SEC-CFTC Harmonization:

June 21, 2018

SEC-CFTC Harmonization:

Key Issues under Title VII of the Dodd-Frank Act

The matrix below summarizes key issues raised as a result of differences between

the rules adopted or proposed by the Securities and Exchange Commission (“SEC”) and the

Commodity Futures Trading Commission (“CFTC”) to implement the regulatory framework for

security-based swaps (“SBS”) and swaps under Title VII of the Dodd-Frank Act. Because most

of the CFTC’s Title VII rules have been in effect for several years, but the SEC’s Title VII rules

are either awaiting adoption or are not yet in effect, greater harmonization of the SEC’s rules to

the CFTC’s rules would help facilitate prompt implementation of the SEC’s Title VII regime with

minimal disruption to the SBS market and robust protections and lower costs for investors and

other end-users. Accordingly, in several instances, our recommendations call for such

harmonization even if the SEC’s rules would, standing alone, be less strict or costly than the

CFTC’s rules. We also note some key areas where changes to the CFTC’s rules or guidance would

be appropriate. Our recommendations cover the following areas:

•

Conflicts with foreign blocking, privacy, secrecy, labor and employment laws

raised by certifications and legal opinions required for foreign dealers,

background checks for associated persons, and trade reporting rules;

•

The treatment of transactions between non-U.S. persons arranged, negotiated or

executed by personnel or agents located in the U.S.;

•

Trade reporting data fields, mechanics, and cross-border application;

•

External business conduct standards; and

•

Capital, margin, and segregation rules. 1

Our recommendations are intended to complement ongoing initiatives by the CFTC

to recalibrate its swaps regulatory regime through Project KISS and leadership in international

standard setting bodies, such as the Basel Committee on Banking Supervision (“BCBS”), the

International Organization of Securities Commissions (“IOSCO”), and the Committee on

Payments and Market Infrastructures (“CPMI”). We have referenced these initiatives where

appropriate in the matrix below. We envision that the agencies’ harmonization efforts would

continue in parallel with these initiatives and that implementation of the SEC’s Title VII regime

should be staggered as a result.

1

In addition to addressing the issues described in this matrix, the CFTC and SEC should also address the

issues raised in our comment letters regarding the agencies’ still-pending rule proposals. See Note 4, below.

June 21, 2018

In addition to the recommendations below, the SEC should, where appropriate,

permanently extend its temporary exemptive relief related to the revision of the definition of

“security” in the Securities Exchange Act of 1934 to encompass SBSs. 2 See SEC Release No. 3482626. We recommend that the SEC grant this permanent extension well in advance of the

expiration of the relief on February 5, 2019 in order to reduce uncertainty and potential duplication

in SBS regulation.

We also recommend that, well in advance of SBS dealer registration, the SEC make

substituted compliance determinations covering the same range of “entity-level” rules and foreign

jurisdictions currently covered by the CFTC’s corollary determinations.

If the SEC takes these steps and the others described herein, then an 18-month

period before SBS dealer registration, business conduct, and reporting rules take effect should be

sufficient to provide for orderly implementation of the SEC’s Title VII ruleset. Additional time

would then be required to implement SBS dealer margin and capital requirements, which must

account for ongoing phased implementation of other regulators’ margin rules and implementation

of the pending capital proposal from the CFTC.

2

As discussed in previous comment letters from the Securities Industry and Financial Markets Association

(“SIFMA”), application of the pre-Dodd Frank securities requirements on SBSs is generally unworkable and/or

unnecessary in light of the new SBS regulatory regime. See, Draft SIFMA SBS Exemptive Relief Request (Oct. 20,

2011), available at https://www.sec.gov/comments/s7-27-11/s72711-7.pdf, and SIFMA SBS Exemptive Relief

Request (Dec. 5, 2011), available at https://www.sec.gov/comments/s7-27-11/s72711-10.pdf. Additionally,

including an SBS in the definition of “security” subjects entities that are dual-registered as SBS dealers and brokerdealers to both the SBS and securities regulatory regimes, placing those dual-registered entities at a competitive

disadvantage.

