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2016-29368

  • [Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]

    [Proposed Rules]

    [Pages 91252-91334]

    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

    [FR Doc No: 2016-29368]

    [[Page 91251]]

    Vol. 81

    Friday,

    No. 242

    December 16, 2016

    Part II

    Commodity Futures Trading Commission

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    17 CFR Parts 1, 23, and 140

    Capital Requirements of Swap Dealers and Major Swap Participants;

    Proposed Rule

    Federal Register / Vol. 81 , No. 242 / Friday, December 16, 2016 /

    Proposed Rules

    [[Page 91252]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1, 23, and 140

    RIN 3038--AD54

    Capital Requirements of Swap Dealers and Major Swap Participants

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is proposing to adopt new regulations and to amend existing

    regulations to implement sections 4s(e) and (f) of the Commodity

    Exchange Act (``CEA''), as added by section 731 of the Wall Street

    Reform and Consumer Protection Act (``Dodd-Frank Act''). Section 4s(e)

    requires the Commission to adopt capital requirements for swap dealers

    (``SDs'') and major swap participants (``MSPs'') that are not subject

    to capital rules of a prudential regulator. Section 4s(f) requires the

    Commission to adopt financial reporting and recordkeeping requirements

    for SDs and MSPs. The Commission also is proposing to amend existing

    capital rules for futures commission merchants (``FCMs''), providing

    specific capital deductions for market risk and credit risk for swaps

    and security-based swaps entered into by an FCM. The Commission is

    further proposing several technical amendments to the regulations.

    DATES: Comments must be received on or before March 16, 2017.

    ADDRESSES: You may submit comments, identified by RIN 3038-AD54 and

    ``Capital Requirements for Swap Dealers and Major Swap Participants'',

    by any of the following methods:

    CFTC Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: Send to Chris Kirkpatrick, Secretary, Commodity

    Futures Trading Commission, 1155 21st Street, NW., Washington, DC

    20581.

    Hand delivery/Courier: Same as Mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one of these methods.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that is exempt from disclosure under the Freedom of

    Information Act, a petition for confidential treatment of the exempt

    information may be submitted according to the procedures set forth in

    Regulation 145.9 of the Commission's regulations.\1\

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    \1\ Commission regulations referred to herein are found at 17

    CFR chapter 1. Commission regulations are accessible on the

    Commission's Web site, http://www.cftc.gov.

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    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Eileen T. Flaherty, Director, Division

    of Swap Dealer and Intermediary Oversight, 202-418-5326,

    eflaherty@cftc.gov; Thomas Smith, Deputy Director, Division of Swap

    Dealer and Intermediary Oversight, 202-418-5495, tsmith@cftc.gov;

    Jennifer C.P. Bauer, Special Counsel, Division of Swap Dealer and

    Intermediary Oversight, 202-418-5472, jbauer@cftc.gov; Joshua Beale,

    Special Counsel, Division of Swap Dealer and Intermediary Oversight,

    202-418-5446, jbeale@cftc.gov; Rafael Martinez, Senior Financial Risk

    Analyst, Division of Swap Dealer and Intermediary Oversight, 202-418-

    5462, rmartinez@cftc.gov; Paul Schlichting, Assistant General Counsel,

    Office of the General Counsel, 202-418-5884, pschlichting@cftc.gov; or

    Lihong McPhail, Research Economist, 202-418-5722, lmcphail@cftc.gov,

    Office of the Chief Economist; Commodity Futures Trading Commission,

    Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Introduction

    A. Statutory Authority

    B. Previous Proposed Rulemaking

    C. Consultation With U.S. Securities and Exchange Commission and

    Prudential Regulators

    II. Proposed Regulations and Amendments to Regulations

    A. Capital

    1. Introduction

    2. Capital Requirements for Swap Dealers and Major Swap

    Participants

    i. Capital Requirements for Swap Dealers Under a Bank-Based

    Capital Approach

    a. Computation of Minimum Capital Requirement

    b. Computation of Common Equity Tier 1 Capital To Meet Minimum

    Capital Requirement

    ii. Capital Requirement for Swap Dealers Under a Net Liquid

    Assets Capital Approach

    a. Computation of Minimum Capital Requirement

    b. Computation of Net Capital To Meet Minimum Capital

    Requirement

    (1) Swap Dealers Computation of Tentative Net Capital and Net

    Capital Without Approval To Use Internal Capital Models

    (2) Swap Dealers Approved To Use Internal Capital Models

    iii. Capital Requirement for Swap Dealers That Are

    ``Predominantly Engaged in non-Financial Activities''

    a. Computation of Minimum Capital Requirement

    b. Computation of Tangible Net Worth To Meet Minimum Capital

    Requirement

    iv. Capital Requirements for Major Swap Participants

    3. Capital Requirements for FCMs

    i. Introduction

    ii. FCM Capital Charges for Swaps and Security-Based Swaps in

    Computing Adjusted Net Capital

    a. Standardized Market Risk and Credit Risk Capital Charges

    b. Model-Based Market Risk and Credit Risk Capital Charges

    iii. Market Risk and Credit Risk Capital Models for Futures

    Commission Merchants That Are Not Alternative Net Capital Firms

    iv. Liquidity Requirements

    4. Model Approval Process

    i. VaR Models

    ii. Stressed VaR Models

    iii. Specific Risk Models

    iv. Incremental Risk Models

    v. Comprehensive Risk Models

    vi. Credit Risk Models

    B. Swap Dealer and Major Swap Participant Liquidity Requirements

    and Equity Withdrawal Restrictions

    1. Liquidity Requirements

    i. Swap Dealers Subject to the Bank-Based Capital Approach

    ii. Swap Dealers Subject to the Net Liquid Assets Capital

    Approach

    2. Swap Dealer Equity Withdrawal Restrictions

    C. Swap Dealer and Major Swap Participant Financial

    Recordkeeping, Reporting and Notification Requirements

    1. Swap Dealer and Major Swap Participant Financial

    Recordkeeping and Financial Statement Reporting Requirements

    2. Swap Dealer and Major Swap Participant Notice Requirements

    3. Electronic Filing Requirements for Financial Reports and

    Regulatory Notices

    4. Swap Dealer and Major Swap Participant Reporting of Position

    Information

    5. Reporting Requirements for Swap Dealers Approved To Use

    Internal Capital Models

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    6. Financial Reporting Requirements for Swap Dealers and Major

    Swap Participants Subject to the Capital Rules of a Prudential

    Regulator

    7. Weekly Position and Margin Reporting

    D. Comparability Determinations for Eligible Swap Dealers and

    Major Swap Participants

    E. Technical Amendments

    1. Amendments to the Financial Reporting Requirements in

    Regulations 1.10 and 1.16

    2. Amendments to the Notice Provisions in Regulation 1.12

    3. Commission Receivables for Certain Swap Transactions in

    Regulation 1.17

    4. Changes to Notice and Disclosure Requirements for Bulk

    Transfers in Regulation 1.65

    5. Conforming Amendments to Delegated Authority Provisions in

    Regulation 140.91

    III. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    1. New Information Collection Requirements and Related Burden

    Estimates

    i. Form SBS

    ii. Notice of Failure to Maintain Minimum Financial Requirements

    iii. Requests for Extensions of Time To File Financial

    Statements

    iv. Capital Requirements Elections

    v. Application for Use of Models

    vi. Liquidity Requirements

    vii. Financial Recordkeeping, Reporting and Notification

    Requirements for SDs and MSPs

    viii. Capital Comparability Determinations

    2. Information Collection Comments

    IV. Cost Benefit Considerations

    A. Background

    B. Regulatory Capital

    C. General Summary of Proposal

    D. Baseline

    E. Overview of Approaches

    1. Bank Based Capital

    2. Net Liquid Assets

    3. Alternative Net Capital (``ANC'')

    4. Tangible Net Worth

    5. Substituted Compliance

    F. Entities

    1. Bank Subsidiaries

    2. SD/BD (Without Models)

    3. SD/BD/OTC Derivatives Dealers (Without Models)

    4. SD/FCM (Without Models)

    5. ANC Firms (SD/BD and/or FCMs That Use Models)

    6. Stand-Alone SD (With and Without Models)

    7. Non-Financial SD (With and Without Models)

    8. MSP

    9. Substituted Compliance

    G. Liquidity and Funding Requirements

    H. Reporting and Recordkeeping Requirements

    I. Section 15(a) Factors

    1. Protection of Market Participants and the Public

    2. Efficiency, Competitiveness, and Financial Integrity of Swaps

    Markets

    3. Price Discovery

    4. Sound Risk Management Practices

    5. Other Public Interest Considerations

    I. Introduction

    A. Statutory Authority

    Section 731 of the Dodd-Frank Act \2\ amended the CEA \3\ by adding

    section 4s(e), which requires the Commission to adopt rules

    establishing capital requirements for SDs and MSPs to help ensure the

    safety and soundness of the SDs and MSPs.\4\ Section 4s(e) applies a

    bifurcated approach requiring each SD and MSP subject to the capital

    requirements of a prudential regulator to meet the capital requirements

    adopted by the applicable prudential regulator, and requiring each SD

    and MSP that is not subject to the capital requirements of a prudential

    regulator to meet the capital requirements adopted by the

    Commission.\5\ Therefore, SDs and MSPs that are not banking entities,

    including nonbank subsidiaries of bank holding companies regulated by

    the Federal Reserve Board, are subject to the Commission's capital

    requirements.\6\ The Commission is also proposing in this release to

    require SDs to meet defined liquidity and funding requirements and is

    proposing certain limitations on the withdrawal of capital from SDs as

    part of the SD capital requirements.

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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

    \3\ 7 U.S.C. 1 et seq.

    \4\ See 7 U.S.C. 6s(e)(3)(A). Section 4s(e) also directs the

    Commission to adopt regulations for SDs and MSPs imposing initial

    and variation margin requirements on all swaps that are not cleared

    by a registered clearing organization. The Commission adopted final

    SD and MSP margin requirements for uncleared swap transactions on

    December 18, 2015. See, Margin Requirements for Uncleared Swaps for

    Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).

    \5\ The term ``prudential regulator'' is defined in section

    1a(39) of the CEA for purposes of the section 4s(e) capital

    requirements. Specifically, the term ``prudential regulator'' is

    defined to mean the Board of Governors of the Federal Reserve System

    (``Federal Reserve Board''); the Office of the Comptroller of the

    Currency (``OCC''); the Federal Deposit Insurance Corporation; the

    Farm Credit Administration; and the Federal Housing Finance Agency.

    All references to an ``SD'' or an ``MSP'' in this proposal will mean

    an SD or MSP that is subject to the Commission's capital rules,

    unless otherwise specified.

    \6\ The prudential regulators, including the Federal Reserve

    Board and OCC which have capital responsibilities for SDs

    provisionally-registered with the Commission, have adopted capital

    rules that incorporate capital requirements for swap and security-

    based swap transactions. In this regard, the Federal Reserve Board

    and OCC have adopted revised capital rules to incorporate Basel III

    capital adequacy requirements. See, Regulatory Capital Rules:

    Regulatory Capital, Implementation of Basel III, Capital Adequacy,

    Transition Provisions, Prompt Corrective Action, Standardized

    Approach for Risk-weighted Assets, Market Discipline and Disclosure

    Requirements, Advanced Approaches Risk-Based Capital Rule, and

    Market Risk Capital Rule, 78 FR 62018 (Oct. 11, 2013).

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    The Commission is also required to adopt regulations to implement

    provisions in section 4s related to financial reporting and

    recordkeeping by SDs and MSPs. Section 4s(f)(2) of the CEA directs the

    Commission to adopt rules governing financial condition reporting and

    recordkeeping for SDs and MSPs, and section 4s(f)(1)(A) requires each

    registered SD and MSP to make such reports as are required by

    Commission rule or regulation regarding the SD's or MSP's financial

    condition. The Commission is also proposing record retention and

    inspection requirements consistent with the provisions of section

    4s(f)(1)(B).\7\ Pursuant to the financial reporting provisions, the

    Commission is proposing that SDs and MSPs submit periodic financial

    information and swaps and security-based swaps position information to

    the Commission, and that SDs and MSPs file written notices with the

    Commission whenever defined reportable events are triggered.

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    \7\ The Commission previously finalized certain record retention

    requirements for SDs and MSPs regarding their swap activities. See,

    Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and

    Duties Rules; Futures Commission Merchant and Introducing Broker

    Conflicts of Interest Rules; and Chief Compliance Officer Rules for

    Swap Dealers, Major Swap Participants, and Futures Commission

    Merchants, 76 FR 20128 (Apr. 3, 2012).

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    In addition to proposing minimum capital and financial reporting

    requirements for SDs and MSPs, the Commission is also proposing to

    amend existing capital requirements for FCMs to include specific market

    risk capital charges and credit risk capital charges for swaps and

    security-based swaps transactions that are not cleared by clearing

    organizations.\8\ Section 4s(a) of the CEA requires entities that

    engage in swap dealing activities and otherwise meet the definition of

    an SD to register with the Commission as SDs. The Commission expects

    that certain FCMs will engage in swap dealing activities that requires

    them to register as SDs. In addition, the Commission expects that other

    FCMs may engage in a level of swap dealing activity that is below the

    de minimis exception and, therefore, exempts the FCMs from registering

    as SDs.\9\ Accordingly, the Commission is

    [[Page 91254]]

    proposing to amend Regulation 1.17 to establish specific capital

    requirements for FCMs that engage in swaps or security-based swaps that

    are not cleared by a clearing organization. These proposed capital

    requirements would apply to all FCMs that enter into uncleared swaps or

    security-based swaps. The Commission also is proposing technical

    amendments to several regulations as part of the proposed capital and

    financial recordkeeping and reporting requirements.

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    \8\ Section 4f(b) of the CEA authorizes the Commission to

    establish minimum financial requirements for FCMs. The Commission

    previously adopted minimum capital requirements for FCMs, which are

    set forth in Commission Regulation 1.17.

    \9\ Regulation 1.3(ggg) defines the term ``swap dealer'' and

    contains a general exception from the definition for a person that

    engages in a de minimis level of swap dealing activities. Regulation

    1.3(ggg) generally defines the term ``de minimis'' to mean that the

    swap dealing activities of a person, or any other entity

    controlling, controlled by or under common control with the person,

    over the preceding 12 months have an aggregate gross notional amount

    of no more than $3 billion (subject to a phase in level of $8

    billion) and an aggregate notional amount of no more than $25

    million with regard to swaps in which the counterparty is a

    ``special entity'' as defined in section 4s(h)(2)(C) of the CEA and

    Commission Regulation 23.401(c).

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    B. Previous Proposed Rulemaking

    The Commission previously proposed capital and financial reporting

    rules for SDs and MSPs in 2011.\10\ The Commission received comments

    from a broad spectrum of market participants, industry representatives,

    and other interested parties. The commenters addressed numerous topics

    including the permissible use of models for computing capital and the

    need for harmonization of the Commission's rules with capital rules of

    the prudential regulators and the Securities and Exchange Commission

    (``SEC'').\11\

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    \10\ See Capital Requirements of Swap Dealers and Major Swap

    Participants, 76 FR 27802 (May 12, 2011).

    \11\ Comments received on the Commission's May 12, 2011 proposed

    capital and financial reporting rules are available on the

    Commission's Web site. Commenters included financial services

    associations, agricultural associations, energy associations,

    insurance associations, banks, brokerage firms, investment managers,

    insurance companies, pension funds, commercial end users, law firms,

    public interest organizations, and other members of the public.

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    The Commission elected to defer consideration of final capital

    rules until the Commission adopted final regulations governing margin

    requirements for SDs and MSPs engaging in uncleared swap transactions.

    The Commission adopted the final margin requirements for uncleared

    swaps in December 2015.\12\

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    \12\ See 81 FR 636 (Jan. 6, 2016).

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    The Commission has considered the comments it received from its

    initial capital proposal in developing this proposal. In addition, and

    as discussed below, the Commission also has considered capital rules

    adopted by the prudential regulators and capital rules proposed by the

    SEC for security-based swap dealers (``SBSDs'') and major security-

    based swap participants (``MSBSPs'') in developing this proposal. The

    Commission further considered the impact of the final margin rules for

    uncleared swaps and the final rules addressing the cross-border

    application of the margin requirements for uncleared swaps in

    developing this proposal.\13\

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    \13\ The Commission adopted final regulations addressing the

    cross-border application of the uncleared swaps margin rules. See,

    Margin Requirements for Uncleared Swaps for Swap Dealers and Major

    Swap Participants--Cross-Border Application of the Margin

    Requirements, 81 FR 34818 (May 31, 2016).

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    C. Consultation With U.S. Securities and Exchange Commission and

    Prudential Regulators

    Section 4s(e)(3)(D) of the CEA provides that the CFTC, SEC, and

    prudential regulators (collectively, the ``Agencies'') shall, to the

    maximum extent practicable, establish and maintain comparable minimum

    capital requirements for SDs and MSPs. Further, section 4s(e)(3)(D)

    directs staff of the Agencies to meet periodically, but no less

    frequently than annually, to consult on minimum capital requirements.

    Accordingly, staff from each of the Agencies had the opportunity to

    provide oral and/or written comments to the capital and financial

    reporting regulations for SDs and MSPs contained in this proposing

    release, and the proposal reflects certain elements of their comments.

    II. Proposed Regulations and Amendments to Regulations

    A. Capital

    1. Introduction

    Broadly speaking, in developing the proposed capital requirements

    for SDs and MSPs, the Commission strived to advance the statutory goal

    of helping to protect the safety and soundness of SDs and MSPs, while

    also taking into account the diverse nature of entities participating

    in the swaps market and the existing capital regimes that apply to

    these entities and/or their financial group. To that end, the

    Commission is proposing three alternative capital approaches for SDs

    and MSPs, which are intended to minimize competitive advantages that

    might otherwise arise if the Commission were to impose a singular

    capital approach in light of the different corporate and operating

    structures of the entities. The Commission further considered the

    degree to which its proposed capital requirements would be consistent

    with an existing regulatory framework (if any) to which these entities

    are already subject and the statutory objective of the capital

    requirements, to help ensure the safety and soundness of SD and MSP

    registrants.

    The Commission has, to a great extent, drawn on existing CFTC,

    prudential regulator, and SEC capital rules in developing the proposed

    capital requirements for SDs and MSPs. Also, as discussed in this

    release, the Commission's proposed capital requirements for SDs and

    MSPs are consistent in many respects with the SEC's proposed capital

    requirements for SBSDs and MSBSPs, and the prudential regulators'

    capital requirements for banks and bank holding companies.\14\

    Specifically, the proposal, depending on the characteristics of the

    registered entity, would: (i) Permit SDs to elect a capital requirement

    that is based on existing bank holding company capital rules adopted by

    the Federal Reserve Board (the ``bank-based capital approach''); (ii)

    permit SDs to elect a capital requirement that is based on the existing

    CFTC FCM capital rule, the existing SEC broker-dealer (``BD'') capital

    rule, and the SEC's proposed capital requirements for SBSDs, (the ``net

    liquid assets capital approach''); or (iii) permit SDs that meet

    defined conditions designed to ensure that they are ``predominantly

    engaged in non-financial activities'' to compute their minimum

    regulatory capital based upon the firms' tangible net worth (the

    ``tangible net worth capital approach'').

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    \14\ Section 15F(e) of the Exchange Act (15 U.S.C. 78o-

    10(e)(1)(B)) provides that the SEC shall prescribe capital and

    margin requirements for SBSDs and nonbank MSBSPs that do not have a

    prudential regulator. The SEC proposed capital requirements for

    SBSDs and MSBSPs in November 2012. See Capital, Margin, and

    Segregation Requirements for Security-Based Swap Dealers and Major

    Security-Based Swap Participants, 77 FR 70214 (Nov. 23, 2012). The

    prudential regulators adopted amendments to the capital rules for

    banks and bank holding companies to incorporate certain requirements

    set forth in the Dodd-Frank Act. See, 78 FR 62018 (Oct. 11, 2013).

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    With respect to MSPs, the Commission is proposing a minimum

    regulatory capital requirement based upon the tangible net worth of the

    MSP. This tangible net worth approach is consistent with the SEC's

    proposed capital rule for MSBSPs as discussed in section II.A.2.iii of

    this release.

    The Commission's proposed SD and MSP capital requirements are set

    forth in new Regulation 23.101, and are discussed in section II.A.2 of

    this release. Proposed Regulation 23.101 details the minimum capital

    requirements for each of the three capital approaches and the

    eligibility criteria (as applicable), and further

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    defines the capital computations for each approach, including various

    market risk and credit risk charges, whether using models or otherwise,

    to determine whether an SD satisfies the minimum capital requirements.

    The proposal also defines a minimum capital requirement for MSPs and

    defines the capital computation for MSPs.

    The Commission is also proposing several amendments to Regulation

    1.17, which governs the capital requirements for FCMs. The proposed

    amendments would establish specific market risk and credit risk capital

    charges for swap and security-based swap positions, and would provide a

    process for an FCM that is dually-registered as an SD to seek approval

    from the Commission or from the registered futures association

    (``RFA'') of which the FCM is a member to use internal capital models

    to compute market risk and credit risk capital charges.\15\ The

    discussion of the proposed FCM capital amendments is contained in

    section II.A.3 of this release.

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    \15\ Section 3 of the CEA states that a purpose of the CEA is to

    establish a system of effective self-regulation under the oversight

    of the Commission. Consistent with the self-regulatory concept

    established under section 3, section 17 of the CEA provides a

    process whereby an association of persons may register with the

    Commission as a registered futures association (``RFA''). Currently,

    the National Futures Association (``NFA'') is the only RFA under

    section 17 of the CEA.

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    2. Capital Requirements for Swap Dealers and Major Swap Participants

    The Commission is proposing capital requirements for SDs and MSPs

    in order to help ensure the safety and soundness of the SDs and MSPs by

    requiring such firms to maintain a minimum level of financial resources

    that is based upon the activities of the firms. Adequate levels of

    capital will allow SDs and MSPs to meet their obligations to swap and

    security-based swap counterparties and general creditors.

    The Commission's proposed SD capital requirements in Regulation

    23.101 are comprised of two components. First, an SD must compute the

    minimum amount of capital that the SD is required to maintain under

    proposed Regulation 23.101. Second, the SD must compute, based upon its

    balance sheet and certain adjustments including market risk and credit

    risk charges on its swaps, security-based swaps and other proprietary

    positions, the actual amount of capital that the SD maintains. The SD's

    actual capital must be equal to or greater than the SD's minimum

    capital requirement. This section discusses the proposed minimum amount

    of capital required to be maintained by an SD or MSP under the proposal

    and the proposed regulations governing the computation of the amount of

    capital that an SD or MSP actually maintains.

    To provide SDs with flexibility given the diverse nature of their

    corporate structures and operations, the Commission is proposing a

    bank-based capital approach, a net liquid assets capital approach, and

    a tangible net worth capital approach for SDs. And as described below,

    SDs which are subject to existing capital requirements that would

    adequately address their swaps transactions may choose to remain under

    those existing requirements. The Commission believes that providing

    this flexibility is appropriate as both the bank-based capital approach

    and the net liquid assets capital approach are based on

    internationally-recognized and accepted approaches for establishing

    strong minimum capital requirements for financial institutions. Both of

    these approaches are designed to ensure that SD's meet their financial

    obligations and to help ensure that safety and soundness of the SD.

    Although there are differences between the bank-based and net liquid

    assets based capital approaches, they are structurally similar in that

    they evaluate the composition of the SD's balance sheet and are

    formulated to ensure the SD's ability to continue its operations in

    times of financial stress. The option to use the tangible net worth

    approach is appropriate because it would be available only for SDs that

    are predominantly engaged in non-financial activities. These SDs are

    primarily involved in commercial activities and engage in a relatively

    insignificant amount of financial transactions when compared to their

    entire operations, as described below. As the Commission has previously

    noted, financial firms generally present a higher level of systemic

    risk than commercial firms as the profitability and viability of

    financial firms is more tightly linked to the health of the financial

    system than commercial firms.\16\

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    \16\ See 81 FR 636, 640 (Jan. 6, 2016).

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    In addition, as noted above, the Commission based the proposal on

    existing regulatory capital regimes. The Commission recognizes that

    certain of the current registered SDs are nonbank subsidiaries of bank

    holding companies that are already subject to the Federal Reserve

    Board's bank-based capital requirements for bank holding companies. The

    Commission anticipates that SDs that are nonbank subsidiaries of bank

    holding companies may elect the bank-based capital approach as the

    firms consolidate into bank holding companies that are subject to the

    Federal Reserve Board's bank-based capital requirements. The

    Commission's proposed bank-based capital approach would allow an SD

    that consolidates into a bank holding company to maintain books and

    records, and perform capital computations, in a manner that is

    consistent with its holding company parent entity.

    Furthermore, several of the current provisionally-registered SDs

    are also dually-registered with the Commission as FCMs or dually-

    registered with the SEC as BDs or ``OTC derivatives dealers,'' and

    several of the current provisionally-registered SDs are anticipated to

    register with the SEC as SBSDs.\17\ FCMs, BDs, and OTC derivatives

    dealers currently are subject to a net liquid assets capital

    requirement, and the SEC is proposing a net liquid assets capital

    requirement for SBSDs.\18\ The Commission believes that permitting

    dually-registered SDs/SBSDs or SDs/OTC derivatives dealers to use a

    uniform CFTC-SEC net liquid assets capital approach would simplify the

    SDs recordkeeping obligations and allow them to use existing accounting

    and financial reporting systems. This approach is also consistent with

    the Commission's long-standing practice of maintaining a uniform

    capital rule for dually-registered FCM/BDs, while also imposing a

    strong capital requirement on the SDs to help ensure the safety and

    soundness of the firms.

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    \17\ An OTC derivatives dealer is a limited purpose BD

    established by SEC regulations. An OTC derivatives dealer's

    securities activities are limited to engaging in eligible OTC

    derivative instruments that are securities and other enumerated

    activities. See 17 CFR 240.3b-12.

    \18\ FCM capital requirements are set forth in CFTC Regulation

    1.17. SEC Rule 15c3-1 (17 CFR 240.15c3-1) governs the capital

    requirements for BDs. SEC proposed Rule 18a-1 would govern the

    capital requirements for SBSDs that are not registered as BDs. (See

    77 FR 70214).

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

    In addition to the bank-based capital approach and the net liquid

    assets capital approach, the Commission is also proposing to permit SDs

    that are ``predominantly engaged in non-financial activities,'' as

    defined below, to elect a capital approach that is based on the SD's

    tangible net worth.\19\ The Commission is proposing the tangible net

    worth capital approach in recognition that not all SDs will be

    principally engaged in traditional dealing and other financial

    activities. The Commission anticipates that a small number of SDs will

    be substantially engaged in commercial operations that would make

    meeting a traditional bank-based capital approach or net liquid

    [[Page 91256]]

    assets capital approach extremely challenging, if at all possible,

    without substantial corporate restructuring. The Commission's proposal

    to use the tangible net worth approach would be limited to SDs that are

    predominantly engaged in non-financial (i.e., commercial) activities.

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

    \19\ See proposed Regulation 23.101(a)(2).

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

    The Commission's proposed approach of recognizing existing capital

    requirements on firms that register as SDs and the Commission's further

    recognition that not all SDs will be traditional financial firms offers

    potential benefits to swap market participants by encouraging more

    firms to act as SDs and to make markets in swaps. An approach that

    would impose a standardized capital requirement on firms that otherwise

    are subject to existing capital regimes that differ substantially from

    the standardized capital requirement or that would require substantial

    corporate reorganization to satisfy the standardized capital

    requirement would increase costs of swap transactions for swap dealers

    and their counterparties, including commercial end users and other non-

    financial market participants. A standardized capital requirement may

    also impose significant disincentives for certain SDs to remain in the

    market as dealers in swaps, which would concentrate dealing activities

    in a smaller number of firms. The Commission's proposal implements

    strong capital requirements to help ensure the safety and soundness of

    the SDs, while at the same time offers an appropriate degree of

    flexibility, recognizing that a single, standardized capital approach

    is not appropriate for all SDs which could result in significant

    burdens on all swap market participants.

    Proposed Regulation 23.101 also is consistent with the statutory

    requirements under section 4s(e), which effectively provides that SDs

    subject to the capital rule of a prudential regulator are not subject

    to the Commission's capital rules.\20\ Proposed Regulation 23.101(a)(3)

    would provide that an SD subject to the capital rules of a prudential

    regulator is not subject to the Commission's capital rules.

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

    \20\ See section 4s(e)(1) and (2).

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

    Proposed Regulation 23.101(a)(4) also provides that certain SDs

    that are otherwise currently subject to the Commission's capital rules

    are not subject to Regulation 23.101. Specifically, proposed Regulation

    23.101(a)(4) would provide that an SD that is also registered as an FCM

    with the Commission is subject to the Commission's FCM capital

    requirements contained in Regulation 1.17.\21\ These SDs would be

    subject to the FCM capital requirements, which the Commission is

    proposing to amend in order to better reflect the specific risks of

    engaging in uncleared swaps and security-based swap transactions. The

    Commission is requiring an SD that is dually-registered as an FCM to

    meet the FCM capital requirements as such requirements reflect the

    Commission's long experience in regulating the financial requirements

    of FCMs. For example, the FCM capital requirement, which requires an

    FCM to hold at least one dollar of liquid assets to meet each dollar of

    liabilities (except certain subordinated debt), is designed to ensure

    that an FCM has adequate liquid resources to effectively operate as a

    market intermediary by having resources to pay customers' requests to

    withdraw funds and by satisfying its customers' obligations to clearing

    organizations. The Commission proposed amendments for FCMs are

    discussed in section II.A.3 of this release.

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    \21\ The Commission, as discussed in section II.A.3 of this

    release, also is proposing to amend Regulation 1.17 to specifically

    address capital requirements for FCMs that carry swaps and/or

    security-based swaps positions.

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

    Lastly, proposed Regulation 23.101(a)(5) would contain a provision

    of ``substituted compliance'' for capital and financial reporting

    requirements for SDs that are: (1) Not organized under the laws of the

    U.S., and (2) not domiciled in the U.S. The proposal would permit these

    non-U.S. organized and domiciled SDs (or a regulatory authority in the

    SDs' home country jurisdictions) to petition the Commission to satisfy

    the Commission's capital and financial reporting requirements through

    substituted compliance with the capital and financial reporting

    requirements of the SDs' respective home country jurisdiction.\22\ The

    proposed substituted compliance provisions and the Commission program

    of conducting comparability determinations of foreign jurisdictions

    capital requirements are discussed in section II.D of this release.

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

    \22\ Proposed Regulations 23.101(a)(5) and 23.106.

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

    i. Capital Requirement for Swap Dealers Under a Bank-Based Capital

    Approach

    a. Computation of Minimum Capital Requirement

    The Commission is proposing to provide SDs with an option to elect

    the bank-based capital approach based on the capital requirements

    adopted by the Federal Reserve Board for bank holding companies. The

    Federal Reserve Board's bank holding company capital requirements are

    consistent with the bank capital framework adopted by the Basel

    Committee on Banking Supervision (``BCBS'').\23\ The BCBS framework is

    an internationally-recognized framework for setting capital

    requirements for banks and bank holding companies. The Commission

    believes that proposing capital requirements using the Federal Reserve

    Board's capital framework is appropriate as the framework specifically

    reflects swaps and security-based swaps in the capital requirements,

    and the framework was developed to provide prudential standards to help

    ensure the safety and soundness of bank and bank holding companies. In

    addition, as noted above, the proposal to allow SDs an option to elect

    this approach would provide efficiencies for several of the

    provisionally registered SDs that are part of a bank holding company

    structure, and have developed recordkeeping, accounting, and financial

    reporting systems that are designed to comply with existing prudential

    requirements.

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

    \23\ BCBS is the primary global standard-setter for the

    prudential regulation of banks and provides a forum for cooperation

    on banking supervisory matters. Institutions represented on the BCBS

    include the Federal Reserve Board, the European Central Bank,

    Deutsche Bundesbank, Bank of France, Bank of England, Bank of Japan,

    and Bank of Canada.

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

    The Commission's bank-based capital approach is set forth in

    proposed Regulation 23.101(a)(1)(i), and would require an SD to

    maintain a minimum level of regulatory capital that is equal to or in

    excess of the greater of the following four criteria:

    (1) $20 million of common equity tier 1 capital, as defined under

    the bank holding company regulations in 12 CFR 217.20, as if the SD

    itself were a bank holding company subject to 12 CFR part 217; \24\

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

    \24\ Common equity tier 1 capital is defined in 12 CFR 217.20 of

    the Federal Reserve Board's rules. Common equity tier 1 capital

    generally represents the sum of a bank holding company's common

    stock instruments and any related surpluses, retained earnings, and

    accumulated other comprehensive income.

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

    (2) common equity tier 1 capital, as defined under the bank holding

    company regulations in 12 CFR part 217.20, equal to or greater than

    eight percent of the SD's risk-weighted assets computed under the bank

    holding company regulations in 12 CFR part 217 as if the SD were a bank

    holding company subject to 12 CFR part 217;

    (3) common equity tier 1 capital, as defined under 12 CFR 217.20,

    equal to or greater than 8 percent of the sum of:

    (a) The amount of ``uncleared swaps margin'' (as that term is

    defined in

    [[Page 91257]]

    proposed Regulation 23.100) for each uncleared swap position open on

    the books of the SD, computed on a counterparty by counterparty basis

    pursuant to Regulation 23.154; \25\

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    \25\ The term ``uncleared swap margin'' is defined in Regulation

    23.100 to mean the amount of initial margin that a swap dealer would

    be required to collect from each swap counterparty pursuant to the

    margin rules for uncleared swap transactions (Regulation 23.154).

    The term ``uncleared swap margin'' includes all uncleared swaps that

    an SD is required to collect margin for under the margin

    regulations, and also includes all uncleared swaps that are exempt

    or excluded from the margin requirements including swaps with

    commercial end users, swaps entered into prior to the respective

    compliance dates of the Commission's margin requirements set forth

    in Regulation 23.161 (i.e., legacy swaps), and excluded swaps with

    an affiliated entity.

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

    (b) the amount of initial margin that would be required for each

    uncleared security-based swap position open on the books of the SD,

    computed on a counterparty-by-counterparty basis pursuant to proposed

    SEC Rule 18a-3(c)(1)(i)(B), without regard to any initial margin

    exemptions or exclusions that the rules of the SEC may provide to such

    security-based swap positions; and

    (c) the amount of initial margin required by a clearing

    organization for cleared proprietary futures, foreign futures, swaps,

    and security-based swap positions open on the books of the SD; or

    (4) the capital required by an RFA of which each SD is a member.

    Each of the proposed minimum capital criteria is discussed below.

    The first criterion under the Commission's proposal is that all SDs

    that elect the bank-based capital approach must maintain a minimum of

    $20 million of common equity tier 1 capital. The Commission believes

    that given the role that SDs play in the financial markets by engaging

    in swap dealing activities that it is appropriate to require that all

    SDs maintain a minimum level of capital, stated as an absolute dollar

    amount that does not fluctuate with the level of the firms' dealing

    activities to help ensure the safety and soundness of SDs.

    The proposed $20 million of minimum capital is consistent with the

    minimum regulatory capital requirements proposed by the Commission in

    this release for SDs that elect the net liquid assets capital approach

    or the tangible net worth capital approach discussed in sections

    II.A.2.ii and II.A.2.iii, respectively, of this release. The $20

    million minimum capital requirement is also consistent with the net

    capital requirement proposed by the SEC for SBSDs, and is consistent

    with the current minimum net capital requirements for OTC derivatives

    dealers registered with the SEC.\26\

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    \26\ The SEC proposed capital requirements for SBSDs would

    impose a minimum net capital requirement of $20 million for SBSDs

    that are not approved to use internal capital models and a $100

    million dollar tentative net capital and $20 million net capital

    requirement for SBSDs that are approved to use internal capital

    models. See 77 FR 70214 (Nov. 23, 2012). SEC Rule 15c3-1(a)(5) (17

    CFR 240.15c3-1(a)(5)) currently requires an OTC derivatives dealer

    that has obtained approval to use capital models to maintain a

    minimum of $100 million of tentative net capital and $20 million of

    net capital.

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

    The second criterion of the minimum capital requirement for SDs

    that elect the bank-based capital approach is that the SD must maintain

    common equity tier 1 capital equal to or greater than eight percent of

    the SD's risk-weighted assets computed under the bank holding company

    regulations in 12 CFR part 217 as if the SD were a bank holding

    company. In effect, this provision of Regulation 23.101(a)(1)(i)

    imposes a capital approach on a SD that is generally consistent with

    the approach that the Federal Reserve Board imposes on bank holding

    companies.\27\ The Commission believes it is important to include this

    criterion so that an SD would maintain a level of common equity tier 1

    capital that is comparable to the level it would have to maintain if it

    were subject to the capital rules of the Federal Reserve Board.

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

    \27\ As discussed further below, the Commission's proposal

    differs from the rules of the Federal Reserve Board in that the

    Commission's proposal would require an SD to add to its risk

    weighted assets the market risk capital charges computed in

    accordance with Regulation 1.17 if the SD has not obtained approval

    from the Commission or from an RFA to use internal market risk and

    credit risk models.

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

    The Commission is also proposing to measure the required minimum

    amount of regulatory capital in terms of a minimum ratio of total

    qualifying capital to risk-weighted assets of eight percent, in a

    manner that is comparable to the Federal Reserve Board's capital rules

    for bank holding companies.\28\ For purposes of the Commission's

    proposal, as is also the case for the Federal Reserve Board's minimum

    ratio requirement, the assets and off-balance sheet transactions or

    exposures of the bank holding company are weighted relative to their

    risk.\29\ Thus, under the Commission's proposal, the greater the

    perceived risk of the assets and the off-balance sheet items, the

    greater the weighting for the risk and the greater the amount of

    capital necessary to cover eight percent of the risk-weighted

    assets.\30\

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

    \28\ See 12 CFR 217.10.

    \29\ See 12 CFR 217 subparts D, E, and F.

    \30\ Large, complex banks also must make further adjustments to

    these risk-weighted assets for the additional capital they must hold

    to reflect the market risk of their trading assets See 12 CFR 217

    subpart F. The market risk requirements generally apply to Federal

    Reserve Board-regulated institutions with aggregate trading assets

    and trading liabilities equal to 10 percent or more of total assets

    or one billion dollars or more.

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

    Proposed Regulation 23.101(a)(1)(i) would require an SD that elects

    a bank-based capital approach to compute its risk-weighted assets in

    accordance with the Federal Reserve Board's capital requirements

    contained in 12 CFR part 217. The proposal includes the two general

    approaches to computing risk-weighted assets under 12 CFR part 217. The

    first approach is for SDs that have not obtained Commission or RFA

    approval to calculate their risk-weighted assets using internal credit

    risk and market risk models. Proposed Regulation 23.103 would require

    these SDs to use a standardized, or rules-based, approach to computing

    their risk-weighted assets. Under this approach, these SDs would use

    the credit risk charges from the Federal Reserve Board's standardized

    approach under subpart D of 12 CFR 217 and the market risk charges that

    are set forth in Regulation 1.17.\31\ Regulation 1.17 contains the

    standard market risk capital charges that have been imposed on FCMs for

    many years. Generally, market risk charges are determined by

    multiplying the notional value or market value of an asset by a fixed

    percentage set forth in the regulations.\32\ The market risk charges

    are then multiplied by a factor of 12.5 and added to the total risk-

    weighted assets of the SD.\33\

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

    \31\ The Federal Reserve Board's standardized approach under

    subpart D of 12 CFR 217 applies only to credit risk charges; the

    Federal Reserve Board has not adopted standardized market risk

    charges. Bank and bank holding companies that are subject to market

    risk charges are required to use internal models and, accordingly,

    subpart D of 12 CFR 217 does not include a standardized approach for

    computing market risk charges. To address this issue, the Commission

    is proposing that an SD that has not obtained Commission or RFA

    approval to use internal market risk models must apply the rules-

    based market risk capital charges contained in Regulation 1.17 in

    computing its total risk-weighted assets.

    \32\ For example, U.S. Treasuries are subject to capital charges

    of between zero and six percent depending on the time to maturity of

    each treasury instrument, and readily marketable equity securities

    are subject to a 15 percent capital charge. See Regulation

    1.17(c)(5)(v), which references SEC Rule 15c3-1(c)(2)(vi) (17 CFR

    240.15c3-1(c)(2)(vi)). SEC Rule 15c3-1(c)(2)(vi)(A)(1) provides that

    a BD shall take a capital charge on U.S. Treasuries of between zero

    and six percent of the fair market value of the instrument depending

    upon the time to maturity. Rule 15c3-1(c)(2)(vi)(j) provides a

    capital charge for equities equal to 15 percent of the fair market

    value of the securities.

    \33\ The 12.5 multiplication factor is necessary to ensure that

    the SD maintains common equity tier 1 capital at level to cover the

    full amount of the market risk charge. Since the SD is required to

    maintain common equity tier 1 capital equal to or in excess of eight

    percent of the risk-weighted assets, the market risk charge is

    multiplied by 12.5, which effectively requires the SD to hold common

    equity tier 1 capital in an amount equal to the full amount of the

    market risk charge. This approach is consistent with the Federal

    Reserve Board's approach to bank holding companies.

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

    [[Page 91258]]

    The second approach to computing risk-weighted assets allows SDs

    that have obtained Commission or RFA approval of internal credit risk

    and market risk models to use those models to calculate their risk-

    weighted assets. For SDs that have been approved to use internal models

    to compute market risk and credit risk, the models would have to meet

    the qualitative and quantitative requirements set forth in proposed

    Regulation 23.102 and Appendix A to Regulation 23.102, which are based

    upon the Federal Reserve Board's qualitative and quantitative

    requirements in 12 CFR 217.\34\ The proposed qualitative and

    quantitative requirements for the models, and the proposed model

    submission process, are discussed in section II.4 of this release.

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

    \34\ Federal Reserve Board model-based capital charges for

    credit risk and market risk are set forth in 12 CFR part 217

    subparts E and F, respectively.

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

    The third criterion that comprises the SD minimum capital

    requirement under the proposed bank-based capital approach would

    require an SD to maintain common equity tier 1 capital equal to or in

    excess of eight percent of the sum of: (1) The SD's uncleared swaps

    margin requirements for uncleared swaps transactions, (2) the initial

    margin that would be required for each uncleared security-based swap

    transactions pursuant to SEC's proposed Rule 18a-3(c)(1)(i)(B), without

    regard for any amounts or security-based swaps that may be exempted or

    excluded under the SEC's proposal, (3) the risk margin required on the

    SD's cleared futures, foreign futures, and swaps positions, and (4) the

    amount of initial margin required by a clearing organization that

    clears the SD's proprietary security-based swaps. Each of these

    elements is discussed below.

    This criterion is intended to ensure that an SD maintains a minimum

    level of capital that is correlated to the risk associated with the

    SD's trading activities. The Commission believes that this approach

    would be appropriate for SDs as the minimum capital requirement would

    be correlated with the ``risk'' of the SD's futures, foreign futures,

    swaps, and security-based swaps positions as measured by the margin

    required on the positions. Specifically, the SD's minimum capital

    requirement would increase or decrease as the amount of margin

    necessary to support the SD's futures, foreign futures, swaps and

    security-based swaps positions increased or decreased. This approach is

    consistent with the Commission's current approach to establishing a

    minimum capital requirement for FCMs.\35\

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

    \35\ FCMs are required to maintain a minimum level of adjusted

    net capital that is equal to or greater than eight percent of the

    margin required on futures, foreign futures, and cleared swaps

    positions carried by the FCM in customer and noncustomer accounts.

    See Regulation 1.17(a)(1)(i)(B).

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

    As noted above, the term ``uncleared swaps margin'' is defined in

    proposed Regulation 23.100 and would mean the amount of initial margin

    that the SD would be required to collect from a swap counterparty

    pursuant to the Commission's margin rules for uncleared swap

    transactions in Commission Regulations 23.150 through 23.161, subject

    to certain adjustments to incorporate an amount for the initial margin

    for swaps that are otherwise exempt or excluded from the Commission's

    margin requirements. The SD would compute the uncleared margin amount

    on a portfolio basis for each of its counterparties. Similarly, the

    Commission would also require the SD to compute, again on a portfolio

    basis, the amount of initial margin that would be required for each

    uncleared security-based swap pursuant to SEC's proposed Rule 18a-

    3(c)(1)(i)(B) without regard for any exemptions or exclusions that may

    be provided by the SEC's proposal. The term ``risk margin'' is defined

    in Regulation 1.17(b)(8), and generally refers to the amount of margin

    required by clearing organizations that clear futures, foreign futures,

    and swaps transactions. Similarly, the proposed rules would also

    include the amount of initial margin required by clearing organizations

    for an SD's cleared security-based swaps.

    The proposal would require an SD to include all swaps and security-

    based swaps in the computation, including swaps that are excluded from

    the Commission's margin rules for uncleared swaps and any security-

    based swaps that the SEC may exclude from its margin rules when adopted

    as final. Specifically, the proposal would provide that an SD must

    include in its computation of the uncleared swaps margin each

    outstanding swap, including swaps exempt from the scope of the

    Commission's swaps margin rules by Regulation 23.150 (``TRIPRA

    Exemption''),\36\ foreign exchange swap as the term is defined in

    Regulation 23.151, or netting set of swaps or foreign exchange swaps,

    for each counterparty, as if that counterparty were an unaffiliated SD.

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

    \36\ Title III of the Terrorism Risk Insurance Program

    Reauthorization Act of 2015 amended sections 731 and 764 of the

    Dodd-Frank Act to provide that the Commission's margin requirements

    shall not apply to a swap in which a counterparty: (1) Qualifies for

    an exception under section 2(h)(7)(A) of the CEA; (2) qualifies for

    an exemption issued under section 4(c)(1) of the CEA for cooperative

    entities as defined in such exemption; or (3) satisfies the criteria

    in section 2(h)(7)(D) of the CEA. See Public Law 114-1, 129 Stat. 3.

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

    The Commission's proposal also would require an SD to include the

    initial margin for all swaps that would otherwise fall below the $50

    million initial margin threshold amount or the $500,000 minimum

    transfer amount, as defined in Regulation 23.151, for purposes of

    computing the uncleared swap margin amount. As such, the uncleared swap

    margin amount would be the amount that an SD would have to collect from

    a counterparty, assuming that the exclusions and exemptions for

    collecting initial margin for uncleared swaps set forth in Regulations

    23.150-161 would not apply, and also assuming that the thresholds under

    which initial margin and/or variation margin would not need to be

    exchanged would not apply. Accordingly, uncleared swaps that are not

    subject to the margin requirement such as those executed prior to the

    compliance date for margin requirements (``legacy swaps''), inter-

    affiliate swaps, and TRIPRA Exemption swaps would have to be taken into

    account in determining the capital requirement.

    The Commission is proposing to include these swaps and comparable

    security-based swaps in the computation as it believes that it would be

    appropriate to require an SD to maintain capital for unmargined swap

    and security-based swap exposures to counterparties, so that capital

    would be available to cover the ``residual'' risk of a counterparty's

    uncleared swaps and security-based swap positions. The Commission

    believes that its approach is consistent with its statutory mandate--

    helping to ensure the safety and soundness of the SDs subject to its

    jurisdiction--to require an SD to reserve capital for all of its

    uncollateralized exposures, including the exposures that have been

    excluded or exempted from the Commission's margin requirements. This

    includes swaps where the counterparty is a commercial end user or an

    affiliate of the SD, as the uncollateralized exposures from these

    counterparties present risk to the financial condition of the SD.

    The Commission's proposal to require an SD to reserve capital for

    uncollateralized exposures to swap and security-based swap

    counterparties is not inconsistent with the Commission's

    [[Page 91259]]

    regulations exempting or excluding uncleared swaps with certain

    counterparties from margin requirements.\37\ Initial margin is a

    transaction-based financial resource. Initial margin protects

    counterparties to a swap transaction as well as the overall financial

    system. Initial margin serves both as a check on risk-taking that might

    exceed a counterparty's financial capacity and as a resource that can

    limit losses when there is a failure by a counterparty to meet its

    obligations. If a swap counterparty defaults, the other party may use

    initial margin to cover some or all of the loss.

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

    \37\ See Regulation 23.150.

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

    In developing its proposed margin requirements for uncleared swap

    transactions, the Commission recognized that different categories of

    counterparties present different levels of risk.\38\ The Commission

    stated its belief that financial firms generally present a higher level

    of risk than non-financial firms due to the profitability and viability

    of financial firms being more tightly linked to the health of the

    financial system than non-financial firms.\39\ Non-financial end users,

    however, generally use swaps to hedge commercial risk and were deemed

    to pose less risk to SDs.\40\ Due to the differences in perceived risk

    and potential systemic effects, and consistent with Congressional

    intent, the Commission excluded non-financial end users from the margin

    requirements.

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

    \38\ See Margin Requirements for Uncleared Swaps for Swap

    Dealers and Major Swap Participants; Proposed Rule 79 FR 59898 (Oct.

    3, 2014).

    \39\ Id.

    \40\ Id.

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

    Capital, however, serves as an overall financial resource for the

    SD and is intended to cover potential risks that are not adequately

    covered by other risk management programs (i.e., ``residual risk'')

    including margin on uncleared swaps. Capital is intended to help ensure

    the safety and soundness of the SD by providing financial resources to

    allow an SD to absorb unanticipated losses and declines in asset values

    from all aspects of its business operations, including swap dealing

    activities, while also continuing to meet its financial obligations.

    The Commission is proposing to require that an SD reserve capital

    against all uncollateralized swaps exposures, as such exposures pose

    residual risk not covered by other assets of the SD. Accordingly,

    capital is necessary to provide a financial cushion to protect an SD

    from financial exposures, including uncollateralized exposures to swap

    counterparties.

    The Commission's proposal would not require an SD to reserve

    capital equal to the full amount of its uncollateralized swap

    exposures. The Commission's proposal would require an SD to reserve

    capital equal to a percentage of its uncollateralized exposures. In

    this respect, the Commission's capital requirement would not have the

    same impact on the SD with respect to such uncollaterized swaps (e.g.,

    an SD's funding or pricing of swaps) as would the application of the

    Commission's margin requirements to such swaps. The Commission's

    proposal should also not have the same impact on the cost to commercial

    end users who are counterparties to such uncollaterized swaps as would

    imposition of margin requirements on such swaps, because of the

    different impact on an SD's funding or pricing of swaps and because

    margin requirements impose specific transactional costs on

    counterparties (e.g., establishment of custodial arrangements,

    documentation requirements) that are not generated by SD capital

    requirements. The Commission's proposed approach regarding the

    inclusion of uncollateralized swap exposures in the SD's capital

    requirements is also consistent with the approach adopted by the

    prudential regulators in setting capital requirements for SDs subject

    to their jurisdiction and is consistent with the approach proposed by

    the SEC for SBSDs.

    The proposed capital requirement would require an SD to include in

    the eight percent calculation the amount of margin required by a

    clearing organization for the SD's proprietary cleared swaps, security-

    based swaps, futures, and foreign futures positions. The Commission

    notes that while the proposed minimum capital requirement based on

    eight percent of margin on cleared and uncleared swaps is consistent

    with the SEC's proposal for SBSDs, the SEC approach would require an

    SBSD to maintain a minimum level of net capital equal to or greater

    than eight percent of the risk margin required on cleared and uncleared

    security-based swaps only. The Commission's proposal would expand the

    products included in the SD's minimum capital requirement to include

    swaps, security-based swaps, futures and foreign futures positions. The

    Commission is expanding the products beyond the SEC proposal as it

    believes that it is appropriate for SDs to maintain a minimum level of

    capital that reflects the extent of the risks posed by the full, broad

    range of the SDs' proprietary positions.

    The fourth criterion of the proposed minimum capital requirements

    would require an SD to maintain the minimum level of capital required

    by an RFA of which the SD is a member. The proposed minimum capital

    requirement based on membership requirements of an RFA is consistent

    with current FCM capital requirements under Regulation 1.17, and

    reflects Commission regulations that require each SD to be a member of

    an RFA.\41\ The proposal also is consistent with section 17(p)(2) of

    the CEA, which provides, in relevant part, that an RFA must adopt rules

    establishing minimum capital and other financial requirements

    applicable to the RFA's members for which such requirements are imposed

    by the Commission.\42\ As noted above, the NFA currently is the only

    RFA. The proposal recognizes that the NFA would be required by section

    17 of the CEA to adopt SD capital rules once the Commission imposes

    capital requirements on SDs, and would incorporate the NFA minimum

    capital requirements into the Commission's regulation.

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

    \41\ See Regulations 1.17(a)(1)(i)(C) and 170.16.

    \42\ See section 17(p)(2) of the CEA, which requires RFAs to

    adopt rules establishing minimum capital and other financial

    requirements applicable to its members for which such requirements

    are imposed by the Commission, provided that such requirements may

    not be less stringent than the requirements imposed by the CEA or by

    Commission regulations.

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    b. Computation of Common Equity Tier 1 Capital To Meet Minimum Capital

    Requirement

    Each SD subject to the bank-based capital approach is required to

    maintain a level of common equity tier 1 capital that is equal to or in

    excess of the highest of the three criteria listed in section II.A.2.i

    above. The Commission is proposing to limit the SD's capital that

    qualifies to satisfy the SD's minimum capital requirement to common

    equity tier 1 capital. This limitation would be different from the

    Federal Reserve Board's requirements, which allow a bank holding

    company to meet its minimum capital requirements with a combination of

    common equity tier 1 capital, additional tier 1 capital, and tier 2

    capital.\43\

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    \43\ Under the Federal Reserve Board's rules, a bank holding

    company's total capital must equal or exceed at least eight percent

    of its risk-weighted assets. In addition, at least six percent of

    the bank holding company's capital must be in the form of tier 1

    capital, and at least 4.5 percent of the tier 1 capital must qualify

    as common equity tier 1 capital. The remaining two percent of

    capital may be comprised of tier 2 capital.

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    The Commission is proposing the stricter standard as common equity

    tier 1 capital is a more conservative form of capital than additional

    tier 1 or tier 2 capital, particularly as it relates to the

    [[Page 91260]]

    permanence of the capital and its availability to absorb unexpected

    losses. As noted above, common equity tier 1 capital is defined in 12

    CFR 217.20 to generally comprise the sum of a bank holding company's

    common stock instruments and any related surpluses, retained earnings,

    and accumulated other comprehensive income. Tier 1 capital includes

    common equity tier 1 capital and further includes such instruments as

    preferred stock. Tier 2 capital includes certain types of instruments

    that include both debt and equity characteristics (e.g., certain

    perpetual preferred stock instruments and subordinated term debt

    instruments).\44\ The Commission also is proposing the stricter common

    equity tier 1 requirement as it is not proposing to include in the SD's

    minimum capital requirement certain of the prudential regulators'

    capital add-ons, including the capital conservation buffer and the

    countercyclical capital buffer.\45\ In order for the SD to meet its

    minimum requirements, it must demonstrate that its common equity tier 1

    capital equals or exceeds the highest of the minimum requirements set

    forth in proposed Regulation 23.101(a)(1)(i) and discussed in section

    II.A.2.i.a above.

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

    \44\ See 12 CFR 217.10.

    \45\ See 12 CFR 217.11. The capital conservation buffer and the

    countercyclical capital buffer represent capital ``add-ons'' to the

    standard bank capital requirements and are intended to require

    entities subject to the rules to have certain levels of capital in

    order to make capital distributions and discretionary bonuses.

