Registration and Regulation of Security-Based Swap Execution Facilities, 10948-11070 [2011-2696]
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Federal Register / Vol. 76, No. 39 / Monday, February 28, 2011 / Proposed Rules
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SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240, 242, and 249
Paper Comments
[Release No. 34–63825; File No. S7–06–11]
RIN 3235–AK93
Registration and Regulation of
Security-Based Swap Execution
Facilities
Securities and Exchange
Commission.
ACTION: Proposed rule; proposed
interpretation.
AGENCY:
In accordance with Section
763 (‘‘Section 763’’) of Title VII (‘‘Title
VII’’) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of
2010 (‘‘Dodd-Frank Act’’), the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) is proposing Regulation
SB SEF under the Securities Exchange
Act of 1934 (‘‘Exchange Act’’) that is
designed to create a registration
framework for security-based swap
execution facilities (‘‘SB SEFs’’);
establish rules with respect to the DoddFrank Act’s requirement that a SB SEF
must comply with the fourteen
enumerated core principles (‘‘Core
Principles’’) and enforce compliance
with those principles; and implement a
process for a SB SEF to submit to the
Commission proposed changes to the SB
SEF’s rules. The Commission also is
proposing an interpretation of the
definition of ‘‘security-based swap
execution facility’’ set forth in Section
3(a)(77) of the Exchange Act to provide
guidance on the characteristics of those
systems or platforms that would satisfy
the statutory definition. In addition, the
Commission is proposing to amend Rule
3a–1 under the Exchange Act to exempt
a registered SB SEF from the Exchange
Act’s definition of ‘‘exchange’’ and to
add Rule 15a–12 under the Exchange
Act to exempt, subject to certain
conditions, a registered SB SEF from
regulation as a broker pursuant to
Section 15(b) of the Exchange Act.
DATES: Comments should be submitted
on or before April 4, 2011.
ADDRESSES: Comments may be
submitted by any of the following
methods:
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SUMMARY:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–06–11 on the subject line;
or
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• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F St., NE., Washington, DC 20549–
1090.
All submissions should refer to File
Number S7–06–11. This file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/
proposed.shtml). Comments are also
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F St., NE.,
Washington, DC 20549 on official
business days between the hours of 10
a.m. and 3 p.m. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT:
Nancy J. Burke-Sanow, Assistant
Director, at (202) 551–5621; David Liu,
Senior Special Counsel, at (312) 353–
6265; Constance Kiggins, Special
Counsel, (202) 551–5701; Molly Kim,
Special Counsel, at (202) 551–5644;
Leah Mesfin, Special Counsel, at (202)
551–5655; Susie Cho, Special Counsel,
at (202) 551–5639; Michou Nguyen,
Special Counsel, (202) 551–5634; Heidi
Pilpel, Special Counsel, (202) 551–5666;
Steven Varholik, Special Counsel, at
(202) 551–5615; Sarah Schandler,
Special Counsel, at (202) 551–7145; and
Iliana Lundblad, Attorney, at (202) 551–
5871; Office of Market Supervision,
Division of Trading and Markets,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–7010.
The
Commission is proposing new
Regulation SB SEF under the Exchange
Act governing the registration and
regulation of SB SEFs, an interpretation
with respect to the definition of a SB
SEF and new Form SB SEF for
applicants to register with the
Commission as SB SEFs. The
Commission also is proposing certain
exemptions to facilitate the trading of
security-based swaps (‘‘SB swaps’’) on
SB SEFs.
SUPPLEMENTARY INFORMATION:
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I. Introduction
On July 21, 2010, the President signed
the Dodd-Frank Act into law.1 The
Dodd-Frank Act was enacted, among
other things, to promote the financial
stability of the United States by
improving accountability and
transparency of the nation’s financial
system.2 Title VII of the Dodd-Frank Act
provides the Commission and the
Commodity Futures Trading
Commission (‘‘CFTC’’) with the
authority to regulate over-the-counter
(‘‘OTC’’) derivatives in light of the recent
financial crisis, which demonstrated the
need for enhanced regulation of the
OTC derivatives market. The DoddFrank Act is intended to strengthen the
existing regulatory structure concerning,
and to provide the Commission and the
CFTC with effective regulatory tools to
oversee, the OTC swaps markets, which
have grown exponentially in recent
years and are capable of affecting
significant sectors of the U.S. economy.
The Dodd-Frank Act provides that the
CFTC will regulate ‘‘swaps,’’ the
Commission will regulate ‘‘securitybased swaps,’’ and the CFTC and the
Commission will jointly regulate ‘‘mixed
swaps.’’ 3 The Dodd-Frank Act amends
1 The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Pub. L. 111–203, H.R.
4173).
2 See Public Law 111–203 Preamble.
3 Section 712(d) of the Dodd-Frank Act provides
that the Commission and the CFTC, in consultation
with the Board of Governors of the Federal Reserve
System (‘‘Federal Reserve’’), shall further define the
terms ‘‘swap,’’ ‘‘security-based swap,’’ ‘‘swap dealer,’’
‘‘security-based swap dealer,’’ ‘‘major swap
participant,’’ ‘‘major security-based swap
participant,’’ ‘‘eligible contract participant,’’ and
‘‘security-based swap agreement.’’ These terms are
defined in Sections 721 and 761 of the Dodd-Frank
Act and, with respect to the term ‘‘eligible contract
participant,’’ in Section 1a(18) of the Commodity
Exchange Act (‘‘CEA’’), 7 U.S.C. 1a(18), as redesignated and amended by Section 721 of the
Dodd-Frank Act. Further, Section 721(c) of the
Dodd-Frank Act requires the CFTC to adopt a rule
to further define the terms ‘‘swap,’’ ‘‘swap dealer,’’
‘‘major swap participant,’’ and ‘‘eligible contract
participant’’ to include transactions and entities that
have been structured to evade Title VII of the DoddFrank Act. Section 761(b) of the Dodd-Frank Act
provides that the Commission may adopt a rule to
further define the terms ‘‘security-based swap,’’
‘‘security-based swap dealer,’’ ‘‘major security-based
swap participant,’’ and ‘‘eligible contract
participant,’’ with regard to security-based swaps,
for the purpose of including transactions and
entities that have been structured to evade Title VII
of the Dodd-Frank Act. Finally, Section 712(a) of
the Dodd-Frank Act provides that the Commission
and CFTC, after consultation with the Federal
Reserve, shall jointly prescribe regulations
regarding ‘‘mixed swaps,’’ as may be necessary to
carry out the purposes of Title VII. To assist the
Commission and the CFTC in further defining the
terms specified above, and to prescribe regulations
regarding ‘‘mixed swaps’’ as may be necessary to
carry out the purposes of Title VII, the Commission
and the CFTC have sought comment from interested
parties. See Securities Exchange Act Release Nos.
63452 (December 7, 2010), 75 FR 80174 (December
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the Exchange Act to require, among
other things, the following with respect
to transactions in SB swaps regulated by
the Commission: (1) Transactions in SB
swaps must be cleared through a
clearing agency if they are of a type that
the Commission determines must be
cleared, unless an exemption from
mandatory clearing applies; 4 (2) if the
SB swap is subject to the clearing
requirement, the transaction must be
executed on an exchange or on a SB SEF
registered under Section 3D of the
Exchange Act or a SB SEF exempt from
registration under Section 3D(e) of the
Exchange Act, unless no SB SEF or
exchange makes such SB swap available
for trading or the SB swap transaction
is subject to the clearing exception in
Section 3C(g) of the Exchange Act; 5 and
(3) transactions in SB swaps (whether
cleared or uncleared) must be reported
to a registered security-based swap data
repository (‘‘SDR’’) or the Commission.6
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II. Regulatory Framework of SecurityBased Swap Execution Facilities
Currently, SB swaps trade in the OTC
market, rather than on regulated
markets. Although some SB swaps have
moved to centralized clearing, prior to
the enactment of the Dodd-Frank Act,
centralized clearing of SB swaps was
not required. The current market for SB
swaps is opaque, with little, if any, pretrade transparency (the ability of market
participants to see trading interest prior
to a trade being executed) or post-trade
transparency (the ability of market
participants to see transaction
information after a trade is executed). A
21, 2010) (File No. S7–39–10) (proposed rulemaking
regarding definitions contained in Title VII of the
Dodd-Frank Act relating to participants). The
Commission also will propose rules regarding
definitions contained in Title VII of the Dodd-Frank
Act relating to products in a separate proposed
rulemaking. See also Securities Exchange Act
Release No. 62717 (August 13, 2010), 75 FR 51429
(August 20, 2010) (File No. S7–16–10) (advance
joint notice of proposed rulemaking regarding
definitions contained in Title VII of the Dodd-Frank
Act).
4 See Public Law 111–203, § 763(a) (adding
Section 3C(a)(1) of the Exchange Act).
5 See Public Law 111–203, § 763(a) (adding
Section 3C(h) of the Exchange Act). See also Public
Law 111–203, § 761(a) (adding Section 3(a)(77) of
the Exchange Act), defining the term ‘‘securitybased swap execution facility.’’ The Dodd-Frank Act
amends the CEA to provide for a similar regulatory
framework with respect to transactions in swaps
regulated by the CFTC.
6 See Public Law 111–203, § 761(a)(75) (adding
Section 3(a)(75) of the Exchange Act) (defining the
term ‘‘security-based swap data repository’’). The
registration of an SDR and the reporting of SB
swaps are the subject of separate Commission
rulemakings. See Securities Exchange Act Release
Nos. 63347 (November 19, 2010), 75 FR 77306
(December 10, 2010) (File No. S7–35–10) (‘‘SDR
Release’’) and 63346 (November 19, 2010), 75 FR
75208 (December 2, 2010) (File No. S7–34–10)
(‘‘Reporting and Dissemination Release’’).
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key goal of the Dodd-Frank Act is to
bring trading of SB swaps onto regulated
markets,7 as reflected in the statutory
requirement that, subject to certain
exceptions, any SB swap subject to
mandatory clearing must be traded on a
SB SEF or an exchange, unless no SB
SEF or exchange makes such SB swap
available for trading.
Section 763 of the Dodd-Frank Act
amends the Exchange Act by adding
various new statutory provisions to
govern the regulation of SB SEFs.8
Section 3C(h) of the Exchange Act
specifies that transactions in SB swaps
that are subject to the clearing
requirement of Section 3C(a)(1) of the
Exchange Act must be executed on an
exchange or on a SB SEF registered with
the Commission (or a SB SEF exempt
from registration), unless no exchange
or SB SEF makes the SB swap available
to trade (referred to as the ‘‘mandatory
trade execution requirement’’) or the SB
swap transaction is subject to the
clearing exception in Section 3C(g) of
the Exchange Act (‘‘end-user
exception’’).9 Further, Section 3D(a)(1)
of the Exchange Act states that no
person may operate a facility for the
trading or processing of SB swaps,
unless the facility is registered as a SB
SEF or as a national securities exchange
under that section.10 Under Section
3D(b) of the Exchange Act, a SB SEF
registered with the Commission may
make SB swaps available for trading and
facilitate trade processing of SB
swaps.11 Section 3D(c) of the Exchange
Act requires a national securities
exchange, to the extent it also operates
a SB SEF and uses the same electronic
trade execution system for listing and
executing trades in SB swaps, to
identify whether electronic trading of
SB swaps is taking place on or through
the exchange or the SB SEF.12
Section 3D(d) of the Exchange Act
specifies that to be registered and
maintain registration, a SB SEF must
comply with fourteen Core Principles
enumerated therein and any
7 See
Public Law 111–203, preamble.
Public Law 111–203, § 763 (adding Sections
3C and 3D of the Exchange Act).
9 See Public Law 111–203, § 763 (adding Section
3C(h) of the Exchange Act).
10 See Public Law 111–203, § 763(a) (adding
Section 3D(a)(1) of the Exchange Act). The
Commission views this requirement as applying
only to facilities that meet the definition of
‘‘security-based swap execution facility’’ in Section
3(a)(77) under the Exchange Act. SB swaps that are
not subject to the mandatory trade execution
requirement would not have to be traded on a
registered SB SEF and could be traded in the overthe-counter (‘‘OTC’’) market for SB swaps.
11 See Public Law 111–203, § 763(c) (adding
Section 3D(b) of the Exchange Act).
12 See Public Law 111–203, § 763(c) (adding
Section 3D(c) of the Exchange Act).
8 See
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10949
requirement that the Commission may
impose by rule or regulation.13 The Core
Principles applicable to SB SEFs are
captioned: (1) Compliance with Core
Principles; (2) Compliance with Rules;
(3) Security-Based Swaps Not Readily
Susceptible to Manipulation; (4)
Monitoring of Trading and Trade
Processing; (5) Ability to Obtain
Information; (6) Financial Integrity of
Transactions; (7) Emergency Authority;
(8) Timely Publication of Trading
Information; (9) Recordkeeping and
Reporting; (10) Antitrust
Considerations; (11) Conflicts of
Interest; (12) Financial Resources; (13)
System Safeguards; and (14) Designation
of Chief Compliance Officer.14 As a
result, a registered SB SEF would have
certain regulatory obligations with
respect to overseeing its market and the
participants that trade on its facility.
Further, Section 3D(f) of the Exchange
Act states that the Commission shall
prescribe rules governing the regulation
of SB SEFs.15 Finally, Section 3(a)(77) of
the Exchange Act defines a SB SEF as
a trading system or platform in which
multiple participants have the ability to
execute or trade SB swaps by accepting
bids and offers made by multiple
participants in the facility or system,
through any means of interstate
commerce, including any trading
facility, that: (1) Facilitates the
execution of SB swaps between persons;
and (2) is not a national securities
exchange.16
As regulated markets for the trading of
SB swaps, SB SEFs, as well as
exchanges that post or trade SB swaps
(‘‘SBS exchanges’’), are intended to play
an important role in enhancing the
transparency and oversight of the
market for SB swaps. SB SEFs should
help further the statutory objective of
greater transparency and a more
competitive environment for the trading
of SB swaps by providing a venue for
multiple parties to execute trades in SB
swaps and also by serving as a conduit
for information regarding trading
interest in SB swaps. As a result of the
Dodd-Frank Act’s provisions relating to
SB SEFs, the Commission would have
access to information on the trading of
SB swaps that occurs on SB SEFs and
information regarding trading by their
participants. In addition, because SB
SEFs would have certain regulatory
obligations arising from their Core
13 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(1)(A) of the Exchange Act).
14 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(1)–(14) of the Exchange Act).
15 See Public Law 111–203, § 763(c) (adding
Section 3D(f) of the Exchange Act).
16 See Public Law 111–203, § 761(a) (adding
Section 3(a)(77) of the Exchange Act).
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Principles, such as monitoring trading,
assuring the ability to obtain
information, and establishing and
enforcing rules and procedures to
ensure the financial integrity of SB
swaps entered on or though the SB SEF,
these facilities can play an important
role in helping to oversee the market for
SB swaps on an ongoing basis and
allowing regulators to quickly assess
information regarding the potential for
systemic risk across trading venues.
The Commission is mindful that any
rules that the Commission may adopt
regarding the regulation of SB SEFs
could impact the incentives for existing
or prospective platforms for the trading
of SB swaps to enter or withdraw from
this market. On the other hand, the rules
to be adopted by the Commission for the
trading of SB swaps should be sufficient
to fulfill the objectives of the DoddFrank Act to promote financial stability
and transparency. The Commission also
is mindful that, both over time and as
a result of Commission proposals to
implement the Dodd-Frank Act, the
further development of the SB swap
market may alter some of the specific
calculus for future regulation of SB
SEFs.
The Commission notes that the CFTC
is proposing rules relating to swap
execution facilities (‘‘SEFs’’) as required
under Section 733 of the Dodd-Frank
Act.17 Because there are differences
between the markets and products that
the Commission and the CFTC currently
regulate, the approach that each agency
may take regarding the regulation of SB
SEFs and SEFs, respectively, also may
differ in various respects. The
Commission recognizes that
commenters may respond to the
Commission’s proposals by referring to
the CFTC’s proposals and welcomes
commenters’ views and suggestions on
the impact of any differences between
the Commission and CFTC approaches
to the regulation of SB SEFS and SEFs.
The Commission is particularly
interested in whether its proposed
rulemaking would result in any
duplicative or inconsistent efforts on the
part of market participants subject to
both regulatory regimes or would result
in gaps between those regimes.
Further, the Commission is aware that
regulators in other countries are
considering reform of their swaps and
derivatives markets and are interested in
achieving a consistent approach to
swaps regulation between the United
States, Europe and other jurisdictions to
17 See Public Law 111–203, § 733 (adding Section
5h of the CEA). See also 76 FR 1214 (January 7,
2011) (‘‘Notice of proposed SEF rulemaking by the
CFTC’’).
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mitigate the risk of regulatory
arbitrage.18 Although the Commission
must be guided by the requirements of
the Dodd-Frank Act in crafting proposed
rules applicable to markets that trade SB
swaps and the participants in those
markets, the Commission recognizes
that the particular rules that it may
adopt under the Dodd-Frank Act may
impact the incentives of market
participants with respect to where they
choose to engage in the trading of SB
swaps.
Commenters are urged to consider
generally the role that regulation may
play in fostering or limiting the
development of the market for SB swaps
(or, vice versa, the role that market
developments may play in changing the
nature and implications of regulation)
and specifically to focus on this issue
with respect to the proposals to
establish a framework for the trading of
SB swaps. In addition, commenters are
urged to consider the effect of the
Commission’s proposals relating to SB
SEFs on the global swaps and
derivatives markets and to offer specific
comments regarding how the proposals
compare with the existing or proposed
regulations of other jurisdictions.
