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Vol. 77 Friday,No. 226 November 23, 2012Part II
Securities and Exchange Commission
17 CFR Part 240Capital, Margin, and Segregation Requirements for Security-Based SwapDealers and Major Security-Based Swap Participants and CapitalRequirements for Broker-Dealers; Proposed Rule
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Federal Register
/Vol. 77, No. 226/Friday, November 23, 2012/Proposed Rules
[Release No. 34–68071; File No. S7–08–12]RIN 3235–AL12
Capital, Margin, and SegregationRequirements for Security-BasedSwap Dealers and Major Security-Based Swap Participants and CapitalRequirements for Broker-Dealers
Securities and ExchangeCommission.
Proposed rule.
In accordance with the Dodd-Frank Wall Street Reform and ConsumerProtection Act of 2010 (‘‘Dodd-FrankAct’’), the Securities and ExchangeCommission (‘‘Commission’’), pursuantto the Securities Exchange Act of 1934(‘‘Exchange Act’’), is proposing capitaland margin requirements for security- based swap dealers (‘‘SBSDs’’) andmajor security-based swap participants(‘‘MSBSPs’’), segregation requirementsfor SBSDs, and notificationrequirements with respect to segregationfor SBSDs and MSBSPs. TheCommission also is proposing toincrease the minimum net capitalrequirements for broker-dealerspermitted to use the alternative internalmodel-based method for computing netcapital (‘‘ANC broker-dealers’’).
Comments should be received onor before January 22, 2013.
Comments may besubmitted by any of the followingmethods:
Electronic Comments
Use the Commission’s Internetcomment form (
Send an email to
.Please include FileNumber S7–08–12 on the subject line;or
Use the Federal eRulemaking Portal(
).Follow theinstructions for submitting comments.
Paper Comments
Send paper comments in triplicateto Elizabeth M. Murphy, Secretary,Securities and Exchange Commission,100 F Street, NE., Washington, DC20549–1090.All submissions should refer to FileNumber S7–08–12. This file numbershould be included on the subject lineif email is used. To help theCommission process and review yourcomments more efficiently, please useonly one method. The Commission willpost all comments on the Commission’sInternet Web site (
).Comments alsoare available for Web site viewing andprinting in the Commission’s PublicReference Room, 100 F Street, NE.,Washington, DC 20549, on official business days between the hours of 10a.m. and 3 p.m. All comments receivedwill be posted without change; theCommission does not edit personalidentifying information fromsubmissions. You should submit onlyinformation that you wish to makepublicly available.
Michael A. Macchiaroli, AssociateDirector, at (202) 551–5525; Thomas K.McGowan, Deputy Associate Director, at(202) 551–5521; Randall W. Roy,Assistant Director, at (202) 551–5522;Mark M. Attar, Branch Chief, at (202)551–5889; Sheila Dombal Swartz,Special Counsel, at (202) 551–5545;Valentina M. Deng, Attorney, at (202)551–5778; or Teen I. Sheng, Attorney, at202–551–5511, Division of Trading andMarkets, Securities and ExchangeCommission, 100 F Street, NE.,Washington, DC 20549–7010.
