questions about how the proposed omnibus segregation requirements would
operate in the context of security-based swap transactions, including
specific questions about the computation of the reserve formula, and
what types of hedging would be permitted under the proposed definition
of ``excess securities collateral.'' \65\ The Commission requests
comment on whether there are aspects of the proposed omnibus
segregation requirements where greater clarity regarding the
application of the rule would be helpful. If so, please identify them
and suggest appropriate modifications to the proposed rule.
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    \65\ See, e.g., SIFMA 2/22/2013 Letter.
---------------------------------------------------------------------------

    b. The 2013 Proposals would treat segregation as a transaction-
level requirement, and the Commission proposed paragraph (e) of Rule
18a-4 to prescribe the scope of application of the segregation
requirements in Section 3E(f) of the Act and Rule 18a-4.\66\ The
proposed cross-border application of these segregation requirements to
a foreign SBSD or foreign MSBSP depended on whether it is a registered
broker-dealer, a U.S. branch or agency of a foreign bank, or neither of
the above, and whether the security-based swaps are cleared or non-
cleared.\67\ The Commission requests comment on whether there are
aspects of the proposed cross-border application of the segregation
requirements where greater clarity regarding the application of the
rule would be helpful. If so, please identify them and suggest
appropriate modifications to the proposed rule.
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    \66\ See 2013 Proposals, 78 FR at 31010-11, 31018-22, 31209-10.
    \67\ See id. at 31018-22.
---------------------------------------------------------------------------

    c. The 2013 Proposals provided that a foreign SBSD that is a U.S.
branch or agency of a foreign bank must comply with segregation
requirements with respect to security-based swap transactions with U.S.
security-based swap customers, but not with foreign security-based swap
customers.\68\ Should the segregation requirements apply to certain
foreign security-based swap customers? In particular, the Commission
requests comment on whether a foreign SBSD that is not a broker-dealer
and is a foreign bank should be required to comply with the segregation
requirements (1) with respect to U.S. security-based swap customers
(regardless of which branch or agency the customer's transactions arise
out of), and (2) with respect to a foreign security-based swap customer
if the foreign SBSD holds funds or other property arising out of a
transaction had by such person with a U.S. branch or agency of the
foreign SBSD.
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    \68\ See id.
---------------------------------------------------------------------------

    11. The Commission received a comment that the broker-dealer
customer protection rule (Rule 15c3-3) should be amended to take into
account margin that is posted at a clearing agency by broker-dealers
not registered as SBSDs.\69\ The Commission requests comment on whether
Rule 15c3-3 should be amended to add a new paragraph (p) and a new
Exhibit B that would contain segregation requirements and a customer
reserve formula that parallel those in proposed Rule 18a-4. The
security-based swap segregation requirements that would be added to
Rule 15c3-3 would be substantially the same as the requirements in each
paragraph of proposed Rule 18a-4.\70\ The purpose would be to permit
broker-dealers that are not registered as SBSDs but that engage in
security-based swap activities to use segregation requirements that
parallel those in proposed Rule 18a-4 and which are tailored to
security-based swaps. In addition, the purpose would be to locate in
Rule 15c3-3 the security-based swap segregation requirements for
entities registered as a broker-dealer and SBSD. Proposed Rule 18a-4
would apply to SBSDs that are not registered as broker-dealers.
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    \69\ See Letter from Kathleen M. Cronin, CME Group Inc. (Feb.
22, 2013).
    \70\ The provisions of paragraph (d) of proposed Rule 18a-4
would not apply to a broker-dealer that is not also registered as
either an SBSD or MSBSP because Section 3E(f)(1)(A) of the Act does
not apply to broker-dealers. See 2012 Proposals, 77 FR at 70287.
---------------------------------------------------------------------------