2

June 21, 2018

Issue(s)

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

Final SEC Rule 15Fb2-4(c) will

require a non-resident SBS dealer to

certify and provide a legal opinion

relating to SEC access to books and

records and onsite inspections and

examinations. In adopting this

requirement, the SEC did not specify

which books, records, locations, and

laws must be covered by the

certification and opinion. Absent

clarification or relief, most (if not all)

non-resident SBS dealers could not

satisfy this requirement because they

do business in jurisdictions that have

blocking, privacy, or secrecy laws.

Withdrawal of non-resident SBS

dealers from the U.S. market would

materially reduce market liquidity

and competition for investors.

The registration form for swap

dealers, National Futures Association

(“NFA”) Form 7-R, contains a

carve-out from certifications relating

to U.S. authorities’ access to books

and records for foreign blocking,

privacy, and secrecy laws about

which a swap dealer informs the

CFTC in writing. The CFTC does

not impose a legal opinion

requirement like the one required by

SEC Rule 15Fb2-4(c). Instead, the

CFTC and NFA have generally

worked with swap dealers and

foreign regulators to develop more

tailored measures to avoid or

overcome the obstacles that these

laws can pose to U.S. investigations

or exams.

When the SEC finalizes its

recordkeeping rules for SBS dealers,

it should eliminate its opinion

requirement and amend its

certification requirement to adopt the

same carve-out as the CFTC. If the

SEC does not take these steps, then it

could mitigate (but not eliminate) the

disruption caused by its opinion and

certification requirements by

adopting guidance clarifying that

those requirements cover (i) books

and records related to the SBS

dealer’s U.S. SBS business and (ii)

laws applicable in the SBS dealer’s

jurisdiction of incorporation,

principal place of business or, if

different, the location(s) where the

SBS dealer will maintain and make

available such required books and

records to the SEC. The books and

records related to an SBS dealer’s

U.S. SBS business would be records

(including communications) of the

SBS transactions that count toward

the SBS dealer de minimis threshold

(e.g., U.S.-facing SBS transactions)

and, for an SBS dealer subject to

SEC capital and margin oversight

(without substituted compliance),

financial records.

Conflicts with Foreign Blocking,

Privacy, Secrecy, Labor, and

Employment Laws. The novel,

extraterritorial application of U.S.

law under Title VII has led to several

potential conflicts with foreign

blocking, privacy, secrecy, labor, and

employment laws, including:

•

Requirements for foreign

dealers to register in the

U.S. and submit to U.S.

inspection and examination

requirements, even if they

conduct U.S.-facing

business through a regulated

U.S. affiliate or their only

U.S. nexus is that a U.S.

affiliate guarantees their

transactions with foreign

counterparties;

3

June 21, 2018

Issue(s)

•

A dealer cannot permit an

associated person (“AP”) to

effect or be involved in

effecting transactions on its

behalf if the dealer knows,

or in the exercise of

reasonable care should have

known, that the AP is

subject to statutory

disqualification; and

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

Final SEC Rule 15Fb6-2 will require

(i) an SBS dealer to provide a

certification relating to this

prohibition and (ii) the chief

compliance officer of an SBS dealer

to review and sign employment

questionnaires or applications, which

are to serve as the basis for a

background check. However, in

certain foreign jurisdictions, local

labor or employment law prohibits

employers from requiring their

employees to provide information

regarding their criminal or civil

history; in these jurisdictions,

employers must rely on alternative

measures to vet their employees.

The adverse impact of these conflicts

is exacerbated by the broad

geographic reach of the SEC’s

background check requirements,

which cover non-U.S. employees

who do not interact with U.S.

counterparties, and the application of

these requirements to non-frontoffice personnel, such as personnel

solely responsible for drafting and

negotiating master agreements and

confirmations or managing

collateral.

NFA Form 7-R contains a similar

certification, but neither the CFTC

nor NFA has imposed any

affirmative background check

requirements. In addition, the CFTC

has provided no-action relief from

the statutory disqualification

prohibition for APs located outside

the U.S. whose counterparties are

located outside the U.S. Finally,

unlike the SEC, the CFTC has not

interpreted its AP requirements to

extend outside of front-office

personnel.

When it finalizes its recordkeeping

rules, instead of always requiring a

standard U.S. employment

questionnaire/application and

background check, the SEC should

permit an SBS dealer to use

alternative measures to confirm that

a non-resident AP is not subject to

statutory disqualification in

situations where (i) using a standard

U.S. employment questionnaire/

application and background check

would conflict with local law or the

AP does not interact with U.S.

counterparties and (ii) the AP

complies with applicable registration

or licensing requirements in the

jurisdiction(s) where he or she is

located. The SEC should also make

related clarifications regarding the

AP statutory disqualification

certification.