Table of Contents
I. BackgroundII. Proposed Rules and Rule AmendmentsA. Capital1. Introduction2. Proposed Capital Rules for NonbankSBSDsa. Computing Required Minimum NetCapitali. Stand-alone SBSDs Not Using InternalModelsii. Broker-Dealer SBSDs Not Using InternalModelsiii. Stand-alone SBSDs Using InternalModelsiv. Broker-Dealer SBSDs Using InternalModels and ANC Broker-Dealers b. Computing Net Capitali. The Net Liquid Assets Testii. Standardized Haircuts for Security-Based Swapsiii. VaR Modelsiv. Credit Risk Chargesv. Capital Charge In Lieu of MarginCollateralvi. Treatment of Swapsc. Risk Managementd. Funding Liquidity Stress TestRequiremente. Other Rule 15c3–1 ProvisionsIncorporated into Rule 18a–1i. Debt-Equity Ratio Requirementsii. Capital Withdrawal Requirementsiii. Appendix Civ. Appendix D3. Proposed Capital Rules for NonbankMSBSPsB. Margin1. Introduction2. Proposed Margin Requirements forNonbank SBSDs and Nonbank MSBSPsa. Scope of Rule 18a–3 b. Daily Calculationsi. Nonbank SBSDsii. Nonbank MSBSPsc. Account Equity Requirementsi. Nonbank SBSDsii. Nonbank MSBSPsd. $100,000 Minimum Transfer Amounte. Risk Monitoring and Procedures3. Specific Request for Comment to Limitthe Use of CollateralC. Segregation1. Background2. Proposed Rule 18a–4a. Possession and Control of ExcessSecurities Collateral b. Security-Based Swap Customer ReserveAccountc. Special Provisions for Non-clearedSecurity-Based Swap CounterpartiesIII. General Request for CommentIV. Paperwork Reduction ActA. Summary of Collections of InformationUnder the Proposed Rules and RuleAmendments1. Proposed Rule 18a–1 and Amendmentsto Rule 15c3–12. Proposed Rule 18a–23. Proposed Rule 18a–34. Proposed Rule 18a–4B. Proposed Use of InformationC. RespondentsD. Total Initial and Annual Recordkeepingand Reporting Burden1. Proposed Rule 18a–1 and Amendmentsto Rule 15c3–12. Proposed Rule 18a–23. Proposed Rule 18a–34. Proposed Rule 18a–4E. Collection Of Information Is MandatoryF. ConfidentialityG. Retention Period For RecordkeepingRequirementsH. Request For CommentV. Economic AnalysisA. Baseline Of Economic Analysis1. Overview of the OTC DerivativesMarkets—Baseline for Proposed Rules18a–1 through 18a–42. Baseline for Amendments to Rule 15c3–1B. Analysis of the Proposals andAlternatives1. Overview—The Proposed FinancialResponsibility Programa. Nonbank SBSDs b. Nonbank MSBSPs2. The Proposed Capital Rulesa. Nonbank SBSDs and ANC Broker-dealersi. Minimum Capital Requirementsii. Standardized Haircutsiii. Capital Charge in Lieu of MarginCollateraliv. Credit Risk Chargev. Funding Liquidity Stress TestRequirementvi. Risk Management Procedures b. Capital Requirements for MSBSPsc. Consideration of Burden onCompetition, and Promotion of Efficiency, Competition, and CapitalFormation3. The Proposed Margin Rule—Rule 18a–3
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Federal Register
/Vol. 77, No. 226/Friday, November 23, 2012/Proposed Rules
Public Law 111–203, 124 Stat. 1376 (2010).
Pursuant to section 701 of the Dodd-Frank Act,Title VII may be cited as the ‘‘Wall StreetTransparency and Accountability Act of 2010.’’
