\401\ As discussed below in section II.B.3.a. of this release,
paragraph (d) of Rule 17a-5 requires broker-dealers to file certain
audited annual reports with the Commission. A portion of these
reports is made public.
    \402\ See Exchange Act Release No. 11935 (Dec. 17, 1975), 40 FR
59706, 59707 (Dec. 30, 1975).
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    Under the proposed reporting program for SBSDs and MSBSPs, broker-
dealer SBSDs and broker-dealer MSBSPs--as broker-dealers--would be
subject to Rule 17a-5.\403\ The Commission is proposing amendments to
this rule to account for broker-dealers that are dually registered as
an SBSD or MSBSP.\404\ Stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs would be subject to proposed Rule 18a-7, which
is modeled on Rule 17a-5, as proposed to be amended. Proposed Rule 18a-
7 would not include a parallel requirement for every requirement in
Rule 17a-5 because some of the requirements in Rule 17a-5 relate to
activities that are not expected or permitted of SBSDs and MSBSPs.
Similarly, while all types of SBSDs and MSBSPs would use proposed Form
SBS, broker-dealer SBSDs and broker-dealer MSBSPs would be required to
provide more information than stand-alone SBSDs and stand-alone MSBSPs.
---------------------------------------------------------------------------

    \403\ Except for the requirement to file one of the parts of the
FOCUS Report, broker-dealer SBSDs and broker-dealer MSBSPs would be
subject to all the reporting requirements applicable to broker-
dealers under Rule 17a-5, as proposed to be amended, plus the
additional requirements specifically applicable to an SBSD or MSBSP.
As discussed below in section II.B.2. of this release, a broker-
dealer SBSD or broker-dealer MSBSP would file proposed Form SBS
rather than one of the parts of the FOCUS Report.
    \404\ As discussed below in section II.B.3.b. of this release,
the Commission also is proposing technical amendments to Rule 17a-5.
---------------------------------------------------------------------------

    Further, the reporting requirements in proposed Rule 18a-7 and
proposed Form SBS applicable to bank SBSDs and bank MSBSPs are more
limited in scope because, as discussed above in section I. of this
release, bank SBSDs and bank MSBSPs are subject to reporting
requirements applicable to banks. Further, the prudential regulators--
rather than the Commission--are responsible for capital, margin, and
other prudential requirements applicable to bank SBSDs and bank MSBSPs.
For these reasons, the proposed reporting requirements for bank SBSDs
and bank MSBSPs generally are designed to be tailored specifically to
their activities as an SBSD or an MSBSP (as opposed to their activities
as banks). However, as discussed below, the Commission is proposing
that bank SBSDs and bank MSBSPs report certain general financial
information that banks are required to report pursuant to requirements
of the prudential regulators. Bank SBSDs and bank MSBSPs would be able
to use the same information reported under the requirements of the
prudential regulators to comply with the proposed reporting
requirements applicable to bank SBSDs and bank MSBSPs. The objective is
to provide the Commission with a means to monitor the financial
condition of bank SBSDs and bank MSBSPs without requiring these
entities to report information not already reported to their prudential
regulators.
2. Periodic Filing of Proposed Form SBS
a. Amendments to Rule 17a-5 and Proposed Rule 18a-7
Undesignated Introductory Paragraph
    Rule 17a-5, as proposed to be amended, would contain an
undesignated introductory paragraph explaining that the rule applies to
a broker-dealer, including a broker-dealer dually registered with the
Commission as an SBSD or MSBSP.\405\ The note further explains that an
SBSD or MSBSP that is not dually registered as a broker-dealer (i.e., a
stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP) is
subject to the reporting requirements under proposed Rule 18a-7.\406\
Further, the Commission is proposing to remove paragraph (a)(1) of Rule
17a-5, which provides that paragraph (a) shall apply to every broker-
dealer registered pursuant to section 15 of the Exchange Act.\407\ This
text would be redundant of the undesignated introductory paragraph of
Rule 17a-5, as proposed to be amended.\408\
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    \405\ See undesignated introductory paragraph of Rule 17a-5, as
proposed to be amended.
    \406\ See id.
    \407\ See 17 CFR 240.17a-5(a).
    \408\ See undesignated introductory paragraph of Rule 17a-5, as
proposed to be amended.
---------------------------------------------------------------------------

    Similarly, proposed Rule 18a-7 would contain an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
MSBSP that is not dually registered as a broker-dealer.\409\ The note
further explains that a broker-dealer dually registered as an SBSD or
MSBSP is subject to the reporting requirements under Rule 17a-5.\410\
---------------------------------------------------------------------------

    \409\ See undesignated introductory paragraph of proposed Rule
18a-7.
    \410\ See id.
---------------------------------------------------------------------------

Requirement To File Proposed Form SBS
    Broker-dealers periodically report information about their
financial and operational condition on the FOCUS Report Part II, Part
IIA, Part IIB, or Part II CSE. Each version of the report is designed
for a particular type of broker-dealer and the information to be
reported is tailored to the type of broker-dealer. Specifically: (1)
The FOCUS Report Part IIA is designed to be used by a broker-dealer
that does not hold customer funds or securities; \411\ (2) the FOCUS
Report Part II is designed to be used by a broker-dealer that holds
customer funds or securities; \412\ (3) the FOCUS Report Part IIB is
designed to be used by an OTC derivatives dealer; \413\ and (4) the
FOCUS Report Part II CSE is designed to be used by an ANC broker-
dealer.\414\ The FOCUS Report Part II CSE elicits the most detailed
information of the four parts, including the most detail about a firm's
derivatives activities.
---------------------------------------------------------------------------

    \411\ The FOCUS Report Part IIA is available at http://www.sec.gov/about/forms/formx-17a-5_2f.pdf.
    \412\ The FOCUS Report Part II is available at http://www.sec.gov/about/forms/formx-17a-5_2.pdf.
    \413\ The FOCUS Report Part IIB is available at http://www.sec.gov/about/forms/formx-17a-5_2b.pdf.
    \414\ The FOCUS Report Part II CSE was developed by the New York
Stock Exchange, Inc. (``NYSE''). See Exhibit 3 to Self-Regulatory
Organizations; New York Stock Exchange, Inc.; Notice of Filing of
Proposed Rule Change To Require Members That Use Appendix E To
Calculate Net Capital To File Supplemental and Alternative Reports,
Exchange Act Release No. 51980 (July 6, 2005), 70 FR 40767 (July 14,
2005). See also Self-Regulatory Organizations; New York Stock
Exchange, Inc.; Order Approving Proposed Rule Change to Require
Members That Use Appendix E to Calculate Net Capital to File
Supplemental and Alternative Reports, Exchange Act Release No. 52269
(Aug. 16, 2005), 70 FR 49349 (Aug. 23, 2005).
---------------------------------------------------------------------------

    Paragraph (a) of Rule 17a-5 requires a broker-dealer, other than an
OTC derivatives dealer, to file the FOCUS Report Part II or Part
IIA.\415\ The Commission is proposing to amend this paragraph so that
it would require a broker-dealer that is dually registered as an SBSD
or MSBSP to file proposed Form SBS rather than the FOCUS Report Part II
or Part IIA and to add a parallel requirement in proposed Rule 18a-7 to
require stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and

bank MSBSPs to periodically file proposed Form SBS.\416\
---------------------------------------------------------------------------

    \415\ See 17 CFR 240.17a-5(a). The requirement that an OTC
derivatives dealer file the FOCUS Report Part IIB is set forth in
paragraph (a) of Rule 17a-12. See 17 CFR 240.17a-12(a). While an ANC
broker-dealer is required under paragraph (a) of Rule 17a-5 to file
the FOCUS Report Part IIA, FINRA Rule 4521(b) provides that ANC
broker-dealers must file supplemental and alternative reports as may
be prescribed by FINRA. Under this rule, FINRA requires ANC broker-
dealers to file the FOCUS Report Part II CSE in lieu of the FOCUS
Report Part IIA. See also Self-Regulatory Organizations; New York
Stock Exchange, Inc.; Order Approving Proposed Rule Change to
Require Members That Use Appendix E to Calculate Net Capital to File
Supplemental and Alternative Reports, 70 FR 49349 (Commission
approval of amendments to NYSE Rule 418 requiring ANC broker-dealers
to file Part II CSE).
    \416\ Compare paragraph (a)(1)(iv) of Rule 17a-5, as proposed to
be amended, with paragraphs (a)(1) and (2) of proposed Rule 18a-7.
As a consequence of the proposed removal of paragraph (a)(1) of Rule
17a-5, paragraphs (a)(2)(i), (a)(2(ii), and (a)(2)(iii) would be
redesignated paragraphs (a)(1)(i), (a)(1)(ii), and (a)(1)(iii),
respectively. Further, as discussed below, the Commission is
proposing to add a new paragraph (a)(1)(iv) to Rule 17a-5. As a
consequence of the removal of paragraph (a)(1) and the addition of
paragraph (a)(1)(iv), paragraph (a)(2)(iv) would be redesignated
paragraph (a)(1)(v). Further, as a consequence of the removal of
paragraph (a)(1), paragraphs (a)(3), (a)(4), (a)(5), (a)(6), and
(a)(7) of Rule 17a-5 would be redesignated paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), and (a)(6), respectively.
---------------------------------------------------------------------------

    Currently, paragraph (a)(2) of Rule 17a-5 provides that a broker-
dealer must file the FOCUS Report Part II if it clears transactions or
carries customer accounts or the FOCUS Report Part IIA if it does not
clear transactions or carry customer accounts.\417\ The paragraph
further provides that these reports must be filed within seventeen
business days after the end of the quarter and within seventeen
business days after the end of the fiscal year of the broker-dealer if
the date of the fiscal year end is not the end of a calendar
quarter.\418\ Paragraph (a)(3) provides that reports required to be
filed with the Commission under paragraph (a) (which includes the
reports required under paragraph (a)(2)) shall be considered filed when
received at the Commission's principal office in Washington, DC, and
the regional office of the Commission for the region in which the
broker-dealer has its principal place of business.\419\ Paragraph
(a)(3) further provides that all reports filed pursuant to paragraph
(a) shall be deemed to be confidential.\420\
---------------------------------------------------------------------------

    \417\ See 17 CFR 240.17a-5(a)(2)(ii) and (iii).
    \418\ See id.
    \419\ See 17 CFR 240.17a-5(a)(3).
    \420\ See id.
---------------------------------------------------------------------------

    Notwithstanding these requirements, substantially all broker-
dealers file the FOCUS Report directly with their SROs pursuant to
plans established by the SROs under paragraph (a)(4) of Rule 17a-5
(rather than filing them directly with the Commission).\421\ Generally,
the reporting requirements under the SRO's plans are consistent with,
or more rigorous than, the requirements in paragraph (a)(2) of Rule
17a-5 in terms of the part of the FOCUS Report a broker-dealer must
file and the frequency of filing.\422\ Thus, while most broker-dealers
do not file the FOCUS Report pursuant to paragraphs (a)(2) and (a)(3)
of Rule 17a-5, these provisions establish a baseline for SROs in
designing their plans, which must be declared effective by the
Commission.
---------------------------------------------------------------------------

    \421\ Specifically, paragraph (a)(4) of Rule 17a-5 contains an
exception from the requirement to file the FOCUS Report directly
with the Commission applicable to brokers-dealers that are members
of a national securities exchange or a registered national
securities association if the exchange or association maintains
records containing the information required by the FOCUS Report and
transmits such information to the Commission pursuant to a plan that
has been submitted to, and declared effective by, the Commission
(``FOCUS filing plan'' or ``Plan''). See 17 CFR 240.17a-5(a)(4).
FINRA and other SROs have had FOCUS filing plans in effect since the
1970s under this exception. See, e.g., Self-Regulatory
Organizations; Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Change by the National Association of
Securities Dealers, Inc. Relating to the Association's FOCUS Filing
Plan, Exchange Act Release No. 36780, (Jan. 26, 1996), 61 FR 3743
(Feb. 1, 1996).
    \422\ Currently, FINRA's plan (which applies to most broker-
dealers) requires monthly filing of the FOCUS Report Part II for
members that are subject to the requirements of paragraph (e) of
Rule 15c3-3, or that conduct a business in accordance with paragraph
(k)(2)(i) of Rule 15c3-3, or that are subject to paragraphs
(a)(2)(i) through (iii) of Rule 15c3-1. See 17 CFR 240.15c3-
1(a)(2)(i) through (iii); 17 CFR 240.15c3-3(e) and (k)(2)(i).
FINRA's plan requires quarterly filing of the FOCUS Report Part IIA
for members that conduct a business in accordance with the
provisions of paragraph (k)(1)(i) through (iii), (k)(2)(ii), and
(k)(3) of Rule 15c3-3 and are not subject to paragraphs (a)(2)(i)
through (iii) of Rule 15c3-1, and for members that conduct a
business in accordance with paragraphs (a)(6) through (8) of Rule
15c3-1. See 17 CFR 240.15c3-1(a)(2)(i) through (iii) and (a)(6)
through (8); 17 CFR 240.15c3-3(k)(1)(i) through (iii), (k)(2)(ii),
and (k)(3). These firms generally are non-carrying broker-dealers
and firms that do not meet the definition of dealer under Rule 15c3-
1. Further, as noted above, ANC broker-dealers file the FOCUS Report
Part II CSE pursuant to FINRA Rule 4521(b) rather than the FOCUS
Report Part II.
---------------------------------------------------------------------------

