In response to a request by FINRA on behalf of its broker-dealer members, SEC Division of Trading and Markets ("Division") Associate Director Michael Macchiaroli issued a no-action letter (i) establishing the Division staff's position on the treatment of margin posted by broker-dealers in swap transactions under SEA Rule 15c3-1, and (ii) granting partial relief to broker-dealers who post collateral in swaps transactions.

Mr. Macchiaroli notes that paragraph (c)(2)(iv) of Rule 15c3-1 requires broker-dealers to deduct, from net capital, assets that are not readily convertible into cash, including enumerated items and "other unsecured receivables." Mr. Macchiaroli states that the Division will not recommend enforcement action to the SEC if a broker-dealer does not deduct the value of the collateral posted to a derivatives clearing organization as margin for a cleared swap.

With respect to uncleared swaps, the Division's position is that margin posted by a broker-dealer must be deducted from net worth as a non-allowable asset under Rule 15c3-1(c)(2)(iv)(E), whether it is posted to a third-party custodian or directly to the counterparty. Mr. Macchiaroli asserts that the Division will not recommend enforcement for failing to make the deduction if:

  1. the initial margin requirement is funded by a fully executed written loan agreement with an affiliate of the broker-dealer;
  2. the loan agreement provides that the lender waives repayment of the loan until the initial margin is returned to the broker-dealer; and
  3. the broker-dealer's liability to the lender can be satisfied fully by delivering the collateral serving as initial margin to the lender.

Commentary / JEFF ROBINS

For some time, the Division of Trading and Markets has indicated its uneasiness with international and other U.S. regulators' Basel Committee on Banking Supervision and IOSCO frameworks for derivatives margin requirements, particularly two-way margin requirements. For that reason, this no-action letter is meant to establish that the Division will continue to (i) prioritize the protection of broker-dealers despite calls for regulatory harmonization, and (ii) insist that margin for uncleared swaps must be written down unless it is funded by an affiliate that the SEC does not regulate. The Division's position is unsurprising and hastens the slide toward regulatory and market fragmentation. That should give other regulators pause.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.