On December 2, 2016, the Commodity Futures Trading Commission (CFTC) unanimously approved a re-proposal of rules (the "Proposed Rules" or the "Proposal") that set minimum financial capital requirements for swap dealers (SDs) and major swap participants (MSPs) that are not subject to prudential regulation (each, a "Covered Swap Entity" or "CSE").^[1]The core financial requirement is capital equal to the greatest of $20 million or 8% of the initial margin required on the CSE's cleared and uncleared swaps, security-based swaps, futures and foreign futures, but the Proposed Rules permit or require different types of CSEs to adopt different approaches to meeting these requirements^[2]:

1. A Covered Swap Entity can generally elect one of two approaches to computing its regulatory capital:

   1. an approach (the "bank-based approach") based on maintaining minimum levels of common equity tier 1 capital, as defined under the rules for bank holding companies, or

   2. an approach (the "net liquid assets approach") based on having minimum net capital computed in accordance with the rules adopted by the Securities and   Exchange Commission (SEC) for security-based swap dealers, but with some   specific adjustments.

2. A Covered Swap Entity that is a futures commission merchant (FCM)^[3] must meet existing FCM net capital requirements (as amended by the Proposed Rules to establish market and credit risk charges specifically applicable to swaps and security-based swaps).

3. A CSE that is predominantly engaged in non-financial activities (i.e., at least 85% of its assets and revenues are non-financial) can alternatively elect to meet a tangible net worth test.

4. An SD organized and domiciled outside the United States may follow the capital adequacy requirements of its home jurisdiction if the CFTC has made a capital comparability determination with respect to those non-US rules.

5. An SD that is also a broker-dealer that is registered with the SEC and approved to use internal models as an "alternative net capital" (ANC) firm may simply comply with its existing SEC capital requirements.

6. The only requirement applicable to a major swap participant is that the MSP must maintain a positive tangible net worth.

Exhibit A contains a table summarizing the applicable capital requirements and approaches from the Proposed Rules.

Other noteworthy points concerning the Proposed Rules are as follow:

1. An SD that elects either the bank-based approach or the net liquid assets approach also will be subject to liquidity requirements set in Regulation 23.104(a). For SDs electing the bank-based approach, the liquidity requirement will be based on the liquidity requirements adopted by the prudential regulators. For SDs electing the net liquid assets approach, the liquidity requirement is based on the one proposed by the SEC for security-based swaps. SDs also will have to perform a monthly liquidity stress test, keep liquidity reserves and have a contingency funding plan.

2. The margin prong of the capital requirement for an SD is calculated as 8% of the sum of a) the initial margin owed by the SD on uncleared swaps (without giving effect to the SD's initial margin threshold or minimum transfer amount), b) the initial margin owed by the SD on uncleared security-based swaps (without giving effect to any initial margin threshold or minimum transfer amount set by the SEC), and c) the amount of initial margin required by clearing organizations for all the SD's cleared proprietary futures, foreign futures, swaps and security-based swaps.

3. No swap dealer can make distributions to equity holders or redeem shares if its regulatory capital is less than 120% of the required minimum or if such actions have been restricted by CFTC order.

4. A Covered Swap Entity may apply to the CFTC or the NFA for approval to use internal models to calculate market and credit risk capital charges for the purposes of computing its regulatory capital. Appendix A of the Proposed Rules sets detailed qualitative and quantitative standards for model approval that are similar to existing standards applied by the prudential regulators and the SEC. A CSE that does not have approval to use internal models must use rules-based standardized capital charges set in Regulation 23.103.

5. Any swap dealer subject to the Proposed Rules will be required to provide the routine reports identified in Exhibit B and the event-driven notices identified in Exhibit C that typically require filings after discovery of an enumerated event within 24 hours, or in some cases, immediately. All financial statements and other filings must be accompanied by an oath or affirmation from the CEO or similar officer that the information provided is true and correct. MSPs subject to the Proposed Rule will have similar but fewer reporting requirements.

6. Although an SD that is prudentially regulated is exempt from the substance of the Proposed Rule, it will be required to provide the CFTC with the reports and notices specified in Exhibit D.

Proposed Rules were published in the Federal Register on December 16.  The comment period ends March 16, 2017.

EXHIBIT A

Summary Table of Capital Requirements and Approaches for Covered Swap Entities

(A non-US swap dealer may comply with home jurisdiction capital rules if the CFTC has made a Capital Comparability Determination with respect to the non-US rules.)

 (This table is a modified version of a table that appears in the Proposed Rules.)

EXHIBIT B   

Routine Swap Dealer Reporting Requirements

An SD subject to the Proposed Rules will be required to file all of the following routine reports with the CFTC and the NFA pursuant to :

EXHIBIT C

Event-Driven Swap Dealer Notification Requirements

An SD subject to the Proposed Rules will be required to provide the following notices if the relevant notification trigger is met:

EXHIBIT D

Reporting Requirements for Prudentially Regulated Swap Dealers

An SD that is subject to prudential regulation will be required to file the following routine and event-driven notices and reports with the CFTC and the NFA pursuant to Regulations 23.105(p) and (q):

_{[1] According to the CFTC, there are currently 53 provisionally registered SDs that will be subject to the Proposed Rules. The other 51 US and non-US entities that are now provisionally registered as SDs are prudentially regulated entities that are covered by capital rules adopted by the bank regulators. The CFTC has not, however, published a list categorizing each swap dealer individually by name in these regards (nor has anyone else).}

_{[2] The Proposed Rules specify that a CSE must always meet any greater regulatory capital requirements imposed on it by any registered futures association of which it is a member, but the only such association currently in existence is the National Futures Association (NFA), which does not currently set capital requirements for swap dealers or MSPs.}

_{[3] According to the CFTC, there are currently five SDs that fall into this category.}