# Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2014-09108 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** May 2, 2014 - **Citation:** 79 FR 25194 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249 [Release No. 34-71958; File No. S7-05-14] RIN 3235-AL45 Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Securities and Exchange Commission (“Commission”), pursuant to the Securities Exchange Act of 1934 (“Exchange Act”), is proposing recordkeeping, reporting, and notification requirements applicable to security-based swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”), securities count requirements applicable to certain SBSDs, and additional recordkeeping requirements applicable to broker-dealers to account for their security-based swap and swap activities. The Commission also is proposing an additional capital charge provision that would be added to the proposed capital rule for certain SBSDs. Finally, the Commission is proposing technical amendments to the broker-dealer recordkeeping, reporting, and notification requirements. DATES: Comments should be received on or before July 1, 2014. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( http://www.sec.gov/rules/proposed.shtml ); or • Send an email to rule-comments@sec.gov. Please include File Number S7-05-14 on the subject line; or • Use the Federal eRulemaking Portal ( http://www.regulations.gov ). Follow the instructions for submitting comments. Paper Comments • Send paper comments to Kevin M. O'Neill, Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-05-14. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/proposed.shtml ). Comments also are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W. Roy, Assistant Director, at (202) 551-5522; Denise Landers, Senior Special Counsel, at (202) 551-5544; Raymond A. Lombardo, Branch Chief, at (202) 551-5755; Timothy C. Fox, Special Counsel at (202) 551-5687; or Valentina Minak Deng, Special Counsel, at (202) 551-5778, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010. SUPPLEMENTARY INFORMATION: Table of Contents I. Background II. Proposed Rules and Rule Amendments A. Recordkeeping 1. Introduction 2. Records To Be Made and Kept Current 3. Record Maintenance and Preservation Requirements B. Reporting 1. Introduction 2. Periodic Filing of Proposed Form SBS 3. Filing of Annual Audited Financial Reports and Other Reports C. Notification 1. Introduction 2. Amendments to Rule 17a-11 and Proposed Rule 18a-8 3. Additional Proposed Amendments to Rule 17a-11 D. Quarterly Securities Count and Capital Charge for Unresolved Securities Differences 1. Introduction 2. Proposed Rule 18a-9 3. Capital Charge III. General Request for Comment IV. Paperwork Reduction Act A. Summary of Collections of Information Under the Proposed Rules and Proposed Rule Amendments 1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5 2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6 3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7 4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8 5. Proposed Rule 18a-9 B. Proposed Use of Information C. Respondents D. Total Initial and Annual Recordkeeping and Reporting Burden 1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5 2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6 3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7 4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8 5. Proposed Rule 18a-9 E. Collection of Information Is Mandatory G. Retention Period for Recordkeeping Requirements H. Request for Comment V. Economic Analysis A. Introduction B. Baseline of Economic Analysis 1. OTC Derivatives Market 2. OTC Derivatives Market Participants and Broker-Dealers C. Analysis of the Proposed Program and Alternatives 1. Overview—The Proposed Recordkeeping, Reporting, Notification, and Securities Count Program 2. Alternatives to the Proposed Recordkeeping, Reporting, Notification, and Securities Count Rules 3. Requirements To Make and Keep Records 4. Requirements To Preserve Records 5. Reporting 6. Notification Requirements 7. Quarterly Securities Count D. Impact on Efficiency, Competition, and Capital Formation E. Implementation Considerations VI. Regulatory Flexibility Act Certification VII. Small Business Regulatory Enforcement Fairness Act VIII. Statutory Basis and Text of the Proposed Amendments and New Rules I. Background On July 21, 2010, President Obama signed the Dodd-Frank Act into law. 1 Title VII of the Dodd-Frank Act (“Title VII”) established a new regulatory framework for the over-the-counter (“OTC”) derivatives markets. 2 In this regard, Title VII was enacted, among other reasons, to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and regulation of SBSDs and MSBSPs; (2) imposing clearing and trade execution requirements on swaps and security-based swaps, subject to certain exceptions; (3) creating recordkeeping and real-time reporting regimes; and (4) enhancing the Commission's rulemaking and enforcement authorities with respect to all registered entities and intermediaries subject to the Commission's oversight. 3 1 See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010). 2 Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and Accountability Act of 2010.” See Public Law 111-203, 701. The Dodd-Frank Act assigns responsibility for the oversight of the U.S. OTC derivatives markets to the Commission, the Commodity Futures Trading Commission (“CFTC”), and certain prudential regulators. The term prudential regulator is defined in section 1(a)(39) of the Commodity Exchange Act (“CEA”) (7 U.S.C. 1(a)(39)) and that definition is incorporated by reference in section 3(a)(74) of the Exchange Act (15 U.S.C. 78c(a)(74)). Pursuant to the definition, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), the Farm Credit Administration, or the Federal Housing Finance Agency (collectively, the “prudential regulators”) is the prudential regulator of an SBSD, MSBSP, swap participant, or major swap participant if the entity is directly supervised by that agency. The Commission has oversight authority with respect to a security-based swap as defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)), including to implement a registration and oversight program for a security-based swap dealer as defined in section 3(a)(71) of the Exchange Act (15 U.S.C. 78c(a)(71)) and a major security-based swap participant as defined in section 3(a)(67) of the Exchange Act (15 U.S.C. 78c(a)(67)). The CFTC has oversight authority with respect to a swap as defined in section 1(a)(47) of the CEA (7 U.S.C. 1(a)(47)), including to implement a registration and oversight program for a swap dealer as defined in section 1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) and a major swap participant as defined in section 1(a)(33) of the CEA (7 U.S.C. 1(a)(33)). The Commission and the CFTC jointly have adopted rules to further define, among other things, the terms swap, swap dealer, major swap participant, security-based swap, security-based swap dealer, and major security-based swap participant. See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012) (joint Commission/CFTC final rule); Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (joint Commission/CFTC final rule). 3 See Public Law 111-203, 701 through 774. Section 764 of the Dodd-Frank Act added section 15F to the Exchange Act. 4 Section 15F(f)(2) provides that the Commission shall adopt rules governing reporting and recordkeeping for SBSDs and MSBSPs. 5 Section 15F(f)(1)(A) provides that SBSDs and MSBSPs shall make such reports as are required by the Commission, by rule or regulation, regarding the transactions and positions and financial condition of the SBSD or MSBSP. 6 Section 15F(f)(1)(B)(ii) provides that SBSDs and MSBSPs without a prudential regulator (respectively, “nonbank SBSDs” and “nonbank MSBSPs”) shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. 7 Section 15F(f)(1)(B)(i) provides that SBSDs and MSBSPs for which there is a prudential regulator (respectively, “bank SBSDs” and “bank MSBSPs”) shall keep books and records of all activities related to their business as an SBSD or MSBSP in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. 8 Section 15F(g) of the Exchange Act requires SBSDs and MSBSPs to maintain daily trading records with respect to security-based swaps and provides that the Commission shall adopt rules governing daily trading records for SBSDs and MSBSPs. 9 Finally, section 15F(i)(2) of the Exchange Act provides that the Commission shall adopt rules governing documentation standards for SBSDs and MSBSPs. 10 4 See Public Law 111-203, 764; 15 U.S.C. 78o-10. 5 See 15 U.S.C. 78o-10(f)(2). 6 See 15 U.S.C. 78o-10(f)(1). 7 See 15 U.S.C. 78o-10(f)(1)(B)(ii). A nonbank SBSD or nonbank MSBSP could be dually registered with the Commission as a broker-dealer (respectively, a “broker-dealer SBSD” or “broker-dealer MSBSP”) or registered with the Commission only as an SBSD or MSBSP (respectively, a “stand-alone SBSD” or “stand-alone MSBSP”). Any of these registrants or a bank SBSD or bank MSBSP also could register with the CFTC as a futures commission merchant (“FCM”), swap dealer, or major swap participant. 8 See 15 U.S.C. 78o-10(f)(1)(B)(i). 9 See 15 U.S.C. 78o-10(g). 10 See 15 U.S.C. 78o-10(i). The Commission anticipates that a number of broker-dealers will register as SBSDs (broker-dealer SBSDs) or potentially as MSBSPs (“broker-dealer MSBSPs). 11 Further, the Commission expects that some broker-dealers that are not registered as an SBSD or an MSBSP nonetheless will engage in security-based swap and swap activities. 12 The Commission has authority under section 17(a)(1) of the Exchange Act to adopt rules requiring broker-dealers—which would include broker-dealer SBSDs and broker-dealer MSBSPs—to make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. 13 The Commission also is proposing largely technical amendments to the broker-dealer recordkeeping, reporting, and notification rules. 14 11 While it is anticipated that some broker-dealers and banks will register as SBSDs in order to engage in security-based swap activities, it is unclear whether broker-dealers or banks will register as MSBSPs. For example, a broker-dealer or bank may be required to register as an MSBSP because of the nature of its security-based swap activities. See 15 U.S.C. 78a(c)(67) (defining the term major security-based swap participant ); Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, 77 FR 30596 (further defining the term major security-based swap participant ). In this case, the broker-dealer or bank may conclude that it is more efficient to register as an SBSD in order to engage in security-based swap activities permitted of an SBSD but not of an MSBSP. Nonetheless, because a broker-dealer or bank could register as an MSBSP, the proposed rules and the discussion in this release contemplate these categories of registrants. A broker-dealer MSBSP would be subject to all the securities laws applicable to a broker-dealer, including capital, margin, segregation, recordkeeping, reporting, notification, and securities count requirements, and to any additional requirements that would be applicable only to MSBSPs. Similarly, a bank MSBSP would be subject to all laws and regulations applicable to a bank and to any additional requirements that would be applicable only to MSBSPs. 12 The term security-based swap dealer is defined in section 3(a)(71) of the Exchange Act. See 15 U.S.C. 78c(a)(71). The definition excludes an entity that enters into security-based swaps agreements for its own account, either individually or in a fiduciary capacity, but not as a part of a regular business. See 15 U.S.C. 78c(a)(71)(C). Further, section 3(a)(71)(D) provides that the Commission shall exempt from designation as an SBSD an entity that engages in a de minimis quantity of security-based swap dealing in connection with transactions with or on behalf of its customers and that the Commission shall promulgate regulations to establish factors with respect to the making of any determination to exempt. See 15 U.S.C. 78c(a)(71)(D). The Commission has adopted Rule 3a71-2 to establish a de minimis exception under section 3(a)(71)(D) of the Exchange Act. See 17 CFR 240.3a71-2; Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, 77 FR 30635-30643. 13 See 15 U.S.C. 78q(a)(1). Section 771 of the Dodd-Frank Act states that unless otherwise provided by its terms, Subtitle B of Title VII (relating to the regulation of the security-based swap markets) does not divest any appropriate Federal banking agency, the Commission, the CFTC, or any other Federal or State agency, of any authority derived from any other provision of applicable law. See Public Law 111-203, 771. 