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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations
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must maintain sufficient liquid assets to cover six months of projected operating costs. As discussed above, the Commission is adopting acceptable practices to provide further guidance on the costs that a SEF, based on its reasonable discretion, may exclude from its projected operating costs when determining its financial obligations under amended 37.1303.
Amended 37.1306a requires a SEFs quarterly financial submissions to conform to U.S. GAAP, or in the case of a non-U.S. domiciled SEF that is not otherwise required to prepare U.S.
GAAP-compliant statements, to prepare its statements in accordance with either the International Financial Reporting Standards issued by the International Accounting Standards Board, or a comparable international standard that the Commission may accept in its discretion. Amended 37.1306c provides that a SEFs quarterly financial statements must explicitly: i Identify all the SEFs expenses without any exclusions; ii identify all expenses and corresponding amounts that the SEF
excluded or prorated when it determined its projected operating costs;
iii explain why the SEF excluded or prorated any expenses; and iv identify and explain all costs necessary to wind down the SEFs operations. Amended 37.1306d extends the deadline for a SEFs fourth-quarter financial statement from 60 to 90 days after the end of such fiscal quarter to conform to the extended deadline for a SEFs annual compliance report. Amended 37.1306e is a new rule that requires a SEF to provide notice no later than 48 hours after it knows or reasonably should know it no longer meets its financial resources obligations.
ii. Benefits The Commission expects amended 37.1301a to reduce the total financial assets that most SEFs must maintain because a SEF will only be required to maintain sufficient resources to cover its operations necessary to comply with its core principle obligations and applicable Commission regulations, rather than all of its operating costs as is required by existing 37.1301a.
With respect to 37.1301a, the acceptable practices provide further guidance regarding the scope of a SEFs reasonable discretion when determining the SEFs financial requirements under amended 37.1301a to exclude certain expenses from its projected operating cost calculations, thereby reducing the amount of total financial assets that a SEF must maintain under amended 37.1301a. To the extent that the acceptable practices generally adopt the
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Commission staffs existing financial resources guidance, SEFs may already have realized the benefits associated with reduced financial resources requirements.
The liquidity requirement in amended 37.1303 significantly reduces the amount of liquid financial assets that must be maintained by most SEFs.
Currently, a SEF must maintain liquid financial assets equal to six months of projected operating costs, while amended 37.1303 only requires most SEFs to maintain three months of projected operating costs. As a result, amended 37.1303 is expected to reduce the liquidity requirement for most SEFs by 50 percent.247 In addition, a SEF currently must maintain liquid assets equal to six months of operating costs even if the SEFs actual winddown costs are greater. For certain SEFs with wind-down costs that exceed six months of operating costs, amended 37.1303 augments market integrity for such SEFs by requiring them to maintain additional liquid assets to cover their wind-down costs, even if the SEFs wind-down would exceed six months, but in no event would a SEF be permitted to maintain less than three months of operating costs.
Amended 37.1304 provides that a SEF must make a reasonable calculation of projected wind-down costs, but has reasonable discretion in adopting the methodology for calculating such costs.
The finalized acceptable practices expound upon the reasonable discretion that a SEF has for computing its projected operating costs to exclude certain expenses from its projected three months of operating cost calculations.
The Commission believes the Final Rules provide SEFs with greater flexibility in terms of establishing their financial resources. This, in turn, may lead to greater efficiencies in terms of financing and capital allocation and investment. However, the Commission acknowledges, as discussed below, this flexibility may increase the level of financial risk at the SEF.
Amended 37.1306a and c will increase transparency and augment the Commissions oversight by requiring SEFs to provide standardized, U.S.
247 The Commission notes that the current liquidity requirement in existing 37.1305, as well as amended 37.1303, permits a SEF to acquire a committed line of credit to satisfy the liquidity requirement. However, the Commission notes that most SEFs satisfy this requirement through maintaining liquid assets rather than obtaining a line of credit. Accordingly, as a practical matter, the Commission expects amended 37.1303 to reduce the amount of liquid assets that a SEF must maintain. Moreover, the Commission notes that there would be additional associated costs if a SEF
were to obtain a committed line of credit.

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GAAP-compliant financial submissions that explicitly identify any cost a SEF
has excluded or prorated in determining its projected operating costs. In its experience conducting ongoing SEF
oversight, Commission staff has devoted additional effort to obtain appropriate clarity and sufficient documentation from SEFs. Therefore, the Commission believes that establishing the minimum documentation that a SEF must provide will mitigate the time and resources required both by Commission staff in conducting its oversight and by SEFs in responding to Commission staffs requests for additional information.
Final 37.1306e benefits market integrity by ensuring that the Commission is aware of any noncompliance 48 hours after a SEF knows or reasonably should know that it fails to satisfy its financial resources obligations rather than when the SEF
submits its quarterly financial statement under 37.1306a, increasing the Commissions ability to promptly respond.
iii. Costs Amended 37.1301a reduces the amount of financial resources a SEF
must maintain to an amount that will enable the SEF to comply with its core principle obligations and applicable Commission regulations for a one-year period, calculated on a rolling basis, rather than in an amount necessary to cover all of the SEFs operations as required under existing 37.1301a.
The acceptable practices provide guidance on the costs that a SEF may exclude when determining its obligations under amended 37.1301a.
As a result, amended 37.1301a as supplemented by the acceptable practices likely will induce SEFs to reduce the current level of total financial resources that they maintain under 37.1301. In turn, this could decrease market participants confidence and could harm a SEFs stability during adverse market conditions because the SEF may not have adequate financial resources to cover its costs. However, the Commission believes the potential harm to a SEFs financial stability and to the market is minimal because amended 37.1301a addresses only the amount of a SEFs total financial assets, which includes illiquid assets, rather than focusing only on a SEFs liquid assets.
The Commission notes that illiquid assets are less important compared to the amount of liquid financial assets that a SEF must maintain under amended 37.1303 since it is more difficult for a SEF to timely liquidate its illiquid assets to cover its operating
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