    The Commission is proposing to amend paragraph (a)(2) of Rule 17a-5
to account for the fact that some broker-dealers likely will be
registered as an SBSD or potentially as an MSBSP and, therefore, these
categories of registrants would be subject to the reporting
requirements under Rule 17a-5.\423\ The proposed amendments would
require broker-dealer SBSDs and broker-dealer MSBSPs to file proposed
Form SBS rather than the FOCUS Report Part II or Part IIA.
Specifically, the amendments would specify that the requirement to file
the FOCUS Report Part II or Part IIA directly with the Commission in
paragraph (a) applies only to broker-dealers that are not dually
registered as an SBSD or MSBSP.\424\ In addition, the Commission
proposes to add a new paragraph (a)(1)(iv) to Rule 17a-5.\425\ This
paragraph would provide that a broker-dealer dually registered as an
SBSD or MSBSP must file proposed Form SBS with the Commission within
seventeen business days of the end of the month.\426\ Thus, the
paragraph would require broker-dealer SBSDs and broker-dealer MSBSPs to
file proposed Form SBS on a monthly basis. This would be consistent
with the plans of the SROs, which generally require carrying broker-
dealers and broker-dealers that act as dealers to file the FOCUS Report
Part II on a monthly (rather than quarterly) basis.\427\
---------------------------------------------------------------------------

    \423\ As noted above, the Commission is proposing to redesignate
paragraph (a)(2) of Rule 17a-5 as paragraph (a)(1).
    \424\ See paragraphs (a)(1)(ii) and (iii) of Rule 17a-5, as
proposed to be amended.
    \425\ See paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended.
    \426\ See id.
    \427\ Because this would be a monthly filing requirement, the
Commission is not proposing to require broker-dealer SBSDs and
broker-dealer MSBSPs to also file proposed Form SBS within 17
business days after the end of the fiscal year of the firm where
that date is not the end of a calendar quarter as is required under
paragraphs (a)(2)(ii) and (iii) of Rule 17a-5 (which require
quarterly filing of the FOCUS Report Part II and Part IIA,
respectively). Compare 17 CFR 240.17a-5(a)(2)(ii) and (iii), with
paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be amended.
---------------------------------------------------------------------------

    The Commission is proposing to include a parallel requirement in
paragraph (a)(1) of proposed Rule 18a-7 that is modeled on paragraph
(a)(1)(iv) of Rule 17a-5, as proposed to be amended, that would apply
to stand-alone SBSDs and stand-alone MSBSPs.\428\ Under this paragraph,
these registrants would be required to file proposed Form SBS with the
Commission or its designee within seventeen business days after the end
of each month.\429\ The reference to a Commission designee is intended
to provide the Commission with the option of requiring that these
registrants file proposed Form SBS with a third party.\430\
---------------------------------------------------------------------------

    \428\ Compare paragraph (a)(1)(iv) of Rule 17a-5, as proposed to
be amended, with paragraph (a)(1) of proposed Rule 18a-7.
    \429\ See paragraph (a)(1) of proposed Rule 18a-7.
    \430\ As discussed above, generally all broker-dealers file the
FOCUS Report with their SROs rather than directly with the
Commission.
---------------------------------------------------------------------------

    Paragraph (a)(2) of proposed Rule 18a-7 would apply to bank SBSDs
and bank MSBSPs and require these registrants to file proposed Form SBS
with the Commission or its designee within seventeen business days
after the end of each calendar quarter (instead of each month).\431\
The Commission would require quarterly financial reporting for bank
SBSDs and bank MSBSPs, instead of monthly reporting, because the
prudential regulators currently require banks to file reports of
financial and operational condition known as call reports on a
quarterly basis.\432\ As discussed below in section II.B.3.a. of this
release, the information that would be reported by bank SBSDs and bank

MSBSPs on proposed Form SBS largely would be information that banks are
required to provide in the call reports.
---------------------------------------------------------------------------

    \431\ See paragraph (a)(2) of proposed Rule 18a-7.
    \432\ See Consolidated Reports of Condition and Income for a
Bank with Domestic and Foreign Offices--FFIEC 031 (``FFIEC Form
031'' or ``call report''). See also 12 U.S.C. 161; 12 U.S.C. 324; 12
U.S.C. 1464; 12 U.S.C. 1817.
---------------------------------------------------------------------------

    Paragraph (a)(3) of proposed Rule 18a-7 would apply to SBSDs
authorized by the Commission to compute net capital using internal
models pursuant to paragraph (d) of proposed Rule 18a-1. The Commission
would require these registrants to file most of the required documents
within 17 business days after the end of each month.\433\ However, to
correspond with the timing requirement in paragraph (d)(9)(i)(C)(1)-(2)
of proposed Rule 18a-1,\434\ these registrants would be required to
file the following reports within seventeen business days after the end
of each calendar quarter (instead of each month): A report identifying
the number of business days for which actual daily net trading loss
exceeded the corresponding daily value at risk (``VaR''); and the
results of backtesting of all internal models used to compute allowable
capital, indicating the number of backtesting exceptions.\435\
---------------------------------------------------------------------------

    \433\ See paragraph (a)(3)(i)-(vii) of proposed Rule 18a-7.
    \434\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70337.
    \435\ See paragraph (a)(3)(viii)-(ix) of proposed Rule 18a-7.
---------------------------------------------------------------------------

    The Commission also is proposing amendments to paragraphs
(a)(1)(ii), (a)(1)(iii), (a)(1)(iv), and (a)(1)(v) of Rule 17a-5 that
would make explicit the requirement that the FOCUS Report or Form SBS
filed by a broker-dealer must be ``executed.'' \436\ Additionally,
paragraphs (a)(1) and (a)(2) of proposed Rule 18a-7 would contain
parallel language requiring that a Form SBS filed by a stand-alone
SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP must be executed.
---------------------------------------------------------------------------

    \436\ See paragraphs (a)(1)(ii)-(iv) of Rule 17a-5, as proposed
to be amended. Part II, Part IIA, Part IIB, and Part II CSE of the
FOCUS Report each has a section for the filer to execute the form.
---------------------------------------------------------------------------

    Finally, as noted above, paragraph (a)(4) of Rule 17a-5 contains an
exception from the requirement to file a FOCUS Report directly with the
Commission applicable to broker-dealers that are members of a national
securities exchange or a registered national securities association if
that exchange or association maintains records containing the
information required by the FOCUS Report and transmits such information
to the Commission pursuant to a plan that has been submitted to, and
declared effective by, the Commission.\437\ The Commission proposes to
add a reference to proposed Form SBS to this provision so that SROs
could include the filing of Form SBS in their plans.\438\ If
incorporated into the plans, broker-dealer SBSDs and broker-dealer
MSBSPs would file proposed Form SBS with their SRO (rather than
directly with the Commission). The Commission preliminarily expects
that the reporting requirements under an SRO's plan with respect to
proposed Form SBS would need to be at least as rigorous as the
requirements in paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended, to be declared effective by the Commission.
---------------------------------------------------------------------------

    \437\ See 17 CFR 240.17a-5(a)(4).
    \438\ See paragraph (a)(3) of Rule 17a-5, as proposed to be
amended. Further, paragraph (a)(5) of Rule 17a-5 requires broker-
dealers to file Form Custody (17 CFR 249.1900) with their DEAs
within 17 business days after the end of each calendar quarter and
within 17 business days after the end of the fiscal year of the
broker-dealer where that date is not the end of a calendar quarter.
See 17 CFR 240.17a-5(a)(5). The DEA must maintain the information
obtained through the filing of Form Custody and must promptly
transmit that information to the Commission at such time as it
transmits the applicable part of the FOCUS Report pursuant to a
plan. See id. The Commission is proposing to amend this provision to
include a reference to proposed Form SBS to account for the fact
that broker-dealer SBSDs and broker-dealer MSBSPs would file
proposed Form SBS with their DEAs along with Form Custody (rather
than the FOCUS Report) if the SROs incorporate the filing of Form
SBS in their plans. See paragraph (a)(4) of Rule 17a-5, as proposed
to be amended.
---------------------------------------------------------------------------

b. Information Elicited in Form SBS
    As discussed above, all categories of SBSDs and MSBSPs would be
required to file proposed Form SBS. This form is modeled on the FOCUS
Report, particularly the FOCUS Report Part II CSE.\439\ The FOCUS
Report Part II CSE served as the template for designing proposed Form
SBS because it is designed to account for the use of internal models by
ANC broker-dealers and elicits more detailed information about
derivatives positions and exposures than the FOCUS Report Part II and
Part IIA.\440\ Based on staff experience, including experience
monitoring ANC broker-dealers, the Commission anticipates that most
SBSDs will use internal models to compute their net capital.\441\
---------------------------------------------------------------------------

    \439\ Compare proposed Form SBS, with the FOCUS Report Part II
CSE.
    \440\ The FOCUS Report Part IIB elicits similar information
about derivatives positions and exposures but otherwise is more
limited than the FOCUS Report Part II CSE because OTC derivatives
dealers are permitted to engage in only a narrow range of
activities. See 17 CFR 240.3b-12; 17 CFR 240.15a-1. Specifically,
Rule 3b-12, defining the term OTC derivatives dealer, provides,
among other things, that an OTC derivatives dealer's securities
activities must be limited to engaging in dealer activities in
eligible OTC derivative instruments (as defined in the rule) that
are securities; issuing and reacquiring securities that are issued
by the dealer, including warrants on securities, hybrid securities,
and structured notes; engaging in cash management securities
activities (as defined in Rule 3b-14 (17 CFR 240.3b-14); engaging in
ancillary portfolio management securities activities (as defined in
the rule); and engaging in such other securities activities that the
Commission designates by order. See 17 CFR 240.3b-12. Rule 15a-1,
governing the securities activities of OTC derivatives dealers,
provides that an OTC derivatives dealer must effect transactions in
OTC derivatives with most types of counterparties through an
affiliated Commission-registered broker-dealer that is not an OTC
derivatives dealer. See 17 CFR 240.15a-1.
    \441\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70293.
---------------------------------------------------------------------------

    The FOCUS Report elicits financial and operational information
about a broker-dealer through sections consisting of uniquely numbered
line items. The information (e.g., a number or dollar amount) is
entered into the line items.\442\ Generally, a line item that is common
to Part II, Part IIA, Part IIB, and Part II CSE of the FOCUS Report
shares the same unique number, which facilitates aggregating
information and comparing reported information across broker-
dealers.\443\ Proposed Form SBS similarly would elicit information
about the financial and operational condition of an SBSD or MSBSP
through sections consisting of uniquely numbered line items. Line items
on proposed Form SBS that correspond to line items on the FOCUS Report
would share the same unique number and require the entry of the same
type of information.\444\ Proposed Form SBS would not include a
parallel line item for each line item on the FOCUS Report because not
all of the information required on the FOCUS Report is relevant for
SBSDs and MSBSPs.\445\ Further, proposed Form

SBS would have lines and corresponding line items that are not on the
FOCUS Report. The additional lines and line items would elicit more
detail about the security-based swap and swap activities of the SBSD
and MSBSP filers.\446\
---------------------------------------------------------------------------

    \442\ As used in this release, the term line refers to the lines
in the left column on the FOCUS Report and proposed Form SBS that
describe the type of entries to be made on that line. The term line
item refers to the fields into which information is entered. For
example, Line 1 of the statement of financial condition section on
Form SBS is cash and Line Item 200 is the field to enter the dollar
amount of cash and Line Item 750 is the field to enter the total
dollar amount of cash.
    \443\ For example, Line Item 200 is the field to enter the
dollar amount of cash and Line Item 750 is the field to enter the
total dollar amount of cash in the statement of financial condition
section for each part of the FOCUS Report. The FOCUS Report Part IIB
and Part II CSE share certain common sections that have common
entries but the line items for the entries are assigned different
numbers. Proposed Form SBS would use the numbers assigned to the
line items in Part II CSE.
    \444\ For example, Line Item 200 is the field to enter the
dollar amount of cash and Line Item 750 is the field to enter the
total dollar amount of cash in the statement of financial condition
section on proposed Form SBS.
    \445\ The FOCUS Report Part II CSE has the most line items of
the four parts of the FOCUS Report and, consequently, generally will
serve as the means of comparing proposed Form SBS with the FOCUS
Report for purposes of the discussion in this release. Proposed Form
SBS would not include line items from Part II CSE that are obsolete,
inapplicable, or redundant of the additional line items on proposed
Form SBS. Specifically, proposed Form SBS would not include Line
Item 18 (box checked if FOCUS Part II CSE is filed pursuant to Rule
17a-11 under the Exchange Act); Line Item 98 (SEC File No.); Line
Item 99 (As of date the for statement of financial condition); Line
Item 291 (Derivatives Receivable--Allowable); Line Item 801
(Derivatives Payable--Total); Line Item 3635 (Total Market Risk
Exposure); Line Item 3679 (Total Credit Risk Exposure); Line Item
3931 (Number of months included in this statement); Line Item 3932
(For the period from); Line Item 3933 (For the period to); Line Item
4070 (Interest Expense, Includes interest on accounts subject to
subordination agreements); and Line Items 5000-5350 (Financial and
operational data).
    \446\ Line items that are unique to proposed Form SBS are
identified on the Form by the number 99, 999, 9999, or 99999 for the
purposes of this proposing release.
---------------------------------------------------------------------------