14 See 17 CFR 240.17a-3 (“Rule 17a-3”); 17 CFR 240.17a-4 (“Rule 17a-4”); 17 CFR 240.17a-5 (“Rule 17a-5”); 17 CFR 240.17a-11 (“Rule 17a-11”). The Dodd-Frank Act amended the definition of security in section 3(a)(10) of the Exchange Act to include a security-based swap. See Public Law 111-203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, the term security as used in Rules 17a-3, 17a-4, 17a-5, and 17a-11 includes a security-based swap, and any requirement in those rules relating to a security applies to a security-based swap. The Commission, however, has issued temporary exemptive relief to address the effect that the amendment to the definition of security would have on requirements in Exchange Act provisions and rules that did not otherwise apply specifically to security-based swaps prior to the amendment. See Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Pending Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment, Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7, 2011) (“[R]egistered broker-dealers will solely be exempt from those provisions and rules to the extent that those provisions or rules do not apply to the broker's or dealer's security-based swap positions or activities as of July 15, 2011—the day before the effectiveness of the change to the “security” definition. In other words, during the exemptive period the application of current law will remain unchanged, and those particular Exchange Act requirements will continue to apply to registered broker-dealers' security-based swap activities and positions to the same extent they apply currently. This approach is intended to help avoid undue market disruptions resulting from the change to the “security” definition, while at the same time preserving the current application of those particular provisions or rules to security-based swap activity by registered broker-dealers. Thus, under this approach of preserving the status quo, no exemption will be provided in connection with the [requirements in Exchange Act sections 17(a) and 17(b) and Rules 17a-3, 17a-4, 17a-5, 17a-8, and 17a-13] under the Exchange Act to the extent that those requirements currently apply to registered broker-dealer activities or positions involving instruments that will be security-based swaps (but registered broker-dealers will be exempted in connection with those requirements to the extent that the requirements do not already apply to activities or positions involving those instruments.”); Order Extending Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment, Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218 (Feb. 13, 2013) (extending exemptive relief through February 11, 2014); Order Extending Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment, Exchange Release No. 71485 (Feb. 5, 2014) (extending exemptive relief with respect to Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13 until the earliest compliance date set forth in any final rules regarding recordkeeping and reporting requirements for SBSDs and MSBSPs). The Commission expects that the adoption of the amendments contemplated herein would eliminate the need for temporary exemptive relief from section 17(a) and section 17(b) of the Exchange Act and Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13 thereunder. Pursuant to sections 15F and 17(a) of the Exchange Act, the Commission is proposing to amend Rules 17a-3, 17a-4, 17a-5, and 17a-11 to establish a recordkeeping, reporting, and notification program for broker-dealer SBSDs and broker-dealer MSBSPs. The amendments to Rules 17a-3 and 17a-4 would establish additional recordkeeping requirements applicable to broker-dealers that are not dually registered as an SBSD or MSBSP to the extent they engage in security-based swap or swap activities. Pursuant to section 15F of the Exchange Act, the Commission is proposing new Rules 18a-5 through 18a-9. 15 These new rules would establish a recordkeeping, reporting, and notification program for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, and securities count requirements for stand-alone SBSDs. 16 In addition, pursuant to sections 15F and 17(a) of the Exchange Act, the Commission is proposing new FOCUS Report Form SBS (“Form SBS”) that would be used by all types of SBSDs and MSBSPs to report financial and operational information and, in the case of broker-dealer SBSDs and broker-dealer MSBSPs, replace their use of Part II, Part IIA, Part IIB, or Part II CSE of the Financial and Operational Combined Uniform Single Report (“FOCUS Report”). 17 15 The Commission has proposed new Rules 18a-1 through 18a-4 to establish capital and margin requirements for SBSDs and MSBSPs, segregation requirements for SBSDs, and notification requirements with respect to segregation for SBSDs and MSBSPs. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012). 16 The Commission is not proposing securities count requirements for stand-alone MSBSPs or bank SBSDs. Broker-dealer SBSDs and broker-dealer MSBSPs would be subject to the existing securities count rule applicable to broker-dealers—Rule 17a-13. 17 CFR 240.17a-13. The Commission is not proposing amendments to Rule 17a-13. While in this release Rule 17a-11 is referred to as a notification rule and Rule 17a-13 is referred to as a securities count rule, Rule 17a-11 can be viewed as a reporting rule and Rule 17a-13 can be viewed as a recordkeeping rule. See Prompt Notice of Net Capital or Recordkeeping Violations, Exchange Act Release No. 9268 (July 29, 1971), 36 FR 14725 (Aug. 11, 1971) (adopting Rule 17a-11, in part, under section 17(a) of Exchange Act, which, as discussed above, requires a broker-dealer to make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the Exchange Act); Quarterly Securities Counts by Certain Exchange Members, Brokers and Dealers, Exchange Act Release No. 9376 (Oct. 29, 1971), 36 FR 21178 (Nov. 4, 1971) (similarly adopting Rule 17a-13, in part, under section 17(a) of Exchange Act). 17 A broker-dealer must file the FOCUS Report Part II, Part IIA, Part IIB, or Part II CSE depending on the type of broker-dealer. A more detailed discussion of the FOCUS Report appears below in section II.B.2. of this release. The proposed new rules are modeled on broker-dealer Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13, and on the FOCUS Report. Specifically: (1) Proposed Rules 18a-5 and 18a-6 (the new recordkeeping rules) are modeled on Rules 17a-3 and 17a-4, respectively (the broker-dealer recordkeeping rules); 18 (2) proposed Rule 18a-7 and proposed Form SBS (the new reporting rules) are modeled on Rule 17a-5 and on the FOCUS Report, respectively (the broker-dealer reporting rules); 19 (3) proposed Rule 18a-8 (the new notification rule) is modeled on Rule 17a-11 (the broker-dealer notification rule); 20 and (4) proposed Rule 18a-9 (the new securities count rule) is modeled on the Rule 17a-13 (the broker-dealer securities count rule). 21 18 Compare proposed Rule 18a-5, with 17 CFR 240.17a-3; compare proposed Rule 18a-6, with 17 CFR 240.17a-4. 19 Compare proposed Rule 18a-7, with 17 CFR 240.17a-5; compare proposed Form SBS, with the FOCUS Report. 20 Compare proposed Rule 18a-8, with 17 CFR 240.17a-11. 21 Compare proposed Rule 18a-9, with 17 CFR 240.17a-13. The broker-dealer recordkeeping, reporting, notification, and security count requirements served as the model for the proposals because SBSDs and MSBSPs are expected to operate in financial markets and effect financial transactions that are similar to the financial markets in which broker-dealers operate and the financial transactions that broker-dealers effect. 22 In addition, as discussed below, the objectives of these broker-dealer requirements are similar to the objectives underlying the proposals regarding security-based swaps. Moreover, the broker-dealer requirements have existed for many years and have established a system of recordkeeping for securities transactions that reflect and support prudent business practices and accountability of broker-dealers and have facilitated the ability of securities regulators to review and monitor compliance with securities laws. 23 Consequently, the Commission preliminarily believes the broker-dealer requirements provide an appropriate template on which to model a recordkeeping, reporting, and notification program for SBSDs and MSBSPs and a securities count program for SBSDs. Furthermore, as discussed above, it is expected that some nonbank SBSDs will dually register as broker-dealers in order to be able to offer customers a broader range of securities-based services than would be permitted of a nonbank SBSD. 24 Therefore, establishing consistent requirements could avoid potential competitive disparities between stand-alone SBSDs and broker-dealer SBSDs with respect to their security-based swap business. 22 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70216 (stating a similar rationale for basing the proposed capital, margin, and segregation requirements for SBSDs on the broker-dealer capital, margin, and segregation requirements). 23 See, e.g., Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media Under the Electronic Signatures in Global and National Commerce Act of 2000 With Respect to Rule 17a-4(f), Exchange Act Release No. 44238 (May 1, 2001), 66 FR 22916 (May 7, 2001). 24 Although a broker-dealer SBSD would be able to offer customers a broader range of securities-based services than a bank SBSD, bank SBSDs are not expected to register as broker-dealers because of the regulatory burden associated with complying with the requirements applicable to all three types of entities. Additionally, in accordance with Title VII, the Commission recently proposed, among other things, capital and margin requirements applicable to nonbank SBSDs and nonbank MSBSPs, and segregation requirements applicable to SBSDs. 25 The capital, margin, and segregation proposals that would be applicable to SBSDs were modeled on the capital, margin, and segregation requirements that are applicable to broker-dealers. 26 The broker-dealer capital, margin, segregation, recordkeeping, reporting, notification, and securities count requirements are known collectively as the broker-dealer financial responsibility rules. 27 The financial responsibility rules collectively establish a comprehensive regulatory program designed to promote the prudent operation of broker-dealers and the safeguarding of customer securities and funds held by broker-dealers. The recordkeeping, reporting, notification, and securities count requirements applicable to broker-dealers are an integral part of the financial responsibility rules as they are designed to provide transparency into the business activities of broker-dealers and to assist the Commission and other securities regulators in reviewing and monitoring compliance with the capital, margin, and segregation requirements. Similarly, the proposed recordkeeping, reporting, notification, and securities count requirements applicable to SBSDs and MSBSPs along with the proposed capital, margin, and segregation requirements for these registrants are designed to establish a comprehensive financial responsibility program for SBSDs and MSBSPs. Like the broker-dealer rules, the proposed recordkeeping, reporting, notification, and securities count requirements applicable to SBSDs and MSBSPs are designed to provide transparency into the business activities of SBSDs and MSBSPs and assist the Commission in reviewing and monitoring compliance with the proposed capital, margin, and segregation requirements applicable to SBSDs and MSBSPs. 25 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70213. 26 Id. See also 17 CFR 240.15c3-1 (the broker-dealer capital rule); FINRA Rules 4210 through 4240 (certain broker-dealer margin rules); 17 CFR 240.15c3-3 (the broker-dealer segregation rule). 27 See 17 CFR 240.3a40-1. While the proposed recordkeeping, reporting, notification, and securities count rules are modeled on the broker-dealer rules, stand-alone SBSDs and stand-alone MSBSPs will not engage in the same range of activities permitted of broker-dealers. For example, broker-dealers are permitted to act as dealers with respect to all types of securities, whereas stand-alone SBSDs would be permitted to act as dealers only with respect to security-based swaps and stand-alone MSBSPs would not be permitted to act as dealers with respect to any types of securities. Consequently, the proposed requirements in the new rules applicable to stand-alone SBSDs and stand-alone MSBSPs reflect these differences and are narrower in scope than those applicable to broker-dealer SBSDs and broker-dealer MSBSPs. Further, the proposed requirements applicable to bank SBSDs and bank MSBSPs are narrower in scope than those applicable to stand-alone SBSDs and stand-alone MSBSPs for three reasons. First, as noted above, the recordkeeping and reporting requirements for bank SBSDs and bank MSBSPs—unlike those for nonbank SBSDs and nonbank MSBSPs—must be related to their business as an SBSD or MSBSP. 28 Second, as banks, these registrants are subject to existing recordkeeping and reporting requirements administered by the prudential regulators and therefore to avoid potentially duplicative or conflicting requirements, the Commission has proposed fewer requirements for these entities. Third, the prudential regulators—rather than the Commission—will administer the capital, margin, and other prudential requirements applicable to bank SBSDs and bank MSBSPs and, as noted above, one of the purposes of the proposed recordkeeping requirements is to assist the Commission in reviewing and monitoring compliance with the proposed capital and margin rules applicable to nonbank SBSDs and nonbank MSBSPs, which the Commission will administer. 29 28 Compare 15 U.S.C. 78o-10(f)(1)(B)(i), with 15 U.S.C. 78o-10(f)(1)(B)(ii) and 15 U.S.C. 78q(a). As noted above, section 15F(f)(1)(B)(i) of the Exchange Act provides that each bank SBSD and bank MSBSP shall keep books and records of all activities related to the business as an SBSD or MSBSP in such form and manner and for such period as may be prescribed by the Commission by rule or regulation (emphasis added). See 15 U.S.C. 78o-10(f)(1)(B)(i). Whereas, section 15F(f)(1)(B)(ii) of the Exchange Act provides that each nonbank SBSD and nonbank MSBSP shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. See 15 U.S.C. 78o-10(f)(1)(B)(ii). Further, section 17(a) of the Exchange Act provides that broker-dealers shall make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. See 15 U.S.C. 78q(a). 