III. The Definition of Security-Based
Swap Execution Facilities
Since the enactment of the DoddFrank Act in July 2010, the Commission
has engaged in a number of outreach
programs relating to the legislation’s
rulemaking mandates, including trading
of SB swaps on regulated markets.19 On
September 15, 2010, the staff of the
Commission and of the CFTC conducted
a joint roundtable to discuss issues
related to the formation and regulation
of SEFs and SB SEFs (‘‘Roundtable’’).20
Topics discussed at the Roundtable
included the scope of the definition of
a SEF and SB SEF; registration of these
facilities; products that would trade on
a SEF and SB SEF; block trades; access
to SEFs and SB SEFs; and cross-market
18 See, e.g., Committee of European Securities
Regulators (‘‘CESR’’), CESR Technical Advice to the
European Commission in the context of the MiFID
Review and Responses to the European Commission
for Additional Information, dated October 13, 2010,
available at https://www.cesr-eu.org/index.php
?page=contenu_groups&id=61&docmore=1.
19 See, e.g., Implementing the Dodd-Frank Wall
Street Reform and Consumer Protection Act,
Transparency, Public Input on SEC Regulatory
Initiatives under the Dodd-Frank Act Title VII—
Wall Street Transparency and Accountability,
Mandatory Exchange Trading and Swap Execution
Facilities, available at
https://www.sec.gov/spotlight/dodd-frank.shtml.
20 See Securities Exchange Release No. 62864
(September 8, 2010), 75 FR 55574 (September 13,
2010) (File No. 4–612). Webcast available at https://
www.sec.gov/news/openmeetings/2010/
jac091510.shtml.
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issues.21 The purpose of the Roundtable
was to provide a forum for the
discussion of these issues and to assist
SEC and CFTC staff as they developed
proposed rules to meet the Dodd-Frank
Act’s mandate to bring the trading of
swaps and SB swaps subject to the
mandatory clearing requirement onto
organized markets. Panelists at the
Roundtable provided comments on their
experience with the current market
structure for the trading of swaps and
SB swaps and offered their views and
suggestions on ways that that structure
could change as a result of the
legislation. Pursuant to the
Commission’s outreach, a range of
individuals and entities, including swap
dealers, brokers, end-users, academics
and others, have expressed their views
on a variety of topics, such as the scope
of activities or the nature of platforms
that should fall within the statutory
definition of ‘‘security-based swap
execution facility.’’ 22
Many letters from market participants
advocated for a flexible interpretation of
the statutory definition of SB SEF.23 In
their letters, they argued that the
definition of SB SEF should permit
many different types of existing and
new trading and execution platforms.24
Certain market participants noted that
the SB swap market is more customized
and illiquid than the cash equities
market and argued that a broad range of
trading models would be necessary to
address the SB swap market’s unique
characteristics and to allow this market
to develop properly.25
21 See Press Release issued by the Commission on
September 8, 2010, ‘‘SEC, CFTC To Host Joint
September Roundtables On Swap and SecurityBased Swap Matters’’ (File No. 2010–166), available
at https://www.sec.gov/news/press/2010/2010166.htm.
22 See, e.g., https://www.sec.gov/spotlight/doddfrank.shtml.
23 See, e.g., letter from Ben Macdonald, Global
Head Fixed Income, Bloomberg LP, to Commission,
dated September 22, 2010 (‘‘Bloomberg Letter’’), at
2; letter from Richard H. Baker, President and CEO,
Managed Funds Association, to Elizabeth M.
Murphy, Secretary, Commission, dated September
22, 2010 (‘‘MFA Letter’’), at 16; letter from Ernest C.
Goodrich, Jr., Managing Director—Legal
Department, and Marcelo Riffaud, Managing
Director—Legal Department, Deutsche Bank AG, to
David A. Stawick, Secretary, CFTC, and Elizabeth
M. Murphy, Secretary, Commission, dated October
6, 2010 (‘‘Deutsche Bank Letter’’), at 5–6 and 8–9;
and letter from Larry Tabb, CEO and Founder, Andy
Nybo, Head of Derivatives, and Kevin C.
McPartland, Senior Analyst, TABB Group, to Gary
Gensler, Chairman, CFTC, and Mary Schapiro,
Chairman, Commission, dated August 23, 2010
(‘‘TABB Letter’’), at 2.
24 See, e.g., Bloomberg Letter, id., at 2; MFA
Letter, id., at 16; and Deutsche Bank Letter, id., at
7.
25 See, e.g., Bloomberg Letter, supra note 23, at 2,
and Deutsche Bank Letter, supra note 23, at 6–7.
See also infra, Section III.B for a discussion of the
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Although many commenters who
expressed a view regarding the
definition of SB SEF favored allowing
multiple platforms,26 some commenters
expressed concern about some types of
platforms that potentially could meet
the definition of SB SEF. One
commenter believed that allowing
multiple request for quote (‘‘RFQ’’)
platforms,27 without a price mechanism
that aggregates prices across platforms,
to meet the definition of SB SEF, could
lead to a fragmented market, which
could discourage competition.28
Another commenter suggested that
permitting an RFQ platform to be
treated as a SB SEF could be viewed as
preserving the status quo of a dealerdominated market and believed that the
Dodd-Frank Act envisioned that SB
swaps would be traded on a facility akin
to a limit order book platform.29
The Commission also received other
specific views about platforms that
commenters believed should or should
not be included in the definition of SB
SEF. For example, one commenter
believed that platforms that would not
trade or execute SB swap transactions,
such as pure trade processing facilities,
would not meet the statutory definition
of SB SEF.30 A market participant,
however, stated that in its view the
statutory definition of SB SEF would
encompass pure trade processing
facilities.31
The information presented at the
Roundtable and received from the
public has helped to inform the
proposals relating to SB SEFs that are
part of this rulemaking. The
Commission’s interpretation of the definition of SB
SEF.
26 See supra note 23 and accompanying text.
27 In referring to a RFQ platform, the Commission
means a trading platform where a customer who
wishes to execute a SB swap disseminates a request
for quote to one or more dealers and one or more
of those dealers respond to the request with an
executable quote.
28 See, e.g., Commentary by S. ‘‘Vish’’
Viswanathan, Professor, Fuqua School of Business,
Duke University, at the Roundtable. Webcast
available at https://www.sec.gov/news/
openmeetings/2010/jac091510.shtml.
29 See Commentary by Heather Slavkin, Senior
Legal Policy Advisor for the Office of Investment,
AFL–CIO, at the Roundtable. Webcast available at
https://www.sec.gov/news/openmeetings/2010/
jac091510.shtml. See also infra, Section III.B
discussing the Commission’s interpretation taking
into account concerns raised by commenters.
30 See letter from Mark D. Young, Skadden, Arps,
Slate, Meagher & Flom LLP, to David A. Stawick,
Secretary, CFTC, and Elizabeth M. Murphy,
Secretary, Commission, dated September 22, 2010,
at 3.
31 See Meetings with SEC Officials: Memorandum
from the Division of Trading and Markets regarding
an August 25, 2010 Meeting with representatives of
MarkitSERV, dated September 2, 2010, MarkitSERV
PowerPoint Presentation, dated August 25, 2010 at
p. 5–6, available at https://www.sec.gov/comments/
s7-16-10/s71610-96.pdf.
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Commission is mindful that there exists
a wide range of views on the part of
market participants and others about the
nature of the activities or systems that
would constitute, and the scope of
activities permitted by, a SB SEF and
therefore encourages interested persons
to provide their views and suggestions,
as well as any materials or data to
support their positions, on this aspect of
the proposed rulemaking. The
Commission believes that the prudent
course is to take where appropriate a
deliberate and attentive approach to its
regulation of SB SEFs that is informed
by the state of development of SB swap
trading on regulated markets. The
Commission emphasizes, however, that
any actions it may take now or in the
future would be designed to further the
overall objectives of the Dodd-Frank
Act.
A. Current SB Swap Market
1. Trading Models
Unlike the markets for cash equity
securities and listed options, the market
for SB swaps currently is characterized
by bilateral negotiation in the OTC swap
market; is largely decentralized; many
instruments are not standardized; and
many SB swaps are not centrally
cleared. The lack of uniform rules
concerning the trading of SB swaps and
the one-to-one nature of trade
negotiation in SB swaps has resulted in
the formation of distinct types of venues
for the trading of these securities,
ranging from bilateral negotiations
carried out over the telephone, to singledealer RFQ platforms, to multi-dealer
RFQ platforms, to central limit order
books outside the United States, and
others, as more fully described below.
The use of electronic media to execute
transactions in SB swaps varies greatly
across trading venues, with some
venues being highly electronic whereas
others rely almost exclusively on nonelectronic means such as the telephone.
The reasons for use of, or lack of use of,
electronic media vary from such factors
as user preference to limitations in the
existing infrastructure of certain trading
platforms. The description below of the
ways in which SB swaps may be traded
is based in part on discussions with
market participants. The Commission
solicits comments on the accuracy of
this description.
The Commission uses the term
‘‘bilateral negotiation’’ to refer to the
model whereby one party uses the
telephone, e-mail or other
communications to contact directly a
potential counterparty to negotiate a SB
swap. Once the terms are agreed, the SB
swap transaction is executed and the
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terms are memorialized.32 In a bilateral
negotiation, there may be no pre-trade
or post-trade transparency available to
the marketplace because only the two
parties to the transaction are aware of
the terms of the negotiation and the
final terms of the agreement. Further, no
terms of the proposed transaction are
firm until the transaction is executed.
However, reputational costs generally
serve as a deterrent to either party’s
failing to honor any quoted terms.
Dealer to customer bilateral negotiation
currently is used for all SB swap asset
classes, and particularly for trading in
less liquid SB swaps, in situations
where the parties prefer a privately
negotiated transaction, such as in
executing block trades, or in other
circumstances in which it is not cost
effective for a party to the trade to use
one of the execution methods described
below.
Another model for the trading of SB
swaps is the single-dealer RFQ
electronic trading platform. In a singledealer RFQ platform, a dealer may post
indicative quotes for SB swaps in
various SB swap asset classes that the
dealer is willing to trade. Only the
dealer’s approved customers would
have access to the platform. When a
customer wishes to transact in a SB
swap, the customer requests an
executable quote, the dealer provides
one, and if customer accepts the dealer’s
quote, the transaction is executed
electronically. If the dealer repeatedly
responds to requests for executable
quotes with quotes that are significantly
less favorable than the dealer’s
indicative quotes posted on the singledealer electronic trading platform,
volume on the platform presumably
would diminish and participants may
no longer transact there. This type of
platform generally provides pre-trade
transparency in the form of indicative
quotes on a pricing screen, but only
from one dealer to its customer.
Currently, there is no post-trade
reporting of transactions on singledealer platforms and thus there is no
post-trade transparency.
A variant of the single-dealer model is
an aggregator-type platform that
combines two or more single-dealer
RFQ platforms. In such a platform, a
customer who has access to the
platform, which is determined solely at
the discretion of its operator and of the
dealers involved, may see indicative
quotes from multiple dealers at once
instead of seeing quotes only from one
32 For further discussion, see, e.g., Securities
Exchange Act Release No. 63727 (January 14, 2011),
76 FR 3859 (January 21, 2011) (proposing rules for
the trade acknowledgement and verification of
security-based swaps).
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dealer as in the single-dealer RFQ
platform. Although a participant can
simultaneously view quotes from
multiple dealers, the participant can
request a firm quote from only one
dealer at a time. One feature of the
aggregated single-dealer platform as
compared to the bilateral negotiation
and single-dealer models described
above is the ability of a participant in
the aggregated single-dealer platform to
see indicative quotes from multiple
dealers. However, customers are not
afforded an opportunity to send RFQs to
multiple dealers at the same time to
promote competitive pricing. Also, like
the single-dealer electronic platform,
there is no post-trade reporting of
transactions and thus there is no posttrade transparency.
A third model is the multi-dealer RFQ
electronic trading platform.33 In a multidealer RFQ system, a requester can send
an RFQ to solicit quotes on a certain SB
swap from multiple dealers at the same
time. Currently, dealers on a multidealer RFQ platform generally require
the platform to set limits on the number
of dealers to whom a customer may
send an RFQ, and also may limit which
dealers may participate on the platform.
These platforms are sometimes owned
by dealers themselves. After the RFQ is
submitted, the recipients have a
prescribed amount of time in which to
respond to the RFQ with a quote.
Responses to the RFQ are firm. The
requestor then has the opportunity to
review the responses and accept the best
quote. A multi-dealer RFQ platform
provides a certain degree of pre-trade
transparency, depending on its
characteristics. But to the extent that a
requester is restricted by platform rules
to soliciting quotes from a limited
number of dealers, the customer’s pretrade transparency is restricted to that
number of quotes it receives in response
to its RFQ. In some instances requestors
may prefer to limit the number of
recipients of an RFQ as a way to protect
proprietary trading strategies as
dissemination of their interest to
multiple dealers may increase hedging
costs to dealers, and thus costs to the
requestors as reflected in the prices from
the dealers. Pre-trade transparency may
also exist through the platform’s
33 The single-dealer RFQ platform is an example
of a system that permits customers to submit an
RFQ to a single dealer, which is distinct from a
multi-dealer RFQ platform that permits customers
to solicit quotes from multiple dealers
simultaneously instead of one dealer. The multidealer RFQ platform differs from a single-dealer
aggregator platform because a participant in the
aggregated single-dealer platform may only send a
request to one dealer at a time and thus would not
have the ability to interact with the bids or offers
of multiple dealers simultaneously.
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dissemination of composite indicative
quotes to all participants prior to trades.
Post-trade transparency may exist if the
platform chooses to disseminate
information regarding executed
transactions.
A fourth model for the trading of SB
swaps is a limit order book system or
similar system, which the Commission
understands is not yet in operation for
the trading of SB swaps in the United
States but exists for the trading of SB
swaps in Europe. Today, securities and
futures exchanges in the United States
display a limit order book in which firm
bids and offers are posted for all
participants to see, with the identity of
the parties withheld until a transaction
occurs. Bids and offers are then matched
based on price-time priority or other
established parameters and trades are
executed accordingly. The quotes on a
limit order book system are firm. A limit
order book system may be a more
suitable model for the trading of more
liquid, rather than less liquid, SB swaps.
In general, a limit order book system
also provides greater pre-trade
transparency than the three platforms
described above because all participants
can view bids and offers before placing
their bids and offers. However, broadly
communicating trading interest,
particularly about a large trade, may
increase hedging costs, and thus costs to
investors as reflected in the prices from
the dealers. The system can also provide
post-trade transparency, to the extent
that participants can see the terms of
executed transactions.
A fifth type of trading, which the
Commission herein refers to as
‘‘brokerage trading,’’ is used by brokers
to execute SB swap trades on behalf of
customers, often in larger sized
transactions. In such a system, a broker
receives a request from a customer
(which may be a dealer) who seeks to
execute a specific type of SB swap. The
broker then interacts with other
customers to fill the request and execute
the transaction. The mode of interaction
can vary depending on the size of the
trade and the type of SB swap being
traded. In some cases, the interaction is
done purely by voice over the
telephone, while in other cases, the
interaction is electronic or a hybrid of
voice and an electronic system. The
level of automation and use of
electronic means also vary depending
on the technological state and
functionality of the broker’s platform.34
34 The Commission understands that a small
portion of the brokerage trading in the United States
is currently highly automated and has
characteristics of a limit order book. However,
while depth of the order book may be displayed,
generally there may be only one bid or offer, and
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This model often is used by dealers that
seek to transact with other dealers
through the use of an interdealer broker
as an intermediary. In this model, there
may be pre-trade transparency to the
extent that participants are able to see
bids and offers of other participants and
post-trade transparency to the extent
that participants can see the terms of
executed transactions.
The five foregoing examples represent
broadly the various types of models for
the trading of OTC swaps in existence
today. These examples may not
represent every single method in
existence today and the discussion
above is intended to give an overview of
the models without providing the
nuances of each particular type.
2. The SB Swap Market and the
Commission’s Approach to SB SEF
Definitions
In the Commission’s view, the diverse
nature of these examples demonstrates
the extent to which, when compared
with the equities markets, certain
aspects of the SB swap market are still
evolving.35 In considering ways in
which the Commission could approach
the definition of SB SEF, the
Commission has sought to facilitate
competition and innovations in the SB
swap market that could be used to
promote more efficient trading in
organized, transparent and regulated
trading venues. The Commission does
not believe it should simply overlay the
same regulatory structure that is
currently in place for equities, given
important differences in the nature and
maturity of the SB swap and equities
markets. However, the Commission does
believe that certain elements of equity
sometimes only one side of the market would be
displayed (i.e., a bid without an offer and vice
versa). Because the volume in some SB swaps may
be low, the electronic systems maintained by
wholesale brokers would not necessarily include a
matching engine that would provide for price-time
priority or other execution parameters, unlike other
types of electronic limit order books. Although the
wholesale brokers’ systems are electronic, the
customer would need to perform some steps
manually (e.g., hit the bid or lift the offer) to
execute a trade.
35 For example, data from the Depository Trust
and Clearing Corporation covering the period from
March 22, 2010 to June 20, 2010 for single name
credit default swaps revealed the following: Out of
998 types of swaps (i.e., a swap based on one
reference entity), only 55 had 10 or more trades per
day (34 trades being the highest), and 827 of the
swaps had 5 or fewer trades per day (531 of those
only had 2 or fewer trades per day). In the data set,
‘‘trades per day’’ includes all tenors (e.g., duration
or expiry) in swaps of the same reference entity. See
https://www.dtcc.com/downloads/products/
derivserv/CDS_Snapshot_Analysis_Sep17-2010.pdf;
see also https://www.dtcc.com/products/derivserv/
data_table_snap0002.php and https://
www.dtcc.com/products/deriserv/
data_table_snapshot.php.