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

    Request for Comment

    The Commission requests comment on all aspects of the proposed

    bank-based capital approach. In addition, the Commission requests

    comment, including empirical data in support of comments, in response

    to the following questions:

    1. Is the proposed $20 million fixed amount of minimum tier 1

    capital appropriate? If not, explain why not. If the minimum fixed-

    dollar amount should be set at a level greater or lesser than $20

    million, explain what that greater or less amount should be and explain

    why that is a more appropriate amount.

    2. Is the proposed minimum capital requirement based upon an SD's

    common equity tier 1 capital appropriate? If not, explain why, and

    suggest what modifications the Commission should make to the

    regulation. For example, should the proposal include tier 1 capital

    other than common equity tier 1 capital? Are there specific elements of

    tier 1 capital that the Commission should include in addition to common

    equity tier 1 capital? Are there specific elements of tier 2 capital

    that the Commission should include in the regulation?

    3. Is the proposed minimum capital requirement based upon eight

    percent of the SD's risk weighted assets appropriate? If not, explain

    why not. Is the proposed requirement that the SD add to its risk-

    weighted assets market risk capital charges computed in accordance with

    Regulation 1.17 if the SD has not obtained the approval of the

    Commission or of an RFA to use internal models appropriate? Are there

    other options to compute market risk charges when models are not

    approved? Should the 8 percent be set at a higher or lower level? If

    so, what percent should the Commission consider?

    4. Is the proposed minimum capital requirement based upon eight

    percent of the margin required on the SD's cleared and uncleared swaps

    and security-based swaps, and the margin required on the SD's futures

    and foreign futures appropriate? If not, explain why not. Should the

    percentage be set at a higher or lower level? Please explain your

    response. Is including in the computation margin for swaps and

    security-based swaps that are exempt or excluded from the uncleared

    margin requirements (e.g., legacy swaps and security-based swaps, and

    swaps with commercial end users) appropriate? If not, explain why these

    uncollateralized exposures do not result in risk to the SD without

    capital to address that risk.

    5. Commodity Exchange Act section 4s(e)(3)(A) only cites the risk

    of uncleared swaps in setting standards for capital. Additionally, in

    the Commission's final swap dealer definition rule, it said it will

    ``in connection with promulgation of final rules relating to capital

    requirements for swap dealers and major swap participants, consider

    institution of reduced capital requirements for entities or individuals

    that fall within the swap dealer definition and that execute swaps only

    on exchanges, using only proprietary funds.'' \46\ Given these

    pronouncements, should the Commission exclude cleared swaps from the

    capital calculation requirements?

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    \46\ 77 FR 30596, 30610 fn. 199 (May 23, 2012).

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

    6. In addition to swaps, the proposal includes security-based

    swaps, futures, and foreign futures in the capital calculation

    requirements. The SEC's capital proposal only included security-based

    swaps. Given the statements above in question 5 and the narrower scope

    of the SEC's proposal, should the Commission limit its capital

    calculation requirements to uncleared swaps only?

    7. If the swap dealer de minimis level falls to $3 billion, what

    impact would the proposed capital rule have on any new potential

    registrants? Please provide any quantitative estimates.

    ii. Capital Requirement for Swap Dealers Under a Net Liquid Assets

    Capital Approach

    a. Computation of Minimum Capital Requirement

    Proposed Regulation 23.101(a)(ii) would permit an SD to elect to be

    subject to a net liquid assets capital approach. The net liquid assets

    capital approach is consistent with the Commission's current capital

    approach for FCMs, and is consistent with the SEC's proposed capital

    rule for SBSDs and the SEC's current capital requirements for BDs and

    OTC derivatives dealers.\47\ Harmonization of the CFTC and SEC capital

    requirements benefit firms that are dually-registered (including

    dually-registered SDs and SBSDs) as such firms should be able to meet

    the regulatory requirements of both the CFTC and SEC with a uniform set

    of books and records, and one capital computation. This concept of a

    harmonized capital approach is consistent with the Commission's and

    SEC's long standing uniform capital rule for FCMs and BDs. An SD that

    elects the proposed net liquid assets capital rule contained in

    Regulation 23.101(a)(1)(ii) would be required to comply with proposed

    SEC Rule 18a-1 as if the SD were a SBSD registered with the SEC,

    subject to several modifications discussed below.\48\

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    \47\ The SEC has proposed a net liquid assets capital

    requirement for SBSDs that is set forth in proposed SEC Rule 18a-1.

    See 77 FR 70214 (Nov. 23, 2012).

    \48\ See SEC proposed Rule 18a-1(a)(1) (77 FR 70214).

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

    SDs that elect to comply with the proposed net liquid assets

    capital approach would be required to maintain a minimum level of net

    capital \49\ equal to or greater than the highest of the following

    criteria:

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

    \49\ Net capital is generally defined to mean the SD's liquid

    assets (less deductions for potential decreases in value of the

    assets) less all of the SD's liabilities (excluding qualifying

    subordinated debt).

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

    (1) $20 million;

    (2) net capital equal to or greater than eight percent of the sum

    of:

    (a) The amount of ``uncleared swaps margin'' (as that term is

    defined in proposed Regulation 23.100) for each uncleared swap position

    open on the books of the SD, computed on a counterparty by counterparty

    basis pursuant to Regulation 23.154;

    [[Page 91261]]

    (b) the amount of initial margin that would be required for each

    uncleared security-based swap position open on the books of the SD,

    computed on a counterparty-by-counterparty basis pursuant to proposed

    SEC Rule 18a-3(c)(1)(i)(B), without regard for any amounts that may be

    excluded or exempted under the SEC's rules;

    (c) the amount of ``risk margin requirement'' (as that term is

    defined in Regulation 1.17(b)(8)) for the SD's cleared futures, foreign

    futures, and swaps positions open on the books of the SD; and

    (d) the amount of initial margin required by a clearing

    organization for proprietary cleared security-based swaps positions

    open on the books of the SD; or

    (3) the capital required by the RFA of which the SD is a member.

    In addition, the proposal provides that an SD that has received

    approval from the Commission, or from an RFA of which the SD is a

    member, to use internal models to compute market risk and credit risk

    capital charges for its swaps and/or security-based swaps and other

    proprietary positions when computing its capital, as described in

    section II.A.4 of this release, must maintain a minimum level of

    tentative net capital equal to $100 million and net capital of $20

    million.\50\ The proposal is consistent with the SEC's proposed

    requirement that SBSDs that have obtained approval to use internal

    capital models must maintain tentative net capital of $100 million and

    net capital of $20 million.\51\

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

    \50\ SEC Rules generally define ``tentative net capital'' as the

    registrant's assets less liabilities (excluding certain qualifying

    subordinated debt), and ``net capital'' as tentative net capital

    less certain capital deductions such as market risk and credit risk

    deductions. See 17 CFR 240.15c3-1.

    \51\ See SEC proposed Rule 18a-1(a)(2), (77 FR 70214, 70333).

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

    The first criterion of proposed Regulation 23.101(a)(1)(ii) would

    require the SD to maintain a minimum of $20 million of net capital.

    This requirement is consistent with the minimum requirements proposed

    for SDs under the bank-based capital approach discussed in section

    II.A.2.i.a of this release. As discussed in section II.A.2.i.a above,

    the Commission believes that given the role that SDs play in the

    financial markets by engaging in swap dealing activities that it is

    appropriate to require that all SDs maintain a minimum level of

    capital, stated as an absolute dollar amount that does not fluctuate

    with the level of the firms' dealing activities to help ensure the

    safety and soundness of the SDs. Furthermore, the proposed $20 million

    minimum capital requirement is consistent with the SEC's current

    minimum capital requirement for OTC derivatives dealers and the SEC

    proposed minimum capital requirement for SBSDs.

    The second criterion under the net liquid assets capital approach

    would require an SD to maintain a minimum level of net capital equal to

    or greater than eight percent of the sum of: (1) The amount of

    ``uncleared swap margin'' (as that term is proposed to be defined in

    Regulation 23.100) for each uncleared swap position open on the books

    of the SD, computed on a counterparty by counterparty basis pursuant to

    Regulation 23.154; (2) the amount of initial margin that would be

    required for each uncleared security-based swap position open on the

    books of the SD, computed on a counterparty by counterparty basis

    pursuant to SEC proposed Rule 18a-3(c)(1)(i)(B) without regard to any

    initial margin exemptions or exclusions that the rules of the SEC may

    provide to such security-based swap positons; (3) the amount of ``risk

    margin'' (as defined in Regulation 1.17(b)(8)) required by a clearing

    organization for the SD's futures, swaps, and foreign futures positions

    that are open on the books of the SD; and (4) the amount of initial

    margin required by a clearing organization for security-based swaps

    that are open on the books of the SD.

    Consistent with the requirements for SDs that elect the bank-based

    capital approach discussed in section II.A.2.a above, an SD that elects

    the net liquid assets approach would have to include all swaps and

    security-based swaps in its computation of the margin for uncleared

    swaps subject to the eight percent calculation, including any swaps

    positions that are not included in the Commission's margin requirements

    in Regulations 23.150 through 23.161 and any security-based swaps

    positions that may be exempt or excluded from the SEC's proposed margin

    requirements in Rule 18a-3(c)(1)(i)(B).

    Consistent with the bank-based capital approach discussed in

    section II.A.2.a above, this minimum capital requirement is generally

    comparable to the SEC's proposed minimum capital requirement for SBSDs,

    with the exception that the SEC proposal only requires a SBSD to

    compute its minimum capital requirement based upon eight percent of the

    initial margin required on cleared and uncleared security-based swaps.

    The Commission is proposing to require that an SD expand the positions

    subject to the eight percent initial margin minimum capital requirement

    to include the SD's proprietary swaps, futures, and foreign futures

    positions. The Commission believes that the minimum capital requirement

    should reflect these additional positions to more fully reflect the

    potential exposure from all of the SD's swaps, security-based swaps,

    futures and foreign futures positions. Accordingly, the Commission's

    proposal has adjusted the calculation to include these additional

    positions of the SD.

    The proposed third criterion would require an SD to maintain net

    capital that is equal to or greater than the amount of net capital

    required by the RFA of which is a member. As discussed more fully in

    section II.A.2.i.a above, this provision recognizes that an RFA is

    required to adopt minimum capital requirements for SDs pursuant to

    Commission Regulation 170.16 and section 17(p)(2) of the CEA.

    b. Computation of Net Capital To Meet Minimum Capital Requirement

    Each SD that elects the proposed net liquid assets capital approach

    would be required to maintain net capital in excess of the highest of

    the three criteria listed above. The second component of the proposed

    capital requirement would require an SD to compute its net capital,

    including applicable charges for market and credit risk on its swaps

    and security-based swaps positions and other proprietary positions

    (including debt instruments such as U.S. treasury instruments and

    municipal bonds, and equity instruments), and determine if such net

    capital equals or exceeds the highest level required under the three

    criteria discussed in section II.A.2.ii.a above.

    Proposed Regulation 23.101(a)(1)(ii) would require each SD electing

    the net liquid assets capital approach to compute its tentative net

    capital and net capital in accordance with the SEC's proposed

    computation of tentative net capital and net capital for SBSDs under

    proposed Rule 18a-1 as if the SD were a SBSD, subject to several

    adjustments. Under proposed SEC Rule 18a-1, a SBSD that has not

    received permission to use models to compute its market risk and credit

    risk capital charges, as described below, must maintain net capital of

    not less than the greater of $20 million or eight percent of the risk

    margin amount on cleared and uncleared security-based swaps positions.

    For a SBSD that has received permission from the SEC to use internal

    models to compute its market risk and credit risk capital charges, the

    SBSD must at all times maintain tentative net capital of not less than

    $100 million and adjusted net capital of not less than the greater of

    $20 million or eight percent

    [[Page 91262]]

    of the risk margin amount on cleared and uncleared security-based swaps

    positions. The Commission is proposing the SEC's general approach with

    the adjustments to include an SD's swaps, security-bases swaps, futures

    and foreign futures positions in its calculation of the eight percent

    minimum capital requirement as discussed above.

    (1) Swap Dealers Computation of Tentative Net Capital and Net Capital

    Without Approval To Use Internal Capital Models

    The Commission is proposing that an SD electing the net liquid

    assets capital approach which has not obtained Commission or RFA

    approval to use internal models to compute its market risk and credit

    risk charges for positions in swaps, security-based swaps, and other

    proprietary positions must use the standardized capital charges set

    forth in proposed SEC Rule 18a-1 and the appendices thereto. The use of

    standardized capital charges would be consistent with the SEC's

    proposal for SBSDs that have not obtained SEC approval to use internal

    capital models to compute market risk and credit risk capital charges.

    The Commission anticipates that this consistency would promote parity

    between SDs and SBSDs, as well as efficiency for an entity that is

    dually-registered as both an SBSD and SD.

    Under the Commission's proposal, an SD would be required to compute

    a market risk capital charge for swaps and security-based swaps by

    multiplying the notional amount or fair market value of the swap or the

    security-based swap by a specified percentage set forth in proposed

    Rule 18a-1. The resulting market risk charge would be deducted from the

    SD's tentative net capital to arrive at the firm's net capital.

    SDs would also be required to compute standardized credit risk

    charges pursuant to proposed Rule 18a-1. Rule 18a-1 generally provides

    that a SBSD's unsecured receivables are subject to a 100 percent credit

    risk capital charge (i.e., the SBSD would have to deduct 100 percent of

    any unsecured receivable balance from tentative net capital in

    computing its net capital). The Commission, however, is modifying the

    SEC approach in proposed Regulation 23.101(a)(1)(ii) by providing that

    an SD may recognize as a secured receivable, and not take a capital

    charge for, the amount of initial margin that the SD has deposited with

    a third party custodian for uncleared swap transactions pursuant to the

    Commission's margin rules at Regulations 23.150 through 23.161 or

    margin deposited with a third party custodian for uncleared security-

    based swap transactions pursuant to the SEC's proposed margin

    rules.\52\ Regulation 23.157 provides that each SD that posts margin

    with a third party custodian must enter into an agreement with the

    custodian that, in relevant part: (1) Prohibits the custodian from

    rehypothecating, repledging, reusing, or otherwise transferring the

    collateral held by the custodian; and (2) is a legally binding and

    enforceable agreement under the laws of all relevant jurisdictions

    including in the event of bankruptcy, insolvency, or similar

    proceeding.

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

    \52\ Under the SEC's proposed Rule 18a-1, a SBSD would not be

    permitted to include margin funds deposited with a third party

    custodian as a current asset in computing the SBSD's net capital.

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

    (2) Swap Dealers Approved To Use Internal Capital Models

    The Commission is proposing to permit an SD that elects a net

    liquid assets capital approach to seek Commission or RFA approval to

    use internal models to compute market risk and credit risk capital

    charges on its swaps, security-based swaps and other proprietary

    positions in lieu of the standardized deductions contained in the SEC's

    proposed Rule 18a-1. In order to be considered for approval, the SD's

    models would have to meet the qualitative and quantitative requirements

    set forth in proposed Regulation 23.102 and Appendix A to Regulation

    23.102.

    The Federal Reserve Board has adopted quantitative and qualitative

    requirements for internal models used by bank holding companies to

    compute market risk and credit risk capital charges.\53\ In developing

    the proposed market risk and credit risk requirements for SDs,

    including the proposed quantitative and qualitative requirements, the

    Commission has incorporated the market risk and credit risk model

    requirements adopted by the Federal Reserve Board. The Commission's

    proposed model requirements are also comparable to the SEC's model

    requirements. The model requirements and the process for obtaining

    Commission or RFA review is set forth in section II.4 of this release.

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

    \53\ See, 12 CFR 217, subparts E and F.

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

    Request for Comment

    The Commission requests comment on all aspects of the proposed net

    liquid assets capital approach. In addition, the Commission requests

    comment, including empirical data in support of comments, in response

    to the following questions:

    1. Is the proposed minimum $20 million fixed-dollar amount of net

    capital appropriate for SDs that elect a net liquid assets capital

    approach? If not, explain why not. If the minimum fixed-dollar amount

    should be set at a level greater or lesser than $20 million, explain

    what that amount should be and why that is a more appropriate amount.

    2. Is the proposed minimum $100 million fixed dollar amount of

    tentative net capital appropriate for SDs that use market risk and

    credit risk models approved by the Commission or by an RFA? If not,

    explain why not. If the minimum fixed-dollar amount should be set at a

    level greater or lesser than $100 million, explain what that amount

    should be and explain why that is more appropriate.

    3. Is the proposed minimum capital requirement based upon eight

    percent of the margin required on the SD's cleared and uncleared swaps

    and security-based swaps, and the margin required on the SD's futures

    and foreign futures appropriate? If not, explain why not. Should the

    percentage be set at a higher or lower level? Is so, what percent

    should the Commission consider? Please explain your response. Is

    including in the computation margin for swaps and security-based swaps

    that are exempt or excluded from the uncleared margin requirements

    (e.g., legacy swaps and security-based swaps, and swaps with commercial

    end users) appropriate? If not, explain why these uncollateralized

    exposures would not result in an SD that is not adequately capitalized.

    4. Is the proposed requirement for an SD to compute its capital in

    accordance with the SEC proposed capital rules for stand-alone SBSDs

    (i.e., SEC proposed Rule 18a-1) appropriate? If not, explain why not.

    What other alternatives approaches should the Commission consider?

    5. Is the proposal to allow SDs to recognize as current assets

    margin funds deposited with third-party custodians as margin for

    uncleared swaps or security-based swaps in accordance with the

    Commission's margin rules or the SEC's proposed margin rules

    appropriate? If not, explain why not.

    6. Are there other adjustments to the SEC's proposed capital rules

    for SBSDs that the Commission should consider in adopting such

    requirements for SDs that elect the net liquid asset capital approach?

    Is so, explain such adjustments and why the Commission should consider

    such adjustments.

    7. If the swap dealer de minimis level falls to $3 billion, what

    impact would the capital rule have on any new

    [[Page 91263]]

    potential registrants? Please provide any quantitative estimates.

    iii. Capital Requirement for Swap Dealers That Are ``Predominantly

    Engaged in non-Financial Activities''

    a. Computation of the Minimum Capital Requirement

    The Commission is proposing that SDs that are ``predominantly

    engaged in non-financial activities'', as defined below, would be

    permitted to elect a capital requirement based upon the SD's tangible

    net worth.\54\ An SD eligible to elect the tangible net worth approach

    would have to maintain tangible net worth in an amount equal to or in

    excess of the greatest of:

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

    \54\ See proposed Regulation 23.101(a)(2)(ii).

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

    (1) $20 million plus the amount of the SD's market risk exposure

    requirement and credit risk exposure requirement associated with the

    SD's swap and related hedge positions that are part of the SD's swap

    dealing activities;

    (2) Eight percent of the sum of:

    (a) The amount of uncleared swap margin (as that term is defined in

    Regulation 23.100) for each uncleared swap position open on the books

    of the SD, computed on a counterparty by counterparty basis pursuant to

    Regulation 23.154 without regard to any initial margin exemptions or

    thresholds that the Commission's margin rules may provide;

    (b) the amount of initial margin that would be required for each

    uncleared security-based swap position open on the books of the SD,

    computed on a counterparty by counterparty basis pursuant to 17 CFR

    240.18a-3(c)(1)(i)(B) without regard to any initial margin exemptions

    or exclusions that the rules of the SEC may provide to such security-

    based swap positions; and

    (c) the amount of initial margin required by clearing organizations

    for cleared proprietary futures, foreign futures, swaps and security-

    based swaps positions open on the books of the SD; or

    (3) the amount of net capital required by the registered futures

    association of which the SD is a member.

    The Commission is proposing that in order to be eligible to elect

    the tangible net worth capital approach, an SD's overall financial

    activities would have to be insignificant in relation to its other

    overall non-financial activities. Accordingly, proposed Regulation

    23.101(a)(2) would define the term ``predominantly engaged in non-

    financial activities'' by referencing the definition of the term

    ``financial activities'' under the Federal Reserve Board's regulations

    establishing criteria for determining if a nonbank financial company is

    predominantly engaged in financial activities.\55\ For purposes of the

    proposal, an entity would be considered ``primarily engaged in non-

    financial activities'' if: (1) The consolidated annual gross financial

    revenues of the entity in either of its two most recently completed

    fiscal years represents less than 15 percent of the entity's

    consolidated gross revenue in that fiscal year (``15% revenue test''),

    and (2) the consolidated total financial assets of an entity at the end

    of its two most recently completed fiscal years represents less than 15

    percent of the entity's consolidated total assets as of the end of the

    fiscal year (``15% asset test''). For purposes of the 15% revenue test,

    consolidated annual gross financial revenues means that portion of the

    consolidated total revenue of the entity that are related to activities

    that are financial in nature. For purposes of the 15% asset test,

    consolidated total financial assets means that portion of the

    consolidated total assets of the entity that are related to activities

    that are financial in nature.

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

    \55\ See, 12 CFR 242.3. The Financial Stability Oversight

    Council will use the criteria when it considers the potential

    designation of a nonbank financial company for consolidated

    supervision by the Federal Reserve Board.

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

    The Commission is proposing to define the financial activities

    covered by the 15% revenue test and 15% asset test by reference to the

    listed financial activities set forth in Appendix A of 12 CFR part 242,

    which covers an extensive range of financial activities and services.

    The financial activities include, among other things: (1) Lending,

    exchanging, transferring, investing for others, or safeguarding money

    or securities; (2) insuring, guaranteeing, or indemnifying against loss

    or harm, damage or death in any state; (3) providing financial,

    investment, or economic advisory services; (4) issuing or selling

    interests in a pool; (5) underwriting, dealing in, or making a market

    in securities; and (6) engaging as principal in the investment and

    trading of certain financial instruments. The Commission, however, is

    proposing to explicitly provide that accounts receivable from non-

    financial activities, which may meet the definition of financial

    activities under 12 CFR part 242, may be excluded by the SD from the

    computation of its financial activities. The purpose of providing this

    exclusion is to prevent the SD's non-financial activities from becoming

    part of the computation of the firm's financial activities merely on

    the basis that the non-financial activities result in the SD

    recognizing receivables.

    The Commission is proposing an option to use a tangible net worth

    capital approach as it recognizes that certain entities that engage

    primarily in non-financial activities may currently or in the future

    meet the statutory and regulatory definition of the term ``swap

    dealer'' and, therefore, will be required to register as such with the

    Commission.\56\ However, while these entities may engage in dealing

    activities, they are primarily commercial entities and differ from

    financial entities in various ways, including the composition of their

    balance sheet (e.g., the types of assets they hold), the types of

    transactions they enter into, and the types of market participants and

    swap counterparties that they deal with. Because of these differences,

    the Commission believes that application of the bank-based or net

    liquid assets capital approaches to these SDs could result in

    inappropriate capital requirements that would not be proportionate to

    the risk associated with them, and, therefore, these SDs should have

    the option to apply a tangible net worth approach.\57\

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    \56\ The term ``swap dealer'' is defined by section 1a(49) of

    the CEA and Sec. 1.3(ggg) of the Commission's regulations. Section

    1.3(ggg)(3) provides that an entity may apply to limit its

    designation as an SD to specified categories of swaps or specified

    activities in connection with swaps.

    \57\ Furthermore, as a SD, the firm is subject to the

    Commission's final swaps margin requirements.

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

    b. Computation of Tangible Net Worth To Meet Minimum Capital

    Requirement

    Proposed Regulation 23.101(a)(2) would require an SD to maintain

    tangible net worth in an amount equal to or in excess of the greater of

    the tangible net worth of the SD plus the market risk capital charges

    and credit risk capital charges associated with the SD's dealing swaps

    and related hedging, or eight percent of the initial margin required on

    the SD's proprietary swaps, security-based swaps, futures, and foreign

    futures. The term ``tangible net worth'' is proposed to be defined as

    the net worth of an SD as determined in accordance with generally

    accepted accounting principles in the United States, excluding goodwill

    and other intangible assets.\58\ The proposal would further require an

    SD in computing its tangible net worth to include all liabilities or

    obligations of a subsidiary or affiliate that the SD guarantees,

    endorses, or assumes either directly or indirectly to ensure that the

    tangible net worth of the SD reflects the full extent

    [[Page 91264]]

    of the SD's potential financial obligations.\59\ The proposed

    definition would further provide that in determining net worth, all

    long and short positions in swaps, security-based swaps and related

    positions must be marked to their market value to ensure that the

    tangible net worth reflects the current market value of the SD's swaps

    and security-based swaps, including any accrued losses on such

    positions.\60\

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

    \58\ See proposed Regulation 23.100.

    \59\ See proposed definition of ``tangible net worth'' in

    Regulation 23.100.

    \60\ Id.

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

    In proposing this approach and as discussed above, the Commission

    recognizes that SDs that predominantly engage in non-financial

    activities may differ from financial entities. However, the Commission

    also recognizes that capital should account for all the activities

    entered into by the entity and not just its swap dealing activities in

    order to help ensure the safety and soundness of the SD.\61\ By

    requiring the SD electing this approach to maintain tangible net worth

    equal to its liabilities and swaps market risk and credit risk

    exposures, the Commission believes that its approach would impose a

    sufficient level of capital (i.e., unencumbered tangible assets) to

    help ensure the safety and soundness of an SD and that the SD can meet

    its swap-related obligations to its swap counterparties.

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

    \61\ Section 4s(e)(2)(C) of the CEA states that for SDs that are

    designated as SDs for one single class or category of swap or

    activities, the Commission shall take into account the risks

    associated with other types of swaps or classes of swaps or

    categories of swaps engaged in and the other activities conducted by

    that person that are not otherwise subject to regulation applicable

    to that person by virtue of the status of the person as an SD.

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

    Pursuant to the proposal, the SD would have to compute its market

    risk charges and credit risk charges associated with its dealing swaps

    and related hedges. Proposed Regulation 23.101(a)(2)(i)(A) provides

    that the SD may use internal capital models to compute its market risk

    and credit risk capital charges if the SD has obtained the approval of

    the Commission or an RFA. If the SD has not obtained approval to use

    internal capital models, the SD must use the standardized deductions

    under Regulation 1.17.

    Request for Comment

    The Commission requests comment on all aspects of the proposed

    tangible net worth capital approach for SDs that are predominantly

    engaged in non-financial activities. In addition, the Commission

    requests comment, including empirical data in support of comments, in

    response to the following questions:

    1. Is the proposed minimum net capital requirement of $20 million

    plus the amount of the SD's market risk and credit risk charges for its

    dealing swaps appropriate for SDs that are eligible and elect the

    tangible net worth net capital approach? If not, explain why not. If

    the minimum dollar amount should be set at a level greater or lesser

    than $20 million, explain what that amount should be and explain why

    that is more appropriate.

    2. Should the market risk and credit risk associated with the SD's

    security-based swap positions be added to the market risk and credit

    risk associated with the SD's swap positions in setting the minimum

    capital requirement under proposed Regulation 23.101(a)(2)(A)? Explain

    why or why not such security-based swap positions should or should not

    be included in the minimum capital requirement. Provide any empirical

    data to support your analysis.

    3. Is the proposed minimum capital requirement based upon eight

    percent of the margin required on the SD's cleared and uncleared swaps

    and security-based swaps, and the margin required on the SD's futures

    and foreign futures appropriate? If not, explain why not. Should the

    percentage be set at a higher or lower level? Please explain your

    response. Is including in the computation margin for swaps and

    security-based swaps that are exempt or excluded from the uncleared

    margin requirements (e.g., legacy swaps and security-based swaps, and

    swaps with commercial end users) appropriate? If not, explain why these

    uncollateralized exposures would not result in an SD that is not

    adequately capitalized.

    4. Is the Commission's proposed 15% revenue test and 15% asset test

    appropriate for determining whether an SD is predominantly engaged in

    non-financial activities? If not, explain why not. What other

    alternatives should the Commission consider? If the approach is

    appropriate, should the Commission consider raising or lowering the

    percentages in the 15% revenue test and the 15% asset test?

    5. Is the Commission's proposed reference to the definition of the

    term ``financial activities'' in Rule 242.3 of the Federal Reserve

    Board (12 CFR 242.3) to define whether an SD's activities are

    ``financial activities'' for purposes of computing the 15% revenue test

    and 15% asset test appropriate? If not, explain why not. Provide other

    alternatives that the Commission should consider.

    6. Is the Commission's adjustment in the application of Rule 242.3

    to permit SDs to exclude receivables resulting from non-financial

    activities from the term ``financial activities'' in computing the 15%

    revenue and 15% asset tests appropriate? If not, explain why not. Are

    there other adjustments that the Commission should consider in the

    application of the 15% revenue and 15% asset tests? If yes, explain

    what those adjustments are and why it is appropriate for the Commission

    to make such adjustments.

    iv. Capital Requirements for Major Swap Participants

    Proposed new Regulation 23.101(b) would establish capital

    requirements for MSPs that are not subject to the capital rules of a

    prudential regulator.\62\ An MSP is by definition a person that is not

    a swap dealer and that: (1) Maintains a substantial position in swaps,

    excluding positions held to hedge or mitigate commercial risk; (2) has

    outstanding swaps that create substantial counterparty exposures that

    could have serious adverse effects on the financial stability of the

    U.S. banking system or financial markets; or (3) is a financial entity

    that is highly leveraged, is not subject to capital requirements of a

    prudential regulator, and has a substantial position in swaps,

    including positions used to hedge and mitigate commercial risk.\63\

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

    \62\ There are currently no MSPs provisionally registered with

    the Commission.

    \63\ See Regulation 1.3(hhh).

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

    Under proposed Regulation 23.101(b), an MSP would be required to

    maintain positive tangible net worth or the amount of capital required

    by the RFA of which the MSP is a member. A tangible net worth standard

    is being proposed for MSPs, rather than the net liquid assets capital

    approach or the bank-based capital approach, as the Commission

    anticipates that entities that register as MSPs may engage in a diverse

    range of business activities different from, and broader than, the

    activities engaged in by SDs. For example, MSPs may engage in

    commercial activities that require them to have substantial fixed

    assets to support manufacturing and/or result in them having

    significant assets comprised of non-current assets as defined in the

    Regulations. In addition, MSPs typically use swaps for different

    purposes (e.g., hedging or investing) than SDs, which engage in swaps

    as a dealing activity. The Commission believes requiring MSPs to comply

    with the proposed net liquid assets capital approach or bank-based

    capital approach could result in MSPs having to obtain significant

    additional capital or engage in costly restructuring.

    [[Page 91265]]

    The term ``tangible net worth'' is proposed to be defined as the

    net worth of an MSP as determined in accordance with generally accepted

    accounting principles in the United States, excluding goodwill and

    other intangible assets.\64\ The proposal would further require an MSP

    in computing its tangible net worth to include all liabilities or

    obligations of a subsidiary or affiliate that the MSP guarantees,

    endorses, or assumes either directly or indirectly to ensure that the

    tangible net worth of the MSP reflects the full extent of the MSP's

    potential financial obligations.\65\ The proposed definition would

    further provide that in determining net worth, all long and short

    positions in swaps, security-based swaps and related positions must be

    marked to their market value to ensure that the tangible net worth

    reflects the current market value of the MSP's swaps and security-based

    swaps, including any accrued losses on such positions.\66\

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

    \64\ See proposed Regulation 23.100.

    \65\ See proposed Regulation 23.100.

    \66\ Id.

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

    In developing the proposed positive tangible net worth requirement

    for MSPs, the Commission also considered the impact of its recent

    margin rules for uncleared swap transactions. Under the margin rules,

    MSPs are required to post and collect initial margin and variation

    margin with SDs, other MSPs, and financial end users (subject to

    certain thresholds and minimum transfer amounts). The exchanging of

    variation margin and the posting of initial margin by MSPs will

    substantially reduce their uncollateralized exposures, which will

    mitigate the possibility that MSPs could destabilize the financial

    markets or present systemic risk. Lastly, the Commission's proposed MSP

    capital standard and definitions are comparable with the SEC's proposal

    for MSBSPs, and are intended to require an MSP to maintain a sufficient

    level of assets to meet its obligations to counterparties and creditors

    and to help ensure the safety and soundness of the MSP.

    Request for Comment

    The Commission requests comment on the proposed capital

    requirements for MSPs. In addition, the Commission requests comment,

    including empirical data in support of comments, in response to the

    following questions:

    1. Is a tangible net worth test an appropriate standard for MSPs?

    If not, explain why not. Would the net liquid assets approach or bank-

    based capital approach be a more appropriate method for establishing

    capital requirements for MSPs? If so, please state which approach is

    more appropriate and describe the rationale for such approach. What

    other capital approaches should the Commission consider for MSPs?

    2. Should the proposed minimum capital requirement for MSPs include

    a minimum fixed-dollar amount of tangible net worth, for example, equal

    to $20 million or some greater or lesser amount? Is so, explain the

    merits of imposing a fixed-dollar amount and identify the recommended

    fixed-dollar amount.

    3. Should proposed Regulation 23.101(b) require an MSP to maintain

    positive tangible net worth in an amount in excess of the market risk

    and credit risk charges on the MSP's swaps and security-based swap

    positions? If so, please explain why. Should any other adjustments be

    made to the MSP's minimum capital requirement? If so, please explain

    why.

    3. Capital Requirements for FCMs

    i. Introduction

    Section 4s(e)(3)(B)(i) of the CEA provides that the requirements

    applicable to SDs and MSPs under section 4s do not limit the

    Commission's authority with respect to FCM regulatory requirements.\67\

    The Commission's current capital requirements for FCMs are contained in

    Regulation 1.17, and are designed to require a minimum level of

    ``liquid assets'' in excess of the FCM's liabilities to provide

    resources for the FCM to meet its financial obligations as a market

    intermediary in the regulated futures and cleared swaps markets.

    Specifically, an FCM is required to hold at all times more than one

    dollar of highly liquid assets for each dollar of unsubordinated

    liabilities (e.g., money owed to customers, counterparties and

    creditors). The capital requirements also are intended to ensure that

    an FCM maintains a sufficient level of liquid assets to wind-down its

    operations by transferring customer accounts to other FCMs in the event

    that the FCM decides, or is forced, to cease operations.

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

    \67\ Section 4s(e)(3)(B)(i) states that nothing in section 4s(e)

    imposing capital and margin requirement on SDs and MSPs limits, or

    shall be construed to limit, the authority of the Commission to set

    financial responsibility rules for FCMs pursuant to section 4f(a).

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

    Regulation 1.17(a) specifies the minimum amount of adjusted net

    capital that an FCM is required to maintain as the greatest of: (1) $1

    million; (2) for an FCM that engages in off-exchange foreign currency

    transactions with retail forex customers,\68\ $20 million, plus five

    percent of the FCM's liabilities to the retail forex customers that

    exceed $10 million; (3) eight percent of the sum of the risk margin of

    futures, options on futures, foreign futures, and swap positions

    cleared by a clearing organization and carried by the FCM in customer

    and non-customer accounts; \69\ (4) the amount of adjusted net capital

    required by the RFA of which the FCM is a member; and (5) for an FCM

    that also is registered with the SEC as a BD, the amount of net capital

    required by the rules of the SEC.

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

    \68\ Regulation 5.1(k) defines the term ``retail forex

    customer'' as a person, other than an eligible contract participant

    as defined in section 1a(18) of the CEA, acting on its own behalf in

    any account agreement, contract or transaction described in section

    2(c)(2)(B) or 2(c)(2)(C) of the CEA.

    \69\ The term ``risk margin'' is defined in Regulation

    1.17(b)(8).

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

    Regulation 1.17(c)(5) defines the term ``adjusted net capital'' as

    an FCM's ``current assets'' (i.e., current, liquid assets excluding,

    however, most unsecured receivables), less all of the FCM's liabilities

    (except certain qualifying subordinated debt). An FCM is further

    required to impose certain prescribed capital deductions (``capital

    charges'' or ``haircuts'') from the current market value of the FCM's

    proprietary positions (e.g., futures positions, securities, debt

    instruments, money market instruments, and commodities) in computing

    its adjusted net capital to reflect potential market risk and credit

    risk of the firm's current assets.

    An FCM, in computing its adjusted net capital, is required to

    compute a capital charge to reflect the potential market risk

    associated with uncleared swap and security-based swap positions.

    Regulation 1.17(c)(5) establishes specific capital charges for market

    risk for an FCM's proprietary positions in physical inventory, forward

    contracts, fixed price commitments, and securities. Regulation

    1.17(c)(5) does not explicitly address uncleared swap or security-based

    swap positions. The Commission, however, requires an FCM to use the

    capital charges specified in Regulation 1.17(c)(5)(ii), or the capital

    charges established by SEC Rule 15c3-1 for dually registered FCM-BDs,

    to compute its capital charges for uncleared swap and security-based

    swap positions.

    The Commission is proposing to amend the minimum adjusted net

    capital requirements for FCMs that are also registered as SDs. In this

    regard, the Commission is proposing amendments to Regulation 1.17(a)

    that would require an FCM that is also an SD to maintain

    [[Page 91266]]

    adjusted net capital that is equal to or greater than the highest of:

    (1) $20 million;

    (2) Eight percent of the sum of the following:

    (a) The total risk margin (as defined in Regulation 1.17(b)(8)) for

    positions carried by the FCM in customer and non-customer accounts;

    (b) the total initial margin that the FCM is required to post with

    a clearing agency or broker for security-based swaps positions carried

    in customer and non-customer accounts;

    (c) the total uncleared swaps margin as defined in Regulation

    23.100;

    (d) the total initial margin that the FCM is required to post with

    a broker or clearing organization for all proprietary cleared swap

    positions carried by the FCM;

    (e) the total initial margin computed pursuant to SEC Rule 18a-

    3(c)(1)(i)(B) (17 CFR 240.181-3(c)(1)(i)(B)) for all proprietary

    uncleared security-based swap positions carried by an FCM, without

    regard to any exemptions or exclusions that may be available to the FCM

    under the SEC's proposal; and

    (f) the total initial margin that the FCM is required to post with

    a broker or clearing agency for proprietary cleared security-based

    swaps;

    (3) the amount of net capital required by the SEC if the FCM was a

    BD; or

    (4) the amount of capital required by the RFA of which the FCM was

    a member.

    The Commission's proposed increase in the FCM's minimum capital

    requirement from $1 million to $20 million is consistent with the

    Commission's proposal to adopt a minimum $20 million capital

    requirement for SDs and MSPs, and is necessary and appropriate given

    the change and increase in risk when the FCM is registered as an SD and

    engaging in uncleared swap activities. The Commission also notes that

    the proposed minimum dollar amount of $20 million is consistent with

    the current minimum dollar amount of adjusted net capital imposed by

    Regulation 1.17(a) on FCMs that engage in OTC forex transactions with

    counterparties that do not qualify as ECPs, and is consistent with the

    minimum dollar amount of net capital proposed by the SEC for SBSDs.\70\

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

    \70\ The SEC proposed capital requirements for SBSDs and MSBSPs

    was proposed in 2012. 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 70214 (Nov. 23, 2012).

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

    The Commission is also proposing amendments to Regulation 1.17(a)

    to require an FCM to include eight percent of the uncleared swaps

    margin in its adjusted net capital. Currently FCMs must maintain

    adjusted net capital in excess of eight percent of the risk margin on

    futures, foreign futures and cleared swaps positions carried in

    customer and noncustomer accounts. The proposed amendments would also

    include in the FCM's minimum capital requirements eight percent of the

    ``uncleared swaps margin'' for uncleared swaps and the initial margin

    for uncleared security-based swaps position for which the FCM is a

    counterparty. The term ``uncleared swaps margin'' is defined in

    proposed new Regulation 23.100 as the amount of initial margin that an

    SD would be required to collect pursuant to the Commission's uncleared

    swaps margin rules for each outstanding swap.\71\ The ``uncleared swaps

    margin'' would include both swaps that an SD is required to collect

    margin for under the margin rules as well as swaps that are exempt from

    the margin rules. For example, the FCM would be required to compute the

    amount of initial margin that an SD would be required to collect from

    commercial end users and affiliated counterparties as if the swaps were

    not exempt from the scope of the Commission's margin requirements. In

    addition, the FCM would have to compute the initial margin requirements

    for exempt foreign exchange swaps and foreign exchange forwards as if

    the transactions were not exempt from the Commission's margin

    requirements. Finally, the ``uncleared swaps margin'' amount would not

    exclude initial margin that was below the initial margin threshold

    amount or the minimum margin transfer amounts defined in Regulation

    23.151. Not excluding these amounts in determining the capital

    requirement is consistent with the approach as described above for

    those SDs that elect to apply a net capital standard as these

    uncollateralized exposures may present risk to the SD for which it

    should maintain capital. Similarly, the Commission would require an FCM

    to include in its initial margin amounts for security-based swap

    positions both the amounts that an SD would be required to collect and

    the amounts that the SD would not be required to collect if the SD were

    treated as an SBSD under SEC's proposed rule 18a-3(c)(1)(i)(B) due to

    the SEC provided an exemption or exclusion on the requirement to post

    or collect initial margin.

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

    \71\ See Regulations 23.150, 23.152, and 23.154.

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

    As discussed above, the capital rule is intended to help ensure the

    safety and soundness of the SD. Accordingly, the FCM's capital should

    reflect uncollateralized exposures to swap counterparties.

    ii. FCM Capital Charges for Swaps and Security-Based Swaps in Computing

    Adjusted Net Capital

    As noted in section II.A.3.i above, in computing its adjusted net

    capital, an FCM is required to take certain market risk and credit risk

    capital charges on its proprietary positions. Regulation 1.17(c)

    provides two approaches for an FCM to take capital charges in computing

    its adjusted net capital. The first approach is a rules-based approach

    of standardized haircuts that are set forth in Regulation 1.17(c)(5).

    The second approach is an approved model approach that is currently

    available only to FCMs that are dual-registered FCM/BDs that have been

    approved by the SEC to use internal models to compute market risk and

    credit risk capital charges in lieu of standardized capital charges.

    These dually-registered FCM/BDs are referred to as Alternative Net

    Capital Firms (``ANC Firms'').

    a. Standardized Market Risk and Credit Risk Capital Charges

    Currently, Regulation 1.17(c)(5) does not explicitly define market

    risk capital charges for swaps, and the Commission has imposed the

    general standardized haircuts that are applicable to inventory, fixed

    price commitments, and forward contracts to swaps. For example, an

    energy swap that is not offset by a futures contract is considered a

    fixed price commitment under Regulation 1.17(c)(5) and the FCM is

    required to take a market risk capital charge equal to 20 percent of

    the notional value of the energy swap. The purpose of the capital

    charge is to require an FCM to reserve a minimum level of capital to

    cover potential future losses in the value of the swap, which may have

    to be paid to the swap counterparty in the form of variation margin or

    otherwise.

    The Commission recognizes that the current market risk capital

    charges, which were not explicitly designed for swaps or security-based

    swaps, should be amended to provide specific capital charges.

    Accordingly, the Commission is proposing to amend Regulation

    1.17(c)(5)(iii) to provide a schedule of standardized market risk

    capital deductions for positions in credit default swaps, interest rate

    swaps, foreign exchange swaps, commodity swaps, and all other uncleared

    swaps. This schedule of standardized capital deductions is the same as

    the standardized market risk capital deduction proposed by the SEC for

    such positions in SEC Rule 15c3-1 (17 CFR

    [[Page 91267]]

    240.15c3-1).\72\ The Commission is also proposing to amend Regulation

    1.17(c)(5)(iv) to provide that the FCM must impose the standardized

    market risk capital deduction set forth in SEC Rule 15c3-1 (17 CFR

    240.15c3-1) for any security-based swap positions.

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

    \72\ See 77 FR 70214 (Nov. 23, 2012).

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

    Except for credit default swaps as described below, the proposed

    standardized market risk capital deductions would be the deduction

    currently prescribed in 17 CFR 240.15c3-1 or proposed amended

    Regulation 1.17 applicable to the instrument referenced by the swap

    multiplied by the contract's notional amount.

    The proposed standardized market risk deductions for swaps that are

    credit default swaps are designed to account for the unique attributes

    of these positions. Credit default swaps are generally defined by the

    reference asset or entity, the notional amount, the duration of the

    contract, and credit events. Therefore, the Commission believes that

    proposing a schedule of deductions for credit default swaps based on a

    ``maturity grid'' approach would be appropriate, as the Commission

    currently applies a maturity grid approach in setting standardized

    capital deductions for debt instruments.\73\ Under the proposal, the

    market risk capital deductions for credit default swaps would be based

    on two variables: The length of time to maturity and the amount of the

    current offered basis point spread on the credit default swap. The

    Commission's proposed standardized deductions are consistent with the

    SEC's proposed amendments to its capital rule.

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

    \73\ The capital deductions for debt instruments are

    incorporated into Regulation 1.17 by cross reference to the SEC's

    standardized capital charges for debt instruments. See Regulation

    1.17(c)(5)(v).

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

    The Commission would allow an FCM to net long and short positions

    where the credit default swaps reference the same entity or obligation,

    reference the same credit events that would trigger payment by the

    seller of the protection, reference the same basket of obligations that

    would determine the amount of payment by the seller of protection upon

    the occurrence of a credit event, and are in the same or adjacent

    maturity and spread categories (as long as the long and short positions

    each have maturities within three months of the other maturity

    category). In this case, the FCM would need to take the specified

    percentage deduction only on the notional amount of the excess long or

    short position.

    The Commission would also allow limited netting in, for example,

    long and short credit default swap positions in the same maturity and

    spread categories and that reference corporate entities in the same

    industry sector; where the FCM is long (short) the bond or asset and

    long (short) protection through a credit default swap referencing the

    same underlying bond or asset.

    As noted above, the Commission is proposing the same market risk

    haircut schedule for swaps as proposed by the SEC in its proposed

    capital and margin rule for SBSDs. The Commission understands that the

    proposed capital charges for credit default swaps are derived from the

    SEC's experience with maturity grids for other securities. Given the

    Commission's experience with FCMs and the financial transactions that

    they may enter into, and also in recognition of the SEC's experience

    with BDs and their financial products, the Commission believes that

    these charges should account for the risks of engaging in these swaps

    and security-based swaps. Further, the Commission believes that its

    approach is appropriate, given its long history of referencing 17 CFR

    240.15c3-1 in setting forth capital deductions for certain financial

    instruments held by FCMs and the SEC's reciprocal practice of

    referencing Regulation 1.17 when setting forth capital deductions for

    certain CFTC-regulated products held by BDs. The Commission further

    believes that this harmonized approach would benefit registrants that

    are dually registered with the Commission and the SEC.

    FCMs also are currently required to take a capital charge to

    reflect credit risk associated with uncleared swap and security-based

    swap transactions. Regulation 1.17(c)(2)(ii) requires an FCM to exclude

    unsecured receivables, which includes any unsecured receivables from

    swap and security-based swap counterparties and would include any

    margin collateral for swap or security-based swap transactions that the

    FCM deposits with a third-party custodian pursuant to the Commission's

    or SEC's uncleared margin rules.

    The Commission is proposing to amend Regulation 1.17(c)(2)(ii) to

    permit FCM's to include margin deposited with third-party custodians

    for swap and security-based swap transactions, provided that such

    margin is held by the custodians in accordance with the requirements

    established by the Commission and SEC rules, as applicable.

    b. Model-Based Market Risk and Credit Risk Capital Charges

    As noted in section II.A.3 above, the SEC has approved certain BDs

    to use internal models for computing market risk capital charges in

    lieu of the standardized haircuts in SEC Rule 15c3-1(c)(2)(vi) and

    (vii) (17 CFR 240.15c3-1(c)(2)(vi) and (vii)) for their proprietary

    positions in securities, debt instruments, futures, security-based

    swaps and swaps and for computing credit risk charges associated with

    exposures from swap and security-based swap counterparties in lieu of

    the unsecured receivable capital charges in Rule 15c3-1(c)(2)(iv) (17

    CFR 240.15c3-1(c)(2)(iv)). The BDs that have been approved to use these

    internal models are referred to as ANC Firms. As described in section

    II.A.3 above, ANC Firms may obtain SEC approval to use internal models

    to compute their capital. Once approved by the SEC to use internal

    models, the ANC Firms that are also registered as FCMs may use the same

    models to compute market risk and credit risk charges under CFTC

    Regulation 1.17.

    The ANC Firms' market risk and credit risk models must satisfy

    certain qualitative and quantitative requirements that are set forth in

    the SEC's rules in order to be approved, and the firms are subject to

    certain enhanced reporting requirements. The requirements for such

    models are discussed in section II.A.4 of this release.

    ANC Firms are subject to heightened SEC capital requirements in

    order to qualify to use the market risk and credit risk models.

    Currently, an ANC Firm must maintain tentative net capital of at least

    $1 billion and net capital of at least $500 million in order to be

    approved, and to continue to use market risk and credit risk

    models.\74\ The SEC also requires an ANC Firm to provide notice to the

    SEC if the ANC Firm's tentative net capital falls below $5 billion.\75\

    In such situations, the SEC may impose restrictions on the ANC Firm,

    including limiting its use of the market risk and/or credit risk

    models.\76\

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

    \74\ 17 CFR 240.15c3-1(a)(2)(7)(i).

    \75\ 17 CFR 240.15c3-1(a)(2)(7)(ii).

    \76\ See Alternative Net Capital Requirements for Broker-Dealers

    That Are Part of Consolidated Supervised Entities, 69 FR 34428 (Jun

    21, 2004).

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

    As previously noted, CFTC Regulation 1.17(c)(6) currently provides

    that an FCM that is also an ANC Firm, may use the same market risk and

    credit risk models approved by the SEC in lieu of the standardized

    capital charges in Regulation 1.17(c)(5). The Commission is proposing

    to retain this provision in Regulation 1.17(c)(6). Accordingly, FCMs

    that are ANC Firms that have obtained SEC approval to use market risk

    and credit risk models may continue to use such models in lieu of

    [[Page 91268]]

    taking the standardized capital chares in Regulation 1.17(c).

    Maintaining this provision would allow ANC Firms to engage in swap and

    security-based swap transactions under the existing regulatory

    structure, including the current capital requirements.

    The Commission notes that the SEC has proposed various changes to

    its regulations as part of its proposed capital requirements for SBSDs

    that, if adopted, would impact the ANC Firm's CFTC and SEC capital

    requirements. In this connection, the SEC is proposing to increase the

    amount of tentative net capital that an ANC Firm must maintain from $1

    billion to $5 billion, and the amount of net capital that the ANC Firm

    must maintain from $500 million to $1 billion.\77\ The early warning

    threshold for an ANC Firm also would be increased from $5 billion to $6

    billion.\78\

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

    \77\ See proposed amendments to Rule 15c3-1(a)(7)(ii), 77 FR

    70214, 70329.

    \78\ Id.

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

    The SEC is also proposing to subject ANC Firms to liquidity risk

    management requirements.\79\ Under the SEC's proposal, ANC Firms would

    need to perform a liquidity stress test at least monthly that takes

    into account certain assumed conditions lasting for 30 consecutive

    days.\80\ The results of the liquidity stress test would need to be

    provided within ten business days of the month end to senior management

    responsible for overseeing risk management at the firm.\81\ In

    addition, the assumptions underlying the liquidity stress test would

    need to be reviewed at least quarterly by senior management responsible

    for overseeing risk management at the firm and at least annually by

    senior management of the firm.\82\ The Commission is also proposing

    similar liquidity requirements for SDs, which are discussed in section

    II.B of this release.

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

    \79\ See proposed new paragraph (f) to Rule 15c3-1, 77 FR 70214,

    70331.

    \80\ Id.

    \81\ Id.

    \82\ Id.

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

    In addition, the SEC is proposing to amend its regulations to limit

    an ANC Firm's use of credit risk models to credit exposures solely from

    counterparties that are commercial end users.\83\ Currently, an ANC

    Firm is permitted to compute its credit charges for swaps and security-

    based swaps from all counterparties. This amendment would result in the

    uncollateralized receivables from counterparties that are non-

    commercial end users being subject to a 100 percent charge to capital.

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

    \83\ 77 FR 70214 at 70329.

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

    Since those ANC Firms that are also registered as FCMs will be

    subject to both the capital requirements of the SEC and CFTC, the SEC

    proposed amendments, if adopted, would be applicable to the ANC Firm's

    computation of net capital under CFTC Regulation 1.17(c)(6).

    iii. Market Risk and Credit Risk Capital Models for Futures Commission

    Merchants That Are Not Alternative Net Capital Firms

    As noted in section II.A.3 above, currently only FCMs that are

    registered with the SEC as ANC Firms and that have obtained SEC

    approval may use market risk and credit risk models in lieu of

    standardized haircuts on their swaps, security-based swaps and other

    proprietary positions in computing net capital. The Commission is

    proposing to amend current Regulation 1.17(c)(6) to extend the use of

    capital models to FCMs that are dually-registered as SDs and are not

    otherwise registered with the SEC as BDs.\84\ An FCM/SD that would seek

    to use capital models would have to obtain approval for the models from

    the Commission or from an RFA of which the FCM/SD is a member. The

    Commission is also proposing to amend Regulation 1.17(a)(1)(ii) to

    provide that any FCM/SD that seeks approval to use market risk and/or

    credit risk models must maintain a minimum level of net capital of $100

    million and a minimum level of adjusted net capital equal to $20

    million.

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

    \84\ If an FCM or SD is also a registered BD, it may only use

    market risk and credit risk capital models if the SEC approves the

    firm as an ANC Firm. Accordingly, the Commission's proposal to

    extend models to other FCMs would only apply to FCMs that are not

    also subject to the SEC's capital requirements.

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

    Proposed Regulation 1.17(c)(6)(v) would require an FCM/SD to apply

    in writing to the Commission or RFA of which the FCM/SD is a member for

    approval to use internal models to compute market risk and credit risk

    capital deductions in lieu of the standardized charges contained in

    Regulation 1.17(c)(2) and (5). The models must meet certain qualitative

    and quantitative requirements proposed to be established by the

    Commission in new Regulation 23.102 and Appendix A to new Regulation

    23.102. The qualitative and quantitative requirements for the models

    are discussed in detail in section II.A.4 of this release.

    The Commission is proposing the higher minimum net capital

    requirement of $100 million for FCM/SDs that have received permission

    to model their credit and market risk charges to account for the

    limitations that may be inherent in a model. The Commission notes that

    the $100 million minimum net capital requirement is the same as the

    SEC's proposed minimum net capital requirement for stand-alone SBSDs

    that receive SEC approval to use internal models to compute their

    market and credit risk capital deductions, and is consistent with the

    Commission's proposed requirement for SDs that elect to use a net

    capital approach as discussed in section II.A.2.ii of this release. The

    proposed $100 million net capital requirement for FCM/SDs, however, is

    not consistent with the SEC's current approach for BDs approved to use

    internal capital models (i.e., ANC Firms), nor is it consistent with

    the SEC's proposed capital requirements for SBSDs/ANC Firms approved to

    use internal models. As noted above, ANC Firms are subject under SEC

    rules to substantial capital requirements of a $5 billion ``early

    warning'' requirement, a $1 billion tentative net capital requirement,

    and a $500 million net capital requirement.\85\

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

    \85\ As noted above, the SEC has proposed to increase the

    ``early warning'' requirement to $6 billion, the tentative net

    capital requirement to $5 billion, and the net capital requirement

    to $1 billion.

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

    The Commission believes, however, that FCM/SDs that are not BDs do

    not raise the same types of risks as ANC firms. ANC firms represent the

    largest BDs and engage in significant brokerage business including

    providing customer financing for securities transactions, engaging in

    repurchase transactions and other activities. FCMs generally have

    limited proprietary futures trading and operate primarily as market

    intermediaries for customers trading futures and foreign futures

    transactions. In this capacity, FCMs receive and hold customer funds in

    segregated accounts that are used to satisfy the customers' financial

    obligations to derivatives clearing organizations (``DCOs''). FCMs also

    collect and hold funds from affiliates for futures trading.

