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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
cover all liabilities rather than those maturing in 365 days as was proposed.
These modifications align the first prong more closely to the $100 million tentative net capital requirement of Exchange Act rule 18a1 applicable to SBS Entities approved to use models. As discussed above, Exchange Act rule 18a1 requires SBS Entities that have been approved to use models to maintain at least $100 million in tentative net capital. And, tentative net capital is the amount that an SBS
Entitys liquid assets exceed its total unsubordinated liabilities before applying haircuts. The first prong will require the Covered Entity to subtract total liabilities from total liquid assets.
The amount remaining will need to equal or exceed $100 million. The modifications also align the condition more closely to the $20 million fixeddollar minimum net capital requirement of Exchange Act rule 18a1. As discussed above, net capital is calculated by applying haircuts deductions to tentative net capital and the fixed-dollar minimum requires that net capital must equal or exceed $20
million. The first prong will require the Covered Entity to subtract total liabilities from total liquid assets and then apply the deduction to the difference. The amount remaining after the deduction will need to equal or exceed $20 million.
For the purposes of the first prong of the second additional capital condition, liquid assets are defined as: 1 Cash and cash equivalents; 2 collateralized agreements; 3 customer and other trading related receivables; 4 trading and financial assets; and 5 initial margin posted by the Covered Entity to a counterparty or third-party subject to certain conditions discussed below.242
These categories of liquid assets are designed to align with assets that are considered allowable assets for purposes of calculating net capital under Exchange Act rule 18a1.243
Further, the first four categories of liquid assets also are designed to align with how Covered Entities categorize liquid assets on their financial statements.244 In addition, a commenter 242 See
para. c1iiiB of the Order.
supra notes 224 and 230 describing allowable assets under Exchange Act rule 18a1.
244 The Bank of England publishes a list of the investment firms that have been designated to the PRA PRA-designated investment firms. This list is available at: https www.bankofengland.co.uk/
prudential-regulation/authorisations/which-firmsdoes-the-pra-regulate. As part of the application process, the FCA has stated that the only nonbank i.e., non-prudentially regulated UK dealers that will register with the Commission as security-based swap dealers are PRA-designated investment firms.
The commenter that provided the table showing the
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submitted a table summarizing categories of liquid assets on the balance sheets of six UK dealers Balance Sheet Table that the commenter expects will register with the Commission as security-based swap dealers, and that do not have a prudential regulator and therefore would be subject to Exchange Act rule 18a1.245
The first category of liquid assets is cash and cash equivalents.246 These assets consist of cash and demand deposits at banks net of overdrafts and highly liquid investments with original maturities of three months or less that are readily convertible into known amounts of cash and subject to insignificant risk of change in value.247
balance sheets of six UK investment firms makes the same statement. See SIFMA 5/3/2021 Letter Appendix A We expect all covered entities to be banks or PRA-designated investment firms.
According to the Bank of England, the following dealers are PRA-designated investment firms as of January 4, 2021: Barclays Capital Securities Limited, Citigroup Global Markets Limited, Credit Suisse Securities Europe Ltd, Goldman Sachs International, Merrill Lynch International, MUFG
Securities EMEA plc, Morgan Stanley & Co.
International Plc, and Nomura International Plc.