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market structure may be directly
relevant to the SB swap market.
Furthermore, rather than proposing a
rule that would establish a prescribed
configuration for SB SEFs that would
meet the statutory definition of SB SEF,
the Commission proposes to provide
baseline principles interpreting the
definition of SB SEF, consistent with
the requirements of the Exchange Act,
as amended by the Dodd-Frank Act,
which any entity would need to be able
to meet to register as a SB SEF. Such an
approach is designed to allow flexibility
to those trading venues that seek to
register with the Commission as a SB
SEF and to permit the continued
development of organized markets for
the trading of SB swaps. This more
flexible approach also would allow the
Commission to monitor the market for
SB swaps and propose adjustments, as
necessary, to any interpretation that it
may adopt as this market sector
continues to evolve.
However, the Commission recognizes
that, consistent with the Dodd-Frank
Act, the interpretation of the definition
of SB SEF should: (1) Encourage the
migration of trading SB swaps from the
OTC market to SB SEFs (or exchanges),
(2) provide a meaningful distinction
between a SB SEF and an OTC trading
venue, (3) promote further transparency
of the SB swap market, and (4) to
facilitate competition and innovation in
the SB swap markets that could be used
to promote more efficient trading in
organized, transparent, and regulated
trading venues. In addition, the
interpretation of the definition of SB
SEF should complement other aspects
of proposed SB swap regulations,
including those related to post trade
transparency, mandatory clearing, and
the general requirement that SB swaps
that are subject to mandatory clearing
only be traded on an exchange or SB
SEF, unless no exchange or SB SEF
makes the SB swap available to trade.
B. Scope of SB SEF Definition
As noted above, Section 3(a)(77) of
the Exchange Act defines a SB SEF as
a trading system or platform in which
multiple participants have the ability to
execute or trade SB swaps by accepting
bids and offers made by multiple
participants in the facility or system,
through any means of interstate
commerce, including any trading
facility, that: (1) Facilitates the
execution of SB swaps between persons;
and (2) is not a national securities
exchange.36
36 As discussed infra Section XXI, an entity that
meets the definition of SB SEF would be required
to register as a SB SEF or a national securities
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A key issue noted at the Roundtable
and raised by market participants
generally regarding Dodd-Frank Act
implementation is the scope of the
definition of ‘‘security-based swap
execution facility.’’ 37 SB swap industry
participants have expressed an interest
in, and offered their views on, the
parameters of the definition of SB
SEF.38 Such participants asserted that
the interpretation of the definition of SB
SEF is a significant issue for the SB
swap industry because, under the
mandatory trade execution requirement
in Section 3C(h) of the Exchange Act, a
SB swap subject to mandatory clearing
must be executed on a SB SEF or on an
exchange, if made available for trading.
The discussion below sets forth the
Commission’s preliminary view as to
the meaning of the various elements of
this definition.
The ‘‘multiple participant to multiple
participant’’ requirement in the
definition of SB SEF prescribes that
‘‘multiple participants have the ability to
execute or trade security-based swaps
by accepting bids and offers made by
multiple participants in the facility or
system.’’ 39 Consistent with this
requirement, the Commission proposes
to interpret the definition of SB SEF to
mean a system or platform that allows
more than one participant to interact
with the trading interest of more than
one other participant on that system or
platform. The Commission notes that
this definition can be satisfied by
various types of platforms, but some
platforms that are currently used to
trade SB swaps in the OTC market
would not meet this definition, and
would not be considered SB SEFs. As
noted above, the Commission is aware
that the movement of SB swaps trading
onto regulated platforms is still in an
emergent stage. Therefore, in
considering ways in which the
Commission could approach the
definition of SB SEF, the Commission
has sought to facilitate competition and
innovations in the SB swaps market that
could be used to promote more efficient
trading in organized, transparent and
exchange (unless exempted under Section 3D(e) of
the Exchange Act if the Commission finds that the
facility is subject to comparable, comprehensive
supervision and regulation on a consolidated basis
by the CFTC). A registered SB SEF would be
required to satisfy all 14 Core Principles and any
rules promulgated by the Commission, including
proposed Rule 811(a)(3), which provides for certain
requirements relating trading on a SB SEF. See
Public Law 111–203, § 763(c) (adding Section
3D(a)(1) and (d)(1) of the Exchange Act).
37 See, e.g., Bloomberg Letter, supra note 23, at 2,
and MFA Letter, supra note 23, at 16.
38 See supra notes 23 to 25.
39 See Public Law 111–203, § 763(a) (adding
Section 3(77) of the Exchange Act).
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regulated trading venues to support the
Dodd-Frank Act’s goal of moving the
trading of SB swaps onto regulated
markets.
Under this proposed interpretation, if
a system or platform were to allow an
individual participant (of which there
must be more than one on the system,
but which do not need to be acting
simultaneously) to send, at the same
time, a single RFQ to all other liquidity
providing participants on that system or
platform and view responses from those
participants, the Commission believes
that such a model would satisfy the
requirements of the statutory definition,
even if the quote requesting participants
are acting at different times. A key
element to this model is that the SB SEF
would not be able to limit the number
of liquidity providing participants from
whom a participant could request a
quote on the SB SEF.40
The Commission further believes that
the requirements of the statutory
definition would be met if the system or
platform not only provided the quote
requesting participant with the ability to
send a single RFQ to all liquidity
providing participants, but also
provided the quote requesting
participant with the ability to choose to
send an RFQ to fewer than all liquidity
providing participants. In the
Commission’s view, a system or
platform that affords a quote requesting
participant the ability to send an RFQ to
all participants, but also permits the
quote requesting participant to choose
to send an RFQ to fewer participants,
would satisfy the statutory definition
because multiple participants would
have the ability to execute or trade SB
swaps by accepting bids or offers made
by multiple participants. The person
exercising investment discretion for the
transaction, whether it is the participant
itself or the participant’s customer,
would be the person that would have
the ability to choose to send the RFQ to
less than all participants, as they would
be in the best position to determine the
impact on their interest of a broad or
narrow dissemination of their RFQ.41
Under the proposed interpretation of
the definition of SB SEF, a SB SEF
would be able to offer functionality to
a participant (or a participant’s
customer) enabling that participant to
choose to send a single RFQ to any
number of specific liquidity providing
participants on the SB SEF, including
just a single liquidity provider. The
40 See
infra Section VIII.C.
of the number of participants to
which a RFQ was sent, the response(s) to that RFQ
would be required to be included in the composite
indicative quote of the SB SEF. See infra note 152
and accompanying text.
41 Regardless
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Commission requests comment on
whether in addition to providing this
flexibility to investors initiating RFQs,
the interpretation should also set a floor
for the minimum number of liquidity
providers that must be included in an
RFQ (and, if so, what that minimum
number should be). Commenters should
be mindful that in proposing its
interpretation of the definition of SB
SEF, the Commission is trying to
balance the above-stated goal of
encouraging SB swap trading to move
onto regulated markets with the goal of
promoting greater transparency in the
trading of SB swaps.
On the one hand, providing investors
as much choice as possible in
determining how to route an RFQ on a
SB SEF may incentivize investors to
trade on a SB SEF when they otherwise
might not have made that choice. Since
those investors that have a fiduciary
duty must seek best execution for a
transaction, they may have a natural
incentive to route to multiple dealers.
However, this incentive may be
impacted by the liquidity characteristics
of the SB swap. Market participants,
including dealers and buy-side
customers, have raised concerns
regarding pre-trade transparency of SB
swap trades, particularly block trades.
They believe that if other market
participants know the terms of a trade
prior to the time it is executed, those
other market participants could attempt
to profit from the information about the
trade to the detriment of the initiator of
the trade.42 Therefore, particularly for
illiquid SB swaps, an investor may
determine that it is in its best interest
not to broadly project its trading
intention, and may choose to send a
RFQ to one dealer.43 Other investors
could still benefit by the request
because the response to that RFQ would
become part of the composite indicative
quote of that SB SEF.44 Providing
investors the choice to send a RFQ to
only one dealer on a SB SEF—as long
as they have the ability to send it to
more than one if they chose to—may
encourage investors to execute trades on
a SB SEF even with respect to SB swaps
that are not required to be traded on a
SB SEF or an exchange, thus supporting
the development of trading on regulated
platforms and venues in the United
States, rather than in other jurisdictions.
On the other hand, requiring that all
RFQs on a SB SEF be sent to more than
one dealer could force competition
42 See
discussion in Section VIII.C and D infra.
Reporting and Dissemination Release,
supra note 6, at 89–93.
44 See discussion of proposed Rule 811(d)(5) in
Section VIII.C infra.
43 See
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among dealers more than if RFQs to a
single dealer were permitted. This
competition may lead to lower spreads
as dealers compete with each other on
price. Further, this competition may
provide for a more robust composite
indicative quote because a greater
number of responses would be
incorporated into the composite. In
addition, requiring that RFQs be sent to
more than one dealer provides for the
possibility that a response from a dealer
other than the one with whom the
investor may have ‘‘pre-arranged’’ the
transaction will result in a better price.
However, market participants have
expressed a concern that requiring a
broad level of pre-trade transparency,
particularly for illiquid products, may
not lead to better prices and in certain
circumstances may lead to worse prices
provided by dealers if dealer hedging is
made more difficult after the intent to
trade has been projected to the entire
market.
In addition, the Commission proposes
to interpret the statutory requirement
that ‘‘multiple participants have the
ability to execute or trade SB swaps by
accepting bids and offers made by
multiple participants in the facility or
system’’ to require a SB SEF to provide
at least a basic functionality to allow
any participant on the SB SEF the
ability to make and display executable
bids or offers accessible to all other
participants on the SB SEF, if the
participant chooses to do so. The
Commission preliminarily believes that
such a requirement would allow for
increased price transparency beyond
what would be found in the bilateral
OTC market, if a market participant
chooses to utilize the functionality to
display a bid or offer.
Under the proposed interpretation of
the definition of SB SEF (either with or
without the additional requirement for a
minimum number of liquidity providers
to be included in every RFQ), the
traditional bilateral negotiation model,
as described above, would not fall
within the definition of SB SEF because
there would be only one party able to
seek a quote and only one party that is
able to provide a quote in response. The
Commission believes that the inclusion
of the phrase ‘‘through any means of
interstate commerce’’ in the definition of
SB SEF would not, by itself, support the
proposition that bilateral negotiation
would satisfy the definition’s terms; the
trading system or platform would still
need to meet the other requirements of
the definition, specifically, the
requirement that multiple participants
have the ability to execute or trade SB
swaps by accepting bids and offers
made by multiple participants in the
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facility or system (‘‘multiple participant
to multiple participant requirement’’).
Likewise, a platform where there is a
single dealer interacting with multiple
customers on the other side of the
transaction would not appear to meet
the ‘‘multiple participant to multiple
participant’’ requirement because the
dealer is only one person. This would
be true for aggregated single-dealer
platforms as well, because a participant
on such a platform may only submit one
request at a time and receive only one
response at a time, on a dealer-by-dealer
basis.
The Commission proposes that the
definition of SB SEF cannot be satisfied
by the simple aggregation of trading
interest across trading systems or
platforms to meet the ‘‘multiple
participant to multiple participant’’
requirement. That is, each trading
method—when viewed in isolation—
would need to individually meet the
‘‘multiple participant to multiple
participant’’ requirement on its own.
Thus, an entity that relies on a bilateral
negotiation system with one participant
on each end of the telephone or similar
communication system, but with several
such conversations occurring
simultaneously, could not claim to meet
the definition of SB SEF by asserting
that when those conversations are
viewed in the aggregate, i.e., bilateral
negotiation between persons A and B to
facilitate one transaction, and bilateral
negotiation between persons C and D, to
facilitate a separate transaction, that the
‘‘multiple participant to multiple
participant’’ requirement is met.45 Two
independent single-dealer platforms
also may not be construed in the
aggregate in order to meet the ‘‘multiple
participant to multiple participant’’
requirement. In each of these situations,
there is no opportunity for interaction
among participants, except on a ‘‘one
participant to one participant’’ basis.
However, a system or platform that
provides for an auction for a class of SB
swaps to be held at a prescribed time
and that allows multiple participants to
interact with each other, with trades
executed pursuant to a pre-determined
algorithm, could meet the proposed
interpretation of the definition of SB
SEF. In addition, the Commission
believes that a limit order book system
as described above for the trading of SB
swaps could satisfy the proposed
interpretation of the definition of SB
45 However, as discussed further below in the
discussion of the application of the definition of SB
SEF to wholesale brokers, if person A negotiates
with persons B, C and D as part of the same
transaction, the ‘‘multiple participant to multiple
participant’’ requirements may be able to be met.
See infra note 46 and accompanying text.
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SEF. Such a model generally would
allow interaction between multiple (i.e.,
two or more) firm orders or bids and
offers. Moreover, to satisfy the
definition of SB SEF, a system or
platform would not need to be limited
to only one type of trading model. An
entity that wishes to register as a SB SEF
could operate different trading models
for different SB swap products, as long
as each trading system or platform on its
own meets the interpretation of the
definition of SB SEF that the
Commission may adopt. For example, a
SB SEF could operate both a multidealer RFQ mechanism for the trading
of less liquid SB swaps and a limit order
book for the trading of more liquid SB
swaps.
The Commission has considered
whether brokerage trading, as described
above, would satisfy its proposed
interpretation of the definition of SB
SEF. On the one hand, brokerage trading
relies to a certain degree on ‘‘voice’’
communication, such as telephonic
communication between the broker and
its customers. On the other hand, the
wholesale broker 46 acts as an
intermediary between various potential
participants to a SB swap transaction,
and may utilize electronic systems to
display trading interest with which
various participants could interact to
transact in SB swaps. In some respects,
the wholesale broker’s role is similar to
that of a floor broker on an exchange, in
which the floor broker may use voice
communication to find trading interest
on the floor that can interact with an
order from its customer. If after the
wholesale broker receives a request from
a customer (of which there must be
more than one, but which do not need
to be acting simultaneously) to execute
a trade in a SB swap, and the broker
then submits that request to all
participants on the system or platform
(or to less than all participants, if the
customer has chosen to have the request
sent to less than all participants), the
Commission preliminarily believes that
such a model could satisfy the
Commission’s proposed interpretation
of the definition of SB SEF. Thus, the
brokerage trading model may be able to
satisfy the Commission’s proposed
interpretation of the definition of SB
SEF to the extent that multiple
participants would have access to the
system or platform and their trading
interest could interact with bids and
offers of multiple other participants in
that system or platform. Unless
46 For purposes of this proposing release, the term
‘‘wholesale brokers’’ generally refers to brokers that
intermediate transactions in SB swaps between
dealers or between dealers and end users.
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explicitly requested by the customer, for
any given transaction if a wholesale
broker typically acts only as the
intermediary between a given customer
and a single counterparty to facilitate
the negotiation of a bilateral contract,
the Commission does not believe this
wholesale broker would meet the
proposed interpretation of the definition
of SB SEF. Because of the different
variations of the wholesale broker
system, however, each system would
have to be evaluated on its own merits
to determine whether it would meet the
Commission’s proposed interpretation
of the definition of SB SEF.
The Commission’s proposed
interpretation of the definition of SB
SEF would result in permitting to be
registered as SB SEFs systems or
platforms for the trading of SB swaps
with a variety of features, and not just
those systems or platforms with
exchange-like features (for example,
systems requiring all trading interest to
be firm and displayed to all participants
in the market). The concern with taking
the latter approach is that the market for
many SB swaps is fairly illiquid.47
However, in the context of SB swaps
that are subject to the mandatory
clearing requirement, the Exchange Act
requires that the trading of SB swaps
must occur on a SB SEF or on an
exchange, if the SB swap is made
available for trading (unless certain
exceptions apply). Thus, requiring every
registered SB SEF to operate like a
national securities exchange could
result in (1) cleared SB swaps not being
made available to trade on an exchange
or SB SEF, with the result that SB swaps
would continue to trade in the OTC SB
swap market; or (2) if SB swaps subject
to mandatory clearing are made
available to trade on an exchange or SB
SEF, the continued development of the
SB swap market could be hindered, if
participants are unwilling to display
two-sided firm quotes to participants or
if the requirement to do so results in
bid-offer spreads that are so wide as to
not be economical). If the definition of
SB SEF is too narrowly construed, this
could provide a disincentive for SB
swap trading activity to move from the
OTC swap market to regulated markets.
A broader interpretation of the
definition of SB SEF could have the
beneficial result of increasing the
proportion of trading occurring on
regulated markets. Conversely, if the
definition of SB SEF is too broadly
construed, the Commission’s regulatory
scheme may not adequately advance the
Dodd-Frank Act’s goal of greater
transparency. The Commission’s
47 See
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proposed interpretation of the definition
of SB SEF is intended to balance these
concerns, promoting transparency as
well as providing incentives for market
participants to trade SB swaps on
regulated markets pursuant to
Commission rules and oversight, rather
than in the OTC swap market.
The Commission notes that no matter
what other functionality a SB SEF puts
in place (for example, a multi-dealer
electronic RFQ mechanism), it also
would be required to provide a basic
functionality to allow any participant on
the SB SEF the ability to make and
display executable bids or offers
accessible to all other participants on
the SB SEF, if the market participant
chooses to do so.