    12. The 2012 Proposals include a definition of ``excess securities
collateral'' to identify securities and money market instruments
received from security-based swap customers that must be held in
physical possession or control.\71\ In particular, securities and money
market instruments that are not being used to collateralize the SBSD's
current exposure to the customer (i.e., exceed the variation margin
requirement) would need to be in the physical possession or control of
the SBSD unless one of two exceptions applied.\72\ The exceptions are
that the securities and money market instruments are held in a: (1)
Qualified clearing agency account but only to the extent they are being
used to meet a margin requirement of the clearing agency; or (2)
qualified SBSD account but only to the extent they are being used to
meet a margin requirement that applies to the other SBSD resulting from
entering into a non-cleared security-based swap transaction with the
other SBSD to offset the risk of a non-cleared security-based swap
transaction between the SBSD and the customer.\73\ In addition, the
2012 Proposals included a requirement for an SBSD to perform a customer
reserve formula calculation.\74\ Under the proposal, an SBSD could
include as a debit item in the formula cash collateral posted to a
clearing agency or another SBSD under the same circumstances as the
exceptions to the definition of ``excess securities collateral.'' \75\
The prudential regulators require initial margin posted by an SBSD to a
bank SBSD to be held at a third-party custodian (rather than being held
directly by the bank SBSD).\76\ This means that if an SBSD enters into
a transaction with a bank SBSD to hedge a non-cleared security-based
swap transaction with a security-based swap customer, the SBSD may have
to post initial margin to the bank SBSD and that initial margin would
need to be held by a third-party custodian rather than directly by the
bank SBSD.
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    \71\ See 2012 Proposals, 77 FR at 70278-70282.
    \72\ See id.
    \73\ See id.
    \74\ See id. at 70282-87.
    \75\ See id.
    \76\ See 12 CFR 45.7; 12 CFR 237.7; 12 CFR 624.7; 12 CFR 1221.7;
12 CFR 349.7.
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    The Commission requests comment on how initial margin posted by an
SBSD to a bank SBSD to hedge a transaction with a security-based swap
customer should be treated for purposes of the possession or control
and customer reserve requirements in the