29 Section 15F(e)(1)(A) of the Exchange Act provides that the prudential regulators shall prescribe capital and margin requirements for bank SBSDs and bank MSBSPs, and section 4s(e)(1)(A) of the CEA provides that the prudential regulators shall prescribe capital and margin requirements for swap dealers and major swap participants for which there is a prudential regulator (“bank swap dealers” and “bank swap participants”). See 15 U.S.C. 78o-10(e)(1)(A); 7 U.S.C. 6s(e)(1)(A). The prudential regulators have proposed capital and margin requirements for bank swap dealers, bank SBSDs, bank swap participants, and bank MSBSPs. See Margin and Capital Requirements for Covered Swap Entities, 76 FR 27564 (May 11, 2011). The Commission recognizes that there may be alternative recordkeeping, reporting, notification, and securities count programs that could be used as a model to design a recordkeeping, reporting, notification, and securities count program for SBSDs and MSBSPs. Accordingly, in response to the requests for comment in this release, interested parties are encouraged to consider whether alternative approaches would be appropriate for SBSDs and MSBSPs generally as well as for each type of potential registrant—broker-dealer SBSD, broker-dealer MSBSP, stand-alone SBSD, stand-alone MSBSP, bank SBSD, and bank MSBSP—taking into account the unique characteristics and activities of each type of potential registrant. Some of the current rules that are proposed to be amended and the proposed new rules prescribe recordkeeping or reporting requirements based on requirements in other rules that have been proposed but not yet adopted. For example, Rules 17a-3 and 17a-4, as proposed to be amended, and proposed Rules 18a-5 and 18a-6 would directly or indirectly cross-reference requirements in proposed Rule 901 of Regulation SBSR and proposed Rules 15Fh-1 through 15Fh-6 and proposed Rule 15Fk-1. 30 Similarly, Rules 17a-3, 17a-4, 17a-5, and 17a-11, as proposed to be amended, and proposed Rules 18a-5, 18a-6, 18a-7, and 18a-8 cross-reference requirements in the proposed capital, margin, and segregation requirements for SBSDs and MSBSPs. 31 If a cross-referenced rule is modified from the proposal when adopted, the Commission intends to make any necessary corresponding modifications to the rules proposed in this release when they are adopted. 30 See section II.A. of this release. 31 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70213. Finally, the Commission also is proposing to add a capital charge provision to proposed Rule 18a-1. 32 Proposed Rule 18a-1 would establish net capital requirements for stand-alone SBSDs and is modeled on Rule 15c3-1 under the Exchange Act (the broker-dealer net capital rule) (“Rule 15c3-1”). 33 The capital charge provision that would be added to proposed Rule 18a-1, which is modeled on a provision in Rule 15c3-1, was inadvertently omitted from proposed Rule 18a-1 when originally proposed. The Commission preliminarily believes that proposed Rule 18a-1 should include a provision that parallels the capital charge in Rule 15c3-1. 32 This proposal is discussed below in greater detail in section II.D.3. of this release. 33 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70217-70257. The Commission staff consulted with staff from the prudential regulators and the CFTC in drafting the proposals discussed in this release. 34 In addition, the proposals of the CFTC were considered in developing the Commission's proposed recordkeeping, reporting, notification and securities count rules for SBSDs and MSBSPs. 34 See Public Law 111-203, 712(a)(2). The CFTC has adopted recordkeeping and reporting rules for swap dealers and major swap participants. See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3, 2012). Request for Comment The Commission requests comment on the general approach that would require SBSDs and MSBSPs to comply with recordkeeping, reporting, notification, and securities count rules modeled on the broker-dealer recordkeeping, reporting, notification, and securities count rules. In addition, the Commission requests comment, including empirical data in support of comments, in response to the following questions: 1. Will the entities that register as nonbank SBSDs engage in a securities business with respect to security-based swaps that is similar to the securities business conducted by broker-dealers? If not, describe how the securities activities of nonbank SBSDs will differ from the securities activities of broker-dealers. 2. Will the entities that register as bank SBSDs engage in a securities business with respect to security-based swaps that is similar to the securities business conducted by broker-dealers? If not, describe how the securities activities of bank SBSDs will differ from the securities activities of broker-dealers. 3. How many broker-dealers will register as SBSDs? Describe the types of broker-dealers that will register as SBSDs and the types of activities these broker-dealers currently engage in? How many banks will register as SBSDs? Describe the types of banks that will register as SBSDs and the types of activities these banks currently engage in? 4. How many entities will register as MSBSPs? What types of entities? How many broker-dealers will register as MSBSPs? How many banks will register as MSBSPs? 5. Are there requirements in these proposed rules applicable to broker-dealer SBSDs and broker-dealer MSBSPs but currently not applicable to stand-alone SBSDs or stand-alone MSBSPs that should be applicable to standalone SBSDs or stand-alone MSBSPs, or vice versa? 6. Are there requirements in these proposed rules applicable to broker-dealer SBSDs and broker-dealer MSBSPs but currently not applicable to bank SBSDs or bank MSBSPs that should be applicable to bank SBSDs or bank MSBSPs, or vice versa? 7. Are there provisions in the rules that the CFTC adopted governing recordkeeping and reporting obligations of swap dealers and major swap participants that the Commission should consider incorporating into the recordkeeping and reporting requirements for SBSDs and MSBSPs? If so, please identify the specific provision and explain why the Commission should incorporate it. 8. In the release adopting a further definition of major security-based swap participant, the Commission stated that an entity's security-based swap positions in general would be attributed to a parent, other affiliate, or guarantor for purposes of the MSBSP analysis to the extent that the counterparties to those positions would have recourse to that other entity in connection with the position. 35 The Commission further stated that an entity that becomes an MSBSP by virtue of security-based swaps directly entered into by others must be responsible for compliance with all applicable requirements with respect to those security-based swaps (and must be liable for failures to comply), but may delegate operational compliance with transaction-focused requirements to entities that directly are party to the transactions. 36 The Commission stated its preliminary belief that the same approach should apply in the cross-border context when the guarantor and the guaranteed persons are located in different jurisdictions. 37 The Commission preliminarily believes that certain of the recordkeeping requirements that would be applicable to MSBSPs under the proposed amendments are transaction-focused and, therefore, that an MSBSP may delegate operational compliance with them to the entities that are directly a party to the transaction. 38 For example, the Commission preliminarily believes that the proposed requirements discussed below in section II.A.2. of this release under which MSBSPs would need to make and keep current memoranda of proprietary orders, confirmations, accountholder information, and records relating to certain business conduct standards are transaction-focused. Similarly, the proposed requirements to retain communications relating to the MSBSP's “business as such” are transaction-focused. On the other hand, the Commission preliminarily believes that other recordkeeping requirements proposed for MSBSPs are entity-level requirements and, therefore an MSBSP would not be permitted to delegate operational compliance with respect to these requirements to other entities. For example, the Commission preliminarily believes that the proposed requirement that an MSBSP make and keep current a general ledger (or other records) reflecting all assets and liabilities, income and expense, and capital accounts is an entity-level requirement. Commenters are asked to identify which of the recordkeeping requirements applicable to MSBSPs in proposed new Rules 18a-5 and 18a-6 that they believe are transaction-focused and to explain their reasons for identifying them as such. Commenters also are asked to identify any operational compliance challenges with respect to the proposed recordkeeping requirements raised by attributing guaranteed security-based swap positions to an MSBSP. 35 See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, 77 FR 30689. 36 Id. 37 See Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30968, 31034 (May 23, 2013). 38 The Commission preliminarily believes that the proposed reporting and notification requirements that would be applicable to MSBSPs are not transaction-focused and, therefore, the MSBSP could not delegate operation compliance with respect to these requirements to other entities. II. Proposed Rules and Rule Amendments A. Recordkeeping 1. Introduction As discussed above in section I. of this release, section 15F(f)(2) of the Exchange Act provides that the Commission shall adopt rules governing recordkeeping for SBSDs and MSBSPs. 39 The Commission also has concurrent authority under section 17(a)(1) of the Exchange Act to prescribe recordkeeping requirements for broker-dealers. 40 Further, section 15F(f)(1)(B)(i) of the Exchange Act provides that each bank SBSD and bank MSBSP shall keep books and records of all activities related to its business as an SBSD or MSBSP in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. 41 Section 15F(f)(1)(B)(ii) provides that each nonbank SBSD and nonbank MSBSP shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. 42 39 See 15 U.S.C. 78o-10(f)(2). 40 See 15 U.S.C. 78q(a)(1). 41 See 15 U.S.C. 78o-10(f)(1)(B)(i). 42 See 15 U.S.C. 78o-10(f)(1)(B)(ii). Section 15F(g) of the Exchange Act prescribes statutory recordkeeping requirements applicable to SBSDs and MSBSPs and requires the Commission to adopt rules with respect to these statutory requirements. 43 In particular, section 15F(g)(1) provides that each registered SBSD and MSBSP shall maintain daily trading records of the security-based swaps of the registered SBSD and MSBSP and all related records (including related cash or forward transactions) and recorded communications, including electronic mail, instant messages, and recordings of telephone calls, for such period as may be required by the Commission by rule or regulation. 44 Section 15F(g)(2) provides that the daily trading records shall include such information as the Commission shall require by rule or regulation. 45 Section 15F(g)(3) provides that each registered SBSD and MSBSP shall maintain daily trading records for each counterparty in a manner and form that is identifiable with each security-based swap transaction. 46 Section 15F(g)(4) provides that each registered SBSD and MSBSP shall maintain a complete audit trail for conducting comprehensive and accurate trade reconstructions. 47 Finally, section 15F(g)(5) provides that the Commission shall adopt rules governing daily trading records for SBSDs and MSBSPs. 48 43 See 15 U.S.C. 78o-10(g). 44 See 15 U.S.C. 78o-10(g)(1). 45 See 15 U.S.C. 78o-10(g)(2). 46 See 15 U.S.C. 78o-10(g)(3). 47 See 15 U.S.C. 78o-10(g)(4). 48 See 15 U.S.C. 78o-10(g)(5). Section 15F(i)(1) of the Exchange Act provides that each registered SBSD and MSBSP shall conform with such standards as may be prescribed by the Commission, by rule or regulation, that relate to timely and accurate confirmation, processing, netting, documentation, and valuation of all security-based swaps. 49 Section 15F(i)(2) provides that the Commission shall adopt rules governing documentation standards for SBSDs and MSBSPs. 50 49 See 15 U.S.C. 78o-10(i)(1). 50 See 15 U.S.C. 78o-10(i)(2). Pursuant to section 15F(i) of the Exchange Act, the Commission has proposed Rule 15Fi-1 that would prescribe standards related to timely and accurate confirmation and documentation of security-based swaps. See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011). After considering the anticipated business activities of SBSDs and MSBSPs, the Commission is proposing to establish a recordkeeping program for these registrants under sections 15F and 17(a) of the Exchange Act that is modeled on the recordkeeping program for broker-dealers codified in Rules 17a-3 and 17a-4. 51 Rules 17a-3 and 17a-4 specify requirements with respect to the records that a broker-dealer must make and keep current, as well as how long and, the manner in which, these records and other records relating to a broker-dealer's business must be maintained and preserved. 52 51 See 17 CFR 240.17a-3; 17 CFR 240.17a-4. 52 See 17 CFR 240.17a-3; 17 CFR 240.17a-4. In particular, Rule 17a-3 requires a broker-dealer to make and keep current certain books and records. 53 The required records include, among other records: Blotters containing an itemized daily record of all purchases and sales of securities; ledgers reflecting all assets and liabilities, income and expense, and capital accounts; a securities record or ledger reflecting separately for each security as of the clearance dates all “long” or “short” positions; a memorandum of each brokerage order; a memorandum of each purchase or sale of a security for the account of the broker-dealer; and copies of confirmations. 54 53 See 17 CFR 240.17a-3. 