Considering the early stage of
development of the regulatory
framework for the SB swap market and
the existing structure of the SB swap
market, the Commission is mindful that
its interpretation of the definition of SB
SEF, and the rules it is proposing herein
to implement the Dodd-Frank Act,
could have unforeseen consequences,
either beneficial or undesirable, with
respect to the shape that this market
will take. In the Commission’s view, it
is important that the regulatory
structure will provide incentives for the
trading of SB swaps on regulated
markets that are designed to foster
greater transparency and competition
that are subject to Commission
oversight, while at the same time allow
for the continued efficient innovation
and evolution of the SB swap market.
The Commission therefore is seeking
where appropriate to take a deliberate
and attentive approach to the regulation
of SB SEFs that is informed by the state
of development of the trading of SB
swaps on regulated markets.
C. Request for Comments
The Commission seeks commenters’
views and suggestions on its proposed
interpretation of the definition of SB
SEF. Comment is requested on whether
the Commission’s proposed
interpretation, which would require an
RFQ to be sent to all participants but
would allow the quote requesting
participant to query less than all
participants, is appropriate, or whether
it is too narrow or too broad. Are there
other interpretations of the statutory
definition that would promote price
transparency and competition, as well
as incenting market participants to trade
on SB SEFs rather than in the OTC
market? If so, please explain. Does the
proposed ability of the quote requesting
participant to choose to send a RFQ to
less than all participants, raise any
concerns? Should the decision to
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exercise the ability to choose to send a
RFQ to less than all participants be
required on a transaction-by-transaction
basis? Why or why not? When should
the opt-out feature be permitted other
than on a transaction-by-transaction
basis? What would be the potential
benefits or costs of allowing an RFQ to
be submitted to only one participant?
What would be the potential benefits or
costs of requiring that an RFQ be sent
to more than one participant? If the
Commission were to require that an
RFQ be sent to more than one
participant, how many should be the
minimum? Should the Commission
require that an RFQ be sent to two
participants? Five participants (which is
the number proposed by the CFTC)? 48
Or some other number of participants?
Which approach—allowing a RFQ to be
sent to one participant or requiring a
minimum number greater than one—
would better promote transparency?
Which approach would encourage
greater trading of SB swaps on SB SEFs?
What impact, if any, would the various
approaches have on market participants’
incentives to trade within the United
States or in other jurisdictions? How
should the Commission weigh the
possibility that trading may move to
other jurisdictions in determining how
best to regulate markets within the
United States? What would be the costs
and benefits to such an approach? What
if only a small number of dealers were
willing to provide quotes on the
platform or in a particular SB swap?
Should the proposed interpretation
that affords the ability to opt to have a
RFQ sent to less than all participants be
limited to block trades? Should a
proposed interpretation that affords the
ability to opt to have a RFQ sent to one
participant be limited to block trades?
What would be the benefits and costs of
allowing the opt-out flexibility, to any
number of participants, for block trades?
For non-block trades? Are there factors
that would cause a different result for
block trades versus non-block trades?
Would the flexibility for participants to
choose to send a RFQ to less than all
participants, including to just one
participant, help to address concerns
about the impact of pre-trade
transparency on dealers’ incentives or
ability to provide competitive prices, as
discussed more fully in Section VIII.C?
If so, how so? If not, why not?
The Commission also is interested in
learning commenters’ views on whether
the market for SB swaps would be
enhanced or adversely affected by its
48 See Notice of proposed SEF rulemaking by the
CFTC, supra note 17 (requiring that RFQs be
disseminated to at least five participants).
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proposed interpretation of the definition
of SB SEF and, if so, in what ways.
Should there be a requirement that
the execution of trades or the
submission of bids and offers be done
electronically?
Would the proposed requirement that
an SB SEF provide functionality to
allow any participant on an SB SEF to
make and display executable bids or
offers accessible to all market
participants on the SB SEF, if the
market participants choose to do so, be
beneficial? What, if any, impact would
requiring this functionality have on
access to the SB SEF, or liquidity of the
SB swaps traded on the SB SEF? Should
the proposed requirement be modified?
If so, how? What would be the
advantages and disadvantages of such a
proposal? Do commenters believe that
market participants would utilize this
functionality? Should the Commission
require any particular method of
displaying such bids or offers? For
example, should the Commission
require that the SB SEF post all of these
executable bids and offers on a
centralized screen visible by all
participants? What would be the
advantages and disadvantages of having
such a centralized screen? What other
method could be utilized to display
such bids and offers?
In addition, the Commission requests
comment on the consequences of its
proposed interpretation of the definition
of SB SEF on existing platforms that
may seek to register as a SB SEF and on
those platforms that would not be able
to meet the proposed interpretation of
the definition of SB SEF. What kinds of
changes would existing platforms need
to make to their current structure to fall
within the proposed interpretation of
the definition of SB SEF? Are there
existing platforms that would not be
able to restructure to meet the proposed
interpretation, e.g., single-dealer RFQ
platforms? If so, what impact, if any,
would that outcome have on the market
for SB swaps? Are single-dealer
platforms likely to become obsolete as
trading of certain SB swaps moves to SB
SEFs? Or, are such platforms likely to
continue to exist to support the OTC
market? What impact would the
proposed interpretation have on
competition among existing trading
platforms and liquidity in SB swaps as
trading of certain SB swaps moves to SB
SEFs? Are new platforms likely to
emerge to trade SB swaps?
The Commission is interested in
learning commenters’ views on the
effect on the SB swap market if certain
trading platforms would not meet the
proposed interpretation of the definition
of SB SEF and would not be able to
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register as a SB SEF, and therefore no
longer would be able to trade SB swaps
that are subject to mandatory clearing
and are made available to trade on a SB
SEF or an exchange. Are there any types
of trading venues so critical to the
proper functioning of the SB swap
market that the Commission should
consider expanding the proposed
interpretation of the definition of SB
SEF so that such entities could qualify
as SB SEFs? If so, what trading
platforms are they and what kinds of
conditions should they be subject to?
Should any such expansion of the
proposed interpretation of the definition
of SB SEF to cover such platforms be
temporary and, if so, for how long?
What would be the impact of such
action on any platform that could meet
an unexpanded definition of SB SEF?
Market participants have expressed
concern about the trading of illiquid SB
swaps once platforms are configured to
meet the statutory definition of SB SEF,
particularly in light of the mandatory
trade execution requirement. The
Commission requests comment on the
effect of its proposed interpretation of
the definition of SB SEF on the trading
of illiquid SB swaps. Would a multidealer RFQ system as discussed above
sufficiently accommodate the trading of
illiquid SB swaps? If not, what other
models could meet the statutory
definition of SB SEF and accommodate
the trading of illiquid SB swaps? Would
an interpretation of the definition of SB
SEF that would allow an investor to
choose to send an RFQ to one
participant effectively accommodate the
trading of illiquid SB swaps? Would an
interpretation of the definition of SB
SEF that would require that an RFQ be
sent to more than one participant
effectively accommodate the trading of
illiquid SB swaps? In responding to
these questions, the Commission
requests that commenters take into
account the Commission’s discussion of
SB swaps that are made available to
trade in Section VIII.B below.
The discussion above contains several
examples of trading models that the
Commission believes would meet the
statutory definition of SB SEF. Are there
other trading models not discussed
above that would meet the statutory
definition of SB SEF? The discussion
above also contains several examples of
trading models that the Commission
believes would not meet the statutory
definition of SB SEF. Are there other
models that should be excluded from
the proposed interpretation?
The Commission seeks commenters’
views on the role of wholesale brokers
in the SB swap market and its view that
trading of SB swaps by such brokers
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potentially could satisfy the proposed
interpretation of the definition of SB
SEF. As noted above, the Commission
has identified bilateral negotiation, e.g.,
a trade occurring between two parties
via the telephone, as a model that would
not meet its proposed interpretation of
the definition of a SB SEF. The
Commission understands that wholesale
brokers often act as intermediaries in
executing SB swap transactions and
may engage in bilateral negotiation
when they attempt to complete an order.
The Commission further understands
that the orders that wholesale brokers
attempt to fill may be large and that, as
a result, they may interact with multiple
participants in attempting to execute the
transactions. The Commission also
understands that these brokers may also
maintain electronic systems for the
display of trading interest that their
customers can access. Do commenters
agree that bilateral negotiation by
wholesale brokers, by itself, should not
meet the proposed interpretation of the
definition of SB SEF? Is the
Commission’s view correct that there
are ways in which wholesale brokers
could restructure their operations to
meet the proposed interpretation of the
definition of SB SEF? How would such
platforms or systems be structured to
meet the proposed interpretation? What
would be the impact on the SB swap
market of any restructuring of a
wholesale broker’s business to meet the
Commission’s proposed interpretation
of the definition of SB SEF, particularly
in light of the fact that trades in SB
swaps today frequently occur through
bilateral negotiation? For those
wholesale brokers that currently effect
transactions in SB swaps, would the
modifications that a wholesale
brokerage firm would be required to
make to satisfy the proposed
interpretation of the definition of SB
SEF, the proposed rules implementing
the Core Principles, and the proposed
registration requirements be too costly
or otherwise impracticable to meet so
that the firm would find it difficult to
register as a SB SEF? The Commission
recognizes that wholesale brokerage
activities differ from dealer to customer
activities in effecting SB swap
transactions. Certain proposed
requirements discussed below, such as
impartial access, may affect wholesale
brokers differently than SB SEFs that are
not operated by such brokers. Comment
is requested on any such different
impact on wholesale brokers that intend
to operate SB SEFs, including the costs
and benefits of such impact. Should the
Commission view wholesale brokers’ SB
SEF operations differently than the
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operations of other SB SEFs? If so, how
so?
Another example of a trading platform
that could meet the proposed
interpretation of the definition of SB
SEF would include a multi-dealer RFQ
model. Do commenters agree that the
definition of SB SEF should cover these
types of trading platforms? If so, why?
If not, why not?
Market participants also have
expressed concern about any proposed
interpretation of the definition of SB
SEF that would result in others
discerning their proprietary trading
strategies. What would be the impact of
the Commission’s proposed
interpretation of the definition of SB
SEF on these concerns? Would one or
more of the models discussed above that
would meet the proposed interpretation
of the definition of SB SEF provide an
adequate level of comfort for these
market participants? If not, is there a
model that would meet the statutory
definition of a SB SEF and yet account
for these market participants’ concerns?
As noted above, the Commission
recognizes that the regulatory
framework for the SB swap market is
still in its early stages of development.
What would be the impact on
innovation in the SB swap market as a
result of the proposed interpretation of
the definition of SB SEF?
For example, under the proposed
interpretation of the definition of a SB
SEF, the SB SEF must provide a
mechanism for the dissemination of
firm quotes, if any, submitted by
participants in the SB SEF. This
functionality would allow a ‘‘limit
order-book’’ model to emerge in parallel
with other trading models on the SB
SEF, including RFQ mechanisms,
provided that each model meets all SB
SEF requirements discussed above. The
proposed interpretation is based on the
premise that allowing more than one
type of trading model to qualify as a SB
SEF would, among other things, provide
investors with more choices as well as
encourage more types of SB swaps to
trade on venues regulated by the
Commission. Is there any scenario
where this flexibility could impact
competition or innovation because
dealers may have their own preferences
for one model over another? If so, under
what scenario could this occur, and
what consequences could result? For
example, would the concentration of
trading in the SB swap market raise
concerns that, and provide incentives
for, market participants that have a
significant portion of the trading volume
for certain types of SB swaps in one
type of market structure to resist trading
those SB swaps in a market structure
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that might otherwise be more efficient
for that particular product?
The Commission also is interested in
learning whether its proposed
interpretation of the definition of SB
SEF would influence market
participants’ decisions regarding the
jurisdiction in which to execute their SB
swap trades. Would the proposed
interpretation affect a market
participant’s decision as to the
jurisdiction in which to execute SB
swaps transactions? If so, how? What
other factors might also influence that
decision, and how would those factors
weigh against this factor? The
Commission seeks commenters’ views
on whether, the ways in which, and to
whom any migration to a different
jurisdiction would be beneficial or
adverse.
Commenters are urged, when
considering all questions regarding the
Commission’s proposed interpretation
of the definition of SB SEF, to take into
account the rules being proposed by the
Commission to implement the Core
Principles, particularly the rules
regarding the treatment and interaction
of trading interest on a SB SEF, as
discussed below.49 The 14 Core
Principles set forth in Section 3D(d) of
the Exchange Act are integral to the
regulation of a SB SEF. The
Commission, in Sections VIII to XXII of
this release, is proposing various rules
to implement these Core Principles, as
well as proposed registration
requirements. The Commission also is
interested in commenters’ views on
whether the Commission’s proposed
interpretation of the definition of SB
SEF, along with its proposed rules
implementing the Core Principles and
proposed registration requirements, in
the aggregate, are too permissive, are
appropriate, or are too burdensome at
this stage of development of the SB
swap market. If commenters believe that
the proposals in the aggregate are too
permissive, the Commission is
interested in being informed of ways in
which they could be enhanced. If
commenters believe that the proposals
in the aggregate are too burdensome, the
Commission is interested in being
informed of ways in which they could
be modified.
The Commission is interested in
learning commenters’ views on whether
the combination of the proposed
interpretation of the definition of SB
SEF, its proposed rules implementing
the Core Principles, and its proposed
registration requirements would be too
49 See infra Section VIII (discussing Core
Principle 2 and the requirements relating to a SB
SEF’s trading rules).
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onerous and thus would make it
impractical or economically infeasible
for entities that currently trade SB
swaps to modify their procedures,
personnel, systems or platform in order
to operate as a SB SEF. If this is the case,
the Commission seeks commenters
views on ways that its proposed
interpretation of the definition of SB
SEF, its proposed rules implementing
the Core Principles, or its proposed
registration requirements could be
modified so that entities that currently
trade SB swaps could continue to do so
and at the same time the statutory
requirements of the Dodd-Frank Act
relating to SB SEFs would be met. In
particular, the Commission requests
comment on the question of whether it
should adopt a phased approach to the
implementation and/or application of
the proposed rules, whereby certain
provisions would become operational
only when certain designated timing,
volume, liquidity, or other thresholds
were met.50 The Commission seeks
commenters’ views on the steps it could
take to facilitate the transition to a more
regulatory environment for those
entities that currently trade SB swaps
and expect to register as SB SEFs.51
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IV. Exemption From the Definition of
Exchange for Security-Based Swap
Execution Facilities
An entity that meets the definition of
SB SEF in Section 3(a)(77) of the
Exchange Act may also meet the
definition of ‘‘exchange’’ set forth in
Section 3(a)(1) of the Exchange Act,52
certain of the terms of which have been
interpreted by the Commission in Rule
3b–16 of the Exchange Act.53 The
50 See infra the discussion in Section XXV
regarding a phased approach to implementation.
51 See infra Section XXI.A.2 seeking commenters’
views on a possible phased-in approach to any rules
that the Commission may adopt with respect to SB
SEFs.
52 15 U.S.C. 78c(a)(1). The term ‘‘exchange’’ means
any organization, association, or group of persons,
whether incorporated or unincorporated, which
constitutes, maintains, or provides a market place
or facilities for bringing together purchasers and
sellers of securities or for otherwise performing
with respect to securities the functions commonly
performed by a stock exchange as that term is
generally understood, and includes the market
place and the market facilities maintained by such
exchange.
53 17 CFR 240.3b–16 defines the phrase ‘‘market
place or facilities for bringing together purchasers
or sellers of securities or for otherwise performing
with respect to securities the functions commonly
performed by a stock exchange’’ to mean an
organization, association or group of persons that
(1) brings together the orders for securities of
multiple buyers and sellers; and (2) uses
established, non-discretionary methods (whether by
providing a trading facility or by setting rules)
under which such orders interact with each other,
and the buyers and sellers entering such orders
agree to the terms of the trade.
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Commission believes that Congress did
not intend that entities that meet the
definition of SB SEF in Section 3(a)(77)
of the Exchange Act and that comply
with Section 3D of the Exchange Act
and the rules and regulations
promulgated by the Commission
(including the requirement to register as
a SB SEF) also would be subject to
various requirements applicable to
exchanges, including registration as a
national securities exchange.54
Section 3(a)(77) of the Exchange Act
defines a SB SEF as a trading system or
platform in which multiple participants
have the ability to execute or trade SB
swaps by accepting bids and offers
made by multiple participants in the
facility or system, through any means of
interstate commerce, including any
trading facility, that: (1) Facilitates the
execution of SB swaps between persons;
and (2) is not a national securities
exchange (emphasis added).55 Further,
Section 3C(h) of the Exchange Act
provides that transactions involving SB
swaps subject to the clearing
requirement be executed on either (1) an
exchange or (2) a SB SEF registered
under Section 3D of the Exchange Act
or exempt from registration (unless no
exchange or SB SEF makes the SB swap
available to trade or the SB swap
transaction is subject to a clearing
exception).56 Finally, Section 3D(a)(1) of
the Exchange Act provides that no
person may operate a facility for the
trading or processing of SB swaps,
unless the facility is registered as a SB
SEF or as a national securities
exchange.57 The Commission interprets
these provisions to mean that an entity
that is registered as a SB SEF cannot
also be a national securities exchange;
that an exchange and a SB SEF
54 See, e.g., Section 6 of the Exchange Act, 15
U.S.C. 78f, which, among other things, requires a
national securities exchange to enforce compliance
by its members and their associated persons with
the Exchange Act and rules and regulations
thereunder, as well as with the exchange’s rules.
