SEC Trading and Markets FAQ: Financial Responsibility Requirements

Oct. 8, 2021

The Division of Trading and Markets (“Division”), U.S. Securities and Exchange Commission (“Commission”), has prepared the following responses to questions about the financial responsibility requirements as applied to security-based swap activities of broker-dealers and security-based swap dealers. These responses represent the views of the staff of the Division of Trading and Markets. They are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved this content. These responses, like all staff statements, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person. Additional information can be found in the Commission’s adopting releases for capital, margin and segregation requirements for SBSDs, available at: https://www.sec.gov/rules/final/2019/34-86175.pdf, and recordkeeping and reporting requirements for SBSDs, available at: https://www.sec.gov/rules/final/2019/34-87005.pdf.

The staff may update these questions and answers periodically. In each update, the questions added after publication of the last version will be marked with “MODIFIED” or “NEW.”

Single Reserve Computation under Rule 15c3-3

Question 1: Can a broker-dealer, including a broker-dealer registered as an SBSD (“broker-dealer/SBSD”), (1) account for credits arising from its security-based swap activities with security-based swap customers in its customer reserve formula computation pursuant to Exhibit A to Rule 15c3-3, and (2) maintain the deposit required by the single customer reserve formula computation in a “Special Reserve Bank Account for the Exclusive Benefit of Customers” (a “customer reserve account”) established pursuant to paragraph (e) of Rule 15c3-3, if the customer reserve formula computation does not include any amounts arising from security-based swap activities that would have been included as debit items in a security-based swap customer reserve formula computation under Exhibit B to Rule 15c3-3?

Answer: Yes, staff would not object if a broker-dealer or broker-dealer/SBSD included credits arising from its security-based swap activities with security-based swap customers in its customer reserve computation pursuant to Exhibit A to Rule 15c3-3, and maintained the deposit required in a customer reserve account pursuant to paragraph (e) of Rule 15c3-3. The customer reserve formula computation would not include any debit items arising from security-based swap activities.

Question 2: In connection with the election to use a single reserve computation under Question 1, can a broker-dealer or broker-dealer/SBSD comply with the requirement under paragraph (a)(27) of Rule 17a-3 to make and keep current a record of the reserve computation required under paragraph (p)(3) of Rule 15c-3 (i.e., security-based swap customer reserve formula computation under Exhibit B to Rule 15c3-3) by keeping a record that identifies amounts included in the customer reserve formula computation that are attributable to the firm’s security-based swap activities, which would otherwise have been included as credit items in the security-based swap customer reserve formula computation under Exhibit B to Rule 15c3-3?

Answer: Yes, staff would not object if, under Question 1, to comply with the requirement to make and keep current a record under paragraph (a)(27) of Rule 17a-3, a broker-dealer or broker-dealer/SBSD kept a record that identifies amounts included in the customer reserve formula computation that are attributable to the firm’s security-based swap activities, which would otherwise have been included as credit items in the security-based swap customer reserve formula computation under Exhibit B to Rule 15c3-3.

Question 3: If a broker-dealer or broker-dealer/SBSD accounts for credits arising from security-based swap activities with security-based swap customers in a single customer reserve formula computation under Exhibit A to Rule 15c3-3, and maintains deposits required by the computation in a customer reserve account pursuant to paragraph (e) of Rule 15c3-3, must the firm revise the written notification and written contract that it maintains with the bank pursuant to paragraph (f) of Rule 15c3-3, to reflect that cash and/or qualified securities deposited in the customer reserve account is being held by the bank for security-based swap customers?

Answer: No, staff would not object if the broker-dealer or broker-dealer/SBSD does not revise the written notification and written contract required by paragraph (f) of Rule 15c3-3 if a broker-dealer or broker-dealer/SBSD accounts for credits arising from security-based swap activities with security-based swap customers in a single customer reserve formula computation under Exhibit A to Rule 15c3-3, and maintains deposits required by the computation in a customer reserve account pursuant to paragraph (e) of Rule 15c3-3.

Control Locations

Question 4: What should an application include under paragraph (b)(2)(v) of Rule 18a-4, and paragraph (p)(2)(ii)(E) of Rule 15c3-3, if an SBSD or broker-dealer, as applicable, applies to the Commission to designate a location as a satisfactory control location for a security-based swap customer’s excess securities collateral?