    The Commission also expects that FCMs that are not registered as

    BDs and that register as SDs will provide a market in swaps for

    customers that may not be able to trade with larger SDs. The FCM/SDs

    may be more willing to provide swaps markets in commodities to

    agricultural firms and smaller commercial end users such as farmers and

    ranchers that might not otherwise be able to use such markets to manage

    risks in their businesses or might have to pay higher fees to engage in

    swaps if the number of SDs was limited. The Commission further believes

    that given the nature of the business operations of FCM/SDs, the

    proposed minimum capital requirement of $100 million of

    [[Page 91269]]

    adjusted net capital is consistent with section 4s(e) of the CEA.

    The Commission believes that setting the same amount of minimum

    required capital would ensure a level playing field for SDs and FCMs

    that engage in swaps. However, to the extent that an FCM is dually

    registered as a BD and has received permission to use internal models

    for its credit and market risk charges, the FCM would follow the SEC's

    requirements with respect to the minimum capital it needs to maintain.

    iv. Liquidity Requirements

    The Commission is further proposing to require an FCM that is also

    registered as an SD to comply with the liquidity requirements in

    Proposed Rule 23.104(b)(1). The Commission recognizes that an FCM that

    acts as an SD is acting as a counterparty rather than as an

    intermediary between its customer and another counterparty. Therefore,

    for all the reasons discussed further below in section 3, the

    Commission is proposing to require FCMs that are also SDs to comply

    with the liquidity requirement set forth in Proposed Rule 23.104(b)(1).

    Request for Comment

    The Commission requests comment on all aspects of the proposed

    amendments to the FCM capital requirements. In addition, the Commission

    requests comment, including empirical data in support of comments, in

    response to the following questions:

    1. Is the proposed minimum adjusted net capital requirement of $20

    million appropriate for an FCM that is dually-registered as an SD? If

    not, explain why not. If the minimum dollar amount should be set at a

    level greater or lesser than $20 million, explain what that greater or

    lesser amount should be and explain why that is a more appropriate

    amount.

    2. Is the proposed minimum net capital requirement of $100 million

    appropriate for an FCM that is dually-registered as an SD, and has been

    approved to use internal models to compute market risk and credit risk?

    If not, explain why not. If the minimum dollar amount should be set at

    a level greater or lesser than $100 million, explain what that greater

    or lesser amount should be and explain why that is a more appropriate

    amount.

    3. The proposal's minimum capital requirement based on 8% of

    margin, includes swaps exempt or excluded from the CFTC's margin

    requirements, such as inter-affiliate swaps. Please provide comment on

    the breadth of the definition. Should the scope be narrowed? If so,

    how?

    4. Should the 8 percent of margin capital requirement be set at a

    higher or lower level? If it should be adjusted, what percent should

    the Commission consider? Please provide analysis in support of the

    adjustment.

    4. Model Approval Process

    Under the proposal as discussed above, SDs subject to the bank-

    based capital approach, the net liquid assets capital approach, or the

    tangible net worth capital approach are subject to market risk and

    credit risk capital charges on their swaps, security-based swaps and

    other proprietary positions in computing their regulatory capital. The

    Commission is proposing in Regulation 23.102 to permit SDs to compute

    market risk and credit risk capital charges using internal models in

    lieu of the standardized rules-based capital charges. The Commission

    recognizes that internal models, including value-at-risk models, can

    provide a more effective means of measuring economic risk from complex

    trading strategies involving uncleared swaps and other investment

    instruments.

    The Commission, however, is concerned, given the number of SDs and

    the likely complexity of the capital models, that it may not be able to

    review models as thoroughly and expeditiously as would be necessary

    with its limited resources. In addition, the Commission recognizes that

    with its current resources it would be challenged to perform

    appropriate ongoing monitoring and assessment of the capital models to

    ensure that such models operate as designed. Accordingly, the

    Commission is proposing in Regulation 23.102 to permit an SD to use

    internal capital models that have been approved by the Commission or by

    an RFA of which the SD is a member to compute market risk and credit

    risk capital charges in lieu of standardized deductions.\86\

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

    \86\ See proposed Regulation 23.102(b).

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

    As previously noted, NFA currently is the only RFA. Allowing an SD

    to use internal capital models that have been approved by NFA is

    consistent with the Commission's recent approach with respect to margin

    models for uncleared swap transactions.\87\ Specifically, Commission

    Regulation 23.154(b) allows an SD to obtain NFA's approval to use a

    model to calculate the initial margin requirement for uncleared swaps

    and security-based swap positions. NFA has established a process, and

    is reviewing the margin models submitted by SDs.

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

    \87\ See 81 FR 636, 654 (Jan. 6, 2016). As an RFA, NFA also is

    required to establish minimum capital requirements for its members,

    including SDs and MSPs, that are at least as stringent as the

    capital rules imposed by the Commission. The Commission anticipates

    that NFA's capital rules will permit SDs to use NFA approved capital

    models in computing regulatory capital.

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

    Capital models, however, would pose different challenges for

    regulators, including NFA. Unlike the approach for initial margin,

    where SDs jointly developed a standardized initial margin model for

    swaps and security-based swaps that would be available for use by

    market participants, each SD seeking NFA approval would submit for

    review several individually developed capital models to compute the

    market risk for the full portfolio of trading positions, including

    swaps and security-based swaps, and counterparty credit risk charges

    that are discussed below. Therefore, reviewing capital models would

    significantly increase the number of models that NFA would need to

    review and approve relative to the margin models.\88\ In addition, NFA

    would have to perform ongoing supervision over the models to assess the

    effective operation and implementation.

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

    \88\ In many instances, SDs whose capital models would be

    subject to NFA review would be affiliates of SDs whose capital

    models are subject to review by one of the prudential regulators, or

    affiliates of foreign SDs whose capital models are reviewed by a

    foreign regulatory authority. The Commission expects that a

    prudential regulator's or foreign regulator's review and approval of

    capital models that are used throughout the corporate family would

    be a significant factor in NFA determining the scope of its review,

    provided that appropriate information would be available to the

    Commission and NFA.

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

    The SD's application to use internal models must be in writing and

    must be filed with the Commission and with an RFA in accordance with

    the applicable instructions. The model application must include

    specified information regarding the models, which is contained in

    proposed Appendix A to Regulation 23.102. For example, proposed

    Appendix A would require an SD to submit: (1) A list of categories of

    positions the SD holds in its proprietary accounts and a brief

    description of the methods the SD would use to calculate deductions for

    market risk and credit risk on those categories of positions; (2) a

    description of the mathematical models to be used to price positions

    and to compute deductions for market risk, including those portions of

    the deductions attributable to specific risk, if applicable, and

    deductions for credit risk; (3) a description of how the SD will

    calculate current exposure and potential future exposure for it credit

    risk charges, and (4) a description of how the SD

    [[Page 91270]]

    would determine internal credit risk weights of counterparties, if

    applicable.

    The Commission or RFA may also require the SD to submit

    supplemental information relating to its models. If any information in

    an application is found to be or becomes inaccurate before the

    Commission or RFA approves the application, the SD must notify the

    Commission and RFA promptly and provide the Commission and RFA with a

    description of the circumstances in which the information was

    inaccurate along with updated accurate information. As part of the

    approval process, and on an ongoing basis, an SD would be required to

    demonstrate to the Commission or RFA that the models reliably account

    for the risks that are specific to the types of positions the SD

    intends to include in the model computations. The Commission or RFA may

    approve, in whole or in part, an application or an amendment to the

    application, subject to any conditions or limitations the Commission or

    RFA may require.

    After receiving approval of its models, an SD would be required to

    amend and submit to the Commission or RFA for approval its application

    before materially changing its models or its internal risk management

    control system. Further, an SD would be required to notify the

    Commission or the RFA 45 days before it ceases using models to compute

    its capital. The Commission or the RFA may revoke an SD's ability to

    use models to compute capital if either the Commission or the RFA finds

    that the use of the models by the SD is no longer appropriate. If the

    Commission or the RFA revokes an SD's ability to use models to compute

    capital, the SD would need to use the standardized haircuts for all of

    its positions.

    In developing the proposed market risk and credit risk

    requirements, including the proposed quantitative and qualitative

    requirements discussed below, the Commission has incorporated in the

    proposed requirements the market risk and credit risk model

    requirements adopted by the Federal Reserve Board for bank holding

    companies, including the value at risk (``VaR''), stressed VaR,

    specific risk, incremental risk, and comprehensive risk qualitative and

    quantitative standards and requirements. The Commission's proposed

    qualitative and quantitative requirements for capital models also are

    comparable to the SEC's existing capital model requirements for OTC

    derivatives dealers and ANC BDs.

    i. VaR Models

    Proposed Regulation 23.102 would require that a VaR model's

    quantitative criteria include the use of a VaR-based measure based on a

    99 percent, one-tailed confidence interval. The VaR-based measure must

    be based on a price shock equivalent to a ten business-day movement in

    rates or prices. Price changes estimated using shorter time periods

    must be adjusted to the ten-business-day standard. The minimum

    effective historical observation period for deriving the rate or price

    changes is one year and data sets must be updated at least quarterly or

    more frequently if market conditions warrant. For many types of

    positions it is appropriate for an SD to update its data positions more

    frequently than quarterly. In all cases, an SD must have the capability

    to update its data sets more frequently than quarterly in anticipation

    of market conditions that would require such updating.

    The SD would not need to employ a single internal capital model to

    calculate its VaR-based measure. An SD may use any generally accepted

    approach, such as variance-covariance models, historical simulations,

    or Monte Carlo simulations. However, the level of sophistication of the

    SD's internal capital model must be commensurate with the nature and

    size of the positions the model covers. The internal capital model must

    use risk factors sufficient to measure the market and credit risk

    inherent in all positions. The risk factors must address the risks

    including interest rate risk, credit spread risk, equity price risk,

    foreign exchange risk, and commodity price risk. For material positions

    in the major currencies and markets, modeling techniques must

    incorporate enough segments of the yield curve--in no case less than

    six--to capture differences in volatility and less than perfect

    correlation of rates along the yield curve.

    The internal capital model may incorporate empirical correlations

    within and across risk categories, provided that the SD validates and

    demonstrates the reasonableness of its process for measuring

    correlations. If the internal capital model does not incorporate

    empirical correlations across risk categories, the SD must add the

    separate measures from its internal capital models for the appropriate

    risk categories as listed above to determine its aggregate VaR-based

    measure of capital.

    The VaR-based measure must include the risks arising from the

    nonlinear price characteristics of options positions or positions with

    embedded optionality and the sensitivity of the fair value of the

    positions to changes in the volatility of the underlying rates, prices

    or other material factors. An SD with a large or complex options

    portfolio must measure the volatility of options positions or positions

    with embedded optionality by different maturities and/or strike prices,

    where material.

    The internal capital model must be subject to back-testing

    requirements that must be calculated no less than quarterly. An SD must

    compare its daily VaR-based measure for each of the preceding 250

    business days against its actual daily trading profit or loss, which

    includes realized and unrealized gains and losses on portfolio

    positions as well as fee income and commissions associated with its

    activities. If the quarterly backtesting shows that the SD's daily net

    trading loss exceeded its corresponding daily VaR-based measure, a

    backtesting exception has occurred. If an SD experiences more than four

    backtesting exceptions over the preceding 250 business days, it is

    generally required to apply a multiplication factor in excess of three

    when it calculates its capital requirements.

    The qualitative requirements would specify, among other things,

    that: (1) Each VaR model must be integrated into the SD's daily

    internal risk management system; (2) each VaR model must be reviewed

    periodically by the firm's internal audit staff and annually by a third

    party service provider; and (3) the VaR measure computed by the model

    must be multiplied by a factor of at least three but potentially a

    greater amount if there are exceptions to the measure resulting from

    quarterly back-testing results.

    An SD would also be subject to on-going supervision by staff of the

    Commission and or RFA with respect to its internal risk management,

    including its use of VaR models.

    ii. Stressed VaR Models

    The Commission is proposing a stressed VaR component for SDs that

    have permission to use VaR models to compute market risk capital

    deductions. The stressed VaR measure supplements the VaR measure, as

    the VaR measure's inherent limitations produced an inadequate amount of

    capital to withstand the losses sustained by many financial

    institutions in the financial crisis of 2007-2008.\89\ The stressed VaR

    measure should also contribute to a

    [[Page 91271]]

    more appropriate measure of the risks of an SD's positions, as it

    should account for more volatile and extreme price changes.

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

    \89\ See Revisions to the Basel II market risk framework,

    published by the Basel Committee on Banking Supervision for an

    explanation of the implementation of the stressed VaR requirement.

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

    An SD would be required to use the same model that it uses to

    compute its VaR measure for its stressed VaR measure. The model inputs

    however would be calibrated to reflect historical data from a

    continuous 12-month period that reflects a period of significant

    financial stress appropriate to the SD's portfolio. The stressed VaR

    measure must be calculated at least weekly and be no less than the VaR

    measure. The Commission would expect that the stressed VaR measure

    would be substantially greater than the VaR measure.

    The Commission would require the stress tests to take into account

    concentration risk, illiquidity under stressed market conditions, and

    other risks arising from the SD's activities that may not be captured

    adequately in the SD's internal models. For example, it may be

    appropriate for the SD to include in its stress testing large price

    movements, one-way markets, nonlinear or deep out-of-the-money

    products, jumps-to-default, and significant changes in correlation.

    Relevant types of concentration risk include concentration by name,

    industry, sector, country, and market.

    The SD must maintain policies and procedures that describe how it

    determines the period of significant financial stress used to compute

    its stressed VaR measure and be able to provide empirical support for

    the period used. These policies and procedures must address: (1) How

    the SD links the period of significant financial stress used to

    calculate the stressed VaR-based measure to the composition and

    directional bias of the SD's portfolio; and (2) the SD's process for

    selecting, reviewing, and updating the period of significant financial

    stress used to calculate the stressed VaR measure and for monitoring

    the appropriateness of the 12-month period in light of the SD's current

    portfolio. Before making material changes to these policies and

    procedures, an SD must obtain approval from the Commission or RFA. The

    Commission or the RFA may also require the SD to use a different period

    of stress to compute its stressed VaR measure.

    iii. Specific Risk Models

    The Commission's proposal would allow SDs to model their specific

    risk. Under the proposal, the specific risk model must be able to

    demonstrate the historical price variation in the portfolio, be

    responsive to changes in market conditions, be robust to an adverse

    environment, and capture all material aspects of specific risk for its

    positions. The Commission would require that an SD's models capture

    event risk (such as the risk of loss on equity or hybrid equity

    positions as a result of a financial event, such as the announcement or

    occurrence of a company merger, acquisition, spin-off, or dissolution)

    and idiosyncratic risk, capture and demonstrate sensitivity to material

    differences between positions that are similar but not identical, and

    to changes in portfolio composition and concentrations. If an SD

    calculates an incremental risk measure for a portfolio of debt or

    equity positions under paragraph (I) of 23.102 Appendix A, the SD is

    not required to capture default and credit migration risks in its

    internal models used to measure the specific risk of these portfolios.

    The Commission understands that not all debt, equity, or

    securitization positions (for example, certain interest rate swaps)

    have specific risk. Therefore, there would be no specific risk capital

    requirement for positions without specific risk. An SD must have clear

    policies and procedures for determining whether a position has specific

    risk.

    The Commission believes that an SD should develop and implement

    VaR-based models for both market risk and specific risk. An SD's use of

    different approaches to model specific risk and general market risk

    (for example, the use of different models) will be reviewed to ensure

    that the overall capital requirement for market risk is commensurate

    with the risks of the SD's covered positions.

    iv. Incremental Risk Models

    The Commission is proposing an incremental risk requirement for SDs

    that measures the specific risk of a portfolio of debt positions using

    internal models. Incremental risk consists of the default risk and

    credit migration risk of a position. Default risk means the risk of

    loss on a position that could result from the failure of an obligor to

    make timely payments of principal or interest on its debt obligation,

    and the risk of loss that could result from bankruptcy, insolvency, or

    similar proceeding. Credit migration risk means the price risk that

    arises from significant changes in the underlying credit quality of the

    position. An SD may also include portfolios of equity positions in the

    incremental risk model with the prior permission from the Commission or

    RFA, provided that the SD consistently includes such equity positions

    in how it internally measures and manages the incremental risk for such

    positions at the portfolio level. Default is assumed to occur with

    respect to an equity position that is included in its incremental risk

    model upon the default of any debt of the issuer of the equity

    position.

    v. Comprehensive Risk Models

    Under the proposal, an SD would be required to compute all material

    price risks of one or more portfolios of correlation trading positions

    using an internal model. The Commission would require the model to

    measure all price risk consistent with a one-year time horizon at a

    one-tail, 99.9 percent confidence level, under the assumption either of

    a constant level of risk or of constant positions. The Commission would

    expect that the SD remains consistent in its choice of constant level

    or risk or positions, once it makes a selection. Also, the SD's choice

    of a liquidity horizon must be consistent between its calculation of

    its comprehensive and incremental risk.

    The Commission would require an SD's comprehensive risk model to

    capture all material price risk, including, but not limited to: (1) The

    risk associated with the contractual structure of cash flows of each

    position, its issuer, and its underlying exposures (for example, the

    risk arising from multiple defaults, including the ordering of defaults

    in tranched products); (2) credit spread risk, including nonlinear

    price risks; (3) volatility of implied correlations, including

    nonlinear price risks such as the cross-effect between spreads and

    correlations; (4) basis risks; (5) recovery rate volatility as it

    relates to the propensity for recovery rates to affect tranche prices;

    and (6) to the extent that comprehensive risk measure incorporates

    benefits from dynamic hedging, the static nature of the hedge over the

    liquidity horizon. The Commission notes that additional risks that are

    not explicitly discussed but are a material source of price risk must

    be included in the comprehensive risk measure.

    The Commission would require an SD to have sufficient market data

    to ensure that it fully captures the material price risks of the

    correlation trading positions in its comprehensive risk measure.

    Moreover, an SD must be able to demonstrate that its model is an

    appropriate representation of comprehensive risk in light of the

    historical price variation of its correlation trading positions. An SD

    would also be required to inform the Commission and RFA if the SD plans

    to extend the use of a model that has been

    [[Page 91272]]

    approved to an additional business line or product type.

    The comprehensive risk measure must be calculated at least weekly.

    In addition, an SD must at least weekly apply to its portfolio of

    correlation trading positions a set of specific stressed scenarios that

    capture changes in default rates, recovery rates, and credit spreads,

    and various correlations. An SD must retain and make available to the

    Commission and the RFA the results of the stress testing, including

    comparisons with capital comparisons generated by the SD's

    comprehensive risk model. An SD must promptly report to the Commission

    or the RFA any instances where the stress tests indicate any material

    deficiencies in the comprehensive risk model.

    vi. Credit Risk Models

    Swap dealers that obtain Commission or RFA approval to use internal

    models to compute credit risk would be required to submit credit risk

    models that satisfy the quantitative and qualitative requirements set

    forth in Appendix A to proposed Regulation 23.102. With respect to OTC

    derivatives contracts, an SD would need to determine an exposure charge

    for each OTC derivatives counterparty. The exposure charge for a

    counterparty that is insolvent, in a bankruptcy proceeding, or in

    default of an obligation on its senior debt, is the net replacement

    value of the OTC derivatives contracts with the counterparty (i.e., the

    net amount of uncollateralized current exposure to the counterparty).

    The counterparty exposure charge for all other counterparties is the

    credit equivalent amount of the SD's exposure to the counterparty

    multiplied by an applicable credit risk weight factor multiplied by

    eight percent. The credit equivalent amount is the sum of the SD's (1)

    maximum potential exposure (``MPE'') multiplied by a back-testing

    determined factor; and (2) current exposure to the counterparty. The

    MPE amount is a charge to address potential future exposure and is

    calculated using the VaR model as applied to the counterparty's

    positions after giving effect to a netting agreement, taking into

    account collateral received, and taking into account the current

    replacement value of the counterparty's positions.

    The Commission in its margin requirements (see Regulations 23.150

    through 23.161) has set forth the requirements for eligible collateral

    for uncleared swaps. In order to account for collateral in its VaR

    model for the credit risk charges, the Commission would expect an SD to

    account for only the collateral that complies with Regulation 23.156

    and is held in accordance with Regulation 23.157 for uncleared swaps

    that are subject to the Commission's margin rules. An SD would be able

    to take into consideration in its VaR calculation collateral that does

    not comply with Regulation 23.156 and is not held in accordance with

    Regulation 23.157 for uncleared swaps that are not subject to the

    Commission's margin rules.

    The Commission is allowing SDs to use internal methodologies to

    determine the appropriate credit risk weights to apply to

    counterparties, if it has received the Commission's or the RFA's

    approval. A higher percentage credit risk weight factor would result in

    a larger counterparty exposure charge amount. The Commission expects

    that the counterparty credit risk weight should be based on an

    assessment of the creditworthiness of the counterparty.

    The second component to the credit risk charge would be a

    counterparty concentration charge. This charge is intended to account

    for the additional risk resulting from a relatively large exposure to a

    single counterparty. This charge is triggered if an SD's current

    exposure to a counterparty exceeds five percent of the tier 1 or

    tentative net capital of the SD. In this case, an SD must take a

    counterparty concentration charge equal to: (1) Five percent of the

    amount by which the current exposure exceeds five percent of the tier 1

    or tentative net capital of the SD for a counterparty with a credit

    risk weight of 20 percent or less; (2) 20 percent of the amount by

    which the current exposure exceeds five percent of the tentative net

    capital for a counterparty with a risk weight factor of greater than 20

    percent and less than 50 percent; and (3) 50 percent of the amount by

    which the current exposure exceeds five percent of the tier 1 or

    tentative net capital for a counterparty with a risk weight factor of

    50 percent or more.

    The Commission is also proposing a portfolio concentration charge

    to address the risk of having a large amount of exposure relative to

    the capital of the SD. This charge is triggered when the aggregate

    current exposure of the SD to all counterparties exceed 50 percent of

    the SD's common equity tier 1capital or tentative net capital. In this

    case, the portfolio concentration charge would be equal to 100 percent

    of the amount by which the aggregate current exposure exceeds 50

    percent of the SD's common equity tier 1capital or tentative net

    capital.

    The Commission believes that its approach to calculating credit

    risk charges is appropriate given that its requirements are based on a

    method of computing capital charges for credit risk exposures in the

    international capital standards for banking institutions. Since credit

    risk is the risk that a counterparty could not meet its obligations on

    an OTC derivatives contract in accordance with agreed terms (such as

    failing to pay), the considerations that inform an SD's assessment of a

    counterparty's credit risk should be broadly similar across the various

    relationships that may arise between the dealer and the counterparty.

    Therefore, the Commission believes that its approach should be a

    reasonable model, as the SEC also uses a similar approach for its ANC

    broker-dealers or security-based SDs using models.

    SDs that are subject to the bank-based capital requirement could

    also request Commission or RFA approval to use the Federal Reserve

    Board's internal ratings-based and advanced measurement model

    approaches to compute risk-weighted assets for the credit exposures

    listed in subpart E of 12 CFR 217. The SD would have to include such

    exposures in its application to the Commission and RFA, and explain how

    its proposed models are consistent with the Federal Reserve Board's

    model criteria in subpart E of 12 CFR 217.

    Request for Comment

    The Commission requests comment on all aspects of the proposed

    model approval process and the computation of the credit risk charges.

    In addition, the Commission requests comment, including empirical data

    in support of comments, in response to the following questions:

    1. Do the proposed models appropriately account for the market and

    credit risk of swaps and security-based swaps? If not, explain why and

    provide alternatives that the Commission should consider.

    2. Is the proposed model review process appropriate? If not,

    explain why not and provide alternatives that the Commission should

    consider.

    3. The proposal states that the Commission expects that a

    prudential regulator's or foreign regulator's review and approval of

    capital models that are used in the corporate family of an SD would be

    a significant factor in NFA determining the scope of its review,

    provided that appropriate information sharing agreements are in place.

    Given the number and complexity of the model review process, please

    provide comments on the viability of the proposed model review process?

    What other alternatives should the Commission consider?

    [[Page 91273]]

    4. Should the Commission provide for automatic approval or

    temporary approval of capital models already approved by a prudential

    or foreign regulator? If so, please provide information regarding on

    what conditions such models should be approved?

    5. What factors should the Commission consider in setting an

    effective date for the capital rules given the application process and

    the model approval process? Are most SDs that would be subject to the

    rule already using models that are consistent with the proposed

    regulations?

    6. Are there other approaches available to facilitate the timely

    review of applications from SDs to use internal models? For example,

    could a more limited review be performed of models that have been

    approved by another regulator? If so, what conditions, if any, should

    the Commission consider prior to approving the model?

    7. How much implementation time is needed for the Commission's

    proposed model review and approval process?

    8. Are the proposed methods of computing the credit risk charge

    appropriate for nonbank SDs? If not, explain why not. For example, are

    there differences between FCM/BDs that are also SDs and standalone SDs

    that would make the method of computing the credit risk charge

    appropriate for the former but not the latter. If so, identify the

    differences and explain why they would make the credit risk charge not

    appropriate for nonbank SDs. What modifications should be made in that

    case?

    9. Is the method of computing the counterparty exposure charge

    appropriate for nonbank SDs? If not, explain why not. For example, is

    the calculation of the credit equivalent amount (i.e., the sum of the

    MPE and the current exposure to the counterparty) a workable

    requirement for nonbank SDs? If not, explain why not.

    10. Are the conditions for taking collateral into account when

    calculating the credit equivalent amount appropriate for nonbank SDs?

    If not, explain why not.

    11. Are the conditions for taking netting agreements into account

    when calculating the credit equivalent amount appropriate for nonbank

    SDs? If not, explain why not.

    12. Are the standardized risk weight factors (20%, 50%, and 150%)

    proposed for calculating the credit equivalent amount appropriate for

    nonbank SDs? If not, explain why not.

    13. Is the method of computing the counterparty concentration

    charge appropriate for nonbank SDs? If not, explain why not.

    14. Is the method of computing the portfolio concentration charge

    appropriate for SDs? If not, explain why not.

    B. Swap Dealer and Major Swap Participant Liquidity Requirements and

    Equity Withdrawal Restrictions

    1. Liquidity Requirements

    The Commission is proposing liquidity requirements for SDs that

    elect a bank-based capital approach under proposed Regulation

    23.101(a)(1)(i) or a net liquid assets capital approach under proposed

    Regulation 23.101(a)(1)(ii). The Commission also is proposing liquidity

    requirements for SDs that are registered FCMs. The Commission's

    proposed liquidity requirements are designed to address the potential

    risk that an SD may not be able to efficiently meet both expected and

    unexpected current and future cash flow and collateral needs as a

    result of adverse events impacting the SD's daily operations or

    financial condition. The proposed liquidity requirements for SDs

    subject to the bank-based capital approach are consistent with existing

    liquidity requirements adopted by the Federal Reserve Board for bank

    holding companies.\90\ The proposed liquidity requirements for SDs

    subject to the net liquid assets capital approach are consistent with

    liquidity requirements proposed by the SEC for SBSDs.\91\

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    \90\ See 12 CFR part 249.

    \91\ See SEC proposed Rule 18a-1(f), 77 FR 226 (Nov. 23, 2012).

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

    SDs that are subject to the capital requirements of a prudential

    regulator, would not be subject to the Commission's proposed liquidity

    requirements as such SDs are subject to regulation by the prudential

    regulators, including liquidity requirements established by the

    prudential regulators. The Commission also is not proposing liquidity

    requirements for SDs that are eligible to use the tangible net worth

    capital approach under proposed Regulation 23.101(a)(2)(i). SDs that

    are eligible to use the net worth capital approach are required to be

    primarily engaged in commercial activities, with their financial

    activities limited by the 15% asset test or 15% revenue tests discussed

    in section II.A.2.iii of this release. Accordingly, the business

    operations of SDs that are eligible to use the tangible net worth

    capital approach are significantly different from the traditional

    business activities of financial firms and financial market

    intermediaries whose need for access to liquidity is crucial to meet

    their obligations to make daily payments to their clients and to meet

    other daily funding obligations. In contrast, the liquidity needs of

    SDs that are eligible to use the tangible net worth approach would

    encompass the daily funding and payment obligations of the non-

    financial business with which the SD is connected.

    i. Swap Dealers Subject to the Bank-Based Capital Approach

    Proposed Regulation 23.104(a)(1) would provide that an SD that

    elects the bank-based capital approach would need to meet the liquidity

    coverage ratio requirements set forth in 12 CFR part 249, and apply

    such requirements as if the SD were a bank holding company subject to

    12 CFR part 249. The proposed liquidity coverage ratio would require

    the SD to maintain each day an amount of high quality liquid assets

    (``HQLAs''), as defined in 12 CFR 249.20, that is no less than 100

    percent of the SDs total net cash outflows over a prospective 30

    calendar-day period.\92\

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

    \92\ See 12 CFR 249.10. Federal Reserve Board rules require a

    regulated institution to maintain a liquidity coverage ratio of HQLA

    to net cash outflows that is equal to or greater than 1.0 on each

    business day.

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

    HQLAs are assets that are unencumbered by liens and other

    restrictions on the ability of the SD to transfer the assets.\93\ There

    are three categories of HQLAs (level 1 and levels 2A and 2B),\94\ and

    there are haircuts and concentration restrictions on the level 2A and

    level 2B assets.\95\ Specifically, level 2A and level 2B assets are

    valued at 85 percent and 50 percent, respectively, of the fair value of

    the assets.\96\ The HQLA categories are designed so that the assets

    that are HQLAs could be converted quickly into cash without reasonably

    expecting to incur losses in excess of the applicable haircuts during a

    stress period.

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

    \93\ See 12 CFR 249.22(b).

    \94\ See 12 CFR 249.20.

    \95\ See 12 CFR 249.21. Level 2A liquid assets are subject to a

    15 percent haircut, and level 2B liquid assets are subject to a 50

    percent haircut. The concentration limits on level 2A and 2B assets

    are set forth in 12 CFR 249.21(d), and effectively provide that

    level 2A and level 2B assets may not comprise more than 40 percent

    and 15 percent, respectively, of an entity's HQLAs.

    \96\ See 12 CFR 249.21(a).

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

    An SD's total net cash outflow amount would be determined by

    applying outflow and inflow rates, which reflect certain standardized

    stressed assumptions, against the balances of an SD's funding sources,

    obligations, transactions, and assets over a prospective 30 day

    period.\97\ Inflows that can be included to offset outflows are limited

    to 75 percent of the outflows

    [[Page 91274]]

    to ensure that the SD is maintaining sufficient liquidity and is not

    overly reliant on inflows. The stressed assumptions include events such

    as a partial loss of secured, short-term financing with certain

    collateral and counterparties and losses from derivatives positions and

    the collateral supporting those positions.

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

    \97\ See 12 CFR 249.32.

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

    The Commission recognizes that certain portions of 12 CFR part 249

    may not be applicable to a particular SD. For example, an SD may not

    have certain of the instruments listed in 12 CFR part 249 as an asset

    or may not have certain of the cash inflows and outflows listed in the

    regulation.\98\ However, the Commission believes that the portion of

    the regulations applicable to derivative transactions would be

    applicable to an SD. Therefore, the SD would be required to apply the

    portions of 12 CFR part 249 that are applicable to it, based on its

    balance sheet and the composition of its assets and liabilities.

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

    \98\ The Commission is also proposing to explicitly include an

    SD's cash deposits that are readily available to meet the general

    obligations of the SD as a level 1 liquid asset. The Commission is

    also modifying the proposal to provide that SDs organized and

    domiciled outside of the U.S. may include in its HQLAs held outside

    of the U.S. (See proposed Regulation 23.104(a)(1)).

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

    Furthermore, the Commission is proposing to adjust the Federal

    Reserve Board's liquidity coverage ratio to better reflect the business

    of an SD. Specifically, the proposal would explicitly include an SD's

    cash deposits that are readily available to meet the general

    obligations of the SD as a level 1 liquid asset in computing its

    liquidity coverage ratio.\99\ The Commission is also modifying the

    proposal to provide that an SD organized and domiciled outside of the

    U.S. may include in its HQLAs assets held in it home country

    jurisdiction.\100\ The Commission believes that these adjustments are

    appropriate to better align the liquidity coverage ratio with the

    expected operations of certain SDs.

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

    \99\ See proposed Regulation 23.104(a)(1).

    \100\ Id.

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

    The Commission also believes that the results of stress tests play

    a key role in shaping an SD's liquidity risk contingency planning.

    Thus, stress testing and contingency planning are closely intertwined.

    Under proposed Regulation 23.104(a)(4), an SD would be required to

    establish a contingency funding plan. The contingency funding plan

    would need to clearly set out the strategies and funding sources for

    addressing liquidity shortfalls in emergency situations and would need

    to address the policies, roles, and responsibilities for meeting the

    liquidity needs of the SD.

    The proposal further provides that the SD's senior management that

    has responsibility for risk management would need to be informed if the

    SD did not maintain a liquidity coverage ratio of at least 1.0. In

    addition, the assumptions underlying the calculation of the liquidity

    coverage ratio would need to be reviewed at least quarterly by senior

    management that has responsibility to oversee risk management at the SD

    and at least annually by senior management of the SD.\101\

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

    \101\ See proposed Regulation 23.104(a)(2) and (3).

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

    The Commission also is proposing to require an SD to obtain

    Commission approval prior to transferring HQLAs to the SD's affiliates

    or parent if, after the transfer of those liquid assets, the SD would

    not be able to comply with the liquidity coverage ratio

    requirement.\102\ Therefore, an SD may not transfer assets that would

    qualify for the numerator of the liquidity coverage ratio to its

    affiliates or parent if, after the transfer, the SD's HQLA would be

    below 100 percent of its total projected net cash flows over a 30 day

    period.

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

    \102\ See proposed Regulation 23.104(a)(2).

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

    ii. Swap Dealers Subject to the Net Liquid Assets Capital Approach

    An SD that elects to be subject to a net liquid assets capital

    approach would need to comply with liquidity risk management

    requirements set forth in proposed Regulation 23.104(b). The Commission

    understands that many financial institutions have traditionally used

    liquidity funding stress tests as a means to measure liquidity risk.

    These tests would generally estimate cash and collateral needs over a

    period of time and assume that sources to meet those needs (e.g.,

    obtaining secured funding lines and lines of credit) will become

    impaired or be unavailable. Therefore, to raise funds during a

    liquidity stress event, a firm would generally keep a pool of

    unencumbered liquid assets that can be used to meet its current

    liabilities or other funding needs. The size of the pool of

    unencumbered liquid assets would be based on a firm's estimation of how

    much of a diminution of value in those liquid assets and the amount of

    funding that would be lost from external sources during a stress event

    and the duration of the event.

    Under proposed Regulation 23.104(b), an SD would need to perform a

    liquidity stress test at least monthly that takes into account certain

    assumed conditions lasting for 30 consecutive days. The results of the

    liquidity stress test would need to be provided within 10 business days

    of the month end to senior management responsible for overseeing risk

    management at the SD. In addition, the assumptions underlying the

    liquidity stress test would need to be reviewed at least quarterly by

    senior management responsible for overseeing risk management at the SD

    and at least annually by senior management of the SD.\103\

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

    \103\ The assumptions would include (1) a decline in

    creditworthiness of the SD severe enough to trigger contractual

    credit related commitment provisions of counterparty agreements; the

    loss of all existing unsecured funding at the earlier of its

    maturity and an inability to acquire a material amount of new

    unsecured funding; and, the potential for a material loss of secured

    funding.

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

    As noted above, the Commission's proposed liquidity requirements

    for SDs that are subject to a net liquid assets capital approach are

    consistent with the SEC's proposed liquidity requirements for SBSDs,

    and are intended to address the types of liquidity outflows experienced

    by ANC Firms in times of stress. Consistent with the SEC approach, the

    Commission's liquidity stress test proposal is designed to ensure that

    SDs are using a stress test that is severe enough to produce an

    estimate of a potential funding loss of a magnitude that might be

    expected in a severely stressed market. Proposed Regulation

    23.104(b)(3) would require an SD to maintain at all times liquidity

    reserves based on the results of the liquidity stress test in the form

    of unencumbered cash or U.S. government securities. The Commission is

    proposing this requirement to ensure that only the most liquid

    instrument are held in reserves, given that the market for less liquid

    instruments may not be available during a time of market stress.

    As noted above, the results of stress tests play a key role in

    shaping an SD's liquidity risk contingency planning. Therefore, similar

    to the requirement for an SD that elects to be subject to a bank-based

    capital approach, an SD that elects to be subject to a net liquid

    assets capital approach would be required by proposed Regulation

    23.104(b)(4) to establish a contingency funding plan. The plan would

    need to clearly set out the strategies and funding sources for

    addressing liquidity shortfalls in emergency situations and would need

    to address the policies, roles, and responsibilities for meeting the

    liquidity needs of the SD.

    Request for Comment

    The Commission requests comment on all aspects of the proposed

    capital rule and liquidity requirements, including empirical data in

    support of

    [[Page 91275]]

    comments. In addition, the Commission requests comment in response to

    the following questions:

    1. Should the Commission phase-in the implementation of any final

    capital rule? For example, the capital requirements would be

    implemented first and the liquidity requirements would be implemented

    second. Please provide recommendations and implementation time-periods.

    2. Should the Commission consider alternative approaches to the

    proposed liquidity requirements? If so, explain the alternatives and

    the rationale for the alternatives. Please provide any quantitative

    analysis in support of alternative approaches, if possible.

    2. Swap Dealer Equity Withdrawal Restrictions

    The Commission is proposing certain equity withdrawal restrictions

    for SDs that elect either the bank-based capital approach or the net

    liquid assets capital approach. Proposed Regulation 23.104(c) would

    provide that the capital of an SD, or any subsidiary or affiliate of

    the SD that has any of its liabilities or obligations guaranteed by the

    SD, may not be withdrawn by action of an SD or equity holder of the SD,

    or by redemption of shares of stock by the swap dealer or such

    affiliates or subsidiaries, or through the payment of dividends or any

    similar distribution, if such withdrawal or payment, and any other

    similar transactions that are scheduled to occur within the succeeding

    six months, results in the SD holding less than 120 percent of the

    minimum regulatory capital that the SD is required to hold pursuant to

    proposed Regulation 23.101. The proposal includes an exception for

    paying required tax payments and for paying reasonable compensation to

    equity holders of the SD. The proposal is consistent with existing

    equity withdrawal restrictions imposed on FCMs and BDs, and is

    consistent with equity withdrawal restrictions proposed by the SEC for

    SBSDs.\104\

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    \104\ Equity withdrawal restrictions for FCMs are set forth in

    Regulation 1.17(e), and for BDs is set forth in 17 CFR 240.15c3-

    1(e)(2). SEC proposed equity withdrawal restrictions for SBSDs is

    contained in proposed Rule 18a-1(e)(2). See 77 FR 226 (Nov. 23,

    2012).

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

    Proposed Regulation 23.104(d) would grant the Commission the

    ability to issue an order temporarily restricting for up to 20 business

    days the withdrawal of capital from an SD, or prohibiting the SD from

    making an unsecured loan or advance to any stockholder, partner,

    member, employee or affiliate of the SD. The Regulation would further

    provide that the Commission may issue such an order if, based upon the

    information available, the Commission concludes that such withdrawal,

    loan or advance may be detrimental to the financial integrity of the

    SD, or may unduly jeopardize the SD's ability to meet its financial

    obligations to counterparties or to pay other liabilities which may

    cause a significant impact on the markets or expose the counterparties

    and creditors of the SD to loss. The proposal further provides that the

    SD may request a hearing on the order, which must be held within two

    business days of the date of the written request by the SD. The

    proposed grant of authority to the Commission to issue an order

    temporarily restricting certain unsecured loans or advances is

    consistent with the existing Commission authority under Regulation

    1.17(g)(1) for FCMs and with the SEC's authority over BDs.\105\ The

    proposed Commission authority to temporarily restrict equity

    withdrawals also is consistent with the SEC's proposal governing

    SBSDs.\106\

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

    \105\ See Rule 15c3-1(e)(3) (17 CFR 240.15c3-1(e)(3)).

    \106\ See SEC proposed Rule 18a-1(e)(3) (77 FR 70214 (Nov. 23,

    2012).

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

    Both the limitation on the withdrawal of equity capital and the

    authority of the Commission to temporarily restrict the withdrawal of

    capital are intended to provide mechanisms for the Commission to assess

    the financial and operational condition of SDs in times of financial

    stress. In such situations, it is a priority for the Commission that

    SDs maintain the financial strength and liquidity to meet their

    financial obligations to counterparties and creditors.

    C. Swap Dealer and Major Swap Participant Financial Recordkeeping,

    Reporting and Notification Requirements

    1. Swap Dealer and Major Swap Participant Financial Recordkeeping and

    Financial Statement Reporting Requirements

    Section 4s(f) of the CEA directs the Commission to adopt

    regulations governing reporting and recordkeeping for SDs and MSPs,

    including financial condition reporting and position reporting.

    Consistent with section 4s(f), the Commission is proposing new

    Regulation 23.105, which would require SDs and MSPs to satisfy current

    books and records requirements, ``early warning'' and other

    notification filing requirements, and periodic and annual financial

    report filing requirements with the Commission and with any RFA of

    which the SDs and MSPs are members.

    As discussed below, however, the proposed notice and financial

    reporting requirements differentiate between SDs and MSPs that are

    subject to the Commission's capital requirements and SDs and MSPs that

    are subject to the prudential regulators' capital requirements.\107\

    The Commission is proposing not to impose the majority of the financial

    reporting provisions contained in Regulation 23.105 on SDs and MSPs

    that are subject to the capital rules of a prudential regulator from,

    with the exception of certain financial and swaps position and margin

    reporting requirements and notice filing requirements discussed below,

    as the financial condition of these entities will be supervised by the

    applicable prudential regulator and subject to its financial reporting

    requirements. The Commission believes that the proposal is consistent

    with section 4s of the CEA which grants the prudential regulators the

    authority to establish capital requirements for SDs and MSPs subject to

    their jurisdiction. Additionally, the Commission's proposed approach

    avoids imposing potential duplicative, and potentially contradictory,

    requirements on SDs and MSPs that are subject to both Commission and

    prudential regulator oversight.

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

    \107\ See proposed Regulation 23.105(a)(2).

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

    Proposed Regulation 23.105(b) is based upon existing FCM and BD

    financial recordkeeping and reporting requirements and would require an

    SD or MSP to prepare current ledgers or other similar records showing

    or summarizing each transaction affecting its asset, liability, income,

    expense and capital accounts.\108\ The accounts must be classified in

    accordance with U.S. generally accepted accounting principles (``U.S.

    GAAP'') provided, however, that if the SD or MSP is organized under the

    laws of a foreign jurisdiction and is not otherwise required to prepare

    its records or financial statements in accordance with U.S. GAAP, the

    SD or MSP may prepare the required records in accordance with

    International Financial Reporting Standards (``IFRS'') issued by the

    International Accounting Standards Board (``IASB'').\109\ Proposed

    Regulation

    [[Page 91276]]

    23.105(b) also would require an SD or MSP to maintain its ledgers or

    other similar records showing or summarizing each transaction affecting

    its asset, liability, income, expense and capital accounts for a period

    of five years pursuant to Regulation 1.31.

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

    \108\ Commission Regulation 1.18 requires each FCM to prepare

    and keep current ledgers or other similar records which show or

    summarize, with appropriate references to supporting documents, each

    transaction affecting its asset, liability, income, expense and

    capital accounts. SEC Rule 17a-3 (17 CFR 240.17a-3) requires a BD to

    make and maintain comparable ledgers and other similar records

    reflecting its assets, liabilities, income and expenses.

    \109\ FCMs are required to classify accounts only in accordance

    with U.S. GAAP.

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

    The Commission is proposing in Regulation 23.105(b) to permit an SD

    or MSP organized and domiciled outside of the U.S. to maintain

    financial books and records in accordance with IFRS in recognition that

    U.S. GAAP may not be the native accounting principles for a non-U.S.

    firm and that these firms may be subject to existing non-U.S. GAAP

    financial reporting requirements in their home country jurisdictions.

    These SDs and MSPs would be subject to substantial expense and burden

    if they were required to maintain two separate accounting records and

    systems to satisfy two separate financial reporting requirements. The

    Commission, however, is proposing that if the SD or MSP is otherwise

    required to maintain books and records in accordance with U.S. GAAP,

    the SD or MSP must maintain its records pursuant to U.S. GAAP in order

    to comply with Regulation 23.105(b).

    The Commission is also proposing to require SDs and MSPs to file

    periodic financial reports with the Commission and with the SDs' or

    MSPs' RFA. Consistent with the recordkeeping requirements, the proposed

    financial reporting requirements are consistent with existing

    Commission requirements for FCMs and SEC requirements for BDs.\110\

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

    \110\ Regulation 1.10 requires FCMs to submit unaudited monthly

    and audited annual financial reports to the Commission and to the

    FCMs' respective designated self-regulatory organization. SEC Rule

    17a-5 (17 CFR 240.17a-5) directs BDs to file unaudited monthly

    reports and annual audited reports with the SEC.

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

    Proposed Regulation 23.105(d)(1) would require an SD or MSP to file

    a monthly unaudited financial report within 17 business days of the

    close of business each month, and proposed Regulation 23.105(e)(1)

    would require an SD or MSP to file an annual audited financial report

    within 60 days of the close of the SD's or MSP's fiscal year-end

    date.\111\ The monthly unaudited and the annual audited financial

    reports must be prepared in the English language and denominated in

    U.S. dollars.\112\ The monthly unaudited and annual audited financial

    reports also must include: (1) A statement of financial condition; (2)

    a statement of income or loss; (3) a statement of cash flows; (4) a

    statement of changes in ownership equity; (5) a statement of the

    applicable capital computation; and (6) any further materials that are

    necessary to make the required statements not misleading.\113\ Proposed

    Regulation 23.105(e)(4)(iii) would further require that the annual

    audited financial statements also include any necessary footnote

    disclosures. Proposed Regulation 23.105(e)(2) would require the annual

    financial statements to be audited by a public accountant that is in

    good standing in the accountant's home country jurisdiction.\114\

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

    \111\ The Commission also is proposing certain technical,

    administrative provisions for SD and MSP financial statements.

    Proposed paragraph (g) to Regulation 23.105 would prohibit an SD or

    MSP from changing its fiscal year end date unless the SD or MSP has

    requested and received written approval for the change from the RFA

    of which it is a member. Proposed paragraph (j) would provide that

    an SD or MSP may request an extension of time to file its unaudited

    monthly or audited annual report from the RFA, which may be granted

    on a conditional or unconditional basis, or disapproved by the RFA.

    Proposed paragraphs (g) and (j) of Regulation 23.105 are consistent

    with current provisions governing FCMs under Regulation 1.10.

    \112\ See proposed Regulations 23.105(d)(2) and (e)(3).

    \113\ See proposed Regulations 23.105(d)(2) and (e)(4).

    \114\ FCMs currently are required to file unaudited financial

    reports and an annual financial report with the Commission within 17

    and 60 days, respectively, of the end of the reporting period. See

    Regulation 1.10(b).

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

    The monthly unaudited and annual audited financial statements must

    be prepared in accordance with U.S. GAAP, provided, however, that the

    Commission is proposing to permit SDs or MSPs that are organized and

    domiciled outside of the U.S., and otherwise are not required to

    prepare financial statements in accordance with U.S. GAAP, to prepare

    the financial statements in accordance with IFRS or another local

    accounting standard, after requesting approval by the Commission, which

    is discussed below, in lieu of U.S. GAAP.\115\ The use of IFRS in lieu

    of U.S. GAAP is consistent with the proposed treatment in Regulation

    23.105(b) discussed above that would allow a these SDs and MSP to

    maintain their financial books and records in accordance with IFRS.

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

    \115\ See proposed Regulations 23.105(d)(2) and (e)(3).

    Regulation 1.10 provides that FCMs must present its unaudited

    monthly reports and audited annual reports in accordance with U.S

    GAAP.

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

    The Commission, however, is proposing that if the non-U.S. SD or

    non-U.S. MSP is otherwise required to prepare financial statements in

    accordance with U.S. GAAP, the SD or MSP must submit financial

    statements prepared in accordance with U.S. GAAP to the Commission and

    to the firm's RFA in order to comply with the regulations. This

    requirement reflects the fact that certain foreign-based SDs or MSPs

    that consolidate into a U.S. parent organization may prepare U.S. GAAP

    financial statements as part of the consolidation. Under the proposed

    regulations, if the foreign-based SD or MSP prepares U.S. GAAP

    financial statements as part of the consolidation, it would be required

    to submit such U.S. GAAP statements to the Commission and to the firm's

    RFA to comply with Regulation 23.105(d)(2) and (e)(3).

    While the Commission has proposed to permit SDs or MSPs organized

    and domiciled outside the U.S. to use IFRS in lieu of U.S. GAAP in the

    preparation and presentation of the monthly unaudited and annual

    audited financial reports, the Commission recognizes that not all non-

    U.S. jurisdictions have adopted IFRS. In addition, the Commission

    understands that even in certain foreign jurisdictions that have

    adopted IFRS, SDs and MSPs may be permitted to prepare and present

    their financial statements in accordance with local accounting

    standards. To address this issue, the Commission is proposing in

    Regulation 23.105(o) to permit an SD or MSP organized and domiciled

    outside of the U.S. to petition the Commission to use local accounting

    standards in lieu of U.S. GAAP or IFRS in monthly unaudited and annual

    audited financial reports filed with the Commission.

    The process for seeking Commission approval to use local accounting

    standards is set forth in proposed Regulation 23.106 and is discussed

    in more detail in section II.D below. The Commission would review each

    request on a case-by-case basis and determine what, if any, additional

    information would be necessary in order to accept financial reports

    prepared in accordance with local accounting standards, including

    possible reconciliations of the financial information to U.S. GAAP. The

    Commission notes further that notwithstanding the proposed substituted

    compliance provisions, financial statements from all SDs and MSPs must

    be prepared in the English language and denominated in U.S. dollars, as

    proposed in Regulation 23.105(d)(2) and 23.105(e)(3).

    The Commission is also proposing in Regulation 23.105(d)(3), (4)

    and (e)(5) to permit an SD or MSP that is registered with the

    Commission as an FCM or registered with the SEC as a BD to satisfy the

    Commission's SD or MSP financial statement reporting requirements by

    submitting a CFTC Form 1-FR-FCM or its applicable SEC Financial and

    Operational Combined Uniform Single ('' FOCUS'') Report in lieu of the

    specific financial statements required under proposed Regulation

    [[Page 91277]]

    23.105.\116\ The financial information that would be required under

    proposed Regulation 23.105(d) for SDs and MSPs is consistent with the

    Commission's current requirements for Form 1-FR-FCM and the SEC's

    requirements for FOCUS Reports for BDs. The proposal also is consistent

    with the Commission's long history of permitting SEC registrants to

    meet their financial statement filing obligations with the Commission

    by submitting a FOCUS Report in lieu of CFTC Form 1-FR-FCM and reduces

    the burden on dually-registered firms by not requiring two separate

    financial reporting requirements.\117\

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    \116\ FCMs are required to file monthly unaudited and annual

    audited Forms 1-FR-FCM with the Commission and with their designated

    self-regulatory organization. The Forms 1-FR-FCM include, among

    other information, a statement of financial condition, a statement

    of income or loss, a statement of changes in ownership equity, a

    statement of liabilities subordinated to the claims of general

    creditors, a statement of the computation of regulatory minimum

    capital, and any further information as may be necessary to make the

    required statements not misleading. See Regulation 1.10(d).

    SEC FOCUS Reports are required to contain, among other

    statements and information, a statement of financial condition, a

    statement of income or loss, a statement of changes in ownership

    equity, a statement of liabilities subordinated to the claims of

    general creditors, and a statement of the computation of regulatory

    minimum capital. See SEC Rule 17a-5 (17 CFR 240.17a-5).

    \117\ See Regulation 1.10(h), which permits an FCM that is also

    registered as a BD to file its SEC FOCUS Report in lieu of the

    Commission's Form 1-FR-FCM.

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

    In addition to the specific financial reporting requirements

    discussed above, the Commission is also proposing in Regulation

    23.105(h) to require any SD or MSP to file additional financial or

    operational information as the Commission may deem necessary in order

    to adequately assess the SD's or MSP's financial condition or

    operational status. This additional financial and operational

    information may be necessary at times when an SD or MSP is experiencing

    a financial or operational crisis, and the additional information is

    necessary for the Commission to assess whether the SD or MSP will be

    able to continue to meet its obligations to counterparties and other

    creditors. The authorization to request additional information from a

    registrant also is consistent with existing Regulation 1.10 which

    provides the Commission with the authority to request financial

    information from FCMs and IBs, and it is consistent with existing

    authority that the SEC has with respect to BDs and with the proposed

    authority that the SEC would have over SBSDs and MSBSPs.\118\

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    \118\ See CFTC Regulation 1.10(b)(4).

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    The Commission also is proposing limited financial reporting for

    SDs and MSPs that are subject to the capital requirements of a

    prudential regulator as such regulators have existing financial

    reporting requirements in place for these SDs and MSPs. The financial

    reporting requirements for such SDs and MSPs are described in section

    II.C.6 below.

    The Commission, however, is proposing that SDs and MSPs that are

    subject to capital rules of a prudential regulator file financial

    reports and specific position and margin information with the

    Commission and with the RFA of which the SDs and MSPs are members

    within 17 business days of the end of each calendar quarter and not on

    a monthly basis. The financial reports and specific position

    information that would be required is set forth in Appendix B to

    proposed Regulation 23.105.

    SDs and MSPs that are dually registered as FCMs will continue to be

    subject to the capital requirements in Regulation 1.17, and along with

    proposed conforming amendments in Regulation 1.17 applicable to dually

    registered SDs and MSPs discussed above, will be permitted to comply

    with the applicable financial recordkeeping, notification and reporting

    under Regulation 23.105 by following applicable FCM requirements in

    Regulations 1.10, 1.12, and 1.16.\119\ Similarly, SDs and MSPs dually

    registered with the SEC as either SBSDs or MSBSPs will be permitted to

    comply with the Commission's financial reporting and notification

    requirements under Regulation 23.105 by filing simultaneously with the

    Commission all applicable notices or reports required under the SEC's

    rules.\120\

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    \119\ See Regulation 23.105(d)(4) and (e)(6), wherein SDs and

    MSPs dually registered as FCMs will be permitted to comply with the

    monthly and annual financial reporting requirements by filing form

    1-FR-FCM in lieu of the financial reports required under proposed

    Regulation 23.105.

    \120\ See Regulation 23.105(c)(5) referencing proposed 17 CFR

    240-18a-8 for notification requirements for SBSDs and MSBSPs. See

    Sec. 23.105(d)(3) and Sec. 23.105(e)(5) referencing proposed 17

    CFR 240-18a-7, for monthly and annual financial reporting

    requirements for SBSDs and MSBSPs.

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

    The Commission is further proposing to require that SDs and MSPs

    provide public disclosure on their Web site of some of the proposed

    required financial reporting, including a statement of financial

    condition and of the amount of minimum regulatory capital required and

    the amount of regulatory capital of the SD or MSP no less than

    quarterly, with the same information provided from an audited financial

    statement no less than annually. The proposal for public disclosure is

    consistent with financial reporting information the Commission has

    previously determined should not qualify as exempt from the Freedom of

    Information Act for FCMs. The proposal to require quarterly reporting

    is intended to make the frequency of such public disclosure consistent

    with publicly available information provided by bank entities in call

    reports.