These PRA-designated investment firms publish annual audited financial statements. See, e.g., Barclays Capital Securities Limited 2020 Annual Report, available at: https find-andupdate.company-information.service.gov.uk/
company/01929333/filing-history; Citigroup Global Markets Limited 2019 Annual Report, available at:
https find-and-update.companyinformation.service.gov.uk/company/01763297/
filing-history; Credit Suisse Securities Europe Limited Annual Report 2020, available at: https
www.credit-suisse.com/ch/en/investment-banking/
financial-regulatory/european-financials.html;
Goldman Sachs International Annual Report 2020, available at: https www.goldmansachs.com/
investor-relations/financials/current/subsidiaryfinancial-info/gsi/123120-financialstatements.pdf; Merrill Lynch International 2020
Annual Report, available at: https
d1io3yog0oux5.cloudfront.net/_9d85f1cf3d21160d 5542784492310fed/bankofamerica/db/914/9397/
pdf/Merrill+Lynch+International+2020+
Financial+Statements.pdf; MUFG Securities EMEA
plc 2020 Annual Report, available at: https
www.mufgemea.com/images/mufg/MUS_EMEA_
Financial_Statement_2020.pdf; Morgan Stanley &
Co. International Plc 2020 Annual Report, available at: https www.morganstanley.com/about-us-ir/
pdf/MSIP_Group_Accounts_31_December_
2020.pdf; and Nomura International Plc 2020
Annual Report, available at: https find-andupdate.company-information.service.gov.uk/
company/01550505/filing-history.
245 See SIFMA 5/3/2021 Letter at 1011, Appendix C. The categories of liquid assets identified in the Balance Sheet Table are: 1 Cash/
Cash Equivalents; 2 Collateralised Agreements;
3 Trade/Other Receivables; cash collateral pledged; and 4 Trading/Financial Assets.
SIFMA 5/3/2021 Letter Appendix C.
246 See para. c1iiiB1 of the Order.
247 See, e.g., International Financial Reporting Standards Foundation IFRS, IAS 7 Statement of Cash Flows defining cash as comprising cash on hand and demand deposits and cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. See also Books and Records Adopting
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The second category of liquid assets is collateralized agreements.248 These assets consist of secured financings where securities serve as collateral such as repurchase agreements and securities loaned transactions.249 The third category of liquid assets is customer and other trading related receivables.250
These assets consist of customer margin loans, receivables from broker-dealers, receivables related to fails to deliver, and receivables from clearing organizations.251 The fourth category of liquid assets is trading and financial assets.252 These assets consist of cash market securities positions and listed and over-the-counter derivatives positions.253
As discussed above, initial margin posted to a counterparty is treated differently under Exchange Act rule 18a1 and the Basel capital standard, and commenters highlighted this difference.254 The fifth category of liquid assets is initial margin posted by the Covered Entity to a counterparty or a third-party custodian, provided: 1
The initial margin requirement is funded by a fully executed written loan agreement with an affiliate of the Covered Entity; 2 the loan agreement provides that the lender waives repayment of the loan until the initial margin is returned to the Covered Entity; and 3 the liability of the Covered Entity to the lender can be fully satisfied by delivering the collateral serving as initial margin to the Release, 84 FR at 6867374 the section of the amended Part II of the FOCUS Report setting forth the assets side of the balance sheet and identifying cash as an allowable asset in Box 200.
248 See para. c1iiiB2 of the Order.
249 See Books and Records Adopting Release, 84
FR at 6867374 the section of the amended Part II
of the FOCUS Report setting forth the assets side of the balance sheet and identifying securities borrowed as an allowable asset in Boxes 240 and 250 and securities purchased under agreements to resell as an allowable asset in Box 360.
250 See para. c1iiiB3 of the Order.
251 See Books and Records Adopting Release, 84
FR at 6867374 the section of the amended Part II
of the FOCUS Report setting forth the assets side of the balance sheet and identifying fails to deliver as allowable assets in Boxes 220 and 230, receivables from clearing organizations as allowable assets in Boxes 280 and 290, and receivables from customers as allowable assets in Boxes 310, 320, and 330.
252 See para. c1iiiB4 of the Order.
253 See Books and Records Adopting Release, 84
FR at 6867374 the section of the amended Part II
of the FOCUS Report setting forth the assets side of the balance sheet and identifying securities, commodities, and swaps positions as allowable assets in Box 12019.
254 See Better Markets Letter at 7; Americans for Financial Reform Education Fund Letter at 2. See also UK Substituted Compliance Notice and Proposed Order, 86 FR at 18387 discussing the different treatment of initial margin posted to a counterparty.

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