54 Id. As noted above in section I. of this release, the Dodd-Frank Act amended the definition of security in section 3(a)(10) of the Exchange Act to include a security-based swap. See Public Law 111-203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, each reference in Rules 17a-3 and 17a-4 to a security includes a security-based swap. The Commission, however, has issued temporary exemptive relief excluding security-based swaps from the definition of security to the extent Commission rules did not otherwise apply specifically to security-based swaps prior to the amendment. See Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Pending Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment, 76 FR 39927. Rule 17a-4 requires a broker-dealer to preserve additional records if the broker-dealer makes or receives the type of record. 55 The categories of records include, among other records, check books, bank statements, bills receivable or payable, communications relating to the broker-dealer's business as such, and written agreements. 56 The rule also establishes retention periods for all records required to be made and kept current under Rule 17a-3 and preserved under Rule 17a-4, and prescribes, among other things, how the records must be retained, including requirements for firms that preserve their records electronically. 57 55 See 17 CFR 240.17a-4. 56 Id. 57 Id. The recordkeeping program codified in Rules 17a-3 and 17a-4 is designed, among other things, to promote the prudent operation of broker-dealers and assist the Commission, self-regulatory organizations (“SROs”), and state securities regulators in conducting effective examinations of broker-dealers. 58 As the Commission has stated, 58 See, e.g., See Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media under the Electronic Signatures in Global and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 FR 22916; Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934, Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (“The Commission has required that broker-dealers create and maintain certain records so that, among other things, the Commission, [SROs], and State Securities Regulators . . . may conduct effective examinations of broker-dealers.”) (footnote omitted). In combination, Rules 17a-3 and 17a-4 require broker-dealers to create, and preserve in an accessible manner, a comprehensive record of each securities transaction they effect and of their securities business in general. These rules impose minimum recordkeeping requirements that are based on standards a prudent broker-dealer should follow in the normal course of business. The requirements are an integral part of the investor protection function of the Commission, and other securities regulators, in that the preserved records are the primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards. 59 59 See Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media under the Electronic Signatures in Global and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 FR 22917. Under the proposed recordkeeping program for SBSDs and MSBSPs, broker-dealer SBSDs and broker-dealer MSBSPs—as broker-dealers—would be subject to Rules 17a-3 and 17a-4. 60 The Commission is proposing amendments to these rules to account for the security-based swap and swap activities of broker-dealers, including broker-dealers registered as SBSDs and MSBSPs, as well as to implement the specific recordkeeping requirements mandated under the Dodd-Frank Act. 61 Stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would be subject to proposed Rules 18a-5 and 18a-6, which are modeled on Rules 17a-3 and 17a-4, respectively, as these rules are proposed to be amended. 60 See 17 CFR 240.17a-3; 17 CFR 240.17a-4. 61 As discussed in more detail below, the Commission also is proposing additional largely technical amendments to Rules 17a-3 and 17a-4. Proposed Rules 18a-5 and 18a-6 would not include a parallel requirement for every requirement in Rules 17a-3 and 17a-4 because some of the requirements in Rules 17a-3 and 17a-4 relate to activities that are not expected or permitted of SBSDs and MSBSPs. Further, the proposed recordkeeping requirements that would be applicable to bank SBSDs and bank MSBSPs are more limited in scope because, as discussed above in section I. of this release: (1) The Commission's authority under section 15F(f)(1)(B)(i) of the Exchange Act is tied to activities related to the conduct of business as an SBSD or MSBSP; (2) bank SBSDs and bank MSBSPs are subject to recordkeeping requirements applicable to banks; and (3) the prudential regulators—rather than the Commission—are responsible for capital, margin, and other prudential requirements applicable to bank SBSDs and bank MSBSPs. For these reasons, the proposed recordkeeping requirements that would be applicable to bank SBSDs and bank MSBSPs are designed to be tailored more specifically to their security-based swap activities as an SBSD or an MSBSP. 62 62 As discussed below in section II.B.2. of this release, the Commission is proposing that bank SBSDs and bank MSBSPs be subject to a limited reporting program of general information about their overall financial condition based on discrete elements of the reporting program the prudential regulators have established for banks. 2. Records To Be Made and Kept Current As discussed above, Rule 17a-3 requires a broker-dealer to make and keep current certain records. 63 The Commission is proposing to amend this rule to account for the security-based swap and swap activities of broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs. 64 The Commission also is proposing additional largely technical amendments to Rule 17a-3. 65 With respect to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the Commission is proposing new Rule 18a-5—which is modeled on Rule 17a-3, as proposed to be amended—to require these registrants to make and keep current certain records. 66 For the reasons discussed above, proposed Rule 18a-5 does not include a parallel requirement for every requirement in Rule 17a-3. 67 In addition, paragraph (a) of proposed Rule 18a-5 contains one set of recordkeeping requirements applicable to stand-alone SBSDs and stand-alone MSBSPs and paragraph (b) of proposed Rule 18a-5 contains a separate set of recordkeeping requirements applicable to bank SBSDs and bank MSBSPs that are more limited in scope. 68 63 See 17 CFR 240.17a-3. 64 Broker-dealer SBSDs and broker-dealer MSBSPs would be required to make and keep current all the records required of broker-dealers under Rule 17a-3, as proposed to be amended, plus the additional records required specifically of an SBSD or MSBSP. 65 The proposed technical amendments are discussed below in section II.A.2.b. of this release. 66 See proposed Rule 18a-5. 67 The Commission is not proposing to include in proposed Rule 18a-5 requirements that would parallel requirements in paragraphs (a)(4), (a)(13), (a)(14), (a)(15), and (a)(16) of Rule 17a-3. These paragraphs require broker-dealers to make and keep current records with respect to activities that stand-alone SBSDs and stand-alone MSBSPs would not be expected or permitted to engage in or would not relate to a bank's business as an SBSD or MSBSP, or relate to rules that would not apply to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs. Further, the Commission is not proposing to include in proposed Rule 18a-5 requirements that would parallel requirements in paragraphs (a)(17), (a)(18), (a)(19), and (a)(20) of Rule 17a-3. These requirements are designed to enhance the ability of regulators, particularly State securities regulators, to conduct effective and efficient sales practice examinations. See Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934, 66 FR 55818. By adopting these requirements, the Commission enabled States to adopt and enforce similar rules on the State level under the National Securities Market Improvement Act of 1996. See National Securities Markets Improvement Act of 1996, Public Law 104-290, 110 Stat. 3416 (1996). As discussed below, the Commission has proposed external business conduct rules for SBSDs and MSBSPs and, as discussed below, the Commission is proposing recordkeeping requirements to support examinations for compliance with these proposed external business conduct rules. 68 Compare paragraph (a), with paragraph (b) of proposed new Rule 18a-5. As discussed above, section 15F(g) of the Exchange Act provides, among other things, that each registered SBSD and MSBSP shall maintain: (1) Daily trading records of the security-based swaps of the registered SBSD and MSBSP; (2) daily trading records for each counterparty in a manner and form that is identifiable with each security-based swap transaction; and (3) a complete audit trail for conducting comprehensive and accurate trade reconstructions. 69 Further, section 15F(g)(2) provides that the daily trading records shall include such information as the Commission shall require by rule or regulation. 70 To implement section 15F(g) of the Exchange Act, Rule 17a-3, as proposed to be amended, and proposed Rule 18a-5 include provisions that, among other things, are designed to require information that would facilitate a comprehensive and accurate trade reconstruction for each security-based swap transaction. 69 See 15 U.S.C. 78o-10(g)(1), (3), and (4). 70 See 15 U.S.C. 78o-10(g)(2). In this regard, the amendments to Rule 17a-3 and proposed Rule 18a-5 would require broker-dealers, SBSDs, and MSBSPs to make and keep current daily trading records, 71 ledger accounts, 72 a securities record, 73 memoranda of brokerage orders, 74 and/or memoranda of proprietary trades 75 with respect to security-based swap activity. The Commission has proposed Rule 901 of Regulation SBSR, which would require market participants, including broker-dealers, SBSDs, and MSBSPs, to report certain data elements to security-based swap data repositories. 76 71 See paragraph (a)(1) of Rule 17a-3, as proposed to be amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5. 72 See paragraph (a)(3) of Rule 17a-3, as proposed to be amended; paragraphs (a)(3) and (b)(2) of proposed Rule 18a-5. 73 See paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended; paragraphs (a)(4)(ii) and (b)(3)(ii) of proposed Rule 18a-5. 74 See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended; paragraph (b)(4) of proposed Rule 18a-5. 75 See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5. 76 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Securities Exchange Act Release No. 63346 (Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010). See also Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, 78 FR 30968 (re-proposing certain aspects of Regulation SBSR). The following data elements that would be required to be reported under proposed Rule 901 also would need to be documented in the daily trading records, ledger accounts, memoranda of brokerage orders, and/or memoranda of proprietary trades of security-based swap transactions required under the proposed amendments to Rule 17a-3 and proposed Rule 18a-5: (1) The type of security-based swap; 77 (2) the reference security, index, or obligor; 78 (3) the date and time of execution; 79 (4) the effective date; 80 (5) the termination or maturity date; 81 (6) the notional amount; 82 (7) the unique transaction identifier; 83 and (8) the unique counterparty identifier. 84 The following data elements that would be required to be reported under proposed Rule 901 would also need to be documented in the securities record of security-based swap transactions required under the proposed amendments to Rule 17a-3 and proposed Rule 18a-5: (1) The reference security, index, or obligor; 85 (2) the unique transaction identifier; 86 (3) the unique counterparty identifier; 87 (4) whether the security-based swap is cleared or not cleared; 88 and (5) if cleared, identification of the clearing agency where the security-based swap is cleared. 89 In addition, the securities record for security-based swaps would parallel the securities record for securities by requiring a record of whether the security-based swap is a “long” or “short” position. 90 77 Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, 75 FR 75213 (discussing the requirement in paragraph (c)(1) of proposed Rule 901 to report the asset class of the security-based swap). 78 See id. at 75214 (discussing the requirement in paragraph (c)(2) of proposed Rule 901 to report the specific assets or issuers of any securities upon which the security-based swap is based). 79 See id. at 75213 (discussing the requirement in paragraph (c)(4) of proposed Rule 901 to report the time and date of execution of the security-based swap). 80 See id. at 75214 (discussing the requirement in paragraph (c)(5) of proposed Rule 901 to report the effective date of the security-based swap). 81 See id. at 75214 (discussing the requirement in paragraph (c)(6) to of proposed Rule 901 to report the scheduled termination date of the security-based swap). 82 See id. at 75214 (discussing the requirement in paragraph (c)(3) of proposed Rule 901 to report the notional amount of the security-based swap). 83 See id. at 75221 (discussing the requirement in paragraph (g) of proposed Rule 901 to report the unique transaction identifier for the security-based swap). 84 See id. at 75217-75218, 75221-75222 (discussing the requirement in paragraph (d) of proposed Rule 901 to report the unique identifier of the counterparty to the security-swap transaction). 85 See id. at 75214 (discussing the requirement in paragraph (c)(2) of proposed Rule 901 to report the specific assets or issuers of any securities upon which the security-based swap is based). 86 See id. at 75221 (discussing the requirement in paragraph (g) of proposed Rule 901 to report the unique transaction identifier for the security-based swap). 87 See id. at 75217-75218, 75221-75222 (discussing the requirement in paragraph (d)(1)(i) of proposed Rule 901 to report the participant ID of the counterparty to the security-swap transaction). 