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Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices
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comply with the net liquid assets test under Exchange Act rule 18a1, rather than the Basel capital standards.216 The commenter stated that the net liquid assets test appropriately limits uncollateralized lending, fixed assets, and other illiquid assets such as real estate which have been proven repeatedly to be unreliable forms of capital but are currently counted as allowable capital under the Basel capital standard.217 This commenter also agreed with the Commission that the initial margin that is posted is not available for other purposes and therefore, under the Basel standard, could swiftly result in less balance sheet liquidity than the standards under the Exchange Acts Rule 18a1. 218
A commenter supported the Commissions proposed Order to grant substituted compliance in connection with the Exchange Act capital requirements.219 This commenter, however, opposed additional capital conditions.220 The commenter reiterated this opposition with respect to the potential four pronged capital condition for which the Commission sought comment in the Reopening Release.221
The commenter stated that the potential capital condition was unnecessary, unduly rushed, and highly likely to be costly and disruptive to market participants and inconsistent with the Commissions substituted compliance framework.222 More specifically, this commenter stated that the potential capital conditions was unnecessary because Covered Entities transact predominantly in securities and 216 See id. We support the Commissions proposal to require foreign security-based swap dealers and participants Covered Entities to abide by capital and initial margin requirements that reflect Exchange Act rule 18a1 standards appropriate for broker-dealers, as opposed to Basel capital requirements for banks that permit illiquid assets to count toward capital minimums..
217 Id.
218 Id. at 2.
219 SIFMA Letter I at 10. See also FBF Letter I at 4; EBF Letter I at 1 generally supporting SIFMA
Letter I.
220 SIFMA Letter I at 1113. See also FBF Letter I at 4.
221 SIFMA Letter II at 717. See also EBF Letter II at 1 The EBF further shares SIFMAs serious concerns that the potential conditions to substituted compliance with capital requirements described in the Release would create brand new, far-ranging capital and liquidity requirements that could not be established prior to the compliance date. and FBF
II Letter at 34 Last but certainly not least, the FBF shares SIFMAs serious concerns that the potential conditions to substituted compliance with capital requirements described in the Release would result in brand new, far-ranging capital and liquidity requirements that could not be established in time for registration, and would essentially force an exit of the relevant entity category from the U.S.
SBS market prior to the de minimis counting date.
222 SIFMA Letter II at 717.

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derivatives, do not extensively engage in unsecured lending or other activities more typical of banks, and are already subject to extensive liquidity requirements.223 The commenter also expressed concern that the potential capital condition was inconsistent with the Commissions substituted compliance framework in that it was duplicative of and would contradict the liquidity requirements established by French and EU authorities.224 This commenter stated that the imposition of the potential capital condition would effectively substitute the Commissions judgment for that of the French and EU
authorities in terms of the best way to address liquidity risk, and may lead other regulators to refuse to extend deference to the Commissions regulatory determinations.225
With respect to the using the concept of allowable and nonallowable assets under Exchange Act rule 18a1, the commenter stated that the first and second prongs of the potential capital condition do not define these terms and there is no analogous concept in the capital framework applicable in France.226 The commenter stated this would require firms to re-categorize every asset on their balance sheets, which would not be feasible in the near term.227 Further, this commented asked the Commission to clarify what it means by haircuts with respect to the first and second prongs, since the Basel capital standard does not apply haircuts to assets, but instead applies a risk-weighted approach.228
This commenter also stated that the third prong of the potential additional capital condition requiring at least $100 million of equity capital composed of highly liquid assets as defined in the Basel capital standard, includes concepts that require clarification.229
For example, this commenter stated that is unclear how a firm would calculate the amount of its equity capital that is composed of highly liquid assets, since equity generally refers to a firms paid-in capital, retained earnings and other items on the liabilities/
shareholders equity side of the balance sheet.230 Finally, this commenter asserted that because it is approximately three months until the August 6th counting date, and firms may encounter significant operational challenges to
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223 SIFMA

Letter II at 8.
Letter II at 1214.
225 SIFMA Letter II at 13.
226 SIFMA Letter II at 14.
227 SIFMA Letter II at 14.
228 SIFMA Letter II at 14.
229 SIFMA Letter II at 15.
230 SIFMA Letter II at 15.
224 SIFMA

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meet the potential or revised capital condition, the potential condition may cause firms to exit the U.S. securitybased swap market, or hope that the conditions are modified and delayed in a manner that will make it feasible to satisfy them.231
Overall, this commenter stated that the Commission should take a more incremental and deliberative approach to additional capital conditions, and specifically recommended that the Commission: 1 Delete the first prong of the capital condition; 2 replace the second prong with a requirement that a nonbank Covered Entity provide the same reports concerning liquidity metrics that the Covered Entity provides to the French and EU authorities; 3
modify the third prong to require a nonbank Covered Entity to maintain at least $100 million of high quality liquid assets, as defined in the Basel capital standard; and 4 issue an order on October 6, 2024, determining whether to maintain, delete, modify or supplement the condition, based on consideration of the liquidity of nonbank Covered Entities, and after publishing a notice of any such changes for at least 90 days of public comment.232
The Commission agrees with the commenters who point out the differences between the capital standard of Exchange Act rule 18a1 i.e., the net liquid assets test and the Basel capital standard applicable to Covered Entities, and who therefore believe thatat a minimumadditional capital conditions are necessary to achieve comparable regulatory outcomes.233 As the Commission explained when seeking comment on the potential additional capital condition, the net liquid assets test is designed to promote liquidity.234 In particular, Exchange Act rule 18a1 allows an SBS Entity to engage in activities that are part of conducting a securities business e.g., taking securities into inventory but in a manner that places the firm in the position of holding at all times more than one dollar of highly liquid assets for each dollar of unsubordinated liabilities e.g., money owed to customers, counterparties, and creditors.235 For example, Exchange 231 SIFMA

Letter II at 1516.
Letter II at 1617.
233 See AFREF Letter at 12; Better Markets Letter at 78.
234 See Reopening Release, 86 FR at 1834345
explaining the differences between Exchange Act rule 18a1 and the Basel capital standard.
235 See, e.g., Exchange Act Release No. 8024 Jan.
18, 1967, 32 FR 856 Jan. 25, 1967 Rule 15c3
1 17 CFR 240.15c31 was adopted to provide safeguards for public investors by setting standards of financial responsibility to be met by brokers and 232 SIFMA

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