Form X-17a-5 - Focus Report (United States Securities And Exchange Commission) (Page 29 of 30) in pdf

FORM X-17A-5, PART IIB

GENERAL INSTRUCTIONS

The FOCUS Report (Form X-17A-5IIB) constitutes the basic financial and operational report required of OTC derivatives dealers.

Much of the information required by the FOCUS report is the same or similar to the information required to be reported by broker-

dealers required to file Form X-17A-5 Part II. Consequently, for those items that appear on both forms, the instructions for X-17A-5

Part II are to be followed when completing Form X-17A-5 Part IIB. The following instructions apply to new information requests

and to items appearing on both forms that have been altered to better reflect an OTC derivatives dealer’s unique business.

Computation of Net Capital and Required Net Capital

(Under Rule 15c3-1 Appendix F)

For purposes of paragraph (a)(5) of Rule 15c3-1 of this chapter (§240.15c3-1, the term “tentative net capital” means the net capital of

an OTC derivatives dealer before deducting the charges for market and credit risk as computed pursuant to Appendix F and increased

by the balance sheet value (including counter-party net exposure) resulting from transactions in eligible OTC derivative instruments

which would otherwise be deducted by virtue of paragraph (c)(2)(iv) of Rule 15c3-1.

Market risk exposure

The capital requirement for an OTC derivatives dealer electing to apply Appendix F of Rule 240.15c3-1 is computed as follows:

(1) Value-at-Risk. An OTC derivatives dealer shall deduct from net worth an amount for market risk exposure for eligible OTC

derivatives transactions and other positions in its proprietary or other accounts equal to the value at risk (“VAR”) of these

positions obtained from its proprietary VAR model, multiplied by the appropriate multiplication factor. See paragraph

(e)(1)(v)(C) of Appendix F for more information on the multiplication factor. The proprietary model used to calculate the

capital requirement for market risk must be approved by the Commission prior to its use.

(2) Alternative Method for Equities. An OTC derivatives dealer may choose to use the Alternative Method to calculate market

risk for equity instruments, including OTC options. An OTC derivatives dealer may also use this alternative method if the

Commission does not approve the OTC derivatives dealer’s use of VAR models for equity instruments. Under the

alternative method, the deduction for market risk will be an amount equal to the largest theoretical loss calculated in

accordance with the theoretical pricing model set forth in Appendix A of § 240.15c3-1. The OTC derivatives dealer may

use its own theoretical pricing model as long as it contains the minimum pricing factors set forth in Appendix A.

(3) Non-Marketable Securities. An OTC derivatives dealer may not use a VAR model to determine a capital charge for any

category of securities having no ready market or any category of debt securities which are below investment grade, or any

derivative instrument based on the value of these categories of securities, unless the Commission has granted, pursuant to

paragraph (a)(1) of Appendix F, for an alternative treatment for any such category of securities, rather than calculate the

market risk capital charge for category of securities under paragraphs (c)(2)(vi) and (vii) of §240.15c3-1.

(4) Residual Positions. To the extent that a position has not been included in the calculation of the market risk charge in

subparagraphs (1) through (3) of this paragraph, the market risk charge for the position shall be computed under paragraph

(c)(2)(vi) of § 240.15c3-1.

Credit risk exposure

The capital requirement for credit risk arising from an OTC derivatives dealer’s eligible OTC derivatives transactions consists of a

counter-party charge and a concentration charge. The counter-party charge is computed as follows:

(1) The net replacement value for each counter-party (including the effect of legally enforceable netting agreements and the

application of liquid collateral) multiplied by 8% multiplied by the counter-party factor. The counter-party factors are 20%

of entities with ratings for senior unsecured long term debt or commercial paper in the two highest rating categories by a

nationally recognized statistical rating organization (“NRSRO”); 50% for entities with ratings for senior unsecured long term

debt in the third and fourth highest ratings categories by an NRSRO; and 100% for entities with ratings for senior unsecured

long term debt below the four highest rating categories.

Form X-17a-5 - Focus Report (United States Securities And Exchange Commission) Page 29