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SEC Adopts Capital, Margin, and Segregation Requirements for Security-Based Swaps
Practical Law Legal Update w-020-9667 (Approx. 4 pages)
SEC Adopts Capital, Margin, and Segregation Requirements for Security-Based Swaps
by Practical Law Finance
| Published on 27 Jun 2019 • USA (National/Federal) |
On June 21, 2019, the SEC adopted a package of new rules and rule amendments that establish capital, margin, and segregation requirements for security-based swaps (SBSs) under Title VII of the Dodd-Frank Act. The final rules:
- Finalize capital and margin requirements for nonbank security-based swap dealers (SBSDs) and nonbank major security-based swap participants (MSBSPs). Nonbank SBSDs are not required to post initial margin under the rules.
- Adopt margin segregation requirements for SBSDs and broker-dealers that are not registered as an SBSD or MSBSP (stand-alone broker-dealers) for cleared and non-cleared SBS.
- Increase minimum net capital requirements for broker-dealers authorized to use internal models to compute net capital (ANC broker-dealers, including ANC broker-dealer SBSDs), intended to account for the SBS and swap activities of broker-dealers.
- Provide for certain capital and margin segregation requirements for broker-dealers that are not SBSDs to the extent they engage SBS and swap activity.
- Provide for substituted compliance with respect to SBS capital and margin requirements.
- Permit an SBSD that is not a broker-dealer and is a CFTC-registered swap dealer (SD) to comply with the CFTC's capital, margin, and segregation requirements in place of the SEC requirements.
The SEC first proposed capital and margin rules for SBSDs and MSBSPs in 2012 under Title VII of the Dodd-Frank Act, as part of a comprehensive regulatory framework for over the counter (OTC) derivatives (see Legal Update, Capital and Margin Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants Proposed by SEC).
In October 2018, the SEC reopened the comment period for the rules, with proposed modifications (see Legal Update, SEC Reopens Comment Period on Security-Based Swap Capital and Margin Rules).
The CFTC, which has regulatory authority over non-security based swaps (referred to as swaps), has finalized most of its analogous rules for CFTC-registered SDs and major swap participants (MSPs) (see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Requirements for Swap Dealers and MSPs). However, the CFTC has yet to finalize its capital requirements for nonbank SDs and MSPs (see US Derivatives Regulation: Requirements for Swap Dealers and MSPs Checklist: Risk Capital Requirements for Derivatives Exposures and Legal Update, CFTC Proposes Dodd-Frank Capital Requirements for Swap Dealers and MSPs).
The final rules reflect coordination between the SEC and the CFTC and include an alternative compliance mechanism that permits an SBSD that is not a broker-dealer and is a CFTC-registered SD to comply with the CFTC's capital, margin, and segregation requirements provided the firm's business is predominately swap dealing, along with certain other requirements.
The final rules are effective on October 21, 2019. However, compliance with the rules will not be required until a later date, after certain other SBS rules are finalized.
The SEC issued a press release and fact sheet on the final rules.
For a detailed discussion of the final rules, see Practice Note, US Derivatives Regulation: SEC Capital, Margin, and Segregation Requirements for Security-Based Swaps.