National securities exchanges are self-regulatory
organizations (‘‘SROs’’) for purposes of the Exchange
Act and are subject to the requirements of Sections
17 and 19 of the Exchange Act, 15 U.S.C. 78q
and78s. Section 17(a)(1) requires national securities
exchanges to make and keep records for prescribed
periods, and to furnish such records to the
Commission as well as any related reports. Section
19(b) requires, among other things, SROs to file
proposed rule changes with the Commission.
55 See Public Law 111–203, § 761(a) (adding
Section 3a(77) of the Exchange Act).
56 See Public Law 111–203, § 763(a) (adding
Section 3C(h) of the Exchange Act). The
Commission notes that in this section Congress
chose to use the term ‘‘exchange’’ as opposed to
‘‘national securities exchange.’’ An exchange only
becomes a ‘‘national securities exchange’’ upon
registration with the Commission pursuant to
Section 6 of the Exchange Act.
57 See Public Law 111–203, § 763(c) (adding
Section 3D(a)(1) of the Exchange Act).
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registered under Section 3D of the
Exchange Act (or exempt from such
registration) are separate categories of
regulated entities for the trading of SB
swaps; and that an entity registered as
a SB SEF would not also be required to
register as a national securities
exchange.
Section 36 of the Exchange Act 58
gives the Commission broad authority to
exempt any person, security, or
transaction from any provision of the
Exchange Act and any rule or regulation
thereunder. Such an exemption may be
subject to conditions. Using this
authority, the Commission is proposing
to amend Rule 3a1–1 of the Exchange
Act 59 by adding paragraph (a)(4) to
exempt any SB SEF from the definition
of ‘‘exchange,’’ if such SB SEF provides
a marketplace solely for the trading of
SB swaps (and no other security) and
complies with the provisions of
proposed Regulation SB SEF.60 The
effect of this exemption would be that
an entity that registers as a SB SEF
would not also have to register as a
national securities exchange.
The Commission preliminarily
believes that this proposed exemption is
necessary and appropriate in the public
interest and is consistent with the
protection of investors because it would
effectuate the intent of the Dodd-Frank
Act, as expressed in Sections 3(a)(77),
3C(h) and 3D(a)(1) of the Exchange Act,
and it would eliminate what the
Commission believes would be a largely
duplicative oversight of SB SEFs. The
Commission believes that Congress
specifically provided a comprehensive
regulatory framework for SB SEFs in the
Exchange Act, as amended by the DoddFrank Act, and therefore that such
entities that are registered as SB SEFs
should not also be required to register
and be regulated as national securities
exchanges. The Commission notes that
a registered SB SEF that chose to
provide a marketplace for the trading of
any security other than a SB swap
would not be in compliance with the
exemption in proposed Rule 3a1–
1(a)(4). Also, as the SB swaps markets
continue to evolve, the Commission will
continue to assess the appropriateness
of, and/or take action with respect to,
the proposed exemption from the
definition of exchange.
The Commission requests comment
on the proposed exemption in Rule 3a1–
1(a)(4). Is the exemption necessary or
appropriate? Are the conditions to the
proposed exemption appropriate or
should there be any additional
58 15
U.S.C. 78mm.
CFR 240.3a1–1.
60 See proposed Rule 3a1–1(a)(4).
59 17
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conditions? What are the benefits or
drawbacks of the proposed exemption?
The definition of ‘‘security-based
swap execution facility’’ and the
definition of ‘‘exchange’’ (certain terms
of which have been interpreted by Rule
3b–16 under the Exchange Act) are
similar in that they both include the
concept of multiple participants and
multiple buyers and sellers,
respectively. However, these definitions
are not identical. It is possible that an
entity that trades SB swaps would meet
the criteria of Rule 3b–16 but not the
definition of SB SEF contained in
Section 3(a)(77) of the Exchange Act. If
such an entity trades SB swaps that are
subject to mandatory clearing and that
are made available to trade on an
exchange or SB SEF, it would be
required to register as a national
securities exchange, absent a limited
volume exemption pursuant to Section
5 of the Exchange Act.61 Should the
Commission permit such a platform to
register as a SB SEF pursuant to Section
3D(a)(1) of the Exchange Act? 62 Should
the Commission instead provide an
exemption from the definition of
exchange for such an entity? If so, why,
and what should be the conditions to
any such exemption? What would be
the benefits or drawbacks of any such
exemption?
61 The trading of a SB swap on an ATS when that
SB swap is subject to mandatory clearing and is
made available to trade on a SB SEF or a national
securities exchange would not satisfy the
requirement of Section 3C(h) of the Exchange Act.
Section 3C(h) of the Exchange Act states that, with
respect to transactions involving SB swaps subject
to the clearing requirement of subsection (a)(1) of
Section 3C of the Exchange Act, the counterparties
shall (A) execute the transaction on an exchange;
or (B) execute the transaction on a SB SEF
registered under Section 3D of the Exchange Act or
a SB SEF that is exempt from registration under
section 3D(e) of the Exchange Act. Although, as
noted above, Section 3C(h) uses the term
‘‘exchange’’ as opposed to ‘‘national securities
exchange,’’ an ATS would not satisfy this
requirement because an ATS is exempt from the
definition of exchange pursuant to Rule 3a1–1
under the Exchange Act.
62 Section 3D(a)(1) of the Exchange Act states that
‘‘no person may operate a facility for the trading or
processing of security-based swaps, unless the
facility is registered as a security-based swap
execution facility or as a national securities
exchange under this section.’’ Section 3(a)(77) of the
Exchange Act defines ‘‘security-based swap
execution facility’’ to mean a trading system or
platform in which multiple participants have the
ability to execute or trade SB swaps by accepting
bids and offers made by multiple participants in the
facility or system, through any means of interstate
commerce, including any trading facility, that (A)
facilitates the execution of SB swaps between
persons; and (B) is not a national securities
exchange. The Commission interprets these two
provisions, taken together, to require registration as
a SB SEF or a national securities exchange for any
entity that meets the definition of SB SEF in Section
3(a)(77) of the Exchange Act.
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V. Conditional Exemption From
Regulation as Brokers for SecurityBased Swap Execution Facilities
An entity that meets the definition of
‘‘security-based swap execution facility’’
in Section 3(a)(77) of the Exchange Act
also would meet the definition of
‘‘broker’’ set forth in Section 3(a)(4) of
the Exchange Act.63 The term ‘‘broker’’
is generally defined to mean any person
engaged in the business of effecting
transactions in securities for the account
of others.64 A SB SEF is defined as a
trading system or platform in which
multiple participants have the ability to
execute or trade SB swaps by accepting
bids and offers made by multiple
participants in the facility or system,
through any means of interstate
commerce, including any trading
facility, that: (A) Facilitates the
execution of SB swaps between persons;
and (B) is not a national securities
exchange.65 A SB SEF, by facilitating
the execution of SB swaps between
persons, also would be engaged in the
business of effecting transactions in
securities for the account of others and
therefore would meet the statutory
definition of ‘‘broker.’’ Absent an
exception or exemption, a SB SEF that
effects transactions in SB swaps would
be required to register as a broker
pursuant to Sections 15(a)(1) and (b) of
the Exchange Act 66 and to comply with
the reporting and other requirements
applicable to brokers under the
Exchange Act and rules and regulations
thereunder.
As the Commission noted in its
discussion regarding the exemption
from the definition of ‘‘exchange’’ for SB
SEFs, the Exchange Act, as amended by
the Dodd-Frank Act, sets forth a
comprehensive regulatory framework
for SB SEFs. The Commission believes
that this framework indicates that
Congress did not intend for entities that
meet the definition of SB SEF in Section
3(a)(77) of the Exchange Act and that
comply with Section 3D of the Exchange
Act and the rules and regulations
thereunder (including the registration as
a SB SEF) also to be subject to all of the
63 15
U.S.C. 78c(a)(4).
The term ‘‘security’’ in Section 3(a)(10) of
the Exchange Act includes a ‘‘security-based swap.’’
See 15 U.S.C. 78c(a)(10).
65 See Public Law 111–203, § 761(a) (adding
Section 3(a)(77) of the Exchange Act).
66 15 U.S.C. 78o(a)(1) and (b). Section 15(a)(1)
generally provides that, absent an exception or
exemption, a broker or dealer that uses the mails
or any means of interstate commerce to effect
transactions in, or to induce or attempt to induce
the purchase or sale of, any security must register
with the Commission. Section 15(b) generally
provides the manner of registration of brokers and
dealers and other requirements applicable to
registered brokers and dealers.
64 Id.
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10959
requirements set forth in the Exchange
Act and the rules and regulations
thereunder applicable to brokers.67 As
discussed above, the Exchange Act, as
amended, establishes the statutory
structure for SB SEFs to register with
the Commission and for the
Commission to adopt rules and
regulations that require these entities to
comply with the Core Principles and
enforce compliance with those Core
Principles and any rules or regulations
that the Commission may adopt.
Section 36 of the Exchange Act gives
the Commission broad authority to
exempt any person, security, or
transaction from provisions of the
Exchange Act and the rules
thereunder.68 Such an exemption may
be subject to conditions.69 Using this
authority, as well as its authority to
establish procedures regarding the
registration of brokers, the Commission
is proposing Rule 15a–12 under the
Exchange Act to allow a SB SEF that is
a broker solely due to its activity with
respect to SB swaps executed on or
through the SB SEF to satisfy the
requirement to register as a broker by
registering as a SB SEF. Such person,
however, must not engage in any
activity that would require registration
as a broker other than facilitating the
trading of SB swaps on or through the
SB SEF in a manner consistent with
Regulation SB SEF. For example, acting
as an agent to a counterparty to a SB
swap trade or acting in a discretionary
manner with respect to the execution of
a SB swap trade would indicate that
such person may be acting as a broker
and, if the person is acting as a broker,
it would be required to register as such,
unless an exemption or exception from
registration was available. If an entity,
such as an inter-dealer broker, for
example, elects not to separate its inter67 Brokers and dealers must comply with the
Exchange Act provisions and rules and regulations
thereunder applicable to them. See, e.g., Section 15
of the Exchange Act, 15 U.S.C. 78o, and rules and
regulations thereunder. For example, brokers and
dealers must comply with a number of regulations
that govern their conduct, such as rules relating to
customer confirmations and disclosure of credit
terms in margin transactions. See 17 CFR 240.10b–
10 and 17 CFR 240.10b–16. They also must comply
with a number of financial responsibility
regulations, such as the net capital and customer
protection rules. See 17 CFR 240.15c3–1 and 17
CFR 240.15c3–3. Among other things, registered
brokers and dealers also must make and keep
current books and records relating to their business
and detailing, among other things, securities
transactions, money balances, and securities
positions; keep records for required periods and
furnish copies of those records to the Commission
on request; and file certain financial reports with
the Commission. See 17 CFR 240.17a–3, 17 CFR
240.17a–4, and 17 CFR 240.17a–5.
68 15 U.S.C. 78mm.
69 See id.
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dealer broker from its SB SEF or create
a subsidiary for its SB SEF, and instead
chooses to operate the SB SEF as the
same entity as the broker, the interdealer broker would not qualify for the
exemption.
In addition, the Commission is
proposing to conditionally exempt any
SB SEF from the Exchange Act and the
rules and regulations thereunder
applicable to brokers, except Exchange
Act Sections 15(b)(4), 15(b)(6), and
17(b).70 Under the proposed Rule, three
key provisions of the Exchange Act that
serve as the basis for Commission
examination and enforcement of the
Federal securities laws with respect to
a registered broker would continue to
apply to a SB SEF that relies on the
exemption in proposed Rule 15a–12.
Section 17(b) of the Exchange Act 71
authorizes the Commission to conduct
reasonable periodic, special, or other
examinations, of ‘‘[a]ll records’’
maintained by entities described in
Section 17(a),72 including registered
brokers.73 These examinations may be
conducted ‘‘at any time, or from time to
time,’’ as the Commission ‘‘deems
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of [the Exchange Act].’’ 74
Proposed Rule 15a–12 also would not
exempt a broker that registers as a SB
SEF from the statutory disqualification
provisions in Sections 15(b)(4) and (6)
of the Exchange Act, both with respect
to itself and with respect to its
associated persons.75 Further, pursuant
to proposed Rule 15a–12(d), a broker
registered under Section 15a–12(a) of
the Exchange Act that does not engage
in any activity other than the facilitating
and trading of SB swaps on or through
the SB SEF in a manner consistent with
Regulation SB SEF would be exempt
from the Securities Investor Protection
Act (‘‘SIPA’’), including membership in
the Securities Investor Protection
Corporation.76
The Commission believes that the
exemption in proposed Rule 15a–12
70 See
proposed Rule 15a–12(c).
U.S.C. 78q(b). See also 15 U.S.C. 78m(h)(4).
72 15 U.S.C. 78q(a).
73 15 U.S.C. 78q(b).
74 Id.
75 15 U.S.C. 78o(b)(4) and (6). See also 15 U.S.C.
78c(a)(18) (defining ‘‘person associated with a
broker or dealer’’ or ‘‘associated person of a broker
or dealer’’).
76 Section 36 of the Exchange Act gives the
Commission broad authority to exempt any person,
security, or transaction from any of the provisions
of the Exchange Act. This authority would include
the ability of the Commission to grant an exemption
under Section 36 from certain requirements of
SIPA. See Securities Exchange Act Release No.
40594 (October 23, 1998), 63 FR 59362, 59366, n.
31 (November 3, 1998).
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under the Exchange Act is necessary
and appropriate in the public interest
and consistent with the protection of
investors because it would eliminate
what the Commission believes would be
unnecessary additional regulation of SB
SEFs. Because SB SEFs would be
required to register as such under
Section 3D of the Exchange Act, it
would be unnecessary for them also to
be subject to statutory and regulatory
provisions governing brokers, subject to
certain exceptions set forth in the
proposed rule. The Commission
believes that Congress specifically
provided a comprehensive regulatory
framework for SB SEFs in the Exchange
Act, as amended by the Dodd-Frank Act,
and therefore that such entities
generally should not also be regulated as
brokers where such regulation would be
duplicative and unnecessary. As such,
the Commission preliminarily believes
that the broker registration and
oversight process can be accomplished
largely through the entity’s registration
as a SB SEF. In this regard, the
Commission also believes that it would
be unnecessary and inconsistent with
the comprehensive regulatory
framework for SB SEFs to require a SB
SEF, which would not be a custodian of
customer funds or securities and would
not otherwise operate as a broker, to
comply with SIPA. SIPA is a
comprehensive regulatory scheme for
the orderly liquidation of failed brokerdealers and the return of customer
property. If additional regulation is
developed for brokers, any application
of such regulation to SB SEFs would be
proposed by rule. Any order, such as a
suspension of the registration or trading
of a security pursuant to Sections 12(j)
or 12(k) of the Exchange Act,77 if
applicable to a SB SEF, would specify
that it would be applicable to a SB SEF.
The Commission notes that it is not
exempting SB SEFs from registration as
brokers; rather, it is proposing to
eliminate an additive layer of regulation
that the Commission believes is not
necessary in light of its regulatory
oversight of SB SEFs. The Commission
does not believe, however, that it would
be in the public interest to exempt SB
SEFs from the examination
requirements of Section 17(b) of the
Exchange Act, the statutory
disqualification provisions of Sections
15(b)(4) and (6) of the Exchange Act.
The Commission requests comment
on all aspects of its proposed rule.
Specifically, the Commission requests
comment on the scope, form, and
conditions of the proposed exemption.
Is the exemption necessary? Should the
77 15
PO 00000
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Commission add additional conditions
to its exemption, including requiring
compliance with any other statutory
provisions or any other rules or
regulations applicable to brokers? If so,
which ones, and why? Should the
Commission exempt SB SEFs from the
provisions of SIPA? If not, why not?
The Commission seeks comment on
whether there is a need for SB SEFs to
become members of a national securities
association. Would it be beneficial to
require SB SEFs to become members of
a national securities association to
provide an additional level of regulatory
oversight in addition to oversight by the
Commission? Why or why not? Should
the proposed exemption include a
condition requiring SB SEFs to comply
with Section 15(b)(8) under the
Exchange Act,78 which requires a
registered broker to be a member of a
registered national securities association
unless such broker effects transactions
solely on a national securities exchange
of which it is a member? What would
be the advantages or disadvantages of
such membership?
As noted above, the proposed Rule
would not apply in those instances
when the SB SEF is engaging in activity
that is not solely related to the
execution of SB swaps on or through the
facility, e.g., when the broker provides
services such as acting as an agent to a
counterparty to an SB swap trade or acts
in a discretionary manner with respect
to the execution of SB swap trades. In
such instances, should the broker be
required to comply with all Exchange
Act and Commission requirements
relating to brokers? If so, how would the
broker be able to separate its brokerage
function from its activities as a SB SEF?
What potential conflict concerns would
be raised, if any, if an entity that was
engaged in brokerage activity in SB
swaps on a SB SEF were affiliated with
that SB SEF, or if an entity were
engaging in brokerage activity in SB
swaps on a SB SEF in the same legal
entity that operates the SB SEF? If
commenters believe that such activity
would raise concerns, should the
Commission require the entity’s
brokerage activities and its SB SEF
activities to be conducted on separate
legal entities? Or, should the
Commission impose requirements on
the ability of a broker to be affiliated
with a SB SEF? If so, what conditions
should the Commission impose, and
how would they address any potential
conflict concerns?
Are there any potential conflict
concerns raised if a wholesale broker is
affiliated with a SB SEF, or is operating
78 15
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in the same legal entity as a SB SEF? If
so, what are those concerns, and what
are commenters views on whether and
how such concerns should be
addressed?