proposed SBSD segregation rule. For purposes of the possession or
control and customer reserve account requirements, should the initial
margin be treated similarly to how initial margin an SBSD posts to a
nonbank SBSD is treated if the purpose is to enter into a transaction
that hedges a transaction with a security-based swap customer? The
purpose would be to accommodate an SBSD that elects to enter into a
hedging transaction with a bank SBSD and must post initial margin that
is segregated at a third-party custodian.
    Would rule language as described below effect this potential
modification to the rule text in the 2012 Proposals? If not, please
explain why and suggest alternative rule language. If the Commission
were to use the language described below, would it strike an
appropriate balance in terms of achieving the objectives of the
proposed rule and accommodating SBSDs that elect to hedge a non-cleared
security-based swap transaction by entering into an off-setting
transaction with a bank SBSD? If not, please explain why and suggest
alternative rule language that could more effectively and efficiently
strike the balance and achieve the objective.
    The potential modifications to paragraph (p)(1)(ii) of Rule 15c3-3
would provide: The term excess securities collateral means securities
and money market instruments carried for the account of a security-
based swap customer that have a market value in excess of the current
exposure of the broker or dealer (after reducing the current exposure
by the amount of cash in the account) to the security-based swap
customer, excluding: (A) Securities and money market instruments held
in a qualified clearing agency account but only to the extent the
securities and money market instruments are being used to meet a margin
requirement of the clearing agency resulting from a security-based swap
transaction of the security-based swap customer; and (B) securities and
money market instruments held in a qualified registered security-based
swap dealer account or in a third-party custodial account but only to
the extent the securities and money market instruments are being used
to meet a regulatory margin requirement of a security-based swap dealer
resulting from the broker or dealer entering into a non-cleared
security-based swap transaction with the security-based swap dealer to
offset the risk of a non-cleared security-based swap transaction
between the broker or dealer and the security-based swap customer.
    The potential modifications to paragraph (p)(1)(viii) of Rule 15c3-
3 would provide: The term third-party custodial account means an
account carried by an independent third-party custodian that meets the
following conditions: (A) The account is established for the purposes
of meeting regulatory margin requirements of another security-based
swap dealer; (B) The account is carried by a bank; (C) The account is
designated for and on behalf of the broker or dealer for the benefit of
its security-based swap customers and the account is subject to a
written acknowledgement by the bank provided to and retained by the
broker or dealer that the funds and other property held in the account
are being held by the bank for the exclusive benefit of the security-
based swap customers of the broker or dealer and are being kept
separate from any other accounts maintained by the broker or dealer
with the bank; and (D) The account is subject to a written contract
between the broker or dealer and the bank which provides that the funds
and other property in the account shall at no time be used directly or
indirectly as security for a loan or other extension of credit to the
security-based swap dealer by the bank and, shall be subject to no
right, charge, security interest, lien, or claim of any kind in favor
of the bank or any person claiming through the bank.
    The potential modifications to Line 16 of Exhibit B to Rule 15c3-3
would provide: Margin related to non-cleared security-based swap
transactions in accounts carried for security-based swap customers
required and held in a qualified registered security-based swap dealer
account at another security-based swap dealer or at a third-party
custodial account.
    The potential modifications to paragraph (a)(2) of Rule 18a-4 would
provide: The term excess securities collateral means securities and
money market instruments carried for the account of a security-based
swap customer that have a market value in excess of the current
exposure of the security-based swap dealer (after reducing the current
exposure by the amount of cash in the account) to the security-based
swap customer, excluding (i) securities and money market instruments
held in a qualified clearing agency account but only to the extent the
securities and money market instruments are being used to meet a margin
requirement of the clearing agency resulting from a security-based swap
transaction of the security-based swap customer; and (ii) securities
and money market instruments held in a qualified registered security-
based swap dealer account or in a third-party custodial account but
only to the extent the securities and money market instruments are
being used to meet a regulatory margin requirement of another security-
based swap dealer resulting from the security-based swap dealer
entering into a non-cleared security-based swap transaction with the
other security-based swap dealer to offset the risk of a non-cleared
security-based swap transaction between the security-based swap dealer
and the security-based swap customer.
    The potential modifications to paragraph (a)(10) of Rule 18a-4
would also provide: The term third-party custodial account means an
account carried by an independent third-party custodian that meets the
following conditions: (i) The account is established for the purposes
of meeting regulatory margin requirements of another security-based
swap dealer; (ii) The account is carried by a bank; (iii) The account
is designated for and on behalf of the security-based swap dealer for
the benefit of its security-based swap customers and the account is
subject to a written acknowledgement by the bank provided to and
retained by the security-based swap dealer that the funds and other
property held in the account are being held by the bank for the
exclusive benefit of the security-based swap customers of the security-
based swap dealer and are being kept separate from any other accounts
maintained by the security-based swap dealer with the bank; and (iv)
The account is subject to a written contract between the security-based
swap dealer and the bank which provides that the funds and other
property in the account shall at no time be used directly or indirectly
as security for a loan or other extension of credit to the security-
based swap dealer by the bank and, shall be subject to no right,
charge, security interest, lien, or claim of any kind in favor of the
bank or any person claiming through the bank.
    The potential modifications to Line 14 of Exhibit A to Rule 18a-4
would provide: Margin related to non-cleared security-based swap
transactions in accounts carried for security-based swap customers
required and held in a qualified registered security-based swap dealer
account at another security-based swap dealer or at a third-party
custodial account.
    13. The 2012 Proposals required an SBSD to deduct the amount of
funds held in a security-based swap customer reserve account at a
single bank to the extent the amount exceeds ten percent (10%) of the
equity capital of the bank

