On October 8, 2021, the SEC's Division of Trading and Markets (staff) issued 13 new frequently asked questions (FAQs) providing guidance on security-based swap (SBS) margin, capital, and segregation requirements for broker-dealers and security-based swap dealers (SBSDs). The FAQs cover:

Single reserve computation under SEC Rule 15c3-3. In the FAQs, the staff clarifies that it would not object if:

Control location issues. The FAQs specify the details and information that must be provided in an application under SEC Rule 18a-4 to designate a location as a satisfactory control location for the holding of an SBS customer's excess securities collateral. The staff also confirmed it would not object if:

VM collateral requirements under SEC Rules 18a-3 and 15-c3. The FAQs clarify that under Rules 18a-4 and 15c3-3, VM owed but not called for by an SBS customer and collateral held or collected but not received by an SBS customer, notwithstanding the SBSD's reasonable efforts to deliver the VM to the counterparty, are not subject to the segregation requirements under Rule 15c3-3 or Rule 18a-4, as applicable, including where:

Under the FAQs, if the collateral collected by an SBSD from an SBS customer to satisfy the customer’s VM requirement under Rule 18a-3 is subject to standardized haircuts under to Rule 18a-3, the excess collateral collected by the SBSD for purposes of satisfying the haircut requirement (haircut collateral) may be rehypothecated by the SBSD. The FAQs clarify that:

Computation of initial margin (IM) amount and risk margin amount under SEC Rule 18a-1 or Rule 15c3-1e, as applicable. The FAQs clarify that until September 1, 2022, an SBSD or broker-dealer/SBSD may use the maximum potential exposure (MPE) without regard to the value of any collateral from the counterparty held by the SBSD or broker-dealer/SBSD instead of the IM amount calculated under Rule 18a-3 if the SBSD or broker-dealer/SBSD has been approved by the SEC to use models to compute deductions for credit risk under Rule 18a-1 or Appendix E to Rule 15c3-1, as applicable, to make certain required calculations. MPE is an evaluation of an existing trade against possible market prices in future during the lifetime of a transaction, as defined by paragraph (e)(2)(iii)(B) of Rule 18a-1 or paragraph (c)(4)(ii) of Rule 15c3-1e, as applicable.

The FAQs clarify that an SBSD or broker-dealer/SBSD may use MPE to:

The FAQs note that for purposes of this FAQ, MPE covers all non-cleared derivatives instruments, including non-cleared SBS, uncleared swaps, non-cleared securities options, and non-cleared securities forwards.

Use of standardized initial (IM) margin grid. The FAQs clarify that SBSDs and broker-dealer/SBSDs are not permitted to use the CTC's standardized initial margin (IM) schedule in place of the standardized method prescribed under paragraph (d)(1) of Rule 18a-3 for non-cleared SBS. The staff notes that Rule 18a-3 requires an SBSD or broker-dealer/SBSD to use the standardized methods in Rules 18a-1 and 15c3-1, as applicable, to compute the IM amount required by Rule 18a-3.

Form X-17A-5 FOCUS Report. The FAQs clarify that Form X-17A-5 (FOCUS Report) Part IIC is based on Federal Financial Institutions Examination Council (FFIEC) Form 031 (Call Report), which banks are required to file with their prudential regulators. A number of differences between FOCUS Report Part IIC and the Call Report have arisen as a result of changes to the Call Report and the FAQs provide specific set of detailed technical questions and answers on how firms may reconcile five specific differences between the Call Report and FOCUS Report Part IIC requirements.

Further information. For details on the SEC's margin capital, and segregation requirements for SBS, see Practice Note, US Derivatives Regulation: SEC Capital, Margin, and Segregation Requirements for Security-Based Swaps.

For additional details on SBS regulation, see US Derivatives Regulation: Security-Based Swaps (SBS) Toolkit.