Public Law 111–203 §701. The Dodd-Frank Actassigns responsibility for the oversight of the U.S.OTC derivatives markets to the Commission, theCommodity Futures Trading Commission (‘‘CFTC’’),and certain ‘‘prudential regulators,’’ discussed below. The Commission has oversight authoritywith respect to a
security-based swap
as defined insection 3(a)(68) of the Exchange Act (15 U.S.C.78c(a)(68)), including to implement a registrationand oversight program for a
security-based swapdealer 
as defined in section 3(a)(71) of the ExchangeAct (15 U.S.C. 78c(a)(71)) and a
major security-based swap participant 
as defined in section3(a)(67) of the Exchange Act (15 U.S.C. 78c(a)(67)).The CFTC has oversight authority with respect toa
as defined in section 1(a)(47) of theCommodity Exchange Act (‘‘CEA’’) (7 U.S.C.1(a)(47)), including to implement a registration andoversight program for a
swap dealer 
as defined insection 1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) anda
major swap participant 
as defined in section1(a)(33) of the CEA (7 U.S.C. 1(a)(33)). TheCommission and the CFTC jointly have adoptedrules to further define, among other things, thoseterms and the terms
swap, security-based swap,swap dealer, major swap participant, security-based swap dealer, and major security-based swap participant. See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based SwapAgreement’’; Mixed Swaps; Security-Based SwapAgreement Recordkeeping,
Exchange Act ReleaseNo. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23,2011) (‘‘
Product Definitions Proposing Release’’ 
Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping,
Exchange Act Release No. 67453(July 18, 2012), 77 FR 48208 (Aug. 13, 2012) (Jointfinal rule with the CFTC) (‘‘
Product DefinitionsAdopting Release’’ 
Further Definition of ‘‘SwapDealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based SwapParticipant’’ and ‘‘Eligible Contract Participant’’,
Exchange Act Release No. 63452 (Dec. 7, 2010), 75FR 80174 (Dec. 21, 2010) (Joint proposal with theCFTC) (‘‘
Entity Definitions Proposing Release’’ 
); and
Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant’’,
Exchange ActRelease No. 66868 (Apr. 27, 2012), 77 FR 30596(May 23, 2012) (Joint final rule with the CFTC)(‘‘
Entity Definitions Adopting Release’’ 
Public Law 111–203 §§701–774.
See id.
§764; 15 U.S.C. 78o–10.
15 U.S.C. 78o–10(e)(1)(B). Specifically,section 15F(e)(1)(B) of the Exchange Act providesthat each registered SBSD and MSBSP for whichthere is not a prudential regulator shall meet suchminimum capital requirements and minimuminitial and variation margin requirements as theCommission shall by rule or regulation prescribe.The term ‘‘prudential regulator’’ is defined insection 1(a)(39) of the CEA (7 U.S.C. 1(a)(39)) andthat definition is incorporated by reference insection 3(a)(74) of the Exchange Act (15 U.S.C.78c(a)(74)). Pursuant to the definition, the Board of Governors of the Federal Reserve System (‘‘FederalReserve’’), the Office of the Comptroller of theCurrency (‘‘OCC’’), the Federal Deposit InsuranceCorporation (‘‘FDIC’’), the Farm CreditAdministration, or the Federal Housing FinanceAgency (collectively, the ‘‘prudential regulators’’) isthe ‘‘prudential regulator’’ of an SBSD, MSBSP,swap participant, or major swap participant if theentity is directly supervised by that agency.
Public Law 111–203 §763; 15 U.S.C. 78c–5.
15 U.S.C. 78c–5(a)–(g). Section 3E of theExchange Act does not distinguish between bankand nonbank SBSDs and bank and nonbankMSBSPs, and, consequently, provides theCommission with the authority to establishsegregation requirements for SBSDs and MSBSPs,whether or not they have a prudential regulator.
7 U.S.C. 6s(e)(1)(B).
15 U.S.C. 78o–10(e)(1)(A); 7 U.S.C.6s(e)(1)(A).
See Margin and Capital Requirements for Covered Swap Entities,
76 FR 27564 (May 11, 2011)(‘‘
Prudential Regulator Margin and Capital Proposing Release’’ 
). The prudential regulators, aspart of their proposed margin requirements for non-cleared security-based swaps, proposed asegregation requirement for collateral received asmargin.
See Capital Requirements of Swap Dealers and Major Swap Participants,
76 FR 27802 (May 12,2011) (‘‘
CFTC Capital Proposing Release’’ 
MarginRequirements for Uncleared Swaps for SwapDealers and Major Swap Participants,
76 FR 23732(Apr. 28, 2011) (‘‘
CFTC Margin Proposing Release’’ 
).The CFTC reopened the comment period for theCFTC Margin Proposing Release to allow interestedparties to comment on the CFTC proposed rules inlight of the proposals discussed in the internationalconsultative paper.