    2. Swap Dealer and Major Swap Participant Notice Requirements

    The Commission is proposing to require SDs and MSPs to file certain

    regulatory notices with the Commission and with the RFA of which the

    SDs or MSPs are members if certain defined triggering events occur.

    Proposed Regulation 23.105(c) would require an SD or MSP that is not

    subject to the capital rules of a prudential regulator to provide the

    Commission and RFA with immediate written notice when the firm is: (1)

    Undercapitalized; (2) fails to maintain capital at a level that is in

    excess of 120 percent of its minimum capital requirement; or (3) fails

    to maintain current books and records.

    Proposed Regulation 23.105(c) would further require an SD or MSP,

    as applicable, to provide notice to the Commission and to the RFA

    within 24 hours of: (1) Failing to comply with the liquidity

    requirements under proposed Regulation 23.104, (2) experiencing a 30

    percent reduction in capital as compared to the last reported capital

    in a financial report filed with the Commission, or (3) failing to post

    or collect initial margin for uncleared swap transactions or exchange

    uncleared swap variation margin as required under the Commission's

    uncleared swaps margin rules and the initial margin that would be

    required for uncleared security-based swaps as required under 17 CFR

    240.18a-3(c)(1)(i)(B), if the total amount that has not been either

    collected by and exchanged with or posted by and exchanged with the SD

    is equal to or greater than: (1) 25 percent of the SD's required

    capital under the Commission's proposal calculated for a single

    counterparty or group of counterparties that are under common ownership

    or control; or (2) 50 percent of the SD's required capital under the

    Commission's proposal calculated for all of the SD's

    counterparties.\121\

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    \121\ See CFTC Regulations 23.152 and 23.153.

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    Proposed Regulation 23.105(c) also would require an SD to provide

    the Commission and the RFA with two business day's advance notice of a

    withdrawal that would exceed 30

    [[Page 91278]]

    percent of the SD's excess regulatory capital.\122\ Finally, the

    proposal would also require an SD or MSP that is dually-registered with

    the SEC as an SBSD or MSBSP to file with the Commission and with its

    RFA a copy of any notice that the SBSD or MSBSP is required to file

    with the SEC under SEC Rule 18a-8 (17 CFR 240.18a-8). SEC proposed Rule

    18a-8 requires SBSDs and MSBSPs to provide written notice to the SEC

    for comparable reporting events as proposed by the Commission in

    Regulation 23.105(c), including if a SBSD or MSBSP is undercapitalized

    or fails to maintain current books and records. The Commission is

    proposing to require SDs and MSPs that are dually-registered with the

    SEC to file copies with the Commission of notices filed with the SEC

    under Rule 18-8 to allow the Commission to be aware of any events that

    may indicate that the SD or MSP is unable to meet its operational or

    financial obligations on an ongoing basis.

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    \122\ The term ``regulatory capital'' is defined in proposed

    Regulation 23.100 and means the relevant capital approach applicable

    to the SD under proposed Regulation 23.101.

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

    The proposed notice provisions are intended to provide the

    Commission and the appropriate RFA with timely notice of potentially

    adverse financial or operational issues that may warrant immediate

    attention and ongoing surveillance. The proposed notice requirements

    are comparable to the notice requirements concerning capital currently

    required for FCMs under Regulation 1.12 of the Commission's regulations

    and with the SEC's notice requirements for BDs.\123\

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    \123\ See SEC Rule 17a-11 (17 CFR 240.17a-11).

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    3. Electronic Filing Requirements for Financial Reports and Regulatory

    Notices

    Proposed Regulation 23.105(m) would require all notifications and

    financial statement filings submitted to the Commission pursuant to

    Regulation 23.105 to be filed in an electronic manner using a user

    authentication process approved by the Commission. The Commission notes

    that the many SDs and MSPs are already familiar with the Commission

    approved WinJammer filing system maintained jointly by NFA and Chicago

    Mercantile Exchange. WinJammer currently allows Commission registrants

    that are authorized to use the electronic system to file financial

    reports and notices with the Commission and NFA simultaneously. The

    Commission views this system, as well as other future Commission

    approved systems, as the most effective way to ensure that the filings

    required under proposed Regulation 23.105 would be submitted promptly

    and directly to the Commission.

    4. Swap Dealer and Major Swap Participant Reporting of Position

    Information

    Proposed Regulation 23.105(l) would require each SD or MSP that was

    not subject to the capital rules of a prudential regulator to file

    monthly swap and security-based swap position information with the

    Commission and with the RFA of which the SD or MSP is a member. The

    information required to be submitted would be included in proposed

    Appendix A to Regulation 23.105, and is based upon the information that

    the SEC is proposing be filed with the SEC by SBSDs.\124\ Accordingly,

    SDs or MSPs that are dually-registered as SBSDs would be subject to

    file the same position information with both regulators.

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    \124\ See SEC proposed Form SBS part 4.

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    The position information that would be required by proposed

    Regulation 23.105(l) would include an SD's or MSP's: Current net

    exposure by the top 15 counterparties, and all other counterparties

    combined; total exposure by the top 15 counterparties, and all others

    combined; the internal credit rating, gross replacement value, net

    replacement value, current net exposure, total exposure, and margin

    collected for the top 36 counterparties. The SD or MSP would also have

    to provide current exposure and net exposure by country for the top 10

    countries. The Commission would use this information as part of its

    financial surveillance program to monitor the financial condition and

    positions of SDs and MSPs.

    5. Reporting Requirements for Swap Dealers Approved To Use Internal

    Capital Models

    The Commission is proposing reporting requirements for SDs that

    have received approval from the Commission or from an RFA under

    proposed Regulation 23.102(d) to use internal models to compute market

    risk capital charges or credit risk capital charges. The Commission's

    proposed requirements for the collection of model information are

    largely based on existing requirements for ANC Firms under Regulation

    1.17 and the rules of the SEC, and on SEC proposed Rules for SBSDs and

    BDs.

    Regulation 23.105(k) would require an SD to file, on a monthly

    basis, a listing of each product category for which the SD does not use

    an internal model to compute market, and the amount of the market risk

    deduction; a graph reflecting, for each business line, the daily intra-

    month VaR; the aggregate VaR for the SD; for each product for which the

    SD uses scenario analysis, the product category and the deduction for

    market risk; and, credit risk information on swap, mixed swap, and

    security-based swap exposures, including: (A) Overall current exposure,

    (B) current exposure listed by counterparty; (C) the 10 largest

    commitments listed by counterparty, (D) the SD's maximum potential

    exposure listed by counterparty for the 15 largest exposures; (E) the

    SD's aggregate maximum potential exposure, (F) a summary report

    reflecting the SD's current and maximum potential exposures by credit

    rating category, and (G) a summary report reflecting the SD's current

    exposure for each of the top 10 countries to which the SD is exposed.

    Regulation 23.105(k) would also require an SD to report the results

    of the liquidity stress tests required by proposed Regulation 23.104.

    Regulation 23.104 also would require each SD approved to use internal

    capital models to submit a report identifying the number of business

    days for which the actual daily net trading loss exceeded the

    corresponding daily VaR and the results of backtesting of all internal

    models used to compute allowable capital, including VaR, and credit

    risk models, indicating the number of backtesting exceptions. All of

    the information required to be submitted to the Commission or RFA under

    proposed Regulation 23.105(k) would be required to be filed within 17

    days of the close of each month, with the exception of the report

    identifying the number of business days for which the actual daily net

    trading loss exceeded the corresponding daily VaR, which would be

    required on a quarterly basis.

    6. Financial Reporting Requirements for Swap Dealers and Major Swap

    Participants Subject to the Capital Rules of a Prudential Regulator

    The Commission is proposing not to require an SD or MSP that is

    subject to the capital rules of a prudential regulator to file monthly

    unaudited or annual audited financial statements with the Commission or

    with the RFA of which the SD or MSP is a member. The Commission also is

    proposing to not to require such SDs or MSPs to file notifications

    contained in Regulation 23.105(c) with the Commission or with an RFA.

    The Commission is, however, proposing to require SDs and MSPs that

    are subject to capital rules of a

    [[Page 91279]]

    prudential regulator to file quarterly unaudited financial reports and

    certain regulatory notices with the Commission and with an RFA.

    Proposed Regulation 23.105(p) would require SDs and MSPs that are

    subject to the capital requirements of a prudential regulator to file

    quarterly unaudited financial reports with the Commission that are

    largely based on existing ``call reports'' that the SDs and MSPs are

    required to file with their respective prudential regulator.\125\ The

    proposed financial reporting requirement is consistent with the SEC

    proposed filing requirement for SBSDs that are subject to the capital

    rule of a prudential regulator.\126\ Specifically, the Commission is

    proposing that the SDs and MSPs submit to the Commission Appendix B of

    proposed Regulation 23.105, which is largely based on the SEC's

    proposed Form SBS part 2 and part 5.

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    \125\ See proposed Sec. 23.105(p) and Appendix B. See also

    Consolidated Reports of Condition and Income for a Bank with

    Domestic and Foreign Offices (``call reports''); 12 U.S.C. 324; 12

    U.S.C. 1817; 12 U.S.C. 161; and 12 U.S.C. 1464.

    \126\ See proposed SEC Rule 17 CFR 240.18a-8.

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

    The financial information required by Regulation 23.105(p) would

    include the SD's or MSP's balance sheet and details of the SD's or

    MSP's capital composition and capital ratios. The financial information

    would further focus on the SD's or MSP's swap and security-based swap

    activities, including requiring aggregate security-based swaps, mixed

    swaps, swaps, and other derivatives information. The information would

    include both cleared and uncleared positions and would further

    differentiate between long and short positions. The Commission is

    requiring this information in order to provide the Commission and the

    SD's or MSP's RFA with swap and security-based swap trading data, which

    may be monitored as part of their respective financial and market

    surveillance monitoring programs.

    Proposed Regulation 23.105(p) would also require SDs and MSPs that

    are subject to the capital rules of a prudential regulator to file

    regulatory notices with the Commission and with an RFA. Proposed

    Regulation 23.105(p)(3)(i) would require an SD or MSP to file a notice

    with the Commission and with an RFA if the SD or MSP filed a notice of

    change of its reported capital category with the Federal Reserve Board,

    the OCC, or the FDIC. Prudential regulators have established five

    capital categories that are used to describe a bank's capital strength:

    (1) Well capitalized; (2) adequately capitalized; (3) undercapitalized;

    (4) significantly undercapitalized; and (5) critically

    undercapitalized.\127\ The definition of each capital category is based

    on capital measures under the bank capital standard and other

    factors.\128\

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    \127\ See 12 CFR 325.103; 12 CFR 6.4; 12 CFR 208.43.

    \128\ See id.

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

    A bank is required to notify its appropriate prudential regulator

    of adjustments to the bank's capital category that may have occurred

    that would put the bank into a lower capital category from the category

    previously assigned to it. Following the notice, the prudential

    regulator determines whether the bank needs to adjust its capital

    category.\129\ Because these notices may indicate that a bank is in or

    approaching financial difficulty, the Commission is proposing to

    include a notification requirement in proposed regulation

    23.105(p)(3)(i) that would require a bank SD or a bank MSP to give

    notice to the Commission when it files an adjustment of reported

    capital category with its prudential regulator by transmitting a copy

    of the notice to the Commission.

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

    \129\ See 12 CFR 6.3(c); 12 CFR 208.42(c); 12 CFR 325.102(c).

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

    The rules of the Federal Reserve Board, OCC and FDIC also establish

    minimum capital requirements in the form of capital ratios that banks

    and bank holding companies are required to meet in order to comply with

    the respective Agencies capital requirements.\130\ The Commission is

    proposing to require a bank SD or bank MSP to file notice with the

    Commission if the SD's or MSP's regulatory capital is less than the

    applicable minimum capital requirements set forth in the prudential

    regulators' rules.

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

    \130\ See 12 CFR 3.10; 12 CFR 217.10; 12 CFR 324.10.

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

    The Commission also is proposing in Regulation 23.105(p)(3) to

    require an SD that is a foreign bank to notify the Commission if the

    SD's files a notice of a change in its capital category or a notice of

    falling below its minimum capital requirement with a prudential

    regulator or with it home country supervisors. This notice requirement

    is intended to provide the Commission with information that a

    registered SD may be experiencing financial issues, and provides the

    Commission with the opportunity to consult with the appropriate

    prudential regulator.

    The Commission also is proposing to require a bank SD or a bank MSP

    to file a notice in the event the SD or MSP fails to post or collect

    initial margin for uncleared swap transactions or post or collect

    uncleared swap variation margin as required under the respective

    prudential regulators' rules, if the total amount that has not been

    either collected or posted by and exchanged with the SD or MSP is equal

    to or greater than: (1) 25 percent of the SD's or MSP's minimum capital

    requirement; or (2) 50 percent of the SD's or MSP's minimum capital

    requirement.

    Consistent with section 4s(e) of the CEA, bank SDs and bank MSPs

    are subject to the capital rules of the prudential regulators. The

    proposed bank SD and MSP notice requirements contained in Regulation

    23.105(p) are intended to provide the Commission with sufficient

    information to effectively monitor these entities as market

    participants in the swap markets subject to Commission oversight. For

    example, bank SDs and bank MSPs may be swap counterparties to non-bank

    SDs and non-bank MSPs subject to the Commission's capital and margin

    rules. The proposed notice provisions will assist Commission staff with

    monitoring these bank SDs and bank MSPs for compliance with other

    statutory and regulatory requirements, such as the existing business

    conduct rules applicable on all SDs, and the potential impacts these

    bank SDs and bank MSPs may have on other Commission registrants and on

    the market as a whole. The Commission anticipates that its staff, as

    appropriate, would engage with staff of the relevant prudential

    regulator in assessing the potential market impacts upon receiving a

    regulatory notice.

    Proposed paragraph (p) of Regulation 23.105 would also include

    identical oath and affirmation provisions and electronic filing

    requirements for SDs and MSPs that are subject to the capital rules of

    a prudential regulator as the Commission is proposing under paragraphs

    (f) and (n) of Regulation 23.105 for SDs and MSPs that are subject to

    the Commission's capital rules.

    7. Weekly Position and Margin Reporting

    The Commission is proposing weekly reporting of position and margin

    information for the purposes of conducting risk surveillance of SDs and

    MSPs. This requirement would apply to SDs and MSPs subject to the

    capital and margin rules of either the Commission or a prudential

    regulator. Similar reporting is currently provided on a daily basis by

    DCOs for cleared swaps.\131\

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

    \131\ 17 CFR 39.19(c)(1).

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    Proposed Regulation 23.105(q)(1) would require SDs and MSPs to

    report position information, in a format specified by the Commission,

    (i) by

    [[Page 91280]]

    counterparty, and (ii) for each counterparty, by the following asset

    classes--commodity, credit, equity, and foreign exchange or interest

    rate. Under the uncleared margin rules, these are asset classes within

    which margin offsets may be taken.\132\

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    \132\ 17 CFR 23.154(b)(2)(v).

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

    Proposed Regulation 23.105(q)(2) would require SDs and MSPs to

    report margin information, in a format specified by the Commission,

    showing (i) the total initial margin posted by the SD or MSP with each

    counterparty; (ii) the total initial margin collected by the SD or MSP

    from each counterparty; and (iii) the net variation margin paid or

    collected over the previous week with each counterparty.

    The Commission currently uses the position and margin information

    filed by DCOs to identify and to take steps to mitigate the risks posed

    to the financial system by participants in cleared markets including

    DCOs, clearing members, and large traders. The Commission would

    incorporate the additional data file by SDs and MSPs into that program.

    The Commission would analyze positions and margin across cleared and

    uncleared markets in order to obtain a picture of the risks posed by

    large market participants to one another and to the financial system.

    Request for Comment

    The Commission requests comment on all aspects of the proposed

    financial reporting, recordkeeping and notification requirements. In

    addition, the Commission requests comment, including empirical data in

    support of comments, in response to the following questions:

    1. For SDs or MSPs organized and domiciled outside the U.S., is

    IFRS issued by the IASB an appropriate accounting standard that would

    allow the Commission and RFA to properly assess the financial condition

    of SDs and MSPs? If not, explain why not, and suggest what

    modifications the Commission should make to the proposed regulation.

    2. Should the Commission accept financial statements prepared in

    accordance with local accounting standards from SDs or MSPs located in

    foreign jurisdictions and are not required to prepare financial

    statements in accordance with U.S. GAAP or IFRS? If not, explain why

    not. Should such firms be required to submit a reconciliation of the

    local accounting to U.S. GAAP? Would such a reconciliation provide the

    necessary information for the Commission and RFA to fully understand

    the financial position of the SD or MSP? What costs would be incurred

    by the SD or MSP in preparing the reconciliation?

    3. Should SDs or MSPs that file non-U.S. GAAP financial statements

    also file a reconciliation of the non-U.S. GAAP financial statements to

    U.S. GAAP? Would such a reconciliation provide the Commission with

    necessary information to understand the non-U.S. GAAP financial

    statements? What costs would be incurred by the SD or MSP in preparing

    the reconciliation?

    4. Are there competitive advantages to SDs and MSPs that would be

    permitted to prepare financial statements in accordance with IFRS or

    another non-U.S. GAAP reporting standard? If so, is it necessary for

    the Commission to address such advantages? How should the Commission

    address those advantages?

    5. The Commission is proposing to require SDs and MSPs that are

    subject to the capital rules of a prudential regulator to file notices

    with the Commission and with the SDs' or MSPs' RFA. Such notices

    include if the SD's or MSP's regulatory capital is less than the

    applicable minimum requirements set forth in the prudential regulators'

    rules or an adjustment in the SD's or MSP's reported capital category.

    The proposal would also require SDs that are foreign banks to file

    notice with the Commission and with their RFA if they experience an

    adjustment in their regulatory capital category under the rules of a

    prudential regulator or a similar provision of the regulations of its

    home country supervisors, and to file notice with the Commission and

    with their RFA if their regulator capital is below the minimum required

    by the prudential regulators or their home country supervisors. Should

    the Commission require SDs that are subject to the capital rules of a

    prudential regulator to file notices with the Commission regarding

    changes to their capital status? If not, explain why not? Are SDs that

    are banks subject to an legal restrictions on disclosing such capital

    information to the Commission? If so, cite such legal restrictions.

    Should the Commission differentiate between SDs that are U.S. banks

    from SDs that are non-U.S. banks? If so, explain how and why the

    Commission should differentiate between such SDs. Are there other

    notices that the Commission should consider receiving from SDs or MSPs

    that are subject to the capital and margin rules of a prudential

    regulator? Do these rules adequately address SDs and MSPs that are

    foreign domiciled entities subject to prudential regulation by foreign

    banking authorities? Are there alternative provisions that the

    Commission should consider for both domestic and foreign SDs and MSPs

    that are subject to prudential regulation?

    6. Are the reporting elements to Appendix A adequately defined to

    capture the relevant information? If not, what specific changes should

    the Commission consider?

    7. Are the reporting elements to Appendix B adequately defined to

    capture the relevant information? If not, what specific changes should

    the Commission consider?

    8. Should the Commission make public any other monthly unaudited or

    annual audited financial information filed by an SD or MSP under

    Regulation 23.105? If so, how would the public disclosure of such

    information be consistent with the FOIA and Sunshine Act exemptions?

    9. What SD or MSP financial information should the Commission make

    publicly available?

    10. Is it appropriate to have different disclosure rules for SDs

    and MSPs? If so, explain why disclosure rules should be different for

    SDs and MSPs?

    11. Would disclosure of certain financial information provide SD

    and MSP counterparties with necessary information concerning some SDs

    or MSPs without adversely impacting that particular SD's or MSP's

    ability to maintain a trading book?

    12. Should the Commission post SD and MSP financial data on the

    Commission's Web site?

    D. Comparability Determinations for Eligible Swap Dealers and Major

    Swap Participants

    The Commission is proposing to permit eligible SDs and MSPs to rely

    on substituted compliance to meet certain components of the

    Commission's capital and financial reporting requirements to the extent

    that the Commission determines that the relevant foreign jurisdiction's

    capital and financial reporting requirements are comparable to the

    Commission's corresponding capital and financial reporting requirements

    (i.e., ``Comparability Determination''). Proposed Regulation 23.106

    outlines a framework for the Commission's Comparability Determinations,

    including establishing a standard of review for determining whether

    some or all of the relevant foreign jurisdiction's capital and

    financial reporting requirements are comparable to the Commission's

    corresponding capital and financial reporting requirements. This

    framework is generally consistent with the framework set forth in

    Regulation 23.160 for assessing substituted compliance for applying

    margin to

    [[Page 91281]]

    uncleared cross border swap transactions.

    Proposed Regulation 23.106 identifies persons eligible to request a

    Comparability Determination with respect to the Commission's capital

    and financial reporting requirements, including any SD or MSP that is

    eligible for substituted compliance under Regulation 23.101 and any

    foreign regulatory authority that has direct supervisory authority over

    one or more SDs or MSPs that are eligible for substituted compliance

    under Regulation 23.101 and that is responsible for administering the

    relevant foreign jurisdiction's capital adequacy and financial

    reporting requirements over the SD or MSP. The proposal would permit

    eligible persons to request a Comparability Determination individually

    or collectively with respect to the Commission's capital and financial

    reporting requirements. Eligible SDs and MSPs may wish to coordinate

    with their home regulators and other SDs or MSPs in order to simplify

    and streamline the process. The Commission would make Comparability

    Determinations on a jurisdiction-by-jurisdiction basis.

    Persons requesting Comparability Determinations would need to

    provide the Commission with certain documents and information in

    support of their request. Notably, the proposal would require

    requesters to provide copies of the relevant foreign jurisdiction's

    capital and financial reporting requirements (including English

    translations of any foreign language documents), descriptions of their

    objectives and how they are comparable to or differ from the

    Commission's capital and financial reporting requirements (e.g., the

    net liquid assets approach and bank-based approach), international

    standards such as Basel bank capital requirements, if applicable, and

    how they address the elements of the Commission's capital requirements.

    The requestors would need to identify the regulatory provisions that

    correspond to the Commission's capital requirements (and, if necessary,

    whether the foreign jurisdiction's capital requirements do not address

    a particular element). Requesters would also need to provide a

    description of the ability of the relevant foreign regulatory authority

    or authorities to supervise and enforce compliance with the relevant

    foreign jurisdiction's capital requirements and any other information

    and documentation the Commission deems appropriate.

    The proposal identifies certain key factors that the Commission

    would consider in making a Comparability Determination. Specifically,

    the Commission would consider the scope and objectives of the relevant

    foreign jurisdiction's capital requirements; how and whether the

    relevant foreign jurisdiction's capital adequacy requirements compare

    to international Basel capital standards for banking institutions or to

    other standards such as those use for securities brokers or dealers;

    whether the relevant foreign jurisdiction's capital requirements

    achieve comparable outcomes to the Commission's corresponding capital

    requirements; the ability of the relevant regulatory authority or

    authorities to supervise and enforce compliance with the relevant

    foreign jurisdiction's capital adequacy and financial reporting

    requirements; as well as any other facts or circumstances the

    Commission deems relevant. In making a comparability determination, it

    is possible that a foreign capital regime may be comparable in some,

    but not all, elements of the Commission's capital requirements.

    Proposed Regulation 23.106 would provide that any SD or MSP that,

    in accordance with a Comparability Determination, complies with a

    foreign jurisdiction's capital requirements would be deemed in

    compliance with the Commission's corresponding capital adequacy and

    financial reporting requirements. Accordingly, the failure of such an

    SD or MSP to comply with the relevant foreign capital and financial

    reporting requirements may constitute a violation of the Commission's

    capital adequacy and financial reporting requirements. In addition, all

    SDs and MSPs remain subject to the Commission's examination and

    enforcement authority regardless of whether they rely on a

    Comparability Determination. The proposal would further provide that

    the Commission retains the authority to impose any terms and conditions

    it deems appropriate in issuing a Comparability Determination and to

    further condition, modify, suspend, terminate or otherwise restrict any

    Comparability Determination it has issued in its discretion. This could

    result, for example, from a situation where, after the Commission

    issues a comparability determination, the basis of that determination

    ceases to be true.

    In this regard, Comparability Determinations issued by the

    Commission would require that the Commission be notified of any

    material changes to information submitted in support of a Comparability

    Determination, including, but not limited to, changes in the relevant

    foreign jurisdiction's supervisory or regulatory regime. The Commission

    expects that the comparability determination process would require

    close consultation, cooperation, and coordination with other

    appropriate U.S. regulators and relevant foreign regulators. The

    Commission would also expect that the relevant foreign regulator will

    enter into, or will have entered into, an appropriate memorandum of

    understanding or similar arrangement with the Commission in connection

    with a Comparability Determination.

    E. Technical Amendments

    1. Amendments to the Financial Reporting Requirements in Regulation

    1.10 and 1.16

    Regulation 1.10 currently requires each FCM to file within 17

    business days of the close of each month an unaudited financial with

    the Commission and with the firm's designated self-regulatory

    organization.\133\ Regulation 1.10 also requires each FCM to file

    within 60 days of the end of the firm's fiscal year end an audited

    annual financial report. An FCM's monthly financial reports must be

    submitted on CFTC Form 1-FR-FCM, while the annual financial report may

    be submitted on Form 1-FR-FCM or, subject to certain conditions,

    presented in a manner consistent with U.S. GAAP.\134\

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    \133\ The term ``self-regulatory organization'' (``SRO'') is

    defined in Regulation 1.3(ee) as a contract market (as defined in

    Regulation 1.3(h)), a swap execution facility (as defined in

    Regulation 1.3(rrrr)), or a registered futures association under

    section 17 of the Act. The term ``designated self-regulatory

    organization'' is defined in Regulation 1.3(ff) and generally means

    the SRO that has primary financial surveillance responsibilities

    over a registrant.

    \134\ See Regulation 1.10(d)(3).

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

    Regulation 1.10 requires each IB to file an unaudited financial

    report with NFA on a semi-annual basis, and an audited annual financial

    report with the NFA. The IB unaudited reports must be submitted on Form

    1-FR-IB and the audited annual report may be filed on Form 1-FR-IB or,

    subject to certain conditions, presented in a manner consistent with

    U.S. GAAP.

    Regulation 1.10(h) currently provides relief from the Form 1-FR

    filing requirements to FCMs or IBs that are dually-registered as BDs.

    Such dual-registrants are permitted to file the SEC's Financial and

    Operational Combined Uniform Single Report under the Securities

    Exchange Act of 1934, Part II, Part IIA, or Part II CSE (FOCUS Report),

    in lieu of a Form 1-FR-FCM or Form 1-FR-IB.

    The Commission is proposing to amend Regulation 1.10(h) to permit

    an

    [[Page 91282]]

    FCM or IB that is dually-registered as SBSD or MSBSP to file its SEC

    FOCUS Report in lieu of a CFTC Form 1-FR-FCM or CFTC Form 1-FR-IB. The

    proposed amendment would be consistent, as noted above, with the

    current relief provided to entities that are dually-registered as an

    FCM and a BD. Furthermore, the Commission's experience with Regulation

    1.10(h) indicates that the FOCUS Reports include information that is

    substantially comparable to the Form 1-FR and adequate for the

    Commission to conduct financial surveillance of the registrant.

    Regulations 1.10(f) and 1.16(f) currently provide that a dually-

    registered FCM/BD or IB/BD may automatically obtain an extension of

    time to file its unaudited and audited financial reports required under

    Regulation 1.10 by submitting a copy of the written approval for the

    extension issued by the BD's securities designated examining authority

    (``DEA''). The Commission is proposing to amend Regulations 1.10(f) and

    1.16 to provide that an FCM or IB that is also registered with the SEC

    as a SBSD or MSBSP may obtain the automatic extension of time to file

    its unaudited or audited FOCUS Report or Form SBS with the Commission

    and with the firm's DSRO, as applicable, by submitting a copy of the

    SEC's or the DEA's approval of the extension request. This proposed

    amendment maintains the intent of the current regulations by retaining

    a consistent approach to the granting to dual registrants extensions of

    time to file financial reports. The Commission also is proposing a

    technical amendment to Regulation 1.16 to correct a cross reference to

    SEC Rule 17a-5 (17 CFR 240.17a-5) for extensions of time to file

    audited financial statements.

    2. Amendments to the Notice Provisions in Regulation 1.12

    Regulation 1.12 requires an FCM or IB to file a notice with the

    Commission and with the firm's DSRO when certain prescribed events

    occur that trigger a notice filing requirement. Such events include the

    firm: (1) Failing to maintain compliance with the Commission's capital

    requirements or the capital rules of a SRO; (2) failing to hold

    sufficient funds in segregated or secured amount accounts to meet its

    regulatory requirements; (3) failing to maintain current books and

    records; and (4) experiencing a significant reduction in capital from

    the previous month-end.

    The Commission is proposing several amendments to Regulation 1.12.

    The proposed amendments to Regulation 1.12(a) would revise the

    obligation of an FCM or IB to file a notice when it fails to meet the

    capital requirement of the Commission or of an SRO to include if the

    firm fails to meet the SEC's capital requirements when the firm is a

    dual-registrant. Such notice is appropriate as it would provide

    Commission staff with the opportunity to assess the potential impact on

    its CFTC regulated activities, and to initiate discussions with the SEC

    regarding the capital deficiency.

    Commission Regulation 1.12(b) requires an FCM or IB to file notice

    with the Commission and with the firm's DSRO if the firm's adjusted net

    capital falls below the applicable ``early warning level'' set forth in

    the regulation.\135\ The Commission is proposing amendments to

    Regulation 1.12(b) to require an FCM or IB that is also registered with

    the SEC as a SBSD or a MSBSP to file a notice if the SBSD or MSBSP

    falls below the ``early warning level'' established in the rules of the

    SEC. The proposal is intended to provide additional information to the

    Commission in its efforts to monitor the financial condition of its

    registrants.

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

    \135\ If an FCM's or IB's adjusted net capital falls below a

    certain threshold, such as 120 percent of its minimum adjusted net

    capital requirement, the firm is deemed to be maintaining adjusted

    net capital at a level below its ``early warning level.''

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

    3. Commissions Receivable for Certain Swap Transactions in Regulation

    1.17

    The Commission is proposing to amend Regulation 1.17(c)(2)(ii)(B)

    to codify several staff no-action letters that permit IBs to reflect

    certain commissions receivable balances from swap transactions that are

    aged not more than 60 days from the month-end accrual date as a current

    asset in computing the IB's adjusted net capital, provided that the

    commissions are promptly billed. The proposed amendments would extend

    the current asset treatment to commission receivables from both cleared

    swaps and uncleared swaps.

    4. Changes to Notice and Disclosure Requirements for Bulk Transfers in

    Regulation 1.65

    Regulation 1.65 describes the notice and disclosure requirements to

    customers and to the Commission, which must be given prior to the

    transfer of customer accounts other than at the request of the

    customer, to another futures commission merchant or introducing broker.

    Regulation 1.65(b) requires that notice of such a transfer be filed

    with the Commission at least five business days in advance of the

    transfer if the transfer meets certain enumerated conditions. Further,

    Regulation 1.65(d) requires, among other things, that such notice to

    the Commission must be filed by mail, addressed to the Deputy Director,

    Compliance and Registration Section, Division of Swap Dealer and

    Intermediary Oversight and does not provide for electronic filing.

    Finally, Regulation 1.65(e) provides that in the event notice cannot be

    filed with the Commission within five days, then it must be filed as

    soon as practicable and no later than the day of the transfer along

    with a brief statement explaining the circumstances necessitating the

    delay in filing.

    The Commission has found that five days' notice, when given, is

    often not a sufficient amount of time to allow the Commission to

    oversee the bulk transfer of customer accounts. Accordingly, the

    Commission is proposing to amend Regulation 1.65(b) to require that the

    notice of a bulk transfer of customer accounts be filed with the

    Commission at least ten business days in advance of a transfer. The

    Commission notes that bulk transfers of customer accounts are generally

    planned well in advance such that the FCM should be able to provide the

    Commission ten days advance notice of such a transfer. The Commission

    is also proposing to amend Regulation 1.65(d) to require the notice to

    be filed electronically. This is consistent with the filing

    requirements of other notices and financial forms with the Commission,

    which are already required to be filed electronically. The Commission

    notes that the electronic system to file such notices already exists

    and is in use by registrants, therefore, this change should not result

    in any additional costs either to the Commission or to registrants.

    Finally, the Commission is proposing to amend Regulation 1.65(e) to

    delegate to the Director of the Division of Swap Dealer and

    Intermediary Oversight the authority to accept a lesser time period for

    the notification provided for in Regulation 1.65(b). However, the

    notice must be filed as soon as practicable and in no event later than

    the day of the transfer.

    5. Conforming Amendments to Delegated Authority Provisions in

    Regulation 140.91

    Commission Regulations 1.10, 1.12, and 1.17 reserve certain

    functions to the Commission, the greater part of which the Commission

    has delegated to the Director of the Division of Swap Dealer and

    Intermediary Oversight through the provisions of Regulation 140.91. The

    Commission proposes to amend Regulation 140.91 to provide similar

    delegations with respect to functions reserved to the Commission in

    part 23.

    Proposed Regulation 23.101(c) would require an SD or MSP to be in

    [[Page 91283]]

    compliance with the minimum regulatory capital requirements at all

    times and to be able to demonstrate such compliance to the Commission

    at any time. Proposed Regulation 23.103(d) would require an SD or MSP,

    upon the request of the Commission, to provide the Commission with

    additional information regarding its internal models used to compute

    its market risk exposure requirement and OTC derivatives credit risk

    requirement. Proposed Regulation 23.105(a)(2) would require an SD or

    MSP to provide the Commission with immediate notification if the SD or

    MSP failed to maintain compliance with the minimum regulatory capital

    requirements, and further authorizes the Commission to request

    financial condition reporting and other financial information from the

    SD or MSP. Proposed Regulation 23.105(d) authorizes the Commission to

    direct an SD or MSP that is subject to capital rules established by a

    prudential regulator, or has been designated a systemically important

    financial institution by the Financial Stability Oversight Council and

    is subject to capital requirements imposed by the Board of Governors of

    the Federal Reserve System to file with the Commission copies of its

    capital computations for any periods of time specified by the

    Commission.

    The Commission is proposing to amend Regulation 140.91 to delegate

    to the Director of the Division of Swap Dealer and Intermediary

    Oversight, or the Director's designee, the authority reserved to the

    Commission under proposed Regulations 23.101(c), 23.103(d), and

    23.105(a)(2) and (d). The delegation of such functions to staff of the

    Division of Swap Dealer and Intermediary Oversight is necessary for the

    effective oversight of SDs and MSPs compliance with minimum financial

    and related reporting requirements. The delegation of authority also is

    comparable to the authorities currently delegated to staff under

    Regulation 140.91 regarding the supervision of FCMs compliance with

    minimum financial requirements.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies

    consider whether the regulations they propose will have a significant

    economic impact on a substantial number of small entities.\136\ This

    proposed rulemaking would affect the obligations of SDs, MSPs, FCMs,

    and IBs. The Commission has previously determined that SDs, MSPs, and

    FCMs are not small entities for purposes of the RFA.\137\ Therefore,

    the requirements of the RFA do not apply to those entities. The

    Commission has found it appropriate to consider whether IBs should be

    deemed small entities for purposes of the RFA on a case-by-case basis,

    in the context of the particular Commission regulation at issue.\138\

    As certain IBs may be small entities for purposes of the RFA, the

    Commission considered whether this proposed rulemaking would have a

    significant economic impact on such registrants. Only a few of the

    regulations included in this proposed rulemaking, the amendment of

    Commission regulations 1.10, 1.12, 1.16 and 1.17, will impact the

    obligations of IBs. As discussed above, these amendments will permit

    the filing and harmonization of financial reporting and notification

    rules as adopted by the SEC for dual registered SBSD and MSBSPs and

    accommodate common billing practices in the swap industry surrounding

    the collection of commission receivables. Because these amendments

    benefits IBs, they are not expected to impose any new burdens or costs

    on them. The Commission does not, therefore, expect small entities to

    incur any additional costs as a result of this proposed rulemaking.

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

    \136\ 5 U.S.C. 601 et seq.

    \137\ See Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,

    47 FR 18618 (Apr. 30, 1982) (FCMs) and Registration of Swap Dealers

    and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs

    and MSPs).

    \138\ See Introducing Brokers and Associated Persons of

    Introducing Brokers, Commodity Trading Advisors and Commodity Pool

    Operators; Registration and Other Regulatory Requirements, 48 FR

    35248, 35276 (Aug. 3, 1983).

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

    Accordingly, for the reasons stated above, the Commission believes

    that this proposed rulemaking will not have a significant economic

    impact on a substantial number of small entities. Therefore, the

    Chairman, on behalf of the Commission, hereby certifies, pursuant to 5

    U.S.C. 605(b), that the proposed regulations being published today by

    this Federal Register release will not have a significant economic

    impact on a substantial number of small entities. The Commission

    invites comment on the impact of this proposal on small entities.

    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \139\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. This proposed rulemaking, would

    result in an amendment to existing collection of information

    ``Regulations and Forms Pertaining to Financial Integrity of the Market

    Place; Margin Requirements for SDs/MSPs'' \140\ as discussed below. The

    Commission, therefore, is submitting this proposed rulemaking to the

    Office of Management and Budget (``OMB'') for its review and approval

    in accordance with 44 U.S.C. 3507(d) and 5 CFR Regulation 1320.11.

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

    \139\ 44 U.S.C. 3501 et seq.

    \140\ See OMB Control No. 3038-0024, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0024 (last visited

    Apr. 7, 2016). This collection is being retitled ``Regulations and

    Forms Pertaining to Financial Integrity of the Market Place.''

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

    The responses to this collection of information are mandatory. An

    agency may not conduct or sponsor, and a person is not required to

    respond to, a collection of information unless it displays a currently

    valid control number issued by OMB.

    1. New Information Collection Requirements and Related Burden Estimates

    \141\

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

    \141\ This discussion does not include information collection

    requirements that are included under other Commission regulations

    and related OMB control numbers. For example, Proposed Commission

    Regulation 1.17(c)(5)(iii)(E)(4) would require that appropriate

    documentation of qualifying master netting agreements be maintained

    by dual-registered FCM-SDs for purposes of certain margin deductions

    from net capital. As noted in the Margin rulemaking, this collection

    is already covered under OMB Control Number 3038-0088 pertaining to

    swap trading relationship documentation. See 81 FR 636, 680 (Jan. 6,

    2016).

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

    Currently, there are approximately 104 SDs and no MSPs

    provisionally registered with the Commission that may be impacted by

    this proposed rulemaking and, in particular, the collections of

    information contained herein and discussed below.\142\

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

    \142\ The number of impacted SDs and MSPs is significantly

    smaller than the 300 expected in the Commission's previous proposed

    rulemaking, and the Commission has reduced its burden estimates

    accordingly herein. See, Capital Requirements of Swap Dealers and

    Major Swap Participants, 76 FR 27802 (May 12, 2011).

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

    i. Form SBS

    The proposed amendments to Commission regulation 1.10(h) would

    allow an FCM or IB that is also a securities broker or dealer to file,

    subject to certain conditions, its Form SBS in lieu of its Form 1-FR.

    Because these amendments would provide an alternative to filing Form 1-

    FR, the Commission believes that the amendments would not cause FCMs or

    IBs to incur any additional burden. Rather, to the extent that the

    proposed rule provides an alternative to filing a Form 1-FR and is

    elected by FCMs or

    [[Page 91284]]

    IBs, it is reasonable for the Commission to infer that the alternative

    is less burdensome to such FCMs and IBs.

    The proposed amendments to Commission regulation 1.10(f) would

    allow an FCM or IB that is dually-registered with the SEC as either a

    SBSD or MSBSP to request an extension of time to file its uncertified

    Form SBS. The Commission is unable to estimate with precision how many

    requests it would receive from registrants under proposed Sec. 1.10(f)

    in relation to Form SBS annually. The Commission anticipates that it

    would receive one such request in the aggregate annually, and that

    preparing such a request would consume five burden hours, resulting in

    an annual increase in burden of five hours in the aggregate.

    ii. Notice of Failure To Maintain Minimum Financial Requirements

    Commission regulations 1.12(a) and (b) currently require FCMs and

    IBs, to file notices if they know or should have known that certain

    specified minimum financial thresholds have been exceeded. The

    amendments to Commission regulation 1.12(a) and (b) would add as an

    additional threshold for such notices certain financial requirements of

    the SEC if the applicant or registrant is registered with the SEC as an

    SBSD or MSBSD. The Commission is unable to estimate with precision how

    many additional notices it would receive from such entities as a result

    of the additional minimum threshold. In an attempt to provide

    conservative estimates, the Commission anticipates that it would

    receive 10 such notices in the aggregate annually, and that preparing

    such a notice would consume five burden hours, resulting in an annual

    increase in burden of 50 hours in the aggregate.

    iii. Requests for Extensions of Time To File Financial Statements

    The proposed amendments to Commission regulation 1.16(f) would

    allow an FCM or IB that is registered with the SEC as an SBSD or MSBSP

    to request an extension of time to file its audited annual financial

    statements.\143\ The Commission is unable to estimate with precision

    how many of such requests it would receive from such entities. The

    Commission anticipates that it would receive one of such requests in

    the aggregate annually, and that preparing such a request would consume

    five burden hours, resulting in an annual increase in burden of five

    hours in the aggregate.

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

    \143\ The registrant would also be required to promptly file

    with the DSRO designated self-regulatory organization and the

    Commission copies of any notice it receives from its designated

    examining authority to approve or deny the requested extension of

    time.

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

    iv. Capital Requirement Elections

    Proposed Commission regulation 23.101(a)(7) would require that

    certain SDs that wish to change their capital election submit a written

    request to the Commission and provide any additional information and

    documentation requested by the Commission. The Commission is unable to

    estimate with precision how many of such requests it would receive from

    such entities. The Commission anticipates that it would receive one

    such request in the aggregate annually, and that preparing such a

    request would consume five burden hours, resulting in an annual

    increase in burden of five hours in the aggregate.

    v. Application for Use of Models

    Commission regulation 23.102(a) would allow an SD to apply to the

    Commission or an RFA of which it is a member for approval to use

    internal models when calculating its market risk exposure and credit

    risk exposure under Sec. Sec. 23.101(a)(1)(i)(B), 23.101(a)(1)(ii)(A),

    or 23.101(a)(2)(ii)(A), by sending to the Commission and such RFA an

    application, including the information set forth in Appendix A to

    Commission regulation 23.102 and meeting certain other requirements.

    Proposed Commission regulation 1.17(c)(6)(v) relatedly would allow an

    FCM that is also an SD to apply in writing to the Commission or an RFA

    of which it is a member for approval to compute deductions for market

    risk and credit risk using internal models in lieu of the standardized

    deductions otherwise required under Commission regulation 1.17.\144\

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

    \144\ Note that the changes to proposed 1.17(c)(6)(i), which

    permit any dual registered FCM Broker-Dealer who has received

    approval by the SEC under Sec. 240.15c3-1(a)(7) to use models to

    calculate its market and credit risk charges, do not add an

    additional collection of information and therefore are not

    considered in this analysis.

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

    Appendices A and B to Commission regulation 23.102 contain further

    related information collection requirements, including that the SD: (i)

    Provide notice to the Commission and RFA and/or update its application

    and related materials for certain inaccuracies and amendments; (ii)

    notify the Commission or RFA before it ceases to use such internal

    models to compute deductions; (iii) if a VaR model is used, have an

    annual review of such model conducted by a qualified third party

    service, (iv) conduct stress-testing, retain and make available to the

    Commission and the RFA records of the results and all assumptions and

    parameters thereof, and notify the Commission and RFA promptly of

    instances where such tests indicate any material deficiencies in the

    comprehensive risk model; (v) demonstrate to the Commission or the RFA

    that certain additional conditions have been satisfied and retain and

    make available to the Commission or the RFA records related thereto;

    and (vi) comply with additional conditions that may be imposed on the

    SD by the Commission or the RFA.

    As discussed above, there are currently 104 SDs and 0 MSPs

    provisionally registered with the Commission. Of these, the Commission

    estimates that approximately 53 SDs and no MSPs would be subject to the

    Commission's capital rules as they are not subject to the capital rules

    of a prudential regulator. The Commission further estimates

    conservatively that 32 of these SDs would seek to obtain Commission

    approval to use models for computing their market and credit risk

    capital charges.

    The Commission staff estimates that an SD approved to use internal

    models would spend approximately 5,600 hours per year to review and

    update the models and approximately 640 hours per year to back-test the

    models for the aggregate of 6240 annual burden hours for each SD.\145\

    Consequently, Commission staff estimates that reviewing and back-

    testing the models for the 32 SDs would result in an aggregate annual

    hour burden of approximately 199,680 hours.\146\

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

    \145\ Id. at 70294.

    \146\ 343,200 is the product of 55 and the sum of 5,600 and 640.

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

    vi. Liquidity Requirements

    Commission regulation 23.104 proposes additional liquidity

    requirements and equity withdrawal restrictions on certain SDs.

    Commission regulation 23.104(a)(2) would provide that certain SDs may

    not dispose of, or transfer to an affiliate, a high quality liquid

    asset without prior notice to and approval by the Commission. Section

    23.104(a)(3) would require certain SDs to have a written contingency

    funding plan that addresses the SD's policies and the roles and

    responsibilities of relevant personnel for meeting the liquidity needs

    of the SD and communicating with the public and other market

    participants during a liquidity stress event.

    Commission regulations 23.104(a)(2) and 23.104(a)(3) apply only to

    SDs that have elected to be subject to the requirements of

    23.101(a)(1)(i) as if the

    [[Page 91285]]

    SD were regulated by the Federal Reserve Board. Out of the 104

    provisionally registered SDs, the Commission currently estimates that

    16 SDs will elect to be subject to the requirements of 23.101(a)(1)(i).

    Accordingly, the Commission estimates these proposed regulations will

    add 50 burden hours per month, or 600 burden hours per year, for each

    of the 16 electing SDs, resulting in a an aggregate annual burden of

    9,600.

    Commission regulation 23.104(b)(1) would require that certain SDs

    perform a monthly liquidity stress test, provide the results of that

    test to senior management, and perform a quarterly and annual reviews

    with appropriate levels of management. Commission regulation

    23.104(b)(2) would require that an SD document any differences with

    those of the liquidity stress test of the consolidated parent and

    regulation 23.104(b)(4) would require that an SD have a written

    contingency funding plan. Regulation 23.104(b) applies only to SDs that

    have elected to be subject to the requirements of regulation

    23.101(a)(1)(ii). The Commission estimates that 11 SDs out of the 104

    provisionally registered will fall into this category and that all 11

    will be part of a consolidated entity that performs a liquidity stress

    test. As such, the Commission estimates that the proposed regulations

    will add 50 burden hours per month, or 600 burden hours per year,

    resulting in an aggregate annual burden of 6,600 hours.

    Commission regulation 23.104(c) would allow an SD to apply in

    writing for relief from restrictions on certain equity withdrawals.

    Regulation 23.104(c) applies to SDs that have elected to comply under

    regulation 23.101(a)(1)(i) and 23.101(a)(1)(ii). Commission staff

    estimates that 28 of the 104 currently provisionally registered SDs

    would be subject to this regulation. Commission staff estimates that

    each of these 28 SDs would file approximately two notices annually with

    the Commission and that it would take approximately 30 minutes to file

    each of these notices. This results in an aggregate annual hour burden

    estimate of approximately 28 hours.

    vii. Financial Recordkeeping, Reporting and Notification Requirements

    for SDs and MSPs

    Commission regulation 23.105 would require generally that each SD

    and MSP maintain certain specified records, report certain financial

    information and notify or request permission from the Commission under

    certain specified circumstances, in each case, as provided in the

    proposed regulation. For example, the regulation requires generally

    that SDs and MSPs maintain current books and records, provide notice to

    the Commission of regulatory capital deficiencies and related

    documentation, provide notice of certain other events specified in the

    proposed rule, and file financial reports and related materials with

    the Commission (including the information in Appendix A and B to the

    proposed regulation, as applicable). Regulation 23.105 also requires

    the SD or MSP to furnish information about its custodians that hold

    margin for uncleared swap transactions and the amounts of margin so

    held, and for SDs approved to use models (as discussed above), provide

    additional information regarding such models, as further described in

    regulation 23.105(k).

    The Commission estimates that there are 28 SD firms which will be

    required to fulfill their financial reporting, recordkeeping and

    notification obligations under Regulation 23.105(a)-23.105(n) because

    they are not subject to a prudential regulator, not already registered

    as an FCM, and not dually registered as a SBSD. The Commission expects

    these 28 firms will apply to use models. Commission staff estimates

    that the preparation of monthly and annual financial reports for these

    SDs, including the recordkeeping, related notification and preparation

    of the specific information required in proposed Appendix A to

    regulation 23.105, would impose an on-going burden of 250 hour per firm

    annually. The Commission further estimates it would cost each SD

    $300,000 to retain an independent public accountant to audit its

    financial statements each year. Thus, the total burden hours estimated

    for compliance with 23.105(a)-23.105(n) for these 28 SD firms would be

    7,000 hours annually.

    Regulation 23.105(p) and its accompanying Appendix B propose a

    quarterly financial reporting and notification obligations on SDs which

    are subject to a prudential regulator. The Commission expects that

    approximately 51 of the 104 currently provisionally registered SDs are

    subject to a prudential regulator. The Commission estimates that this

    proposed reporting and notification requirements will impose a burden

    of 33 hours on-going annually. This results in a total aggregate burden

    of 1,683 hours annually.

    Regulation 23.105(q) requires all SDs and MSPs to report to the

    Commission weekly summary position and margin data. The Commission

    expects that all 104 SDs and no MSPs will be subject to this

    requirement. The Commission estimates that it would impose 520 burden

    hours per firm annually. This results in total aggregate burden of

    54,080 hours annually.

    viii. Capital Comparability Determinations

    Commission regulation 23.106 would allow certain SDs, MSPs, and

    foreign regulatory authorities to request a Capital Comparability

    Determination with respect to capital adequacy and financial reporting

    requirements for SDs or MSPs, as discussed above. As part of this

    request, persons are required to submit to the Commission certain

    specified supporting information and further information, as requested

    by the Commission. Further, if such a determination was made by the

    Commission, an SD or MSP would be required to file a notice with the

    RFA of which it is a member of its intent to comply with the capital

    adequacy and financial reporting requirements of the foreign

    jurisdiction. Moreover, in issuing a Capital Comparability

    Determination, the Commission would be able to impose any terms and

    conditions it deems appropriate, including additional capital and

    financial reporting requirements.

    The Commission expects that 17 firms out of the 104 currently

    provisionally registered SDs would seek Capital Comparability

    Determinations. These 17 firms are located in five different

    jurisdictions, all of which appear to have adopted some level of Basel

    compliant capital rule or another capital rule that would apply to SDs.

    As such, Commission staff estimates that it will take approximately ten

    hours per firm annually to prepare and submit requests for Capital

    Comparability Determinations and otherwise comply with the requirements

    of proposed Regulation 23.106, resulting in aggregate annual burden of

    170 hours.

    2. Information Collection Comments

    The Commission invites the public and other Federal agencies to

    comment on any aspect of the proposed information collection

    requirements discussed above. Pursuant to 44 U.S.C.3506(c)(2)(B), the

    Commission will consider public comments on such proposed requirements

    in:

    Evaluating whether the proposed collections of information

    are necessary for the proper performance of the functions of the

    Commission, including whether the information will have a practical

    use;

    Evaluating the accuracy of the estimated burden of the

    proposed information collection requirements, including the degree to

    which the

    [[Page 91286]]

    methodology and the assumptions that the Commission employed were

    valid;

    Enhancing the quality, utility, and clarity of the

    information proposed to be collected; and

    Minimizing the burden of the proposed information

    collection requirements on respondents, including through the use of

    appropriate automated, electronic, mechanical, or other technological

    information collection techniques, e.g., permitting electronic

    submission of responses.

    Copies of the submission from the Commission to OMB are available

    from the CFTC Clearance Officer, 1155 21st Street NW., Washington, DC

    20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and

    individuals desiring to submit comments on the proposed information

    collection requirements should send those comments to the OMB Office of

    Information and Regulatory Affairs at:

    The Office of Information and Regulatory Affairs, Office

    of Management and Budget, Room 10235, New Executive Office Building,

    Washington, DC 20503, Attn: Desk Officer of the Commodity Futures

    Trading Commission;

    (202) 395-6566 (fax); or

    OIRAsubmissions@omb.eop.gov (email).

    Please provide the Commission with a copy of submitted comments so

    that all comments can be summarized and addressed in the final rule

    preamble. Please refer to the ADDRESSES section of this rulemaking and

    the margin rulemaking for instructions on submitting comments to the

    Commission. OMB is required to make a decision concerning the proposed

    information collection requirements between thirty (30) and sixty (60)

    days after publication of the NPRM in the Federal Register. Therefore,

    a comment to OMB is best assured of receiving full consideration if OMB

    (as well as the Commission) receives it within thirty (30) days of

    publication of this NPRM.

    IV. Cost Benefit Considerations

    A. Background

    Section 15(a) of the CEA requires the Commission to consider the

    costs and benefits of its discretionary actions before promulgating a

    regulation under the CEA or issuing certain orders.\147\ Section 15(a)

    further specifies that the costs and benefits shall be evaluated in

    light of five broad areas of market and public concern: (1) Protection

    of market participants and the public; (2) efficiency, competitiveness,

    and financial integrity of futures markets; (3) price discovery; (4)

    sound risk management practices; and (5) other public interest

    considerations. In this cost benefit section, the Commission discusses

    the costs and benefits resulting from its discretionary determinations

    with respect to the section 15(a) factors.\148\ In addition, in

    Appendix A to this section, the Commission, using available data,

    estimates the cost of the proposal to each type of SD or MSP and the

    overall market.

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

    \147\ U.S.C. 19(a).

    \148\ The Commission notes that the costs and benefits

    considered in this proposal, and highlighted below, have informed

    the policy choices described throughout this release.

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

    This proposed rulemaking implements the new statutory framework of

    Section 4s(e) of the CEA, added by Section 731 of the Dodd-Frank Act,

    which requires the Commission to adopt capital requirements for SDs and

    MSPs that do not have a prudential regulator (i.e., ``covered swap

    entities'' or ``CSEs'') and amends Commission Regulation 1.17 to impose

    specific market risk and credit risk capital charges for uncleared swap

    and security-based swap positions held by an FCM.\149\ Section 4s(e) of

    the CEA requires the Commission to adopt minimum capital requirements

    for CSEs that are designed to help ensure the CSE's safety and

    soundness and be appropriate for the risk associated with the uncleared

    swaps held by a CSE. In addition, section 4s(e)(2)(C) of the CEA,

    requires the Commission to set capital requirements for CSEs that

    account for the risks associated with the CSE's entire swaps portfolio

    and all other activities conducted by the CSE. Lastly, section

    4s(e)(3)(D) of the CEA provides that the Commission, the prudential

    regulators, and the SEC, must ``to the maximum extent practicable''

    establish and maintain comparable capital rules. The proposal also

    includes certain financial reporting requirements related to an SDs and

    MSPs financial condition and capital requirements.

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

    \149\ See Section 4s(e)(2)(B).

