Proposed capital rules for swap dealers and security-based swap dealers

In December 2016, the Commodity Futures Trading Commission (“CFTC”) released its re-proposed capital rules for swap dealers (“SDs”) and major swap participants (“MSPs”).1  Additionally, the Securities and Exchange Commission (“SEC”) proposed its capital rules in 20122 for security-based SDs and MSPs.  The CFTC’s re-proposal attempts to accomplish several things, including harmonization with the proposed SEC capital rules.  It further provides optionality for financial and non-financial SDs regarding computing capital under a standardized versus models-based approaches.3  It is important for each financial SD to assess the implications of the proposed rulemaking to its swap dealing operating model.  Questions to consider include:  (1) Why should SDs consider a models-based capital approach versus non-model?  (2) How does entity type (e.g., bank, broker-dealer) impact capital methodology?

Capital methodology

The CFTC and SEC proposed capital rules provide financial SDs some optionality for computing net capital (see Appendix 1).  Specifically, there are two approaches available for computing capital—standardized and models-based—as outlined below:

  • CFTC’s bank-based capital approach would permit financial SDs to elect a capital requirement that has some attributes of the capital rules adopted by the Federal Reserve Board (FRB) for bank holding companies (Basel III, standard and advanced approaches)
  • CFTC’s net liquid assets capital approach would permit financial SDs to elect a capital requirement based on existing and proposed rules governing futures commission merchants (“FCMs”), broker-dealers, and security-based SDs. This includes:
    • CFTC Regulation 1.17
    • SEC proposed Rule 18a-1 standardized charge methodology, and
    • SEC Rule 15c3-1 Appendix E models-based methodology4

Financial institutions may apply with the SEC and the National Futures Association (“NFA”) for models-based capital treatment, where capital is computed using market and credit risk models.

Capital considerations

The re-proposal emphasizes inter-agency harmonization of the rules and the use of quantitative models to compute risk charges.  It also requires financial institutions to consider the following:

  • Financial institutions should consider the following: A models-based capital approach – Under the proposed capital rules, the standardized market and credit risk capital charges would likely require significant amounts of capital infusion, prompting financial institutions to apply for more sophisticated models-based approaches. If a financial institution operates with a risk infrastructure that is—or can be aligned to—the proposed capital rules, a models-based capital approach should be considered.
  • How does an entity type (e.g., bank, broker-dealer) impact capital methodology):
    • Financial institutions that deal in security-based swaps must register with the SEC. Financial institutions that deal in other swaps, including interest rate and indexed credit default swaps, must register with the CFTC.  Banks that register as SDs with either agency are not required to comply with the CFTC or SEC capital rules, only with the capital rules of the banking regulators.
    • Broker-dealers that engage in swaps and security-based swaps require the highest minimum net capital. Such entities would be subject to both the CFTC’s and SEC’s capital requirements.  Currently, the SEC’s proposed capital rules for security-based SDs require $5 billion in net capital before deductions of market and credit risk charges and $6 billion in early warning requirements.
  • How margin requirements for un-cleared swaps impact capital
    • The amount of initial margin required for each un-cleared swap, security-based swap, or futures position—computed on a counterparty-by-counterparty basis—determines the amount of minimum capital required.
    • Without approval for margin models, the requirement calculated under a standardized approach may be onerous and can create challenges for the business.
    • Generally, to the extent that margin is not collected, a capital charge is required.

In addition to the above, a deeper dive into the proposed capital rules raises some considerations on computing capital, including:

  • Floor deduction percentage – A minimum 0.5% standardized deduction percentage is proposed on un-cleared interest rate swaps, leading to a significant impact on capital requirements.
  • Risk charge for over-the-counter (OTC) derivatives – CFTC Regulation 1.17 requires a standardized market risk charge for derivatives to be calculated based on notional amount, leading to a significant capital requirement:
    • CFTC Regulation 1.17 does not recognize hedges between cleared swaps and futures, interest rate swaps, or fixed income securities.

Models-based capital application

The proposed rules would likely push financial institutions toward a models-based capital approach given the onerous nature of the standardized approach.  Although the SEC’s capital rules for security-based SDs have not yet been finalized, the broker-dealer lite rules5 are final and the SEC has an application and approval process for models-based capital in place.  The broker-dealer lite registration and application approval structure can be used as an alternative and later converted to a security-based SD upon finalization of the security-based SD capital rules.  Broker-dealer lite registration allows for exempt borrower status under the FRB’s margin rule (Regulation T).  For jointly registered SDs, models approved by the SEC will be coordinated with the CFTC for joint recognition.  Appendix 2 provides a high-level overview of the models-based capital application process.

How Deloitte can help

Deloitte has been at the forefront of assisting clients with their pro-forma capital calculations and legal entity analyses.  While the rules and standards summarized above continue to be refined by the regulators, there are many things firms can do to prepare.   This includes being proactive in determining how to effectively manage and implement finalized ruling, as well as future rulings. Deloitte welcomes the opportunity to discuss how our Regulatory & Operational Risk professionals can assist in your efforts to meet these regulatory needs or challenges.


Marjorie Forestal
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Mike Jamroz
Independent Senior Advisor to Deloitte & Touche LLP

Claudio Rodriguez
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Alex LePore
Senior Consultant | Deloitte Risk and Financial Advisory
Center for Regulatory Strategy, Americas
Deloitte & Touche LLP

Appendix 1 – Capital requirements summary table

Appendix 2 – Internal model application summary

1CFTC’s proposed Capital Requirements of Swap Dealers and Major Swap Participants
2SEC’s proposed Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers
3For purposes of this document, the focus will only be on financial SDs.
4SEC’s Rule 15c3-1 Appendix E are final rules already in existence.
5See SEC Rule 15c3-1 Appendix F

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2018 Deloitte Development LLC. All rights reserved.

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