as reported by the bank in its most recent Consolidated Report of
Condition and Income (``Call Report'').\77\ This proposal was
consistent with amendments to Rule 15c3-3 that at that time were still
in the proposal stage.\78\ In 2013, the Commission adopted with
modifications the amendments to Rule 15c3-3.\79\ The modifications
increased the threshold applicable to broker-dealer customer reserve
accounts held at a bank to fifteen percent (15%) and excluded cash on
deposit at an affiliated bank.
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    \77\ See 2012 Proposals, 77 FR at 70282-86.
    \78\ See Amendments to Financial Responsibility Rules for
Broker-Dealers, Exchange Act Release No. 55431 (Mar. 9, 2007), 72 FR
12862 (Mar. 19, 2007).
    \79\ See Financial Responsibility Rules for Broker-Dealers,
Exchange Act Release No. 70072 (Jul. 30, 2013), 78 FR 51824, 51832-
35 (Aug. 21, 2013).
---------------------------------------------------------------------------

    The Commission requests comment on whether, for consistency with
broker-dealers, the threshold applicable to SBSD customer reserve
accounts held at a bank should be increased to fifteen percent (15%) of
the bank's equity capital and whether any cash deposited with an
affiliated bank should be excluded. The purpose would be to more
closely align the proposed segregation requirements for security-based
swaps with the existing customer reserve requirements in Rule 15c3-3,
as amended in 2013. Should the fifteen percent (15%) threshold not
apply if the SBSD is a bank and maintains the security-based swap
customer reserve account itself rather than at an affiliated or non-
affiliated bank? The purpose of this exception would be to accommodate
a bank SBSD that holds the customer reserve account directly.
    The changes discussed above would modify paragraph (c)(1) of
proposed Rule 18a-4 and new paragraph (p)(3) of proposed Rule 15c3-3 to
more closely align them with the 2013 amendments to Rule 15c3-3 and,
with respect to proposed Rule 18a-4, establish an exception from the
fifteen percent (15%) threshold for a bank SBSD that maintains the
security-based swap customer reserve account itself. Would rule
language as described below effect this potential modification to the
rule text in the 2012 Proposals? If not, please explain why and suggest
alternative rule language. If the Commission were to use the language
described below, would it strike an appropriate balance in terms of
achieving the objectives of the proposed rule and providing sufficient
flexibility to SBSDs in terms of locating their reserve account
deposits? If not, please explain why and suggest alternative rule
language that could more effectively and efficiently strike the balance
and achieve the objective.
    The potential modifications to paragraph (p)(3)(i) of Rule 15c3-3
would provide: In determining the amount maintained in a special
reserve account for the exclusive benefit of security-based swap
customers, the security-based swap dealer must deduct (A) the amount of
cash deposited with a single non-affiliated bank to the extent the
amount exceeds fifteen percent (15%) of the equity capital of the bank
as reported by the bank in its most recent Call Report or any successor
form the bank is required to file by its appropriate federal banking
agency (as defined by Section 3 of the Federal Deposit Insurance Act
(12 U.S.C. 1813)); and (B) the total amount of cash deposited with an
affiliated bank.
    Similarly, the potential modifications to paragraph (c)(1)(i) of
Rule 18a-4 would provide: In determining the amount maintained in a
special reserve account for the exclusive benefit of security-based
swap customers, the security-based swap dealer must deduct (A) the
amount of cash deposited with a single non-affiliated bank to the
extent the amount exceeds fifteen percent (15%) of the equity capital
of the bank as reported by the bank in its most recent Call Report or
any successor form the bank is required to file by its appropriate
federal banking agency (as defined by Section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813)); and (B) for a security-based swap
dealer for which there is not a prudential regulator, the total amount
of cash deposited with an affiliated bank.
    The potential modifications to paragraph (c)(1)(ii) of Rule 18a-4
would provide the following exception: A security-based swap dealer for
which there is a prudential regulator need not take the deduction
specified in paragraph (c)(1)(i)(D) of this section if it maintains the
special reserve account for the exclusive benefit of security-based
swap customers itself rather than at an affiliated or non-affiliated
bank.