    As discussed below, broker-dealer SBSDs and broker-dealer MSBSPs
would be required to report the most information on proposed Form SBS
because it would elicit information about their activities as a broker-
dealer and as an SBSD or MSBSP. Stand-alone SBSDs and stand-alone
MSBSPs would be required to report information similar to that required
of broker-dealer SBSDs and broker-dealer MSBSPs. The information
elicited from bank SBSDs and bank MSBSPs would: (1) Derive largely from
the information they report on the call reports; and (2) focus on their
business as an SBSD or MSBSP.\447\
---------------------------------------------------------------------------

    \447\ See 15 U.S.C. 78o-10(f)(1)(B)(i).
---------------------------------------------------------------------------

    Proposed Form SBS is divided into five parts. Part 1 would apply to
nonbank SBSDs and nonbank MSBSPs (i.e., broker-dealer SBSDs, broker-
dealer MSBSPs, stand-alone SBSDs, and stand-alone MSBSPs) and is
similar to the FOCUS Report Part II CSE, but includes additional
sections and line items to elicit more detail about security-based swap
and swap activities. Part 2 would apply to bank SBSDs and bank MSBSPs
and elicit certain financial information that these classes of
registrants--as banks--would need to report in the call reports plus
certain additional information about security-based swap and swap
activities. Part 3 would apply to an SBSD or MSBSP that is dually
registered as an FCM and elicit information about the firm's net
capital computation and segregation of customer assets under CFTC
rules. Part 4 would apply to nonbank SBSDs and nonbank MSBSPs and
elicit detailed information about a firm's security-based swap and swap
positions, counterparties, and exposures. Part 5 would apply to bank
SBSDs and bank MSBSPs and also elicit detailed information about a
firm's security-based swap and swap positions, but on a more limited
basis than Part 4.
    Proposed Form SBS would have a cover page that largely is in the
same format as the cover page of the FOCUS Report, but includes line
items to indicate the type of registrant filing Form SBS: (1) A stand-
alone SBSD; (2) a stand-alone MSBSP; (3) a broker-dealer SBSD; (4) a
broker-dealer MSBSP; (5) a bank MSBSP; or (6) a bank MSBSP. The heading
at the top of each remaining page of proposed Form SBS would identify
the type of registrant that must enter the information to be reported
on the page.
    A general description of each Part of proposed Form SBS appears
below, including a more detailed description of the components of Form
SBS for which there are not parallel components in the FOCUS Report. In
addition to proposed Form SBS, the Commission is proposing instructions
for Form SBS to provide further guidance on the information to be
entered into certain line items.\448\ The instructions are modeled on
the instructions to the FOCUS Report Part II, but with more
instructions to cover the additional line items and sections that are
not on the FOCUS Report Part II.\449\
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    \448\ See instructions to proposed Form SBS.
    \449\ Compare instructions to proposed Form SBS, with
instructions to the FOCUS Report Part II. The instructions to the
FOCUS Report Part IIA are available at http://www.sec.gov/about/forms/formx-17a-5_2a.pdf.
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i. Part 1 of Proposed Form SBS
    Part 1 of proposed Form SBS would apply to nonbank SBSDs and
nonbank MSBSPs. This part of Form SBS is modeled on the FOCUS Report,
particularly the FOCUS Report Part II CSE, but includes additional
sections and line items to report more detail about security-based swap
and swap activities.\450\ Like the FOCUS Report Part II CSE, Part 1 of
proposed Form SBS would require the filer to enter information into the
following sections, as applicable: (1) A statement of financial
condition; \451\ (2) a computation of net capital; \452\ (3) a
computation of minimum net capital required; \453\ (4) a statement of
income (loss); \454\ (5) a statement of capital withdrawals, a
statement of changes in ownership equity, and a statement of changes in
liabilities subordinated to claims of creditors; \455\ (6) certain

financial and operational data; \456\ (7) a customer reserve account
computation under Rule 15c3-3; \457\ (8) information for possession or
control requirements under Rule 15c3-3; \458\ and (9) a computation for
the determination of reserve requirements for proprietary accounts of
broker-dealers (``PAB'').\459\ Part 1 of proposed Form SBS includes
additional line items in certain of these sections to elicit more
detail about security-based swap and swap activities.\460\ Further,
Part 1 has the following additional sections: (1) a computation of
tangible net worth under proposed Rule 18a-2; \461\ (2) a reserve
account computation under proposed Rule 18a-4; \462\ and (3)
information for possession or control requirements under proposed Rule
18a-4.\463\ The additional line items and sections are discussed below.
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    \450\ Compare Part 1 proposed Form SBS, with the FOCUS Report
Part II CSE. As discussed below, the FOCUS Report has a number of
sections that are common to all the parts thereof. Generally, a
section on the FOCUS Report Part II CSE elicits information that is
as detailed, if not more detailed, than the parallel section on the
FOCUS Report Part II, Part IIA, or Part IIB.
    \451\ Each part of the FOCUS Report has a section to provide a
statement of financial condition that elicits detail about the
assets, liabilities and ownership equity of the broker-dealer. Part
1 of proposed Form SBS similarly has a section to provide a
statement of financial condition. See Part 1 of proposed Form SBS,
Statement of Financial Condition. This section would need to be
completed by nonbank SBSDs and nonbank MSBSPs. As discussed below,
the statement of financial condition section on proposed Form SBS
has additional line items that are not on the FOCUS Report.
    \452\ Each part of the FOCUS Report has a section to provide a
computation of net capital under Rule 15c3-1. Part 1 of proposed
Form SBS similarly has sections to provide a computation of net
capital that would need to be completed by nonbank SBSDs (i.e.,
broker-dealer SBSDs and stand-alone SBSDs) and broker-dealer MSBSPs
(all of which would be subject to a net capital rule). See Part 1 of
proposed Form SBS, Computation of Net Capital (Filer Authorized to
use Models) and Computation of Net Capital (Filer Not Authorized to
use Models). As discussed below, proposed Form SBS has two net
capital computation sections: one for firms that are authorized to
use models and one for firms that are not authorized to use models.
Further, these sections have additional line items that are not on
the FOCUS Report.
    \453\ Each part of the FOCUS Report has a section to provide a
computation of minimum required net capital under Rule 15c3-1. Part
1 of proposed Form SBS similarly has sections to provide a required
minimum net capital computation that would need to be completed by
nonbank SBSDs and broker-dealer MSBSPs. See Part 1 of proposed Form
SBS, Computation of Minimum Regulatory Capital Requirements (Broker-
Dealer) and Computation of Minimum Regulatory Capital Requirements
(Non-Broker-Dealer). As discussed below, proposed Form SBS has two
minimum net capital computation sections: one for broker-dealer
filers (i.e., broker-dealer SBSDs and broker-dealer MSBSPs) and one
for stand-alone SBSDs. Further, these sections have additional line
items that are not on the FOCUS Report.
    \454\ Each part of the FOCUS Report has a section to provide a
statement of income (loss) that elicits detail about the revenue and
expenses of the broker-dealer during the reporting period. Part 1 of
proposed Form SBS similarly has a statement of income (loss) section
that would need to be completed by nonbank SBSDs and nonbank MSBSPs.
See Part 1 of proposed Form SBS, Statement of Income (Loss). As
discussed below, the statement of income (loss) section on proposed
Form SBS is modeled on a supplemental statement of income form
promulgated by FINRA. The proposed Form SBS section has additional
line items that are not on FINRA's form.
    \455\ The FOCUS Report Part II, Part IIB, and Part II CSE have
sections to provide a statement of capital withdrawals, a statement
of changes in ownership equity, and a statement of changes in
liabilities subordinated to claims of general creditors. The FOCUS
Report Part IIA has sections to provide a statement of changes in
ownership equity and a statement of changes in liabilities
subordinated to claims of general creditors. In the statement of
capital withdrawals section, a broker-dealer must report information
about the firm's ownership equity and subordinated liabilities
maturing or proposed to be withdrawn within the next six months and
accruals that have not been deducted in the computation of net
capital. In the statements of changes in ownership equity and
liabilities subordinated to claims of general creditors sections, a
broker-dealer must report the amount of such equity and liability
balances, respectively, as of the beginning of the reporting period
and as of the end of the reporting period and provide detail with
respect to changes in the balances. The information reported in all
these statements is designed to assist securities regulators in
monitoring the financial condition of the broker-dealer and the
firm's compliance with the net capital rule. For example, under Rule
15c3-1, broker-dealers are subject to debt-to-equity ratio
requirements, limitations governing the withdrawal of equity
capital, and requirements with respect to subordinated loans that
qualify to be added back to net worth when computing net capital.
See 17 CFR 240.15c3-1d ; 17 CFR 240.15c3-3(d) and (e). Nonbank SBSDs
and broker-dealer MSBSPs would be subject to similar requirements
and limitations. See Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70254-70256. Consequently, Part 1 of proposed Form SBS has sections
to provide a statement of capital withdrawals, a statement of
changes in ownership equity, and a statement of changes in
liabilities subordinated to claims of creditors that would need to
be completed by nonbank SBSDs and broker-dealer MSBSPs. See Part 1
of proposed Form SBS, Capital Withdrawals and Capital Withdrawals
Recap. These sections on proposed Form SBS have the same line items
as the parallel sections on the FOCUS Report Part II CSE and there
are no additional line items.
    \456\ Each part of the FOCUS Report has a section to report
certain financial and operational data. The FOCUS Report Part II CSE
has additional sections to report operational charges deducted from
net capital under Rule 15c3-1 and potential operational charges.
Broker-dealers must report information on these sections about,
among other things, the number of income and non-income producing
personnel, fails, security concentrations, lease and rentals
payables, money suspense and balancing differences, and securities
differences. Certain of these items--including securities
differences--result in charges when computing net capital. See 17
CFR 240.15c3-1(c)(2)(v). Securities regulators use this information
to monitor, among other things, whether the broker-dealer is
processing securities transactions in a timely manner and properly
accounting for the securities it holds. Part 1 of proposed Form SBS
similarly has sections to report this type of financial and
operational data that would need to be completed by nonbank SBSDs
and broker-dealer MSBSPs. See Part 1 of proposed Form SBS, Financial
and Operational Data. The sections of the form have the same line
items as the parallel sections in the FOCUS Report Part II CSE and
there are no additional line items.
    \457\ The FOCUS Report Part II and Part II CSE have a section to
provide a computation of the customer reserve requirement under Rule
15c3-3. As discussed above in section II.A.2.a. of this release,
Rule 15c3-3 requires a carrying broker-dealer to maintain a reserve
of funds or qualified securities in an account at a bank that is at
least equal in value to the net cash owed to customers. See 17 CFR
240.15c3-3(e). The amount of net cash owed to customers is computed
pursuant to a formula set forth in Exhibit A to Rule 15c3-3. See 17
CFR 240.15c3-3a. Part 1 of proposed Form SBS similarly has a section
to provide a computation of the customer reserve requirement under
Rule 15c3-3 that would need to be completed by broker-dealer SBSDs
and broker-dealer MSBSPs that hold funds and securities for
customers that are not security-based swap customers. See Part 1 of
proposed Form SBS, Computation for Determination of Reserve
Requirements. This section has the same line items as the parallel
section on the FOCUS Report Part II CSE and there are no additional
line items. Further, as discussed below, proposed Form SBS has a
section to provide a separate computation for the security-based
swap customer reserve account requirement under proposed Rule 18a-4.
In addition, the FOCUS Report Part IIA has a section to claim an
exemption under Rule 15c3-3. In this section, a broker-dealer
claiming an exemption under Rule 15c3-3 must identify whether it is
relying on paragraph (k)(1), (k)(2)(A), (k)(2)(B), or (k)(3) of Rule
15c3-3. Part 1 of proposed Form SBS similarly has a section in which
a broker-dealer SBSD or broker-dealer MSBSP could claim an exemption
from Rule 15c3-3. See Part 1 of proposed Form SBS, Exemptive
Provision under Rule 15c3-3.
    \458\ The FOCUS Report Part II and Part II CSE have a section to
report information relating to the possession or control requirement
under Rule 15c3-3. As discussed above in section II.A.2.a. of this
release, Rule 15c3-3 requires a carrying broker-dealer to maintain
physical possession or control over customers' fully paid and excess
margin securities. See 17 CFR 240.15c3-3(d). Physical possession or
control means the carrying broker-dealer must hold these securities
in one of several locations specified in Rule 15c3-3 and free of
liens or any other interest that could be exercised by a third party
to secure an obligation of the broker-dealer. See 17 CFR 240.15c3-
3(c). Part 1 of proposed Form SBS similarly has a section to report
the same information about the possession or control requirement
under Rule 15c3-3 as is required in the FOCUS Report Part II and
Part II CSE. See Part 1 of proposed Form SBS, Computation for
Determination of Reserve Requirements. This section would need to be
completed by broker-dealer SBSDs and broker-dealer MSBSPs that hold
funds and securities for customers that are not security-based swap
customers. This section has the same line items as the parallel
section on the FOCUS Report Part II CSE and there are no additional
line items. Further, as discussed below, proposed Form SBS has a
section to report the same type of information about the possession
or control requirement relating to security-based swap customers
under proposed Rule 18a-4.
    \459\ The FOCUS Report Part II CSE has a section to provide the
computation of the reserve requirement for proprietary accounts of
broker-dealers. This computation is a result of a broker-dealer not
being a customer as that term is defined in Rule 15c3-3. See 17 CFR
240.15c3-3(a)(1). Accordingly, a carrying broker-dealer that holds
the account of another broker-dealer is not required to maintain
possession or control of the fully paid and excess margin securities
of the other the broker-dealer or include credit and debit items
associated with the account of the other broker-dealer in its
customer reserve computation. The absence of a requirement to
protect the other broker-dealer's cash under Rule 15c3-3 raised a
question of whether the other broker-dealer could treat cash held by
the carrying broker-dealer as an allowable asset under Rule 15c3-1.
In response, the Commission staff issued a no-action letter stating
that the staff would not recommend enforcement action to the
Commission if a broker-dealer treated cash held by another broker-
dealer as an allowable asset under Rule 15c3-1, provided the other
broker-dealer agreed to: (1) perform a reserve computation for
broker-dealer accounts; (2) establish a separate special reserve
bank account, and; (3) maintain cash or qualified securities in the
reserve account equal to the computed reserve requirement. See
Letter from Michael A. Macchiaroli, Associate Director, Division of
Market Regulation, Commission, to Raymond J. Hennessy, Vice
President, NYSE, and Thomas Cassella, Vice President, NASD
regulation, Inc. (Nov. 10, 1998). The Commission recently codified
this letter through amendments to Rule 15c3-3. See Financial
Responsibility Rules for Broker-Dealers, Exchange Act Release No.
70072 (July 30, 2013); 78 FR 51824 (Aug. 21, 2013). Part 1 of
proposed Form SBS similarly has a section to provide a computation
of PAB reserve requirements. See Part 1 of proposed Form SBS,
Computation for Determination of PAB Requirements. This section
would need to be completed by broker-dealer SBSDs and broker-dealer
MSBSPs. The section has the same line items as the parallel section
on the FOCUS Report Part II CSE and there are no additional line
items.
    \460\ As noted above, additional line items are identified on
proposed Form SBS by the number 99, 999, 9999, or 99999 for the
purposes of this proposing release.
    \461\ Proposed Rule 18a-2 would require stand-alone MSBSPs to
maintain positive tangible net worth. See Capital, Margin, and
Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70256-70257. Under proposed Rule 18a-2,
tangible net worth would be defined to mean the MSBSP's net worth as
determined in accordance with generally accepted accounting
principles in the U.S., excluding goodwill and other intangible
assets.
    \462\ As discussed above in section II.A.2.a. of this release,
proposed Rule 18a-4 would require an SBSD, among other things, to
maintain a security-based swap customer reserve account at a bank
separate from any other bank account of the SBSD. See Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70282-70287. Further, it would provide
that the SBSD must at all times maintain in the security-based swap
customer reserve account cash and/or qualified securities in amounts
computed daily in accordance with Exhibit A to proposed Rule 18a-4.
See id.
    \463\ As discussed above in section II.A.2.a. of this release,
proposed Rule 18a-4 would require an SBSD to promptly obtain and
thereafter maintain physical possession or control of all excess
securities collateral carried for the accounts of security-based
swap customers. See Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70278-70282.
---------------------------------------------------------------------------