What would be the effect of having SB
SEFs join a registered securities
association without having a
comparable SRO for security-based
swap dealers (‘‘SB swap dealers’’) or
major security-based swap participants
(‘‘major SB swap participants’’)? Because
SB SEFs would be subject to regulatory
obligations, should the Commission
provide guidance on the acceptable
scope of any outsourcing of regulatory
matters that the SB SEF could
undertake?
VI. Access to Security-Based Swap
Execution Facilities
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The Dodd-Frank Act does not define
the categories of market participants
that may have access to trading on a
registered SB SEF or the terms of such
access. For the purposes of providing
guidance on this issue and to ensure
that SB SEFs grant access to their
markets in a manner that is consistent
with the Core Principles in Section 3D
of the Exchange Act, the Commission is
proposing Rule 809 and 811(b).
Proposed Rule 809 would set forth the
categories of persons that would be
permitted to have direct access to
trading on a registered SB SEF as a
participant and also the terms and
conditions that the SB SEF would need
to adopt for granting such access.79
Proposed Rule 811(b) would elaborate
on the standards for providing impartial
access.80 The purpose of the proposed
rules is to ensure that access to SB SEFs
is granted in a manner that strikes an
appropriate balance between the
statutory requirements of impartial
access (Core Principle 2) and financial
integrity of transactions (Core Principle
6) for SB SEFs.
The Commission understands that,
currently, trades in SB swaps occur
among dealers on OTC inter-dealer
markets, and between dealers and enduser customers on single- or multidealer OTC dealer-to-customer markets
or through bilateral negotiations. In
addition, trading of SB swaps in these
OTC markets is dominated by a small
number of large swap dealers.81 When a
79 See
proposed Rule 809.
proposed Rule 811(b).
81 See Office of the Comptroller of the Currency
(‘‘OCC’’), Quarterly Report on Bank Trading and
Derivatives Activities, First Quarter 2010
(‘‘Derivatives activity in the U.S. banking system
continues to be dominated by a small group of large
financial institutions. Five large commercial banks
represent 97% of the total banking industry
notional amounts * * *.’’). Several commenters on
80 See
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small group of market participants
dominates much of the trading in SB
swaps, and exerts control over access to
the SB swaps market, it raises concerns
about open access and competition. If
SB SEFs are controlled by a small group
of dealers who also dominate trading in
the market for SB swaps, the dealers
may have economic incentives to exert
undue influence to restrict the level of
access to SB SEFs and thus impede
competition by other market
participants in order to increase their
ability to maintain higher profit
margins.82 At the same time, in the
absence of clearing or other financial
safeguards, counterparties assess the
degree of credit risk posed by each
other, and enter into SB swap
transactions only with other persons
deemed to have an acceptable level of
credit risk. Therefore, in the OTC
market for SB swaps, open access and
containing counterparty credit risk may
be viewed as competing and potentially
conflicting goals.
The Dodd-Frank Act addresses these
competing concerns in several ways.
Section 3C(a)(1) of the Exchange Act
requires the mandatory clearing of SB
swaps that the Commission determines
must be cleared.83 With respect to
trading on SB SEFs, the Dodd-Frank Act
requires SB SEFs to establish rules for
both impartial access to their markets
and the financial integrity of
transactions on their markets, including
with respect to clearance and
settlement. Specifically, Core Principle
2 requires SB SEFs to provide market
participants with impartial access to the
proposed Regulation MC, however, took issue with
this statistic because the OCC data included
information about U.S. dealers only. See, e.g., Letter
from Barry L. Zubrow, Executive Vice President &
Chief Risk Officer, JP Morgan Chase & Co., to
Elizabeth M. Murphy, Secretary, Commission, and
David A. Stawick, Secretary, CFTC, dated
November 17, 2010.
82 In addition, these market participants might be
motivated to restrict the scope of SB swaps that are
made available for trading at SB SEFs if there is a
strong economic incentive to keep such SB swaps
in the OTC market. Conflicts of interest concerns
relating to SB SEFs are discussed in greater depth
in the release proposing Regulation MC, which
recently was published by the Commission as part
of a rulemaking mandated by Section 765 of the
Dodd-Frank Act. See Securities Exchange Act
Release No. 63107 (October 14, 2010), 75 FR 65882
(October 26, 2010) (‘‘Regulation MC Proposing
Release’’). Section 765 of the Dodd-Frank Act
requires the Commission to adopt rules to mitigate
specified conflicts of interest relating to SB SEFs,
security-based swap clearing agencies, and SBS
exchanges.
83 See Public Law 111–203, § 763(a) (adding
Section 3C(a)(1) of the Exchange Act). Section
3C(a)(1) makes it unlawful for a person to engage
in a SB swap unless the SB swap is submitted for
clearing to a registered clearing agency, if the SB
swap is required to be cleared.
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10961
market.84 Under Core Principle 6, SB
SEFs are required to establish and
enforce rules and procedures for
ensuring the financial integrity of SB
swaps entered on or through the
facilities of the SB SEF, including the
clearance and settlement of SB swaps
pursuant to Section 3C(a)(1) of the
Exchange Act.85 The Commission does
not believe that the requirement for
impartial access to a SB SEF under Core
Principle 2 means that it must allow
unfettered access to any and all persons.
Rather, the requirements of Core
Principle 6 that SB SEFs ensure the
financial integrity of transactions on
their markets, particularly with respect
to the mandatory clearing requirement,
permit SB SEF to have minimum
standards for access to their markets,
though such access must be provided on
an impartial basis.
In recognition of the challenges in
striking the balance between impartial
access and financial integrity goals of
the Dodd-Frank Act, and in view of the
current dominance of trading in SB
swaps in the OTC market by a small
number of dealers, the Commission is
proposing Rule 809 and Rule 811(b) to
establish certain baseline principles for
granting access to SB SEFs in
compliance with the requirements of
both Core Principles 2 and 6.
Specifically, proposed Rule 809(a)
through (c) and proposed Rule 811(b)
would require that SB SEFs enact and
apply objective standards for access to
their markets, in compliance with the
impartial access requirement of Core
Principle 2. Proposed Rule 809(a) and
(c)(1) through (4) would establish
certain minimum, objective standards
for SB SEF participants, in compliance
with the financial integrity of
transactions requirements of Core
Principle 6.
A. Impartial Access
Proposed Rule 809(a) would provide
that only registered SB swap dealers,
major SB swap participants, or brokers
(as defined in section 3(a)(4) of the
Exchange Act), or eligible contract
participants 86 would be eligible to
84 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(2) of the Exchange Act).
85 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(6) of the Exchange Act). Section
3C(a)(1) makes it unlawful for a person to engage
in a SB swap unless the SB swap is submitted for
clearing to a registered clearing agency, if the SB
swap is required to be cleared. See Public Law 111–
203, § 763(a) (adding Section 3C(a)(1) of the
Exchange Act).
86 The term ‘‘eligible contract participant’’ is
defined in Section 3(a)(65) of the Exchange Act as
having the same meaning as in Section 1a of the
CEA (7 U.S.C. 1a). As discussed above, this term
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become participants in a SB SEF.
Proposed Rule 809(b) would require a
SB SEF to permit all eligible persons
that meet the requirements for becoming
a participant under Rule 809(a) and the
SB SEF’s rules to become participants in
the SB SEF, consistent with the
requirements for impartial access in
Core Principle 2 and proposed Rule
811(b).87 Proposed Rule 809(b) would,
however, permit a SB SEF to choose to
not permit any eligible contract
participants that are not registered with
the Commission as a SB swap dealer,
major SB swap participant, or broker (as
defined in section 3(a)(4) of the Act 88)
(‘‘non-registered ECP’’), to become
participants in the SB SEF. Thus, under
the proposed rule, while a SB SEF could
choose to not allow any non-registered
ECPs to become participants, if the SB
SEF chose to permit such non-registered
ECPs to become participants in the SB
SEF, it could not selectively prohibit
certain non-registered ECPs from
becoming participants if they otherwise
satisfied the SB SEF’s requirements. In
effect, proposed Rule 809(b) would limit
the discretion involved in admitting
participants to a SB SEF because it
would impose an affirmative
requirement on SB SEFs to grant
qualified persons access to their markets
as participants.89
Proposed Rule 809(c) would require a
SB SEF to establish rules setting forth
requirements for eligible persons to
become participants in the SB SEF
consistent with the SB SEF’s obligations
under the Exchange Act and the rules
thereunder, and includes certain
enumerated minimum standards.90
Proposed Rule 809(c), by requiring a SB
SEF to codify its standards for becoming
a participant in its market, would make
the process of admitting participants
transparent and rules-based, and
thereby more objective. In addition,
such rules would have to be consistent
may be further defined by the Commission and the
CFTC pursuant to various sections of the DoddFrank Act. See supra note 3.
87 Core Principle 2 requires a SB SEF to establish
and enforce compliance with rules relating to any
limitation on access to the facility and to provide
market participants with impartial access to the
market. See Public Law 111–203, § 763(c) (adding
Section 3D(d)(2) of the Exchange Act).
88 15 U.S.C. 78c(a)(4).
89 This proposed requirement is analogous to the
fair access requirement for national securities
exchanges under Section 6(b)(2) of the Exchange
Act, which also imposes an affirmative duty to
admit qualified broker-dealers as members. See 15
U.S.C. 78f(b)(2). ‘‘The rules of the exchange [must]
provide that any registered broker or dealer or
natural person associated with a registered broker
or dealer may become a member of such exchange
* * *.’’
90 See proposed Rule 809(c)(1)–(4) and infra notes
105–109 and accompanying text for a discussion of
those proposed provisions.
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with proposed Rule 811(b), which
would require every SB SEF to establish
fair, objective, and not unreasonably
discriminatory standards for granting
impartial access to trading on the
facility.91 Proposed Rule 811(b) would
require that a SB SEF may not
unreasonably prohibit or limit any
person with respect to access to the
services offered by the SB SEF by
applying those standards in an unfair or
unreasonably discriminatory manner.92
Proposed Rule 811(b)(3) also would
require every SB SEF to make and keep
records of all grants, denials, or
limitations of access and to report that
information on proposed Form SB
SEF 93 and in the annual compliance
report of the Chief Compliance Officer
(‘‘CCO’’) pursuant to proposed Rule
823(c).
As was the case when the
Commission adopted Regulation ATS,94
these provisions are based on the
principle that qualified market
participants should have fair access to
the nation’s securities markets. Under
the proposal, a SB SEF would have
flexibility in establishing standards for
impartial access so long as those
standards are fair and objective and do
not unreasonably discriminate, and the
SB SEF does not apply the standards in
an unfair or unreasonably
discriminatory manner. For example, a
SB SEF could establish objective
minimum capital or credit requirements
for participants, as long as they were not
designed to, and did not have the effect
of, unreasonably discriminating among
persons seeking access to the SB SEF.95
Similarly, a SB SEF could reasonably
deny access to participants based on an
unfavorable disciplinary history.
Provided that these or other standards
are objective and applied consistently to
all potential participants, a SB SEF
could be considered to be granting or
denying access fairly. A denial of access
might be unreasonable, however, if it
were based solely, for example, on the
business activities of a prospective
participant that are unrelated to trading
on the SB SEF.96
91 See
proposed Rule 811(b)(1).
proposed Rule 811(b)(2).
93 The Commission is proposing that SB SEFs
register on Form SB SEF. See infra Section XXII for
a discussion of proposed Form SB SEF.
94 17 CFR 242.300 et seq. See Securities Exchange
Act Release No. 40760, (December 8, 1998), 63 FR
70844 (‘‘ATS Adopting Release’’) at notes 245 to
256.
95 See infra Section XII for a discussion of the
ability of a SB SEF to impose higher capital
requirements.
96 The Commission also discussed fair access at
length in the ATS Adopting Release. See supra note
94 at note 245.
92 See
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The Commission believes that
impartial access to SB SEFs would work
in conjunction with rules proposed by
the Commission to mitigate conflicts of
interest that could arise when a small
number of market participants,
including their related persons, exercise
control or undue influence over a SB
SEF either through ownership of voting
interests or participation in the
governance of the SB SEF.97 The
Commission requests comment,
however, on the extent to which both
types of rules are necessary to ensure
fair access to SB SEFs.
B. Financial Integrity
As noted above, proposed Rule 809(a)
would permit only persons that are
registered with the Commission as SB
swap dealers, major SB swap
participants, or brokers, or persons that
are eligible contract participants (as
defined in section 3(a)(65) of the Act) to
become participants of a SB SEF.98
Permitting registered SB swap dealers,
major SB swap participants, and brokers
to become participants would support
the SB SEF’s duty to ensure the
financial integrity of transactions,
including the clearance and settlement
of SB swaps, under Core Principle 6.99
Registered SB swap dealers, major SB
swap participants, and brokers are all
subject to, or would be subject to,
minimum financial responsibility
requirements (including margin and net
capital requirements) and business
conduct requirements as a result of their
registered status under the Exchange
Act, which the Commission believes
would serve as a useful baseline for
ensuring the financial integrity of their
transactions entered on SB SEFs.100
97 See Regulation MC Proposing Release, supra
note 82.
98 See proposed Rule 809(a). The term
‘‘participant,’’ when used with respect to a SB SEF,
would mean a person that is permitted to directly
effect transactions on the SB SEF. See proposed
Rule 800.
99 Core Principle 6 requires SB SEFs to establish
and enforce rules and procedures for ensuring the
financial integrity of SB swaps entered on or
through the facilities of the SB SEF, including the
clearance and settlement of SB swaps pursuant to
Section 3C(a)(1) of the Exchange Act. See Public
Law 111–203, § 763(c) (adding Section 3D(d)(6) of
the Exchange Act).
100 The Exchange Act requires registered SB swap
dealers and major SB swap participants to comply
with certain minimum financial responsibility and
business conduct requirements. See Public Law
111–203, § 764(a) (adding Sections 15F(e) and (h) of
the Exchange Act). The financial responsibility and
business conduct requirements applicable to
registered SB swap dealers and major SB swap
participants will be the subject of a separate
rulemaking. Likewise, the Exchange Act requires
registered brokers to comply with certain financial
responsibility and business conduct obligations
under Section 15(c) of the Exchange Act and the
rules and regulations thereunder. See 15 U.S.C.
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Moreover, the Commission notes that
these registered persons are subject to
Commission oversight for compliance
with those requirements.101
At the same time, proposed Rule
809(a) also would permit a SB SEF to
choose to allow non-registered ECPs to
become participants in the SB SEF. If a
SB SEF chooses to permit non-registered
ECPs to become participants, the SB
SEF would be responsible for
establishing risk management controls
and supervisory procedures reasonably
designed to manage financial,
regulatory, and other risks associated
with the eligible contract participants’
access under proposed Rule 809(d).
Proposed Rule 809(d) would require
SB SEFs that provide direct access to
non-registered ECPs as participants to
establish, document, and maintain a
system of risk management controls and
supervisory procedures reasonably
designed to manage the financial,
regulatory, and other risks of direct
access by eligible contract
participants.102 The SB SEF’S risk
management controls and supervisory
procedures for granting access to nonregistered ECPs would be required to be
reasonably designed to ensure
compliance with all regulatory
requirements. The proposed
requirements for SB SEFs in proposed
Rule 809(d) are based on similar
requirements in Rule 15c3–5(b) and
(c)(2) under the Exchange Act for ATSs
that provide access to their markets to
non-broker-dealers.103
Allowing eligible contract
participants to be direct participants in
a SB SEF would be consistent with the
way the OTC SB swaps market operates
today. The Commission preliminarily
believes that it is reasonable and
appropriate to require the SB SEF that
provides direct access to non-registered
ECPs to undertake certain
responsibilities to manage the risk of
those market participants accessing
their market. This proposed requirement
would support the SB SEF’s compliance
with the financial integrity of
transaction requirement of Core
Principle 6. Participants that are SB
swap dealers, major SB swap
participants, and brokers that are
78o(c), and Rules 15c1–2, 15c1–3, 15c2–1, 15c2–5,
and 15c3–1 under the Exchange Act, 17 CFR
240.15c1–2, 15c1–3, 15c2–1, 15c2–5, and 15c3–1.
101 The Commission’s regulatory and oversight
authority includes and would include requirements
to keep books and records open to the inspection
and examination authority of the Commission. See
Section 15F(f) of the Exchange Act, Public Law
111–203, § 764 (adding Section 15F(f) of the
Exchange Act) and Section 17(b) of the Exchange
Act, 15 U.S.C. 78q(b).
102 See proposed Rule 809(d)(1).
103 See 17 CFR 240.15c3–5(c).
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participants of the SB SEFs would be
required to be registered with the
Commission and be subject to certain
margin, net capital, and other financial
requirements that, by virtue of their
registration, are designed to curtail the
market risk imposed by their trading
activities. In contrast, non-registered
ECPs would not have corresponding
requirements under the Exchange Act.
The proposed requirements of Rule
809(d) are designed to reduce the risks
associated with non-registered ECPs that
have direct access to SB SEFs by
requiring SB SEFs that choose to allow
non-registered ECPs to be participants to
establish, document and maintain risk
management controls and supervisory
procedures. Since non-registered ECPs
are not subject to capital and other
financial requirements, there is a
concern that, in the absence of requiring
risk management controls and
supervisory procedures, they could
enter into trades that exceed appropriate
credit or capital limits for their risk
capacity. The Commission preliminarily
believes that the SB SEF is best
positioned to implement the proposed
controls and procedures.