Additionally, the SEC should focus

Rule 15Fb6-2’s requirements and

related recordkeeping rules on

personnel who are performing

“front-office” functions, such as

recommending or executing SBS

transactions. If the SEC does not do

so, it should clarify that other

personnel will not be considered to

effect or be involved in effecting

SBS transactions unless they

exercise managerial or other

discretionary, supervisory authority

over the SBS business of an SBS

dealer.

4

June 21, 2018

Issue(s)

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

Requirements for dealers to

report identifying

information regarding

counterparties when

reporting such information

would conflict with foreign

laws. The Financial

Stability Board has

spearheaded an effort to

eliminate those conflicts.

Final Regulation SBSR will require

SBS dealers to report IDs for

counterparties. To address conflicts

with foreign laws, the SEC indicated

it might grant exemptions from

reporting counterparty IDs, but only

for historical transactions.

The CFTC staff has addressed some

(but not all) of the relevant legal

conflicts through no-action relief

allowing swap dealers to use

substitute, “masked” identifiers for

counterparties who reside in

enumerated jurisdictions whose local

privacy or similar laws prohibit

reporting un-masked IDs. This relief

applies to both historical and new

transactions.

Like the CFTC, the SEC should

grant masking relief covering both

historical and new transactions. The

agencies should also consider

enhancements to existing relief.

ANE Transactions. The CFTC and

SEC have taken different approaches

to how they treat transactions

between non-U.S. persons that are

arranged, negotiated, or executed by

personnel located in the U.S. (“ANE

Transactions”). Market participants

have raised concerns that applying

U.S. rules to ANE Transactions

already subject to foreign regulation

would discourage non-U.S. clients

from interacting with U.S. personnel

and impede risk management by

expert trading personnel located in

the U.S. On the other hand, the

benefits of applying additional

requirements to ANE Transactions

are limited. In particular, such

transactions do not pose any risks to

the U.S. financial system because no

U.S. person is party to the

transactions either directly or as

guarantor. Also, identifying ANE

Transactions poses costly

implementation challenges for

transactions negotiated over longer

periods of time and multiple time

zones or in situations where the

Under final rules adopted by the

SEC, SBSs connected with a nonU.S. person’s SBS dealing activity

that are arranged, negotiated, or

executed by its (or its agent’s)

personnel located in a U.S. branch or

office are:

• included in calculations for the

de minimis exception to crossborder dealing activity

requiring registration of a

potential SBS dealer (Rule

3a71–3(b)(1)(iii));

• subject to regulatory reporting

and public dissemination

(Regulation SBSR, Rule 908);

and

• subject to external business

conduct standards

(Rule 3a71-3).

The CFTC has never required a nonU.S. person to include ANE

Transactions in its swap dealer de

minimis calculation.

The CFTC should codify the

treatment of ANE Transactions in a

rulemaking confirming that

“transaction-level” requirements do

not apply to such transactions and

such transactions are not covered by

the de minimis calculation. The SEC

should revise its rules to treat ANE

Transactions in the same manner.

•

Although a November 2013 CFTC

staff advisory (Advisory No. 13-69)

would have subjected certain ANE

Transactions to CFTC “transactionlevel” requirements (including realtime public reporting rules and

external business conduct standards),

no-action letters have generally

provided relief from these

requirements (see No-Action Letter

No. 17-36). In addition, an October

2016 proposal would have limited

the external business conduct

standards that apply to ANE

Transactions to anti-fraud,

counterparty confidentiality and fair

and balanced communication

requirements.

5

If the SEC does not take this

approach, it should:

• exclude ANE Transactions from

the de minimis calculation if the

trading activity is already

appropriately regulated because

the relevant U.S. personnel are

(i) employed by an affiliate that

is either (a) a bank that is

registered as an SBS dealer or

(b) a registered broker-dealer

and (ii) trading on behalf of an

entity subject to BCBS-IOSCO

compliant margin and capital

rules;

• limit the external business

conduct requirements for ANE

Transactions to anti-fraud,

June 21, 2018

Issue(s)

SEC Rule(s)

CFTC Rule(s)

locations of both parties’ personnel

are relevant (e.g., in the inter-dealer

reporting context). Overcoming

these challenges will require firms

either to modify their systems and

practices to detect involvement of

U.S. personnel on a systematic basis

or systematically to limit the

involvement of such personnel.