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

    In the following cost-benefit considerations, the Commission will

    discuss the costs and benefits of this proposal and some critical

    decisions it made in developing this proposal. The Commission will: (i)

    Discuss the general benefits and costs of regulatory capital; (ii)

    summarize the proposal; (iii) set the baseline for which the cost and

    benefits of this proposal will be compared; (iv) provide an overview of

    the different capital approaches set out in this proposal and the

    rationale for proposing each approach; (v) set out the costs and

    benefits to each type of SD and MSP under their corresponding capital

    approaches; (vi) discuss the proposal's liquidity and funding

    requirements; (vii) discuss the proposal's reporting requirements; and

    (viii) an analyze the proposal as it relates to each of the 15(a)

    factors.

    B. Regulatory Capital

    Regulatory capital is designed to ensure that a firm will have

    enough capital, in times of financial stress, to cover the risk

    inherent of the activities in the firm. Regulatory capital's framework

    can be designed differently, but its primary purpose remains the same--

    to meet this objective. Although a firm may mitigate its risks through

    other methods, including risk management techniques (e.g., netting,

    credit limits, margin), capital is viewed as the last line of defense

    of an entity, ensuring its viability in times of financial stress. In

    designing this proposal, the Commission was cognizant of the purpose of

    capital and the potential trade-off between the costs of requiring

    additional capital and the Commission's statutory mandate of helping to

    ensure the safety and soundness of SDs and MSPs thereby promoting the

    stability of the U.S. financial system.

    C. General Summary of Proposal

    The Commission designed this proposal on well-established existing

    capital regimes. The proposal's framework, which draws upon the

    principles and structures of bank-based capital, broker-dealer capital,

    and FCM capital, provides CSEs, operating under a current capital

    regime, with the ability to continue to comply with that regime, with

    minor adjustments to account for the inherent risk of swap dealing and

    to mitigate regulatory arbitrage. The Commission, in developing its

    capital framework, provides CSEs with the flexibility to continue

    operating under a similar capital framework, which should result in

    minor disruptions to the markets and mitigate the possibility of

    duplicative or even conflicting rules, while helping to ensure the

    safety and soundness of the CSE and the stability of the U.S. financial

    system.

    The proposal details minimum capital requirements for different

    ``types'' or ``categories'' of CSEs and further defines the capital

    computations, including various market risk and credit risk charges,

    whether using models or a standardized rules-based or table-based

    approach, to determine whether a CSE satisfies the minimum capital

    requirements. The Commission is proposing to permit SDs that are

    neither

    [[Page 91287]]

    registered as FCMs nor subject to the capital rules of a prudential

    regulator to elect a capital requirement that is based on existing bank

    holding company (``BHC'') capital rules adopted by the Federal Reserve

    Board (the ``bank-based capital approach'') or a capital requirement

    that is based on the existing FCM/BD net capital rules (the ``net

    liquid assets capital approach''). The Commission is also proposing to

    permit certain SDs that meet defined conditions designed to ensure that

    they are ``predominantly engaged in non-financial activities'' to

    compute their minimum regulatory capital based upon the firms' tangible

    net worth (the ``tangible net worth capital approach''). Further, the

    Commission is proposing to allow SDs to obtain approval from the

    Commission, or from an RFA of which the SDs are members, to use

    internal models to compute certain market risk and credit risk capital

    charges when calculating their capital.\150\

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

    \150\ Section 17 of the CEA sets forth the registration

    requirements for RFAs. RFAs are defined as self-regulatory

    organizations under Regulation 1.3(ee). The Commission recognizes

    that SDs that seek model approval from the Commission or from an RFA

    will be required to submit documentation addressing several capital

    models including value at risk, stressed value at risk, specific

    risk, comprehensive risk and incremental risk. To the extent that

    models are reviewed and approved by an RFA, additional costs may be

    incurred by the RFA which may be passed on to the SDs.

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

    The Commission is proposing to require SDs that elect to use the

    bank-based capital approach or the net liquid assets capital approach

    to perform prescribed liquidity stress testing and to maintain liquid

    assets above defined levels. The Commission is further proposing to

    impose certain restrictions on the withdrawal of capital from SDs if

    certain defined triggers are breached.

    The proposal also establishes a program of ``substituted

    compliance'' that would allow a CSE that is organized and domiciled in

    a non-U.S. jurisdiction (``non-U.S. CSE'') (or an appropriate

    regulatory authority in the non-U.S. CSE's home country jurisdiction)

    to petition the Commission for a determination that the home country

    jurisdiction's capital and financial reporting requirements are

    comparable to the CFTC's capital and financial reporting requirements

    for such CSE, such that the CSE may satisfy its home country

    jurisdiction's capital and financial reporting requirements (subject to

    any conditions imposed by the Commission) in lieu of the Commission's

    capital and financial reporting requirements (i.e., ``Comparability

    Determination'').

    Consistent with section 4s(f), the Commission is proposing to

    require SDs and MSPs to satisfy current books and records requirements,

    ``early warning'' and other notification filing requirements, and

    periodic and annual financial report filing requirements with the

    Commission and with any RFA of which the SDs and MSPs are members.

    D. Baseline

    In determining the costs and benefits of this proposal, the

    Commission's benchmark from which this proposal is compared against is

    the market's status quo, i.e., the swap market as it exists today. As

    the proposal will implement capital and financial reporting on CSEs and

    recordkeeping requirements on SDs and MSPs, the Commission will discuss

    the incremental costs and benefits to each type or category of SD and

    MSP, as to their current capital and financial reporting and

    recordkeeping requirements. As each CSE or its parent holding company

    may be complying with current capital requirements, based on capital

    requirements that are a result of the entity or its parent entity

    registering with a financial agency, as a result of it being a

    financial intermediary (e.g., as an BD, FCM or BHC), the Commission has

    set different baselines for each type or category of entity. In the

    case that a CSE does not have current capital requirements, the

    Commission considered the full cost and benefit of its proposal on the

    entity. The following is a list of types or categories of registered

    entities and their corresponding capital regimes that the CSE currently

    complies with, if there is any, and their corresponding financial

    reporting and capital requirements. Therefore, the Commission is using

    the status quo or baseline for this proposal for the following types or

    categories of CSEs:

    (1) SDs That Are Bank Subsidiaries

    (a) Capital. Currently U.S. CSEs that are bank subsidiaries and are

    not a BD or an FCM are not subject to capital requirements; however, as

    part of a BHC or a subsidiary of a bank, the CSE's parent entity must

    comply with the prudential regulators' capital requirements. In

    addition, certain non-U.S. CSEs that are subsidiaries within a bank

    holding company and are not BDs or FCMs are currently complying with a

    foreign jurisdiction's capital, liquidity and financial reporting

    requirements and these CSEs are covered below, in the Substituted

    Compliance section.

    (b) Liquidity. Although the U.S. CSE entities do not have liquidity

    or funding requirements, their BHC must comply with the Federal Reserve

    Board's liquidity requirements.\151\

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

    \151\ The Federal Reserve Board has proposed funding

    requirements for certain large bank holding companies. See Net

    Stable Funding Ratio: Liquidity Risk Measurement Standards and

    Disclosure Requirements, 81 FR 35123 (Jun. 1, 2016).

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

    (c) Reporting. These SDs do have reporting requirements, but not

    for the information that is requested in this proposal; however, a BHC

    must report the requested information to the Federal Reserve Board,

    which includes certain swap and security-based swap positions held at

    its SD subsidiary.

    (2) SDs That Are BDs (Including, OTC Derivatives Dealers) (With and

    Without Models)

    (a) Capital. If a CSE is also registered as a BD with the SEC, the

    CSE is already meeting the SEC's BD capital requirements.

    (b) The SEC currently imposes the net liquid assets capital

    approach on BDs. However, the SEC has modified certain parts of this

    approach to address certain types of BDs (i.e., ANC Firms and OTC

    derivatives dealers). As discussed below, an ANC Firm is currently

    using SEC-approved capital models to calculate certain market and

    credit risk charges. In addition, OTC derivatives dealers that are

    registered as BDs may use SEC-approved capital models provided that

    they maintain a minimum of $100 million in tentative net capital and at

    least $20 million in net capital. Certain non-U.S. SDs are already

    complying with capital, liquidity and reporting requirements in other

    jurisdictions. Therefore, the Commission will cover these SDs in the

    Substituted Compliance section.

    (c) Liquidity. These SDs do not have any existing regulatory

    liquidity requirements.

    (d) Reporting. As a BD, these SDs must comply with the SEC's BD

    reporting requirements (the Commission's proposed reporting

    requirements are based on the SEC reporting requirements).

    (3) SDs That Are FCMs and Not BDs (With and Without Models)

    (a) Capital. For CSEs that are also registered with the Commission

    as FCMs, the Commission is proposing a net liquid asset capital

    approach that is similar to the capital requirements of a registered

    BD.

    (b) Liquidity. These SDs do not have existing regulatory liquidity

    requirements.

    (c) Reporting. As an FCM, these SDs must comply with the

    Commission's FCM reporting requirements (the

    [[Page 91288]]

    Commission's proposed reporting requirements are based on these).

    (4) SDs That Are BDs and/or FCMs (ANC Firms With Models and One Other

    SD)

    (a) Capital. For CSEs that are also registered as BDs/FCMs (using

    approved models), a significant percentage of these SDs are currently

    using the ANC capital approach, as discussed below. There is currently

    one other SD that is not an ANC Firm, but meets the requirements set

    out above for SD/BDs and SD/FCMs.

    (b) Liquidity. These SDs must comply with the SEC's and the CFTC's

    reporting requirements.

    (c) Reporting. As an ANC firm, these SDs must comply with the SEC's

    and the CFTC's ANC firm reporting requirements.

    (5) Stand-Alone SDs and Commercial SDs (With and Without Models)

    (a) Capital. Currently a CSE that is a stand-alone SD has no

    capital requirements; however, certain non-US Stand-alone SDs are

    complying with a foreign jurisdiction's capital, liquidity and

    reporting requirements and therefore, will be included in the

    Substituted Compliance benchmark below.

    (b) Liquidity. These CSEs do not have existing liquidity

    requirements.

    (c) Reporting. As CSEs, these entities have reporting requirements,

    but not for the information requested in this proposal.

    (6) MSPs

    (a) Capital. Although there are no MSPs at this time, it is

    possible that an MSP in the future may have existing capital

    requirements. For example, if a bank is determined to be an MSP or an

    insurance company, these entities may have existing capital

    requirements.

    (b) Liquidity. These MSPs do not have existing regulatory liquidity

    requirements.

    (c) Reporting. As MSPs, these entities have reporting requirements,

    but not for the information requested in this proposal.

    (7) Substituted Compliance \152\

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

    \152\ The Commission estimates that there are 17 SDs that may be

    eligible for substituted compliance under this proposal.

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

    (a) Capital. As discussed above, there are certain non-U.S. CSEs

    that comply with a foreign jurisdiction's capital and financial

    reporting requirements. Commission staff understands that generally

    these foreign capital requirements are either a bank-based capital

    regime or a dealer-based regime, which, as the Commission has been

    informed by these foreign regulators, are similar to the net liquid

    assets capital approach.

    (b) Liquidity. The Commission is aware that there are certain

    liquidity requirements that some of these non-U.S. CSEs are currently

    complying with. The Commission understands that some of these non-U.S.

    CSEs or their parent entities are complying with a bank-based liquidity

    requirement.

    (c) Reporting. The Commission understands that some of these non-

    U.S. CSEs are currently complying with a foreign jurisdiction's

    financial reporting requirements; however, these financial reporting

    requirements may not be the same as the Commission is requiring in this

    proposal.

    (8) Prudentially Regulated SDs \153\

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

    \153\ The Commission notes that under Section 4s(e) of the CEA,

    these SDs must comply with the prudential regulators' capital

    requirements, but must comply with the Commission's reporting and

    recordkeeping requirements.

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

    (a) Reporting. These SDs comply with their applicable prudential

    regulator's reporting requirements.

    E. Overview of Approaches

    In developing the proposed capital approaches in this proposal, the

    Commission selected from well-established frameworks. As a result of

    the financial crisis and over the years after the crisis, each of the

    approaches has undergone significant analysis and changes. After

    conducting its analysis, BCBS and the prudential regulators

    acknowledged that capital alone was not enough to prevent certain

    financial entities from failing and, therefore, adopted requirements

    for banks and bank holding companies to meet defined liquidity

    requirements. As the financial crisis has shown, a firm can be

    adequately capitalized, but due to a lack of liquidity or funding in

    the firm, it may be unable to meet its current obligations.

    Accordingly, the Commission is proposing to include in its capital

    frameworks liquidity and funding requirements for SDs that are based

    upon the liquidity and funding requirements adopted by the prudential

    regulators and proposed by the SEC for SBSDs. As detailed above, the

    Commission is not including BCBS's leverage ratio, as the Commission

    believes that this ratio is designed to cover a consolidated entity

    (i.e., the BHC), however, as noted above, the Commission may in the

    future include a similar leverage requirement. In addition, the

    Commission is not including a leverage ratio under the net liquid

    assets approach, but may consider leverage requirements in the future.

    Under the proposal, the Commission is providing certain CSEs with

    an option to choose between a bank-based capital approach (similar to

    the prudential regulators' capital approach) and a net liquid assets

    capital approach (similar to the SEC's and CFTC's capital approach). As

    detailed below, the bank-based capital approach is designed to require

    an SD to have enough common equity tier 1 capital (as defined above) to

    absorb losses in a time of stress, while the net liquid assets method

    is designed to require an SD to hold at all times more than one dollar

    of highly liquid assets for each dollar of unsubordinated liabilities.

    The following table summarizes the Commission capital proposal

    followed by a summary of each approach:

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

    The greatest of the

    Approaches SD entities Equity type following:

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

    Bank-Based Capital................... Non-Bank Subsidiaries Common Tier 1 Equity... $20 million.

    of BHC. 8% of RWA (Basel Model

    Stand-Alone SDs........ or Regulation 1.17

    BDs (including, OTC table) plus current

    Derivatives Dealers counterparty credit

    and ANC Firms).. risk.

    8% of the total amount

    of a swap dealer's

    margin.

    RFA.

    [[Page 91289]]

    Net Liquid Assets Capital............ Non-Bank Subsidiaries Net Discounted Assets $20 million or $100

    Regulation 1.17...................... of BHC. (Assets - Liabilities million if approved to

    FCMs (SDs)............. = Net Capital, which use capital models.

    Stand-Alone SDs........ is discounted 8% of the total amount

    (according to of a swap dealer's

    Regulation 1.17)). margin.

    RFA.

    Net Liquid Assets Capital............ BDs (SDs).............. Net Discounted Assets $20 million.

    SEC Rule 15c3-1...................... BDs (OTC Derivatives (Assets-Liabilities = 8% of the total amount

    Dealers).. Net Capital, which is of a swap dealer's

    discounted (according margin.

    to SEA 15c3-1 or VaR RFA.

    based models).

    ANC.................................. ANC Firms.............. Net Discounted Assets $5 billion tentative

    (Assets-Liabilities = net capital (not

    Net Capital, which is discounted).\154\

    discounted (VaR based $6 billion early

    model). warning net capital

    (not discounted).

    $1 billion Net

    Discounted Assets.

    RFA.

    Non-Financial Swap Dealers........... Non-financial Entities Equity................. $20 million plus market

    (15% test). and credit risk

    charges.

    8% of the total amount

    of a swap dealer's

    margin.

    RFA.

    MSPs................................. MSP.................... Equity................. >=$1.

    RFA.

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

    1. Bank-Based Capital

    Under the bank-based capital approach a CSE would need to maintain

    common equity tier 1 capital equal to the greatest of the following:

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

    \154\ The SEC is proposing to increase the minimum capital

    requirements for ANC Firms to require the firms to maintain a

    minimum of $1 billion of net capital and $5 billion of tentative net

    capital. Under the SEC proposal, ANC Firms also must file a

    regulatory notice (i.e., ``early warning notice'') with the SEC if

    its tentative net is below $6 billion.

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

    $20 million;

    Eight percent of the sum of the following: (i) The amount

    of its risk-weighted-assets (``RWA''), which is the market risk capital

    charge under a VaR computation or a standardized formula table (Reg.

    1.17); (ii) the amount of current counterparty credit risk (``CCR''),

    which is the sum of the default risk capital charge and a credit value

    adjustment (``CVA'') risk capital charge, which is under either a

    standardized formula table or a VaR method;

    Eight percent of the total amount of a swap dealer's

    uncleared swap margin, uncleared security-based swap margin and initial

    margin required for its cleared positions; or

    The amount required by its RFA.

    As noted above, the Commission is proposing a $20 million fixed-

    dollar floor, as this is the minimum amount of required capital under

    all proposed approaches. The Commission is proposing this minimum level

    as it believes that this is the minimum amount of capital that should

    be required for a CSE, without regard to the volume of swaps the CSE

    engages in, to conduct its dealing activity. As noted above, this

    amount is based on the Commission's experience with other registered

    entities that are currently subject to capital requirements. The

    Commission is also proposing, however, an eight percent of margin

    requirement, as through its experience in supervising FCMs, it

    recognizes that this capital computation is a determinative condition

    in computing their required capital and requires an SD to maintain a

    higher level of capital as the risks associated with its dealing

    activities increases, as measured by the initial margin requirements on

    the swaps positions. Moreover, under the net liquid assets approach,

    the Commission is including the same eight percent margin requirement.

    In calculating the eight percent of the total uncleared margin, the

    Commission is including all uncollateralized exposures from uncleared

    swaps (e.g., inter-affiliate swaps, swaps with commercial end users,

    and legacy swaps), as these are exposures where no initial margin is

    collected and, therefore, are part of the SD's counterparty credit

    risk, which the Commission believes must be part of the SD's required

    capital. The Commission believes that not requiring capital on these

    uncollateralized amounts would leave a significant gap in determining a

    level of capital that adequately reflects the overall risk of the SD

    and would not help to ensure that safety and soundness of the SD.

    In addition, the Commission is also requiring the inclusion of an

    SD's required initial margin from clearing organizations for all its

    cleared positions. The Commission's eight percent of margin requirement

    is intended to serve as a proxy for the level of risk associated with

    the SD's swap activities and proprietary trading. The Commission

    believes it is appropriate to include the margin for both cleared and

    uncleared products in this calculation as it provides a measure of the

    potential risks posed by the cleared and uncleared positions.

    In addition, the Commission has proposed to include a standardized

    table for market risk that is currently not part of the BCBS or

    prudential regulator capital framework. The Commission included the

    standardized table in calculating an SD's market risk charges to

    address SDs that do not use approved models in computing market risk

    charges. The Commission included the Regulation 1.17 standard market

    risk charges, as it believes these charges result in adequate capital

    computations for the level of market risk inherent in these financial

    instruments. In addition, the Commission is currently using these

    standardized charges in computing an FCM's market risk charges on the

    same financial instruments for an FCM's required capital.

    2. Net Liquid Assets

    Under this proposed approach, an SD would be required to maintain

    minimum net capital equal to or exceeding the greatest of:

    $20 million; or

    Eight percent of the total amount of a swap dealer's

    uncleared swap margin,

    [[Page 91290]]

    uncleared security-based swap margin and initial margin required for

    its cleared positions.

    Net capital is generally defined as an SD's current and liquid

    assets minus its liabilities (excluding certain qualifying subordinated

    debt), with the remainder discounted according to either a CFTC-

    approved VaR-based model or a standardized rules-based approach set out

    in Regulation 1.17.

    As noted and discussed above, under this approach, the Commission

    is proposing a $20 million fixed-dollar floor. In addition, the

    Commission is proposing, under this approach, a net liquid assets test

    that is designed to allow an SD to engage in activities that are part

    of its swaps business (e.g., holding risk inherent in swaps into its

    dealing inventory), but in a manner that places the SD in the position

    of holding at all times more than one dollar of highly liquid assets

    for each dollar of unsubordinated liabilities (e.g., money owed to

    customers, counterparties, and creditors). Further, the Commission is

    requiring a liquidity ratio and a funding plan under this approach. The

    Commission believes that the net liquid assets approach, although

    structurally different than the bank-based approach, helps to ensure

    the safety and soundness of the SD, while providing the same

    protections to the financial system.

    As discussed above and for the same reasons, the Commission is

    requiring an SD to include in its eight percent of the total uncleared

    margin calculation all uncollateralized exposures from uncleared swaps

    (e.g., inter-affiliate swaps, swaps with commercial end users, and

    legacy swaps) and with clearing organizations.

    3. Alternative Net Capital (``ANC'')

    Under the ANC approach, an SD would need to maintain its net

    capital in accordance with the following requirements:

    $1 billion net capital; \155\

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

    \155\ See proposed 17 CFR 240.15c3-1(a)(7) in Capital, Margin,

    and Segregation Requirements for Security-Based Swap Dealers and

    Major Security-Based Swap Participants and Capital Requirements for

    Broker-Dealers; Proposed Rule, 77 FR 70214, at 70228 (Nov. 23,

    1012).

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

    $5 billion tentative net capital; \156\ and

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

    \156\ See Id.

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

    $6 billion early warning net capital.\157\

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

    \157\ See Id.

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

    Under the proposal, an SD that is registered with the SEC as a BD

    and is approved by the SEC to use internal models to compute certain

    market risk and credit risk capital charges (an ``ANC Firm'') will be

    able to continue to use the ANC approach in calculating its SD capital;

    however, with enhancements to the minimum capital requirements as

    proposed by the SEC.

    Under the proposal, an ANC Firm must maintain, at all times,

    tentative net capital, which is the net capital of an ANC Firm before

    deductions for market and credit risk, of $5 billion. In addition, an

    ANC Firm must maintain, at all times, early warning net capital, which

    is the net capital of an ANC Firm before deductions for market and

    credit risk, of $6 billion. Lastly, an ANC Firm must maintain, at all

    times, $1 billion of net capital, which is net discounted assets

    (discounted by VaR models for market and credit risk).

    In proposing to adopt this approach, but with some amendments to

    the requirements, the Commission recognizes that ANC Firms are dual

    registrants with the Commission and SEC that offer a wide-range of

    financial services and act as different types of intermediaries (e.g.,

    BD, FCM, SD). As a result of the additional complexity and risk

    inherent in these entities, and the Commission's experience with these

    ANC Firms, the Commission is proposing to increase their minimum

    capital requirements in this proposal consistent with the SEC. In

    addition, as with the other approaches, the Commission is proposing to

    require ANC Firms to meet liquidity and funding requirements consistent

    with the SEC.

    The Commission expects that SDs that are ANC Firms will elect to

    use this capital approach for its swaps transactions. The Commission

    believes that since this approach has been in effect for more than 10

    years and it properly accounts for the inherent risk and complexity of

    these firms, including their swap dealing activities, that it is

    appropriate to propose to permit ANC Firms to continue using this

    approach, but with some enhancements based on the Commission's

    experience. As discussed above, the Commission is proposing to increase

    the minimum capital requirements for ANC Firms in a manner consistent

    with the SEC's proposed increases for ANC Firms. The Commission

    believes that the increases are appropriate to reflect the potential

    increase in swaps activities that ANC Firms may engage in, particularly

    if affiliates move their swaps activities into the ANC Firms to

    effectively use the capital held by the ANC Firms.

    4. Tangible Net Worth

    The Commission is proposing a tangible net worth approach for both

    SDs and MSPs. With respect to SDs, the proposal would require an SD to

    maintain minimum net capital equal to or in excess of the greater of:

    $20 million plus market and credit risk charges;

    8 percent of the total amount of a swap dealer's uncleared

    swap margin, uncleared security-based swap margin and initial margin

    required for its cleared positions; or

    The amount required by its RFA.

    The term tangible net worth is proposed to be defined to mean an

    SD's net worth as determined in accordance with generally accepted

    accounting principles in the United States, excluding goodwill and

    other intangible assets.

    As noted above, the Commission is proposing this approach as it

    recognizes that certain SD's that are primarily engaged in non-

    financial activities may engage in a diverse range of business

    activities different from, and broader than, the dealing activities

    conducted by a financial entity. Under the proposal, an SD, availing

    itself of this approach, must meet the Commission's 15% revenue test

    and 15% asset test as discussed in section II.A.2.iii of this proposal

    to demonstrate that entity is primarily engaged in non-financial

    activities.

    As discussed below, the Commission believes that the tangible net

    worth capital approach meets statutory mandate, as it is designed to

    help ensure the safety and soundness of the SD, while calibrated to the

    inherent risk of the uncleared swaps held by the SD and the overall

    activity of the SD. In addition, the Commission is not requiring these

    SDs to meet its liquidity and funding requirements. As discussed below,

    the Commission believes that the imposition of such requirements would

    result in an over-inclusive requirement, as it would include all non-

    financial funding requirements; likewise, if it narrowed the scope of

    the liquidity requirement to just swap dealing activity, the

    requirement would be under-inclusive as the required liquid assets

    would be comingled with the SD's other liquid assets, which could be

    used for all the entity's liabilities and not just for its swap dealing

    related liabilities. As the proposed tangible net worth capital

    approach would only be available to SDs that are primarily engaged in

    non-financial activities, the Commission believes that this approach

    has proper controls to ensure that it is not exploited by financial

    entities seeking a regulatory advantage.

    With respect to MSPs, the Commission is proposing to require an MSP

    to maintain net tangible net worth in the amount equal to or in excess

    of

    [[Page 91291]]

    the greater of the MSP's positive net worth or the amount of capital

    required by an RFA of which the MSP is a member. There are currently no

    MSPs and the only previously registered MSP were required to register

    as a result of their legacy swaps and not any current swap activity.

    The Commission believes that the proposed capital requirements for MSPs

    are appropriate given that no entities are currently registered and the

    Commission is uncertain of the types of entities that may register in

    the future. As noted above, the Commission has taken this uncertainty

    into consideration by proposing to allow an RFA to establish an MSP's

    minimum capital requirements. Such RFA's are required under section 17

    of the CEA to establish capital requirements for all members that are

    subject to a Commission minimum capital requirement. Accordingly, RFAs

    may adjust their rules going forward depending on the nature of any

    entities that may seek to register as MSPs, and adopt minimum capital

    requirements as appropriate. Such RFA rules must be submitted to the

    Commission for review prior to the rules becoming effective.

    5. Substituted Compliance

    As described above, the Commission is providing certain non-U.S.

    CSEs with the ability to petition the Commission for approval to comply

    with comparable foreign capital and financial reporting requirements in

    lieu of some or all of the Commission's requirements. In proposing this

    approach, the Commission recognizes that this may provide these CSEs

    with cost advantages by avoiding the costs of potentially duplicative

    or conflicting regulation.

    In limiting the scope of substituted compliance, the Commission

    does not believe it should make available substituted compliance to all

    CSEs. The Commission is proposing substituted compliance only to non-

    U.S. CSEs, as it believes that it is necessary that its capital

    requirements apply to U.S. CSEs, as they are integral to the U.S. swaps

    market and critical in ensuring the stability of the U.S. financial

    system.

    Additionally, the Commission recognizes that substituted

    compliance, to the extent that it puts conditions on its comparability

    determination, may result in additional costs to these CSEs; however,

    the Commission believes that providing a substituted compliance regime

    that allows for conditions instead of an all-or-nothing approach will

    benefit these CSEs and provide for a more competitive swaps market.

    Moreover, to the extent that a non-U.S. CSE must comply with a foreign

    regime and the Commission does not find that regime comparable, the

    Commission recognizes that these non-U.S. CSE may be burdened with

    additional costs and subject to conflicting and/or duplicative costs.

    F. Entities

    The following section discusses the related incremental costs and

    benefits of the proposal's capital approaches and reporting

    requirements on each type or category of SDs and MSPs. The Commission

    understands that certain SDs and MSP organized and domiciled outside of

    the U.S. would be included in these types or categories of entities.

    These non-U.S. SDs and MSPs are discussed in the Substituted Compliance

    section below.

    1. Bank Subsidiaries

    All U.S. CSEs that are subsidiaries in a BHC and are not a BD or

    FCM currently are not subject to capital requirements; \158\ however,

    their parent BHC currently complies with the Federal Reserve's capital

    requirements. Under the Federal Reserve Board's capital requirements,

    which are based on Basel III requirements, a BHC must maintain adequate

    capital for the entire consolidated entity.\159\ That is, all the

    assets and liabilities of the BHC's consolidated subsidiaries are

    consolidated into the holding company. The Federal Reserve Board's

    capital requirements are then imposed on the BHC, requiring the BHC to

    maintain capital levels according to those requirements.

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

    \158\ The Commission acknowledges that some subsidiaries in a

    BHC may be an insurance company and, therefore, may have capital

    requirements set by its insurance regulator. Such entities are

    outside the scope of the Commission's proposed rulemaking, as these

    entities are currently not registered with the CFTC as an SD or MSP.

    The Commission further acknowledges that there are some non-U.S.

    subsidiaries that are part of a bank and those subsidiaries and/or

    their parent may be subject to the capital regime of a foreign

    regulator. The Commission believes that in such a case, the capital

    regime that is likely to be applicable would be either the Basel

    III-based approach or a version of the net liquid assets approach.

    \159\ See Regulatory Capital Rules: Regulatory Capital,

    Implementation of Basel III, Capital Adequacy, Transition

    Provisions, Prompt Corrective Action, Standardized Approach for

    Risk-weighted Assets, Market Discipline and Disclosure Requirements,

    Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital

    Rule; Final Rule, 78 FR 62018 (Oct. 11, 2013).

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

    As these CSEs are not currently required to be capitalized, the

    Commission understands that this may add incremental cost to the

    consolidated entity and/or the CSE as it will have to retain earnings

    or further capitalize the CSE to the required capital levels. However,

    the Commission recognizes that a consolidated entity may capitalize one

    of its subsidiaries in many different ways, including retaining

    earnings from the CSE or from within the consolidated group. Even with

    this proposed requirement imposing capital on the subsidiaries, as

    noted above, the BHC must maintain capital levels in accordance with

    the Federal Reserve Board's capital requirements, which are calculated

    on a consolidated basis; therefore, incremental costs may be mitigated,

    as it may be possible for the consolidated entity to keep the same

    level of capital within the BHC, but reallocated among its

    subsidiaries.\160\ In addition, the Commission recognizes that earnings

    may now have to be retained in the CSE and may no longer be available

    to be reallocated to fund other more profitable activities within the

    consolidated group or to be returned to shareholders; however, the

    Commission believes that by providing these CSEs with the option of

    differing capital approaches, these CSEs will select the capital

    approach most optimal for its operations, financial structure and which

    will reduce duplicative or conflicting rules and the administrative

    costs of calculating and maintaining additional sets of books and

    records.

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

    \160\ The Commission notes that the bank or an insurance company

    in a BHC must maintain certain capital and as such, may not be able

    available to capitalize the CSE.

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

    The Commission believes that although the proposed capital

    approaches maybe structurally different, they require a CSE to maintain

    adequate capital levels for its activities, which should help ensure

    the safety and soundness of the CSE and the stability of the U.S.

    financial system.

    In requiring capital for a bank subsidiary that is an SD, as

    discussed above, the SD may incur additional costs. As a result of the

    additional costs, some SDs may be put at a competitive disadvantage,

    when compared to those dealers with lesser capital requirements or with

    no capital requirements. As a result of this additional cost, some swap

    dealing activity may become too costly--becoming a low margin

    activity--and, therefore, some SDs may limit their dealing activity or

    exit the swaps market. Additional costs may also be passed on to

    customers in the form of higher prices; however, if these SDs are to

    remain competitive in the swaps market, they must compete with

    competitors by matching or beating prices. In addition, as most of the

    largest swap dealers are part of a BHC, these SDs are already incurring

    capital charges at the consolidated level, and, therefore, the

    incremental cost and the effect on competition and pricing of

    [[Page 91292]]

    swaps may be mitigated. Because these SDs have the option to select the

    most optimal capital approach for them, they can control some of the

    burdens placed on them by the proposal and thereby, mitigate the

    proposal's effect on pricing.

    2. SD/BD (Without Models)

    Under the proposal, an SD that is also a BD that does not use SEC/

    CFTC-approved models to calculate its market and credit risk charges

    has the option to use either the bank-based approach or the net liquid

    assets approach, but with a standardized capital charges for market

    risk and credit risk. The Commission recognizes that although it is

    giving an option to these SDs to comply with either approach, these SDs

    must still meet the SEC's BD capital requirement.

    The standardized capital charges impose significant capital

    requirements for uncleared swaps primarily in the form of rules-based

    market risk charges and credit risk charges. Therefore, these firms

    currently engage in limited swaps activity in the BD, and the

    Commission does not anticipate that SD/BDs engaging in significant

    swaps activity in the future absent SEC rule amendments.

    3. SD/BD/OTC Derivatives Dealers (Without Models)

    Under the proposal, an SD that is registered with the SEC as an OTC

    derivatives dealer will have the option to comply with either the bank-

    based capital approach or the net liquid assets capital approach. As

    OTC derivatives dealers, these SDs already comply with the SEC's net

    liquid assets capital requirements. OTC derivative dealers also may be

    approved by the SEC to use internal models to calculate market and

    credit risk charges in lieu of standardized, rules and table-based

    capital charges for swaps, security-based swaps and other financial

    instruments.

    The Commission believes that since SDs that are registered OTC

    derivatives dealers are already complying with the SEC's net liquid

    assets approach, they will select this approach in meeting with the

    Commission SD's proposed capital requirements. The Commission believes

    that allowing these entities to continue using current capital

    requirements will reduce the possibility of duplicative or conflicting

    rules and administrative costs of calculating and maintaining

    additional sets of books and records. The Commission believes that its

    proposal will result in only a small incremental cost to OTC derivative

    dealers.

    The Commission recognizes that OTC derivatives dealers already have

    SEC-approved models in computing their current capital requirements

    and, therefore, will not incur any additional costs in developing and

    implementing this model-based approach in computing capital charges.

    4. SD/FCM (Without Models)

    Under the proposal, an SD that is also registered with the

    Commission as an FCM that does not use Var models to calculate market

    and credit risk charges, must compute its capital in accordance with

    the rules-based approach set forth in Regulation 1.17. In the proposal,

    the Commission is amending certain provisions of Regulation 1.17 to

    reduce the burden on an FCM engaging in swaps. The amendments align the

    FCM capital requirements with that of new net liquid assets capital

    approach set out in proposed Regulation 23.101. In amending the

    requirements, the Commission believes that it is reducing the burden

    placed on SDs/FCMs, as the amount of capital on uncleared swaps would

    have been significantly higher under the current requirements and would

    have placed SD/FCMs at a competitive disadvantage. Specifically,

    Regulation 1.17 currently does not allow an FCM to recognize collateral

    held at a third-party custodian as capital. Therefore, under Regulation

    1.17 an SD/FCM would have to take a 100 percent capital charge for

    margin posted with third-party custodians even though the Commission's

    uncleared margin rules require initial margin to be held at a third-

    party custodian. This is true even though the custodian has no ability

    to rehypothecate the initial margin and the SD has the ability to

    retrieve the initial margin back from the custodian with no

    encumbrance. Therefore, the Commission believes that its proposed

    amendments to Regulation 1.17 to allow an SD/FCM to recognize margin

    posted with third-party custodians in accordance with the Commission's

    margin rules will make it easier for an SD/FCM to meet its minimum

    level of required capital while also requiring an SD/FCM to maintain

    adequate capital levels, when considering the amount of initial margin

    that the SD has at its disposal in the event of a counterparty default.

    As a result of the proposal's amendments, these SD/FCMs should

    benefit from lower capital charges and should allow these SD/FCMs to

    continue to comply with one capital rule, which should mitigate some of

    the administrative costs and reduce the possibility of duplicative or

    conflicting rules. The Commission is not providing these SDs with an

    option to use the bank-based capital approach, as the Commission

    believes that this option is unnecessary and costly, and the current

    FCM capital approach reflects that the firm acts as an intermediary for

    customers on futures markets. The Commission has made amendments to

    account for SD/FCMs' swap activities and in allowing these FCMs to

    change their current capital method, the Commission believes that this

    would add an additional layer of complexity and costs to the FCMs, as

    the FCMs would have to change, modify or migrate all of their current

    systems to a new capital regime. In addition, the Commission believes

    that requiring the same capital regime, with beneficial amendments, is

    more appropriate in transitioning the Commission's capital requirements

    to these entities, as it should result in fewer burdens and a simple

    transition in implementing the Commission's proposed capital

    requirements. In addition, the Commission believes that this would

    simplify the Commission's ability to supervise these entities, as the

    Commission will be able to seamlessly transition from its current

    capital regime to these new requirements; however, the Commission

    recognizes that by not providing these SDs with the option to use the

    bank-based capital approach it may be foreclosing the ability of these

    SDs to use a capital approach that may be more cost effective than the

    one proposed.

    As a result of this proposal, the Commission recognizes that by

    amending Regulation 1.17 capital charges it is reducing the burden

    currently placed on SD/FCMs' swaps activities, which may result in

    greater liquidity in the swaps market, as this activity will be less

    costly and may incentivize these entities to engage in more swap

    dealing activity.

    As a result of the amendments to Regulation 1.17, these SD/FCMs may

    be able to realize some of the cost saving of the amendments when

    competing with other dealers for counterparties. This cost savings may

    also result in more efficient pricing for their counterparties.

    However, the Commission notes, as stated above, that as a result of the

    Commission's margin requirements for uncleared swaps these benefits may

    be limited.

    5. ANC Firms (SD/BDs and/or FCMs That Use Models)

    Under the proposal, an SD that is an ANC Firm (i.e., also a BD and/

    or FCM, with approval by the SEC/CFTC to use models in computing market

    risk and credit risk charges), will incur minimal additional capital

    charges, as a result of this proposal. The Commission is retaining this

    approach for these firms,

    [[Page 91293]]

    but with an increase in the capital thresholds, as noted above. The

    Commission is proposing these amendments based on market experience in

    supervising ANC Firms, and in recognition that the proposal is

    consistent with the SEC's proposed capital increases for ANC Firms. The

    Commission notes that the current ANC Firms are already maintaining

    more than the amended thresholds; however, by increasing these capital

    requirements the Commission recognizes that this may have an additional

    cost, as ANC Firms will now be required to maintain these capital

    levels, as under the current capital thresholds, these were held at

    their discretion.

    The Commission recognizes that ANC firms already have SEC-approved

    models in computing their current capital requirements and, therefore,

    they will not incur any additional costs in developing and implementing

    this model-based approach in computing capital charges.

    6. Stand-Alone SD (With and Without Models)

    Under the proposal, a stand-alone SD is provided with an option to

    comply with either the bank-based capital approach or the net liquid

    assets capital approach. In providing this option, the Commission, as

    discussed above, believes that both options provide adequate capital

    requirements and account for the financial activities of an SD.

    Therefore, under the proposal, the Commission believes that these SDs

    will benefit, as these SDs will have the ability to select the most

    optimal approach, based on their organizational and operational

    structure and the composition of their assets. In addition, this option

    will also reduce the possibility of duplicative or conflicting rules

    and administrative costs of calculating and maintaining additional sets

    of books and records.

    Under the proposal, a stand-alone SD that does not use models must

    compute their market risk and credit risk charges in accordance with

    rules-based requirements and a standardized table. The Commission

    recognizes that under the bank-based capital approach, market risk

    charges are calculated with a prudential regulator's approved model;

    however, to allow stand-alone SDs to use the bank-based capital

    approach without a model, the Commission is proposing to incorporate

    Regulation 1.17 market risk charges into the framework. In providing

    this alternative, the Commission is providing an option to those stand-

    alone SDs that do not have Commission-approved models. In doing so, the

    Commission is providing these SDs with a benefit, as they are still

    able to choose the most efficient capital approach. The Commission

    incorporated Regulation 1.17 market risk charges, with proposed

    amendments, as it believes that this is a well-established method that

    properly accounts for market risk charges.

    However, the Commission recognizes that many of these entities are

    not currently subject to minimum capital requirements, and as such,

    will incur additional costs on all of their financial activities,

    including their swap activities, which may result in possible increases

    in costs and pricing. In addition, a stand-alone SD selecting to use

    models in computing its market and credit risk charges may incur

    additional costs in developing and implementing these models.

    As a result of this proposal, the Commission recognizes that by

    requiring capital for SDs this may put these SDs at a competitive

    disadvantage, when compared to those entities with a lesser capital

    requirement or with no capital requirements. As a result of this

    additional cost, some swap activities may become too costly and,

    therefore, some SDs may limit their activity or exit the swaps market.

    This additional cost may in turn be passed on to customers in the form

    of higher prices; however, if these SDs are to remain competitive in

    the swaps market, they must compete by matching or beating prices of

    their competitors. If an SD decides to limit its activity or withdraw

    from the swaps market, this may result in a reduced level of liquidity

    in the swaps market.

    In requiring minimum capital requirements, the Commission believes

    that it is complying with its statutory mandate, as these standards are

    calibrated to the level of risk in an SD and are designed to help

    ensure safety and soundness of the SD and the stability of the U.S.

    financial system. In addition, the Commission's proposal is modeled

    after two well-established capital regimes, which should help ensure

    safety and soundness of the SD and competition among all registered

    SDs.

    7. Non-Financial SD (With and Without Models)

    Under the proposal, an SD that is predominantly engaged in non-

    financial activities, as defined in proposed Regulation 23.100 (85%

    non-financial threshold), may use the tangible net worth capital

    approach. This approach is designed after GAAP's tangible net worth

    computation and excludes intangibles and goodwill.\161\ The Commission

    is also requiring that the non-financial SD include in its capital

    requirement its market risk and credit risk charges.

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

    \161\ Under GAAP, tangible net equity is determined by

    subtracting a firm's liabilities from its tangible assets.

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

    The Commission believes that this approach, which is tailored to

    non-financial entities that are SDs, provides these entities with the

    flexibility to meet an appropriate capital requirement, without

    requiring the firms to engage in costly restructuring of their

    operations and business. The Commission recognizes that these SDs deal

    in swaps, but the Commission also recognizes that these entities are

    primarily engaged in commercial activities and counteract with

    primarily with commercial clients. BCBS, the Commission and the SEC did

    not fully consider this type of business model when developing the

    bank-based capital approach and the net liquid assets capital approach

    set out in this proposal. In allowing these entities to maintain their

    current structure, the Commission believes that its proposed approach

    will allow for less disruption to these SDs and in the markets, as

    these SDs may serve smaller clients that would not otherwise be able to

    participate in the swaps market without these SDs. However, the

    Commission, in helping to ensure the safety and soundness of these SDs,

    is requiring that these entities maintain a level of tangible net worth

    equal to or greater than the greatest of (i) $20 million plus the SD's

    market and credit risk charges, (ii) eight percent of its margin amount

    (i.e., eight percent of all of the SD's uncleared swap margin,

    uncleared security-based swap margin and initial margin required for

    its cleared positions), or (iii) the amount of capital required by an

    RFA, as this would account for the SD's exposure (market and credit

    risk) to the swaps markets, without penalizes the SD's commercial

    activities.

    In developing this approach, the Commission also recognizes that

    the commercial activities of a commercial SD could affect the overall

    financial health of the SD. That is, in the event of a substantial loss

    emanating from its commercial activities, this loss may have a

    substantial negative affect on the SD, which may find itself in

    financial distress. As the Commission is not accounting for the risk in

    the commercial activities, it is possible that the amount and type of

    capital that a commercial SD is required to maintain may not be

    adequate to prevent the failure of the SD, which then will affect

    [[Page 91294]]

    all of its swap counterparties. However, in tailoring this method to

    these commercial SDs, the Commission is taking a position that is

    consistent with the Commission's prior positions on commercial

    entities, as it believes these commercial entities and their

    corresponding activities are less risky than a financial entity.\162\

    In addition, and as discussed above, an RFA will have the ability to

    assess capital levels at all SDs and may adopt rules to impose capital

    requirements that are more stringent than the Commission's capital

    requirements on SDs as their experience with these firms develops.

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

    \162\ See e.g., 17 CFR 39.6.

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

    The Commission recognizes that these entities are not currently

    subject to minimum capital requirements, and as such, will incur

    additional costs on all of their swap activities, which may result in

    possible increases in pricing; however, as the Commission has developed

    its capital requirements to better target these commercial SDs, it

    believes that the additional cost should be mitigated by this approach.

    In addition, as the Commission expects that these SDs will use

    models in computing its market and credit risk charges, this may also

    result in additional costs in developing and implementing these models;

    however, this cost should be mitigated by the savings that may be

    realized by using such models.

    8. MSP

    Under the proposal, an MSP must maintain capital (i.e., tangible

    net worth) of the greater of positive tangible net worth or the amount

    of capital required by a registered futures association of which the

    MSP is a member. This approach is designed after GAAP's tangible net

    worth computation and excludes intangible assets and goodwill.

    Currently there are no MSPs. The Commission cannot determine if other

    entities will register in the future as MSPs, however, the Commission

    is required to propose a capital requirement to address potential

    future registrants.

    In proposing the tangible net worth approach for MSPs, the

    Commission is allowing these entities to continue their operations if

    they become registered as MSPs with little to no changes to the

    entities' structures. In providing for this, the Commission believes

    that these entities if they become registered as MSPs will incur

    minimal additional costs to comply with the proposed requirements.

    The Commission believes that the proposed capital requirements will

    help ensure the safety and soundness of MSPs, as these entities will

    typically be posting and collect margin on all of their new uncleared

    swaps and, therefore, as these MSPs are registered only as a result of

    being an end-user of swaps and not a swap dealer, the margin

    requirements are better tailored to cover that same risk, which is on a

    $1 for $1 basis, than through its capital requirements. Therefore, the

    Commission is only proposing to require MSPs to be solvent, while

    nothing that the entity may be subject to other capital requirements

    and hence required to comply with those capital requirements.

    As the Commission's capital requirements will result in minimal

    additional costs to these MSPs, there should be little to no effect on

    competition, as they are end-users (i.e., price takers) and little to

    no incremental effect on pricing.

    9. Substituted Compliance

    Under the proposal, a non-U.S. CSE that is already complying with a

    comparable foreign jurisdiction's capital or financial reporting regime

    is provided with the ability to meet the Commission's capital

    requirements by meeting the foreign jurisdiction's capital

    requirements. In providing these CSEs with the ability to continue to

    comply with their current capital and financial reporting regimes the

    Commission believes that it is limiting the potential for conflicting

    and duplicate capital requirements. In addition, as each foreign

    jurisdiction must be determined to be comparable, the possible negative

    effect on the U.S. financial system is mitigated.

    The Commission further recognizes that non-U.S. CSEs that use

    conditional substituted compliance may incur additional costs; however,

    the Commission believes that conditional substituted compliance

    provides an offsetting benefit to these CSEs as it allows for a

    conditional substituted compliance determination instead of an all-or-

    nothing approach, which may result in the Commission not recognizing a

    foreign jurisdictions capital requirements, resulting in additional

    cost, including possible conflicting and/or duplicative requirements.

    G. Liquidity and Funding Requirements

    Under the proposal, the Commission is requiring that SDs, excluding

    SDs that are predominantly engaged in non-financial activities, be

    required to comply with a liquidity requirement and to adopt a funding

    plan. Depending on the capital approach that the SD is complying with,

    the SD must comply with the corresponding liquidity requirement. Any SD

    that complies with the bank-based capital approach must comply with

    liquidity coverage ratio (``bank-based liquidity''). Alternatively, any

    SD that complies with the net liquid assets capital approach must

    comply with the liquidity stress test requirement (``liquidity stress

    test'').

    As discussed above, in recognizing the limitations that were

    highlighted by the financial crisis and acknowledged by BCBS, the

    Commission is adopting a liquidity requirement to enhance protection

    provided by its capital requirements. During the financial crisis, it

    was evident that although many firms had adequate capital levels they

    did not have enough liquidity or funding sources to cover their current

    obligations, which resulted in firms being adequately capitalized under

    the applicable regulations, but nonetheless in default on their

    obligations. Therefore, the Commission believes that in proposing this

    requirement it is enhancing the safety and soundness of SDs and

    thereby, helping to ensure stability of the U.S. financial system.

    The Commission selected these two approaches from the prudential

    regulators' liquidity model and the SEC's proposed capital

    requirements, which contains a liquidity requirement. Each approach is

    designed to ensure that an SD has enough liquid assets over a stressed

    30-day period to meet its obligations, over that same period. As the

    bank-based liquidity ratio is required under the prudential regulators'

    capital rules, the Commission believes that it would be consistent in

    tying these two requirements, as it was developed to complement its

    corresponding capital requirements. Alternatively, the Commission is

    requiring the liquidity stress test approach for those SDs that comply

    with the net liquid assets capital approach, as the Commission believes

    these two approaches complement each other, as these both focus on net

    liquid assets of a SD. The Commission believes that matching these two

    requirements will benefit SDs, as they will not have to comply with

    possible duplicative and/or conflicting requirements.

    The Commission is also requiring these SDs to maintain a funding

    plan. The Commission believes that these costs are marginal and are

    accounted for in the proposal's PRA. As discussed above in regard to

    the proposal's liquidity requirements and for the same reasons, under

    the proposal the Commission is requiring a funding plan, as it believes

    that this requirement is necessary to further enhance the

    [[Page 91295]]

    Commission's capital requirements and to help ensure the safety and

    soundness of the CSEs.

    As noted above, SDs are not required by the Commission to comply

    with any liquidity or funding requirements. In requiring these SDs to

    comply with its liquidity requirements, the Commission recognizes that

    these SDs may have to hold more liquid assets; however, the Commission

    believes that this requirement increases the possibility that an SD

    will be able to withstand another financial crisis. As the Commission

    is mandated to set capital requirements to help ensure the safety and

    soundness of the SD, and in learning from the events of the financial

    crisis, the Commission believes that this requirement is necessary to

    ensure the viability of SDs. In addition, non-bank subsidiaries of a

    BHC, although not required to retain a certain level of liquid assets,

    are constrained on the amount of illiquid assets that they can hold on

    their balance sheet indirectly, as their BHC parent must meet the

    Federal Reserve's liquidity requirements. This will mitigate some of

    the costs incurred by certain SDs that select the bank-based capital

    requirements. Moreover, the Commission recognizes that these costs will

    also be mitigated to some degree, as liquidity can be moved around an

    organization, provided there are no legal restrictions or

    constraints.\163\

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

    \163\ The Commission notes that Section 23A and 23B may

    constrain the ability of moving liquidity in a BHC. In addition, if

    an entity must current comply with liquidity provisions, this may

    also limit the ability to move liquidity among consolidated

    entities.

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

    The Commission believes that to the extent that all of its

    financial SDs must comply with one of the two liquidity requirements,

    the competitive effects should be mitigated. In addition, as a result

    of a liquidity requirement being an internationally accepted

    requirement under BCBS, this should mitigate some of the competitive

    advantages that non-CFTC registered dealers may have over financial

    SDs. In addition, to the extent that SDs maintain liquid assets to

    cover their initial margin requirements and variation margin

    requirements (under the Commission's variation margin requirements,

    swaps between two CSEs require the exchange of cash or U.S.

    treasuries), this may also mitigate the cost of this proposed liquidity

    requirement.

    In proposing a liquidity requirement, the Commission understands

    that this may have a negative effect on liquidity of the swaps market.

    This proposed requirement will require financial SDs to hold more

    liquid assets than prior to this proposal. Therefore, this may cause

    some of these financial SDs, to limit or withdraw from swap dealing

    activity, as the proposal may make swaps activity more costly, which

    may result in a reduction in market liquidity.

    Under the proposal, the Commission is not requiring Commercial SDs

    to comply with its proposed liquidity and funding requirements. The

    Commission believes that if it were to impose liquidity and funding

    requirements on Commercial SDs it would result in an over-inclusive

    requirement, as it would include all non-financial liquidity and

    funding requirements. Alternatively, if the Commission narrowed the

    scope of the liquidity and funding requirements to just swap dealing

    activity, the Commission believes that it would be under-inclusive, as

    the required liquid assets will be comingled with the SD's other liquid

    assets, which could be used for all the entity's liabilities and not

    just for its swap dealing related liabilities. In addition, the

    Commission understands that if the Commercial SD defaults on any

    obligation, including commercial, this may have a negative impact on

    the entity's SD. With these two conflicting views, the Commission

    believes it is not appropriate at this time to propose liquidity or

    funding requirements on Commercial SDs.

    As noted in the section F.9., the Commission is providing

    substituted compliance to certain non-U.S. CSEs. As discussed above and

    for the same reasons, the Commission believes that, in regards to its

    liquidity and funding requirements, providing substitute compliance to

    these non-U.S. CSEs should reduce the possibility of additional costs

    and duplicative or conflicting requirements.

    H. Reporting and Recordkeeping Requirements

    The recordkeeping, reporting and notification requirements set out

    in this proposal are intended to facilitate effective oversight and

    improve internal risk management, via requiring robust internal

    procedures for creating and retaining records central to the conduct of

    business as an SD or MSP. Requiring registered SDs and MSPs to comply

    with recordkeeping and reporting rules should help ensure more

    effective regulatory oversight. The proposal would help the Commission

    determine whether an SD or MSP is operating in compliance with the

    Commission's capital requirements and allow the Commission to assess

    the risks and exposures that these entities are managing.

    As detailed above in Section II.C of this proposal, the Commission

    is requiring all SDs to file certain financial information pertaining

    to their capital requirements. Those SDs that are prudentially

    regulated are provided with the option to submit their financial

    information that is reported to their prudential regulator to the

    Commission. In addition, those SDs that are also FCMs may file their

    financial information pertaining to their capital requirements under

    this proposal with the Commission, including notices, in the same

    manner as they currently report. For those SDs that are also registered

    with the SEC as a BD or a SBSD, these SDs may file the same financial

    information to the Commission, as they file with the SEC. In filing the

    proposed required financial information with the Commission, these

    entities must file through the Winjammer electronic filing system.

    Alternatively, these same SDs have the option to report their financial

    information like stand-alone SDs, commercial SDs and MSPs report their

    financial information to the Commission. The Commission is providing

    this option, as the information reported to the Commission under this

    proposal and that is filed with the Commission or other financial

    regulatory agencies are similar, as the information provides the

    Commission with the ability to assess and monitor an SD's financial

    condition and whether the SD is currently meeting the Commission's

    capital requirements. In permitting these SDs to use their current

    required information, the Commission believes that this should mitigate

    some additional costs to prepare and report this information to the

    Commission. In addition, these SDs should already have developed

    policies, procedures and systems to aggregate, monitor, and track their

    swap dealing activities and risks. As such, this should also mitigate

    some of the costs incurred under the proposal.

    Under the proposal, those SDs and MSPs that are not subject to

    current capital requirements will have to develop and establish

    policies, procedures and systems to monitor, track, calculate and

    report the required information. In developing these policies,

    procedures and systems, these SDs will incur costs; however, as these

    entities are registered with the Commission as SDs, the Commission

    believes that they should already have developed policies, procedures

    and systems to aggregate, monitor, and track their swap activities and

    risks, as is required under the Commission's swap dealer framework.

    This should mitigate some of the burdens of the proposed reporting and

    recordkeeping

    [[Page 91296]]

    requirements. In addition, as the information that the Commission is

    proposing to require is based on GAAP or another accounting method,

    this information is already being prepared for other purposes and

    therefore, should again mitigate the costs in meeting these proposed

    requirements.

    The Commission also believes that as a result of the proposed

    reporting and recordkeeping requirements, SDs should be able to more

    effectively track their trading and risk exposure in swaps and other

    financial activities. To the extent that these SDs can better monitor

    and track their risks, this should help them better manage risk.

    As noted in the section F.9., the Commission is providing

    substituted compliance to certain non-U.S. CSEs. As discussed above and

    for the same reasons, the Commission believes that, in regards its

    reporting requirements, providing substitute compliance to these non-

    U.S. CSEs it should reduce the possibility of additional costs and

    duplicative or conflicting requirements

    I. Section 15(a) Factors

    The following is a discussion of the cost and benefit

    considerations of the proposal, as it relates to the five broad areas

    of market and public concern: (1) Protection of market participants and

    the public; (2) efficiency, competitiveness, and financial integrity of

    futures markets; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations.