Statement of Financial Condition
    The line items in the statement of financial condition section on
proposed Form SBS are largely the same line items in the statement of
financial

condition section on the FOCUS Report Part II CSE.\464\ However, as
discussed below, the proposed Form SBS section has additional line
items that are not in the Part II CSE section.
---------------------------------------------------------------------------

    \464\ Compare Part 1 of proposed Form SBS, Statement of
Financial Condition, with the FOCUS Report Part II CSE, Statement of
Financial Condition.
---------------------------------------------------------------------------

    First, a broker-dealer must enter detail in the FOCUS Report Part
II CSE section about the dollar amount of receivables from other
broker-dealers and clearing organizations.\465\ The detail includes the
amount of such receivables includible in the reserve computation under
Rule 15c3-3.\466\ The proposed Form SBS section requires the same
detail about these receivables.\467\ Additionally, it requires detail
about the dollar amount of the receivables includible in the reserve
computation under proposed Rule 18a-4.\468\
---------------------------------------------------------------------------

    \465\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 3A-3E.
    \466\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 3A1, 3B1, 3C1, and 3D1.
    \467\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 3A-3E.
    \468\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 3A2, 3B2, 3C2, and 3D2. As discussed in section
II.A.2.a. of this release, proposed Rule 18a-4 is modeled on Rule
15c3-3. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70274-70288.
---------------------------------------------------------------------------

    Second, a broker-dealer must enter detail in the FOCUS Report Part
II CSE section about the dollar amount of payables to other broker-
dealers and clearing organizations.\469\ The detail includes the amount
of such payables includible in the reserve computation under Rule 15c3-
3.\470\ The proposed Form SBS section requires the same detail about
these payables.\471\ Additionally, it requires detail about the dollar
amount of the payables includible in the reserve computation under
proposed Rule 18a-4.\472\
---------------------------------------------------------------------------

    \469\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 21A-21E.
    \470\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 21A1, 21B1, 21C1, and 21D1.
    \471\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 20A-20E.
    \472\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 20A2, 20B2, 20C2, and 20D2.
---------------------------------------------------------------------------

    Third, a broker-dealer must enter detail in the FOCUS Report Part
II CSE section about the dollar amount of payables to securities and
commodities customers.\473\ The broker-dealer also must provide the
dollar amount of the payable to securities customers representing free
credit balances.\474\ The proposed Form SBS section requires the same
detail about payables to securities and commodities customers.\475\
Additionally, it requires detail about the dollar amount of payables to
security-based swap customers, including the amount of the payables
representing free credits, and the amount of payables to swap
customers.\476\
---------------------------------------------------------------------------

    \473\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 22A-22B.
    \474\ See FOCUS Report Part II CSE, Line Item 950.
    \475\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 21A-21B.
    \476\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 21C-21D.
---------------------------------------------------------------------------

    Fourth, a broker-dealer must enter into the FOCUS Report Part II
CSE section the dollar amount of payables to securities and commodities
non-customers.\477\ The proposed Form SBS section requires the entry of
the same information.\478\ Additionally, it requires the entry of the
dollar amount of the payables to security-based swap and swap non-
customers.\479\
---------------------------------------------------------------------------

    \477\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 23A-23B.
    \478\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 22A-22B.
    \479\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 22C-22D.
---------------------------------------------------------------------------

Computation of Net Capital
    Nonbank SBSDs and broker-dealer MSBSPs would need to complete a
computation of net capital section on proposed Form SBS.\480\ Unlike
the FOCUS Report Part II CSE, there are two sections on proposed Form
SBS: One applicable to filers that are authorized to use internal
models; and one applicable to filers that are not authorized to use
internal models.\481\
---------------------------------------------------------------------------

    \480\ Broker-dealer SBSDs and broker-dealer MSBSPs--as broker-
dealers--would be subject to Rule 15c3-1 and, therefore, would be
required to compute net capital as that term is defined in the rule.
See 17 CFR 240.15c3-1(c)(2). Stand-alone MSBSPs would be subject to
a tangible net worth capital standard pursuant to proposed Rule 18a-
2, and therefore, would not compute net capital. See Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70256-70257. The Commission has proposed
that stand-alone SBSDs be subject to a net capital requirement in
proposed Rule 18a-1 that is modeled on Rule 15c3-1. See id. at
70217-70257. Under proposed Rule 18a-1, stand-alone SBSDs would be
required to compute net capital as defined in proposed Rule 18a-1.
See id. The definition in proposed Rule 18a-1 is modeled on the
definition in Rule 15c3-1 and, consequently, proposed Form SBS does
not have separate net capital computation sections for broker-dealer
filers and stand-alone SBSD filers.
    \481\ All broker-dealers that file the FOCUS Report Part II CSE
have been approved to use models. Accordingly, it does not need to
have a computation for broker-dealers not approved to use models.
---------------------------------------------------------------------------

    Computation for Filers Authorized to use Models. The line items in
the net capital computation section on proposed Form SBS applicable to
filers authorized to use models are largely the same line items in the
computation of net capital section on the FOCUS Report Part II
CSE.\482\ However, as discussed below, the proposed Form SBS section
has additional line items that are not on the FOCUS Report Part II CSE
section.
---------------------------------------------------------------------------

    \482\ Compare Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), with FOCUS Report Part II
CSE, Computation of Net Capital.
---------------------------------------------------------------------------

    First, a broker-dealer must enter detail in the Part II CSE section
about deductions and other charges that the firm must subtract from net
worth, including the total dollar amount of non-allowable assets from
the Statement of Financial Condition.\483\ The detail includes charges
for under-margined securities accounts of customers and non-
customers,\484\ and under-margined accounts of commodities customers
and non-customers.\485\ The proposed Form SBS section would require the
same detail about these deductions.\486\ In addition, the section would
require detail about the amount of deductions for under-margined
accounts of security-based swap customers and non-customers,\487\ and
under-margined

accounts of swap customers and non-customers.\488\
---------------------------------------------------------------------------

    \483\ See FOCUS Report Part II CSE, Computation of Net Capital,
Line 6A.
    \484\ See FOCUS Report Part II CSE, Computation of Net Capital,
Line 6A1. Paragraph (c)(2)(xii) of Rule 15c3-1 requires a broker-
dealer to deduct the amount of cash required in each customer's or
non-customer's account to meet the maintenance margin requirements
of the DEA for the broker-dealer, after application of calls for
margin, marks to the market or other required deposits which are
outstanding five business days or less. See 17 CFR 240.15c3-
1(c)(2)(xii). Broker-dealers are subject to maintenance margin
requirements in rules promulgated by their DEAs. See, e.g., FINRA
Rules 4210 through 4240.
    \485\ See FOCUS Report Part II CSE, Computation of Net Capital
Line 6A2. Paragraphs (a)(3)(xii) and (a)(3)(xiii) of Appendix B to
Rule 15c3-1 prescribe capital deductions for under-margined customer
and non-customer commodity accounts. See 17 CFR 240.15c3-
1b(a)(3)(xii) and (xiii).
    \486\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), Lines 6A1-6A2.
    \487\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), Line 6A3. The Commission
has proposed that nonbank SBSDs be required to deduct the amount of
cash required in the account of each security-based swap customer to
meet the margin requirements of a clearing agency, DEA, or the
Commission, after application of calls for margin, marks to the
market, or other required deposits which are outstanding one
business day or less and to take certain capital charger in lieu of
collecting margin from certain types of entities or with respect to
certain types of accounts. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70245-70248. In addition, as discussed above in section
II.A.2.a. of this release, the Commission has proposed margin
requirements for nonbank SBSDs and nonbank MSBSPs with respect to
non-cleared security-based swaps. See id. at 70257-70274. Security-
based swap clearing agencies require their clearing members to post
margin for proprietary and customer positions of the member cleared
by the clearing agency. See Process for Submissions for Review of
Security-Based Swaps for Mandatory Clearing and Notice Filing
Requirements for Clearing Agencies; Technical Amendments to Rule
19b-4 and Form 19b-4 Applicable to All Self-Regulatory
Organizations, Exchange Act Release No. 67286 (June 28, 2012), 77 FR
41602, 41603 (July 13, 2012). They also may require their clearing
members to collect margin from their security-based swap customers.
See id.
    \488\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Authorized to Use Models), Line 6A4. Derivatives clearing
organizations require their clearing members to post margin for
proprietary and customer swaps positions of the member cleared by
the clearing organization. See Process for Submissions for Review of
Security-Based Swaps for Mandatory Clearing and Notice Filing
Requirements for Clearing Agencies; Technical Amendments to Rule
19b-4 and Form 19b-4 Applicable to All Self-Regulatory
Organizations, 77 FR 41603. They also may require their clearing
members to collect margin from their swaps customers. See id.
---------------------------------------------------------------------------