Answer: The Commission modeled the control locations in paragraph (b)(2)(v) of Rule 18a-4 and paragraph (p)(2)(ii)(E) of Rule 15c3-3 on the requirements in paragraph (c) to Rule 15c3-3.[1] Further, the Commission has previously published interpretive guidance on the information that should be included in applications for foreign control locations under paragraphs (c)(4) and (c)(7) of Rule 15c3-3.[2] Therefore, applications under paragraph (b)(2)(v) of Rule 18a-4, and paragraph (p)(2)(ii)(E) of Rule 15c3-3, would contain the same representations and types of information that are currently utilized for control location applications for traditional customer securities submitted under the applicable provisions of paragraph (c) of Rule 15c3-3 (i.e., applications submitted pursuant to paragraphs (c)(4) and (c)(7) of Rule 15c3-3, and applications submitted pursuant to only paragraph (c)(7) of Rule 15c3-3). In addition, an authorized representative of the control location would provide the SBSD or the broker-dealer with a no-lien letter containing the required representations that would apply to the type of control location application submitted under the applicable provision(s) of paragraph (c) of Rule 15c3-3. Applications submitted under paragraph (b)(2)(v) of Rule 18a-4 should be sent to the Office of Financial Responsibility in the Commission’s Division of Trading and Markets by email at SBS-OTCDDrequests@sec.gov. Applications submitted under paragraph (p)(2)(ii)(E) of Rule 15c3-3 should be sent to the Office of Financial Responsibility in the Commission’s Division of Trading and Markets by email at finoprequests@sec.gov.

Question 5: If a broker-dealer or broker-dealer/SBSD has established a location as a satisfactory control location for traditional customer securities under the applicable provisions of paragraph (c) of Rule 15c3-3, must the broker-dealer or broker-dealer/SBSD submit an additional application to treat the same control location as a satisfactory control location for a security-based swap customer’s excess securities collateral under paragraph (p)(2)(ii)(E) of Rule 15c3-3?

Answer: No, staff would not object if a broker-dealer or broker-dealer/SBSD that has established a control location as a satisfactory control location for traditional customer securities under the applicable provisions of paragraph (c) of Rule 15c3-3 does not submit an additional control location application or obtain a new no-lien letter to treat the same control location as a satisfactory control location for a security-based swap customer’s excess securities collateral provided that the existing no-lien letter language is legally sufficient to cover a security-based swap customer’s excess securities collateral under paragraph (p)(2)(ii)(E) of Rule 15c3-3.

Question 6: If a broker-dealer or broker-dealer/SBSD maintains excess securities collateral at a “bank” as that term is defined in section 3(a)(6) of the Securities Exchange Act of 1934, and the firm has obtained a no-lien letter from the bank under paragraph (c)(5) of Rule 15c3-3 to establish the bank as a satisfactory control location for the firm’s traditional customer securities, and the existing no-lien letter language is legally sufficient to cover the excess securities collateral of security-based swap customers, must the firm obtain a new no-lien letter from the bank under paragraph (p)(2)(ii)(C) of Rule 15c3-3 to establish control of excess securities collateral held at the bank?

Answer: No, staff would not object if a broker-dealer or broker-dealer/SBSD that has obtained a no-lien letter from a bank under paragraph (c)(5) of Rule 15c3-3 does not obtain a new no-lien letter from the bank if the existing no-lien letter language is legally sufficient to cover the excess securities collateral of security-based swap customers to deem the bank a satisfactory control location for excess securities collateral under paragraph (p)(2)(ii)(C) of Rule 15c3-3.

Variation Margin Collateral

Question 7: If an SBSD’s counterparty is owed variation margin under paragraph (c)(1)(ii)(A)(2) of Rule 18a-3, but the counterparty chooses not to call for and receive the variation margin from the SBSD, is the variation margin subject to the security-based swap segregation requirements under Rule 18a-4 for SBSDs or Rule 15c3-3 for broker-dealer/SBSDs?

Answer: No, paragraph (c)(1)(ii)(A)(2) of Rule 18a-3 requires an SBSD to deliver to a counterparty collateral in an amount equal to the current exposure that the counterparty has to the SBSD (not including initial margin). If, notwithstanding the SBSD’s reasonable efforts to deliver the variation margin to the counterparty, the counterparty elects not to receive the variation margin, staff’s view is that the variation margin is not subject to the segregation requirements under Rule 15c3-3 or Rule 18a-4, as applicable.

Question 8: If the collateral an SBSD collects from a security-based swap customer to satisfy the customer’s variation margin requirement under paragraph (c)(1)(ii)(A)(1) of Rule 18a-3 is subject to standardized haircuts pursuant to paragraph (c)(3) of Rule 18a-3, can the excess collateral collected by the SBSD for purposes of satisfying the haircut requirement (i.e., the “haircut collateral”) be rehypothecated by the SBSD or must the SBSD treat the haircut collateral as excess securities collateral?