    1. Protection of Market Participants and the Public

    The proposed rules are intended to strengthen the swaps market by

    requiring all CSEs to maintain a minimum level of capital and

    liquidity. These minimum capital requirements should enhance the loss

    absorbing capacity of CSEs and reduce the probability of financial

    contagion in the event of a counterparty default or a financial crisis.

    In addition, capital functions as a risk management tool by limiting

    the amount of leverage that a CSE can incur. Moreover, the proposal's

    liquidity and funding requirements should provide CSEs with the

    ability, in times of financial stress, to meet their current and other

    obligations as they come due, which should lower the probability of a

    CSE defaulting. This should help mitigate the overall risk in the

    financial system and ultimately reduce systemic risk. Financial

    reporting requirements for CSEs set out in this proposal should help

    the Commission and investors monitor and assess the financial condition

    of these CSEs. As this proposal is designed to protect financial

    entities from default, this should have a direct benefit to the public,

    as the failure of these CSEs could result in a financial contagion,

    which could negatively impact the general public. On the other hand,

    the proposed capital rules may require additional capital to be raised

    and may increase the cost of swaps, as described above.

    Request for Comment

    Do proposed capital, liquidity, and financial reporting

    requirements properly protect market participants and the public?

    Please explain.

    2. Efficiency, Competitiveness, and Financial Integrity of Swaps

    Markets

    In this proposal, the Commission sought to promote efficiency and

    financial integrity of the swaps market, and where possible, mitigate

    undue competitive disparities. Most notably, the Commission aligned the

    proposed regulations with that of the prudential regulators', SEC's and

    the Commission's current capital frameworks to the greatest extent

    possible. Doing so should promote greater operational efficiencies for

    those SDs that are part of a BHC or are also registered with the SEC as

    a BD or the Commission as an FCM, as they may be able to avoid creating

    duplicative compliance and operational infrastructures and instead,

    rely on the infrastructure supporting the other registered entities. In

    addition, this approach should also enhance efficiency and limit

    conflicting rules, as these entities can continue to operate under

    their current regimes. Moreover, the proposal permits CSEs to calculate

    credit and market risk charges under a standardized or model-based

    approach, which allows them to choose the methodology that is the most

    suitable for their asset composition.

    The Commission notes that the proposed capital rule, like other

    requirements under the Dodd-Frank Act, could have a substantial impact

    on competition in the swaps market. As the Commission's proposal will

    result in additional costs to certain CSEs that do not have current

    capital requirements, these CSEs may either limit their swap activities

    or withdraw from the swaps market. In this event, it is possible that

    this may result in less competition and increases in prices of swaps.

    Depending on the relative cost of the Commission's capital and

    liquidity requirements compared with corresponding requirements under

    prudential regulators' regime, SEC's regime or in other jurisdictions,

    certain CSEs may have a competitive advantage or disadvantage; however,

    the Commission, in developing the proposal, harmonized the proposal

    with those of the prudential regulators and the SEC to the maximum

    extent practicable.

    As noted above, the Commission, recognizing that SDs are critical

    to the financial integrity of the financial markets, designed their

    capital requirements to help ensure the safety and soundness of these

    SDs. In doing so, this should protect an SD in the event of a default

    by its counterparty or a financial crisis, which should reduce the

    probability of financial contagion.

    Request for Comment

    Is market integrity adversely affected by the proposed rules? If

    so, how might the Commission mitigate any harmful impact?

    3. Price Discovery

    As noted above, the proposal may have a negative effect on

    competition, as a result of increasing costs, which may result in some

    SDs limiting or withdrawing from the swaps markets. In that event, this

    negative effect on competition could result in a less liquid swaps

    market, which will have a negative effect on price discovery. However,

    as discussed above, most of the larger SDs or their parent entities are

    already subject to capital requirements that impose capital charges for

    their swap activities and, therefore, the proposal's effect on

    competition, liquidity and price discovery should be limited.

    Request for Comment

    How might this proposal affect price discovery? Please explain.

    4. Sound Risk Management Practices

    A well-designed risk management system helps to identify, evaluate,

    address, and monitor the risks associated with a firm's business. As

    discussed above, capital plays an important risk management function

    and limits the amount of leverage an entity can incur. In addition,

    capital serves as the last line of defensive in the event of a

    counterparty default or severe losses at a firm. The Commission's

    proposal is developed from two well-established capital regimes. In

    addition, the Commission is requiring certain liquidity standards and a

    funding requirement. Therefore, the Commission's proposal should

    promote increase risk management practices within a CSE. Moreover, the

    Commission believes that as a result of the proposed reporting and

    recordkeeping requirements, SDs may

    [[Page 91297]]

    more effectively track their trading and risk exposure in swaps and

    other financial activities. To the extent that these SDs can better

    monitor and track their risks, this should help them better manage risk

    within the entity.

    Request for Comment

    How might this proposal affect sound risk management practices?

    Please explain.

    5. Other Public Interest Considerations

    The Commission has not identified any additional public interest

    considerations related to the costs and benefits of the proposed rule.

    Request for Comment

    Are there other public interest considerations that the Commission

    should consider? Please explain.

    Appendix to Cost Benefit Considerations

    The Commission generally requests comments about its analysis of

    the general costs and benefits of the proposed rule. The Commission

    requests data to quantify and estimate the costs and the value of the

    benefits of the proposals. Are there additional costs and benefits that

    the Commission should consider? Has the Commission misidentified any

    costs or benefits? Commenters are encouraged to include both

    quantitative and qualitative assessments of benefits as well as data,

    or other information of support for such assessments.

    i. Minimum Capital Requirement

    The Commission focuses its analysis on cost arising from minimum

    capital requirement, due to data availability. As discussed above, this

    proposal would prescribe capital requirements for SDs and MSPs, and

    proposed amendments to existing capital rules for FCMs would prescribe

    capital requirement for FCMs that are also registered as SDs and

    increase capital requirement for FCMs to account for risk arising from

    their swaps and security-based swaps. The Commission first discusses

    cost at the entity level, and then quantifies cost at the industry

    level using SDR data.

    As of Nov. 9, 2016, there are approximately 104 SDs and no MSPs

    provisionally registered with the Commission. The Commission estimates

    that out of the 104 provisionally registered SDs, 15 U.S. Prudential

    Regulated Registrants SDs are exempt from the Commission's capital

    requirement; 36 SDs which are Non-U.S. Registrants Overseen by the FRB

    are also exempt from the Commission's capital requirement. For the rest

    53 provisionally registered SDs, eight SDs are currently also

    registered with the Commission as FCMs, while the other 45 SDs

    currently are not FCMs.\164\

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

    \164\ CAs of Nov. 9, 2016, one SD has filed a request with the

    Commission to withdraw its SD registration.

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

    Discussing Capital Requirement Cost at Entity Level

    The Commission collects monthly financial and capital information

    from FCMs. There are currently eight SDs which are also registered as

    FCMs. The Commission proposed following amendments to existing FCM

    capital rule to increase capital requirement to account for risk

    arising from swaps.

    Table 1--Minimum Capital Requirement for SDs That Are Also FCMs

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

    Tentative net Adjusted net capital

    capital ----------------------------------------------------

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

    Fixed dollar Fixed dollar Financial ratio

    (million) (million)

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

    FCM SD (not using models).................. N/A $20 8% of risk margin plus ``uncleared

    swap margin''.

    FCM SD (using models)...................... $100 $20 8% of risk margin plus ``uncleared

    swap margin''.

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

    The Commission expects most if not all entities would use models.

    For the purpose of discussing cost of complying with these proposed

    minimum capital requirements, the Commission further separates these

    SDs that are also FCMs into two categories: SDs that are also SEC

    registered ANC firms, and FCMs that are not ANC firms registered with

    the SEC.

    1. SDs That Are FCMs and ANC Firms With the SEC

    Table 2--Capital for SDs That Are Also FCMs and ANC Firms as of April 30, 2016

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

    Adjusted net Net capital Excess net

    Name of swap dealers Registered as capital requirement capital

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

    CITIGROUP GLOBAL MARKETS INC... FCM BD SD 7,378,708,335 1,449,570,569 5,929,137,766

    GOLDMAN SACHS & CO............. FCM BD SD 16,978,669,484 2,553,867,535 14,424,801,949

    JP MORGAN SECURITIES LLC....... FCM BD SD 13,539,160,236 2,542,050,203 10,997,110,033

    MORGAN STANLEY & CO LLC........ FCM BD SD 10,906,187,328 1,818,426,660 9,087,760,668

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

    Source: FCM financial data as of April 30, 2016.

    The Commission estimates that four SDs are already registered as

    ANC broker-dealers with SEC. ANC firms registered with the SEC are

    currently required to maintain a minimum of five billion dollars of

    tentative net capital and a minimum of one billion dollars of net

    capital. In addition, all ANC firms use models for risk charge

    computations. These required minimum capital for ANC firms by the SEC

    are much higher than the proposed minimum capital requirement by the

    Commission, thus are more likely the binding constraints for these

    firms. Based on financial information reported by these SDs in their

    monthly reports filed with the Commission, these four SDs maintain a

    significant amount of net capital in excess of SEC's requirement and

    the Commission's proposal. Therefore, the Commission expects that

    incremental costs from this

    [[Page 91298]]

    proposed capital requirement may not be significant for these firms.

    2. SDs That Are FCMs but Currently Are Not ANC Firms Registered With

    SEC

    The Commission estimates that there are four SDs in this category

    with one SD withdrawn pending. Based on the FCM Financial data provided

    to the Commission, three SDs currently have excess net capital ranging

    from $26.4 million to $312 million.\165\ The Commission expects that

    smaller SDs with less than 100 million adjusted net capital might need

    to raise additional capital and might incur significant cost to comply

    with this proposal. The Commission would like to request comments on

    (1) how much capital these SDs might need to raise? (2) Is it feasible

    for these SDs to raise capital? (3) If these SDs would raise capital

    through retained earnings, what would be the estimated ratio of

    required capital as percent of their current retained earnings?

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

    \165\ Selected FCM Financial Data as of April 30, 2016. http://www.cftc.gov/idc/groups/public/@financialdataforfcms/documents/file/fcmdata0416.pdf.

    Table 3--Capital for SDs That Are FCMs but Not ANC Firms as of April 30, 2016

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

    Adjusted net Net capital Excess net

    Name of swap dealers Registered as capital requirement capital

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

    FOREX CAPITAL MARKETS LLC...... FCMRFD SD 58,264,892 31,858,770 26,406,122

    MIZUHO SECURITIES USA INC...... FCM BD SD 575,181,123 263,266,797 311,914,326

    RJ OBRIEN ASSOCIATES LLC....... FCM SD 209,084,814 138,749,913 70,334,901

    IBFX INC *..................... ...................... ................. ................. .................

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

    IBFX INC * withdrawn pending.

    Source: FCM financial data as of April 30, 2016.

    For SDs that are not FCMs, the Commission prescribes following

    minimum capital requirements depending whether SDs use models to

    compute credit and market risk charges and whether SDs are financial

    entities or commercial entities. In addition, the Commission proposes

    positive tangible net worth requirement for MSPs. The Commission

    expects that most, if not all, stand-alone SDs would use models. For

    the purpose of discussing the cost of complying with minimum capital

    requirement, the Commission separates stand-alone SDs into following

    categories.

    Table 4--Minimum Capital Requirement for Stand-Alone SDs/MSPs

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

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

    Type of registrant Net liquid asset approach

    Bank-based capital approach

    Tangible net worth

    approach

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

    Tentative Adjusted net capital

    net capital

    Common equity tier 1

    Tangible net worth

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

    Fixed Fixed Financial ratio Fixed Financial ratios Fixed dollar... Financial ratio

    dollar dollar dollar

    (million) (million) (million)

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

    U.S. SD (Financial Entity N/A $20 8% of the total $20 8% of the total 8% of risk N/A............ N/A.

    not using internal models). amount of amount of weighted asset.

    margin. margin.

    U.S. SD (Financial Entity $100 $20 8% of the total $20 8% of the total 8% of risk N/A............ N/A.

    using internal models). amount of amount of weighted asset.

    margin. margin.

    U.S. SD (Not predominantly N/A N/A N/A............ N/A N/A............ N/A............ $20 million 8% of the total

    engaged in financial plus credit amount of

    activities). risk charge margin.

    and market

    risk charge.

    U.S. MSP.................... N/A N/A N/A............ N/A N/A............ N/A............ Positive....... N/A.

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

    Non-U.S. SDs................ Substituted Compliance Eligible, Capital Comparability Determination Required.

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

    3. Nonbank Subsidiaries of U.S. Bank Holding Companies (BHCs)

    The Commission estimates that 12 SDs are nonbank subsidiaries of

    U.S. BHC. These SDs currently do not have any capital requirement, and

    the proposed capital requirement may increase cost to these SDs as it

    may have to retain earnings to capitalize to the required level.

    However, their parents are currently subject to Federal Reserve's

    capital requirements on a consolidated basis, including U.S. Basel III

    capital requirement and also are participants of the Comprehensive

    Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test

    (DFAST). CCAR evaluates the capital planning process and capital

    adequacy of the largest U.S.-based BHCs, including the firms' planned

    capital actions. The Dodd-Frank Act stress tests are a forward-looking

    component to help assess whether firms have sufficient capital to

    absorb losses and have the ability to lend to households and businesses

    even in times of financial and economic stress. The parent BHCs of

    these nonbank SDs below are well capitalized due to these requirements,

    as indicated by their common equity tier 1 capital ratio at

    consolidated level is much higher than eight percent in the table

    below. Therefore, the additional cost from the Commission's proposed

    capital requirement may not be significant, as it may be possible for

    the consolidated entity to keep the same level of capital within the

    BHC, but just reallocate among its subsidiaries. In addition, the

    Commission recognizes that earnings

    [[Page 91299]]

    will now have to retain in the SD and will no longer be available to be

    reallocated to fund other more profitable activities within the

    consolidated group or to be returned to shareholders. The Commission

    understands that capital is not additive, i.e., the sum of capital at

    individual subsidiary level may be more than the amount of capital

    required at the parent level for all its subsidiaries, due to the loss

    of netting benefits. The Commission requests comments on whether it is

    reasonable to assume that SDs would be able to comply with the proposal

    while consolidated group of these SDs would not be able to keep the

    current level of capital. If not, please provide specific comments and

    estimates the additional cost of complying with the proposal.

    Table 5--SD's Parent BHC's Common Equity Tier 1 Capital Ratio as of

    First Quarter 2016

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

    Common equity tier 1

    Name of swap dealers capital ratio of SEC registered

    parent BHC BD

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

    CITIGROUP ENERGY INC........... Citigroup Inc. 12.3% N

    \166\.

    GOLDMAN SACHS FINANCIAL MARKETS Goldman Sachs 13.4% Y

    LP. \167\.

    GOLDMAN SACHS MITSUI MARINE Goldman Sachs 13.4%... N

    DERIVATIVE PRODUCTS LP.

    J ARON & COMPANY............... Goldman Sachs 13.4%... N

    JP MORGAN VENTURES ENERGY JP Morgan Chase & Co. N

    CORPORATION. 11.7% \168\.

    MERRILL LYNCH CAPITAL SERVICES Bank of America 11% N

    INC. \169\.

    MERRILL LYNCH COMMODITIES INC.. Bank of America 11%... N

    MERRILL LYNCH FINANCIAL MARKETS Bank of America 11%... Y

    INC.

    MORGAN STANLEY CAPITAL GROUP Morgan Stanley 14.5% N

    INC. \170\.

    MORGAN STANLEY CAPITAL SERVICES Morgan Stanley 14.5%.. N

    LLC.

    MORGAN STANLEY DERIVATIVE Morgan Stanley 14.5%.. N

    PRODUCTS INC.

    MORGAN STANLEY CAPITAL PRODUCTS Morgan Stanley 14.5%.. N

    LLC.

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

    As discussed above, the Commission expects all SDs would use models

    to calculate market risk and credit risk charges. Their parents BHCs

    most likely are already using their risk models to calculate capital

    for the positions of these wholly owned subsidiaries (including

    uncleared swaps) to measure the credit and market risk exposures of

    these positions.

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

    \166\ http://www.citigroup.com/citi/investor/data/qer116.pdf?ieNocache=23.

    \167\ http://www.goldmansachs.com/investor-relations/creditor-information/creditor-Website-presentation.pdf

    \168\ https://www.jpmorganchase.com/corporate/investor-relations/document/1Q16_Earnings_Presentation.pdf

    \169\ http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=quarterlyearnings#fbid=ECX9ZgSZ-Oq.

    \170\ https://www.morganstanley.com/about-us-ir/shareholder/1q2016.pdf.

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

    4. U.S. SDs That Are Not Part of U.S. BHCs

    The Commission estimates that there are 15 U.S. SDs not part of

    U.S. BHCs. These SDs currently do not have any capital requirement.

    However, out of these 15 SDs, six SDs are subsidiaries of foreign BHCs

    or a foreign financial holding company (FHC) which already comply with

    Basel III risk-based capital requirements and having common equity tier

    1 capital ratio at consolidated level exceeding eight percent.

    Specifically, two SDs are wholly-owned subsidiaries of Japanese BHCs,

    two SDs are subsidiaries of a Japanese Financial Holding Company, one

    SD is subsidiary of Netherlands BHC, and one SD is subsidiary of

    Australian investment bank. For the 9 SDs that are not subsidiaries of

    foreign holding companies that comply with Basel III, six SDs are part

    of groups that are subject to the CFTC's or the SEC's net capital

    requirements. Specifically, four SDs are subsidiaries of FCMs, and two

    SDs are also SEC registered BDs. These SDs' consolidated group has

    excess net capital ranging from $14.8 million to $1.2 billion.\171\ As

    it is possible for the consolidated entity to keep the same level of

    capital within the group, but just reallocate among its subsidiaries,

    the additional cost of complying with the Commission's proposed capital

    requirement may not be too burdensome. However, for those SDs or their

    consolidated groups that currently have smaller amount of excess net

    capital, they might need to raise additional capital and thus might

    incur significant cost to comply with this proposal. The Commission

    would like to request comments on (1) how much capital these SDs might

    need to raise? (2) Is it feasible for these SDs to raise capital? (3)

    If these SDs would raise capital through retained earnings, what would

    be the estimated ratio of required capital as percent of their current

    retained earnings?

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

    \171\ Selected FCM Financial Data as of April 30, 2016. http://www.cftc.gov/idc/groups/public/@financialdataforfcms/documents/file/fcmdata0416.pdf.

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

    The Commission estimates that three SDs do not belong to

    consolidated entities that have excess capital (either common equity

    tier 1 or net capital). The Commission, therefore, expects that these

    three SDs may incur significant additional costs to comply with this

    proposal and maintain their current business model. However, the

    Commission does not have data to precisely estimate the possible

    capital costs for these three SDs.

    Table 6--Current Capital Requirement (Common Equity Tier 1 Capital Ratio or Excess Net Capital) at the SD or Its

    Parent Level

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

    Excess net

    Common equity tier 1 capital capital at SEC registered

    Name of swap dealers ratio at parent level entity or its BD

    parent level

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

    BTIG LLC.................................... .............................. \172\ 50,043,660 Y

    GAIN GTX LLC................................ .............................. \173\ 14,821,951 N

    [[Page 91300]]

    ING CAPITAL MARKETS LLC \174\............... ING bank--11.6% \175\......... ................. N

    INTL FCSTONE MARKETS LLC.................... .............................. 60,582,006 Y

    JEFFERIES FINANCIAL PRODUCTS LLC............ .............................. \176\ N

    1,204,270,344

    MACQUARIE ENERGY LLC........................ Macquarie Bank--9.9% \177\.... ................. N

    MIZUHO CAPITAL MARKETS CORPORATION.......... Mizuho Financial Group--10.5% ................. N

    \178\.

    NOMURA DERIVATIVE PRODUCTS INC.............. Nomura Holdings, Inc.--15.1%.. ................. N

    NOMURA GLOBAL FINANCIAL PRODUCTS INC........ Nomura Holdings, Inc.--15.1%.. ................. Y

    SMBC CAPITAL MARKETS INC.................... SMFG--11.81% \179\............ ................. N

    JEFFERIES FINANCIAL SERVICES INC............ .............................. 1,204,270,344 N

    CANTOR FITZGERALD SECURITIES................ .............................. \180\ 232,219,010 N

    SHELL TRADING RISK MANAGEMENT LLC........... .............................. ................. N

    BP ENERGY COMPANY........................... .............................. ................. N

    CITADEL SECURITIES SWAP DEALER LLC.......... .............................. ................. N

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

    5. Non-Financial/Commercial SDs

    This proposal would require Non-Financial/Commercial SDs to

    maintain tangible net worth in an amount equal to or in excess of the

    minimum capital level ($20 million plus market risk charges and credit

    risk charges). Currently there is no capital requirement for commercial

    SDs. The Commission estimates that currently only one SD would be in

    this category, and believes that its tangible net worth greatly exceeds

    the Commission's proposed requirement.\181\ Therefore, the costs of

    this proposal are not expected to be material because it is not

    expected that this firm would have to alter its existing business

    practice in any substantial way to comply with minimum tangible net

    worth requirement.

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

    \172\ https://www.sec.gov/Archives/edgar/vprr/1600/16001826.pdf.

    \173\ GAIN GTX LLC is a wholly owned subsidiary of GAIN Capital

    Holdings, Inc., a global provider of online trading services. GAIN

    Capital Group LLC (a CFTC registered FCM and RFD) is also subsidiary

    of GAIN Capital Holdings, Inc. and has excess net capital of

    14,821,951.

    \174\ ING Bank was designated by the Basel Committee and the FSB

    as one of the global systemically important banks `G-SIBs' and by

    the Dutch Central Bank and the Dutch Ministry of Finance as a

    domestic SIFI. See ``ING Group Annual Report on Form 20-F 2015''.

    \175\ http://www.ing.com/About-us/Profile-Fast-facts/Fast-facts.htm.

    \176\ Excess net capital of Jefferies LLC, parent of Jefferies

    Derivative Products LLC, Jefferies Financial Products LLC, and

    Jefferies Financial Services LLC.

    \177\ http://www.macquarie.com/us/about/newsroom/2015/agm-2015.

    \178\ http://www.mizuho-fg.co.jp/english/faq/kessan.html.

    \179\ http://www.smfg.co.jp/english/investor/financial/latest_statement/2016_3/h2803_e1_01.pdf.

    \180\ Excess net capital at Cantor Fitzgerald & CO. (FCM and

    Broker-Dealer), which is owned by Cantor Fitzgerald Securities (94%

    ownership).

    \181\ http://www.cargill.com/company/financial/five-year/index.jsp.

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

    6. Non-U.S. SDs Not Subject to a Prudential Regulator

    The Commission is proposing to allow a ``substituted compliance''

    program for capital requirements for SDs that are: (1) Not organized

    under the laws of the U.S., and (2) not domiciled in the U.S. The

    Commission estimates that there are 17 non-U.S. provisionally

    registered SDs not subject to U.S. prudential regulators that would be

    eligible to apply for substituted compliance. Out of these 18 non-U.S.

    SDs, approximately 10 SDs are domiciled in the U.K., three SDs are

    domiciled in Japan, two SDs are domiciled in Mexico, one SD is

    domiciled in Singapore, and one SD is domiciled in Australia. The

    Commission would permit these non-U.S. SDs (or regulatory authorities

    in the non-U.S. SD's home country jurisdictions) to petition the

    Commission to satisfy the Commission's capital requirements through a

    program of substituted compliance with the SD's home country capital

    requirements. U.K., Japan, Mexico, Singapore, and Australia are members

    of Basel Committee on Banking Supervision and have adopted Basel III

    risk-based capital.\182\ Thus, the Commission does not expect

    significant additional cost arising from this proposal for these

    entities.

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

    \182\ http://www.bis.org/bcbs/publ/d338.pdf.

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

    Estimated Capital Requirement for IRS Positions of the SDs Subject to

    the Commission's Capital Requirement

    The Commission focuses its analysis on IRS as it covers the

    majority of swaps' notional reported to SDRs. Table below shows that

    IRS positons reported to SDR on June 24, 2016 account for about $312

    trillion. Cleared IRS positions are roughly $165 trillion, accounting

    for 53% of all IRS positions; while uncleared IRS positions are roughly

    $147 trillion, accounting for the rest 47%. Of the $147 trillion

    uncleared IRS positions, the Commission estimates that about 39% are

    inter-affiliate swaps \183\ and 61% are outward-facing swaps.

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

    \183\ An inter-affiliate swap is identified if the ultimate

    parent of both counterparties is the same entity, using the

    Commission's internal legal entity hierarchy database.

    \184\ These numbers are roughly the same numbers of CFTC Weekly

    Swap Report posted on http://www.cftc.gov/MarketReports/SwapsReports/L1GrossExpCS. The small discrepancies may be due to the

    fact that the table above is generated using the new automated

    weekly swaps report process.

    Table 7--Gross Notional of IRS Billion $ Reported to SDR on Positions

    [June 24, 2016]

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

    Uncleared Cleared Total

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

    Outward-facing \184\............................................ 90,117 164,646 254,763

    [[Page 91301]]

    Inter-affiliate................................................. 57,222 2 57,224

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

    Total....................................................... 147,339 164,648 311,987

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

    For the purpose of capital estimates, we double the notional

    amounts listed above since both counterparties to a swap position may

    be subject to the capital rules and therefore need to hold capital.

    Table below shows that of roughly $295 trillion uncleared IRS position

    on June 24, 2016 (double counting $147 trillion of uncleared notional),

    the Commission estimates that about 46% of uncleared swaps are held by

    SDs that are subject to the prudential regulators' capital requirement

    and, therefore, are exempt from this proposal, 30% of uncleared swaps

    are held by SDs that are subject to the Commission's capital

    requirement, while the rest 24% are held by institutions not subject to

    prudential regulators or the Commission's capital requirement.\185\

    About 88 trillion of uncleared IRS positions (with double counting) are

    held by SDs subject to the Commission's capital requirement. Of the 88

    trillion uncleared IRS swap positions (double counting), 38% are

    outward-facing swaps while 62% are inter-affiliate swaps. The

    Commission assumes that these uncleared swaps will require margin of

    about 0.2% to two percent of gross notional amount.\186\ The upper

    bound two percent margin rate based on average of table-based approach

    and is a conservative assumption because margin estimates from models

    tend to be on a much lower side. The initial margin amount required for

    these uncleared swaps (including inter-affiliate swaps) is 177 billion

    to 1.77 trillion. Assuming capital required is eight percent of margin

    amount, the capital required for the uncleared swaps held by SDs

    subject to CFTC's capital requirement would range from $14 billion to

    $140 billion. The Commission believes that most institutions, if not

    all institutions, will use models to calculate initial margin amount.

    If that is the case, the estimated capital required may be close to the

    lower bound of $14 billion. This estimated capital required here

    assumes that covered SDs currently do not hold capital for these swap

    positions. This is also a conservative assumption, because many SDs or

    their parent entities may already be holding capital against these

    uncleared swap positions. The Commission estimates that SDs may have

    significant amount of excess capital and in the case that SDs do not

    hold capital themselves, their parents may hold significant amount of

    excess capital. It may be possible for the consolidated entity (their

    parents) to keep the same level of capital within the group, but just

    reallocate among its subsidiaries and therefore, the additional cost of

    complying with the Commission's proposed capital requirement may not be

    too burdensome.

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

    \185\ These estimates are based on SDs registered with

    Commission on June 24, 2016. Since then, three SDs withdrew their

    registration with the Commission.

    \186\ The upper bound 2% is based on standardized approach,

    while the lower bound 0.2% is based on surveys that show model-based

    margin numbers could be as low as 10% of standardized margin

    requirement.

    Table 8--Gross Notional of Uncleared IRS Positions (Billion $) Reported to SDR on June 24, 2016

    [Double counting as both Counterparties may need to hold capital]

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

    Gross notional in billion $ for uncleared IRS position (double Outward- Inter-

    counting) facing affiliate Total

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

    Held by SDs subject to CFTC capital requirement................. 33,627 54,742 88,369

    Held by SDs subject to Prudential Regulator (PR)'s capital 89,062 46,689 135,751

    requirement....................................................

    Held by institutions not subject to CFTC or PR capital 57,546 13,013 70,558

    requirement....................................................

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

    Total....................................................... 180,234 114,443 294,677

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

    The table below shows that of $329 trillion cleared IRS position on

    June 24, 2016 (double counting $216 trillion as both counterparties may

    need to hold capital against the same position), the Commission

    estimates that about 31% of cleared swaps are held by SDs that are

    already subject to prudential regulators' capital requirement and

    exempt from this proposal, nine percent of cleared swaps are held by

    SDs that are subject to the Commission's capital requirement, while the

    remaining 60% are held by institutions not subject to prudential

    regulators or the Commission's capital requirement. Roughly $29

    trillion of outward-facing cleared IRS positions (with double counting)

    are held by SDs subject to the Commission's capital requirement. The

    Commission assumes that cleared swaps requires margin of about 0.14%

    (which is, 0.2%/[radic]2) to 1.4% (2%/[radic]2) of gross notional,

    because margin period of risk is five days for cleared swaps compared

    to ten days for uncleared swaps. The initial margin required for

    cleared swaps held by SDs subject to CFTC requirement is about 40

    billion to 400.6 billion. Assuming capital required is eight percent of

    initial margin, the capital required for the cleared swaps held by SDs

    subject to CFTC's proposed capital requirement is about $4.84 billion

    to $48.4 billion. As discussed earlier, estimated capital required for

    covered SDs is most likely to be close to the lower bound of $4.84

    billion. Therefore, the total capital required for both cleared and

    uncleared IRS positions held by SDs subject to the Commission's

    proposed rule would range from $18.84 billion to $188.4 billion. As

    discussed earlier, the estimated capital for IRS swaps held by SDs

    subject to the Commission's requirement is most likely to be $18.84

    billion. As discussed earlier, many SDs

    [[Page 91302]]

    already hold significant amount of excess capital. In the case that SDs

    do not hold capital themselves, their parents hold significant amount

    of excess capital. It may be possible for the consolidated entity to

    keep the same level of capital within the group, but just reallocate

    among its subsidiaries and therefore, the additional cost of complying

    with the Commission's proposed capital requirement may not be too

    burdensome.

    Table 9--Gross Notional of Cleared IRS Positions (Billion $) Reported to SDR on June 24, 2016

    [Double counting as both Counterparties may need to hold capital]

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

    Gross notional in billion $ for uncleared IRS position (double Outward- Inter-

    counting) facing affiliate Total

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

    Held by SDs subject to CFTC capital requirement................. 28,612 0 28,612

    Held by SDs subject to Prudential Regulator (PR)'s capital 102,221 0 102,221

    requirement....................................................

    Held by institutions not subject to CFTC or PR capital 198,458 5 198,463

    requirement....................................................

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

    Total....................................................... 329,291 5 329,296

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

    Request for Comment

    The Commission does not have sufficient financial information about

    these SDs to estimate precise costs of these proposed requirements and

    would welcome comments on how the proposed rule would impact the

    capital structure and the cost of doing business.

    1. Would the minimum capital requirements represent a barrier to

    entry to firms that may otherwise seek to trade swaps as SDs? If so,

    which types of firms would be foreclosed?

    2. Is it correct to assume that firms part of U.S. BHCs that are

    subject to Basel III and stress testing requirements would be readily

    able to meet the proposed capital requirement?

    3. Is it correct to assume that ANC firms would be readily able to

    meet the proposed capital requirement?

    4. Is it correct to assume that it would not be too costly for

    firms or their parents already subject to SEC current BD and/or

    proposed SBSD capital requirement or CFTC's current FCM capital

    requirement to comply with the capital requirement?

    5. Is it correct to assume that proposed capital requirements would

    not be too burdensome for firms that are part of foreign BHCs subject

    to Basel?

    6. Would it be too costly for the smaller SDs and SDs that are not

    subject to Basel or SEC or CFTC capital requirements to comply?

    7. What restrictions would smaller firms be willing to accept for a

    lower capital requirement?

    8. What alternative capital requirements might achieve the same

    policy goal?

    ii. Margin vs. Capital

    The Commission's proposal also would require an SD to include the

    initial margin for all swaps that would otherwise fall below the $50

    million initial margin threshold amount or the $500,000 minimum

    transfer amount, as defined in Regulation 23.151, for purposes of

    computing the uncleared swap margin amount. As such, the uncleared swap

    margin amount would be the amount that an SD would have to collect from

    a counterparty, assuming that the exclusions and exemptions for

    collecting initial margin for uncleared swaps set forth in Regulations

    23.150-161 would not apply, and also assuming that the thresholds under

    which initial margin and/or variation margin would not need to be

    exchanged would not apply. Accordingly, swaps that are not subject to

    the margin requirement such as those executed prior to the compliance

    date for margin requirements (``legacy swaps''), inter-affiliate swaps,

    and swaps with counterparties that would qualify for the exception or

    exemption under section 2(h)(7)(A) would have to be taken into account

    in determining the capital requirement.

    The Commission is proposing this approach as it believes that it

    would be appropriate to require an SD to maintain capital for

    uncollateralized swap exposures to counterparties to cover the

    ``residual'' risk of a counterparty's uncleared swaps positions. The

    Commission's proposed approach regarding the inclusion of

    uncollateralized swap exposures in the SD's capital requirements is

    consistent with the approach adopted by the prudential regulators in

    setting capital requirements for SDs subject to their jurisdiction and

    is consistent with the approach proposed by the SEC for SBSDs.

    The Commission provides certain exemptions from initial margin

    requirements for uncleared trades between affiliates. However, for the

    proposed capital rule inter-affiliate swaps would require capital to be

    held against them. The Commission requests comments on how the proposed

    capital rule would impact the competitiveness between different SDs

    based on the legal entity structure of the firm. The Commission

    understands that SDs may have different organizational structures due

    to various reasons. These reasons include, among others, centralized

    risk management for consolidation of balance-sheet, asset-liability and

    liquidity risk management; taxation benefits; funds transfer pricing;

    merger and acquisition; and subsidiaries in different jurisdictions. An

    arms-length swap may be offset by swap transaction with an affiliated

    SD because of any of the reasons listed above and possibly others.

    Centralization of risk within different entities of a firm in the same

    jurisdiction provides risk reduction benefits somewhat similar to the

    CCP and is encouraged.

    As per the proposed rule, both parties to a swap transaction may be

    required to hold capital even if they both are part of the same parent

    institution. In that sense, there may be double (or more) counting of

    capital at the parent level for a given outward facing swap based on

    the legal structure of the entity. This may lead to an uneven playing

    field between SDs if for a given swap, different swap dealers are

    required to hold different amount of capital based on the number of

    inter-affiliate trades that they execute for the same client facing

    trade.

    iii. Model vs. Table

    The proposal would allow an SD to apply to the Commission or an RFA

    of which it is a member for approval to use internal models when

    calculating its market risk exposure and credit risk exposure. The

    proposal would also allow an FCM that is also an SD to apply in writing

    to the Commission or an RFA of which it is a member for approval to

    compute deductions for market risk and credit risk using internal

    models in lieu of the standardized deductions otherwise required.

    As discussed above, there are approximately 107 SDs and no MSPs

    provisionally registered with the

    [[Page 91303]]

    Commission. Of these, the Commission estimates that approximately 55

    SDs and no MSPs would be subject to the Commission's capital rules as

    they are not subject to those of a prudential regulator. The Commission

    further estimates conservatively that most of these SDs and MSPs would

    seek to obtain Commission approval to use models for computing their

    market and credit risk capital charges. These entities would incur cost

    to develop, maintain, document, audit models, and seek model approval.

    The possibility of using models to calculate credit risk and market

    risk charges may allow SDs to more efficiently deploy capital in other

    parts of its operations, because models could reduce capital charges

    and thereby could make additional capital available. This reduced

    capital requirement due to model use could improve returns of SDs and

    make them more competitive.

    Although the Commission expects that SDs would use models for

    calculating market risk and credit risk charges, it is possible that

    some entities, particularly potential new entrants, may not have the

    risk management capabilities of which the models are an integral part,

    and, therefore, have to rely on the standardized haircut approach. The

    benefit of the standardized haircut approach for measuring market risk

    is its inherent simplicity. Therefore, this approach may improve

    customer protections and reduce systemic risk. In addition, a

    standardized haircut approach may reduce costs for the SD related to

    the risk of failing to observe or correct a problem with the use of

    models that could adversely impact the firm's financial conditions,

    because the use of models would require the allocation by the SD of

    additional firm resources and personnel. Conversely, if the proposed

    standardized haircuts are too conservative, they could make conducting

    swap business too costly, preventing or impairing the ability of the

    firms to engage in swaps, increasing transaction costs, reducing

    liquidity, and reducing the availability of swaps for risk mitigation

    by end users.

    Request for Comment

    Does the proposed capital requirement reflect the increased risk

    associated with the use of models and trading in a portfolio of swaps?

    iv. Liquidity Requirement and Equity Withdrawal Restrictions

    The Commission proposes additional liquidity requirements and

    equity withdrawal restrictions on certain eligible SDs. For SDs that

    elect a bank-based capital approach, the Commission is proposing to

    require the SD to maintain each day an amount of high quality liquid

    assets (``HQLAs''), that is no less than 100 percent of the SDs total

    net cash outflows over a prospective 30 calendar-day period. The HQLAs

    could be converted quickly into cash without reasonably expecting to

    incur losses in excess of the applicable haircuts during a stress

    period. Total net cash outflow amount are calculated by applying

    outflow and inflow rates, which reflect certain standardized stressed

    assumptions, against the balances of an SD's funding sources,

    obligations, transactions, and assets over a prospective 30 day period.

    For SDs that elect a net liquid assets capital approach, the

    Commission is proposing a liquidity stress test to be conducted by SDs

    that elect a net liquid assets capital approach at least monthly that

    takes into account certain assumed stressed conditions lasting for 30

    consecutive days. The proposed minimum elements are designed to ensure

    that SDs employ a stress test that is severe enough to produce an

    estimate of a potential funding loss of a magnitude that might be

    expected in a severely stressed market.

    Table 10--Minimum Liquidity Requirement

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

    Liquidity reserve Contingency Transferring

    requirement funding plan Risk management approval

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

    SDs that elect a bank-based Liquidity Coverage Strategies to Review LCR Approval prior to

    capital approach. Ratio (LCR) >=1; address liquidity quarterly by transferring

    HQLAs >= total net shortfalls in senior management HQLAs if, after

    cash outflows emergency. overseeing risk transferring, LCR

    over a management, <1.

    prospective 30 annually by

    calendar-day senior management.

    period.

    SDs that elect a net liquid Liquidity Stress Strategies to .................. ..................

    asset capital approach. Test; address liquidity

    Unencumbered cash shortfalls in

    + U.S. government emergency..

    securities >= a

    potential funding

    loss of a

    magnitude that

    might be expected

    in a severely

    stressed market

    for 30

    consecutive days.

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

    SDs that elect a tangible net None .................. ..................

    worth approach.

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

    The benefit of the proposed liquidity requirement is an additional

    level of protection against disruptions in the ability to obtain

    funding for a firm. This requirement intends to increase the likelihood

    that a firm could withstand a general loss of confidence in the firm

    itself, or the markets more generally and stay solvent for up to 30

    days, during which time it could either regain the ability to obtain

    funding in the ordinary course or else better position itself for

    resolution, with less impact on other market participants and the

    financial system. Therefore, this requirement may reduce the likelihood

    and severity of a fire sale and thus mitigate spillover effects and

    lower systemic risk. This, in turn, may increase confidence in swap

    markets and may lead to an increase in the use of swaps.

    However, this requirement would impose additional cost of capital

    and other costs directly related to the amount of the required

    liquidity reserve because an SD would be unable to deploy the assets

    that are maintained for the liquidity reserve in other, potentially

    more profitable ways. In addition, some firms may incur more

    implementation costs, because, firms (or their parent holding

    companies) that are

    [[Page 91304]]

    already complying with Basel III or SEC's liquidity requirements may

    already run stress tests, maintain liquidity reserves based on those

    tests, and/or have a written contingency funding plan.

    Request for Comment

    How much additional cost would SDs incur resulting from the

    proposed liquidity requirements given their current practice? The

    Commission requests that commenters quantify the extent of the

    additional cost the proposed minimum liquidity requirement would incur

    based on its portfolios and financials, and provide the Commission with

    such data. The Commission also requests comments on alternative

    approaches to liquidity requirements to achieve the same policy goal.

    v. Other Considerations

    The proposed requirements should reduce the risk of a failure of

    any major market participant in the swap market, which in turn reduces

    the possibility of a general market failure, and thus promotes

    confidence for market participants to transact in swaps for investment

    and hedging purposes. The proposed capital requirements are designed to

    promote confidence in SDs among customers, counterparties, and the

    entities that provide financing to SDs, thereby, lessen the potential

    that these market participants may seek to rapidly withdraw assets and

    financing from SDs during a time of market stress. This heightened

    confidence is expected to increase swap transactions and promote

    competition among dealers. A more competitive swap market may promote a

    more efficient capital allocation.

    However, to the extent that costs associated with the proposed

    rules are high, they may negatively affect competition within the swap

    markets. This may, for example, lead smaller dealers or entities for

    whom dealing is not a core business to exit the market because

    compliance with the proposed minimum capital, liquidity, and reporting

    requirements is not feasible due to its cost. The same costs might also

    deter the entry of new SDs into the market, and if sufficiently high,

    increase concentration among SDs.

    The proposals ultimately adopted could have a substantial impact on

    domestic and international commerce and the relative competitive

    position of SDs operating under different requirements of various

    jurisdictions. Specifically, SDs subject to a particular regulatory

    regime may be advantaged or disadvantaged if corresponding requirements

    in other regimes are substantially more or less stringent. This could

    affect the ability of U.S. SDs to compete in the domestic and global

    markets, the ability of non-U.S. to compete in U.S. markets.

    Substantial differences between the U.S. and foreign jurisdictions in

    the costs of complying with these requirements for swaps between U.S.

    and foreign jurisdictions could reduce cross-border capital flows and

    hinder the ability of global firms to most efficiently allocate capital

    among legal entities to meet the demands of their customers/

    counterparties.

    The willingness of end users to trade with an SD dealer will depend

    on their evaluation of the counterparty credit risks of trading with

    that particular SD compared to alternative SDs, and their ability to

    negotiate favorable price and other terms. The proposed capital,

    liquidity, and risk management requirements would in general reduce the

    likelihood of SDs' defaulting or failing, and therefore may increase

    the willingness of end users to trade with more SDs that have strong

    capital and liquidity reserves. End users of covered swaps are mostly

    made up of sophisticated participants such as hedge fund, asset

    management, other financial firms, and large commercial corporations.

    Many of these entities trade substantial volume of swaps and are

    relatively well-positioned to negotiate price and other terms with

    competing dealers. To the extent that the proposals result in increased

    competition, participants should be able to take advantage of this

    increased competition and negotiate improved terms. On the other hand,

    SDs may pass on additional capital, liquidity, and operational costs

    resulting from the proposal to end users in the form of higher fees or

    wider spreads. Thus end users may experience increased cost of using

    swaps for hedging and investing purposes.

    In addition, benefits may arise when SDs consolidate with other

    affiliated SDs, FCMs, and/or broker-dealers. This may yield

    efficiencies for clients conducting business in swaps, including

    netting benefits, reduced number of account relationships, and reduced

    number of governing agreements. These potential benefits, however, may

    be offset by reduced competition from a smaller number of competing

    SDs. Further, the proposals would permit conducting swap business in an

    entity jointly registered as an FCM, or SBSD, or broker-dealer, which

    may offer the potential for these firms to offer portfolio margining

    for a variety of positions. From a holding company's perspective,

    aggregating swap business in a single entity, could help simplify and

    streamline risk management, allow more efficient use of capital, as

    well as operational efficiencies, and avoid the need for multiple

    netting and other agreements.

    The proposed rules may create the potential for regulatory

    arbitrage to the extent that they differ from corresponding rules other

    regulators adopt. Also, to the extent that the proposed requirements

    are overly stringent, they may prevent or discourage new entrants into

    swap markets and thereby may either increase spreads and trading costs

    or even reduce the availability of swaps. In these cases, end users

    would face higher cost or be forced to use less effective financial

    instruments to meet their business needs.

    List of Subjects

    17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements.

    17 CFR Part 23

    Capital and margin requirements, Major swap participants, Swap

    dealers, Swaps.

    17 CFR Part 140

    Authority delegations (Government agencies).

    For the reasons discussed in the preamble, the Commodity Futures

    Trading Commission proposes to amend 17 CFR chapter I as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    0

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 9a, 12, 12a,

    16, 18, 19, 21, and 23.

    0

    2. In Sec. 1.10, revise paragraph (f)(1) introductory text; paragraphs

    (f)(1)(i)(B), (f)(1)(ii)(B), and (g)(1); paragraph (g)(2) introductory

    text; and paragraph (h) to read as follows:

    Sec. 1.10 Financial reports of futures commission merchants and

    introducing brokers.

    * * * * *

    (f) Extension of time for filing uncertified reports. (1) In the

    event a registrant finds that it cannot file its Form 1-FR, or, in

    accordance with paragraph (h) of this section, its Financial and

    Operational Combined Uniform Single Report under the Securities

    Exchange Act of 1934, part II,

    [[Page 91305]]

    part IIA, part II CSE (FOCUS report), or a Form SBS, for any period

    within the time specified in paragraphs (b)(1)(i) or (b)(2)(i) of this

    section without substantial undue hardship, it may request approval for

    an extension of time, as follows:

    (i) * * *

    (B) A futures commission merchant that is registered with the

    Securities and Exchange Commission as a securities broker or dealer may

    file with its designated self-regulatory organization a copy of any

    application that the registrant has filed with its designated examining

    authority, pursuant to Sec. 240.17a-5(m) of this title, for an

    extension of time to file its FOCUS report or Form SBS. The registrant

    must also promptly file with the designated self-regulatory

    organization and the Commission copies of any notice it receives from

    its designated examining authority to approve or deny the requested

    extension of time. Upon receipt by the designated self-regulatory

    organization and the Commission of copies of any such notice of

    approval, the requested extension of time referenced in the notice

    shall be deemed approved under this paragraph (f)(1).

    * * * * *

    (ii) * * *

    (B) An introducing broker that is registered with the Securities

    and Exchange Commission as a securities broker or dealer may file with

    the National Futures Association copies of any application that the

    registrant has filed with its designated examining authority, pursuant

    to Sec. 240.17a-5(m) of this title, for an extension of time to file

    its FOCUS report or Form SBS. The registrant also must promptly file

    with the National Futures Association copies of any notice it receives

    from its designated examining authority to approve or deny the

    requested extension of time. Upon the receipt by the National Futures

    Association of a copy of any such notice of approval, the requested

    extension of time referenced in the notice shall be deemed approved

    under this paragraph (f)(1)(ii).

    * * * * *

    (g) Public availability of reports. (1) Forms 1-FR filed pursuant

    to this section, and FOCUS reports or Forms SBS filed in lieu of Forms

    1-FR pursuant to paragraph (h) of this section, will be treated as

    exempt from mandatory public disclosure for purposes of the Freedom of

    Information Act and the Government in the Sunshine Act and parts 145

    and 147 of this chapter, except for the information described in

    paragraph (g)(2) of this section.

    (2) The following information in Forms 1-FR, and the same or

    equivalent information in FOCUS reports or Forms SBS filed in lieu of

    Forms 1-FR, will be publicly available:

    * * * * *

    (h) Filing option available to a futures commission merchant or an

    introducing broker that is also a securities broker or dealer. Any

    applicant or registrant which is registered with the Securities and

    Exchange Commission as a securities broker or dealer, a security-based

    swap dealer, or a major security-based market participant may comply

    with the requirements of this section by filing (in accordance with

    paragraphs (a), (b), (c), and (j) of this section) a copy, as

    applicable, of its Financial and Operational Combined Uniform Single

    Report under the Securities Exchange Act of 1934, Part II, Part IIA, or

    Part II CSE (FOCUS Report), or Form SBS, in lieu of Form 1-FR;

    Provided, however, That all information which is required to be

    furnished on and submitted with Form 1-FR is provided with such FOCUS

    Report or Form SBS; and Provided, further, That a certified FOCUS

    Report or Form SBS filed by an introducing broker or applicant for

    registration as an introducing broker in lieu of a certified Form 1-FR-

    IB must be filed according to National Futures Association rules,

    either in paper form or electronically, in accordance with procedures

    established by the National Futures Association, and if filed

    electronically, a paper copy of such filing with the original manually

    signed certification must be maintained by such introducing broker or

    applicant in accordance with Sec. 1.31.

    * * * * *

    0

    3. Amend Sec. 1.12 as follows:

    0

    a. Revise paragraph (a) introductory text and paragraphs (a)(1),

    (b)(3), and (b)(4); and

    0

    b. Add paragraph (b)(5).

    The revisions and addition to read as follows:

    Sec. 1.12 Maintenance of minimum financial requirements by futures

    commission merchants and introducing brokers.

    (a) Each person registered as a futures commission merchant or who

    files an application for registration as a futures commission merchant,

    and each person registered as an introducing broker or who files an

    application for registration as an introducing broker (except for an

    introducing broker or applicant for registration as an introducing

    broker operating pursuant to, or who has filed concurrently with its

    application for registration, a guarantee agreement and who is not also

    a securities broker or dealer), who knows or should have known that its

    adjusted net capital at any time is less than the minimum required by

    Sec. 1.17 or by the capital rule of any self-regulatory organization

    to which such person is subject, or the minimum net capital

    requirements of the Securities and Exchange Commission if the applicant

    or registrant is registered with the Securities and Exchange

    Commission, must:

    (1) Give notice, as set forth in paragraph (n) of this section that

    the applicant's or registrant's capital is below the applicable minimum

    requirement. Such notice must be given immediately after the applicant

    or registrant knows or should have known that its adjusted net capital

    or net capital, as applicable, is less than minimum required amount;

    and

    * * * * *

    (b) * * *

    (3) 150 percent of the amount of adjusted net capital required by a

    registered futures association of which it is a member, unless such

    amount has been determined by a margin-based capital computation set

    forth in the rules of the registered futures association, and such

    amount meets or exceeds the amount of adjusted net capital required

    under the margin-based capital computation set forth in Sec.

    1.17(a)(1)(i)(B), in which case the required percentage is 110 percent;

    (4) For securities brokers or dealers, the amount of net capital

    specified in Rule 17a-11(b) of the Securities and Exchange Commission

    (Sec. 240.17a-11(b) of this title); or

    (5) For security-based swap dealers or major security-based swap

    participants, the amount of net capital specified in Rule 18a-8(b) of

    the Securities and Exchange Commission (Sec. 240.18a-8(b) of this

    title), must file notice to that effect, as soon as possible and no

    later than twenty-four (24) hours of such event.

    * * * * *

    0

    4. In Sec. 1.16, revise paragraphs (f)(1)(i)(B) and (f)(1)(ii)(B) to

    read as follows:

    Sec. 1.16 Qualifications and reports of accountants.

    * * * * *

    (f)(1) * * *

    (i) * * *

    (B) A futures commission merchant that is registered with the

    Securities and Exchange Commission as a securities broker or dealer, a

    security-based swap dealer, or a major security-based swap participant,

    may file with its designated self-regulatory organization a copy of any

    application that the registrant has filed with its designated examining

    [[Page 91306]]

    authority, pursuant to Sec. 240.17a-5(m) of this title, for an

    extension of time to file audited annual financial statements. The

    registrant must also promptly file with the designated self-regulatory

    organization and the Commission copies of any notice it receives from

    its designated examining authority to approve or deny the requested

    extension of time. Upon receipt by the designated self-regulatory

    organization and the Commission of copies of any such notice of

    approval, the requested extension of time referenced in the notice

    shall be deemed approved under this paragraph (f)(1)(i).

    * * * * *

    (ii) * * *

    (B) An introducing broker that is registered with the Securities

    and Exchange Commission as a securities broker or dealer, a security-

    based swap dealer, or a major security-based swap participant may file

    with the National Futures Association copies of any application that

    the registrant has filed with its designated examining authority,

    pursuant to Sec. 240.17a-5(m) of this title, for an extension of time

    to file audited annual financial statements. The registrant must also

    file promptly with the National Futures Association copies of any

    notice it receives from its designated examining authority to approve

    or deny the requested extension of time. Upon the receipt by the

    National Futures Association of a copy of any such notice of approval,

    the requested extension of time referenced in the notice shall be

    deemed approved under this paragraph (f)(1)(ii).

    * * * * *

    0

    5. Amend Sec. 1.17 as follows:

    0

    a. Revise paragraphs (a)(1)(i)(A), (a)(1)(i)(B), (a)(1)(ii), (b)(9),

    and (b)(10);

    0

    b. Add paragraph (b)(11);

    0

    c. Revise paragraphs (c)(1)(i), (c)(2)(i), (c)(2)(ii)(B), and

    (c)(2)(ii)(D);

    0

    d. Add paragraphs (c)(2)(ii)(G) and (c)(5)(iii);

    0

    e. Revise paragraphs (c)(5)(viii), (c)(5)(ix), (c)(5)(x), and

    (c)(5)(xiv);

    0

    f. Add paragraph (c)(5)(xv);

    0

    g. Revise paragraph (c)(6) introductory text and paragraphs (c)(6)(i)

    and (c)(6)(iv)(A);

    0

    h. Add paragraphs (c)(6)(v) and (c)(6)(vi); and

    0

    i. Revise paragraph (g)(1).

    The revisions and additions to read as follows:

    Sec. 1.17 Minimum financial requirements for futures commission

    merchants and introducing brokers.

    (a)(1)(i) * * *

    (A) $1,000,000, Provided, however, that if the futures commission

    merchant also is a swap dealer, the minimum amount shall be

    $20,000,000;

    (B) The futures commission merchant's risk-based capital

    requirement, computed as eight percent of the sum of:

    (1) The total risk margin requirement (as defined in paragraph

    (b)(8) of this section) for positions carried by the futures commission

    merchant in customer accounts and noncustomer accounts;

    (2) The total initial margin that the futures commission merchant

    is required to post with a clearing agency or broker for security-based

    swap positions carried in customer and noncustomer accounts;

    (3) The total uncleared swaps margin, as that term is defined in

    Sec. 23.100 of this chapter;

    (4) The total initial margin that the futures commission merchant

    is required to post with a broker or clearing organization for all

    proprietary cleared swaps positions carried by the futures commission

    merchant;

    (5) The total initial margin computed pursuant to Rule 18a-

    3(c)(1)(i)(B) (Sec. 240.18a-3(c)(1)(B) of this title) of the

    Securities and Exchange Commission for all uncleared security-based

    swap positions carried by the futures commission merchant without

    regard to any initial margin exemptions or exclusions that the rules of

    the Securities and Exchange Commission may provide to such security-

    based swap positions; and

    (6) the total initial margin that the futures commission merchant

    is required to post with a broker or clearing agency for proprietary

    cleared security-based swaps;

    * * * * *

    (ii) A futures commission merchant that is registered as a swap

    dealer and has received approval from the Commission, or from a

    registered futures association of which the futures commission merchant

    is a member, to use internal models to compute market risk and credit

    risk charges for uncleared swaps must maintain net capital equal to or

    in excess of $100 million and adjusted net capital equal to or in

    excess of $20 million.