Recommendation(s)

•

Trade Reporting Data Fields,

Mechanics, and Cross-Border

Application. Differences among the

data fields, reporting mechanics, and

cross-border application required

under trade reporting rules adopted

by the SEC, CFTC, and foreign

regulators limit the ability for

reporting parties to use common

systems across rulesets, prevent the

creation of a common data set that is

aggregable across jurisdictions, and

impose differential costs or market

impact on end-users, which can skew

markets. These differences also

inhibit reliance on substituted

compliance. The main areas that

raise these issues are set out below:

6

disclosure, and fair and balanced

communication requirements,

since these requirements will not

pose onboarding issues for nonU.S. counterparties that could

discourage them from interacting

with U.S. personnel; and

apply reporting requirements

solely based on the status of the

each party to the transaction as,

for example, a U.S. person or

U.S.-registered SBS dealer,

instead of triggering additional

reporting requirements for ANE

Transactions solely because of

the involvement of U.S.

personnel.

June 21, 2018

Issue(s)

•

Inconsistent requirements

for when data repositories

must publicly disseminate

data and how reporting

parties should embargo that

data;

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

Rule 901 of final Regulation SBSR

imposes an interim reporting

deadline of 24 hours after execution,

but Rule 902 requires an SBS data

repository to disseminate trade

information publicly immediately

upon receipt. Rule 902 also prohibits

disclosure of trade information to

others before it has been sent to an

SBS data repository (the “Embargo

Rule”).

Part 43 of the CFTC’s rules requires

the reporting party to report trade

information to a swap data repository

as soon as technologically

practicable after execution, but for

trades at or above the “minimum

block size” (set by the CFTC) the

swap data repository has to apply a

delay before it disseminates that

information publicly. The length of

this delay depends on the size and

asset class of a transaction. Foreign

jurisdictions’ reporting rules

typically operate in a similar manner.

Part 43 also imposes an Embargo

Rule, which creates challenges with

respect to compliance with foreign

reporting requirements as well.

Firms would generally prefer to

report SBS transactions earlier than

the SEC’s rules require so they can

use existing, CFTC-compliant

reporting systems to submit the

reports. However, if they did so,

SBS data repositories would

immediately publicly disseminate

these transactions, without the

benefits of the 24-hour public

dissemination delay intended by the

SEC. 3 But if reporting parties delay

these reports until the 24-hour

deadline, they could face issues with

the SEC’s Embargo Rule due to

reporting requirements in foreign

jurisdictions. In addition, a lack of

uniform technology to apply

reporting delays amongst SBS

dealers may create the opportunity

for reverse engineering parties’

identities and trading strategies. To

address these issues, the SEC should

amend Rule 902, or grant relief, so

that SBS data repositories

disseminate trade information

publicly not upon receipt of reported

data but when the relevant time

period (i.e., 24 hours after execution)

has expired.

3

While the interim, 24-hour public dissemination delay will give the SEC additional time to consider how to set block sizes, further analysis is needed

whether the 24-hour delay gives sufficient protection (and time to hedge) for less liquid SBS products. We note in this regard proposals for the CFTC to

recalibrate its own public dissemination rules. The agencies should work together going-forward to make appropriate amendments to public dissemination rules.

7

June 21, 2018

Issue(s)

•

Inconsistent requirements

for what trade data must be

reported;

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

Rule 901 of final Regulation SBSR

requires reporting of Primary and

Secondary Trade Information as set

forth in the rule. While there is no

requirement to report certain data

(such as valuation data), other data

elements are new and more

challenging (such as trader ID or

additional data elements that are

necessary for a person to determine

the market value of the transaction).

The CFTC’s reporting rules (Parts

43, 45, and 46) require a different set

of data to be reported per trade, such

as the “Minimum Primary Economic

Terms,” which, for example, do not

include trader IDs. However, other

data elements are problematic under

the CFTC rules (as previously raised

with the CFTC by market

participants) such as the “any other

terms” field.

