SEC Proposed Rule: Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants

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Dodd-Frank Timeline, Capital, Margin and Segregation for SB-SD/MSPs, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
November 23, 2012 February 22, 2013 July 22, 2013

On October 17, 2012, the Securities and Exchange Commission issued a proposed rulemaking regarding margin, collateral and segregation requirements for security-based swap dealers and major swap participants.[1] The proposed rules will determine how much capital dealers in security-based swaps need to hold; when and how these dealers need to collect collateral, or margin, to protect against losses from counterparties; and how these dealers segregate and protect funds and securities held for customers.

The rule appeared in the Federal Register on November 23, 2012. The initial deadline for public comment was January 22, 2013, but was subsequently extended until February 22, 2013. Then, on May 1, 2013, the comment periods were reopened for SEC proposed rules related to security-based swaps and security-based swap entities. The extended comment deadline is July 22, 2013. To submit a comment, click HERE.


One of the provisions of Title VII of the Dodd-Frank Act is a mandate that the SEC create a framework for regulation of security-based swap dealers and major swap participants (SB-SD/MSPs]s, including the adoption of certain minimum capital requirements. Previously, the CFTC proposed, but not finalized, a proposed rule on capital requirements for SD/MSPs. In a separate rulemaking, the CFTC approved a proposed rule on margin requirements for uncleared swaps. Both rules are expected to become final in late 2012.

Additionally, in My 2011, a group of five Prudential Regulators issued a joint joint proposed rule on margin and capital requirements for SD/MSPs under their jurisdictions.

Key Provisions of the Proposed Rule

Security-Based Swap Dealers (SB-SDs)

  • Minimum Net Capital Requirements:
    • The proposals would establish a fixed dollar minimum as well as a ratio requirement equal to 8 percent of the margin required for cleared and non-cleared security-based swaps. Because the amount of margin required varies with the size and riskiness of the business a firm conducts, this 8 percent margin factor would adjust the capital required based on this factor.
    • The proposals also set risk management standards for security-based swap dealers by requiring them to comply with an existing rule (Rule 15c3-4), which presently applies to broker-dealers that are approved to use internal models.
  • Margin Requirements:
    • Under Rule 18a-3, a security-based swap dealer would need to collect margin collateral from counterparties to non-cleared security-based swap transactions to cover current exposure and potential future exposure (i.e., variation and initial margin) unless an exception applies.
    • Also, a swap dealer would be required to perform daily calculations for the account of each counterparty to a non-cleared security-based swap, and collect cash, securities, or money market instruments from the counterparty in an amount at least equal to the negative equity (current exposure or variation margin) in the account plus the margin amount (potential future exposure or initial margin).
    • Current Exposure Calculation (Variation Margin) would be calculated by marking-to-market the positions and collateral in the account, which would determine the equity in the account.
    • Potential Future Exposure Calculation (Initial Margin): The potential future exposure would be calculated by applying the deductions required under the security-based swap dealer capital rule to the positions in the account. If a nonbank dealer is not approved to use internal models, the dealer would use the standardized haircuts. If the dealer is approved to use internal models for capital purposes, the dealer could use its value-at-risk model for CDS and fixed-income total return security-based swaps. For swaps referencing equities, the dealer could use a methodology based on the current methodology in Rule 15c3-1 for calculating haircuts for equity options and related instruments.
    • Eligible margin collateral includes cash, securities, and/or money-market instruments.
    • Margin would not be required to be collected from commercial end-users, nor for swaps already in existence prior to the rulemaking ("legacy swaps").
  • Dealer to dealer transactions: The proposal cites two alternatives, and invites comment upon the alternatives.
    • In Alternative A, dealers would be required to collect variation, but not initial, margin in transactions with each other.
    • In Alternative B, dealers would collect variation and initial margin in all transactions with each other, and that initial margin be held at an independent third party account.

Major Security-Based Swap Participants ("MSPs"): Daily Calculation

  • MSPs would be required to perform a daily calculation of the amount of equity in the account of each counterparty to a non-cleared security-based swap to determine whether the major security-based swap participant has current exposure to the counterparty or the counterparty has current exposure to the major security-based swap participant. Major security-based swap participants would not be required to calculate a potential future exposure measure because they would not be required to collect margin collateral to cover this amount.
  • Major security-based swap participants would be required to collect margin collateral to cover their current exposure to a counterparty and to deliver margin collateral to a counterparty to cover the counterparty’s current exposure to the major security-based swap participant.

Segregation: Under the rule, which is modeled on the broker-dealer segregation rule, Rule 15c3-3, would require

  • Retention of physical possession or control over customers’ fully paid and excess margin securities, and
  • Maintenance of a reserve of funds or qualified securities in an account at a bank that is equal in value to the net cash owed to customers.

Related Documents: Federal Register Entry; Chart: Regulatory Regime for SB-SD/MSPs


  1. SEC Proposes Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants. SEC. Retrieved on October 17, 2012.

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