88 See id. at 75214 (discussing the requirement in paragraph (c)(9) of proposed Rule 901 to report the whether or not the security-based swap will be cleared by a clearing agency). 89 See id. at 75218 (discussing the requirement in paragraph (d)(1)(vi) of proposed Rule 901 to report the name of the clearing agency if the security-based swap will be cleared). 90 Compare 17 CFR 240.17a-3(a)(5), with paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended, and paragraphs (a)(4)(ii) and (b)(3)(ii) of proposed Rule 18a-5. Where a data element that would need to be documented in the daily trading records of security-based swap transactions under the proposed amendments to Rule 17a-3 or proposed Rule 18a-5 is substantively the same as a data element that would need to be reported under proposed Rule 901, the Commission preliminarily believes that the type of information that would need to be documented in the daily trading records could be the same data element reported under proposed Rule 901. 91 91 Proposed Rule 901 may be modified when adopted, which could include changing or eliminating certain data elements required to be reported under the rule. Any such modifications to the data elements could change the Commission's preliminary view on the comparability of the information to be recorded in the daily trading records and the information to be reported pursuant to proposed Rule 901. a. Amendments to Rule 17a-3 and Proposed Rule 18a-5 Undesignated Introductory Paragraph Rule 17a-3, as proposed to be amended, would contain an undesignated introductory paragraph explaining that the rule applies to a broker-dealer, including a broker-dealer dually registered with the Commission as an SBSD or MSBSP. 92 The note further explains that an SBSD or MSBSP that is not dually registered as a broker-dealer ( i.e., a stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP) is subject to the books and records requirements under proposed Rule 18a-5. 93 92 See undesignated introductory paragraph of Rule 17a-3, as proposed to be amended. 93 Id. Similarly, proposed Rule 18a-5 would contain an undesignated introductory paragraph explaining that the rule applies to an SBSD or an MSBSP that is not dually registered as a broker-dealer. 94 The note further explains that a broker-dealer that is dually registered as an SBSD or MSBSP is subject to the books and records requirements under Rule 17a-3. 95 94 See undesignated introductory paragraph of proposed Rule 18a-5. 95 Id. Trade Blotters Paragraph (a)(1) of Rule 17a-3 requires broker-dealers to make and keep current trade blotters (or other records of original entry) containing an itemized daily record of all transactions in securities, all receipts and deliveries of securities, all receipts and disbursements of cash, and all other debits and credits. 96 The Commission is proposing to amend paragraph (a)(1) of Rule 17a-3 to require that the blotters specifically account for security-based swaps, and proposing to include parallel blotter requirements in paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5 that are modeled on paragraph (a)(1) of Rule 17a-3, as proposed to be amended. 97 In particular, paragraph (a)(1) of Rule 17a-3, as proposed to be amended, would require broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current blotters containing an itemized daily record of all transactions in securities, including security-based swaps, all receipts and deliveries of securities, all receipts and disbursements of cash, and all other debits and credits. 98 In order to document the attributes of security-based swaps, the proposed amendments also would require that such records show the contract price of the security-based swap, and include for each purchase and sale, the following information: (1) The type of security-based swap; (2) the reference security, index, or obligor; (3) the date and time of execution; (4) the effective date; (5) the termination or maturity date; (6) the notional amount; (7) the unique transaction identifier; and (8) the unique counterparty identifier. 99 96 See 17 CFR 240.17a-3(a)(1). 97 See paragraph (a)(1) of Rule 17a-3, as proposed to be amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5. 98 See paragraph (a)(1) of Rule 17a-3, as proposed to be amended. 99 See id. Paragraph (a)(1) of proposed Rule 18a-5 mirrors paragraph (a)(1) of Rule 17a-3, as proposed to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current the same types of blotters as broker-dealers. 100 Paragraph (b)(1) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to make and keep current the same types of blotters but only with respect to their security-based swap activities. 101 100 Compare paragraph (a)(1) of Rule 17a-3, as proposed to be amended, with paragraph (a)(1) of proposed Rule 18a-5. 101 See paragraph (b)(1) of proposed Rule 18a-5. General Ledger Paragraph (a)(2) of Rule 17a-3 requires broker-dealers to make and keep current ledgers (or other records) reflecting all assets and liabilities, income and expense, and capital accounts. 102 These records reflect the overall financial condition of the broker-dealer and in the Commission's view can incorporate security-based swap activities without the need for a clarifying amendment. Because the overall financial condition of stand-alone SBSDs and stand-alone MSBSPs is a matter of regulatory concern for the Commission, the Commission is proposing to include a parallel provision in paragraph (a)(2) of proposed Rule 18a-5 that mirrors paragraph (a)(2) of Rule 17a-3. 103 Consequently, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current the same types of general ledgers. 104 102 See 17 CFR 240.17a-3(a)(2). 103 Compare 17 CFR 240.17a-3(a)(2), with paragraph (a)(2) of proposed Rule 18a-5. 104 See paragraph (a)(2) of proposed Rule 18a-5. Ledgers for Customer and Non-Customer Accounts Paragraph (a)(3) of Rule 17a-3 requires broker-dealers to make and keep current certain ledger accounts (or other records) relating to securities and commodities transactions in customer and non-customer cash and margin accounts. 105 The Commission is proposing to amend paragraph (a)(3) of Rule 17a-3 to require that the ledgers (or other records) specifically account for security-based swaps, and to include parallel ledger requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(3) of Rule 17a-3, as proposed to be amended. 106 In particular, paragraph (a)(3) of Rule 17a-3 would be amended to include a requirement that broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, make and keep current ledger accounts (or other records) itemizing separately as to each security-based swap: (1) The type of security-based swap; (2) the reference security, index, or obligor; (3) date and time of execution; (4) the effective date; (5) the termination or maturity date; (6) the notional amount; (7) the unique transaction identifier; and (8) the unique counterparty identifier. 107 105 See 17 CFR 240.17a-3(a)(3). 106 See paragraph (a)(3) of Rule 17a-3, as proposed to be amended; paragraphs (a)(3) and (b)(2) of proposed Rule 18a-5. 107 See paragraph (a)(3) of Rule 17a-3, as proposed to be amended. Paragraph (a)(3) of Rule 18a-5 is modeled on paragraph (a)(3) of Rule 17a-3, as proposed to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current the same types of ledgers (or other records). 108 Unlike paragraph (a)(3) of Rule 17a-3, paragraph (a)(3) of proposed Rule 18a-5 would not refer to “cash and margin accounts” as these types of accounts involve activities that would not be permitted of stand-alone SBSDs and stand-alone MSBSPs because they are not registered as broker-dealers. 109 Paragraph (b)(2) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to make and keep current ledger accounts (or other records) relating to securities and commodity transactions but only with respect to their security-based swap customers and non-customers. 110 108 Compare paragraph (a)(3) of Rule 17a-3, as proposed to be amended, with paragraph (a)(3) of proposed Rule 18a-5. 109 See id. 110 See paragraph (b)(2) of proposed Rule 18a-5. The Commission has proposed a definition of security-based swap customer for the purposes of proposed Rule 18a-4. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70278. Proposed Rule 18a-4—which is modeled on Rule 15c3-3—would establish segregation requirements for SBSDs with respect to their security-based swap customers. Id. at 70274-70288. The term security-based swap customer would be defined in proposed Rule 18a-4 to mean any person from whom or on whose behalf the SBSD has received or acquired or holds funds or other property for the account of the person with respect to a cleared or non-cleared security-based swap transaction. Id. at 70278. The definition would exclude a person to the extent that person has a claim for funds or other property which by contract, agreement or understanding, or by operation of law, is part of the capital of the SBSD or is subordinated to all claims of security-based swap customers of the SBSD. Id. Stock Record Paragraph (a)(5) of Rule 17a-3 requires broker-dealers to make and keep current a securities record (also referred to as a “stock record”). 111 This is a record of the broker-dealer's custody and movement of securities. The “long” side of the record accounts for the broker-dealer's responsibility as a custodian of securities and shows, for example, the securities the firm has received from customers and securities owned by the broker-dealer. The “short” side of the record shows where the securities are located such as at a securities depository. 111 See 17 CFR 240.17a-3(a)(5). The Commission is proposing to amend paragraph (a)(5) of Rule 17a-3 to require that the securities record specifically account for security-based swaps, and to include parallel securities record requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(5) of Rule 17a-3, as proposed to be amended. 112 Paragraph (a)(5) of Rule 17a-3, as proposed to be amended, would contain separate provisions: One for securities other than security-based swaps and one for security-based swaps. 113 Specifically, paragraph (a)(5)(i) would apply to securities other than security-based swaps and largely mirror the current text of paragraph (a)(5) of Rule 17a-3. 114 Paragraph (a)(5)(ii) would apply to security-based swaps. 115 This paragraph would require a broker-dealer, including a broker-dealer SBSD and broker-dealer MSBSP, to make and keep current a securities record or ledger reflecting separately for each security-based swap: (1) The reference security, index, or obligor; (2) the unique transaction identifier; (3) the unique counterparty identifier; (4) whether it is a “long” or “short” position in the security-based swap; (5) whether the security-based swap is cleared or not cleared; and (6) if cleared, identification of the clearing agency where the security-based swap is cleared. 116 112 See paragraph (a)(5) of Rule 17a-3, as proposed to be amended; paragraphs (a)(4) and (b)(3) of proposed Rule 18a-5. 113 See paragraphs (a)(5)(i)-(ii) of Rule 17a-3, as proposed to be amended. 114 Compare 17 CFR 240.17a-3(a)(5), with paragraph (a)(5)(i) of Rule 17a-3, as proposed to be amended. 115 See paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended. 116 See id. Paragraph (a)(4) of proposed Rule 18a-5 mirrors paragraph (a)(5) of Rule 17a-3 as proposed to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current the same type of securities record. 117 Paragraph (b)(3) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to make and keep current a securities record of the firm's securities positions but only with respect to positions related to their business as an SBSD or MSBSP. 118 117 Compare paragraph (a)(5) of Rule 17a-3, as proposed to be amended, with paragraph (a)(4) of proposed Rule 18a-5. 118 See paragraph (b)(3) of proposed Rule 18a-5. Memoranda of Brokerage Orders Paragraph (a)(6) of Rule 17a-3 requires broker-dealers to make and keep current a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of a security. The memorandum must show the terms and conditions of each brokerage order. 119 The Commission is proposing to amend paragraph (a)(6) of Rule 17a-3 to require broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current a memorandum of each brokerage order, given or received for the purchase or sale of a security-based swap. 120 The Commission is not proposing to include a parallel provision in paragraph (a) of proposed Rule 18a-5 applicable to stand-alone SBSDs and stand-alone MSBSPs because these registrants would not be permitted to engage in the business of effecting brokerage orders in security-based swaps without registering as a broker-dealer or a bank. 121 The Commission is proposing to include a parallel provision that would be applicable to bank SBSDs and bank MSBSPs in paragraph (b) of proposed Rule 18a-5 that is modeled on paragraph (a)(6) of Rule 17a-3, as proposed to be amended. 122 119 See 17 CFR 240.17a-3(a)(6). 120 See paragraph (a)(6) of Rule 17a-3, as proposed to be amended. 