The CFTC and SEC are participating

in a CPMI-IOSCO data

harmonization working group

covering transaction IDs, product

IDs, and other critical data elements,

and the CFTC intends to make

changes to its rules taking into

consideration final guidance

provided by CPMI-IOSCO. The

agencies should work together to

identify a harmonized set of data for

the reporting of swaps and SBSs and

then revise their rules accordingly.

Pending the outcome of this

workstream, the SEC should not

require data fields or reports for

SBSs that the CFTC or foreign

regulators do not require for swaps.

SBS dealers would still be required

to maintain the underlying

information as part of their records.

This phased implementation would

make it possible to implement

Regulation SBSR sooner and set the

stage for firms to make a single set

of changes to their reporting systems

in the future when the SEC and

CFTC have agreed on an enhanced

set of harmonized data fields. If the

SEC and CFTC data fields were

harmonized, it would enhance the

agencies’ oversight of related swaps

and SBSs and allow a single report

for “mixed swaps” submitted to one

data repository (for swaps or SBSs)

to be made available to both the SEC

and CFTC, eliminating duplicative

reporting and reducing risk of errors.

8

June 21, 2018

Issue(s)

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

•

Inconsistent requirements

for the non-reporting party

to a transaction to provide

data;

Rule 906 of final Regulation SBSR

requires an SBS data repository to

collect certain information directly

from the non-reporting side, such as

counterparty ID and (if applicable)

the broker ID, branch ID, execution

agent ID, trading desk ID, and trader

ID.

The CFTC’s reporting rules (Parts

43, 45, and 46) and its data

repository rules (Part 49) do not

impose similar obligations on swap

data repositories to obtain data from

non-reporting parties.

Many end-users are not equipped to

report data to a data repository. The

CFTC and SEC should work together

to adopt a consistent approach to

requirements for non-reporting

sides/parties, which minimizes

burdens on end-users in line with the

CFTC rules. In the meantime, the

SEC should not

require additional data beyond

counterparty IDs from non-reporting

sides, either directly or indirectly

through reporting sides.

•

Inconsistent requirements

for the public dissemination

of the actual notional or

principal amount for

transactions;

Rules 901 and 902 of final

Regulation SBSR require the

reporting side to report, and the SBS

data repository to disseminate

publicly, the actual notional or

principal amount for an SBS.

CFTC Rule 43.4 requires the

reporting party to report the actual

notional or principal amount for a

swap, but the swap data repository

publicly disseminates a rounded or

capped notional or principal amount.

Even with a 24-hour delay,

disseminating the actual notional or

principal amount for a transaction

can still cause an adverse market

impact for less liquid or larger sized

transaction types. In addition,

publicly disseminating this

information can facilitate reverse

engineering of parties’ identities and

trading strategies. To address these

issues, the SEC should adopt

notional rounding and capping rules.

•

Absence of determinations

permitting substituted

compliance with foreign

reporting rules; and

Rule 908 of final Regulation SBSR

does not permit the SEC to make a

substituted compliance determination

unless it finds that a foreign

jurisdiction’s reporting rules require

comparable data fields and the SEC

has direct electronic access to data

reported pursuant to those rules,

among other conditions.

CFTC guidance imposes similar

conditions on substituted compliance

with foreign reporting rules.

However, pending substituted

compliance, the CFTC has granted

no-action relief until 2020 for certain

foreign-headquartered swap dealers

in relation to reporting their swaps

with non-U.S. counterparties (NoAction Letter No. 17-64).

If the SEC does not make substituted

compliance determinations prior to

when its SBS reporting rules take

effect, it should provide temporary

relief.

9

June 21, 2018

Issue(s)

•

Inconsistent extraterritorial

reach of reporting rules.

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

Rule 908 requires trade reports for

SBSs where both parties are nonU.S. persons but at least one is

guaranteed by a U.S. person. The

SEC has also treated foreign

branches of U.S. SBS dealers in

emerging markets in the same

manner as branches located in

jurisdictions with more active SBS

markets.

CFTC guidance does not apply

public reporting rules to a non-U.S.

person guaranteed by a U.S. person

unless its counterparty is a U.S.

person, another guaranteed affiliate

of a U.S. person, a conduit affiliate

of a U.S. person or a registered swap

dealer. In addition, certain emerging

market branches benefit from a de

minimis exception from public

reporting and other “transactionlevel” rules.