The Commission preliminarily
believes that proposed Rules 809(a) and
(d) would ensure that access to SB SEFs
is sufficiently broad, while at the same
time imposing certain thresholds and
conditions for such access to ensure the
financial integrity of transactions on the
SB SEF. The Commission preliminarily
believes that the proposed limit on
eligible persons that may become
participants in SB SEFs under proposed
Rule 809(a) should not have the effect
of preventing interested market
participants from trading SB swaps. The
Commission notes, for example, that
many dealers would likely meet the
definition of SB swap dealer, and
thereby would be able to have direct
access to trading SB swaps on SB SEFs
once they are registered. Many other
market participants would qualify for
direct access by meeting the definition
of ‘‘eligible contract participant’’ in
Section 3(a)(65) of the Act. The
Commission notes that, although SB
SEFs are not required to provide access
to their markets to non-registered ECPs
as participants, if a SB SEF should
provide access to non-registered ECPs to
its markets as participants, it would be
required to provide such access
impartially consistent with proposed
Rule 811(b). In addition, the
Commission notes that eligible contract
participants that are not participants
could access a SB SEF indirectly
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through a participant.104 Therefore, the
Commission preliminarily believes that
proposed Rule 809(a) would not have an
adverse effect on access to trading SB
swaps on a SB SEF.
To help ensure that access to SB SEFs
is granted in a manner that would
enable the SB SEF to carry out its
responsibilities under Core Principle 6,
proposed Rule 809(c)(1) and (2) also
would require SB SEFs to have rules to
require a participant to, at a minimum:
(1) Be a member of, or have an
arrangement with a member of, a
registered clearing agency to clear trades
in SB swaps that are subject to
mandatory clearing pursuant to Section
3C(a)(1) of the Act and entered into by
the participant on the SB SEF; and (2)(i)
to meet the minimum financial
responsibility requirements 105 and
recordkeeping and reporting
requirements 106 imposed by the
Commission by virtue of its registration
as a SB swap dealer, major SB swap
participant, or broker, or (ii) in the case
of an eligible contract participant, meet
the recordkeeping and reporting
requirements that the SB SEF shall
establish pursuant to proposed Rule
813.
Requiring SB SEFs to put in place
rules that require its participants to be
a clearing member of, or have
arrangements with a clearing member
of, a registered clearing agency to clear
trades in SB swaps that are subject to
mandatory clearing and entered by the
participant and, in the case of registered
104 Under the Dodd-Frank Act, transactions in SB
swaps with a market participant that is not an
eligible contract participant must be effected on a
national securities exchange registered under
Section 6(b) of the Exchange Act. See Public Law
111–203, § 763(e) (adding Section 6(l) of the
Exchange Act). In addition, the offer and sale of SB
swaps to market participants that are not eligible
contract participants would have to be pursuant to
an effective registration statement under Section 6
of the Securities Act of 1933. See 15 U.S.C. 77f.
105 See Public Law 111–203, § 764(a) (adding
Sections 15F(e) of the Exchange Act) and Section
15(c) of the Exchange Act, 15 U.S.C. 78o(c). For
registered brokers, see also Rule 15c3–1 under the
Exchange Act. The financial responsibility
requirements applicable to registered SB swap
dealers and major SB swap participants will be the
subject of a separate rulemaking.
106 The Exchange Act requires registered SB swap
dealers and major SB swap participants to keep
books and records of activities related to their
business and provide certain reports of those
activities. See Public Law 111–203, § 764(a) (adding
Section 15F(f) of the Exchange Act). The rules
relating to the recordkeeping and reporting
requirements of these entities will be the subject of
a separate Commission rulemaking. Likewise, the
Exchange Act and rules and regulations thereunder
require registered brokers to keep books and records
of activities related to their business and provide
certain reports of those activities. See Section 17(a)
of the Exchange Act, 15 U.S.C. 78q(a), and see, e.g.,
Rules 17a–3 through 17a–5 under the Exchange Act,
17 CFR 240.17a–3 through 240.17a–5.
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SB swap dealers, major SB swap
participants, or brokers, to meet the
minimum financial responsibility
requirements imposed by the
Commission should strengthen the
financial integrity of SB swap
transactions that occur on the SB SEFs
by reducing the counterparty credit
risks associated with SB swap
transactions, consistent with Core
Principle 6.107 Furthermore, the
requirement for participants to meet the
minimum recordkeeping and reporting
requirements imposed by the
Commission by virtue of their
registration or, in the case of nonregistered ECPs, those requirements
imposed by the SB SEF, would enable
a SB SEF to obtain the necessary
information to perform their functions
under Section 3D of the Exchange Act,
consistent with Core Principle 5, and to
enforce its rules and procedures for
ensuring the financial integrity of SB
swaps entered on the SB SEF, consistent
with Core Principle 6.108 The
recordkeeping and reporting
requirements also should foster a SB
SEF’s ability to comply with its
obligations to capture information that
may be used in establishing whether
rule violations have occurred under
Core Principle 2 and to monitor trading
in SB swaps under Core Principle 4.109
Proposed Rules 809(c)(3) and (4)
would require SB SEFs to have rules to
require a participant to, at a minimum:
(1) Agree to comply with the rules,
policies, and procedures of the SB SEF,
and (2) consent to disciplinary
procedures of the SB SEF for violations
of its rules. The Commission notes that
the cooperation of participants is critical
to the SB SEF’s ability to comply with
several Core Principles in Section 3D of
the Exchange Act, particularly Core
Principles 2 (Compliance with Rules), 4
(Monitoring of Trading and Trade
Processing), and 6 (Financial Integrity of
Transactions). For this reason, the
Commission believes that it is important
for SB SEFs to have rules conditioning
access to their markets on a participant’s
compliance with the SB SEF’s rules and
its consent to the disciplinary
procedures of the SB SEF.
The Commission requests comments
on all aspects of the proposed rules
relating to access on SB SEFs. The
Commission also requests comments on
whether proposed Rule 809 incorporates
the appropriate categories of persons to
be allowed direct access to SB SEFs. If
107 See
supra note 99.
Public Law 111–203, § 763(c) (adding
Sections 3D(d)(5) and (6) of the Exchange Act).
109 See Public Law 111–203, § 763(c) (adding
Sections 3D(d)(2)(B)(ii) and 3D(d)(4)(B).
108 See
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not, how should the categories of such
persons be altered? Should certain
proposed participants be excluded from
having direct access to a SB SEF? If so,
which ones and why? Should other
categories of persons also be allowed to
have direct access to a SB SEF? If so,
which ones, and why? Are there any
concerns with allowing non-regulated
entities to directly access a SB SEF?
What would be the benefits of allowing
such access? The Commission
understands that it is the current
practice for customers to engage in
transactions with dealers without
intermediation. How would the
requirements of proposed Rule 809
affect that practice? Please describe any
such effects. What would be the result
of the proposed rule?
What are the benefits and drawbacks
of the proposal for SB SEFs to provide
direct access to all persons that meet the
requirements for becoming a participant
in their rules? Are there other
alternatives that the Commission should
consider to achieve the goal of having
impartial access to SB SEFs, consistent
with Core Principle 2? If so, please
explain.
Proposed Rule 809(b) would allow a
SB SEF to choose not to permit nonregistered ECPs to become participants.
How, if at all, would this proposed
provision affect access to SB SEFs?
Should the Commission allow SB SEFs
to have the discretion to choose whether
or not to permit non-registered ECPs to
become participants? Or should the
Commission mandate whether or not to
require SB SEFs to allow non-registered
ECPs to become participants? If the
latter, should the Commission require
SB SEFs to allow, or prohibit, nonregistered ECPs from becoming
participants? What would be the effect
on access of a mandate for either
option? Are SB SEFs that are capable of
establishing the risk management
controls and supervisory procedures
required in proposed Rule 809(d) likely
to exclude non-registered ECPs from
becoming participants to reduce
competition on their markets? Would
having the flexibility to exclude nonregistered ECPs from becoming
participants advance the market entry of
smaller SB SEFs that do not have the
resources to comply with proposed Rule
809(d),110 thus increasing opportunities
for competition across SB SEFs?
110 Proposed Rule 809(d) would require a SB SEF
that choose to permit non-registered ECPs to have
access as participants to establish, document, and
maintain a system of risk management controls and
supervisory procedures reasonably designed to
manage the financial, regulatory, and other risks of
this business activity and to ensure compliance
with all regulatory requirements.
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Are the proposed minimum standards
for participants of a SB SEF, as set forth
in proposed Rule 809(c), necessary and
appropriate? If not, why not? Do the
qualifications for being a participant in
proposed Rule 809(c)(1) and (2)
adequately address the financial
integrity requirements of Core Principle
6? Do the requirements of proposed
Rule 809(c)(2) also foster the ability of
SB SEFs to comply with their
obligations under Core Principles 2, 4,
and 5? What other qualifications should
participants in a SB SEF be required to
meet as a threshold matter? Are there
other minimum standards that the
Commission should consider requiring?
Are the requirements in proposed
Rule 809(d) pertaining to risk
management controls and supervisory
procedures for SB SEFs that provide
direct access to non-registered ECPs
necessary or appropriate? If so, why? If
not, why not and what would be a better
alternative for addressing risks, if any,
associated with providing access to nonregistered ECPs?
The Commission recently adopted
new Rule 15c3–5 to require brokerdealers to have certain risk management
controls for direct and indirect access to
trading on national securities exchanges
and ATSs.111 Specifically, Rule 15c3–5
imposes requirements on broker-dealers
that have direct access to trading on
national securities exchanges and ATSs
and to broker-dealer operators of ATSs
that provide direct access to non-brokerdealers. Proposed Rule 809(d) would
incorporate a requirement to establish,
document, and maintain a system of risk
management controls and supervisory
procedures reasonably designed to
manage the financial, regulatory, and
other risks of their business activity that
is generally based upon the
requirements of Rule 15c3–5(b) and
(c)(2) as they apply to ATSs. However,
proposed Rule 809 would not prescribe
the specific components for the required
risk management controls and
supervisory procedures that are
contained in Rule 15c3–5(c) or the other
requirements in Rule 15c3–5(d) and (e).
Should proposed Rule 809(d) provide
more specific requirements as to the risk
management controls and supervisory
procedures that should apply to SB
SEFs that provide access to nonregistered ECPs as participants? If so,
would some or all of the requirements
of Rule 15c3–5(c) be appropriate for SB
111 See Securities Exchange Act Release No.
63241 (November 3, 2010), 75 FR 69792 (November
15, 2011) (File No. S7–03–10) (adopting release for
Rule 15c3–5, which governs the terms for
sponsored access or direct access on national
securities exchanges and alternative trading
systems).
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SEFs? 112 Please specify and explain
why. If not, why not and what would be
a better alternative for SB SEFs in this
context? Would the remaining
requirements of Rule 15c3–5, in
paragraphs (d) and (e), be appropriate to
apply to SB SEFs that provide access to
non-registered ECPs as participants? 113
At this time, the Commission is not
proposing to adopt rules relating to
direct or indirect access to SB SEFs for
SB swap dealers, major SB swap
participants, or brokers.114 Should the
Commission adopt rules for risk
management controls and supervisory
procedures for SB swap dealers, major
SB swap participants, brokers and any
other participant with direct access to
trading or that may provide indirect
access to trading, on a SB SEF as a
participant? If so, would the terms of
Rule 15c3–5 be an appropriate guideline
for such rules? Please explain why or
why not. If so, should the Commission
apply some or all of the requirements of
Rule 15c3–5 to SB swap dealers, major
SB swap participants, and brokers that
are participants in a SB SEF? If only
some of the requirements of Rule 15c3–
5 should apply, which ones should
apply and why? Should the Commission
apply requirements similar to those in
Rule 15c3–5 only when SB swap
dealers, major SB swap participants,
and brokers that are participants in a SB
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112 Rule
15c3–5(c) requires the financial risk
management controls and supervisory procedures
to be reasonably designed to: (i) Prevent the entry
of orders that exceed appropriate pre-set credit or
capital thresholds and, where appropriate, more
finely-tuned by sector, security, or otherwise by
rejecting orders if such orders would exceed the
applicable credit or capital thresholds; and (ii)
prevent the entry of erroneous orders, by rejecting
orders that exceed appropriate price or size
parameters, on an order-by-order basis or over a
short period of time, or that indicate duplicative
orders; (iii) prevent the entry of orders unless there
has been compliance with all regulatory
requirements that must be satisfied on a pre-order
entry basis or if restricted from trading those
securities; (iv) restrict access to trading systems and
technology that provide access to permit access to
persons and accounts that are pre-approved and
authorized; and (v) assure that appropriate
surveillance personnel receive immediate posttrade execution reports that result from market
access. See 17 CFR 240.15c3–5(c).
113 Rule 15c3–5(d) requires the financial and
regulatory risk management controls and
supervisory procedures to be under the direct and
exclusive control of the broker or dealer subject to
the requirements of the rule, except under certain
proscribed circumstances. Rule 15c3–5(e) imposes
certain requirements pertaining to regularly
reviewing the effectiveness of the risk management
controls and supervisory procedures required by
the rule and for promptly addressing any issues.
See Rule 15c3–5(d) and (e), 17 CFR 242.15c3–5(d)
and (e).
114 The Commission notes that participants that
provide sponsored access to SB SEFs would be
required to register with the Commission as a
broker under Section 15(a)(1) and (b) of the
Exchange Act.
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SEF provide indirect access to the SB
SEF to non-participants? Or, should the
risk management controls and
procedures required in Rule 15c3–5 also
apply to their own transactions as
participants of a SB SEF (as they do for
the broker-dealers with direct access
under Rule 15c3–5)? Why or why not?
Or, are the terms of Rule 15c3–5
inappropriate for SB swap dealers,
major SB swap participants, brokers, or
other persons that are participants of a
SB SEF? If so, why and what terms
would be a better alternative to address
the risks associated with direct access or
sponsored access to SB SEFs? What
other terms and conditions should the
Commission consider to mitigate the
risks associated with access to SB SEFs?
What would be the likely impact of
having a rule like Rule 15c3–5 apply to
SB swap dealers, major SB swap
participants, and brokers that are
participants in SB SEFs? How would
current practices for trading SB swaps
be affected by applying a rule like Rule
15c3–5 to participants in SB SEFs? How
might the evolution of the SB swaps
market over time be affected by such a
rule? Would it promote or impede the
establishment of SB SEFs?
VII. Core Principle 1—Compliance
With Core Principles
Section 3D(d)(1) of the Exchange Act
(Core Principle 1) requires a SB SEF, to
be registered and maintain registration
as a SB SEF with the Commission, to
comply with: (i) the Core Principles
described in Section 3D(d) of the
Exchange Act; and (ii) any requirement
that the Commission may impose by
rule or regulation.115 The Commission
proposes to implement the requirements
of Section 3D(d)(1) of the Exchange Act
in proposed Rule 810(a) of Regulation
SB SEF.
The Commission proposes in Rule
810(b) to require a SB SEF to have rules
for the maintenance of certain standards
of fairness in dealings with participants
on their markets. The proposed
requirements in Rule 810(b) are derived
from similar requirements that national
securities exchanges are subject to
under Section 6(b) of the Exchange
Act.116 The Commission preliminarily
believes that the analogous
requirements incorporated into
proposed Rule 810(b) are appropriate
because SB SEFs, like national
securities exchanges, are subject to
statutory requirements to establish and
enforce trading and participation rules
115 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(1) of the Exchange Act).
116 15 U.S.C. 78f(b).
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that will deter abuses and provide
impartial access to their markets.117
Proposed Rule 810(b)(1) would
require a SB SEF to establish rules that
provide for the equitable allocation of
reasonable dues, fees, and other charges
among its participants and any other
users of its system.118 This requirement
is comparable to a similar requirement
for national securities exchanges in
Section 6(b)(4) of the Exchange Act.119
SB SEFs, like exchanges, presumably
would assess dues, fees, or other charges
on the various market participants that
trade on their markets. The purpose of
this proposed requirement is to ensure
that SB SEFs apply those dues, fees and
other charges among participants and
any other users of their systems in ways
that are fair and equitable, and not in
ways that inequitably favor, or
discriminate against, one or more
classes of such persons. Thus, proposed
Rule 810(b)(1) would support the
requirement in Core Principle 2 and the
proposed rules thereunder that SB SEFs
must provide for impartial access to
their markets by ensuring that each
market participant’s access to the SB
SEF is not limited by an inequitable
distribution of dues, fees, or other
charges assessed by the SB SEF.120 In
this regard, proposed Rule 810(b)(1) also
is designed to promote fair competition
on SB SEFs.
Proposed Rule 810(b)(2) would
require a SB SEF to establish rules and
systems that are not designed to permit
unfair discrimination among
participants and any other persons
using its system. This proposed
requirement is comparable to one of the
requirements for national securities
exchanges contained in Section 6(b)(5)
of the Exchange Act.121 In practical
terms, the proposal would compel SB
SEFs to design their rules and systems
in ways that would treat the various
market participants in the SB SEF
similarly, unless appropriate
considerations, consistent with the goals
of the Exchange Act, provide a
justification for treating some market
participants differently. Like proposed
117 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(2)(B) of the Exchange Act).
118 See proposed Rule 810(b)(1).
119 Section 6(b)(4) of the Exchange Act requires
the rules of the exchange to provide for the
equitable allocation of reasonable dues, fees, and
other charges among its members and issuers and
other persons using its facilities. 15 U.S.C. 78f(b)(4).
120 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(2) of the Exchange Act) and proposed
Rule 811(b).
121 Section 6(b)(5) of the Exchange Act provides,
in part, that the rules of the exchange must not be
designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. 15 U.S.C.
78f(b)(5).
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Rule 810(b)(1), proposed Rule 810(b)(2)
is designed to support the impartial
access requirements of Core Principle 2
and promote fair competition on SB
SEFs.