Substituted Compliance

    14. The 2013 Proposals would make substituted compliance with
respect to capital and margin requirements available to foreign nonbank
SBSDs that are not also registered as broker-dealers.\80\ Upon a
Commission substituted compliance determination, this type of SBSD
would be able to satisfy relevant capital and margin requirements by
complying with corresponding requirements under a foreign regulatory
system. The Commission requests comment on whether the potential
modifications to the rule text in the 2012 Proposals discussed in this
release would have an impact on substituted compliance determinations.
If so, please explain how.
---------------------------------------------------------------------------

    \80\ See 2013 Proposals, 78 FR at 31207-08.
---------------------------------------------------------------------------

    A number of commenters requested that the Commission consider
consistency with the prudential regulators, international standards,
and foreign regulators when making substituted compliance
determinations with respect to the proposed nonbank SBSD capital
requirements.\81\
---------------------------------------------------------------------------

    \81\ See, e.g., ISDA 1/23/2013 Letter.
---------------------------------------------------------------------------

    a. Commenters generally requested additional guidance regarding the
criteria the Commission would consider when making substituted
compliance determinations.\82\ In light of the comments and the goals
of this provision, the Commission requests comment on the factors it
should consider in making a substituted compliance determination with
respect to the proposed nonbank SBSD capital requirements of Section
15F(e) of the Act and proposed Rule 18a-1. In making a substituted
compliance determination, should the Commission consider whether the
capital requirements of the foreign financial regulatory system are
designed to help ensure the safety and soundness of registrants in a
manner that is comparable to the proposed capital requirements for
nonbank SBSDs? \83\ In addition, the proposed nonbank SBSD capital rule
prescribes a net liquid assets test that requires the firm to have an
amount of highly liquid assets that exceeds the amount of the firm's
unsubordinated liabilities.\84\ In terms of the conditions that might
be included in an order making an affirmative substituted compliance
determination, should the Commission consider a condition that requires
foreign nonbank SBSDs relying on the order to maintain liquid assets in
excess of their unsubordinated liabilities? \85\ Are there

reasonable alternatives to a net liquid assets test that could be the
basis for a condition that is designed to ensure the foreign nonbank
SBSD maintains sufficient liquidity to meet its obligations to
security-based swap customers and other creditors? If so, describe them
and explain how they would achieve this objective. Would these
alternatives be appropriate for a domestic nonbank SBSD that is not
registered as a broker-dealer? If so, explain why. Should the
Commission consider a condition that the foreign nonbank SBSD not have
a disproportionate number of U.S. customers? If not, explain why.
---------------------------------------------------------------------------

    \82\ See, e.g., Letter from the Coalition for Derivatives End-
Users (Agricultural Retailers Association, Business Roundtable,
Financial Executives International, National Association of
Corporate Treasurers, National Association of Manufacturers, U.S.
Chamber of Commerce) (Aug. 21, 2013).
    \83\ See, e.g., 15 U.S.C. 78o-10(e)(3)(A).
    \84\ See 2012 Proposals, 77 FR at 70221-25.
    \85\ See Interpretation Guide to Net Capital Computation for
Brokers and Dealers, Exchange Act Release No. 8024 (Jan. 18, 1967),
32 FR 856 (Jan. 25, 1967) (``Rule 15c3-1 (17 CFR 240.15c3-1) was
adopted to provide safeguards for public investors by setting
standards of financial responsibility to be met by brokers and
dealers. The basic concept of the rule is liquidity; its object
being to require a broker-dealer to have at all times sufficient
liquid assets to cover his current indebtedness.'') (footnotes
omitted); Net Capital Requirements for Brokers and Dealers, Exchange
Act Release No. 15426 (Dec. 21, 1978), 44 FR 1754 (Jan. 8, 1979)
(``The rule requires brokers or dealers to have sufficient cash or
liquid assets to protect the cash or securities positions carried in
their customers' accounts. The thrust of the rule is to insure that
a broker or dealer has sufficient liquid assets to cover current
indebtedness.''); Net Capital Requirements for Brokers and Dealers,
Exchange Act Release No. 26402 (Dec. 28, 1989), 54 FR 315 (Jan. 5,
1989) (``The rule's design is that broker-dealers maintain liquid
assets in sufficient amounts to enable them to satisfy promptly
their liabilities. The rule accomplishes this by requiring broker-
dealers to maintain liquid assets in excess of their liabilities to
protect against potential market and credit risks.'') (footnote
omitted). See also Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants; Proposed Rule, 78 FR at 31090.
---------------------------------------------------------------------------