    Second, an ANC broker-dealer must provide detail on a schedule to
the FOCUS Report Part II CSE about the credit risk charges it takes as
part of its capital computation.\489\ Specifically, the FOCUS Report
Part II CSE schedule requires the ANC broker-dealer to provide detail
with respect to the three components of the credit risk charge, namely:
(1) The aggregate counterparty exposure charge; (2) the aggregate
counterparty concentration charge; and (3) the portfolio concentration
charge.\490\ Proposed Form SBS would require the same detail about
these components of the credit risk charge but require that it be
reported in the net capital computation section rather than on a
separate schedule.\491\ The proposed Form also would require additional
detail about the first component of the credit risk charge: the
counterparty exposure charge.\492\ Under the proposed capital
requirements for nonbank SBSDs, a firm authorized to use models would
need to calculate a counterparty exposure charge for a commercial end
user in the same manner as an ANC broker-dealer.\493\ Specifically, the
exposure charge for a commercial end user that is insolvent, in a
bankruptcy proceeding, or in default of an obligation on its senior
debt would be the net replacement value of the security-based swaps
with the end user.\494\ The counterparty exposure charge for all other
commercial end users would be the credit equivalent amount of the
firm's exposure to the end user multiplied by an applicable credit risk
weight factor and then multiplied by 8%.\495\ Proposed Form SBS would
have line items to enter the aggregate counterparty exposure charge for
these two categories of commercial end users (i.e., (1) end users that
are insolvent, in a bankruptcy proceeding, or in default of an
obligation on their senior debt; and (2) all other end users and to
enter the sum of the two categories).\496\
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    \489\ See FOCUS Report Part II CSE, Schedule 1--FINRA
Supplementary Capital Information, Lines 6A-6C. As discussed above
in section II.B.3.a. of this release, ANC broker-dealers are
permitted to add back to net worth uncollateralized receivables from
counterparties arising from OTC derivatives transactions when
computing net capital. See 17 CFR 240.15c3-1e(c). Instead of the
100% deduction that applies to most unsecured receivables under Rule
15c3-1, ANC broker-dealers are permitted to take the credit risk
charge. See 17 CFR 240.15c3-1(a)(7); 17 CFR 240.15c3-1e(c).
    \490\ See Part II CSE, Schedule 1--FINRA Supplementary Capital
Information, Lines 6A-6C.
    \491\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), Lines 15A-15C. As
discussed above in section II.B.3.a. of this release, the Commission
has proposed that ANC broker-dealers be permitted to add back to net
worth uncollateralized receivables and take the corresponding credit
risk charge but only with respect to receivables from counterparties
that are commercial end users as that term would be defined in
proposed amendments to Rule 15c3-1 and only with respect to
security-based swaps. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70240-70245. In addition, the proposed capital requirements
for ANC broker-dealer SBSDs and stand-alone ANC SBSDs similarly
would allow these registrants to take credit risk charges with
respect to uncollateralized receivables but only from commercial end
users arising from security-based swaps. See id. Under these
proposals, the firms would take a credit risk charge that consists
of the three components identified above: (1) A counterparty
exposure charge; (2) a concentration charge if the current exposure
to a single counterparty exceeds certain thresholds; and (3) a
portfolio concentration charge if aggregate current exposure to all
counterparties exceeds certain thresholds. See id.
    \492\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Authorized to Use Models), Line 15A.
    \493\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70240-70245.
    \494\ See id.
    \495\ See id. The credit equivalent amount is the sum of the
firm's: (1) Maximum potential exposure (``MPE'') to the commercial
end user multiplied by a backtesting determined factor; and (2)
current exposure to the commercial end user. The MPE amount would be
a charge to address potential future exposure and would be
calculated using the firm's VaR model as applied to the commercial
end user's positions after giving effect to a netting agreement with
the end user, taking into account collateral received from the end
user, and taking into account the current replacement value of the
end user's positions. See id. The current exposure amount would be
the current replacement value of the commercial end user's positions
after giving effect to a netting agreement with the counterparty and
taking into account collateral received from the counterparty. See
id.
    \496\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), Lines 15A, 15A1, and 15A2.
---------------------------------------------------------------------------

    Computation for filers not authorized to use models. The line items
in the net capital computation section on proposed Form SBS applicable
to filers not authorized to use models are largely the same line items
in the computation of net capital section on the FOCUS Report Part
II.\497\ However, as discussed below, the proposed Form SBS section has
additional line items that are not in the Part II section.
---------------------------------------------------------------------------

    \497\ Compare Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), with the FOCUS Report
Part II, Computation of Net Capital. The FOCUS Report Part II is
used by broker-dealers that have not been approved to use internal
models as part of their net capital computation.
---------------------------------------------------------------------------

    First, as discussed above, the computation section applicable to
filers authorized to use models includes line items to enter charges
with respect to under-margined security-based swap and swap accounts.
The computation section applicable to filers not authorized to use
models similarly would require detail about the amount of charges
relating to under-margined accounts of security-based swap customers
and non-customers,\498\ and under-margined accounts of swap customers
and non-customers.\499\
---------------------------------------------------------------------------

    \498\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Line 6A3.
    \499\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Line 6A4.
---------------------------------------------------------------------------

    Second, a broker-dealer that is not authorized to use models is
required to enter in the FOCUS Report Part II net capital computation
section detail about the dollar amount of the standardized haircuts it
takes on various categories of proprietary securities positions.\500\
The proposed Form SBS section requires the same detail about
standardized haircuts.\501\ The section also requires additional
entries for the amount of the standardized haircuts applied to
security-based swap \502\ and swap positions.\503\
---------------------------------------------------------------------------

    \500\ See FOCUS Report Part II, Computation of Net Capital,
Lines 9A-9E.
    \501\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Lines 9A-9E.
    \502\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Line 10. The proposed
capital rules for nonbank SBSDs would prescribe standardized
haircuts for security-based swaps. See Capital, Margin, and
Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70231-70237.
    \503\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Line 11. The proposed
capital rules for nonbank SBSDs would prescribe standardized
haircuts for swaps. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70248-70250.

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

Computation of Minimum Regulatory Capital Requirements
    Proposed Form SBS has two sections for computing minimum required
net capital: One for broker-dealer filers (i.e., broker-dealer SBSDs
and broker-dealer MSBSPs) and one for stand-alone SBSDs.\504\ As
discussed above in section II.A.3.a. of this release, Rule 15c3-1, as
proposed to be amended, and proposed Rule 18a-1 would prescribe minimum
net capital requirements applicable to nonbank SBSDs as the greater of
a fixed-dollar amount and a ratio amount.\505\ The ratio amount
applicable to a broker-dealer SBSD would be the sum of the current
ratio amount prescribed in Rule 15c3-1 (the 15-to-1 aggregate
indebtedness to net capital ratio or the 2% of aggregate debit items
ratio) and an amount equal to the 8% margin factor.\506\ The ratio
amount applicable to a stand-alone SBSD would be an amount equal solely
to the 8% margin factor.\507\ Because the minimum net capital
requirement computation that would be applicable to a broker-dealer
filer differs from the computation that would be applicable to a stand-
alone SBSD, proposed Form SBS would contain a separate section for each
type of filer. The line items in the minimum net capital requirement
section on proposed Form SBS applicable to broker-dealer filers are
largely the same line items in the minimum net capital requirement
section on the FOCUS Report Part II.\508\ The computation section
applicable to stand-alone SBSDs is a substantially scaled down version
of the parallel FOCUS Report Part II section. As discussed below, both
sections on proposed Form SBS have additional line items that are not
on the Part II section.
---------------------------------------------------------------------------

    \504\ See Part 1 of proposed Form SBS, Broker-Dealer Computation
of Minimum Regulatory Capital Requirements and Non-Broker-Dealer
Computation of Minimum Regulatory Capital Requirements. As noted
above, broker-dealer MSBSPS--as broker-dealers--would be subject to
Rule 15c3-1, and therefore would be subject to a minimum net capital
requirement. See 17 CFR 140.15c3-1(a). Stand-alone MSBSPs would be
subject to a tangible net worth standard pursuant to proposed Rule
18a-2, and therefore would not be subject to a minimum net capital
requirement. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70256-70257.
    \505\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70221-70229.
    \506\ See id.
    \507\ See id. Neither the 15-to-1 aggregate indebtedness to net
capital ratio nor the 2% of aggregate debit items ratio would apply
to stand-alone SBSDs. See id.
    \508\ Compare Part 1 of proposed Form SBS, Computation of
Minimum Regulatory Capital Requirements (Broker-Dealer), with the
FOCUS Report Part II, Computation of Basic Net Capital Requirement,
Computation of Aggregate Indebtedness, Computation of Alternate Net
Capital Requirement, and Other Ratios.
---------------------------------------------------------------------------

    First, both sections require the entry of detail about the amount
of excess tentative net capital held by the firm.\509\ The proposed
capital requirements for nonbank SBSDs prescribe minimum tentative net
capital requirements for ANC broker-dealer SBSDs and stand-alone ANC
SBSDs.\510\ These filers would need to indicate in proposed Form SBS:
(1) The amount of tentative net capital they maintain; (2) their
minimum tentative net capital requirement; \511\ (3) their excess
tentative net capital; \512\ and (4) the amount of tentative net
capital in excess of 120% of their minimum tentative net capital
requirement.\513\
---------------------------------------------------------------------------

    \509\ See Part 1 of proposed Form SBS, Computation of Minimum
Regulatory Capital Requirements (Broker-Dealer), Lines 1-4; Part 1
of proposed Form SBS, Computation of Minimum Regulatory Capital
Requirements (Non-Broker-Dealer), Lines 1-4.
    \510\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70226-70227. Tentative net capital would be the amount of net
capital maintained by the firm before applying standardized haircuts
or using internal models to determine deductions on the mark-to-
market value of proprietary positions to arrive at the broker-
dealer's amount of net capital. See id. The minimum tentative net
capital requirement is designed to account for the fact that VaR
models, while more risk sensitive than standardized haircuts, tend
to substantially reduce the amount of the deductions to tentative
net capital in comparison to the standardized haircuts because the
models recognize more offsets between related positions (i.e.,
positions that show historical correlations) than the standardized
haircuts. See id.
    \511\ Under the proposed capital requirements, an ANC broker-
dealer SBSD would be required to maintain minimum tentative net
capital of $5 billion and a stand-alone ANC SBSD would be required
to maintain minimum tentative net capital of $100 million. See
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, 77 FR 70226-70227.
    \512\ The amount of excess tentative net capital would be the
amount that the tentative net capital exceeds the amount of required
tentative net capital.
    \513\ As discussed below in section II.C.2. of the release, Rule
17a-11, as proposed to be amended, and proposed Rule 18a-8 would
require an ANC broker-dealer SBSD and a stand-alone ANC SBSD to file
a regulatory notice if the firm's tentative net capital falls below
120% of its required minimum tentative net capital.
---------------------------------------------------------------------------

    Second, both sections would have line items to enter the amount of
the 8% margin factor. As discussed above, the minimum net capital
requirement for a nonbank SBSD would be the greater of a fixed-dollar
amount and a ratio amount. The ratio amount for a broker-dealer SBSD
would be the sum of the existing ratio requirement and the 8% margin
factor. Consequently, the computation section for broker-dealer filers
has line items to enter amounts for (as applicable): (1) The 15-to-1
aggregate indebtedness to net capital ratio; (2) the 2% of aggregate
debit items ratio; and (3) the 8% margin factor.\514\ The section for
stand-alone SBSDs has a line item to enter the 8% margin factor.\515\
---------------------------------------------------------------------------

    \514\ See Part 1 of proposed Form SBS, Computation of Minimum
Regulatory Capital Requirements (Broker-Dealer), Lines 4A-4C.
    \515\ See Part 1 of proposed Form SBS, Computation of Minimum
Regulatory Capital Requirements (Non-Broker-Dealer), Line 4.
---------------------------------------------------------------------------

    Third, a broker-dealer must provide detail in the FOCUS Report Part
II CSE section about the dollar amount of net capital in excess of the
greater of: (1) 5% of combined aggregate debit items; and (2) 120% of
the firm's minimum net capital requirement.\516\ The proposed Form SBS
sections would require a broker-dealer SBSD, broker-dealer MSBSP, and
stand-alone SBSD to enter the amount of net capital in excess of 120%
of the minimum net capital requirement.\517\
---------------------------------------------------------------------------

    \516\ See FOCUS Report Part II CSE, Computation of Net Capital
Requirement, Line 15. As discussed below in section II.C.2. of the
release, Rule 17a-11 requires a broker to give notification when its
net capital falls below 5% of aggregate debit items and when its net
capital falls below 120% of the minimum net capital requirement. See
17 CFR 240.17a-11(c)(2)-(3).
    \517\ See Part 1 of proposed Form SBS, Computation of Minimum
Regulatory Capital Requirements (Broker-Dealer), Line 9A. See also
Part 1 of proposed Form SBS, Computation of Minimum Regulatory
Capital Requirements (Non-Broker-Dealer), Line 9A. As noted above,
Rule 17a-11 requires a broker dealer to give notification when its
net capital computation performed pursuant to Rule 15c3-1 shows that
its total net capital is less than 120% of the broker-dealer's
required minimum net capital. See 17 CFR 240.17a-11(c)(3). As
discussed below in section II.C.2. of the release, proposed Rule
18a-8 would require a stand-alone SBSD to notify the Commission when
its net capital computation shows that its total net capital is less
than 120% of the SBSD's required minimum net capital.
---------------------------------------------------------------------------

