SEC Proposes Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants


[author: Ross Pazzol, Kenneth M. Rosenzweig]

On October 17, the Securities and Exchange Commission released a fact sheet on a yet-to-be-released rule that establishes capital, margin and segregation of collateral requirements (the Fact Sheet) for security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs).

The Fact Sheet indicates that the yet-to-be-released proposed rule (the Rule) first mandates different minimum net capital requirements for SBSDs based on whether a firm is a broker-dealer SBSD, a stand-alone SBSD, and whether the firm uses internal models to calculate its regulatory capital. For example, unlike an SBSD that does not use an internal model, an SBSD using an internal model would be required to maintain $100 million in tentative net capital. Conversely, an SBSD that uses an internal model would be permitted to take lower unsecured receivable haircuts than an SBSD that does not use such a model. MSBSPs must comply with different capital requirements, including the requirement to maintain a positive tangible net worth and to comply with various specified risk management standards.

According to the SEC, the Rule’s margin requirements would largely be based on the margin requirements already established for broker-dealers by the self-regulatory organizations. Among other things, an SBSD would be required to collect margin from counterparties to any non-cleared security-based swap transaction, unless an exception applies. In general, the margin required to be collected by an SBSD would be based on its current and potential future exposure. By contrast, an MSBSP will be required to collect margin to cover its current exposure to a counterparty and to deliver margin to a counterparty to cover such counterparty’s current exposure to the MSBSP.

Finally, the Fact Sheet describes the segregation requirements set forth in the Rule and indicates that such requirements are consistent with the SEC’s broker-dealer customer protection Rule 15c3-3. The Rule first requires an SBSD to maintain possession and control of all “excess securities collateral,” which is defined as collateral provided by customers to the SBSD in excess of the SBSD’s current exposure to the customer. The Rule would also require a nonbank SBSD to maintain a reserve account (of either funds or qualified securities) that is equal in value to the net cash owed to security-based swap customers.

Click here for more information on the Fact Sheet.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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