    b. The Commission requests comment on the composition of the
balance sheets of entities in foreign jurisdictions that may register
as nonbank SBSDs. Are the assets and liabilities of these foreign
entities similar to the assets and liabilities of U.S. broker-dealers
that are subject to the net liquid assets test? If not, explain the
differences.
    c. The approach described in 14.a would modify Rule 3a71-6
(proposed as Exchange Act Rule 3a71-5 at 78 FR 30967, 31207-08) to
describe factors that the Commission would consider in making a
substituted compliance determination with respect to the proposed
nonbank SBSD capital requirements.\86\ Would rule language as described
below effect this potential modification to the rule text in the 2012
Proposals? If not, please explain why and suggest alternative rule
language. If the Commission were to use the language described below,
would it strike an appropriate balance in terms of achieving the
objectives of the proposed rule and addressing the commenters' concerns
described above? If not, please explain why and suggest alternative
rule language that could more effectively and efficiently strike the
balance and achieve the objective.
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    \86\ See 17 CFR 240.3a71-6.
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    The potential modifications to paragraph (d)(4) of Rule 3a71-6
would provide that substituted compliance is available with respect to:
The capital requirements of Section 15F(e) of the Act (15 U.S.C. 78o-
10(e)) and Sec.  240.18a-1; provided, however, that prior to making
such substituted compliance determination with respect to security-
based swap dealers, the Commission intends to consider (in addition to
any conditions imposed) whether the capital requirements of the foreign
financial regulatory system are designed to help ensure the safety and
soundness of registrants in a manner that is comparable to the
applicable provisions arising under the Act and its rules and
regulations.

Compliance Date

    15. In the Commission's release establishing the registration
process for SBSDs and MSBSPs, the Commission provided that the
compliance date for the SBSD and MSBSP registration requirements will
be the later of: Six months after the date of publication in the
Federal Register of final rules establishing capital, margin, and
segregation requirements for SBSDs and MSBSPs; the compliance date of
final rules establishing recordkeeping and reporting requirements for
SBSDs and MSBSPs; the compliance date of final rules establishing
business conduct requirements under Sections 15F(h) and 15F(k) of the
Exchange Act; or the compliance date for final rules establishing a
process for a registered SBSD or MSBSP to make an application to the
Commission to allow an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on the SBSD or MSBSP's behalf (the ``Registration Compliance
Date'').\87\ Would this provide enough time for registrants to take the
necessary steps to come into compliance with applicable requirements?
If not, explain why. Would a longer period, such as 18 months after the
date of publication of the last of four releases noted above in the
Federal Register, be more appropriate? If so, explain why. Would a
shorter period be more appropriate? If so, explain why. Should the
Commission consider the timing of the phased implementation of initial
margin requirements provided for by other regulators in making any
changes to the compliance period? \88\ If so, explain why.
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    \87\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, Exchange Act Release No.
75611 (Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015).
    \88\ See Margin and Capital Requirements for Covered Swap
Entities, 80 FR at 74849-51 (adopting compliance dates phasing-in
initial margin requirements beginning September 1, 2016 and ending
September 1, 2020 for bank swap dealers, bank SBSDs, bank swap
participants, and bank MSBSPs); Margin Requirements for Uncleared
Swaps for Swap Dealers and Major Swap Participants, 81 FR at 674-677
(adopting compliance dates phasing-in initial margin requirements
beginning September 1, 2016 and ending September 1, 2020 for nonbank
swap dealers and nonbank major swap participants).
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Additional Requests for Comment--Economic Implications