To avoid unduly disadvantaging U.S.

firms when doing business outside of

the U.S., the SEC should align the

extraterritorial scope of its reporting

rules with the CFTC. Alternatively,

it should grant relief for branches

and guaranteed affiliates located in

emerging market jurisdictions

(subject to a 5 percent volume limit)

and temporary relief (pending

substituted compliance) for other

jurisdictions. (The same

approach/relief should apply to other

transaction level requirements —

such as mandatory clearing and

trading requirements — once SEC

rules for these requirements come

into effect.)

10

June 21, 2018

Issue(s)

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

External Business Conduct

Standards.

•

•

To facilitate industry-wide

compliance with business

conduct rules, the

International Swaps and

Derivatives Association

(“ISDA”) developed the

August 2012 Dodd-Frank

Protocol. The Protocol was

developed over a roughly

six-month period, and it

took over nine months after

publication of the Protocol

to ensure broad, marketwide adherence. The

Protocol now has over

20,000 adherents.

Drafting and obtaining

broad adherence to a new

Protocol would require

considerable resources and

time, but there would be

little to no benefits due to

the extensive similarities

between the agencies’ rules.

The SEC’s external business conduct rules only impose additional or

different obligations on dealers relative to the parallel CFTC rules in a small

number of respects:

SBS dealers will likely be able to

satisfy the SEC’s expanded

disclosure rules and stricter

suitability safe harbor without

needing a new Protocol. However, a

new Protocol might be needed due to

small differences in the terms of the

representations that the SEC requires

in connection with other rules. To

address this issue, the SEC should:

•

The SEC’s disclosure rules require more information about a

counterparty’s clearing rights and a dealer’s valuation methods;

•

The SEC’s institutional suitability safe harbor is limited to entities

with more than $50 million in total assets and specified regulated

entities, such as banks and broker-dealers;

•

The SEC’s rules provide that an employee benefit plan that is not a

governmental plan or subject to the Employee Retirement Income

Security Act (“ERISA”) is considered to be a Special Entity unless

it opts out of that status, whereas such a plan is not a Special Entity

under the CFTC’s rules unless it opts into that status;

•

Permit an SBS dealer to consider

an employee benefit plan not to

be a Special Entity if the plan

previously represented it is not a

Special Entity for swap purposes

(i.e., it did not opt in), the SBS

dealer notifies the plan that it can

opt into Special Entity status for

SBS purposes, and the plan does

not do so;

•

The SEC’s safe harbor from an SBS dealer being deemed an advisor

to a Special Entity includes a prong for the Special Entity or its

fiduciary to acknowledge that the SBS dealer is not acting as an

advisor, whereas the parallel CFTC safe harbor provides for the

Special Entity or its fiduciary to represent that it is not relying on a

swap dealer’s recommendations;

•

As an alternative to receiving an

acknowledgment that the SBS

dealer is not acting as an advisor,

permit an SBS dealer to rely on a

representation that a Special

Entity or its representative is not

relying on the dealer’s

recommendations;

•

The SEC’s safe harbor from an SBS dealer being deemed an advisor

to an ERISA Special Entity requires that ERISA Special Entity to

represent that its fiduciary will review all recommendations

“involving” an SBS, whereas the parallel CFTC safe harbor provides

for the ERISA Special Entity to represent that its fiduciary will

review recommendations “materially affecting” a swap;

•

Clarify that, for a

communication to be considered

a “recommendation . .

involving” an SBS, the

communication must materially

affect an SBS;

11

June 21, 2018

Issue(s)

SEC Rule(s)

CFTC Rule(s)

•

The SEC’s safe harbor for non-ERISA Special Entities requires the

Special Entity’s representative to make representations regarding its

satisfaction of the SEC’s qualification requirements in addition to a

representation that it has policies and procedures reasonably

designed to ensure that it satisfies those requirements; and

•

The agencies’ qualification and independence requirements for a

non-ERISA Special Entity’s representative use slightly different

“statutory disqualification” and “associated person” definitions.

