In recently submitted comments, SIFMA, ISDA, the FIA, Morgan Stanley and Citadel, among others, urged the SEC to substantially revise proposed rules on capital, margin and segregation requirements for security-based swap dealers ("SBSDs"). The proposal (summarized here) would set minimum capital and margin requirements for non-bank SBSDs and collateral segregation requirements for all SBSDs.

In its comment letter, SIFMA made a number of significant recommendations as to how the SEC should the rulemaking and called for either an extension of the comment period or formally re-proposing the rules to allow for a full comment period. SIFMA's recommended approach attempts to address problems SIFMA argues are caused by inconsistencies between the proposed SEC rules and the rules that already have been adopted by other regulators. SIFMA's approach focuses on: (i) how to calculate minimum net capital requirements for security-based swap ("SBS") activity, (ii) the formula for calculating initial margin amounts for non-cleared SBS and (iii) segregation requirements for SBS collateral in a securities or SBS account.

According to SIFMA, under their recommended approach:

  • over-the-counter derivatives dealers ("OTCDD") and stand-alone SBSDs would generally have the ability to transact in SBS on a "level playing field with banks and foreign dealers";
  • "[f]ull-purpose" broker-dealers that are dually registered as SBSDs ("BD-SBSDs") would follow an approach based on "existing BD financial responsibility requirements"; and
  • BD-SBSDs could potentially have the ability to offer SBS on an "integrated basis with other securities-related services," which bank SBSDs, OTCDDs and stand-alone SBSDs cannot offer.

Like SIFMA, the U.S. Chamber of Commerce and ISDA encouraged the SEC to publish a unified re-proposal of the rule, which would provide greater clarity regarding how the SEC views the regulatory approaches that have been finalized by other regulators since the SEC rules were first proposed over six years ago.

A general theme among comments on the proposal was that the SEC revise aspects of the proposal to harmonize with previously established regulations set forth by the CFTC and U.S. banking regulators ("Prudential Regulators"), as many firms have made significant investments establishing compliance with those regulations. In addition, ISDA encouraged the SEC to, among other things: (i) allow nonbank SBSDs to apply for approval to use industry standard margin models to calculate initial margin ("IM") for all security-based swaps and (ii) base its threshold for collecting IM from a counterparty on the same fixed $50 million level adopted by the CFTC and the Prudential Regulators. Separately, Morgan Stanley urged the SEC to adopt an SBSD customer protection and segregation regime based on "legal certainty" and "client choice."

Portfolio margining also received particular attention from commenters, with ISDA, the FIA and the Managed Funds Association, among others, urging the SEC to work with the CFTC to provide market participants with the ability to margin across product types.

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