    16. The Proposals contain economic analyses seeking to identify and
consider the benefits and costs--including the effects on efficiency,
competition and capital formation--that would result from the proposed
capital, margin, and segregation requirements. To assist in the
quantification of the economic effects of the proposed requirements,
the Commission requests comment and supporting data on the current risk
management practices that support the trading activity in security-
based swaps. Specifically, what are the main sources of funding
available to entities that would be registering as nonbank SBSDs to
support their trading activity? How much of the capital available to an
entity that would be registering as a nonbank SBSD consists of liquid
capital? What are typical risk management procedures for dealing with
losses stemming from the market risk of security-based swap positions?
What are typical risk management procedures for dealing with losses
stemming from the credit risk of uncollateralized security-based swap
positions? In the event that losses from trading activities overcome
the available liquid capital, how are excess losses dealt with? What
are the operational risks and concerns associated with maintaining
adequate levels of capital?
    The Commission also requests comment and data on how the baseline
of the economic analyses has changed since the publication of the
Proposals. For example, in 2015, the U.S. prudential regulators and the
CFTC adopted final rules on minimum margin requirements for non-cleared
swaps that began to be implemented in September 2016. A June 2017
survey on dealer financing terms noted that some of the survey
respondents indicated that their clients' transaction volume or their
own transaction volume in non-cleared swaps decreased somewhat over the
period of September 2016 to June 2017.\89\ However, the respondents
reported no changes in the prices that

they quote to their clients in non-cleared swaps over this period. One-
fifth of the survey respondents also reported that they would be less
likely to exchange daily variation margin with mutual funds, exchange-
traded funds, pension plans, endowments, and separately managed
accounts established with investment advisers due primarily to lack of
operational readiness (e.g., the need to establish or update the
necessary credit support annexes to cover daily exchange of variation
margin) over this period. Two-fifths of the survey respondents also
reported that the volume of mark and collateral disputes on variation
margin has increased somewhat over this period. Furthermore, the survey
noted that there is variation among respondents with respect to the
number of days it takes to resolve a mark and collateral dispute on
variation margin, with one-third reporting less than two days, while
three-fifths reporting more than two days but less than a week, on
average. This type of data could provide insight regarding how entities
that may register as nonbank SBSDs may respond to the Commission's
final margin requirements.
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    \89\ See Yesol Huh, Division of Research and Statistics, Board
of Governors of the Federal Reserve System, The June 2017 Senior
Credit Officer Opinion Survey on Dealer Financing Terms, available
at https://www.federalreserve.gov/data/scoos/files/scoos_201706.pdf.
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    Commenters are asked to describe changes, if applicable, in: (1)
The trading volumes in the relevant security-based swap and swap
markets; (2) the regulatory structure of these markets; and (3) the
number and types of entities that participate in these markets.
Commenters also are asked to describe how those changes in the baseline
would impact the potential benefits and costs--including the effects on
efficiency, competition and capital formation--of the Proposals as well
as the potential benefits and costs--including the effects on
efficiency, competition and capital formation--that would result from
the potential alternatives described in the questions above taking the
changes in the baseline into account (if applicable).
    Finally, the Commission requests comment on whether there are
economic considerations apart from those discussed in the Proposals
that should be considered in the economic analysis of the capital,
margin, and segregation requirements as well as the alternatives
described in the questions above.

    By the Commission.

     Dated: October 11, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22531 Filed 10-18-18; 8:45 am]
 BILLING CODE 8011-01-P