121 Generally, persons engaged in brokerage activities are required to register as brokers under section 15(b) of the Exchange Act. See 15 U.S.C. 78o(b). Banks are permitted to engage in certain limited securities brokerage activities. Specifically, section 3(a)(4) of the Exchange Act provides eleven exceptions to broker-dealer registration for banks. See 15 U.S.C. 78c(a)(4). In addition, the Commission and the Federal Reserve promulgated joint rules establishing further exemptions permitting banks to engage in certain securities brokerage activities without registering as a broker-dealer. See Definitions of Terms and Exemptions Relating to the “Broker” Exceptions for Banks, Exchange Act Release No. 56501 (Sept. 24, 2007), 72 FR 56514 (Oct. 3, 2007); 17 CFR 247.100-781. These exceptions and exemptions permit a bank to act as a broker or agent in securities transactions provided they satisfy certain conditions. Section 716 of the Dodd-Frank Act (“Swap Push-Out Provision”) generally prohibits providing certain types of federal assistance, including FDIC insurance, to SBSDs and MSBSPs with respect to any swap, security-based swap, or other activity of the SBSD or MSBSP. See Public Law 111-203, 716. The Swap Push-Out Provision excludes MSBSPs that are insured depository institutions. See Public Law 111-203, 716(b)(2)(B). Further, SBSDs that are insured depository institutions are permitted to engage in certain swap and security-based swap activities under certain conditions and still qualify for federal assistance. See Public Law 111-203, 716(d) through (f). Thus, a bank SBSD or bank MSBSP may act as a broker or agent in a security-based swap transaction. In such instances, the brokerage order record requirements of paragraph (b)(4) of proposed Rule 18a-5 would apply. 122 See paragraph (b)(4) of proposed Rule 18a-5. Paragraph (a)(6) of Rule 17a-3, as proposed to be amended, would contain separate provisions: One for brokerage orders involving securities other than security-based swaps and one for brokerage orders involving security-based swaps. 123 Specifically, proposed paragraphs (a)(6)(i)(A) and (B) would apply to securities other than security-based swaps and largely mirror the current text of paragraph (a)(6) of Rule 17a-3. 124 Proposed paragraph (a)(6)(ii) would apply to brokerage orders involving security-based swaps. 125 This paragraph would require a broker-dealer, including a broker-dealer SBSD and broker-dealer MSBSP, to make and keep current a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of a security-based swap, whether executed or unexecuted. The memorandum would need to include information that is similar to the information currently required under Rule 17a-3 for brokerage orders. 126 In addition, to account for the attributes of security-based swaps, the memorandum would need to include: (1) The type of security-based swap; (2) the reference security, index, or obligor; (3) the date and time of execution; (4) the effective date; (5) the termination or maturity date; (6) the notional amount; (7) the unique transaction identifier; and (8) the unique counterparty identifier. 127 123 See paragraph (a)(6) of Rule 17a-3, as proposed to be amended. Rule 17a-3 currently contains paragraphs (a)(6)(i) and (ii). See 17 CFR 240.17a-3(a)(6)(i) and (ii). Under the amendments, paragraph (a)(6)(i) of Rule 17a-3 would be redesignated as paragraph (a)(6)(i)(A) and paragraph (a)(6)(ii) would be redesignated as paragraph (a)(6)(i)(B). The new requirement to make and keep current a memorandum of each security-based swap brokerage order would be contained in paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended. 124 Compare 17 CFR 240.17a-3(a)(6)(i) and (ii), with paragraphs (a)(6)(i)(A) and (B) of Rule 17a-3, as proposed to be amended. 125 See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended. 126 Compare 17 CFR 240.17a-3(a)(6)(i), with paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended. 127 See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended. Paragraph (b)(4) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to document key terms of brokerage orders but only with respect to security-based swaps. 128 Consequently, proposed paragraph (b)(4) would not contain a provision for securities that are not security-based swaps. 129 Instead, the entire paragraph mirrors paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended, which, as discussed above, relates solely to security-based swaps. 130 128 See paragraph (b)(4) of proposed Rule 18a-5. 129 See id. 130 Compare paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended, with paragraph (b)(4) of proposed Rule 18a-5. Memoranda of Proprietary Orders Paragraph (a)(7) of Rule 17a-3 requires broker-dealers to make and keep current a memorandum of each purchase and sale for the account of the broker-dealer. 131 Generally, paragraph (a)(7) of Rule 17a-3 requires broker-dealers to document the terms of securities transactions where they are acting as a dealer or otherwise trading for their own account. The Commission is proposing to amend paragraph (a)(7) of Rule 17a-3 to require the terms of security-based swap transactions to be documented, and to include parallel memorandum requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(7) of Rule 17a-3, as proposed to be amended. 132 Paragraph (a)(7) of Rule 17a-3, as proposed to be amended, would contain two separate provisions: One for securities other than security-based swaps and one for security-based swaps. 133 Specifically, proposed paragraph (a)(7)(i) would apply to securities other than security-based swaps and largely would mirror the current text of paragraph (a)(7) of Rule 17a-3. 134 Paragraph (a)(7)(ii) would apply to security-based swaps. 135 This paragraph would require broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current a memorandum documenting each security-based swap transaction for the account of the broker-dealer. The memorandum would need to include certain information regarding the purchase or sale of a security-based swap for the account of the broker-dealer that is similar to the information currently required under paragraph (a)(7) of Rule 17a-3. 136 In addition, to account for the attributes of security-based swaps, the memorandum would need to include: (1) The type of security-based swap; (2) the reference security, index, or obligor; (3) the date and time of execution; (4) the effective date; (5) the termination or maturity date; (6) the notional amount; (7) the unique transaction identifier; and (8) the unique counterparty identifier. 137 131 See 17 CFR 240.17a-3(a)(7). 132 See paragraph (a)(7) of Rule 17a-3, as proposed to be amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5. 133 See paragraphs (a)(7)(i) and (ii) of Rule 17a-3, as proposed to be amended. 134 Compare 17 CFR 240.17a-3(a)(7), with paragraph (a)(7)(i) of Rule 17a-3, as proposed to be amended. 135 See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended. 136 Compare 17 CFR 240.17a-3(a)(7), with paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended. 137 See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended. Paragraph (a)(5) of proposed Rule 18a-5 would require stand-alone SBSDs and stand-alone MSBSPs to make memoranda of proprietary transactions but only with respect to security-based swaps. 138 This is because a stand-alone SBSD or a stand-alone MSBSP would need to be registered as a broker-dealer (and therefore would be subject to Rule 17a-3) (or, in certain circumstances, a bank) to deal in securities other than security-based swaps. Paragraph (b)(5) of proposed Rule 18a-5 would require bank SBSDs and bank MSBSPs to make memoranda of proprietary transactions but also only with respect to security-based swaps. 139 138 See paragraph (a)(5) of proposed Rule 18a-5. 139 See paragraph (b)(5) of proposed Rule 18a-5. Confirmations Paragraph (a)(8) of Rule 17a-3 requires broker-dealers to make and keep current copies of confirmations of purchases and sales of securities. 140 The Commission is proposing to amend paragraph (a)(8) to require that confirmations of security-based swaps be documented, and to include analogous confirmation requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(8) of Rule 17a-3, as proposed to be amended. 141 Paragraph (a)(8) of Rule 17a-3, as proposed to be amended, would contain separate provisions: One for securities other than security-based swaps and one for security-based swaps. 142 Specifically, proposed paragraph (a)(8)(i) would apply to confirmations of securities transactions other than security-based swap transactions and largely mirror the current text of paragraph (a)(8) of Rule 17a-3. 143 Proposed paragraph (a)(8)(ii) would apply to confirmations of security-based swap transactions. 144 As discussed above, section 15F(i)(2) of the Exchange Act provides that the Commission shall adopt rules governing documentation standards for SBSDs and MSBSPs. 145 Pursuant to section 15F(i)(2), the Commission proposed Rule 15Fi-1 under the Exchange Act (“Rule 15Fi-1”) to prescribe standards related to timely and accurate confirmation and documentation of security-based swaps. 146 Under this proposed rule, SBSDs and MSBSPs would be required to acknowledge and, thereafter, verify security-based swap transactions. 147 Consequently, paragraph (a)(8)(ii) of Rule 17a-3 would require broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current copies of the security-based swap trade acknowledgments and verifications made pursuant to proposed Rule 15Fi-1. 148 140 See 17 CFR 240.17a-3(a)(8). See also 17 CFR 240.10b-10 (a requirement that broker-dealers disclose specified information to customers at or before completion of a securities transaction). 141 See paragraph (a)(8) of Rule 17a-3, as proposed to be amended; paragraphs (a)(6) and (b)(6) of proposed Rule 18a-5. 142 See paragraphs (a)(8)(i) and (a)(8)(ii) of Rule 17a-3, as proposed to be amended. 143 Compare paragraph (a)(8)(i) of Rule 17a-3, as proposed to be amended, with 17 CFR 240.17a-3(a)(8). 144 See paragraph (a)(8)(ii) of Rule 17a-3, as proposed to be amended. 145 See 15 U.S.C. 78o-10(i)(2). 146 See Trade Acknowledgment and Verification of Security-Based Swap Transactions, 76 FR 3859. 147 Id. 148 See paragraph (a)(8)(ii) of Rule 17a-3, as proposed to be amended. Paragraph (a)(6) of proposed Rule 18a-5 would require stand-alone SBSDs and stand-alone MSBSPs to make and keep current copies of confirmations of all purchases or sales of securities, which would include securities other than security-based swaps. 149 Paragraph (a)(6) also would specify that, for security-based swap transactions, stand-alone SBSDs and stand-alone MSBSPs would need to make and keep current copies of the security-based swap trade acknowledgments and verifications made pursuant to proposed Rule 15Fi-1. 150 Paragraph (b)(6) would require bank SBSDs and bank MSBSPs to make and keep current copies of all confirmations of purchases and sales of securities but only if related to their business as an SBSD or MSBSP. 151 This would require a bank SBSD or bank MSBSP to make and keep current copies of confirmations relating to transactions in securities, other than security-based swaps, if the transaction was related to their business as an SBSD or MSBSP. For example, this requirement would apply if the bank SBSD or bank MSBSP entered into a transaction in the security underlying a security-based swap to hedge the risk of the security-based swap. Paragraph (b)(6) also would specify that, for security-based swap transactions, bank SBSDs and bank MSBSPs would need to make and keep current copies of the security-based swap trade acknowledgments and verifications made pursuant to proposed Rule 15Fi-1. 152 149 See paragraph (a)(6) of proposed Rule 18a-5. 150 Id. 151 See paragraph (b)(6) of proposed Rule 18a-5. 152 Id. Accountholder Information Paragraph (a)(9) of Rule 17a-3 requires broker-dealers to make and keep current certain information with respect to each securities accountholder. 153 The Commission is proposing to amend paragraph (a)(9) to require certain information with respect to security-based swap accountholders, and to include similar requirements in paragraphs (a) and (b) of proposed Rule 18a-5. 154 The amendments to Rule 17a-3 would add a new paragraph (a)(9)(iv). 155 This paragraph would require broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current, in the case of a security-based swap account: (1) A record of the unique counterparty identifier of the accountholder; (2) the name and address of accountholder; and (3) the signature of each person authorized to transact business in the security-based swap account. 156 Consequently, in the case of accounts of legal entities ( e.g., a corporation, partnership, or trust), signatures would be required from persons authorized by the entity to transact business in the account. 153 See 17 CFR 240.17a-3(a)(9). 154 See paragraph (a)(9) of Rule 17a-3, as proposed to be amended; paragraphs (a)(7) and (b)(7) of proposed Rule 18a-5. 155 See paragraph (a)(9)(iv) of Rule 17a-3, as proposed to be amended. 156 Id. Paragraphs (a)(7) and (b)(7) of proposed Rule 18a-5 mirror paragraph (a)(9)(iv) of Rule 17a-3, as proposed to be amended. 157 Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would be required to make and keep current the same types of records with respect to security-based swap accountholders. 157 Compare paragraph (a)(9)(iv) of Rule 17a-3, as proposed to be amended, with paragraphs (a)(7) and (b)(7) of proposed Rule 18a-5. Options Positions Paragraph (a)(10) of Rule 17a-3 requires broker-dealers to make and keep current a record of all options positions. 158 The Commission is not proposing to amend paragraph (a)(10) of Rule 17a-3 to account for security-based swaps. 159 In addition, because the records required under this paragraph are not specific to security-based swaps, the Commission is not proposing to include an analogous provision in paragraph (b) applicable to bank SBSDs and bank MSBSPs. However, in order to facilitate the monitoring of the financial condition of stand-alone SBSDs and stand-alone MSBSPs, the Commission is proposing to include a parallel provision in paragraph (a)(8) of proposed Rule 18a-5 applicable to stand-alone SBSDs and stand-alone MSBSPs. 160 Consequently, under the proposed rule, these registrants would be required to make and keep current the same type of records broker-dealers must keep: A record of all puts, calls, spreads, straddles, and other options in which the stand-alone SBSD or stand-alone MSBSP has any direct or indirect interest or which the stand-alone SBSD or stand-alone MSBSP has granted or guaranteed, containing, at a minimum, an identification of the security and the number of units involved. 