Statement of Income (Loss)
    FINRA has adopted Form SSOI with the Commission's approval ``to
magnify the data from the Statement of Income (Loss) page of the FOCUS
Report.'' \518\

The statement of income (loss) section on proposed Form SBS is modeled
on Form SSOI and uses the same line items to report information about
categories of revenues and expenses.\519\ However, as discussed below,
the proposed Form SBS section has additional line items that are not on
Form SSOI.
---------------------------------------------------------------------------

    \518\ Self-Regulatory Organizations; Financial Industry
Regulatory Authority, Inc.; Notice of Filing of Amendment No. 2 and
Order Granting Accelerated Approval of a Proposed Rule Change, as
Modified By Amendment No. 2, Adopting FINRA Rule 4524 (Supplemental
FOCUS Information) and Proposed Supplementary Schedule to the
Statement of Income (Loss) Page of FOCUS Reports, Exchange Act
Release No. 66364 (Feb. 9, 2012), 77 FR 8938 (Feb. 15, 2012). (Form
SSOI ``is intended to capture more granular detail of a firm's
revenue and expense information. The lack of more specific revenue
and expense categories for certain business activities on the
Statement of Income (Loss) Page has led many firms to report much of
their revenue and expenses as `other' (miscellaneous), a very
general categorization that provides FINRA limited visibility into
revenue and expense trends.'') Form SSOI is available at http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>    \519\ Compare Part 1 of proposed Form SBS, Statement of Income
(Loss), with Form SSOI.
---------------------------------------------------------------------------

    First, a broker-dealer is required to enter into Form SSOI detail
about the amount of revenue attributable to fees or commissions with
respect to various categories of securities.\520\ The statement of
income (loss) section on proposed Form SBS would require a nonbank SBSD
or nonbank MSBSP to enter the same information.\521\ In addition, the
section would elicit information about commissions and fees
attributable to security-based swaps, mixed swaps, and swaps.\522\
---------------------------------------------------------------------------

    \520\ See FINRA Form SSOI, Lines 1A-1M.
    \521\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 1A-1P.
    \522\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 1M-1O.
---------------------------------------------------------------------------

    Second, a broker-dealer is required to enter into Form SSOI detail
about the amount of revenue attributable to gains or losses on
principal trades with respect to various categories of financial
instruments, including security-based swaps and swaps.\523\ The
statement of income (loss) section on proposed Form SBS would require
an SBSD or MSBSP to enter the same information, except that it would
require additional detail about gains or losses with respect to
security-based swaps and swaps.\524\ Specifically, the section would
require entries for gains and losses with respect to the following
categories of security-based swaps: (1) Debt security-based swaps
(other than credit default swaps); (2) equity security-based swaps, (3)
credit default swaps; and (4) other security-based swaps.\525\ It
further would require entries for gains and losses with respect to
mixed swaps \526\ and the following categories of swaps: (1) Interest
rate swaps; (2) foreign exchange swaps; (3) commodity swaps; (4) debt
index swaps (other than credit default swaps); (5) equity index swaps;
(6) credit default swaps; and (7) other swaps.\527\
---------------------------------------------------------------------------

    \523\ See FINRA Form SSOI, Lines 5A-5O.
    \524\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 5A-5P.
    \525\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 5L1-5L4.
    \526\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Line 5M.
    \527\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 5N1-5N7.
---------------------------------------------------------------------------

    Third, a broker-dealer is required to enter into the statement of
income (loss) section on the FOCUS Report Part II detail about the
amount of gains or losses on the firm's securities investment
accounts.\528\ Specifically, the section requires: (1) The dollar
amount of the realized gains or losses; (2) the dollar amount of the
unrealized gains or losses; and (3) the total dollar amount of the
gains or losses.\529\ Form SSOI requires the total dollar amount of
gains or losses on firm investments but not the detail on the realized
and unrealized gains or losses that must be reported on the FOCUS
Report Part II.\530\ The statement of income (loss) section on proposed
Form SBS would require an SBSD or MSBSP to report the same detail about
capital gains and losses on investment accounts as the FOCUS Report
Part II.\531\
---------------------------------------------------------------------------

    \528\ See FOCUS Report Part II Lines 3a-3c.
    \529\ See id.
    \530\ See FINRA Form SSOI, Line 6.
    \531\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 6A-6C.
---------------------------------------------------------------------------

Computation of Tangible Net Worth
    Proposed Rule 18a-2 would require stand-alone MSBSPs to maintain
positive tangible net worth.\532\ Under proposed Rule 18a-2, tangible
net worth would be defined to mean the MSBSP's net worth, as determined
in accordance with GAAP in the U.S., excluding goodwill and other
intangible assets.\533\ Part 1 of proposed Form SBS has a computation
of tangible net worth section that would need to be completed by an
MSBSP.\534\ In separate lines, the MSBSP would enter: (1) Total
ownership equity; and (2) goodwill and other intangible assets.\535\
The difference between those two line items would be entered in a third
line to indicate the MSBSP's tangible net worth.\536\
---------------------------------------------------------------------------

    \532\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70256-70257.
    \533\ See id.
    \534\ See Part 1 of proposed Form SBS, Computation of Tangible
Net Worth.
    \535\ See Part 1 of proposed Form SBS, Computation of Tangible
Net Worth, Lines 1 and 2.
    \536\ See Part 1 of proposed Form SBS, Computation of Tangible
Net Worth, Line 3.
---------------------------------------------------------------------------

Reserve Account Computation Under Proposed Rule 18a-4
    Proposed Rule 18a-4 would require an SBSD, among other things, to
maintain a security-based swap customer reserve account at a bank
separate from any other bank account of the SBSD.\537\ Further,
proposed Rule 18a-4 would provide that the SBSD must at all times
maintain in the security-based swap customer reserve bank account cash
and/or qualified securities in amounts computed daily in accordance
with a formula set forth in Exhibit A to proposed Rule 18a-4.\538\ The
formula in Exhibit A to proposed Rule 18a-4 is modeled closely on the
formula in Exhibit A to Rule 15c3-3.\539\ Consequently, the steps
necessary to compute the reserve account deposit requirement under
proposed Rule 18a-4 are, for the most part, the same steps necessary to
compute the reserve account deposit requirement under Rule 15c3-3.
---------------------------------------------------------------------------

    \537\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70282-70287. As noted above, broker-dealer SBSDs and broker-dealer
MSBSPs would be subject to Rule 15c3-3 with respect to customers
that are not security-based swap customers and, in the case of a
broker-dealer SBSD, Rule 18a-4 with respect to security-based swap
customers. Proposed Rule 18a-4 would provide that the SBSD must at
all times maintain in the security-based swap customer reserve
account cash and/or qualified securities in amounts computed daily
in accordance with Exhibit A to proposed Rule 18a-4.
    \538\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70282-70287.
    \539\ See id.
---------------------------------------------------------------------------

    Part 1 of proposed Form SBS has a section on which a broker-dealer
SBSD or stand-alone SBSD would provide a computation of the deposit
requirement for the security-based swap customer reserve account.\540\
The section is modeled on the sections in the FOCUS Report Part II and
Part II CSE on which broker-dealers provide a computation of the
reserve account deposit requirement under Rule 15c3-3.\541\ The
computation section on proposed Form SBS has two line items that are
not on the FOCUS Report Part II CSE or Part II section to account for
two additional debit items

that are part of the formula in Appendix A to proposed Rule 18a-4.\542\
---------------------------------------------------------------------------

    \540\ See Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A. Part 2 of proposed Form SBS has an identical
section that a bank SBSD would complete.
    \541\ Compare Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, with FOCUS Report Part II CSE, Computation for the
Determination of Reserve Requirements for Broker-Dealers under Rule
15c3-3, and FOCUS Report Part II, Computation for the Determination
of Reserve Requirements for Broker-Dealers under Rule 15c3-3.
    \542\ See Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, Lines 17 and 18. The line items on these lines
require the entry of the amount of margin required and on deposit
related to cleared and non-cleared security-based swaps. See also
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, 77 FR 70282-70287.
---------------------------------------------------------------------------

Information for Possession or Control Requirements Under Proposed Rule
18a-4
    Proposed Rule 18a-4 would require an SBSD to promptly obtain and
thereafter maintain physical possession or control of all excess
securities collateral carried for the accounts of security-based swap
customers.\543\ Part 1 of proposed Form SBS has a section on which a
broker-dealer SBSD or a stand-alone SBSD would enter information
related to the possession or control requirements of Rule 18a-4.\544\
The section is modeled on the sections in the FOCUS Report Part II and
Part II CSE on which broker-dealers report information related to the
possession or control requirements of Rule 15c3-3.\545\
---------------------------------------------------------------------------

    \543\ Under proposed Rule 18a-4, the term excess securities
collateral would be defined to mean securities and money market
instruments carried for the account of a security-based swap
customer that have a market value in excess of the current exposure
of the SBSD to the customer, excluding, under certain specified
conditions, securities or money market instruments used to meet a
margin requirement of a registered security-based swap clearing
agency or of another SBSD. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70279. The term security-based swap customer would be defined
to mean any person from whom or on whose behalf the SBSD has
received or acquired or holds funds or other property for the
account of the person with respect to a cleared or non-cleared
security-based swap transaction. See id. at 70278. The definition
would exclude a person to the extent that person has a claim for
funds or other property which by contract, agreement or
understanding, or by operation of law, is part of the capital of the
SBSD or is subordinated to all claims of security-based swap
customers of the SBSD. See id.
    \544\ See Part 1 of proposed Form SBS, Information for
Possession or Control Requirements under Rule 18a-4. Part 2 of
proposed Form SBS has an identical section that a bank SBSD would
complete.
    \545\ Compare Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, with FOCUS Report Part II CSE, Computation for the
Determination of Reserve Requirements for Broker-Dealers under Rule
15c3-3, and FOCUS Report Part II, Computation for the Determination
of Reserve Requirements for Broker-Dealers under Rule 15c3-3.
---------------------------------------------------------------------------

ii. Part 2 of Proposed Form SBS
    As discussed above, the proposed reporting requirements for bank
SBSDs and bank MSBSPs generally are designed to be tailored
specifically to their activities as an SBSD or an MSBSP. However, in
order to be able to monitor the financial condition of bank SBSDs and
bank MSBSPs, the Commission is proposing a limited program of reporting
certain general financial information by these registrants, which is
based on the reporting requirements of the prudential regulators.
Specifically, banks are required to file quarterly reports on FFIEC
Form 031.\546\ Like the FOCUS Report, FFIEC Form 031 elicits financial
and operational information about a bank, which is entered into
uniquely numbered line items. Part 2 of proposed Form SBS would require
a bank SBSD or a bank MSBSP to report certain of the information
reported on FFIEC Form 031.\547\ Specifically, Part 2 has: (1) A
balance sheet section that largely mirrors Schedule RC to FFIEC Form
031; (2) a statement of regulatory capital section that is a scaled
down version of Schedule RC-R to FFIEC Form 031; and (3) an income
statement section that is a scaled down version of Schedule RI to FFIEC
Form 031. Line items on proposed Form SBS that correspond to line items
on FFIEC Form 031 would require the entry of the same type of
information.\548\
---------------------------------------------------------------------------

    \546\ See 12 U.S.C. 161; 12 U.S.C. 324; 12 U.S.C. 1464; and 12
U.S.C. 1817. FFIEC Form 031 is available at http://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201303_f.pdf.
    \547\ Obtaining a bank's FFIEC Form 031 information through Form
SBS will allow Commission staff to easily and efficiently retrieve
and transfer the information into a database where values can be
compared over time and with other firms. For example, broker-dealers
submit FOCUS Reports electronically to FINRA through a user-
interactive portal known as ``eFOCUS.'' This allows FINRA and
Commission staff to easily and efficiently retrieve firm-specific
data as well as aggregate data across firms.
    \548\ The identifying number of each Line Item on proposed Form
SBS shares the same first four characters as the corresponding Line
Item on FFIEC Form 031. However, the Form SBS line items end with an
additional ``b'' character. For example, Line Item 0081 on FFIEC
Form 031 is Line Item 0081b on proposed Form SBS. The additional
``b'' accounts for the fact that some of the line items on FFIEC
Form 031 have the same unique numbers as line items on the FOCUS
Report.
---------------------------------------------------------------------------