Recommendation(s)

•

•

12

Consistent with the SEC’s

decision to provide a safe harbor

permitting an SBS dealer to treat

an ERISA fiduciary as a

qualified independent

representative of an ERISA

Special Entity, provide a safe

harbor permitting an SBS dealer

to treat a representative of a nonERISA Special Entity that meets

CFTC-compliant qualification

and independence standards and

provides CFTC-compliant

representations regarding how it

meets those standards to be a

qualified independent

representative of that Special

Entity for SEC rule purposes;

and

Provide relief from requirements

that an SBS dealer obtain

representations in relation to

SBSs from a counterparty or

representative that previously

provided parallel representations

in relation to swaps if the SBS

dealer is not aware of

information that would cause a

reasonable person to question the

assumption that the facts

underlying those parallel

representations are the same for

SBSs as they are for swaps.

June 21, 2018

Issue(s)

•

Disclosure requirements

that go beyond what the

Dodd-Frank Act’s statutory

text requires have proven to

provide little benefit to

counterparties.

Capital, Margin and Segregation

Rules. The SEC originally proposed

its capital, margin and segregation

rules for SBS dealers in 2012,

drawing from existing broker-dealer

rules. Since 2012, the Basel

Committee and IOSCO have

published international standards for

margin rules, which were then

reflected in final rules adopted by the

U.S. Prudential Regulators (for bank

swap dealers and SBS dealers), the

CFTC (for nonbank swap dealers)

and numerous foreign jurisdictions.

Those rules have been in effect since

2016, and market participants have

adopted an industry standard initial

margin model (the “SIMM”) and

documentation designed to satisfy

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

Unlike the CFTC’s rules, the SEC’s rules (and the statute) do not require

dealers to provide counterparties with pre-trade mid-market marks and

scenario analysis.

The CFTC should amend its rules to

eliminate its pre-trade mid-market

marks and scenario analysis

requirements, consistent with the

SEC’s rules and the statute.

Under the SEC’s proposed capital,

margin and segregation rules, an

SBS dealer would be required to:

Under the CFTC’s final margin and

segregation rules and its proposed

capital rules, a swap dealer would be

required to:

In addition to addressing the broad

range of issues raised during the

comment process, the agencies

should take the following steps to

address the issues raised by

differences between their rules: 4

•

Calculate initial margin for

uncleared SBSs using either

standardized haircuts or, for nonequity SBSs only, an approved

internal model;

•

Calculate initial margin for all

types of uncleared swaps using

either standardized haircuts or an

approved initial margin model,

such as the SIMM;

•

•

Collect variation margin from all •

counterparties other than

commercial end-users and legacy

accounts, subject to a $100,000

minimum transfer amount

(shared with initial margin);

Collect and post variation margin

with all counterparties except

non-financial end-users, subject

to a $500,000 minimum transfer

amount (shared with initial

margin);

4

Consistent with the SEC’s

approach to cleared credit default

swaps held by a dually registered

broker-dealer/futures

commission merchant, the SEC

should permit a dually registered

SBS/swap dealer to portfolio

margin SBSs and swaps together

in accordance with either

agency’s margin and segregation

rules, subject to credit risk

capital charges as discussed

These recommendations focus on issues raised by differences between the agencies’ requirements. Other issues, such as the approval process for capital

models and the calibration of minimum capital requirements, are common across the capital rules proposed by the SEC and CFTC. Our comments also

addressed certain unique issues raised by the SEC’s margin and segregation proposal. See Letter from Kenneth E. Bentsen, Jr., Executive Vice President, Public

Policy and Advocacy, SIFMA, to the SEC, dated February 22, 2013; Letter from Sarah A. Miller, Chief Executive Officer, Institute of International Banks, to the

CFTC, dated May 15, 2017; and Letter from Mary Kay Scucci, Managing Director, SIFMA, to the CFTC, dated May 15, 2017.

13

June 21, 2018

Issue(s)

them. In addition, in 2016 the CFTC

proposed capital rules for nonbank

swap dealers that would, for dual

registrants, overlap with the SEC’s

capital rules. Inconsistencies

between SEC and CFTC capital,

margin, and segregation rules will

make nonbank SBS dealers

uncompetitive with bank SBS

dealers, especially if they prevent

nonbank SBS dealers from using the

SIMM—instead requiring them to

use less risk-sensitive calculation

methods than bank SBS dealers who

can use the SIMM to calculate initial

margin under the Prudential

Regulators’ margin rules—or

penalize them for trading with

counterparties who elect to segregate

initial margin at a third-party

custodian.