Answer: An SBSD is permitted to rehypothecate haircut collateral that it receives from a security-based swap customer to satisfy the customer’s variation margin requirement under paragraph (c)(1)(ii)(A)(1) of Rule 18a-3. For a broker-dealer/SBSD under paragraph (p)(1)(ii) of Rule 15c3-3, and paragraph (a)(2) of Rule 18a-4 for SBSDs, the term “excess securities collateral” means securities and money market instruments carried for the account of a security-based swap customer that have a market value in excess of the current exposure of the firm to the security-based swap customer. The Commission has stated that it did not intend the result that the use of the term market value rather than haircut value (i.e., market value less collateral haircuts) for the securities collateral posted in connection with non-cleared security-based swaps would require that an SBSD use its own resources to fund margin requirements.[3] This means the collateral haircut is included in the term market value as used in the definition of “excess securities collateral.” Therefore, if an SBSD collects securities collateral to meet a variation margin requirement of a security-based swap customer, the securities collateral (including the haircut collateral) posted by the customer would not constitute “excess securities collateral” because it would not have a market value in excess of the current exposure of the firm to the security-based swap customer. For example, if a security-based swap customer delivers $105 in US Treasuries (“UST”) to the SBSD to satisfy the customer’s $100 variation margin call (the excess to cover the haircut on the collateral), the $5 excess also is treated as variation margin and the entire $105 in USTs can be rehypothecated by the SBSD.

Computation of Initial Margin Amount and Risk Margin Amount

Question 9: Until September 1, 2022, can an SBSD or broker-dealer/SBSD calculate its risk margin amount for non-cleared security-based swaps pursuant to paragraph (c)(6)(ii) of Rule 18a-1 or paragraph (c)(17)(ii) of Rule 15c3-1, as applicable, using the maximum potential exposure or “MPE” (as defined by paragraph (e)(2)(iii)(B) of Rule 18a-1 or paragraph (c)(4)(ii) of Rule 15c3-1e, as applicable), without regard to the value of any collateral from the counterparty held by the firm, instead of the initial margin amount calculated under paragraph (c)(1)(i)(B) of Rule 18a-3, if the firm has been approved by the Commission to use models to compute deductions for credit risk pursuant to paragraph (d) to Rule 18a-1 or Appendix E to Rule 15c3-1, as applicable. For purposes of this question 9, MPE covers all non-cleared derivatives instruments, including non-cleared security-based swaps, uncleared swaps, non-cleared securities options, and non-cleared securities forwards.

Answer: Yes, staff would not object, if the SBSD or broker-dealer/SBSD is authorized to use models to compute deductions for credit risk pursuant to paragraph (d) to Rule 18a-1 or Rule 15c3-1e, as applicable.

Question 10: Until September 1, 2022, can an SBSD or broker-dealer/SBSD calculate the initial margin amount pursuant to paragraph (c)(1)(i)(B) of Rule 18a-3 for counterparties exempt from initial margin requirements under paragraph (c)(1)(iii) of Rule 18a-3, using the MPE (as defined by paragraph (e)(2)(iii)(B) of Rule 18a-1 or paragraph (c)(4)(ii) of Rule 15c3-1e, as applicable, without regard to the value of any collateral from the counterparty held by the firm, instead of the initial margin amount calculated pursuant to paragraph (d) of Rule 18a-3, if the firm has been approved by the Commission to use models to compute deductions for credit risk pursuant to paragraph (d) to Rule 18a-1 or Appendix E to Rule 15c3-1, as applicable. For purposes of this question 10, MPE covers all non-cleared derivatives instruments, including non-cleared security-based swaps, uncleared swaps, non-cleared securities options, and non-cleared securities forwards.

Answer: Yes, staff would not object, if the SBSD or broker-dealer/SBSD is authorized to use models to compute deductions for credit risk pursuant to paragraph (d) to Rule 18a-1 or Rule 15c3-1e, as applicable.

Question 11: Until September 1, 2022, can an SBSD or broker-dealer/SBSD comply with the requirement under paragraph (a)(12) of Rule 18a-5 or paragraph (a)(25) of Rule 17a-3, as applicable, to make and keep current a record of the daily calculation of the initial margin amount for each account of a counterparty under paragraph (c) of Rule 18a-3 using the MPE, as described in Question 10 above, for counterparties exempt from initial margin requirements under paragraph (c)(1)(iii) of Rule 18a-3?

Answer: Yes, staff would not object if an SBSD or broker-dealer/SBSD complied with the requirement under paragraph (a)(12) of Rule 18a-5 or paragraph (a)(25) of Rule 17a-3, as applicable, to make and keep current a record of the daily calculation of the initial margin amount for each account of a counterparty under paragraph (c) of Rule 18a-3 using the MPE, as described in Question 10 above, for counterparties exempt from initial margin requirements under paragraph (c)(1)(iii) of Rule 18a-3.

Use of Standardized Initial Margin Grid

Question 12: Can an SBSD or a broker-dealer/SBSD use the standardized initial margin schedule prescribed in the CFTC’s standardized initial margin schedule (17 CFR 23.154(c)(1)) to calculate initial margin in lieu of the standardized method prescribed under paragraph (d)(1) of Rule 18a-3 for non-cleared security-based swaps?