See Margin Requirements for Uncleared Swaps for Swap Dealers and Major SwapParticipants,
77 FR 41109 (July 12, 2012).
See Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendmentsto the Commodity Broker Bankruptcy Provisions,
77FR 6336 (Feb. 7, 2012) and
Protection of Collateral of Counterparties to Non-cleared Swaps; Treatment of Securities in a Portfolio Margining Account in aCommodity Broker Bankruptcy,
75 FR 75432 (Dec.3, 2010).
17 CFR 240.15c3–1; 17 CFR 240.15c3–3.
a. Calculation of Margin Amount b. Account Equity Requirementsi. Commercial end usersii. SBSDs—Alternatives A and Bc. Margin Requirements for Nonbank-MSBSPsd. Consideration of Burden onCompetition, and Promotion of Efficiency, Competition, and CapitalFormation4. Proposed Segregation Rule—Rule 18a–4a. Consideration of Burden onCompetition, and Promotion of Efficiency, Competition, and CapitalFormationC. Implementation ConsiderationsD. General Request for CommentVI. Regulatory Flexibility Act CertificationVII. Statutory Basis and Text of the ProposedAmendments
I. Background
On July 21, 2010, President Obamasigned the Dodd-Frank Act into law.
 Title VII of the Dodd-Frank Act (‘‘TitleVII’’) established a new regulatoryframework for OTC derivatives.
In thisregard, Title VII was enacted, amongother reasons, to reduce risk, increasetransparency, and promote marketintegrity within the financial system by,among other things: (i) Providing for theregistration and regulation of SBSDs andMSBSPs; (ii) imposing clearing andtrade execution requirements onstandardized derivative products; (iii)creating recordkeeping and real-timereporting regimes; and (iv) enhancingthe Commission’s rulemaking andenforcement authorities with respect toall registered entities and intermediariessubject to the Commission’s oversight.
 Section 764 of the Dodd-Frank Actadded section 15F to the Exchange Act.
 Section 15F(e)(1)(B) of the Exchange Actprovides that the Commission shallprescribe capital and marginrequirements for SBSDs and nonbankMSBSPs that do not have a prudentialregulator (respectively, ‘‘nonbankSBSDs’’ and ‘‘nonbank MSBSPs’’).
 Section 763 of the Dodd-Frank Actadded section 3E to the Exchange Act.
 Section 3E provides the Commissionwith authority to establish segregationrequirements for SBSDs and MSBSPs.
 Section 4s(e)(1)(B) of the CEAprovides that the CFTC shall prescribecapital and margin requirements forswap dealers and major swapparticipants for which there is not aprudential regulator (‘‘nonbank swapdealers’’ and ‘‘nonbank swapparticipants’’).
Section 15F(e)(1)(A) of the Exchange Act provides that theprudential regulators shall prescribecapital and margin requirements for bank SBSDs and bank MSBSPs, andsection 4s(e)(1)(A) of the CEA providesthat the prudential regulators shallprescribe capital and marginrequirements for swap dealers andmajor swap participants for which thereis a prudential regulator (‘‘bank swapdealers’’ and ‘‘bank swapparticipants’’).
The prudentialregulators have proposed capital andmargin requirements for bank swapdealers, bank SBSDs, bank swapparticipants, and bank MSBSPs.
TheCFTC has proposed capital and marginrequirements for nonbank swap dealersand nonbank major swap participants.
 The CFTC also has adopted segregationrequirements for cleared swaps andproposed segregation requirements fornon-cleared swaps.
 Pursuant to sections 763 and 764 of the Dodd-Frank Act, the Commission isproposing to amend Rule 15c3–1 andRule 15c3–3 and propose new Rules18a–1 (including appendices to Rule18a–1), 18a–2, 18a–3, and 18a–4(including an exhibit to Rule 18a–4).
 The proposed amendments and newrules would establish capital andmargin requirements for nonbankSBSDs, including broker-dealers that areregistered as SBSDs (‘‘broker-dealerSBSDs’’), and nonbank MSBSPs. Theyalso would establish segregationrequirements for SBSDs and notificationrequirements with respect to segregationfor SBSDs and MSBSPs.Further, the proposals also wouldincrease the minimum net capital
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