    Part 2 of proposed Form SBS also has sections for: (1) A reserve
account computation under proposed Rule 18a-4; and (2) information for
possession or control requirements under proposed Rule 18a-4. The
sections of Part 2 are discussed below.
Balance Sheet
    A bank must report detail about its assets, liabilities, and equity
capital on Schedule RC to FFIEC Form 031.\549\ Schedule RC also has a
``Memoranda'' section that elicits information about the bank's
external auditors and fiscal year end date.\550\ Bank SBSDs and bank
MSBSPs would be required to report detail about their assets,
liabilities, and equity capital on a balance sheet section on Part 2 of
proposed Form SBS.\551\ The balance sheet section would have the same
line items as Schedule RC to FFIEC Form 031, except it would not
include line items from the ``Memoranda'' section.\552\ Consequently,
bank SBSDs and bank MSBSPs would be required to report in proposed Form
SBS the same information about assets, liabilities, and equity capital
that they report in Schedule RC (excluding the Memoranda information).
---------------------------------------------------------------------------

    \549\ See FFIEC Form 031, Schedule RC, Balance Sheet, Lines 1-
29.
    \550\ See FFIEC Form 031, Schedule RC, Balance Sheet, Memoranda,
Lines 1-2.
    \551\ See Part 2 of proposed Form SBS, Balance Sheet
(Information As Reported On FFIEC Form 031--Schedule RC), Lines 1-
29.
    \552\ Compare Part 2 of proposed Form SBS, Balance Sheet
(Information As Reported On FFIEC Form 031--Schedule RC), Lines 1-
29, with FFIEC Form 031, Schedule RC, Balance Sheet, Lines 1-29.
---------------------------------------------------------------------------

Regulatory Capital
    A bank must report detail about its regulatory capital on Schedule
RC-R to FFIEC Form 031.\553\ Schedule RC-R also has a ``Memoranda''
section that elicits detail about derivatives.\554\ The information
elicited on Schedule RC-R is designed to facilitate an analysis of the
bank's regulatory capital. As discussed above in section II.A.1. of
this release, the prudential regulators are responsible for
administering capital requirements for bank SBSDs and bank MSBSPs.\555\
The prudential regulators have proposed capital rules that would
require a bank SBSD or bank MSBSP to comply with the capital rules
applicable to banks.\556\
---------------------------------------------------------------------------

    \553\ See FFIEC Form 031, Schedule RC-R, Regulatory Capital,
Lines 1-62.
    \554\ See FFIEC Form 031, Schedule RC-R, Regulatory Capital,
Memoranda, Lines 1-2.
    \555\ See 15 U.S.C. 78o-10(e)(2).
    \556\ See Margin and Capital Requirements for Covered Swap
Entities, 76 FR 27564.
---------------------------------------------------------------------------

    Bank SBSDs and bank MSBSPs would be required to report detail about
their regulatory capital on a section on Part 2 of proposed Form
SBS.\557\ The regulatory capital section would include certain--but not
all--of the line items on Schedule RC-R.\558\ The included line items
require a bank to enter total amounts of the components of bank
regulatory capital (e.g., total Tier 1, Tier 2, or Tier 3 capital) and
other summary

measures. The objective is to require high level reporting of key
elements of the regulatory capital of a bank SBSD or bank MSBSP to
obtain a profile of the firm's regulatory capital position. Thus, the
information elicited in Part 2 of proposed Form SBS would not involve
the level of detail required by the prudential regulators on Schedule
RC-R.
---------------------------------------------------------------------------

    \557\ See Part 2 of Proposed Form SBS, Regulatory Capital
(Information As Reported On FFIEC Form 031--Schedule RC-R), Lines 1-
10.
    \558\ See Line Items 3210, 8274, 5311, 1395, 3792, A223, L138,
7204, 7206, 7205, 7273, 7274, and 7275 of FFIEC Form 031 and
proposed Form SBS.
---------------------------------------------------------------------------

Income Statement
    A bank must report detail about its income (loss) and expenses on
Schedule RI to FFIEC Form 031.\559\ Schedule RI also has a
``Memoranda'' section that elicits further detail about income
(loss).\560\ Bank SBSDs and bank MSBSPs would be required to report
detail about their income (loss) and expenses on an income section on
Part 2 of proposed Form SBS.\561\ However, the level of detail would be
significantly less than is required in Schedule RI. Specifically, to
focus the reporting on summary information and information relevant to
securities and derivatives activities, the income section only includes
line items from Schedule RI that require the entry of: (1) Total
amounts for categories of income, expense, and loss; \562\ (2) detail
about gains and losses on securities positions; \563\ (3) detail about
trading revenues; \564\ and (4) detail about gains and losses on
derivatives.\565\
---------------------------------------------------------------------------

    \559\ See FFIEC Form 031, Schedule RI, Income Statement, Lines
1-14.
    \560\ See FFIEC Form 031, Schedule RI, Income Statement,
Memoranda, Lines 1-14.
    \561\ See Part 2 of Proposed Form SBS, Income Statement
(Information As Reported On FFIEC Form 031--Schedule RI), Lines 1-
11.
    \562\ See Line Items 4107, 4073, 4079, 4093, 4301, and 4340 of
FFIEC Form 031 and proposed Form SBS.
    \563\ See Line Items 3521 and 3196 of FFIEC Form 031 and
proposed Form SBS.
    \564\ See Line Items 8757, 8758, 8759, 8760, F186, K090, and
K094 of FFIEC Form 031 and proposed Form SBS.
    \565\ See Line Items C889, C890, and A251 of FFIEC Form 031 and
proposed Form SBS.
---------------------------------------------------------------------------

Reserve Account Computation Under Proposed Rule 18a-4
    As discussed above, Part 1 of proposed Form SBS has a section on
which a broker-dealer SBSD or stand-alone SBSD would provide a
computation of the deposit requirement for the security-based swap
customer reserve account.\566\ This section is modeled on the sections
of the FOCUS Report Part II and Part II CSE on which broker-dealers
provide a computation of the customer reserve account deposit
requirement under Rule 15c3-3.\567\ Part 2 of proposed Form SBS has an
identical section that would be completed by a bank SBSD.\568\
---------------------------------------------------------------------------

    \566\ See Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A.
    \567\ Compare Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, with the FOCUS Report Part II CSE, Computation for
the Determination of Reserve Requirements for Broker-Dealers under
Rule 15c3-3 and the FOCUS Report Part II, Computation for the
Determination of Reserve Requirements for Broker-Dealers under Rule
15c3-3.
    \568\ See Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A.
---------------------------------------------------------------------------

Information for Possession or Control Requirements Under Proposed Rule
18a-4
    As discussed above, Part 1 of proposed Form SBS has a section on
which a broker-dealer SBSD or a stand-alone SBSD would enter
information related to the possession or control requirements of Rule
18a-4.\569\ The section is modeled on the sections of the FOCUS Report
Part II and Part II CSE on which broker-dealers provide information
related to the possession or control requirements of Rule 15c3-3.\570\
Part 2 of proposed Form SBS has an identical section that would be
completed by a bank SBSD.\571\
---------------------------------------------------------------------------

    \569\ See Part 1 of proposed Form SBS, Information for
Possession or Control Requirements under Rule 18a-4.
    \570\ Compare Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, with the FOCUS Report Part II CSE, Computation for
the Determination of Reserve Requirements for Broker-Dealers under
Rule 15c3-3 and the FOCUS Report Part II, Computation for the
Determination of Reserve Requirements for Broker-Dealers under Rule
15c3-3.
    \571\ See Part 2 of proposed Form SBS, Information for
Possession or Control Requirements under Rule 18a-4.
---------------------------------------------------------------------------

iii. Part 3 of Proposed Form SBS
    FCMs are required to periodically file with the CFTC and their
designated SRO Form 1-FR-FCM.\572\ Like the FOCUS Report and FFIEC Form
031, Form 1-FR-FCM elicits financial and operational information about
an FCM, which is entered into uniquely numbered line items. To account
for ANC broker-dealers that are dually registered as FCMs, the FOCUS
Report Part II CSE incorporates, substantially in the same format, the
following from Form 1-FR FCM: \573\ (1) A section to show a statement
of segregation requirements and funds in segregation for customers
trading on U.S. commodity exchanges; \574\ (2) a section to show a
statement of segregation requirements and funds in segregation for
customers' dealer options account; \575\ (3) a section to show a
summary statement of secured amounts and funds held in separate
accounts for foreign futures and foreign options customers pursuant to
CFTC Regulation 30.7; \576\ (4) a section to show a

statement of secured amounts and funds held in separate accounts for
foreign futures and foreign options customers pursuant to CFTC
Regulation 30.7; \577\ and (5) a section to show a computation of the
firm's minimum capital requirement.\578\ An ANC broker-dealer dually
registered as an FCM can file the FOCUS Report Part II CSE rather than
Form 1-FR-FCM.\579\
---------------------------------------------------------------------------

    \572\ See 17 CFR 1.10. See also Form 1-FR-FCM, available at
http://www.nfa.futures.org/NFA-registration/templates-and-forms/form1FR-fcm.HTML.
    \573\ The FOCUS Report Part II CSE assigns different numbers to
the line items.
    \574\ See FOCUS Report Part II CSE, Statement of Segregation
Requirements and Funds in Segregation for Customers Trading on U.S.
Commodity Exchanges, Lines 1-14. Section 4d of the CEA requires each
FCM to segregate from its own assets all money, securities and other
property deposited by futures customers to margin, secure, or
guarantee futures contracts and options on futures contracts traded
on designated contract markets. It further requires an FCM to treat
and deal with futures customer funds as belonging to the futures
customer, and prohibits an FCM from using the funds deposited by the
futures customer to margin or extend credit to any person other than
the futures customer that deposited the funds. 7 U.S.C. 6d. The CFTC
has adopted Rules 1.20 through 1.30 to implement section 4d. See 17
CFR 1.20 through 1.30. The Statement of Segregation Requirements and
Funds in Segregation for Customers Trading on U.S. Commodity
Exchanges generally indicates the total amount of funds held by the
FCM in segregated accounts, the total amount of funds that the FCM
must hold in segregated accounts to meet its regulatory obligations
to futures customers, and whether the firm holds excess segregated
funds in the segregated accounts as of the reporting date.
    \575\ See FOCUS Report Part II CSE, Statement of Segregation
Requirements and Funds in Segregation for Customers' Dealer Options
Accounts, Lines 1-3. Rule 1.32 requires an FCM to prepare a daily
computation which shows: (1) The amount of funds that an FCM is
required to segregate for customers who are trading on U.S.
commodity exchanges pursuant to the CEA and CFTC rules; (2) the
amount of funds the FCM actually has in segregated accounts; and (3)
the amount, if any, of the FCM's residual interest in the customer
funds segregated. See 17 CFR 1.32.
    \576\ See FOCUS Report Part II CSE, Statement of Secured Amounts
and Funds Held in Separate Accounts for Foreign Futures and Foreign
Options Customers Pursuant to Commission Regulation 30.7, Foreign
Futures and Foreign Options Secured Amount: Summary, Lines I-II, 1-
3. Section 4(b) of the CEA provides that the CFTC may adopt rules
and regulations proscribing fraud and requiring minimum financial
standards, the disclosure of risk, the filing of reports, the
keeping of books and records, the safeguarding of the funds
deposited by persons for trading on foreign markets, and
registration with the CFTC by any person located in the U.S. who
engages in the offer or sale of any contract of sale of a commodity
for future delivery that is made subject to the rules of a board of
trade located outside of the U.S. See 7 U.S.C. 6. Pursuant to
section 4(b), the CFTC adopted Part 30 of its regulations to address
foreign futures and foreign option transactions. See 17 CFR 30.1
through 30.13. Rule 30.7 provides that an FCM may deposit the funds
belonging to foreign futures or foreign options customer in an
account or accounts maintained at a bank or trust company located in
the U.S., a bank or trust company located outside the U.S. that has
in excess of $1 billion of regulatory capital, an FCM registered
with the CFTC, a derivatives clearing organization, a member of a
foreign board of trade, a foreign clearing organization, or a
depository selected by the member of a foreign board of trade or
foreign clearing organization. See 17 CFR 30.7.
    \577\ See FOCUS Report Part II CSE, Statement of Secured Amounts
and Funds Held in Separate Accounts for Foreign Futures and Foreign
Options Customers Pursuant to Commission Regulation 30.7, Funds
Deposited In Separate 17 CFR Sec.  30.7 Accounts, Lines 1-8. This
statement generally indicates the total amount of funds held by the
FCM in secured accounts, the total amount of funds that the FCM must
hold in secured accounts to meet its regulatory obligations to
foreign futures or foreign options customers, and whether the firm
holds excess secured funds in the secured accounts as of the
reporting date.
    \578\ See FOCUS Report Part II CSE, Computation of CFTC Minimum
Net Capital Requirement, Lines A-C. A broker-dealer dually
registered as an FCM is required to maintain net capital in an
amount at least equal to the greater of: (1) The minimum amount
required of a broker-dealer under Rule 15c3-1; and (2) the minimum
amount required of an FCM under CFTC Rule 1.17. See 17 CFR 1.17; 17
CFR 240.15c3-1.
    \579\ See 17 CFR 1.10(h) (allowing broker-dealers to file the
FOCUS Report instead of Form 1-FR-FCM so long as all information
required to be furnished on and submitted with Form 1-FR-FCM is
provided with the FOCUS Report). See also instructions to Form 1-FR-
FCM, available at<EMAIL_ADDRESS>Enhancing
Protections Afforded Customers and Customer Funds Held by Futures
Commission Merchants and Derivatives Clearing Organizations, 78 FR
68506, 68513 (Nov. 14, 2013).
---------------------------------------------------------------------------