Answer: No, paragraph (d)(1) of Rule 18a-3 requires an SBSD or broker-dealer/SBSD to use the standardized methods in Rules 18a-1(c)(1)(vi)(B) and 15c3-1(c)(2)(vi)(P), as applicable, to compute the initial margin amount required by paragraph (c)(1)(i)(B) of Rule 18a-3.

FOCUS Report

Question 13: Form X-17A-5 (“FOCUS Report”) Part IIC is based on FFIEC Form 031 (“Call Report”), which banks are required to file with their prudential regulators.[4] A number of differences between FOCUS Report Part IIC and the Call Report have arisen as a result of changes to the Call Report. How may firms reconcile the following differences between the Call Report and FOCUS Report Part IIC?

• Difference 1: The Call Report requests “Equity securities with readily determinable fair values not held for trading” (box number JA22) but this item is not solicited in FOCUS Report Part IIC. FOCUS Report Part IIC only requests “held-to-maturity securities” (box number 1754b) and “available-for-sale securities” (box number 1773b) in the Balance Sheet section.
• Difference 2: FOCUS Report Part IIC requires firms to report “Tier 3 capital allocated for market risk” (box number 1395b) but this item is no longer solicited on the Call Report.
• Difference 3: FOCUS Report Part IIC solicits “Impact on trading revenue of changes in the creditworthiness of the bank’s derivative counterparties on the bank’s derivative assets” (box number K090b), but the Call Report also requires firms to break out this line into “Gross credit valuation adjustment (CVA)” (box number FT36) and “CVA hedge” (box number FT37).
• Difference 4: FOCUS Report Part IIC requests “Impact on trading revenue of changes in the creditworthiness of the bank on the bank’s derivative liabilities” (box number K094b), but the Call Report also requires firms to break out this line into “Gross debit valuation adjustment (DVA)” (box number FT38) and “DVA hedge” (box number FT39).
• Difference 5: FOCUS Report Part IIC requests totals for “Tier 2 capital” (box number 5311b), “Total risk-based capital” (box number 3792b), “Total risk-weighted assets” (box number A223b), “Tier 1 risk-based capital ratio” (box numbers 7206b and 7206bb), and “Total risk-based capital ratio” (box numbers 7205b and 7205bb) but the Call Report also enables firms to report these items using the standardized and advanced approaches under Basel III.

Answer: The differences between the Call Report and FOCUS Report Part IIC may be resolved as follows:

• Difference 1: Firms should report the total of both “held-to-maturity securities” and “equity securities with readily determinable fair values not held for trading” on the line entitled “held-to-maturity securities” (box number 1754b). Firms may report the breakout between “held-to-maturity securities” and “equity securities with readily determinable fair values not held for trading” as an item memo accompanying “held-to-maturity securities” (box number 1754b).
• Difference 2: Firms should leave blank on FOCUS Report Part IIC the line entitled “Tier III capital allocated for market risk” (box number 1395b).
• Difference 3: Firms may report the breakout between “Gross credit valuation adjustment (CVA)” and “CVA hedge” as an item memo accompanying “Impact on trading revenue of changes in the creditworthiness of the bank’s derivative counterparties on the bank’s derivative assets” (box number K090b).
• Difference 4: Firms may report the breakout between “Gross debit valuation adjustment (DVA)” and “DVA hedge” as an item memo accompanying “Impact on trading revenue of changes in the creditworthiness of the bank on the bank’s derivative liabilities” (box number K094b).
• Difference 5: Firms may use the standardized or advanced approach under Basel III to report the amounts for “Tier 2 capital” (box number 5311b), “Total risk-based capital” (box number 3792b), “Total risk-weighted assets” (box number A223b), “Tier 1 risk-based capital ratio” (box numbers 7206b and 7206bb), and “Total risk-based capital ratio” (box numbers 7205b and 7205bb). Firms reporting these values using the advanced approach should indicate that they are using the advanced approach in an item memo accompanying each of these line items.

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[1] See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 43872, 43938 (Aug. 22, 2019) (“Capital, Margin, and Segregation Adopting Release”).

[2] See Guidelines for Foreign Control Locations for Foreign Securities Pursuant to Subparagraphs (c)(4) and (c)(7) under the Securities Exchange Act of 1934, Exchange Act Release No. 10429 (Oct. 12, 1973), available at: https://www.sec.gov/rules/interp/1973/34-10429.pdf.

[3] See Capital, Margin, and Segregation Adopting Release, 84 FR at 43936.

[4] See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers, Exchange Act release no. 87005 (Sept. 19, 2019), 84 FR 68550, 68636 (Dec. 16, 2019).

Last Reviewed or Updated: June 26, 2024