161 158 See 17 CFR 240.17a-3(a)(10). 159 As discussed below in section II.A.2.b. of this release, the Commission is proposing technical amendments to paragraph (a)(10) of Rule 17a-3. 160 See paragraph (a)(8) of proposed Rule 18a-5. The second sentence of paragraph (a)(10) of Rule 17a-3 applies only to a special class of broker-dealers that limit their activities to dealing in OTC derivatives (“OTC derivatives dealers”). See 17 CFR 240.17a-3(a)(10); OTC Derivatives Dealers, Exchange Act Release No. 40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998). Consequently, it is not included in paragraph (a)(8) of proposed Rule 18a-5. 161 See paragraph (a)(8) of proposed Rule 18a-5. Trial Balances and Computation of Net Capital Paragraph (a)(11) of Rule 17a-3 requires broker-dealers to make and keep current a record of the proof of money balances of all ledger accounts in the form of trial balances and certain records relating to the computation of aggregate indebtedness and net capital under Rule 15c3-1. 162 The Commission is not proposing to amend paragraph (a)(11) to account for security-based swaps because the impact of security-based swaps on those computations is reflected in the amendments to the capital rules that have been proposed by the Commission to apply to broker-dealer SBSDs and stand-alone SBSDs. 163 In addition, because the records required under the rule are not specific to security-based swaps and because bank SBSDs and bank MSBSPs will be subject to capital requirements administered by the prudential regulators, the Commission is not proposing to include a parallel provision in paragraph (b) of proposed Rule 18a-5 applicable to these types of registrants. 162 See 17 CFR 240.17a-3(a)(11). 163 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70217-70257. As discussed below in section II.A.2.b. of this release, the Commission is proposing technical amendments to paragraph (a)(11) of Rule 17a-3. The Commission, however, is proposing to include a parallel requirement in paragraph (a)(9) of proposed Rule 18a-5 applicable to stand-alone SBSDs and stand-alone MSBSPs because the types of records required under paragraph (a)(11) of Rule 17a-3 would facilitate the review and monitoring of the financial condition and regulatory capital of stand-alone SBSDs and stand-alone MSBSPs. As noted above, the Commission will administer the capital rules applicable to stand-alone SBSDs and stand-alone MSBSPs. 164 Under Paragraph (a)(9) of proposed Rule 18a-5, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current similar records to those required under paragraph (a)(11) of Rule 17a-3 but in relation to the proposed capital rules for these entities: (1) Proposed Rule 18a-1 in the case of stand-alone SBSDs; and (2) proposed Rule 18a-2 in the case of stand-alone MSBSPs. 165 Specifically, paragraph (a)(9) would require stand-alone SBSDs and stand-alone MSBSPs to make and keep current a record of the proof of money balances of all ledger accounts in the form of trial balances, and a record as of the trial balance date of the computation of net capital pursuant to proposed Rule 18a-1 or the computation of tangible net worth pursuant to proposed Rule 18a-2. The trial balances and computations would need to be prepared at least once a month in relation to the financial reporting on Form SBS that the Commission is proposing for these registrants under proposed Rule 18a-7. 166 164 See paragraph (a)(9) of proposed Rule 18a-5. 165 See id. See also Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70213 (proposing Rule 18a-1 applicable to stand-alone SBSDs and Rule 18a-2 applicable to nonbank MSBSPs that would establish capital standards for these registrants). 166 The proposed requirements to file Form SBS are discussed below in section II.B.2. of this release. Associated Persons Paragraph (a)(12) of Rule 17a-3 requires broker-dealers to make and keep current records of information about associated persons of the broker-dealer. 167 This requirement will apply to broker-dealer SBSDs and broker-dealer MSBSPs and, therefore, the Commission is not proposing to amend paragraph (a)(12) to account for security-based swaps. 168 The Commission, however, is proposing to include parallel provisions in paragraphs (a) and (b) of proposed Rule 18a-5. 169 Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would be required to make and keep current a questionnaire or application for employment for each associated person, which must include the associated person's identifying information, business affiliations for the past ten years, relevant disciplinary history, relevant criminal record, and place of business, among other things. 170 167 See 17 CFR 240.17a-3(a)(12). 168 As discussed below in section II.A.2.b. of this release, the Commission is proposing technical amendments to paragraph (a)(12) of Rule 17a-3. 169 Compare 17 CFR 240.17a-3(a)(12), with paragraphs (a)(10) and (b)(8) of proposed Rule 18a-5. 170 See paragraph (a)(10) and (b)(8) of proposed Rule 18a-5. Unlike paragraph (a)(12) of Rule 17a-3, paragraphs (a)(10) and (b)(8) do not permit applications of registration made by the associated person to an SRO to satisfy the requirements because the Dodd-Frank Act did not establish SROs for SBSDs and MSBSPs. Compare 17 CFR 240.17a-3(a)(12), with paragraph (a)(10) and (b)(8) of proposed Rule 18a-5. Further, the Commission is proposing to amend the definition of associated person in Rule 17a-3 to include in the definition a person associated with an SBSD or MSBSP as defined under section 3(a)(70) of the Exchange Act. 171 Section 761 of the Dodd-Frank Act added section 3(a)(70) to the Exchange Act to define the terms person associated with a security-based swap dealer or major security-based swap participant and associated person of a security-based swap dealer or major security-based swap participant . 172 Paragraph (c)(1) of proposed Rule 18a-5 similarly would provide that the term associated person means for the purposes of proposed Rule 18a-5 a person associated with an SBSD or MSBSP as defined under section 3(a)(70) of the Exchange Act. 173 Paragraph (c)(2) of proposed Rule 18a-5 would limit the definition of the term associated person for purposes of the rule and with respect to bank SBSDs and bank MSBSPs to persons whose activities relate to the conduct of business as an SBSD or MSBSP. 174 171 See paragraph (f)(4) of Rule 17a-3, as proposed to be amended; 15 U.S.C. 78c(a)(70). 172 See Public Law 111-203, 761; 15 U.S.C. 78c(a)(70). 173 See paragraph (c)(1) of proposed Rule 18a-5. 174 See paragraph (c)(2) of proposed Rule 18a-5. Liquidity Stress Test Funding liquidity risk has been defined as the risk that a firm will not be able to efficiently meet both expected and unexpected current and future cash flow and collateral needs without adversely impacting either the daily operations or the financial condition of the firm. 175 The financial crisis of 2008 demonstrated that the funding liquidity risk management practices of certain individual financial institutions were not sufficient to handle a liquidity stress event of that magnitude. 176 In particular, it has been observed that the stress tests utilized at the time by financial institutions had weaknesses 177 and the amount of contingent liquidity they maintained to replace external sources of funding was insufficient to cover the institutions' liquidity needs. 178 175 See Joint Forum, Bank for International Settlements, The management of liquidity risk in financial groups, 1 n.1 (May 2006), available at http://www.bis.org/publ/joint16.pdf . See also Basel Committee on Banking Supervision, Bank for International Settlements, Principles for Sound Liquidity Risk Management and Supervision, n.2 (Sept. 2008), available at http://www.bis.org/publ/bcbs144.pdf (“Funding liquidity risk is the risk that the firm will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs without affecting either daily operations or the financial condition of the firm. Market liquidity risk is the risk that a firm cannot easily offset or eliminate a position at the market price because of inadequate market depth or market disruption.”); Amendments to Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 55432 (Mar. 9, 2007), 72 FR 12862, 12870 n.72 (Mar. 19, 2007) (“Liquidity risk includes the risk that a firm will not be able to unwind or hedge a position or meet cash demands as they become due.”); Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies, Federal Reserve, 77 FR 594 (Jan. 5, 2012) (proposing a rule to require certain large financial institutions to conduct liquidity stress testing at least monthly). 176 See Senior Supervisors Group, Risk Management Lessons from the Global Bank Crisis of 2008, (Oct. 21, 2009), available at http://www.sec.gov/news/press/2009/report102109.pdf . 177 Id. at 14 (“Market conditions and the deteriorating financial state of firms exposed weaknesses in firms' approaches to liquidity stress testing, particularly with respect to secured borrowing and contingent funding needs. These deteriorating conditions underscored the need for greater consideration of the overlap between systemic and firm-specific events and longer time horizons, and the connection between stress tests and business-as-usual liquidity management.”). 178 Id. at 15 (“Interviewed firms typically calculated and maintained a measurable funding cushion, such as `months of coverage,' which is conceptually similar to rating agencies' twelve-month liquidity alternatives analyses. Some institutions were required to maintain a liquidity cushion that could withstand the loss of unsecured funding for one year. Many institutions found that this metric did not capture important elements of stress that the organizations faced, such as the loss of secured funding and demands for collateral to support clearing and settlement activity and to mitigate the risks of accepting novations.”) (emphasis in the original). The Commission has proposed that certain broker-dealers, including broker-dealer SBSDs, and certain stand-alone SBSDs be subject to liquidity stress test requirements. 179 In particular, the Commission has proposed amendments to Rule 15c3-1 that would establish liquidity stress test requirements for broker-dealers that have been approved to use internal models to calculate market and credit risk charges when computing net capital (“ANC broker-dealers”), which would include broker-dealer SBSDs approved to use internal models for this purpose (“ANC broker-dealer SBSDS”). 180 The Commission has proposed identical liquidity stress test requirements for stand-alone SBSDs that are approved to use internal models to calculate market and credit risk charges when computing net capital under proposed Rule 18a-1 (“stand-alone ANC SBSDs”). 181 Under the proposed liquidity stress test requirements, ANC broker-dealers and stand-alone ANC SBSDs would be required, among other things, to conduct a liquidity stress test at least monthly that takes into account certain assumed conditions lasting for thirty consecutive days and to establish a written contingency funding plan. 179 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70252-70254 (proposing funding liquidity stress test requirements). 180 Id. Rule 15c3-1 requires that a broker-dealer perform two calculations: (1) A computation of the minimum amount of net capital the firm must maintain; and (2) a computation of the amount of net capital the firm is maintaining. See 17 CFR 240.15c3-1. In computing net capital, a broker-dealer must, among other things, make certain adjustments to net worth such as deducting illiquid assets and taking other capital charges and adding qualifying subordinated loans. See 17 CFR 240.15c3-1(c)(2)(i) through (xiii). The amount remaining after these deductions is defined as tentative net capital . See 17 CFR 240.15c3-1(c)(15). The final step in computing net capital is to take prescribed percentage deductions (“standardized haircuts”) from the mark-to-market value of the proprietary positions ( e.g., securities, money market instruments, and commodities) that are included in tentative net capital. See 17 CFR 240.15c3-1(c)(2)(vi). The standardized haircuts are designed to account for the market risk inherent in these positions and to create a buffer of liquidity to protect against other risks associated with the securities business. ANC broker-dealers and OTC derivatives dealers are permitted, with Commission approval, to calculate net capital using internal models as the basis for taking market risk and credit risk charges in lieu of the standardized haircuts for classes of positions for which they have been approved to use models. See 17 CFR 240.15c3-1(a)(5) and (a)(7); 17 CFR 240.15c3-1e; 17 CFR 240.15c3-1f. Broker-dealer SBSDs that seek to use internal models to calculate market and credit risk charges when computing net capital would need to be approved to operate as ANC broker-dealers. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70217-70256. Theoretically, a broker-dealer MSBSP could be authorized to operate as an ANC broker-dealer, in which case it would be subject to the liquidity stress test requirement. 181 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70252-70254. To promote compliance with these proposed requirements and the risk management practices of ANC broker-dealers, the Commission is proposing to amend Rule 17a-3 to add a requirement that ANC broker-dealers, including ANC broker-dealer SBSDs, make and keep current a report of the results of the monthly liquidity stress test, a record of the assumptions underlying the liquidity stress test, and the liquidity funding plan required under the proposed amendments to Rule 15c3-1. 