SEC Adopts Swap Capital, Margin and Segregation Requirements

Steven Lofchie Commentary by Steven Lofchie

The SEC adopted new rules and rule amendments to establish security-based swap capital, margin and segregation requirements.

The compliance date for the new rules and rule amendments will be 18 months after the later of either: (i) the effective date of the final rules enacting recordkeeping and reporting requirements for SBSDs; or (ii) the effective date of the final rules concerning the cross-border application of certain security-based swap requirements.

The new rules will, among other things:

  • establish minimum capital requirements, where there is not a prudential regulator, for security-based swap dealers ("nonbank SBSDs");

  • increase the minimum net capital requirements for broker-dealers that use internal models to compute net capital;

  • adopt capital requirements for security-based swap dealers and swap-related amendments to the rules for broker-dealers that are not registered as an SBSD;

  • adopt security-based swap margin requirements for nonbank SBSDs;

  • adopt segregation requirements for SBSDs and stand-alone broker-dealers for cleared and non-cleared security-based swaps; and

  • allow foreign SBSDs to request substituted compliance regarding capital and margin requirements.

SEC Commissioner Hester M. Peirce said that the rulemaking package takes into account many of the challenges posed by enacting SEC requirements applicable to firms that may also be subject to CFTC rules. For example, the SEC distinguishes between SBSDs that are registered as full-service broker-dealers and stand-alone SBSDs in its newly adopted regulatory capital regime on nonbank SBSDs. However, Ms. Peirce noted that the SEC rules will differ from the CFTC rules in some significant ways. For example, the rules will not require SBSDs to post initial margin but will require SBSDs to take a capital deduction for (i) IM that it posts away, except under certain financing arrangements, and (ii) various swap exposures.

Commentary

This is a significant rulemaking that will require closer inspection. A Cadwalader memorandum will be posted shortly that will provide a more detailed analysis of the new rules.

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