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SEC Reopens Comment Period on Capital, Margin and Segregation Requirements for SBSDs's picture
Commentary by Nihal Patel

The SEC reopened the comment period, and requested additional comments, on proposed new rules and amendments to (i) establish capital, margin and segregation requirements for security-based swap dealers ("SBSDs") and major security-based swap participants, and (ii) revise broker-dealer capital requirements relating to the use of security-based swaps.

In October 2012, the SEC proposed capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants that do not have prudential regulators. The comment period has been reopened to (i) solicit feedback on all aspects of the proposals in light of recent regulatory and market developments and (ii) seek comments on aspects of the proposals in the following areas: capital, margin, segregation, substituted compliance, compliance dates and the economic implications of the proposals.

The comment period will be open for 30 days following publication of the release in the Federal Register.

Click here to access Cadwalader's Clients & Friends Memorandum on the SEC release and related security-based swap rulemaking matters.


The proposal is significant for any non-U.S. entity that is contemplating registration as a security-based swap dealer. While it is somewhat wide-ranging (over 300 pages), the proposal largely focuses on three key points: (1) clarifying requirements relating to the "arranged, negotiated or executed" standard: (2) clarifying and providing relief for non-U.S. registrants from the currently problematic "opinion of counsel" requirements; and (3) providing background check relief for persons whose sales activities are outside of the United States.

All three are important for potential registrants, but (1) is the most interesting policy debate (the other two are more about fixing existing problems), and it is notable that the SEC is taking steps to amend these rules even before the rules have ever been tested in practice, and before the CFTC has taken action on similar rules that it first formally proposed in 2016.

It will be interesting to see how significant commenters find the SEC-proposed relief to be. Under the SEC proposals, in order to rely on the relief, personnel at a U.S. entity that are acting in an "ANE" capacity for a non-U.S. entity would be subject to SBSD requirements and the non-U.S. entity would need to be subject to home-country margin and capital requirements. Thus, for example, a bank in France using personnel at its U.S. broker-dealer affiliate to "agent" a transaction with persons in Ecuador would be able to avoid U.S. SBSD registration only if the U.S. personnel comply with SBSD rules as though the French bank were registered as an SBSD and the French bank would need to ensure it is subject to appropriate regulation in France. As to the alternative proposal to permit the use of registered brokers (non-SBSDs) for this activity, it would be helpful if the SEC and FINRA were to be more clear about what aspects of broker-dealer regulation would apply to this type of activity (in addition to any SBSD requirements that apply as a condition of the exception) in order for market participants to provide more meaningful comments as to whether the exception is useful.

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