182 The Commission is not proposing to include a similar provision in paragraph (b) of proposed Rule 18a-5 applicable to bank SBSDs because these registrants would not be subject to the Commission's capital requirements, including the funding liquidity stress test requirement. However, the Commission is proposing to include a parallel provision applicable to stand-alone SBSDs in paragraph (a) of proposed Rule 18a-5 that is modeled on the requirement that would be added to Rule 17a-3, as proposed to be amended. 183 Consequently, stand-alone ANC SBSDs would be required to make and keep current a report of the results of the monthly liquidity stress test, a record of the assumptions underlying the liquidity stress test, and the liquidity funding plan. 184 182 See paragraph (a)(24) of Rule 17a-3, as proposed to be amended. 183 Compare paragraph (a)(24) of Rule 17a-3, as proposed to be amended, with paragraph (a)(11) of proposed Rule 18a-5. 184 See paragraph (a)(11) of proposed Rule 18a-5. Account Equity and Margin Calculations Under Proposed Rule 18a-3 The Commission has proposed Rule 18a-3, which would establish margin requirements with respect to non-cleared security-based swaps applicable to nonbank SBSDs and nonbank MSBSPs. 185 Proposed Rule 18a-3 would require nonbank SBSDs, among other things, to perform two daily calculations for each security-based swap account: The amount of equity in the account and a margin amount for the account. 186 Nonbank MSBSPs would be required to calculate only the equity in the account. 187 The Commission is proposing to require that nonbank SBSDs and nonbank MSBSPs make and keep current a record of the daily calculations that would be required under Rule 18a-3 by amending Rule 17a-3 and including a parallel provision in paragraph (a) of proposed Rule 18a-5. 188 The objective of these requirements is to promote compliance with proposed Rule 18a-3, to require records to assist nonbank SBSDs and nonbank MSBSPs in managing their credit risk to security-based swap counterparties, and to assist Commission examiners in reviewing compliance with those rule requirements. 189 185 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70257-70274. 186 Id. at 70260-70262. 187 Id. at 70262-70263. 188 See paragraph (a)(25) of Rule 17a-3, as proposed to be amended; paragraph (a)(12) of proposed Rule 18a-5. See also Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70257-70274. 189 As discussed above in section I. of this release, section 15F(e)(1)(A) of the Exchange Act provides that the prudential regulators shall prescribe capital and margin requirements for bank SBSDs and bank MSBSPs. See 15 U.S.C. 78o-10(e)(1)(A). Possession or Control Requirements Under Proposed Rule 18a-4 Rule 15c3-3 under the Exchange Act (“Rule 15c3-3”) requires a broker-dealer that carries customer securities or cash (a “carrying broker-dealer”) to maintain physical possession or control over customers' fully paid and excess margin securities. 190 Physical possession or control means the carrying broker-dealer must hold these securities in one of several locations specified in Rule 15c3-3 and free of liens or any other interest that could be exercised by a third party to secure an obligation of the broker-dealer. 191 Permissible locations include a bank, as defined in section 3(a)(6) of the Exchange Act, and a clearing agency. 192 The Commission has proposed Rule 18a-4 to establish security-based swap customer protection requirements that are modeled on the requirements in Rule 15c3-3. 193 Paragraph (b)(1) of proposed Rule 18a-4 would require an SBSD to promptly obtain and thereafter maintain physical possession or control of all excess securities collateral carried for the accounts of security-based swap customers. 194 The physical possession or control requirement of paragraph (b)(1) of proposed Rule 18a-4 would prohibit SBSDs from lending or hypothecating excess securities collateral of security-based swap customers, and would require SBSDs to either physically hold excess securities collateral or to custody the collateral in a satisfactory control location. 195 Paragraph (b)(2) of proposed new Rule 18a-4 would identify five satisfactory control locations for excess securities collateral. 196 Paragraph (b)(3) of Rule 18a-4 would require that each business day the SBSD must determine from its books and records the quantity of excess securities collateral that the firm had in its possession or control as of the close of the previous business day and the quantity of excess securities collateral the firm did not have in its possession or control on that day. 197 The paragraph would provide further that the SBSD must take steps to retrieve excess securities collateral from certain specifically identified non-control locations if securities and money market instruments of the same issue and class are at these locations. 198 190 See 17 CFR 240.15c3-3(d). The term fully paid securities includes all securities carried for the account of a customer in a special cash account as defined in Regulation T promulgated by the Federal Reserve, as well as margin equity securities within the meaning of Regulation T which are carried for the account of a customer in a general account or any special account under Regulation T during any period when section 8 of Regulation T (12 CFR 220.8) specifies that margin equity securities shall have no loan value in a general account or special convertible debt security account, and all such margin equity securities in such account if they are fully paid: provided, however, that the term fully paid securities shall not apply to any securities which are purchased in transactions for which the customer has not made full payment. See 17 CFR 240.15c3-3(a)(3). The term margin securities means those securities carried for the account of a customer in a general account as defined in Regulation T, as well as securities carried in any special account other than the securities referred to in paragraph (a)(3) of Rule 15c3-3. See 17 CFR 240.15c3-3(a)(4). The term excess margin securities means those securities referred to in paragraph (a)(4) of Rule 15c3-3 carried for the account of a customer having a market value in excess of 140% of the total of the debit balances in the customer's account or accounts encompassed by paragraph (a)(4) of Rule 15c3-3 which the broker-dealer identifies as not constituting margin securities. See 17 CFR 240.15c3-3(a)(5). 191 See 17 CFR 240.15c3-3(c). Customer securities held by the carrying broker-dealer are not assets of the firm. Rather, the carrying broker-dealer holds them in a custodial capacity and the possession or control requirement is designed to ensure that the carrying broker-dealer treats them in a manner that allows for their prompt return. 192 Id. 193 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70274-70288. As broker-dealers, broker-dealer SBSDs and broker-dealer MSBSPs would be subject to Rule 15c3-3 with respect to customers that are not security-based swap customers and, in the case of a broker-dealer SBSD, Rule 18a-4 with respect to security-based swap customers. Id. at 70277 (“A broker-dealer SBSD would need to treat security-based swap accounts separately from other securities accounts and, consequently, would need to perform separate possession or control and reserve account computations for security-based swap accounts and other securities accounts. The former would be subject to the possession or control and reserve account requirements in proposed new Rule 18a-4 and the latter would continue to be subject to the analogous requirements in Rule 15c3-3. This would keep separate the segregated customer property related to security-based swaps from customer property related to other securities, including property of retail securities customers.”). 194 Under proposed Rule 18a-4, the term excess securities collateral would be defined to mean 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 SBSD to the customer, excluding, under certain specified conditions, securities or money market instruments used to meet a margin requirement of a registered security-based swap clearing agency or of another SBSD. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70279. As noted above, the term security-based swap customer would be defined to mean any person from whom or on whose behalf the SBSD has received or acquired or holds funds or other property for the account of the person with respect to a cleared or non-cleared security-based swap transaction. Id. at 70278. The definition would exclude a person to the extent that person has a claim for funds or other property which by contract, agreement or understanding, or by operation of law, is part of the capital of the SBSD or is subordinated to all claims of security-based swap customers of the SBSD. Id. 195 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70278. 196 Id. at 70280-70281. 197 Id. at 70281-70282. 198 Id. at 70281. The Commission is proposing to require that all SBSDs make and keep current a record of compliance with the possession or control requirement under proposed Rule 18a-4 by amending Rule 17a-3 to add this new requirement and including parallel requirements in paragraphs (a) and (b) of proposed Rule 18a-5. 199 Consequently, this new recordkeeping requirement would apply to broker-dealer SBSDs, stand-alone SBSDs, and bank SBSDs. 200 The records required under this proposal would need to document that each business day the firm took the steps required under paragraph (b) of proposed Rule 18a-3 described above. The objective of this new recordkeeping requirement would be to promote compliance with the possession or control requirements of proposed Rule 18a-4 and to assist Commission examiners in reviewing compliance. 199 See paragraph (a)(26) of Rule 17a-3, as proposed to be amended; paragraphs (a)(13) and (b)(9) of proposed Rule 18a-5. 200 See id. Customer Reserve Requirements Under Proposed Rule 18a-4 Rule 15c3-3 requires a carrying broker-dealer to maintain a reserve of funds or qualified securities in an account at a bank that is at least equal in value to the net cash owed to customers. 201 The amount of net cash owed to customers is computed pursuant to a formula set forth in Exhibit A to Rule 15c3-3. 202 The Commission has proposed a parallel requirement in proposed Rule 18a-4. 203 Proposed Rule 18a-4 would require an SBSD, among other things, to maintain a security-based swap customer reserve account at an unaffiliated bank separate from any other bank account of the SBSD. 204 Further, it would provide that the SBSD must at all times maintain in the security-based swap customer reserve account cash and/or qualified securities in amounts computed daily in accordance with Exhibit A to proposed Rule 18a-4. 205 201 See 17 CFR 240.15c3-3(e). The term qualified security is defined in Rule 15c3-3 to mean a security issued by the U.S. or a security in respect of which the principal and interest are guaranteed by the U.S. See 17 CFR 240.15c3-3(a)(6). 202 See 17 CFR 240.15c3-3a. 203 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70282-70287. As noted above, broker-dealer SBSDs and broker-dealer MSBSPs would be subject to Rule 15c3-3 with respect to customers that are not security-based swap customers and, in the case of a broker-dealer SBSD, Rule 18a-4 with respect to security-based swap customers. 204 Id. 205 Id. The Commission is proposing to require that all types of SBSDs make and keep current a record of their reserve computations under proposed Rule 18a-4 by amending Rule 17a-3 to add the requirement and to include parallel requirements in paragraphs (a) and (b) of proposed Rule 18a-5. 206 The objective of this requirement would be to promote SBSD compliance with the customer reserve computation requirement and to assist Commission examiners in reviewing compliance. 206 See paragraph (a)(27) of Rule 17a-3, as proposed to be amended; paragraphs (a)(14) and (b)(10) of proposed Rule 18a-5. Unverified Transactions Prudent practice requires counterparties to promptly confirm the terms of executed OTC derivatives transactions. 207 Consequently, the Commission proposed Rule 15Fi-1 to promote the efficient operation of the security-based swap market and to facilitate market participants' management of the risk of trading in security-based swaps. 208 Among other things, proposed Rule 15Fi-1 would require broker-dealers, SBSDs, and MSBSPs to provide trade acknowledgments containing the details of a security-based swap transaction within prescribed timeframes and to establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the terms of the trade acknowledgments. 209 207 See Trade Acknowledgment and Verification of Security-Based Swap Transactions, 76 FR 3860. 208 Id. at 3861. 209 Id. at 3861-3867. To promote compliance with proposed Rule 15Fi-1 and the risk management practices of broker-dealers, SBSDs, and MSBSPs, the Commission is proposing to amend Rule 17a-3 to add a requirement to make a record of each security-based swap trade acknowledgment that is not verified within five business days of execution and to include parallel provisions in paragraphs (a) and (b) of proposed Rule 18a-5. 210 Consequently, all types of SBSDs and MSBSPs would be required to make and keep current these records. While the Commission did not prescribe a timeframe in proposed Rule 15Fi-1 within which security-based swap trade acknowledgements would need to be verified, the proposed rule does require procedures reasonably designed to obtain “prompt verification.” 211 The proposed requirement to make a record of security-based swap trade acknowledgments that are not verified within five business days is not intended to establish a m [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2014-09108. Public record. Not legal advice.