    * * * * *

    (b) * * *

    (9) Cleared over the counter derivative positions means a swap

    cleared by a derivatives clearing organization or a clearing

    organization exempted by the Commission from registering as a

    derivatives clearing organization, and further includes positions

    cleared by any organization permitted to clear such positions under the

    laws of the relevant jurisdiction.

    (10) Cleared over the counter customer means any person that is not

    a proprietary person as defined in Sec. 1.3(y) and for whom the

    futures commission merchant carries on its books one or more accounts

    for the cleared over the counter derivative positions of such person.

    (11) Uncleared swap margin. This term means the amount of initial

    margin that would be required to be collected by a swap dealer, as set

    out in Sec. 23.152(a) of this chapter for each outstanding swap

    (including the swaps that are exempt from the scope of Sec. 23.152 of

    this chapter by Sec. 23.150 of this chapter), exempt foreign exchange

    swaps or foreign exchange forwards, or netting set of swaps or foreign

    exchange swaps, for each counterparty, as if that counterparty was an

    unaffiliated swap dealer. In computing the uncleared swap margin

    amount, a swap dealer may not exclude the initial margin threshold

    amount or minimum transfer amount as such terms are defined in Sec.

    23.151 of this chapter.

    (c) * * *

    (1) * * *

    (i) Unrealized profits shall be added and unrealized losses shall

    be deducted in the accounts of the applicant or registrant, including

    unrealized profits and losses on fixed price commitments, uncleared

    swaps, and forward contracts;

    * * * * *

    (2) * * *

    (i) Exclude any unsecured commodity futures, options, cleared

    swaps, or other Commission regulated account containing a ledger

    balance and open trades, the combination of which liquidates to a

    deficit or containing a debit ledger balance only: Provided, however,

    deficits or debit ledger balances in unsecured customers', non-

    customers', and proprietary accounts, which are the subject of calls

    for margin or other required deposits may be included in current assets

    until the close of business on the business day following the date on

    which such deficit or debit ledger balance originated providing that

    the account had timely satisfied, through the deposit of new funds, the

    previous day's debit or deficits, if any, in its entirety.

    (ii) * * *

    (B)(1) Interest receivable, floor brokerage receivable, commissions

    receivable from other brokers or dealers (other than syndicate

    profits), mutual fund concessions receivable and management fees

    receivable from registered investment companies and commodity pools

    that are not outstanding more than thirty (30) days from the date they

    are due;

    [[Page 91307]]

    (2) Dividends receivable that are not outstanding more than thirty

    (30) days from the payable date; and

    (3) Commissions or fees receivable, including from other brokers or

    dealers, resulting from swap transactions that are not outstanding more

    than sixty (60) days from the month end accrual date provided they are

    billed promptly after the close of the month of their inception;

    * * * * *

    (D) Receivables from registered futures commission merchants or

    brokers, resulting from commodity futures, options, cleared swaps,

    foreign futures or foreign options transactions, except those

    specifically excluded under paragraph (c)(2)(i) of this section;

    * * * * *

    (G) Receivables from third-party custodians that represent the

    futures commission merchant's initial margin deposits associated with

    uncleared swap transactions pursuant to Sec. 23.158 of this chapter or

    uncleared security-based swap transactions under the rules of the

    Securities and Exchange Commission.

    * * * * *

    (5) * * *

    (iii) Swaps--(A) Uncleared swaps that are credit-default swaps

    referencing broad-based securities indices--(1) Short positions

    (selling protection). In the case of an uncleared short credit default

    swap that references a broad-based securities index, deducting the

    percentage of the notional amount based upon the current basis point

    spread of the credit default swap and the maturity of the credit

    default swap in accordance with the following table:

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

    Basis point spread (%)

    Length of time to maturity of CDS contract -----------------------------------------------------------------------------------------------

    100 or less 101-300 301-400 401-500 501-699 700 or more

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

    12 months or less....................................... 0.67 1.33 3.33 5.00 6.67 10.00

    13 months to 24 months.................................. 1.00 2.33 5.00 6.67 8.33 11.67

    25 months to 36 months.................................. 1.33 3.33 6.67 8.33 10.00 13.33

    37 months to 48 months.................................. 2.00 4.00 8.33 10.00 11.67 15.00

    49 months to 60 months.................................. 2.67 4.67 10.00 11.67 13.33 16.67

    61 months to 72 months.................................. 3.67 5.67 11.67 13.33 15.00 18.33

    73 months to 84 months.................................. 4.67 6.67 13.33 15.00 16.67 20.00

    85 months to 120 months................................. 5.67 10.00 15.00 16.67 18.33 26.67

    121 months and longer................................... 6.67 13.33 16.67 18.33 20.00 33.33

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

    (2) Long positions (purchasing protection). In the case of an

    uncleared swap that is a long credit default swap referencing a broad-

    based securities index, deducting 50 percent of the deduction that

    would be required by paragraph (c)(5)(iii)(A)(1) of this section if the

    swap was a credit default swap.

    (3) Long and short positions--(i) Long and short uncleared credit

    default swaps referencing the same broad-based security index. In the

    case of uncleared swaps that are long and short credit default swaps

    referencing the same broad-based security index, have the same credit

    events which would trigger payment by the seller of protection, have

    the same basket of obligations which would determine the amount of

    payment by the seller of protection upon the occurrence of a credit

    event, that are in the same or adjacent maturity spread category and

    have a maturity date within three months of the other maturity

    category, deducting the percentage of the notional amounts specified in

    the higher maturity category under paragraph (c)(5)(iii)(A)(1) or

    (c)(5)(iii)(A)(2) of this section on the excess of the long or short

    position.

    (ii) Long basket of obligors and uncleared long credit default swap

    referencing a broad-based securities index. In the case of an uncleared

    swap that is a long credit default swap referencing a broad-based

    securities index and the futures commission merchant is long a basket

    of debt securities comprising all of the components of the securities

    index, deducting 50 percent of the amount specified in Sec. 240.15c3-

    1(c)(2)(vi) of this title for the component of securities, provided the

    futures commission merchant can deliver the component securities to

    satisfy the obligation of the futures commission merchant on the credit

    default swap.

    (iii) Short basket of obligors and uncleared short credit default

    swap referencing a broad-based securities index. In the case of an

    uncleared swap that is a short credit default swap referencing a broad-

    based securities index and the futures commission merchant is short a

    basket of debt securities comprising all of the components of the

    securities index, deducting the amount specified in Sec. 240.15c3-

    1(c)(2)(vi) of this title for the component securities.

    (B) Interest rate swaps. In the case of an uncleared interest rate

    swap, deducting the percentage deduction specified in Sec. 240.15c3-

    1(c)(2)(vi)(A) of this title based on the maturity of the interest rate

    swap, provided that the percentage deduction must be no less than 0.5

    percent;

    (C) All other uncleared swaps. (1) In the case of any uncleared

    swap that is not a credit default swap or interest rate swap, deducting

    the amount calculated by multiplying the notional value of the swap by:

    (i) The percentage specified in Sec. 240.15c3-1 of this title

    applicable to the reference asset if Sec. 240.15c3-1 of this title

    specifies a percentage deduction for the type of asset and this section

    does not specify a percentage deduction;

    (ii) Six percent in the case of a currency swap that references

    euros, British pounds, Canadian dollars, Japanese yen, or Swiss francs,

    and twenty percent in the case of currency swaps that reference any

    other foreign currencies; or

    (iii) In the case of over-the-counter swap transactions involving

    commodities, 20 percent of the market value of the amount of the

    underlying commodities; and

    (iv) In the case of security-based swaps as defined in section 3(a)

    of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)), the

    percentage as specified in Sec. 240.15c3-1 of this title.

    * * * * *

    (viii) In the case of a futures commission merchant, for

    undermargined customer accounts, the amount of funds required in each

    such account to meet maintenance margin requirements of the applicable

    board of trade or if there are no such maintenance margin requirements,

    [[Page 91308]]

    clearing organization margin requirements applicable to such positions,

    after application of calls for margin or other required deposits which

    are outstanding no more than one business day. If there are no such

    maintenance margin requirements or clearing organization margin

    requirements, then the amount of funds required to provide margin equal

    to the amount necessary, after application of calls for margin or other

    required deposits outstanding no more than one business day, to restore

    original margin when the original margin has been depleted by 50

    percent or more: Provided, to the extent a deficit is excluded from

    current assets in accordance with paragraph (c)(2)(i) of this section

    such amount shall not also be deducted under this paragraph. In the

    event that an owner of a customer account has deposited an asset other

    than cash to margin, guarantee or secure his account, the value

    attributable to such asset for purposes of this subparagraph shall be

    the lesser of:

    (A) The value attributable to the asset pursuant to the margin

    rules of the applicable board of trade, or

    (B) The market value of the asset after application of the

    percentage deductions specified in paragraph (c)(5) of this section;

    (ix) In the case of a futures commission merchant, for

    undermargined noncustomer and omnibus accounts the amount of funds

    required in each such account to meet maintenance margin requirements

    of the applicable board of trade or if there are no such maintenance

    margin requirements, clearing organization margin requirements

    applicable to such positions, after application of calls for margin or

    other required deposits which are outstanding no more than one business

    day. If there are no such maintenance margin requirements or clearing

    organization margin requirements, then the amount of funds required to

    provide margin equal to the amount necessary after application of calls

    for margin or other required deposits outstanding no more than one

    business day to restore original margin when the original margin has

    been depleted by 50 percent or more: Provided, to the extent a deficit

    is excluded from current assets in accordance with paragraph (c)(2)(i)

    of this section such amount shall not also be deducted under this

    paragraph. In the event that an owner of a noncustomer or omnibus

    account has deposited an asset other than cash to margin, guarantee or

    secure his account the value attributable to such asset for purposes of

    this paragraph shall be the lesser of the value attributable to such

    asset pursuant to the margin rules of the applicable board of trade, or

    the market value of such asset after application of the percentage

    deductions specified in paragraph (c)(5) of this section;

    (x) In the case of open futures contracts, cleared swaps, and

    granted (sold) commodity options held in proprietary accounts carried

    by the applicant or registrant which are not covered by a position held

    by the applicant or registrant or which are not the result of a

    ``changer trade'' made in accordance with the rules of a contract

    market:

    (A) For an applicant or registrant which is a clearing member of a

    clearing organization for the positions cleared by such member, the

    applicable margin requirement of the applicable clearing organization;

    (B) For an applicant or registrant which is a member of a self-

    regulatory organization, 150 percent of the applicable maintenance

    margin requirement of the applicable board of trade, or clearing

    organization, whichever is greater;

    (C) For all other applicants or registrants, 200 percent of the

    applicable maintenance margin requirements of the applicable board of

    trade or clearing organization, whichever is greater; or

    (D) For open contracts or granted (sold) commodity options for

    which there are no applicable maintenance margin requirements, 200

    percent of the applicable initial margin requirement: Provided, the

    equity in any such proprietary account shall reduce the deduction

    required by this paragraph (c)(5)(x) if such equity is not otherwise

    includable in adjusted net capital;

    * * * * *

    (xiv) For securities brokers and dealers, all other deductions

    specified in Sec. 240.15c3-1 of this title;

    (xv) In the case of a futures commission merchant, the amount of

    the uncleared swap margin that the futures commission merchant has not

    collected from a swap counterparty, less any amounts owed by the

    futures commission merchant to the swap counterparty for uncleared swap

    transactions.

    (6)(i) Election of alternative capital deductions that have

    received approval of Securities and Exchange Commission pursuant to

    Sec. 240.15c3-1(a)(7) of this title. Any futures commission merchant

    that is also registered with the Securities and Exchange Commission as

    a securities broker or dealer, and who also satisfies the other

    requirements of this paragraph (c)(6), may elect to compute its

    adjusted net capital using the alternative capital deductions that,

    under Sec. 240.15c3-1(a)(7) of this title, the Securities and Exchange

    Commission has approved by written order in lieu of the deductions that

    would otherwise be required under this section.

    * * * * *

    (iv) * * *

    (A) Information that the futures commission merchant files on a

    monthly basis with its designated examining authority or the Securities

    and Exchange Commission, whether by way of schedules to its FOCUS

    reports or by other filings, in satisfaction of Sec. 240.17a-5(a)(5)

    of this title;

    * * * * *

    (v) Election of alternative market risk and credit risk capital

    deductions for a futures commission merchant that is registered as a

    swap dealer and has received approval of the Commission or a registered

    futures association for which the futures commission merchant is a

    member. For purposes of this paragraph (c)(6)(v) only, all references

    to futures commission merchant means a futures commission merchant that

    is also registered as a swap dealer.

    (A) A futures commission merchant may apply in writing to the

    Commission or a registered futures association of which it is a member

    for approval to compute deductions for market risk and credit risk

    using internal models in lieu of the standardized deductions otherwise

    required under this section. The futures commission merchant must file

    the application in accordance with instructions approved by the

    Commission and specified on the Web site of the registered futures

    association.

    (B) A futures commission merchant's application must include the

    information set forth in Appendix A to Sec. 23.102 of this chapter and

    the market risk and credit risk charges must be computed in accordance

    with Sec. 23.102 of this chapter.

    (vi) A futures commission merchant that is also registered as a

    swap dealer must comply with the liquidity requirements in Sec.

    23.104(b)(1) of this chapter as though it were a swap dealer that

    elected to follow Sec. 23.101(a)(1)(ii) of this chapter in computing

    its minimum capital requirement.

    * * * * *

    (g)(1) The Commission may by order restrict, for a period of up to

    twenty business days, any withdrawal by a futures commission merchant

    of equity capital, or any unsecured advance or loan to a stockholder,

    partner, limited liability company member, sole proprietor, employee or

    affiliate if the Commission, based on the facts and information

    available, concludes that

    [[Page 91309]]

    any such withdrawal, advance or loan may be detrimental to the

    financial integrity of the futures commission merchant, or may unduly

    jeopardize its ability to meet customer obligations or other

    liabilities that may cause a significant impact on the markets.

    * * * * *

    0

    6. In Sec. 1.65, revise paragraph (b) introductory text and paragraphs

    (d) and (e) to read as follows:

    Sec. 1.65 Notice of bulk transfers and disclosure obligations to

    customers.

    * * * * *

    (b) Notice to the Commission. Each futures commission merchant or

    introducing broker shall file with the Commission, at least ten

    business days in advance of the transfer, notice of any transfer of

    customer accounts carried or introduced by such futures commission

    merchant or introducing broker that is not initiated at the request of

    the customer, where the transfer involves the lesser of:

    * * * * *

    (d) The notice required by paragraph (b) of this section shall be

    considered filed when submitted to the Director of the Division of Swap

    Dealer and Intermediary Oversight, in electronic form using a form of

    user authentication assigned in accordance with procedures established

    by or approved by the Commission, and otherwise in accordance with

    instructions issued by or approved by the Commission.

    (e) In the event that the notice required by paragraph (b) of this

    section cannot be filed with the Commission at least ten days prior to

    the account transfer, the Commission hereby delegates to the Director

    of the Division of Swap Dealer and Intermediary Oversight, or such

    other employee or employees as the Director may designate from time to

    time, the authority to accept a lesser time period for such

    notification at the Director's or designee's discretion. In any event,

    however, the transferee futures commission merchant or introducing

    broker shall file such notice as soon as practicable and no later than

    the day of the transfer. Such notice shall include a brief statement

    explaining the circumstances necessitating the delay in filing.

    * * * * *

    PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

    0

    7. The authority citation for part 23 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,

    9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

    Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),

    Pub. L. 111-203, 124 Stat. 1641 (2010).

    0

    8. Revise subpart E of part 23 to read as follows:

    Subpart E--Capital and Margin Requirements for Swap Dealers and Major

    Swap Participants

    Sec.

    23.100 Definitions applicable to capital requirements.

    23.101 Minimum financial requirements for swap dealers and major

    swap participants.

    23.102 Calculation of market risk exposure requirement and credit

    risk exposure requirement using internal models.

    23.103 Calculation of market risk exposure requirement and credit

    risk exposure requirement when models are not approved.

    23.104 Liquidity requirements and equity withdrawal restrictions.

    23.105 Financial recordkeeping, reporting and notification

    requirements for swap dealers and major swap participants.

    23.106 Comparability determination for substituted compliance.

    23.107-23.149 [Reserved]

    Subpart E--Capital and Margin Requirements for Swap Dealers and

    Major Swap Participants

    Sec. 23.100 Definitions applicable to capital requirements.

    For purposes of Sec. Sec. 23.101 through 23.108 of subpart E of

    this part, the following terms are defined as follows:

    Actual daily net trading profit and loss. This term is used in

    assessing the performance of a swap dealer's VaR measure and refers to

    changes in the swap dealer's portfolio value that would have occurred

    were end-of-day positions to remain unchanged (therefore, excluding

    fees, commissions, reserves, net interest income, and intraday

    trading).

    Credit risk. This term refers to the risk that the counterparty to

    an uncleared swap transaction could default before the final settlement

    of the transaction's cash flows.

    Credit risk exposure requirement. This term refers to the amount

    that the swap dealer is required to compute under Sec. 23.102 if

    approved to use internal credit risk models, or to compute under Sec.

    23.103 if not approved to use internal credit risk models.

    Exempt foreign exchange swaps and foreign exchange forwards are

    those foreign exchange swaps and foreign exchange forwards that were

    exempted from the definition of a swap by the U.S. Department of the

    Treasury.

    Market risk exposure. This term means the risk of loss in a

    position or portfolio of positions resulting from movements in market

    prices and other factors. Market risk exposure is the sum of:

    (1) General market risks including changes in the market value of a

    particular assets that result from broad market movements, such as a

    changes in market interest rates, foreign exchange rates, equity

    prices, and commodity prices;

    (2) Specific risk, which includes risks that affect the market

    value of a specific instrument, such as the credit risk of the issuer

    of the particular instrument, but do not materially alter broad market

    conditions;

    (3) Incremental risk, which means the risk of loss on a position

    that could result from the failure of an obligor to make timely

    payments of principal and interest; and

    (4) Comprehensive risk, which is the measure of all material price

    risks of one or more portfolios of correlation trading positions.

    Market risk exposure requirement. This term refers to the amount

    that the swap dealer is required to compute under Sec. 23.102 if

    approved to use internal market risk models, or Sec. 23.103 if not

    approved to use internal market risk models.

    Predominantly engaged in non-financial activities. A swap dealer is

    predominantly engaged in non-financial activities if:

    (1) The swap dealer's consolidated annual gross financial revenues

    in either of its two most recently completed fiscal years represents

    less than 15 percent of the swap dealer's consolidated gross revenue in

    that fiscal year (``15% revenue test''), and

    (2) The consolidated total financial assets of the swap dealer at

    the end of its two most recently completed fiscal years represents less

    than 15 percent of the swap dealer's consolidated total assets as of

    the end of the fiscal year (``15% asset test''). For purpose of

    computing the 15% revenue test or the 15% asset test, a swap dealer's

    activities shall be deemed financial activities if such activities are

    defined as financial activities under 12 CFR 242.3 and Appendix A of 12

    CFR part 242, including lending, investing for others, safeguarding

    money or securities for others, providing financial or investment

    advisory services, underwriting or making markets in securities,

    providing securities brokerage services, and engaging as principal in

    investing and trading activities; provided, however, a swap dealer may

    exclude from its financial activities accounts receivable resulting

    from non-financial activities.

    Prudential regulator. This term has the same meaning as set forth

    in section

    [[Page 91310]]

    1a(39) of the Act, and includes the Board of Governors of the Federal

    Reserve System, the Office of the Comptroller of the Currency, the

    Federal Deposit Insurance Corporation, the Farm Credit Administration,

    and the Federal Housing Finance Agency, as applicable to a swap dealer

    or major swap participant.

    Regulatory capital. This term shall mean the amount of tier 1

    capital or ratio based capital, tangible net worth, or calculated net

    capital of a swap dealer or major swap participant relevant to the

    associated applicable regulatory capital requirement.

    Regulatory capital requirement. This term refers to each of the

    capital requirements that Sec. 23.101 applies to a swap dealer or

    major swap participant.

    Tangible net worth. This term means the net worth of a swap dealer

    or major swap participant as determined in accordance with generally

    accepted accounting principles in the United States, excluding goodwill

    and other intangible assets. In determining net worth, all long and

    short positions in swaps, security-based swaps and related positions

    must be marked to their market value. A swap dealer or major swap

    participant must include in its computation of tangible net worth all

    liabilities or obligations of a subsidiary or affiliate that the swap

    dealer or major swap participant guarantees, endorses, or assumes

    either directly or indirectly.

    Uncleared swap margin. This term means the amount of initial

    margin, computed in accordance with Sec. 23.154, that a swap dealer

    would be required to collect from each counterparty for each

    outstanding swap position of the swap dealer. A swap dealer must

    include all swap positions in the calculation of the uncleared margin

    amount, including swaps that are exempt from the scope of the

    Commission's margin for uncleared swaps rules pursuant to Sec. 23.150,

    exempt foreign exchange swaps or foreign exchange forwards, or netting

    set of swaps or foreign exchange swaps, for each counterparty, as if

    that counterparty was an unaffiliated swap dealer. Furthermore, in

    computing the uncleared swap margin amount, a swap dealer may not

    exclude the initial margin threshold amount or minimum transfer amount

    as such terms are defined in Sec. 23.151.

    Sec. 23.101 Minimum financial requirements for swap dealers and major

    swap participants.

    (a)(1) Except as provided in paragraphs (a)(2) through (a)(5) of

    this section, each swap dealer must elect to be subject to the minimum

    capital requirements set forth in either paragraphs (a)(1)(i) or

    (a)(1)(ii) of this section:

    (i) A swap dealer that elects to meet the capital requirements in

    this paragraph (a)(1)(i) must maintain regulatory capital that equals

    or exceeds the greatest of the following:

    (A) $20 million of common equity tier 1 capital, as defined under

    the bank holding company regulations in 12 CFR 217.20, as if the swap

    dealer itself were a bank holding company subject to 12 CFR part 217;

    (B) Common equity tier 1 capital, as defined under the bank holding

    company regulations in 12 CFR 217.20, equal to or greater than eight

    percent of the swap dealer's risk-weighted assets computed under the

    bank holding company regulations in 12 CFR part 217, as if the swap

    dealer itself were a bank-holding company subject to 12 CFR part 217;

    provided, however, that the swap dealer must add to its risk-weighted

    assets market risk capital charges computed in accordance with Sec.

    1.17 of this chapter if the swap dealer has not obtained the approval

    of the Commission or of a registered futures association to use

    internal capital models under Sec. 23.102;

    (C) Common equity tier 1 capital, as defined under 12 CFR 217.20,

    equal to or greater than eight percent of the sum of:

    (1) The amount of uncleared swap margin, as that term is defined in

    Sec. 23.100, for each uncleared swap position open on the books of the

    swap dealer, computed on a counterparty by counterparty basis pursuant

    to Sec. 23.154;

    (2) The amount of initial margin that would be required for each

    uncleared security-based swap position open on the books of the swap

    dealer, computed on a counterparty by counterparty basis pursuant to

    Sec. 240.18a-3(c)(1)(i)(B) of this title without regard to any initial

    margin exemptions or exclusions that the rules of the Securities and

    Exchange Commission may provide to such security-based swap positions;

    and

    (3) The amount of initial margin required by clearing organizations

    for cleared proprietary futures, foreign futures, swaps, and security-

    based swaps positions open on the books of the swap dealer; or,

    (D) The amount of capital required by a registered futures

    association of which the swap dealer is a member.

    (ii) A swap dealer that elects to meet the capital requirements in

    this paragraph (a)(1)(ii) must maintain regulatory capital that equals

    or exceeds the greatest of the following:

    (A) The amount of tentative net capital and net capital required

    by, and computed in accordance with, Sec. 240.18a-1 of this title as

    if the swap dealer were a security-based swap dealer registered with

    the Securities and Exchange Commission and subject to Sec. 240.18a-1

    of this title; Provided, however, that the swap dealer's computation is

    subject to the following adjustments:

    (1) In computing its minimum capital requirement, a swap dealer

    shall adjust the ``risk margin amount'' subject to the eight percent

    computation under Sec. 240.18a-1(a)(1) and (2) of this title to be the

    sum of:

    (i) The amount of uncleared swap margin, as that term is defined in

    Sec. 23.100, for each uncleared swap position open on the books of the

    swap dealer, computed on a counterparty by counterparty basis pursuant

    to Sec. 23.154;

    (ii) The amount of initial margin that would be required for each

    uncleared security-based swap position open on the books of the swap

    dealer, computed on a counterparty by counterparty basis pursuant to

    Sec. 240.18a-3(c)(1)(i)(B) of this title without regard to any initial

    margin exemptions or exclusions that the rules of the Securities and

    Exchange Commission may provide to such security-based swap positions;

    (iii) The amount of risk margin, as defined in Sec. 1.17(b)(8) of

    this chapter, required by a clearing organization for proprietary

    futures, swaps, and foreign futures positions open on the books of the

    swap dealer; and

    (iv) The amount of initial margin required by a clearing

    organization for proprietary security-based swaps open on the books of

    the swap dealer;

    (2) A swap dealer that uses internal models to compute market risk

    for its proprietary positions under Sec. 240.18a-1(d) of this title

    must calculate the total market risk as the sum of the VaR measure,

    stressed VaR measure, specific risk measure, comprehensive risk

    measure, and incremental risk measure of the portfolio of proprietary

    positions in accordance with Sec. 23.102 and Appendix A of Sec.

    23.102;

    (3) A swap dealer that has obtained approval from the Commission or

    from a registered futures association of which it is a member to uses

    internal models to compute credit risk capital charges for receivables

    resulting from uncleared swap and security-based swap transactions may

    use such models in computing the credit risk charge for receivables

    resulting from swap and security-based swap transactions under Sec.

    240.18a-1(d) of this title from all counterparties, including

    commercial end users as defined in Sec. 240.18a-3(b)(2) of this title;

    (4) A swap dealer may recognize as a current asset, receivables

    from third-

    [[Page 91311]]

    party custodians that maintain the swap dealer's initial margin

    deposits associated with uncleared swap transactions under Sec. 23.152

    and the swap dealer's initial margin deposits associated with uncleared

    security-based swap transactions under Sec. 240.18a-1(c)(1) of this

    title; and

    (5) A swap dealer may not deduct the margin difference as that term

    is defined in Sec. 240.18a-1(c)(1)(viii) of this title for swap and

    security-based swap transactions in lieu of collecting margin on such

    transactions; or

    (B) The amount of capital required by a registered futures

    association of which the swap dealer is a member.

    (2)(i) A swap dealer that is ``predominantly engaged in non-

    financial activities'' as defined in Sec. 23.100 may elect to meet the

    minimum capital requirements in this paragraph (a)(2) in lieu of the

    capital requirements in paragraph (a)(1) of this section.

    (ii) A swap dealer that satisfies the requirements of paragraph

    (a)(2)(i) of this section and elects to meet the requirements of this

    paragraph (a)(2) must maintain tangible net worth, as defined in Sec.

    23.100, equal to or in excess of the greatest of the following:

    (A) $20 million plus the amount of the swap dealer's market risk

    exposure requirement (as defined in Sec. 23.100) and its credit risk

    exposure requirement (as defined in Sec. 23.100) associated with the

    swap dealer's swap and related hedge positions that are part of the

    swap dealer's swap dealing activities. The swap dealer shall compute

    its market risk exposure requirement and credit risk exposure

    requirement for its swap positions in accordance with Sec. 23.102 if

    the swap dealer has obtained the approval of the Commission or a

    registered futures association of which it is a member to use internal

    capital models. The swap dealer shall compute its market risk exposure

    requirement and credit risk exposure requirement in accordance with the

    standardized approach of paragraphs (b)(1) and (c)(1) of Sec. 23.103

    if it has not been approved by the Commission or a registered futures

    association to use internal capital models;

    (B) Eight percent of the sum of:

    (1) The amount of uncleared swap margin, as that term is defined in

    Sec. 23.100, for each uncleared swap positions open on the books of

    the swap dealer, computed on a counterparty by counterparty basis

    pursuant to Sec. 23.154;

    (2) The amount of initial margin that would be required for each

    uncleared security-based swap position open on the books of the swap

    dealer, computed on a counterparty by counterparty basis pursuant to

    Sec. 240.18a-3(c)(1)(i)(B) of this title without regard to any initial

    margin exemptions or exclusions that the rules of the Securities and

    Exchange Commission may provide to such security-based swap positions;

    and

    (3) The amount of initial margin required by clearing organizations

    for cleared proprietary futures, foreign futures, swaps, security-based

    swaps positions on the books of the swap dealer; or,

    (C) The amount of capital required by a registered futures

    association of which the swap dealer is a member.

    (3) A swap dealer that is subject to minimum capital requirements

    established by the rules or regulations of a prudential regulator

    pursuant to section 4s(e) of the Act is not subject to the regulatory

    capital requirements set forth in paragraph (a)(1) or (2) of this

    section.

    (4) A swap dealer that is a futures commission merchant is subject

    to the minimum capital requirements of Sec. 1.17 of this chapter, and

    is not subject to the regulatory capital requirements set forth in

    paragraph (a)(1) or (2) of this section.

    (5) A swap dealer that is organized and domiciled outside of the

    United States, including a swap dealer that is an affiliate of a person

    organized and domiciled in the United States, may satisfy its

    requirements for capital adequacy under paragraphs (a)(1) or (2) of

    this section by substituted compliance with the capital adequacy

    requirement of its home country jurisdiction. In order to qualify for

    substituted compliance, a swap dealer's home country jurisdiction must

    receive from the Commission a Capital Comparability Determination under

    Sec. 23.106, and the swap dealer must obtain a confirmation to rely on

    the Capital Comparability Determination from a registered futures

    association as provided under Sec. 23.106.

    (6) A swap dealer that elects to meet the capital requirements of

    paragraph (a)(1)(i), (a)(1)(ii), or (a)(2) of this section may not

    subsequently change its election without the prior written approval of

    the Commission. A swap dealer that wishes to change its election must

    submit a written request to the Commission and must provide any

    additional information and documentation requested by the Commission.

    (b)(1) Every major swap participant for which there is not a

    prudential regulator must at all time have and maintain positive

    tangible net worth.

    (2) Notwithstanding paragraph (b)(1) of this section, each major

    swap participant for which there is no prudential regulator must meet

    the minimum capital requirements established by a registered futures

    association of which the major swap participant is a member.

    (c)(1) Before any applicant may be registered as a swap dealer or

    major swap participant, the applicant must demonstrate to the

    satisfaction of a registered futures association of which it is a

    member, or applying for membership, one of the following:

    (i) That the applicant complies with the applicable regulatory

    capital requirements in paragraph (a)(1), (a)(2), (b)(1) or (b)(2) of

    this section;

    (ii) That the applicant is a futures commission merchant that

    complies with Sec. 1.17 of this chapter;

    (iii) That the applicant is subject to minimum capital requirements

    established by the rules or regulations of a prudential regulator under

    paragraph (a)(3) of this section;

    (iv) That the applicant is organized and domiciled in a non-U.S.

    jurisdiction and is regulated in a jurisdiction for which the

    Commission has issued a Capital Comparability Determination under Sec.

    23.106, and the non-U.S. person has obtained confirmation from a

    registered futures association of which it is a member that it may rely

    upon the Commission's Comparability Determination under Sec. 23.106.

    (2) Each swap dealer and major swap participant subject to the

    minimum capital requirements set forth in paragraphs (a) and (b) of

    this section must be in compliance with such requirements at all times,

    and must be able to demonstrate such compliance to the satisfaction of

    the Commission and to the registered futures association of which the

    swap dealer or major swap dealer is a member.

    Sec. 23.102 Calculation of market risk exposure requirement and

    credit risk exposure requirement using internal models.

    (a) A swap dealer may apply to the Commission, or to a registered

    futures association of which the swap dealer is a member, for approval

    to use internal models under terms and conditions required by the

    Commission and by these regulations, or under the terms and conditions

    required by the registered futures association of which the swap dealer

    is a member, when calculating the swap dealer's market risk exposure

    and credit risk exposure under Sec. 23.101(a)(1)(i)(B), (a)(1)(ii)(A),

    or (a)(2)(ii)(A).

    (b) The swap dealer's application to use internal models to compute

    market risk exposure and credit risk exposure must be in writing and

    must be filed with the Commission and with the registered futures

    association of which

    [[Page 91312]]

    the swap dealer is a member. The swap dealer must file the application

    in accordance with instructions established by the Commission and the

    registered futures association.

    (c) A swap dealer's application must include the information set

    forth in Appendix A of this section.

    (d) The Commission or the registered futures association may

    approve or deny the application, or approve an amendment to the

    application, in whole or in part, subject to any conditions or

    limitations the Commission or registered futures association may

    require, if the Commission or registered futures association finds the

    approval to be appropriate in the public interest, after determining,

    among other things, whether the applicant has met the requirements of

    this section, and the appendices to this section. A swap dealer that

    has received Commission or registered futures association approval to

    compute market risk exposure requirements and credit risk exposure

    requirements pursuant to internal models must compute such charges in

    accordance with Appendix A of this section.

    (e) A swap dealer must cease using internal models to compute its

    market risk exposure requirement and credit risk exposure requirement,

    upon the occurrence of any of the following:

    (1) The swap dealer has materially changed a mathematical model

    described in the application or materially changed its internal risk

    management control system without first submitting amendments

    identifying such changes and obtaining the approval of the Commission

    or the registered futures association for such changes;

    (2) The Commission or the registered futures association of which

    the swap dealer is a member determines that the internal models are no

    longer sufficient for purposes of the capital calculations of the swap

    dealer as a result of changes in the operations of the swap dealer;

    (3) The swap dealer fails to come into compliance with its

    requirements under this section, after having received from the

    Director of the Commission's Division of Swap Dealer and Intermediary

    Oversight, or from the registered futures association of which the swap

    dealer is a member, written notification that the swap dealer is not in

    compliance with its requirements, and must come into compliance by a

    date specified in the notice; or

    (4) The Commission by written order finds that permitting the swap

    dealer to continue to use the internal models is no longer appropriate.

    Appendix A to Sec. 23.102--Application for Internal Models To Compute

    Market Risk Exposure Requirement and Credit Risk Exposure Requirement

    (a) A swap dealer that is requesting the approval of the

    Commission, or the approval of a registered futures association of

    which the swap dealer is a member, to use internal models to compute

    its market risk exposure requirement and credit risk exposure

    requirement under Sec. 23.102 must include the following

    information as part of its application:

    (1) An executive summary of the information within its

    application and, if applicable, an identification of the ultimate

    holding company of the swap dealer;

    (2) A list of the categories of positions that the swap dealer

    holds in its proprietary accounts and a brief description of the

    methods that the swap dealer will use to calculate deductions for

    market risk and credit risk on those categories of positions;

    (3) A description of the mathematical models used by the swap

    dealer under this Appendix A to compute the VaR of the swap dealer's

    positions; the stressed VaR of the swap dealer's positions; the

    specific risk of the swap dealer's positions subject to specific

    risk; comprehensive risk of the swap dealer's positions; and the

    incremental risk of the swap dealer's positions, and deductions for

    credit risk exposure. The description should encompass the creation,

    use, and maintenance of the mathematical models; a description of

    the swap dealer's internal risk management controls over the models,

    including a description of each category of persons who may input

    data into the models; if a mathematical model incorporates empirical

    correlations across risk categories, a description of the process

    for measuring correlations; a description of the backtesting

    procedures the swap dealer will use to backtest the mathematical

    models; a description of how each mathematical model satisfies the

    applicable qualitative and quantitative requirements set forth in

    this Appendix A and a statement describing the extent to which each

    mathematical model used to compute deductions for market risk

    exposures and credit risk exposures will be used as part of the risk

    analyses and reports presented to senior management;

    (4) If the swap dealer is applying to the Commission or a

    registered futures association for approval to use scenario analysis

    to calculate deductions for market risk for certain positions, a

    list of those types of positions, a description of how those

    deductions will be calculated using scenario analysis, and an

    explanation of why each scenario analysis is appropriate to

    calculate deductions for market risk on those types of positions;

    (5) A description of how the swap dealer will calculate current

    exposure;

    (6) A description of how the swap dealer will determine internal

    credit ratings of counterparties and internal credit risk weights of

    counterparties, if applicable;

    (7) For each instance in which a mathematical model to be used

    by the swap dealer to calculate a deduction for market risk exposure

    or to calculate maximum potential exposure for a particular product

    or counterparty differs from the mathematical model used by the swap

    dealer's ultimate holding company or the swap dealer's affiliates

    (if applicable) to calculate an allowance for market risk exposure

    or to calculate maximum potential exposure for that same product or

    counterparty, a description of the difference(s) between the

    mathematical models;

    (8) A description of the swap dealer's process of re-estimating,

    re-evaluating, and updating internal models to ensure continued

    applicability and relevance; and

    (9) Sample risk reports that are provided to management at the

    swap dealer who are responsible for managing the swap dealer's risk.

    (b) The application of the swap dealer shall be supplemented by

    other information relating to the internal risk management control

    system, mathematical models, and financial position of the swap

    dealer that the Commission or a registered futures association may

    request to complete its review of the application.

    (c) A person who files an application pursuant to this section

    for which it seeks confidential treatment may clearly mark each page

    or segregable portion of each page with the words ``Confidential

    Treatment Requested.'' All information submitted in connection with

    the application will be accorded confidential treatment, to the

    extent permitted by law.

    (d) If any of the information filed with the Commission or a

    registered futures association as part of the application of the

    swap dealer is found to be or becomes inaccurate before the

    Commission or a registered futures association approves the

    application, the swap dealer must notify the Commission or

    registered futures association promptly and provide the Commission

    or registered futures associations with a description of the

    circumstances in which the information was found to be or has become

    inaccurate along with updated, accurate information.

    (e) The Commission or registered futures association may approve

    the application or an amendment to the application, in whole or in

    part, subject to any conditions or limitations the Commission or the

    registered futures association may require if the Commission or the

    registered futures association finds the approval to be appropriate

    in the public interest, after determining, among other things,

    whether the swap dealer has met all the requirements of this

    Appendix A.

    (f) A swap dealer shall amend its application under this

    Appendix A and submit the amendment to the Commission and the

    registered futures association for approval before it may materially

    change a mathematical model used to calculate market risk exposure

    requirements or credit risk exposure requirements or before it may

    materially change its internal risk management control system with

    respect to such model.

    (g) As a condition for a swap dealer to use internal models to

    compute deductions for market risk exposure and credit risk exposure

    under this Appendix A, the swap dealer agrees that:

    [[Page 91313]]

    (1) It will notify the Commission and registered futures

    association 45 days before it ceases to use internal models to

    compute deductions for market risk exposure and credit risk exposure

    under this Appendix A; and

    (2) The Commission or the registered futures association may

    determine that the notice will become effective after a shorter or

    longer period of time if the swap dealer consents or if the

    Commission or the registered futures association determines that a

    shorter or longer period of time is appropriate in the public

    interest.

    (h) The Commission may by written order, or the registered

    futures association by written notice, revoke a swap dealer's

    approval to use internal models to compute market risk exposures and

    credit risk exposures on certain credit exposures arising from

    transactions in derivatives instruments if the Commission or the

    registered futures association of which the swap dealer is a member

    finds that such approval is no longer appropriate in the public

    interest. In making its finding, the Commission or the registered

    futures association will consider the compliance history of the swap

    dealer related to its use of models and the swap dealer's compliance

    with its internal risk management controls. If the Commission or

    registered futures association withdraws all or part of a swap

    dealer's approval to use internal models, the swap dealer shall

    compute market risk exposure requirements and credit risk exposure

    requirements in accordance with Sec. 23.103.

    (i) VaR models. A value-at-risk (``VaR'') model must meet the

    following minimum requirements in order to be approved:

    (1) Qualitative requirements.

    (i) The VaR model used to calculate market risk exposure or

    credit risk exposure for a position must be integrated into the

    daily internal risk management system of the swap dealer;

    (ii) The VaR model must be reviewed both periodically and

    annually. The periodic review may be conducted by personnel of the

    swap dealer that are independent from the personnel that perform the

    VaR model calculations. The annual review must be conducted by a

    qualified third party service. The review must include:

    (A) An evaluation of the conceptual soundness of, and empirical

    support for, the internal models;

    (B) An ongoing monitoring process that includes verification of

    processes and the comparison of the swap dealer's model outputs with

    relevant internal and external data sources or estimation

    techniques; and

    (C) An outcomes analysis process that includes backtesting. This

    process must include a comparison of the changes in the swap

    dealer's portfolio value that would have occurred were end-of-day

    positions to remain unchanged (therefore, excluding fees,

    commissions, reserves, net interest income, and intraday trading)

    with VaR-based measures during a sample period not used in model

    development.

    (iii) For purposes of computing market risk, the swap dealer

    must determine the appropriate multiplication factor as follows:

    (A) Beginning three months after the swap dealer begins using

    the VaR model to calculate the market risk exposure, the swap dealer

    must conduct monthly backtesting of the model by comparing its

    actual daily net trading profit or loss with the corresponding VaR

    measure generated by the VaR model, using a 99 percent, one-tailed

    confidence level with price changes equivalent to a one business-day

    movement in rates and prices, for each of the past 250 business

    days, or other period as may be appropriate for the first year of

    its use;

    (B) On the last business day of each quarter, the swap dealer

    must identify the number of backtesting exceptions of the VaR model

    using actual daily net trading profit and loss, as that term is

    defined in Sec. 23.100. An exception has occurred when for a

    business day the actual net trading loss, if any, exceeds the

    corresponding VaR measure. The counting period shall be for the

    prior 250 business days except that during the first year of use of

    the model another appropriate period may be used; and

    (C) The swap dealer must use the multiplication factor indicated

    in Table 1 of this Appendix A in determining its market risk until

    it obtains the next quarter's backtesting results;

    Table 1--Multiplication Factor Based on the Number of Backtesting

    Exceptions of the VaR Model

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

    Multiplication

    Number of exceptions factor

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

    4 or fewer............................................ 3.00

    5..................................................... 3.40

    6..................................................... 3.50

    7..................................................... 3.65

    8..................................................... 3.75

    9..................................................... 3.85

    10 or more............................................ 4.00

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

    (iv) For purposes of computing the credit equivalent amount of

    the swap dealer's exposures to a counterparty, the swap dealer must

    determine the appropriate multiplication factor as follows:

    (A) Beginning three months after it begins using the VaR model

    to calculate maximum potential exposure, the swap dealer must

    conduct backtesting of the model by comparing, for at least 80

    counterparties (or the actual number of counterparties if the swap

    dealer does not have 80 counterparties) with widely varying types

    and sizes of positions with the firm, the ten business day change in

    its current exposure to the counterparty based on its positions held

    at the beginning of the ten-business day period with the

    corresponding ten-business day maximum potential exposure for the

    counterparty generated by the VaR model;

    (B) As of the last business day of each quarter, the swap dealer

    must identify the number of backtesting exceptions of the VaR model,

    that is, the number of ten-business day periods in the past 250

    business days, or other period as may be appropriate for the first

    year of its use, for which the change in current exposure to a

    counterparty, assuming the portfolio remains static for the ten-

    business day period, exceeds the corresponding maximum potential

    exposure; and

    (C) The swap dealer will propose, as part of its application, a

    schedule of multiplication factors, which must be approved by the

    Commission, or a registered futures association of which the swap

    dealer is a member, based on the number of backtesting exceptions of

    the VaR model. The swap dealer must use the multiplication factor

    indicated in the approved schedule in determining the credit

    equivalent amount of its exposures to a counterparty until it

    obtains the next quarter's backtesting results, unless the

    Commission or the registered futures association determines, based

    on, among other relevant factors, a review of the swap dealer's

    internal risk management control system, including a review of the

    VaR model, that a different adjustment or other action is

    appropriate.

    (2) Quantitative requirements. (i) For purposes of determining

    market risk exposure, the VaR model must use a 99 percent, one-

    tailed confidence level with price changes equivalent to a ten

    business-day movement in rates and prices;

    (ii) For purposes of determining maximum potential exposure, the

    VaR model must use a 99 percent, one-tailed confidence level with

    price changes equivalent to a one-year movement in rates and prices;

    or based on a review of the swap dealer's procedures for managing

    collateral and if the collateral is marked to market daily and the

    swap dealer has the ability to call for additional collateral daily,

    the Commission, or the registered futures association of which the

    swap dealer is a member, may approve a time horizon of not less than

    ten business days;

    (iii) The VaR model must use an effective historical observation

    period of at least one year. The swap dealer must consider the

    effects of market stress in its construction of the model.

    Historical data sets must be updated at least monthly and reassessed

    whenever market prices or volatilities change significantly or

    portfolio composition warrant; and

    (iv) The VaR model must take into account and incorporate all

    significant, identifiable market risk factors applicable to

    positions in the accounts of the swap dealer, including:

    (A) Risks arising from the non-linear price characteristics of

    derivatives and the sensitivity of the fair value of those positions

    to changes in the volatility of the derivatives' underlying rates,

    prices, or other material risk factors. A swap dealer with a large

    or complex portfolio with non-linear derivatives (such as options or

    positions with embedded optionality) must measure the volatility of

    these positions at different maturities and/or strike prices, where

    material;

    (B) Empirical correlations within and across risk factors

    provided that the swap dealer validates and demonstrates the

    reasonableness of its process for measuring correlations, if the

    VaR-based measure does not incorporate empirical correlations across

    risk categories, the swap dealer must add the separate measures from

    its internal models used to calculate the VaR-based measure for the

    appropriate risk categories (interest rate risk, credit spread risk,

    equity price risk, foreign exchange rate risk, and/or commodity

    [[Page 91314]]

    price risk) to determine its aggregate VaR-based measure, or,

    alternatively, risk factors sufficient to cover all the market risk

    inherent in the positions in the proprietary or other trading

    accounts of the swap dealer, including interest rate risk, equity

    price risk, foreign exchange risk, and commodity price risk; and

    (C) Spread risk, where applicable, and segments of the yield

    curve sufficient to capture differences in volatility and imperfect

    correlation of rates along the yield curve for securities and

    derivatives that are sensitive to different interest rates. For

    material positions in major currencies and markets, modeling

    techniques must incorporate enough segments of the yield curve--in

    no case less than six--to capture differences in volatility and less

    than perfect correlation of rates along the yield curve.

    (j) Stressed VaR-based Measure. A stressed VaR model must meet

    the following minimum requirements in order to be approved:

    (1) Requirements for stressed VaR-based measure. (i) A swap

    dealer must calculate a stressed VaR-based measure for its positions

    using the same model(s) used to calculate the VaR-based measure

    under paragraph (i) of this appendix, subject to the same confidence

    level and holding period applicable to the VaR-based measure, but

    with model inputs calibrated to historical data from a continuous

    12-month period that reflects a period of significant financial

    stress appropriate to the swap dealer's current portfolio.

    (ii) The stressed VaR-based measure must be calculated at least

    weekly and be no less than the swap dealer's VaR-based measure.

    (iii) A swap dealer must have policies and procedures that

    describe how it determines the period of significant financial

    stress used to calculate the swap dealer's stressed VaR-based

    measure under this section and must be able to provide empirical

    support for the period used. The swap dealer must obtain the prior

    approval of the Commission, or a registered futures association of

    which the swap dealer is a member, if the swap dealer makes any

    material changes to these policies and procedures. The policies and

    procedures must address:

    (A) How the swap dealer links the period of significant

    financial stress used to calculate the stressed VaR-based measure to

    the composition and directional bias of its current portfolio; and

    (B) The swap dealer's process for selecting, reviewing, and

    updating the period of significant financial stress used to

    calculate the stressed VaR-based measure and for monitoring the

    appropriateness of the period to the swap dealer's current

    portfolio.

    (iv) Nothing in this appendix prevents the Commission or the

    registered futures association of which the swap dealer is a member

    from requiring a swap dealer to use a different period of

    significant financial stress in the calculation of the stressed VaR-

    based measure.

    (k) Specific Risk. A specific risk model must meet the following

    minimum requirements in order to be approved:

    (1) General requirement. A swap dealer must use one of the

    methods in this paragraph (k) to measure the specific risk for each

    of its debt, equity, and securitization positions with specific

    risk.

    (2) Modeled specific risk. A swap dealer may use models to

    measure the specific risk of its proprietary positions. A swap

    dealer must use models to measure the specific risk of correlation

    trading positions that are modeled under paragraph (m) of this

    appendix.

    (i) Requirements for specific risk modeling.

    (A) If a swap dealer uses internal models to measure the

    specific risk of a portfolio, the internal models must:

    (1) Explain the historical price variation in the portfolio;

    (2) Be responsive to changes in market conditions;

    (3) Be robust to an adverse environment, including signaling

    rising risk in an adverse environment; and

    (4) Capture all material components of specific risk for the

    debt and equity positions in the portfolio. Specifically, the

    internal models must:

    (i) Capture name-related basis risk;

    (ii) Capture event risk and idiosyncratic risk; and

    (iii) Capture and demonstrate sensitivity to material

    differences between positions that are similar but not identical and

    to changes in portfolio composition and concentrations.

    (B) If a swap dealer calculates an incremental risk measure for

    a portfolio of debt or equity positions under paragraph (l) of this

    appendix, the swap dealer is not required to capture default and

    credit migration risks in its internal models used to measure the

    specific risk of those portfolios.

    (C) A swap dealer shall validate a specific risk model through

    backtesting.

    (ii) Specific risk fully modeled for one or more portfolios. If

    the swap dealer's VaR-based measure captures all material aspects of

    specific risk for one or more of its portfolios of debt, equity, or

    correlation trading positions, the swap dealer has no specific risk

    add-on for those portfolios.

    (3) Specific risk not modeled.

    (i) If the swap dealer's VaR-based measure does not capture all

    material aspects of specific risk for a portfolio of debt, equity,

    or correlation trading positions, the swap dealer must calculate a

    specific-risk add-on for the portfolio under the standardized

    measurement method as described in 12 CFR 217.210.

    (ii) A swap dealer must calculate a specific risk add-on under

    the standardized measurement method as described in 12 CFR 217.200

    for all of its securitization positions that are not modeled under

    this paragraph (k).

    (l) Incremental Risk. An incremental risk model must meet the

    following minimum requirements in order to be approved:

    (1) General requirement. A swap dealer that measures the

    specific risk of a portfolio of debt positions under paragraph (k)

    of this appendix using internal models must calculate at least

    weekly an incremental risk measure for that portfolio according to

    the requirements in this section. The incremental risk measure is

    the swap dealer's measure of potential losses due to incremental

    risk over a one-year time horizon at a one-tail, 99.9 percent

    confidence level, either under the assumption of a constant level of

    risk, or under the assumption of constant positions. With the prior

    approval of the Commission or a registered futures association of

    which the swap dealer is a member, a swap dealer may choose to

    include portfolios of equity positions in its incremental risk

    model, provided that it consistently includes such equity positions

    in a manner that is consistent with how the swap dealer internally

    measures and manages the incremental risk of such positions at the

    portfolio level. If equity positions are included in the model, for

    modeling purposes default is considered to have occurred upon the

    default of any debt of the issuer of the equity position. A swap

    dealer may not include correlation trading positions or

    securitization positions in its incremental risk measure.

    (2) Requirements for incremental risk modeling. For purposes of

    calculating the incremental risk measure, the incremental risk model

    must:

    (i) Measure incremental risk over a one-year time horizon and at

    a one-tail, 99.9 percent confidence level, either under the

    assumption of a constant level of risk, or under the assumption of

    constant positions.

    (A) A constant level of risk assumption means that the swap

    dealer rebalances, or rolls over, the swap dealer's trading

    positions at the beginning of each liquidity horizon over the one-

    year horizon in a manner that maintains the swap dealer's initial

    risk level. The swap dealer must determine the frequency of

    rebalancing in a manner consistent with the liquidity horizons of

    the positions in the portfolio. The liquidity horizon of a position

    or set of positions is the time required for a swap dealer to reduce

    its exposure to, or hedge all of its material risks of, the

    position(s) in a stressed market. The liquidity horizon for a

    position or set of positions may not be less than the shorter of

    three months or the contractual maturity of the position.

    (B) A constant position assumption means that the swap dealer

    maintains the same set of positions throughout the one-year horizon.

    If a swap dealer uses this assumption, it must do so consistently

    across all portfolios.

    (C) A swap dealer's selection of a constant position or a

    constant risk assumption must be consistent between the swap

    dealer's incremental risk model and its comprehensive risk model

    described in paragraph (m) of this appendix, if applicable.

    (D) A swap dealer's treatment of liquidity horizons must be

    consistent between the swap dealer's incremental risk model and its

    comprehensive risk model described in paragraph (m) of this

    appendix, if applicable.

    (ii) Recognize the impact of correlations between default and

    migration events among obligors.

    (iii) Reflect the effect of issuer and market concentrations, as

    well as concentrations that can arise within and across product

    classes during stressed conditions.

    (iv) Reflect netting only of long and short positions that

    reference the same financial instrument.

    (v) Reflect any material mismatch between a position and its

    hedge.

    [[Page 91315]]

    (vi) Recognize the effect that liquidity horizons have on

    dynamic hedging strategies. In such cases, a swap dealer must:

    (A) Choose to model the rebalancing of the hedge consistently

    over the relevant set of trading positions;

    (B) Demonstrate that the inclusion of rebalancing results in a

    more appropriate risk measurement;

    (C) Demonstrate that the market for the hedge is sufficiently

    liquid to permit rebalancing during periods of stress; and

    (D) Capture in the incremental risk model any residual risks

    arising from such hedging strategies.

    (vii) Reflect the nonlinear impact of options and other

    positions with material nonlinear behavior with respect to default

    and migration changes.

    (viii) Maintain consistency with the swap dealer's internal risk

    management methodologies for identifying, measuring, and managing

    risk.

    (m) Comprehensive Risk. A comprehensive risk model must meet the

    following minimum requirements in order to be approved:

    (1) General requirement.

    (i) Subject to the prior approval of the Commission or a

    registered futures association of which the swap dealer is a member,

    a swap dealer may use the method in this paragraph to measure

    comprehensive risk, that is, all price risk, for one or more

    portfolios of correlation trading positions.

    (ii) A swap dealer that measures the price risk of a portfolio

    of correlation trading positions using internal models must

    calculate at least weekly a comprehensive risk measure that captures

    all price risk according to the requirements of this paragraph (m).

    The comprehensive risk measure is either:

    (A) The sum of:

    (1) The swap dealer's modeled measure of all price risk

    determined according to the requirements in paragraph (m)(2) of this

    appendix; and

    (2) A surcharge for the swap dealer's modeled correlation

    trading positions equal to the total specific risk add-on for such

    positions as calculated under paragraph (k) of this appendix

    multiplied by 8.0 percent; or

    (B) With approval of the Commission, or the registered futures

    association of which the swap dealer is member, and provided the

    swap dealer has met the requirements of this paragraph (m) for a

    period of at least one year and can demonstrate the effectiveness of

    the model through the results of ongoing model validation efforts

    including robust benchmarking, the greater of:

    (1) The swap dealer's modeled measure of all price risk

    determined according to the requirements in paragraph (b) of this

    appendix; or

    (2) The total specific risk add-on that would apply to the swap

    dealer's modeled correlation trading positions as calculated under

    paragraph (k) of this appendix multiplied by 8.0 percent.

    (2) Requirements for modeling all price risk. If a swap dealer

    uses an internal model to measure the price risk of a portfolio of

    correlation trading positions:

    (i) The internal model must measure comprehensive risk over a

    one-year time horizon at a one-tail, 99.9 percent confidence level,

    either under the assumption of a constant level of risk, or under

    the assumption of constant positions.

