SEC issues long-awaited final rules on capital, margin, and segregation requirements for security swap-based participants - 21 June 2019

Brought upon by the Dodd-Frank Act, the SEC is adopting capital and margin requirements for security-based swap dealers and major security-based swap participants. This will create a stricter control and more structure for security-based swap dealers by enhancing segregation between security-based swap dealers and major security-based swap participants. This stricter control will protect investors and the market more generally by helping central firms manage counterparty risk better. The new rules address four key areas:

1) establish or raise minimum capital requirements for different types of security-based swaps

2) establish margin requirements for nonbank security-based swap dealers with respect to noncleared security-based swaps

3) establish segregation requirements for security-based swap dealers and other security-based swaps

4) provide a means to request substitution compliance with respect to capital and margin requirements for security-based swap dealers and major security-based swap participants.

In summary, the rules say nonbank security-based swap dealers also registered as broker-dealers (other than registered over-the-counter derivatives dealers) will be subject to the pre-existing requirements in the broker-dealer net capital rule, as amended to account for security-based swap and swap activities of broker-dealers.  All other nonbank security-based swap dealers will be subject to capital requirements. In addition, the rules will require a nonbank major security-based swap participant to collect collateral from or deliver collateral to a counterparty to cover a variation margin requirement, unless an exception applies. The rule does not require these entities to collect or deliver initial margin. These rules will strive to ensure the financial integrity of dealers. In adopting these new requirements, the SEC is adding to the comprehensive framework for swap regulations as mandated by Title VII of the Dodd-Frank Act; the CFTC has praised the SEC for this new adoption, saying it is the next step in harmonization of swap dealer and security-based swap dealer regulations.

For more information visit http://business.cch.com/srd/SECgov_SECAdoptsCapitalMargin.pdf .