SEC and CFTC Establish Capital and Margin Requirements for Security-Based Swap Market Participants

The Dodd-Frank Wall Street Reform Act tasked the Commodity Futures Trading Commission and the Securities and Exchange Commission with creating a regulatory structure to better maintain the $600 trillion derivatives market. As part of this effort, on October 17^th, the SEC released for comment proposed rules on margin and capital requirements for securities-based swap dealers designed “to help ensure the safety and soundness of security-based swap dealers and major security-based swap participants.”

The rule includes minimum capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants.

The minimum capital requirements will vary by firm according to whether the firm is a stand-alone dealer or broker dealer, and whether the firm has been approved to use internal models in calculating regulatory capital. This chart summarizes the new requirements:

Type of Registrant	Tentative Net Capital	Net Capital
		Fixed Dollar	Financial Ratio
Rule 18a-1:
Stand-alone SBSD (not using internal models)	N/A	$20 million	8% margin factor
Stand-alone SBSD (using internal models)	$100 million	$20 million	8% margin factor
Rule 15c3-1:
Broker-dealer SBSD (not using internal models)	N/A	$20 million	8% margin factor + current Rule 15c3-1 ratio
ANC Broker-dealer(using internal models)	$5 billion	$1 billion	8% margin factor + current Rule 15c3-1 ratio

The rule also proposes margin requirements modeled after the Rule 18a-3 requirements for broker-dealers set by self-regulatory organizations. Under the proposal, security-based swap dealers would be required to “collect margin collateral to cover the firm’s current exposure and potential future exposure, unless an exception applies.” Current exposure is “calculated by marking-to-market the positions and collateral in the account.” Calculating potential future exposure again will vary by type of dealer and whether the firm has been approved to use internal models for calculating regulatory capital.

The proposed rule also mandates that collateral held by a securities based swap dealer in excess of the dealer’s current exposure to a customer be segregated from collateral used by the dealer to finance its own business.

SEC Chairman Mary Schapiro said, “The SEC has now proposed — and in some cases adopted — substantially all of the rules that create the new regulatory regime for derivatives within our jurisdiction.” Interested parties have until December 16, 2012 to comment on the proposal.