    The CFTC recently adopted amendments to Form 1-FR-FCM that change
the format of the sections identified in items (1), (3), and (4) above
to enhance customer protections, risk management programs, internal
monitoring and controls, capital and liquidity standards, customer
disclosures, and auditing and examination programs for FCMs.\580\ The
format of these sections in proposed Form SBS are substantively the
same as the format of these recently amended sections of Form 1-FR-
FCM.\581\
---------------------------------------------------------------------------

    \580\ See Enhancing Protections Afforded Customers and Customer
Funds Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68512.
    \581\ One of the objectives of including the Form 1-FR-FCM
sections in proposed Form SBS is to permit a filer that is dually
registered as an FCM to be able to use proposed Form SBS to comply
with reporting requirements of the CFTC, subject to approval by the
CFTC. This objective could be defeated if the format of the sections
on proposed Form SBS is substantively different than the format of
the sections on Form 1-FR-FCM. See 17 CFR 1.10(h) (allowing broker-
dealers to file the FOCUS Report instead of Form 1-FR-FCM so long as
all information required to be furnished on and submitted with Form
1-FR-FCM is provided with the FOCUS Report).
---------------------------------------------------------------------------

    In addition, the CFTC adopted a new section for Form 1-FR-FCM that
requires an FCM to provide detail about segregation requirements and
funds in cleared swap customer accounts.\582\ This new section is
comparable to the section on which an FCM provides a Statement of
Segregation Requirements and Funds in Segregation for Customers Trading
on U.S. Commodity Exchanges.\583\ The purpose of the new section is to
provide an FCM that carries accounts for customers that maintain
cleared swap positions with a means to document and to demonstrate its
compliance with its obligation to treat, and deal with all money,
securities, and property of any swap customer received to margin,
guarantee, or secure a swap cleared by or through a derivatives
clearing organization (including money, securities, or property
accruing to swap customers as the result of such a swap) as belonging
to the FCM's swap customers as required by section 4d of the CEA.\584\
---------------------------------------------------------------------------

    \582\ See Enhancing Protections Afforded Customers and Customer
Funds Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68514.
    \583\ See Enhancing Protections Afforded Customers and Customer
Funds Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68513.
    \584\ See id. at 68507. See also 7 U.S.C. 6d.
---------------------------------------------------------------------------

    Consistent with the CFTC's recent amendment, proposed Form SBS
would include a section requiring an FCM filer to report detail about
segregation requirements and funds in cleared swap customer
accounts.\585\ The format of the section mirrors the format of the
section adopted by the CFTC to be included on Form 1-FR-FCM.
---------------------------------------------------------------------------

    \585\ See Part 3 of proposed Form SBS, Statement of Cleared
Swaps Customer Segregation Requirements and Funds in Cleared Swaps
Customer Accounts under Section 4D(F) of the Commodity Exchange Act,
Lines 1-16.
---------------------------------------------------------------------------

iv. Part 4 of Proposed Form SBS
    Part 4 of proposed Form SBS would apply to nonbank SBSDs and
nonbank MSBSPs. Part 4 consists of four schedules that elicit detailed
information about a firm's security-based swap and swap positions,
counterparties, and exposures. As discussed below, certain of the
schedules are modeled on schedules to the FOCUS Report.
    The schedules in Part 4 of proposed Form SBS would require filers
to report information relating to their exposures resulting from over-
the-counter derivatives exposures (including exposures relating to
security-based swaps and swaps). The instructions to proposed Form SBS
would define terms that are used to indicate the type of information to
be entered about the exposures. Specifically, the terms are: (1) Gross
replacement value also referred to as gross replacement value--
receivable; \586\ (2) gross replacement value--payable; \587\ (3) net
replacement value; \588\ (4) current net exposure; \589\

(5) total exposure; \590\ and (6) margin collected.\591\
---------------------------------------------------------------------------

    \586\ The instructions to proposed Form SBS would define the
terms gross replacement value and gross replacement value--
receivable as the amount that would need to be paid to enter into
identical contracts with respect to derivatives positions that have
a positive mark-to-market value to the firm (i.e., are receivable
positions of the firm), without applying any netting or collateral.
See the Definitions section of the instructions to proposed Form
SBS. Applicable netting and collateral rules would include Appendix
E to Rule 15c3-1 that prescribes, and proposed Rule 18a-1 that would
prescribe, requirements for when netting agreements and collateral
can be taken into account for purposes of calculating credit risk
charges as part of computing net capital. See 17 CFR 240.15c3-
1e(c)(4)(iv) and (v); Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70240-70245. In addition, proposed Rule 18a-3 would prescribe when
netting agreements and collateral can be taken into account for
purposes calculating margin requirements for non-cleared security-
based swaps. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70260-70265. The CFTC also has requirements for netting agreements
and collateral for the purposes of the proposed capital requirements
for swap dealers and major swap participants. See Enhancing
Protections Afforded Customers and Customer Funds Held by Futures
Commission Merchants and Derivatives Clearing Organizations, 78 FR
68506. Similarly, the prudential regulators have proposed
requirements for netting agreements and collateral for the purposes
of their proposed capital and margin requirements for bank SBSDs,
bank MSBSPs, bank swap dealers, and bank major swap participants.
See Margin and Capital Requirements for Covered Swap Entities, 76 FR
27564.
    \587\ The instructions to proposed Form SBS would define the
term gross replacement value--payable as the amount that would need
to be paid to enter into identical contracts with respect to
derivatives positions that have a negative mark-to-market value to
the firm (i.e., are payable positions of the firm), without applying
any netting or collateral. See the Definitions section of the
instructions to proposed Form SBS.
    \588\ The instructions to proposed Form SBS would define the
term net replacement value as the amount of the ``gross replacement
value--receivable'' minus the amount of the ``gross replacement
value--payable'' that may be netted for each counterparty in
accordance with applicable rules. See the Definitions section of the
instructions to proposed Form SBS.
    \589\ The instructions to proposed Form SBS would define the
term current net exposure as the net replacement value minus the
fair market value of collateral collected that may be applied under
applicable rules (e.g., taking into account haircuts to the fair
market value of the collateral required under applicable rules). See
the Definitions section of the instructions to proposed Form SBS.
    \590\ The instructions to proposed Form SBS would define the
term total exposure as the sum of the following (as applicable): (1)
The current net exposure; (2) the amount of initial margin for
cleared security-based swaps and swaps required by a clearing agency
or derivatives clearing organization (regardless of whether the
margin has been collected); (3) the margin amount for uncleared
security-based swaps calculated under paragraph (c) of proposed Rule
18a-3; (4) the initial margin for non-cleared swaps calculated under
the CFTC's rules (regardless of whether the margin has been
collected); and (5) maximum potential exposure as defined in 17 CFR
Sec. Sec.  240.15c3-1 or 18a-1, as applicable, for any over-the-
counter derivatives not included above. See the Definitions section
of the instructions to proposed Form SBS.
    \591\ The instructions to proposed Form SBS would define the
term margin collected as the amount of initial margin collateral
collected that can be applied against the firm's total exposure
under applicable rules. See the Definitions section of the
instructions to proposed Form SBS.
---------------------------------------------------------------------------

Schedule 1
    ANC broker-dealers are required to complete a schedule on the FOCUS
Report Part II CSE to report the dollar amount of the aggregate long
and short positions in various categories of financial instruments held
by the firm.\592\ The categories include, for example, U.S. treasury
securities, foreign debt securities, foreign equity securities, and
corporate obligations. The schedule has a single line for
derivatives.\593\ Schedule 1 to Part 4 of proposed Form SBS has a
subsection that elicits the dollar amount of the aggregate long and
short positions in the same categories of non-derivative financial
instruments as the FOCUS Report Part II CSE section.\594\
---------------------------------------------------------------------------

    \592\ See FOCUS Report Part II CSE, Aggregate Securities and OTC
Derivatives Positions, Lines 1-15. OTC derivatives dealers are
required to provide similar information in a section on the FOCUS
Report Part IIB. See FOCUS Report Part IIB, Schedule VI, Aggregate
Securities and Commodities Positions, Lines 1-15.
    \593\ See FOCUS Report Part II CSE, Aggregate Securities and OTC
Derivatives Positions, Line 11.
    \594\ See Part 4 of proposed Form SBS, Schedule 1, Aggregate
Securities, Commodities, and Swaps Positions, Lines 1-18.
---------------------------------------------------------------------------

    Schedule 1 elicits more detail about security-based swap, mixed
swap, and swap positions than the parallel FOCUS Report Part II CSE
section.\595\ Specifically, it would require the filer to enter the
aggregate long and short positions for cleared and non-cleared: (1)
Debt security-based swaps (other than credit default swaps); (2) equity
security-based swaps, (3) credit default security-based swaps; and (4)
other security-based swaps.\596\ It further would require the same
information with respect to mixed swaps \597\ and the following
categories of swaps: (1) Interest rate swaps; (2) foreign exchange
swaps; (3) commodity swaps; (4) debt index swaps (other than credit
default swaps); (5) equity index swaps; (6) credit default swaps; and
(7) other swaps.\598\ The instructions to proposed Form SBS would
direct firms to report the month-end gross replacement value for
cleared and non-cleared receivables in the long column, and report the
month-end gross replacement value for cleared and non-cleared
receivables in the short column.\599\
---------------------------------------------------------------------------

    \595\ In addition to the differences discussed below, for
increased clarity, Line 2 of the proposed Form SBS schedule would
read ``U.S. government agency and U.S. government-sponsored
enterprises'' instead of ``U.S. government agency and government-
sponsored entities''. Compare FOCUS Report Part II CSE, Aggregate
Securities and OTC Derivatives Positions, Line 2 with Part 4 of
proposed Form SBS, Schedule 1, Aggregate Securities, Commodities,
and Swaps Positions, Line 2. Moreover, the proposed Form SBS
schedule would elicit detail with respect to two categories of U.S.
government agency securities and U.S. government sponsored
enterprise securities: debt securities and mortgage-backed
securities. Finally, for increased clarity, Line 17 would read
``Securities with no ready market'' instead of ``Investments with no
ready market''. Compare FOCUS Report Part II CSE, Aggregate
Securities and OTC Derivatives Positions, Line 13 with Part 4 of
proposed Form SBS, Schedule 1, Aggregate Securities, Commodities,
and Swaps Positions, Line 17. See also Letter from Howard Spindel,
Senior Managing Director, and Cassondra E. Joseph, Managing
Director, Integrated Management Solutions USA LLC to FINRA (Feb. 25,
2013), available at http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>(suggesting such a
modification).
    \596\ See Part 4 of proposed Form SBS, Schedule 1, Aggregate
Securities, Commodities, and Swaps Positions, Lines 12A-12D.
    \597\ See Part 4 of proposed Form SBS, Schedule 1, Aggregate
Securities, Commodities, and Swaps Positions, Line 13.
    \598\ See Part 4 of proposed Form SBS, Schedule 1, Aggregate
Securities, Commodities, and Swaps Positions, Lines 14A-14G.
    \599\ See instructions to proposed Form SBS for Part 4, Schedule
1.
---------------------------------------------------------------------------

Schedule 2
    ANC broker-dealers are required to provide detail on Schedule III
to the FOCUS Report Part II CSE about the fifteen counterparties to
which they have the largest credit exposures in derivatives.\600\ The
FOCUS Report Part II CSE specifies that an ANC broker-dealer must
provide for each of the fifteen counterparties: (1) A counterparty
identifier; (2) the counterparty's country; (3) the counterparty's
industry segment; (4) the counterparty's credit rating; (5) the gross
replacement value of the receivables from and payables to the
counterparty; (6) the net replacement value of the transactions with
the counterparty; (7) the current net exposure to the counterparty; (8)
the total credit exposure to the counterparty; and (9) the aggregate
maximum potential exposure to the counterparty.\601\ It also requires
total amounts for items (5) through (9) above (i.e., the sum of the
amounts for the fifteen counterparties).\602\
---------------------------------------------------------------------------

    \600\ See FOCUS Report Part II CSE, Schedule III, Credit-
Concentration Report for Fifteen Largest Net Exposures in
Derivatives. OTC derivatives dealers are required to provide similar
information in a section on the FOCUS Report Part IIB. See FOCUS
Report Part IIB, Schedule I, Credit-Concentration Report for Twenty
Largest Current Net Exposures.
    \601\ See FOCUS Report Part II CSE, Schedule III, Credit-
Concentration Report for Fifteen Largest Net Exposures in
Derivatives.
    \602\ See FOCUS Report Part II CSE Line Items 7810, 7811, 7812,
7813, 7814, and 7815.
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    Schedule 2 to Part 4 of proposed Form SBS has two tables that are
modeled on Schedule III to the FOCUS Report Part II CSE.\603\ The first