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

•

Collect initial margin from all

•

counterparties other than

commercial end-users and legacy

accounts, subject to a $100,000

minimum transfer amount

(shared with variation margin).

The SEC also proposed an

alternative under which initial

margin requirements would not

apply to uncleared SBSs

between SBS dealers;

Collect and post initial margin

with all swap dealers, all major

swap participants, and all

financial end-users with a

material swaps exposure, subject

to a $500,000 minimum transfer

amount (shared with variation

margin) and a $50 million initial

margin threshold;

•

Apply possession or control and

reserve account requirements to

SBS counterparties’ collateral,

unless a counterparty elects use

of a third-party custodian (a right

that the Dodd-Frank Act grants

them) or waives segregation

entirely; and

•

Segregate all required initial

margin at an unaffiliated, thirdparty custodian and offer

segregation at a third-party

custodian for any other initial

margin; and

•

The CFTC, in turn, should

expand its existing relief

allowing a swap dealer to collect

and post margin on a portfolio

basis for swaps and SBSs under

the CFTC’s margin rules (NoAction Letter No. 16-71) by

reciprocally allowing a dually

registered swap/SBS dealer to

portfolio margin swaps and

SBSs under the SEC’s margin

rules. This relief would also

provide benefits allowing

customers of a broker-dealer that

is also a swap/SBS dealer to

portfolio margin their swaps and

SBSs with related cash securities

positions.

•

Except for uncleared SBSs with

•

commercial end-users, apply a

capital charge to the extent of

any margin not collected by the

SBS dealer, including margin not

collected from legacy accounts,

and initial margin held at a thirdparty custodian.

If the swap dealer has an

approved internal model, apply a

risk-weighted credit risk charge

calculated using that model to

the extent of any uncollateralized

current or potential future

exposure.

•

Instead of a capital charge to the

extent of initial margin that an

SBS dealer is not required to

collect (e.g., because of an

exception, such as for legacy

accounts, or an initial margin

threshold), the SEC should apply

a risk-weighted credit risk

charge, similar to the CFTC’s

14

below, concentration risk capital

charges, risk management

procedures, and waiver of

securities customer protection

rules in favor of CFTC

segregation rules by those

customers who choose to margin

SBSs under the CFTC’s rules.

June 21, 2018

Issue(s)

SEC Rule(s)

CFTC Rule(s)

Recommendation(s)

2016 capital proposal and the

SEC’s existing approach for

alternative net capital brokerdealers and OTC derivatives

dealers. If an SBS dealer uses a

third-party custodian to

segregate initial margin collected

from a counterparty (e.g.,

because the counterparty elects

segregation) and the custody

agreement provides the SBS

dealer with prompt access to that

initial margin in the event of

counterparty default, the SBS

dealer should not face a capital

charge; if the agreement does not

satisfy this standard, then the

SEC should apply a riskweighted credit risk charge to

the SBS dealer instead of a

capital charge to the extent of

initial margin segregated at the

custodian. The SEC should also

allow SBS dealers to rely on

relief previously granted to

broker-dealers posting initial

margin in connection with

swaps. Unsecured current

exposure should be subject to a

100 percent capital charge

except for exposure to

commercial end-users.

15

June 21, 2018

Issue(s)

Foreign dealers are subject to home

country margin and capital

requirements that overlap or will

overlap with CFTC and SEC rules.

Simultaneously complying with

overlapping but inconsistent

requirements will lead to competitive

disparities and impair effective risk

management to such a degree that

some foreign dealers may cease

participating in the U.S. market so as

to avoid triggering U.S. dealer

registration requirements that will

lead to these issues.

SEC Rule(s)

•

A foreign SBS dealer is

potentially eligible to substitute

compliance with comparable

home country capital and margin

requirements.

CFTC Rule(s)

•

16

A foreign swap dealer is

potentially eligible to substitute

compliance with comparable

home country capital and margin

requirements, and the CFTC has

made comparability

determinations permitting such

substituted compliance in

connection with EU and

Japanese margin requirements.

Recommendation(s)

•

Both the CFTC and SEC should

permit a foreign dealer to

substitute compliance with home

country capital and margin

requirements (and the related

financial recordkeeping and

reporting requirements) that are

consistent with applicable

international standards (like the

CFTC has already done in

connection with EU and

Japanese margin requirements),

without imposing additional

conditions that could interfere

with reliance on home country

regulations.