    (ii) The model must capture all material price risk, including

    but not limited to the following:

    (A) The risks associated with the contractual structure of cash

    flows of the position, its issuer, and its underlying exposures;

    (B) Credit spread risk, including nonlinear price risks;

    (C) The volatility of implied correlations, including nonlinear

    price risks such as the cross-effect between spreads and

    correlations;

    (D) Basis risk;

    (E) Recovery rate volatility as it relates to the propensity for

    recovery rates to affect tranche prices; and

    (F) To the extent the comprehensive risk measure incorporates

    the benefits of dynamic hedging, the static nature of the hedge over

    the liquidity horizon must be recognized. In such cases, a swap

    dealer must:

    (1) Choose to model the rebalancing of the hedge consistently

    over the relevant set of trading positions;

    (2) Demonstrate that the inclusion of rebalancing results in a

    more appropriate risk measurement;

    (3) Demonstrate that the market for the hedge is sufficiently

    liquid to permit rebalancing during periods of stress; and

    (4) Capture in the comprehensive risk model any residual risks

    arising from such hedging strategies;

    (iii) The swap dealer must use market data that are relevant in

    representing the risk profile of the swap dealer's correlation

    trading positions in order to ensure that the swap dealer fully

    captures the material risks of the correlation trading positions in

    its comprehensive risk measure in accordance with this section; and

    (iv) The swap dealer must be able to demonstrate that its model

    is an appropriate representation of comprehensive risk in light of

    the historical price variation of its correlation trading positions.

    (3) Requirements for stress testing.

    (i) A swap dealer must at least weekly apply specific,

    supervisory stress scenarios to its portfolio of correlation trading

    positions that capture changes in:

    (A) Default rates;

    (B) Recovery rates;

    (C) Credit spreads;

    (D) Correlations of underlying exposures; and

    (E) Correlations of a correlation trading position and its

    hedge.

    (ii) Other requirements. (A) A swap dealer must retain and make

    available to the Commission and to the registered futures

    association of which the swap dealer is a member the results and all

    assumptions and parameters of the supervisory stress testing,

    including comparisons with the capital requirements generated by the

    swap dealer's comprehensive risk model.

    (B) A swap dealer must report promptly to the Commission and to

    the registered futures association of which it is a member promptly

    any instances where the stress tests indicate any material

    deficiencies in the comprehensive risk model.

    (n) Securitization Exposures. (1) To use the simplified

    supervisory formula approach (SSFA) to determine the specific risk-

    weighting factor for a securitization position, a swap dealer must

    have data that enables it to assign accurately the parameters

    described in paragraph (n)(2) of this appendix. Data used to assign

    the parameters described in paragraph (n)(2) of this appendix must

    be the most currently available data; if the contracts governing the

    underlying exposures of the securitization require payments on a

    monthly or quarterly basis, the data used to assign the parameters

    described in paragraph (n)(2) of this appendix must be no more than

    91 calendar days old. A swap dealer that does not have the

    appropriate data to assign the parameters described in paragraph

    (n)(2) of this appendix must assign a specific risk-weighting of 100

    percent to the position.

    (2) SSFA parameters. To calculate the specific risk-weighting

    factor for a securitization position using the SSFA, a swap dealer

    must have accurate information on the five inputs to the SSFA

    calculation described in paragraphs (n)(2)(i) through (n)(2)(v) of

    this appendix.

    (i) KG is the weighted-average (with unpaid principal

    used as the weight for each exposure) total capital requirement of

    the underlying exposures calculated for a swap dealer's credit risk.

    KG is expressed as a decimal value between zero and one

    (that is, an average risk weight of 100 percent presents a value of

    KG equal to 0.08).

    (ii) Parameter W is expressed as a decimal value between zero

    and one. Parameter W is the ratio of the sum of the dollar amounts

    of any underlying exposures of the securitization that meet any of

    the criteria as set forth in paragraphs (n)(2)(ii)(A) through (F) of

    this appendix to the balance, measured in dollars, of underlying

    exposures:

    (A) Ninety days or more past due;

    (B) Subject to a bankruptcy or insolvency proceeding;

    (C) In the process of foreclosure;

    (D) Held as real estate owned;

    (E) Has contractually deferred payments for 90 days or more,

    other than principal or interest payments deferred on;

    (1) Federally-guaranteed student loans, in accordance with the

    terms of those guarantee programs; or

    (2) Consumer loans, including non-federally guaranteed student

    loans, provided that such payments are deferred pursuant to

    provisions included in the contract at the time funds are disbursed

    that provide for period(s) of deferral that are not initiated based

    on changes in the creditworthiness of the borrower; or

    (F) Is in default.

    (iii) Parameter A is the attachment point for the position,

    which represents the threshold at which credit losses will first be

    allocated to the position. Except as provided in 12 CFR

    217.210(b)(2)(vii)(D) for n\th\ to default derivatives, parameter A

    equals the ratio of the current dollar amount of underlying

    exposures that are subordinated to the position of the swap dealer

    to the current dollar amount of underlying exposures. Any reserve

    account funded by

    [[Page 91316]]

    the accumulated cash flows from the underlying exposures that is

    subordinated to the position that contains the swap dealer's

    securitization exposure may be included in the calculation of

    parameter A to the extent that cash is present in the account.

    Parameter A is expressed as a decimal value between zero and one.

    (iv) Parameter D is the detachment point for the position, which

    represents the threshold at which credit losses of principal

    allocated to the position would result in a total loss of principal.

    Except as provided in 12 CFR 217.210(b)(2)(vii)(D) for n\th\-to-

    default credit derivatives, parameter D equals parameter A plus the

    ratio of the current dollar amount of the securitization positions

    that are pari passu with the position (that is, have equal seniority

    with respect to credit risk) to the current dollar amount of the

    underlying exposures. Parameter D is expressed as a decimal value

    between zero and one.

    (v) A supervisory calibration parameter, p, is equal to 0.5 for

    securitization positions that are not resecuritization positions and

    equal to 1.5 for resecuritization positions.

    (3) Mechanics of the SSFA. KG and W are used to

    calculate KA, the augmented value of KG, which

    reflects the observed credit quality of the underlying exposures.

    KA is defined in paragraph (n)(4) of this section. The

    values of parameters A and D, relative to KA determine

    the specific risk-weighting factor assigned to a securitization

    position, or portion of a position, as appropriate, is the larger of

    the specific risk-weighting factor determined in accordance with

    paragraphs (n)(3) and (n)(4) of this appendix, and a specific risk-

    weighting factor of 1.6 percent.

    (i) When the detachment point, parameter D, for a securitization

    position is less than or equal to KA, the position must

    be assigned a specific risk-weighting factor of 100 percent.

    (ii) When the attachment point, parameter A, for a

    securitization position is greater than or equal to KA,

    the swap dealer must calculate the specific risk-weighting factor in

    accordance with paragraph (n)(4) of this section.

    (iii) When A is less than KA and D is greater than

    KA, the specific risk-weighting factor is a weighted-

    average of 1.00 and KSSFA calculated under paragraphs

    (n)(3)(iii)(A) and (3)(iii)(B) of this appendix. For the purpose of

    this calculation:

    (A) The weight assigned to 1.00 equals

    [GRAPHIC] [TIFF OMITTED] TP16DE16.000

    (o) Additional conditions. As a condition for the swap dealer to

    use this Appendix A to calculate certain of its capital charges, the

    Commission, or registered futures association of which the swap

    dealer is a member, may impose additional conditions on the swap

    dealer, which may include, but are not limited to restricting the

    swap dealer's business on a product-specific, category-specific, or

    general basis; submitting to the Commission or registered futures

    association a plan to increase the swap dealer's regulatory capital;

    filing more frequent reports with the Commission or registered

    futures association; modifying the swap dealer's internal risk

    management control procedures; or computing the swap dealer's

    deductions for market and credit risk in accordance with Sec.

    23.102 as appropriate. If the Commission or registered futures

    association finds it is necessary or appropriate in the public

    interest, the Commission or registered futures association may

    impose additional conditions on the swap dealer, if:

    (1) The swap dealer is required to provide notice to the

    Commission or a registered

    [[Page 91317]]

    futures association that the swap dealer's regulatory capital is

    less than $100 million;

    (2) The swap dealer fails to meet the reporting requirements set

    forth in Sec. 23.105;

    (3) Any event specified in Sec. 23.105 occurs;

    (4) There is a material deficiency in the internal risk

    management control system or in the mathematical models used to

    price securities or to calculate deductions for market and credit

    risk or allowances for market and credit risk, as applicable, of the

    swap dealer;

    (5) The swap dealer fails to comply with this Appendix A; or

    (6) The Commission finds that imposition of other conditions is

    necessary or appropriate in the public interest.

    Sec. 23.103 Calculation of market risk exposure requirement and

    credit risk requirement when models are not approved.

    (a) Non-model approach. A swap dealer that has not received

    approval from the Commission, or from a registered futures association

    of which the swap dealer is a member, to compute its market risk

    exposure requirement and/or credit risk exposure requirement pursuant

    to internal models under Sec. 23.102, or a swap dealer that has had

    its approval to compute its market risk exposure requirement and/or

    credit risk exposure requirement pursuant to internal models under

    Sec. 23.102 revoked by the Commission or the registered futures

    association, must compute its market risk exposure requirements and/or

    credit risk exposure requirements pursuant to paragraphs (b) and (c) of

    this section.

    (b) Market risk exposure requirements. (1) A swap dealer that

    computes its regulatory capital under Sec. 23.101(a)(1)(i),

    (a)(1)(ii), or (a)(2) shall compute a market risk capital charge for

    the positions that the swap dealer holds in its proprietary accounts

    using the applicable standardized market risk charges set forth in

    Sec. 240.18a-1 of this title and Sec. 1.17 of this chapter for such

    positions.

    (2) In computing its regulatory capital under Sec.

    23.101(a)(1)(i), a swap dealer shall increase its risk-weighted assets

    by an amount equal to 1250 percent of the sum of the market risk

    capital charges computed under paragraph (b)(1) of this section.

    (3) In computing its net capital under Sec. 23.101(a)(1)(ii), a

    swap dealer shall deduct from its tentative net capital the sum of the

    market risk capital charges computed under paragraph (b)(1) of this

    section.

    (4) In computing its minimum capital requirement under Sec.

    23.101(a)(2), a swap dealer must add the amount of the market risk

    capital charge computed under this section to the $20 million minimum

    capital requirement.

    (c) Credit risk charges. (1) A swap dealer that computes its

    regulatory capital under Sec. 23.101(a)(1)(i) shall compute

    counterparty credit risk capital charges in accordance with subpart D

    of 12 CFR part 217. A swap dealer that computes regulatory capital

    under Sec. 23.101(a)(1)(ii) shall compute counterparty credit risk

    capital charges using the applicable standardized credit risk charges

    set forth in Sec. 240.18a-1 of this title and Sec. 1.17 of this

    chapter for such positions; Provided, however, that a swap dealer may

    reduce the counterparty credit risk for a particular counterparty by

    the amount of margin deposited by such counterparty for its uncleared

    swap positions that is maintained with a third party custodian in

    accordance with Sec. 23.157 and by the amount of margin deposited by

    such counterparty for its uncleared security-based swap positions that

    is maintained with a third party custodian in accordance with Sec.

    240.18a-3 of this title.

    (2) In computing its regulatory capital under Sec.

    23.101(a)(1)(i), a swap dealer shall increase its risk-weighted assets

    by the sum of the counterparty credit risk capital charges computed

    under paragraph (c)(1) of this section.

    (3) In computing its net capital under Sec. 23.101(a)(1)(ii), a

    swap dealer shall reduce its tentative net capital by the sum of the

    counterparty credit risk capital charges computed under paragraph

    (c)(1) of this section.

    (4) In computing its minimum capital requirement under Sec.

    23.101(a)(2), a swap dealer must add the amount of the credit risk

    capital charge computed under this section to the $20 million minimum

    capital requirement.

    Sec. 23.104 Liquidity requirements and equity withdrawal

    restrictions.

    (a)(1) Liquidity coverage ratio. A swap dealer that is subject to

    the minimum capital requirements of Sec. 23.101(a)(1)(i) must meet the

    liquidity coverage ratio as defined in 12 CFR part 249 as if the swap

    dealer were regulated by the Federal Reserve Board and subject to the

    provisions of 12 CFR part 249; Provided, however, that a swap dealer

    may include cash deposited with banks that is readily available for

    withdrawal as level 1 assets under 12 CFR 249.20, and a swap dealer

    organized and domiciled outside of the U.S. may include high quality

    liquid assets maintained in its home country jurisdiction, in meeting

    its minimum liquidity coverage ratio.

    (2) Notification of senior management. The senior management of the

    swap dealer that is responsible for risk management must be promptly

    informed if the swap dealer's liquidity coverage ratio falls below 1.0.

    In addition, the assumptions underlying the calculation of the

    liquidity coverage ratio must be reviewed at least quarterly by senior

    management of the swap dealer that is responsible for risk management,

    and at least annually by the full senior management of the swap dealer.

    (3) Restrictions on the disposition or transfer of high quality

    liquid assets. A swap dealer may not dispose of, or transfer to an

    affiliate, a high quality liquid asset (as that term is defined in 12

    CFR 249.20) without prior notice to and approval by the Commission if

    such disposition or transfer would result in the swap dealer failing to

    meet the liquidity coverage ratio in paragraph (a)(1) of this section.

    (4) Contingency funding plan. The swap dealer must have a written

    contingency funding plan that addresses the swap dealer's policies and

    the roles and responsibilities of relevant personnel for meeting the

    liquidity needs of the swap dealer and communications with the public

    and other market participants during a liquidity stress event.

    (b)(1) Liquidity stress test. A swap dealer that computes

    regulatory capital under paragraph (a)(1)(ii) of Sec. 23.101 must

    perform a liquidity stress test at least monthly, the results of which

    must be provided within ten business days to senior management that has

    responsibility to oversee risk management at the swap dealer. The

    assumptions underlying the liquidity stress test must be reviewed at

    least quarterly by senior management that has responsibility to oversee

    risk management at the swap dealer and at least annually by senior

    management of the swap dealer. The liquidity stress test must include,

    at a minimum, the following assumed conditions lasting for 30

    consecutive days:

    (i) A stress event includes a decline in creditworthiness of the

    swap dealer severe enough to trigger contractual credit-related

    commitment provisions of counterparty agreements;

    (ii) The loss of all existing unsecured funding at the earlier of

    its maturity or put date and an inability to acquire a material amount

    of new unsecured funding, including intercompany advances and unfunded

    committed lines of credit;

    (iii) The potential for a material net loss of secured funding;

    (iv) The loss of the ability to procure repurchase agreement

    financing for less liquid assets;

    (v) The illiquidity of collateral required by and on deposit at

    clearing agencies or other entities which is not

    [[Page 91318]]

    deducted from net worth or which is not funded by customer assets;

    (vi) A material increase in collateral required to be maintained at

    registered clearing agencies of which it is a member; and

    (vii) The potential for a material loss of liquidity caused by

    market participants exercising contractual rights and/or refusing to

    enter into transactions with respect to the various businesses,

    positions, and commitments of the swap dealer.

    (2) Stress test of consolidated entity. If applicable, the swap

    dealer must justify and document any differences in the assumptions

    used in the liquidity stress test of the swap dealer from those used in

    the liquidity stress test of the consolidated entity of which the swap

    dealer is a part.

    (3) Liquidity reserves. The swap dealer must maintain at all times

    liquidity reserves based on the results of the liquidity stress test.

    The liquidity reserves used to satisfy the liquidity stress test must

    be:

    (i) Cash, obligations of the United States, or obligations fully

    guaranteed as to principal and interest by the United States; and

    (ii) Unencumbered and free of any liens at all times.

    (4) Contingency funding plan. The swap dealer must have a written

    contingency funding plan that addresses the swap dealer's policies and

    the roles and responsibilities of relevant personnel for meeting the

    liquidity needs of the swap dealer and communications with the public

    and other market participants during a liquidity stress event.

    (c) Equity withdrawal restrictions. The capital of a swap dealer,

    including the capital of any affiliate or subsidiary whose liabilities

    or obligations are guaranteed, endorsed, or assumed by the swap dealer

    may not be withdrawn by action of the swap dealer or its equity

    holders, or by redemption of shares of stock by the swap dealer or by

    such affiliates or subsidiaries, or through the payment of dividends or

    any similar distribution, nor may any unsecured advance or loan be made

    to an equity holder or employee if, after giving effect thereto and to

    any other such withdrawals, advances, or loans which are scheduled to

    occur within six months following such withdrawal, advance or loan, the

    swap dealer's regulatory capital is less than 120 percent of the

    minimum regulatory capital required under Sec. 23.101. The equity

    withdrawal restrictions, however, do not preclude a swap dealer from

    making required tax payments or from paying reasonable compensation to

    equity holders. The Commission may, upon application by the swap

    dealer, grant relief from this paragraph (c) if the Commission deems

    such relief to be in the public interest.

    (d) Temporary equity withdrawal restrictions by Commission order.

    (1) The Commission may by order restrict, for a period of up to twenty

    business days, any withdrawal by a swap dealer of capital or any

    unsecured loan or advance to a stockholder, partner, member, employee

    or affiliate under such terms and conditions as the Commission deems

    appropriate in the public interest if the Commission, based on the

    information available, concludes that such withdrawal, loan or advance

    may be detrimental to the financial integrity of the swap dealer, or

    may unduly jeopardize the swap dealer's ability to meet its financial

    obligations to counterparties or to pay other liabilities which may

    cause a significant impact on the markets or expose the counterparties

    and creditors of the swap dealer to loss.

    (2) An order temporarily prohibiting the withdrawal of capital

    shall be rescinded if the Commission determines that the restriction on

    capital withdrawal should not remain in effect. A hearing on an order

    temporarily prohibiting withdrawal of capital will be held within two

    business days from the date of the request in writing by the swap

    dealer.

    Sec. 23.105 Financial recordkeeping, reporting and notification

    requirements for swap dealers and major swap participants.

    (a) Scope. (1) Except as provided in paragraphs (a)(2) and (a)(3)

    of this section, a swap dealer or major swap participant must comply

    with the applicable requirements set forth in paragraphs (b) through

    (q) of this section.

    (2) The requirements in paragraphs (b) through (o) of this section

    do not apply to any swap dealer or major swap participant that is

    subject to the capital requirements of a prudential regulator.

    (3) The requirements in paragraph (p) of this section do not apply

    to any swap dealer or major swap participant that is subject to the

    capital requirements of the Commission.

    (4) The requirements of paragraph (q) of this section apply to swap

    dealers or major swap participants that are subject to the capital

    requirements of the Commission or of a prudential regulator.

    (b) Current books and records. A swap dealer or major swap

    participant shall prepare and keep current ledgers or other similar

    records which show or summarize, with appropriate references to

    supporting documents, each transaction affecting its asset, liability,

    income, expense and capital accounts, and in which all its asset,

    liability and capital accounts are classified in accordance with U.S.

    generally accepted accounting principles, and as otherwise may be

    necessary for the capital calculations required under Sec. 23.101:

    Provided, however, that a swap dealer or major swap participant that is

    not organized under the laws of a state or other jurisdiction in the

    United States, and is not otherwise required to prepare financial

    statements in accordance with U.S. generally accepted accounting

    principles, may prepare and keep records required by this section in

    accordance with International Financial Reporting Standards issued by

    the International Accounting Standards Board. Such records must be

    maintained in accordance with Sec. 1.31 of this chapter.

    (c) Notices. (1) A swap dealer or major swap participant subject to

    minimum regulatory capital requirements under Sec. 23.101 and who

    knows or should have known that its regulatory capital at any time is

    less than the minimum required by Sec. 23.101, must:

    (i) Provide immediate written notice that the swap dealer's or

    major swap participant's regulatory capital is less than that required

    by Sec. 23.101; and

    (ii) Provide together with such notice, documentation in such form

    as necessary to adequately reflect the swap dealer's or major swap

    participant's regulatory capital condition as of any date such person's

    regulatory capital is less than the minimum required. The swap dealer

    or major swap participant must provide similar documentation for other

    days as the Commission may request.

    (2) A swap dealer or major swap participant who is subject to the

    minimum regulatory capital requirements under Sec. 23.101 and who

    knows or should have known that its regulatory capital at any time is

    less than 120 percent of its minimum regulatory capital requirement as

    determined under Sec. 23.101, must provide written notice to that

    effect within 24 hours of such event.

    (3) If a swap dealer or major swap participant at any time fails to

    make or to keep current the books and records required by these

    regulations, such swap dealer or major swap participant must, on the

    same day such event occurs, provide notice of such fact, specifying the

    books and records which have not been made or which are not current,

    and within 48 hours after giving such notice file a written report

    stating what steps have been and are being taken to correct the

    situation.

    [[Page 91319]]

    (4) Each swap dealer that fails to comply with the liquidity

    requirements set forth in Sec. 23.104 must file written notice within

    24 hours of when it knows or should have known that the swap dealer is

    not in compliance.

    (5) A swap dealer or major swap participant must provide notice of

    a substantial reduction in capital as compared to that last reported in

    a financial report filed with the Commission pursuant to this section.

    The notice shall be provided if the swap dealer or major swap

    participant experiences a 30 percent or more decrease in the amount of

    capital that the swap dealer or major swap participant holds in excess

    of its regulatory capital requirement as computed under Sec. 23.101.

    (6) A swap dealer must provide the Commission with notice two

    business days prior to the withdrawal of capital by action of the

    equity holders of the swap dealer where the withdrawal exceeds 30

    percent of the swap dealer's excess regulatory capital as computed

    under Sec. 23.101.

    (7) A swap dealer or major swap participant that is registered with

    the Securities and Exchange Commission as a security-based swap dealer

    or as a major security based swap participant and files a notice with

    the Securities and Exchange Commission under Sec. 240.18a-8 of this

    title, must file a copy of such notice with the Commission at the time

    the swap dealer or major security-based swap participant files the

    notice with the Securities and Exchange Commission.

    (8) A swap dealer or major swap participant must submit a notice to

    the Commission within 24 hours of the occurrence of any of the

    following events:

    (i) A single counterparty or group of counterparties that are under

    common ownership or control fails to post initial margin or pay

    variation margin to the swap dealer or major swap participant for swap

    positions in compliance with Sec. 23.152 and security-based swap

    positions in compliance with proposed Sec. 240.18a-3(c)(1)(i)(b) of

    this title and such initial margin and variation margin, in the

    aggregate, is equal to or greater than 25 percent of the swap dealer's

    minimum capital requirement or 25 percent of the major swap

    participant's tangible net worth;

    (ii) Counterparties fail to post initial margin or pay variation

    margin to the swap dealer or major swap participant for swap positions

    in compliance with Sec. 23.152 and security-based swap positions in

    compliance with proposed Sec. 240.18a-3(c)(1)(i)(B) in an amount that,

    in the aggregate, exceeds 50 percent of the swap dealer's minimum

    capital requirement or 50 percent of the major swap participant's

    tangible net worth;

    (iii) A swap dealer or major swap participant fails to post initial

    margin or pay variation margin to a single counterparty or group of

    counterparties under common ownership and control for swap positions in

    compliance with Sec. 23.152 and security-based swap positions in

    compliance with proposed Sec. 240.18a-3(c)(1)(i)(B) of this title and

    such initial margin and variation margin, in the aggregate, exceeds 25

    percent of the swap dealer's minimum capital requirement or 25 percent

    of the major swap participant's tangible net worth; or

    (iv) A swap dealer or major swap participant fails to post initial

    margin or pay variation margin to counterparties for swap positions in

    compliance with Sec. 23.152 and security-based swap positions in

    compliance with proposed Sec. 240.18a-3(c)(1)(i)(B) in an amount that,

    in the aggregate, exceeds 50 percent of the swap dealer's s minimum

    capital requirement or 50 percent of the major swap participants

    tangible net worth.

    (d) Monthly unaudited financial reports. (1) A swap dealer or major

    swap participant shall file monthly financial reports meeting the

    requirements in paragraph (d)(2) of this section as of the close of

    business each month. Such financial reports must be filed no later than

    17 business days after the date for which the report is made.

    (2) The monthly financial reports must be prepared in the English

    language and be denominated in United States dollars. The monthly

    financial reports shall include a statement of financial condition, a

    statement of income/loss, a statement of cash flows, a statement of

    changes in ownership equity, a statement demonstrating compliance with

    and calculation of the applicable regulatory capital requirement under

    Sec. 23.101, and such further material information as may be necessary

    to make the required statements not misleading. The monthly report and

    schedules must be prepared in accordance with generally accepted

    accounting principles as established in the United States: Provided,

    however, that a swap dealer or major swap participant that is not

    organized under the laws of a state or other jurisdiction in the United

    States, and does not otherwise prepare financial statements in

    accordance with U.S. generally accepted accounting principles, may

    prepare the monthly report and schedules required by this section in

    accordance with International Financial Reporting Standards issued by

    the International Accounting Standards Board.

    (3) A swap dealer or major swap participant that is also registered

    with the Securities and Exchange Commission as a security-based swap

    dealer or a major security-based swap participant and files a monthly

    Form SBS with the Securities and Exchange Commission pursuant to Sec.

    240.18a-7 of this title, may file such Form SBS with the Commission in

    lieu of the financial reports required under paragraphs (d)(1) and (2)

    of this section. The swap dealer or major swap participant must file

    the Form SBS with the Commission when it files the Form SBS with the

    Securities and Exchange Commission, provided, however, that the swap

    dealer or major swap participant must file the Form SBS with the

    Commission no later than 17 business days from the date the report is

    made.

    (4) A swap dealer or major swap participant that is also registered

    with the Commission as a futures commission merchant may file a Form 1-

    FR-FCM in lieu of the monthly financial reports required under

    paragraphs (d)(1) and (2) of this section.

    (e) Annual audited financial reports. (1) A swap dealer and major

    swap participant shall file an annual audited financial report as of

    the close of its fiscal year, certified in accordance with paragraph

    (e)(2) of this section, and including the information specified in

    paragraph (e)(3) of this section no later than 60 days after the close

    of the swap dealer's and major swap participant's fiscal year-end.

    (2) The annual certified financial report shall be audited and

    reported upon with an opinion expressed by an independent certified

    public accountant or independent licensed accountant that is in good

    standing in the accountant's home jurisdiction.

    (3) The annual audited financial reports shall be prepared in

    accordance with generally accepted accounting principles as established

    in the United States, be prepared in the English language, and

    denominated in United States dollars: Provided, however, that a swap

    dealer or major swap participant that is not organized under the laws

    of a state or other jurisdiction in the United States, and does not

    otherwise prepare financial statements in accordance with U.S.

    generally accepted accounting principles, may prepare the annual

    audited financial reports required by this section in accordance with

    International Financial Reporting Standards issued by the International

    Accounting Standards Board.

    [[Page 91320]]

    (4) The annual audited financial report must include the following:

    (i) A statement of financial condition as of the date for which the

    report is made;

    (ii) Statements of income (loss), cash flows, and changes in

    ownership equity for the period between the date of the most recent

    certified statement of financial condition filed with the Commission

    and the date for which the report is made;

    (iii) Appropriate footnote disclosures;

    (iv) A statement demonstrating the swap dealer's or major swap

    participant's compliance with and calculation of the applicable

    regulatory capital requirement under Sec. 23.101;

    (v) A reconciliation of any material differences from the monthly

    unaudited financial report prepared as of the swap dealer's or major

    swap participant's year-end date and the swap dealer's or major swap

    participant's annual financial report prepared under this paragraph

    (e); and

    (vi) Such further material information as may be necessary to make

    the required statements not misleading.

    (5) A swap dealer or major swap participant that is also registered

    with the Securities and Exchange Commission as a security-based swap

    dealer or a major security-based swap participant and files an annual

    financial report with the Securities and Exchange Commission pursuant

    to Sec. 240.18a-7 of this title, may file such annual report with the

    Commission in lieu of the annual financial report required under this

    paragraph (e). The swap dealer or major swap participant must file its

    annual report with the Commission at the same time that it files the

    annual report with the Securities and Exchange Commission, provided

    that the annual report is filed with the Commission no later than 60

    days from the swap dealer's or major swap participant's fiscal year-end

    date.

    (6) A swap dealer or major swap participant that is also registered

    with the Commission as a futures commission merchant may file an

    audited Form 1-FR-FCM in lieu of the annual financial reports required

    under this paragraph (e).

    (f) Oath or affirmation. Attached to each financial report, or

    other filing made pursuant to this section, must be an oath or

    affirmation that to the best knowledge and belief of the individual

    making such oath or affirmation the information contained in the

    financial report is true and correct. The individual making such oath

    or affirmation must be: If the swap dealer or major swap participant is

    a sole proprietorship, the proprietor; if a partnership, any general

    partner; if a corporation, the chief executive officer or chief

    financial officer; and, if a limited liability company or limited

    liability partnership, the chief executive officer, the chief financial

    officer, the manager, the managing member, or those members vested with

    the management authority for the limited liability company or limited

    liability partnership.

    (g) Change of fiscal year-end. A swap dealer or major swap

    participant may not change the date of its fiscal year-end from that

    used in its most recent annual report filed under paragraph (e) of this

    section unless the swap dealer or major swap participant has requested

    and received written approval for the change from a registered futures

    association of which it is a member.

    (h) Additional information requirements. From time to time the

    Commission may, by written notice, require any swap dealer or major

    swap participant to file financial or operational information on a

    daily basis or at such other times as may be specified by the

    Commission. Such information must be furnished in accordance with the

    requirements included in the written Commission notice.

    (i) Public disclosure and nonpublic treatment of reports. (1) A

    swap dealer or major swap participant must no less than quarterly make

    publicly available on its Web site the following information:

    (i) The statement of financial condition; and

    (ii) A statement disclosing the amount of the swap dealer's or

    major swap participant's regulatory capital as of the end of the

    quarter and the amount of its minimum regulatory capital requirement,

    computed in accordance with Sec. 23.101.

    (2) A swap dealer or major swap participant must no less than

    annually make publicly available on its Web site the following

    information:

    (i) The statement of financial condition from the swap dealer or

    major swap participant's audited financial statements including

    applicable footnotes; and

    (ii) A statement disclosing the amount of the swap dealer's or

    major swap participant's regulatory capital as of the fiscal year end

    and its minimum regulatory capital requirement, computed in accordance

    with Sec. 23.101.

    (3) Financial information required to be made publicly available

    pursuant to this section must be posted within 10 business days after

    the firm is required to file applicable financial reports with the

    Commission pursuant to paragraph (d) or (e) of this section.

    (4) Financial information required to be filed pursuant to this

    section, and not otherwise publicly available, will be treated as

    exempt from mandatory public disclosure for purposes of the Freedom of

    Information Act and the Government in the Sunshine Act and parts 145

    and 147 of this chapter; Provided, however, that all information that

    is exempt from mandatory public disclosure will be available for

    official use by any official or employee of the United States or any

    State, by the National Futures Association and by any other person to

    whom the Commission believes disclosure of such information is in the

    public interest.

    (j) Extension of time to file financial reports. A swap dealer or

    major swap participant may file a request with the registered futures

    association of which it is a member for an extension of time to file a

    monthly unaudited financial report or an annual audited financial

    report required under paragraphs (d) and (e) of this section. Such

    request will be approved, conditionally or unconditionally, or

    disapproved by the registered futures association.

    (k) Additional reporting requirements for swap dealers approved to

    use models to calculate market risk and credit risk for computing

    capital requirements. (1) A swap dealer that has received approval

    under Sec. 23.102(d) from the Commission, or from a registered futures

    association of which the swap dealer is a member, to use internal

    models to compute its market risk exposure requirement and credit risk

    exposure requirement in computing its regulatory capital under Sec.

    23.101 must file with the Commission and with the registered futures

    association of which the swap dealer is a member the following

    information within 17 business days of the end of each month:

    (i) For each product for which the swap dealer calculates a

    deduction for market risk other than in accordance with a model

    approved pursuant to Sec. 23.102(d), the product category and the

    amount of the deduction for market risk;

    (ii) A graph reflecting, for each business line, the daily intra-

    month VaR;

    (iii) The aggregate VaR for the swap dealer;

    (iv) For each product for which the swap dealer uses scenario

    analysis, the product category and the deduction for market risk;

    (v) Credit risk information on swap, mixed swap and security-based

    swap exposures including:

    (A) Overall current exposure;

    [[Page 91321]]

    (B) Current exposure (including commitments) listed by counterparty

    for the 15 largest exposures;

    (C) The 10 largest commitments listed by counterparty;

    (D) The swap dealer's maximum potential exposure listed by

    counterparty for the 15 largest exposures;

    (E) The swap dealer's aggregate maximum potential exposure;

    (F) A summary report reflecting the swap dealer's current and

    maximum potential exposures by credit rating category; and

    (G) A summary report reflecting the swap dealer's current exposure

    for each of the top ten countries to which the swap dealer is exposed

    (by residence of the main operating group of the counterparty); and

    (vi) The results of the liquidity stress test required by Sec.

    23.104.

    (2) A swap dealer that has received approval under Sec. 23.102(d)

    from the Commission or from a registered futures association of which

    the swap dealer is a member to use internal models to compute its

    market risk exposure requirement and credit risk exposure requirement

    in computing its regulatory capital under Sec. 23.101 must file with

    the Commission and with the registered futures association of which the

    swap dealer is member the following information within 17 business days

    of the end of each calendar quarter:

    (i) A report identifying the number of business days for which the

    actual daily net trading loss exceeded the corresponding daily VaR; and

    (ii) The results of backtesting of all internal models used to

    compute allowable capital, including VaR, and credit risk models,

    indicating the number of backtesting exceptions.

    (l) Additional position and counterparty reporting requirements. A

    swap dealer or major swap participant must provide on a monthly basis

    to the Commission and to the registered futures association of which

    the swap dealer or major swap participant is a member the specific

    information required in Appendix A to this section.

    (m) Margin reporting. A swap dealer or major swap participant must

    file with the Commission and with the registered futures association of

    which the swap dealer or major swap participant is member the following

    information as of the end of each month within 17 business days of the

    end of each month:

    (1) The name and address of each custodian holding initial margin

    or variation margin collected by the swap dealer or major swap

    participant for uncleared swap transactions pursuant to Sec. Sec.

    23.152 and 23.153;

    (2) The amount of initial margin and variation margin collected by

    the swap dealer or major swap participant that is held by each

    custodian listed in paragraph (m)(1) of this section;

    (3) The aggregate amount of initial margin that the swap dealer or

    major swap participant is required to collect from swap counterparties

    pursuant to Sec. 23.152(a);

    (4) The name and address of each custodian holding initial margin

    or variation margin posted by the swap dealer or major swap participant

    for uncleared swap transaction pursuant to Sec. Sec. 23.152 and

    23.153;

    (5) The amount of initial margin and variation margin posted by the

    swap dealer or major swap participant that is held by each custodian

    listed in paragraph (m)(4) of this section; and

    (6) The aggregate amount of initial margin that the swap dealer or

    majors swap participant is required to post to its swap counterparties

    pursuant to Sec. 23.152(b).

    (n) Electronic filing. All filings of financial reports, notices

    and other information required to be submitted to the Commission under

    paragraphs (b) through (m) of this section must be filed in electronic

    form using a form of user authentication assigned in accordance with

    procedures established by or approved by the Commission, and otherwise

    in accordance with instructions issued by or approved by the

    Commission. A swap dealer or major swap participant must provide the

    Commission with the means necessary to read and to process the

    information contained in such report. Any such electronic submission

    must clearly indicate the swap dealer or major swap participant on

    whose behalf such filing is made and the use of such user

    authentication in submitting such filing will constitute and become a

    substitute for the manual signature of the authorized signer. In the

    case of a financial report required under paragraphs (d), (e), or (h)

    of this section and filed via electronic transmission in accordance

    with procedures established by or approved by the Commission, such

    transmission must be accompanied by the user authentication assigned to

    the authorized signer under such procedures, and the use of such user

    authentication will constitute and become a substitute for the manual

    signature of the authorized signer for the purpose of making the oath

    or affirmation referred to in paragraph (f) of this section.

    (o) Comparability determination for certain financial reporting. A

    swap dealer or major swap participant that is subject to the monthly

    financial reporting requirements of paragraph (d) of this section and

    the annual financial reporting requirements of paragraph (e) of this

    section may petition the Commission for a Comparability Determination

    under Sec. 23.106 to file monthly financial reports and/or annual

    financial reports prepared in accordance with the rules a foreign

    regulatory authority in lieu of the requirements contained in this

    section.

    (p) Quarterly financial reporting and notification provisions for

    swap dealers and major swap participants that are subject to the

    capital requirements of a prudential regulator.

    (1) Scope. A swap dealer or major swap participant that is subject

    to the capital requirements of a prudential regulator must comply with

    the requirements of this paragraph.

    (2) Financial report and position information. A swap dealer or

    major swap participant that is subject to the capital requirements of a

    prudential regulator shall file on a quarterly basis with the

    Commission the financial reports and specific position information set

    forth in Appendix B of this section. The swap dealer or major swap

    participant must file Appendix B with the Commission within 17 business

    days of the date of the end of the swap dealer's fiscal quarter.

    (3) Notices. A swap dealer or major swap participant that is

    subject to the capital requirements of a prudential regulator must

    comply with the following notice provisions:

    (i) A swap dealer or major swap participant that files a notice of

    adjustment of its reported capital category with the Federal Reserve

    Board, the Office of the Comptroller of the Currency, or the Federal

    Deposit Insurance Corporation, or files a similar notice with its home

    country supervisor(s), must give notice of this fact that same day by

    transmitting a copy of the notice of the adjustment of reported capital

    category, or the similar notice provided to its home country

    supervisor(s), to the Commission.

    (ii) A swap dealer or major swap participant must provide immediate

    written notice that the swap dealer's or major swap participant's

    regulatory capital is less than the applicable minimum capital

    requirements set forth in 12 CFR 217.10, 12 CFR 3.10, or 12 CFR 324.10,

    or the minimum capital requirements established by its home country

    supervisor(s).

    (iii) A swap dealer or major swap participant must submit a notice

    to the Commission within 24 hours of the occurrence of any of the

    following events:

    [[Page 91322]]

    (A) A single counterparty or group of counterparties that are under

    common ownership or control fails to post initial margin or pay

    variation margin to the swap dealer for swap positions and security-

    based swap positions and such initial margin and variation margin, in

    the aggregate, is equal to or greater than 25 percent of the swap

    dealer's minimum capital requirement;

    (B) Counterparties fail to post initial margin or pay variation

    margin to the swap dealer for swap positions and security-based swap

    positions in an amount that, in the aggregate, exceeds 50 percent of

    the swap dealer's minimum capital requirement;

    (C) A swap dealer fails to post initial margin or pay variation

    margin to a single counterparty or group of counterparties under common

    ownership and control for swap positions and security-based swap

    positions and such initial margin and variation margin, in the

    aggregate, exceeds 25 percent of the swap dealer's minimum capital

    requirement; or

    (D) A swap dealer fails to post initial margin or pay variation

    margin to counterparties for swap positions and security-based swap

    positions in an amount that, in the aggregate, exceeds 50 percent of

    the swap dealer's s minimum capital requirement.

    (iv) If a swap dealer or major swap participant at any time fails

    to make or to keep current the books and records required by these

    regulations, such swap dealer or major swap participant must, on the

    same day such event occurs, provide notice of such fact, specifying the

    books and records which have not been made or which are not current,

    and within 48 hours after giving such notice file a written report

    stating what steps have been and are being taken to correct the

    situation.

    (4) Additional information. From time to time the Commission may,

    by written notice, require a swap dealer or major swap participant that

    is subject to the capital rules of a prudential regulator to file

    financial or operational information on a daily basis or at such other

    times as may be specified by the Commission. Such information must be

    furnished in accordance with the requirements included in the written

    Commission notice.

    (5) Oath or affirmation. Attached to each financial report, notice

    filing, or other filing made pursuant to this paragraph (p) must be an

    oath or affirmation that to the best knowledge and belief of the

    individual making such oath or affirmation the information contained in

    the filing is true and correct. With respect to financial reports, the

    individual making such oath or affirmation must be: If the swap dealer

    or major swap participant is a sole proprietorship, the proprietor; if

    a partnership, any general partner; if a corporation, the chief

    executive officer or chief financial officer; and, if a limited

    liability company or limited liability partnership, the chief executive

    officer, the chief financial officer, the manager, the managing member,

    or those members vested with the management authority for the limited

    liability company or limited liability partnership.

    (6) Electronic filing. All filings of financial reports, notices,

    and other information made pursuant to this paragraph (p) must be

    submitted to the Commission in electronic form using a form of user

    authentication assigned in accordance with procedures established by or

    approved by the Commission, and otherwise in accordance with

    instructions issued by or approved by the Commission. Each swap dealer

    and major swap participant must provide the Commission with the means

    necessary to read and to process the information contained in such

    report. Any such electronic submission must clearly indicate the swap

    dealer or major swap participant on whose behalf such filing is made

    and the use of such user authentication in submitting such filing will

    constitute and become a substitute for the manual signature of the

    authorized signer. In the case of a financial report required under

    this paragraph (p) and filed via electronic transmission in accordance

    with procedures established by or approved by the Commission, such

    transmission must be accompanied by the user authentication assigned to

    the authorized signer under such procedures, and the use of such user

    authentication will constitute and become a substitute for the manual

    signature of the authorized signer for the purpose of making the oath

    or affirmation referred to in paragraph (p)(5) of this section. Every

    notice or report required to be transmitted to the Commission pursuant

    to this paragraph (p) must also be filed with the Securities and

    Exchange Commission if the swap dealer or major swap participant also

    is registered with the Securities and Exchange Commission.

    (7) Public disclosure and nonpublic treatment of reports. (i) A

    swap dealer or major swap participant that is subject to the capital

    requirements of a prudential regulator must no less than quarterly make

    publicly available on its Web site the following information:

    (A) The statement of financial condition; and

    (B) A statement disclosing the amount of the swap dealer's or major

    swap participant's regulatory capital as of the end of the quarter and

    the amount of its minimum regulatory capital requirement.

    (ii) Financial information required to be made publicly available

    pursuant to this section must be posted within 10 business days after

    the firm is required to file applicable financial reports with the

    Commission pursuant to paragraph (p)(2) of this section.

    (iii) Financial information required to be filed pursuant to this

    section, and not otherwise publicly available, will be treated as

    exempt from mandatory public disclosure for purposes of the Freedom of

    Information Act and the Government in the Sunshine Act and parts 145

    and 147 of this chapter; Provided, however, that all information that

    is exempt from mandatory public disclosure will be available for

    official use by any official or employee of the United States or any

    State, by the National Futures Association and by any other person to

    whom the Commission believes disclosure of such information is in the

    public interest.

    (q) Weekly position and margin reporting--(1) Positions. On the

    first business day of every week, a swap dealer or major swap

    participant shall file with the Commission a report showing, in a

    format specified by the Commission, all open uncleared swap positions

    as of the close of business on the last business day of the previous

    week, sorted as follows:

    (i) By counterparty, and

    (ii) For each counterparty, by the following asset classes--

    commodity, credit, equity, and foreign exchange or interest rate.

    (2) Margin. On the first business day of every week, a swap dealer

    or major swap participant shall file with the Commission a report

    showing, in a format specified by the Commission, for open uncleared

    swap positions as of the close of business on the last business day of

    the previous week:

    (i) The total initial margin posted by the swap dealer or major

    swap participant with each counterparty;

    (ii) The total initial margin collected by the swap dealer or major

    swap participant from each counterparty; and

    (iii) The net variation margin paid or collected over the previous

    week with each counterparty.

    Appendix A to Sec. 23.105--Swap Dealer and Major Swap Participant

    Position Information

    BILLING CODE 6351-01-P

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    BILLING CODE 6351-01-C

    Sec. 23.106 Comparability determination for substituted compliance.

    (a)(1) Eligibility requirements. The following persons may, either

    individually or collectively, request a Capital Comparability

    Determination with respect to the Commission's capital adequacy and

    financial reporting requirements for swap dealers or major swap

    participants:

    (i) A swap dealer or major swap participant that is eligible for

    substituted compliance under Sec. 23.101; or

    (ii) A foreign regulatory authority that has direct supervisory

    authority over one or more swap dealers or major swap participants that

    are eligible for substituted compliance under Sec. 23.101, and such

    foreign regulatory authority is responsible for administering the

    relevant foreign jurisdiction's capital adequacy and financial

    reporting requirements over the swap dealer or major swap participant.

    (2) Submission requirements. A person requesting a Capital

    Comparability Determination must electronically submit to the

    Commission:

    (i) A description of the objectives of the relevant foreign

    jurisdiction's capital adequacy and financial reporting requirements

    over entities that are subject to the Commission's capital adequacy and

    financial reporting requirements in this part;

    (ii) A description (including specific legal and regulatory

    provisions) of how the relevant foreign jurisdiction's capital adequacy

    and financial reporting requirements address the elements of the

    Commission's capital adequacy and financial reporting requirements for

    swap dealers and major swap participants, including, at a minimum, the

    methodologies for establishing and calculating capital adequacy

    requirements and whether such methodologies comport with any

    international standards, including Basel-based capital requirements for

    banking institutions; and

    (iii) A description of the ability of the relevant foreign

    regulatory authority or authorities to supervise and enforce compliance

    with the relevant foreign jurisdiction's capital adequacy and financial

    reporting requirements. Such description should discuss the powers of

    the foreign regulatory authority or authorities to supervise,

    investigate, and discipline entities for compliance with capital

    adequacy and financial reporting requirements, and the ongoing efforts

    of the regulatory authority or authorities to detect and deter

    violations, and ensure compliance with capital adequacy and financial

    reporting requirements. The description should address how foreign

    authorities and foreign laws and regulations address situations where a

    swap dealer or major swap participant is unable to comply with the

    foreign jurisdictions capital adequacy or financial reporting

    requirements.

    (iv) Upon request, such other information and documentation that

    the Commission deems necessary to evaluate the comparability of the

    capital adequacy and financial reporting requirements of the foreign

    jurisdiction.

    (v) All supplied documents shall be provided in English, or

    provided translated to the English language, with currency amounts

    stated in or converted to USD (conversions to be noted with applicable

    date).

    (3) Standard of Review. The Commission will issue a Capital

    Comparability Determination to the extent that it determines that some

    or all of the relevant foreign jurisdiction's capital adequacy and

    financial reporting requirements and related financial recordkeeping

    and reporting requirements for swap dealing financial intermediaries

    are comparable to the Commission's corresponding capital adequacy and

    financial recordkeeping and reporting requirements. In determining

    whether the requirements are comparable, the Commission will consider

    all relevant factors, including:

    (i) The scope and objectives of the foreign jurisdiction's capital

    adequacy and financial reporting requirements;

    (ii) How and whether the relevant foreign jurisdiction's capital

    adequacy requirements compare to international Basel capital standards

    for banking institutions or to other standards such as those used for

    securities brokers or dealers;

    (iii) Whether the relevant foreign jurisdiction's capital adequacy

    and financial reporting requirements achieve comparable outcomes to the

    Commission's corresponding capital adequacy and financial reporting

    requirements for swap dealers and major swap participants;

    (iv) The ability of the relevant regulatory authority or

    authorities to supervise and enforce compliance with the relevant

    foreign jurisdiction's capital adequacy and financial reporting

    requirements; and

    (v) Any other facts or circumstances the Commission deems relevant.

    (4) Reliance. (i) A swap dealer or major swap participant that is

    subject to the supervision of a foreign jurisdiction that has received

    a Capital Comparability Determination from the Commission must file a

    notice of its intent to comply with the capital adequacy and financial

    reporting requirements of the foreign jurisdiction with the registered

    futures association of which the swap dealer or major swap participant

    is a member. The registered futures association will determine the

    information that the swap dealer or major swap participant must include

    in the notice. A swap dealer or major swap participant must obtain a

    confirmation from the registered futures association that it may comply

    with the capital

    [[Page 91333]]

    adequacy and financial reporting requirements of the foreign

    jurisdiction in lieu of some or all of the capital adequacy and

    financial reporting requirements in the part.

    (ii) Any swap dealer or major swap participant that has obtained a

    confirmation from a registered futures association and, in accordance

    with a Capital Comparability Determination, complies with a foreign

    jurisdiction's capital adequacy and financial reporting requirements

    will be deemed to be in compliance with the Commission's corresponding

    capital adequacy and financial reporting requirements. Accordingly, the

    failure of such a swap dealer or major swap participant to comply with

    the foreign jurisdictions capital adequacy and financial reporting

    requirements may constitute a violation of the Commission's capital

    adequacy and financial reporting requirements. All swaps dealer and

    major swap participants, regardless of whether they rely on a Capital

    Comparability Determination, remain subject to the Commission's

    examination and enforcement authority.

    (5) Conditions. In issuing a Capital Comparability Determination,

    the Commission may impose any terms and conditions it deems

    appropriate, including certain capital adequacy and financial reporting

    requirements on swap dealers or major swap participants. The violation

    of such terms and conditions may constitute a violation of the

    Commission's capital adequacy or financial reporting requirements and/

    or result in the modification or revocation of the Capital

    Comparability Determination.

    (6) Modifications. The Commission reserves the right to further

    condition, modify, suspend or terminate or otherwise restrict a Capital

    Comparability Determination in the Commission's discretion.

    Sec. Sec. 23.107-23.149 [Reserved]

    PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    0

    9. The authority citation for part 140 continues to read as follows:

    Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and

    16(b).

    0

    10. Amend Sec. 140.91 as follows:

    0

    a. Redesignate paragraph (a)(12) as paragraph (a)(13);

    0

    b. Redesignate paragraph (a)(11) as paragraph (a)(12);

    0

    c. Add new paragraph (a)(11).

    The addition to read as follows:

    Sec. 140.91 Delegation of authority to the Director of the Division

    of Clearing and Risk and to the Director of the Division of Swap Dealer

    and Intermediary Oversight.

    (a) * * *

    (11) All functions reserved to the Commission in Sec. Sec. 23.100

    through 23.107 of this chapter, except for those related to the

    revocation of a swap dealer's or major swap participant's approval to

    use internal models to compute capital requirements under Sec. 23.102

    of this chapter, and the issuance of Capital Comparability

    Determinations under Sec. 23.106 of this chapter.

    * * * * *

    Issued in Washington, DC, on December 2, 2016, by the

    Commission.

    Christopher J. Kirkpatrick,

    Secretary of the Commission.

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendices to Capital Requirements of Swap Dealers and Major Swap

    Participants--Commission Voting Summary, Chairman's Statement, and

    Commissioner's Statement

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and

    Giancarlo voted in the affirmative. No Commissioner voted in the

    negative.

    Appendix 2--Statement of Chairman Timothy G. Massad

    I support the proposed rulemaking the Commission unanimously

    approved today.

    Capital requirements for swap dealers are among the most

    important reforms of the over-the-counter swap market agreed to by

    the leaders of the G20 nations in 2009. They complement margin

    requirements for uncleared swaps, which the Commission finalized

    earlier this year. While margin is the front line defense against a

    default, adequate capital is critical to the ability of swap dealers

    to absorb losses.

    One of my priorities this year has been to issue a reproposal of

    our rule setting these capital requirements. Our original proposal

    was issued at a time when margin requirements for uncleared swaps

    had not yet been established and bank capital rules were still being

    finalized. It is important that our rules are harmonized with

    prudential requirements, which is why it was appropriate to update

    and repropose our rule.

    As with margin, the law provides that swap dealers for which

    there is a prudential regulator shall comply with the capital rules

    of the prudential regulators, and the CFTC must adopt capital rules

    for all others. Because capital requirements are entity-wide, and

    not specific to transactions, I believe the requirements should take

    into account the fact that there are different types of firms that

    act as swap dealers--such as bank affiliates, broker-dealers,

    futures commission merchants and others primarily engaged in non-

    financial activities. Requiring all firms to follow one approach

    could favor one business model over another, and cause even greater

    concentration in the industry.

    The reproposal we have approved today recognizes this diversity.

    It supports competition as well as safety and soundness, by

    providing three different approaches. First, for swap dealers that

    are affiliates of prudentially regulated firms, the proposal permits

    them to use a method based on that of our banking regulators. Swap

    dealers that are also broker-dealers can use an approach that is

    based on the Securities and Exchange Commission's net liquid assets

    approach. And for those dealers that are engaged primarily in non-

    financial activities, we have proposed a third approach based on net

    worth. And we have harmonized these requirements, where appropriate,

    with the capital rules of our prudential regulators and the

    Securities and Exchange Commission.

    I thank the CFTC's hardworking staff for the significant time

    and effort they have devoted to this rule. I thank my fellow

    Commissioners for their support of this measure. And I encourage

    public comment on this proposal.

    Appendix 3--Statement of Commissioner J. Christopher Giancarlo

    For some time now, I have been asking whether the amount of

    capital which regulators have caused financial institutions to take

    out of trading markets is at all calibrated to the amount of capital

    which is needed to be kept in global markets to support the health

    and durability of the global financial system. I have called on the

    Financial Stability Oversight Council and domestic and foreign

    financial regulators to conduct a thorough analysis in this regard.

    Those calls have been largely ignored. So, I hope that commenters to

    this capital proposal can help provide some insight into my

    question.

    Along those lines, I have included several questions in this

    proposal that ask for feedback on whether the capital requirements

    under the different capital approaches are appropriate. I thank

    staff of the Division of Swap Dealer and Intermediary Oversight for

    including my questions in the proposal. I am particularly interested

    in how the proposed capital requirements will affect smaller swap

    dealers and how much additional capital they may have to raise to

    comply with the proposal. I have included several questions in the

    cost-benefit section in this regard. I am also interested in the

    impact of the proposed rule on any potential new registrants if the

    swap dealer de minimis level falls to $3 billion.

    I have also included several questions about the scope of the

    proposal. For example, the proposed minimum capital requirement is

    based upon eight percent of the margin required on the swap dealer's

    cleared and uncleared swaps and security-based swaps and the margin

    required on the swap dealer's futures and foreign futures. However,

    Commodity Exchange Act section 4s(e)(3)(A) only cites the risk of

    uncleared swaps in

    [[Page 91334]]

    setting standards for capital.\1\ Additionally, in the Commission's

    final swap dealer definition rule, it said it will ``in connection

    with promulgation of final rules relating to capital requirements

    for swap dealers and major swap participants, consider institution

    of reduced capital requirements for entities or individuals that

    fall within the swap dealer definition and that execute swaps only

    on exchanges, using only proprietary funds.'' \2\ Given these

    pronouncements, I welcome commenters' views on the broad scope of

    the proposed capital requirements.

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

    \1\ 7 U.S.C. 6s(e)(3)(A).

    \2\ 77 FR 30596, 30610 fn. 199 (May 23, 2012).

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

    Finally, I am concerned about the proposed capital model review

    and approval process. The proposal states that the Commission

    expects that a prudential regulator's or foreign regulator's review

    and approval of capital models that are used in the corporate family

    of a swap dealer would be a significant factor in the National

    Futures Association's (NFA) determination of the scope of its

    review, provided that appropriate information sharing agreements are

    in place. Given the large number of models that will need to be

    reviewed, the complexity of those models and the practical resource

    constraints at the NFA, I am concerned that the proposed process

    will be unworkable. We have already seen the challenges in the model

    approval process for initial margin under tight implementation

    timelines, and in that case there was a standard initial margin

    model. We should learn from that lesson. So, I am interested to hear

    commenters' views on alternative model approval processes, such as

    automatic or temporary approval of capital models that have been

    previously approved by a prudential or foreign regulator.

    I look forward to reviewing thoughtful and well-considered

    comments.

    [FR Doc. 2016-29368 Filed 12-15-16; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 16, 2016