Proposed Rule 810(b)(3) would
require a SB SEF to establish rules that
promote just and equitable principles of
trade.122 This proposed requirement is
comparable to a similar requirement for
national securities exchanges contained
in Section 6(b)(5) of the Exchange
Act.123 The purpose of proposed Rule
810(b)(3) is to require SB SEFs to design
their rules in a manner that advances
the goals of the Exchange Act of
promoting fair and competitive markets
for SB swaps. SB SEFs, by establishing
rules for trading and monitoring trading
among buyers and sellers of SB swaps
on their systems, could play a
significant role in the development of
regulated markets for SB swaps, which
in turn would help reduce incidents of
systemic risk.
Finally, proposed Rule 810(b)(4)
would require a SB SEF to adopt rules
that, in general, would provide a fair
procedure for disciplining participants
for violations of the rules of the SB
SEF.124 This proposed requirement is
analogous to a similar requirement for
national securities exchanges in Section
6(b)(7) of the Exchange Act.125 A SB
SEF is required, pursuant to Section
3D(d)(2) of the Exchange Act, to enforce
compliance with any of its rules.126 SB
SEFs may choose to enforce rules on
their markets by applying penalties and
taking other disciplinary actions against
participants for violations of their rules.
Proposed Rule 810(b)(4) is designed to
ensure that, when the SB SEF pursues
disciplinary action against a participant
for violations of the SB SEF’s rules, the
participant is afforded a fair process.
While the Commission intends for a
SB SEF to retain flexibility in
establishing its disciplinary procedures,
the Commission anticipates that such
rules would have to comply with rules
recently proposed under Regulation
MC,127 should those rules be adopted by
the Commission. Proposed Rule 702(h)
under Regulation MC would require any
disciplinary process of a SB SEF to
preclude any group or class of
122 See
proposed Rule 810(b)(3).
6(b)(5) of the Exchange Act provides,
in part, that the rules of the exchange must be
designed to promote just and equitable principles
of trade. 15 U.S.C. 78f(b)(5).
124 See proposed Rule 810(b)(4).
125 Section 6(b)(7) of the Exchange Act requires
the rules of the exchange to provide a fair procedure
for the disciplining of members and persons
associated with members. 15 U.S.C. 78f(b)(7).
126 15 U.S.C. 78c–4(d)(2).
127 See Regulation MC Proposing Release, supra
note 82.
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123 Section
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participants from dominating or
exercising disproportionate influence on
the disciplinary process. In other words,
to the extent that there is more than one
type of group or class of persons that are
participants in a SB SEF, the
composition of any disciplinary panel
or other disciplinary body should not
allow one group or class to have
representation that is out of proportion
in comparison to other groups or classes
of persons that are participants in the
SB SEF. In addition, any panel or other
body that is responsible for disciplinary
decisions, and any appellate body for
the reviewing of disciplinary decisions,
would have to include at least one
independent director.128 The
Commission preliminarily believes that
proposed Rule 810(b)(4) under
Regulation SB SEF would supplement
and enhance the proposed requirements
of Regulation MC, although the
Commission requests comment on the
extent to which both sets of rules are
necessary to mitigate potential conflicts
of interest with respect to the SB SEF’s
disciplinary process.129
Proposed Rule 810(c) would prohibit
a SB SEF from using any confidential
information it collects or receives, from
or on behalf of any person, for nonregulatory purposes. The purpose of
proposed Rule 810(c) is to prevent the
SB SEF from taking commercial
advantage of any confidential
information that it receives in
connection with its regulatory
responsibilities.
The Commission requests comments
on all aspects of the proposed Rule 810
implementing Core Principle 1. Are the
provisions of proposed Rule 810
appropriate and sufficiently clear? If
not, why not and are there preferable
alternatives? What are the benefits and
drawbacks of imposing on SB SEFs
proposed requirements that are
comparable to those statutory provisions
that are applicable to national securities
exchanges under the Exchange Act?
Is the Commission’s proposed rule
that would require a SB SEF’s rules to
provide for fees, dues, and other charges
that are reasonable and equitably
allocated among participants and any
other persons using its system
appropriate and sufficiently clear? Is
this requirement necessary? If not, why
not and are there preferable alternatives
to help support the statutory goal of
impartial access? Are there
circumstances under which it would not
128 See proposed Rule 702(h) under Regulation
MC, Regulation MC Proposing Release, supra note
82.
129 For a discussion of further proposals to
mitigate conflicts of interest related to SB SEFs, see
infra Section XVII.
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be appropriate to require the SB SEF to
allocate fees, dues, and other charges
equitably? In what instances might a SB
SEF seek to differentiate among its users
with respect to fees, dues, and other
charges, including discounts and
rebates? Should any of those instances
be permitted or restricted?
Is the Commission’s proposed rule
requiring a SB SEF to establish rules
and systems that are not designed to
permit unfair discrimination among
participants and any other persons
using its system appropriate and
sufficiently clear? If not, what
additional guidelines should the
Commission consider for determining
when a rule or system would create
unfair discrimination among users of
the SB SEF’s system? What, if any,
existing aspects of the current market
for SB swaps may lead to unfair
discrimination among market
participants?
Is the Commission’s proposed rule
requiring a SB SEF to establish rules to
promote just and equitable principles of
trade appropriate and sufficiently clear?
Are there any specific rules or practices
that the Commission should require SB
SEFs to adopt for this purpose? If so,
what rules or practices, existing or
otherwise, should the Commission
require? Should the Commission
provide guidance on the types of rules
that it believes would promote just and
equitable principles of trade?
Are there any other requirements that
the Commission should impose on a SB
SEF to promote fair markets and
competition? What factors would most
promote fair markets and competition in
trading SB swaps, in particular?
Is the proposed requirement that a SB
SEF establish a fair procedure for
disciplining participants for violations
of the rules of the SB SEF appropriate
and sufficiently clear? Are there any
standards that the Commission should
require, at a minimum, for such fair
procedures? Is it sufficiently clear how
SB SEFs could comply with this
requirement in light of the requirements
of proposed Rule 702(h) in Regulation
MC, which would require the SB SEF to
preclude any group or class of
participants from dominating or
exercising disproportionate influence on
the SB SEF’s disciplinary process and to
have at least one independent director
on any disciplinary panel? If not, in
what way is the interaction of proposed
Rule 810(b)(4) of Regulation SB SEF and
proposed Rule 702(h) of Regulation MC
unclear and what steps could the
Commission take to improve these
provisions? Should the Commission
provide further guidance on how SB
SEFs could establish disciplinary
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procedures that would comply with the
requirements of proposed Rule 810(b)(4)
in Regulation SB SEF? Are there
additional measures that the
Commission should take to foster the
independence of the SB SEF’s
disciplinary process, such as requiring
any appeals of disciplinary actions to be
considered by the SB SEF’s independent
directors?
Proposed Rule 810(c) would prohibit
SB SEFs from using for non-regulatory
purposes any confidential information
they collect or receive in connection
with their regulatory obligations. Would
this proposed rule provide sufficient
protection from the improper use of
sensitive information by a SB SEF? If
not, what other measures should the
Commission consider requiring SB SEFs
to implement to protect the
confidentiality of the non-public
information that they collect or receive?
Please provide specific suggestions and
explain how such suggestions would
better address the need to keep nonpublic information confidential.
VIII. Core Principle 2—Compliance
With Security-Based Swap Execution
Facility Rules
Section 3D(d)(2) of the Exchange Act
(Core Principle 2) states that a SB SEF
shall: (A) Establish and enforce
compliance with any rule established by
such SB SEF, including (i) the terms and
conditions of the SB swaps traded or
processed on or through the facility and
(ii) any limitation on access to the
facility; (B) establish and enforce
trading, trade processing, and
participation rules that will deter abuses
and have the capacity to detect,
investigate, and enforce those rules,
including means (i) to provide market
participants with impartial access to the
market and (ii) to capture information
that may be used in establishing
whether rule violations have occurred;
and (C) establish rules governing the
operation of the facility, including rules
specifying trading procedures to be used
in entering and executing orders traded
or posted on the facility, including
block trades.130 The Commission is
proposing to implement these statutory
requirements in proposed Rule 811(a) of
Regulation SB SEF.
The Commission believes that the
primary issues raised by this Core
Principle relate to the rules that a SB
SEF must establish and enforce
regarding access, the SB swaps that
could trade on the system, and
surveillance, investigation and
enforcement of participants’ activities
130 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(2) of the Exchange Act).
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on the SB SEF. In proposing Rule 811(a)
of Regulation SB SEF to implement this
Core Principle, the Commission has
been informed by its experience with
regulating both national securities
exchanges and ATSs, while recognizing
that differences exist between the cash
equities and listed options markets and
the market for SB swaps.
Much as Sections 6 and 19 of the
Exchange Act 131 require that national
securities exchanges have rules, among
other things, to govern trading,
membership, and discipline of its
members, the Commission preliminarily
believes that, pursuant to Section
3D(d)(2) of the Exchange Act, SB SEFs
should have similar rules. In this way,
participants would be fully informed of
the rules governing various aspects of
the operation of the SB SEF and the
requirements governing trading on the
system, and would recognize that there
would be consequences if they fail to
comply with those rules. Below is a
discussion of the rules that, in the
Commission’s view, would need to be
developed and implemented by SB SEFs
to comply with Core Principle 2. These
proposed rules are not meant to be an
exhaustive list, and the Commission
believes that a SB SEF would need to
evaluate its own market to determine
the measures that are necessary to
implement the Core Principles.
A. Denials or Limitations on Access
Core Principle 2 is in part concerned
with limitations on access and mandates
that SB SEFs provide impartial access to
their markets.132 The Commission
discusses the substantive issues relating
to access, and the rules it is proposing
relating to access, in Section VI
above.133 The Commission believes that
one of the most important requirements
of Core Principle 2 concerns the SB
SEF’s rules regarding impartial access to
the facility. The Commission discusses
the procedural rules it is proposing in
connection with the Core Principle 2
requirement for impartial access below.
As the Commission noted in the
Regulation MC Proposing Release,
participants of a SB SEF might seek to
limit the number of direct participants
of the SB SEF to limit competition and
increase the opportunity for higher
profit margins.134
131 See, e.g., Sections 6(b) and 19(g) of Exchange
Act, 15 U.S.C. 78f(b) and 78s(g).
132 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(2)(A)(ii) and 3D(d)(2)(B) of the
Exchange Act).
133 See supra Section VI, notes 79 to 114.
134 See Regulation MC Proposing Release, supra
note 82. See also infra Section VI. As discussed
further in Section XVII below, the Commission
proposed a number of requirements in Regulation
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10967
The Commission is proposing several
procedural rules in support of the
proposed requirements for impartial
access discussed above in Section VI.
First, proposed Rule 811(b)(3) would
require every SB SEF to make and keep
records of all grants of access, including,
for all participants, the reasons for
granting such access, and all denials or
limitations of access, including, for each
applicant, the reasons for denying or
limiting access. The purpose of
proposed Rule 811(b)(3) is to ensure that
Commission staff would have the ability
to examine such records upon request,
pursuant to the requirements of
proposed Rule 814 of Regulation SB
SEF.135 In addition, proposed Rule
811(b)(4) would require each SB SEF to
file notice with the Commission (by
filing an annual amendment to
proposed Form SB SEF 136 and in the
compliance report required of the CCO
pursuant to Core Principle 14 and
proposed Rule 823 of Regulation SB
SEF), if the SB SEF prohibits or limits
access to the facility for any participant,
or if the SB SEF denies access to an
applicant.137 In its notice, a SB SEF
should inform the Commission of the
reasons for its denial of access and
provide the Commission with the
contact information of the aggrieved
participant or applicant.138 Together,
these requirements, which would
provide the Commission with
information about, or access to
information about, any instances when
the SB SEF has denied access to a
participant or an applicant to become a
participant, should help the
Commission carry out its oversight of
SB SEFs. This ability is particularly
important given the identified potential
MC designed to mitigate potential conflicts of
interest relating to SB SEFs, as discussed in the
Regulation MC Proposing Release. The additional
rules the Commission is proposing herein relating
to impartial access are designed to work together
with proposed Regulation MC to help mitigate
potential conflicts of interest, as identified in the
Regulation MC Proposing Release. In addition, as
discussed in Section XVII, the Commission is
proposing governance rules that also are designed
to help mitigate potential conflicts of interest
relating to SB SEFs.
135 See infra Section VI discussing proposed Rule
814 regarding the Commission’s ability to obtain
information.
136 See infra Section XXII discussing proposed
Form SB SEF. The Commission notes that proposed
Form SB SEF would be a publicly available
document, and so such notice would be publicly
available.
137 See infra Sections XXIII and XXI for a
discussion of Form SB SEF and the responsibilities
of the CCO, respectively.
138 The Commission could bring an enforcement
action if it believed that a SB SEF had denied or
limited access in contravention of the Exchange Act
and the rules thereunder.
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conflict of interest concerns with
respect to access to a SB SEF.139
Further, under proposed Rule
811(b)(5), a SB SEF would be required
to establish a fair process for the review
of any prohibition or limitation on
access with respect to a participant or
any refusal to grant access with respect
to an applicant.140 Fair access to trading
venues for SB swaps, and consequently
a fair review process, is important,
especially when a SB SEF may be the
only venue for the trading of a particular
SB swap. The Commission believes that
for any such review process by a SB SEF
to be fair, at a minimum, those persons
involved in the decision to prohibit,
limit, or deny a participant’s or
applicant’s access to the SB SEF should
not be involved in the review of
whether such prohibition, limitation, or
denial was appropriate. Otherwise, the
purpose of the review process could be
undermined. The SB SEF’s Board
should consider the most appropriate
body to conduct the internal review
process, whether that body is the Board
itself, a committee that is delegated this
function by the Board, or some other
appropriate body.
The Commission requests comment
on all aspects of its proposal regarding
denials or limitations of access. Is the
proposed rule requiring a SB SEF to
notify the Commission annually of any
prohibition, limitation, or denial of
access to its services appropriate and
sufficiently clear? Would this be useful
information for market participants and
the public? Should the Commission
require notice more often than
annually? Would the proposal assist in
mitigating conflicts of interest on the
part of a SB SEF? If so, how so? If not,
why not?
Is the Commission’s proposed rule
regarding a SB SEF’s review of its
denials of access appropriate and
sufficiently clear? If not, why not and
what would be a better approach? Are
there any measures that the Commission
could require that would result in a
more meaningful internal review
process? For example, should the
Commission explicitly require that the
Board or the regulatory oversight
committee (‘‘ROC’’) review all denials of
or limitations on access? 141 Would such
139 See Regulation MC Proposing Release, supra
note 82.
140 See proposed Rule 811(b)(5). Such a process
is required for all national securities exchanges and
for ATSs that have exceeded certain volume
thresholds. See Sections 6(c) and 19(e) of the
Exchange Act (15 U.S.C. 78f(c) and 78s(e)) and Rule
301(b)(5) (17 CFR 242.301(b)(5)) of Regulation ATS.
141 The Commission proposed in Regulation MC
to require a SB SEF to have a ROC, and that the
ROC be composed of independent directors. See
Regulation MC Proposing Release, supra note 82.
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a proposal be useful? If so, within what
time frame should the review be
completed? Are there any other
requirements the Commission should
impose?
B. Swap Review Committee
Proposed Rule 811(c) would require a
SB SEF to establish and enforce
compliance with rules concerning the
terms and conditions of the SB swaps
traded on the facility. To carry out this
requirement, a SB SEF would be
required to establish a swap review
committee 142 to determine the SB
swaps that trade on the SB SEF, as well
as the SB swaps that should no longer
trade on the SB SEF. The proposed rule
would require that the composition of
the swap review committee provide for
the fair representation of participants in
the SB SEF and other market
participants. Specifically, the proposed
rule would require that each class of
participant and other market
participants (such as the customers of
participants, including end-users and
buy-side firms) would have the right to
participate in the swap review
committee. The proposed rule also
would provide that the members of the
swap review committee be chosen so
that no single class of participant or
category of market participant would
predominate. The rules of the SB SEF
also would be required to stipulate the
method by which such representation
would be chosen by the Board of the SB
SEF.143 Having a compositionally
balanced committee should help to
assure that the process of determining
those SB swaps that should trade (or no
longer should trade) would be fair and
that various classes of participants in
the SB SEF, as well as other market
participants, would have a voice in
those decisions.
Proposed Rule 811(c)(3) would
require the SB SEF to establish criteria
to be used by the swap review
committee in determining which SB
swaps should be traded on the SB SEF.
The Commission preliminarily believes
that this would allow the most
flexibility by permitting a SB SEF to
choose whatever criteria it believes are
important in determining which SB
swaps to trade, thereby encouraging as
much trading of SB swaps on SB SEFs
as possible.
The Dodd-Frank Act requires that
transactions involving SB swaps subject
142 The swap review committee would not be
required to be a committee of the Board under the
Commission’s proposed rule, although a SB SEF
may choose to allow or require members of its
Board to serve on the swap review committee, as
the SB SEF would determine.
143 See proposed Rule 811(c)(2).
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to the clearing requirement of
subsection (a)(1) of Section 3C of the
Exchange Act be executed on an
exchange or on a registered SB SEF
unless no exchange or SB SEF makes
the SB swap available to trade.144
Consequently, once a SB swap is ‘‘made
available to trade’’ on an exchange or a
SB SEF (and is required to be cleared),
it can no longer trade in the OTC
market, making the determination of
what it means for a SB swap to be ‘‘made
available to trade,’’ as well as the
decision as to who makes such a
determination, central to the
implementation of Title VII of the DoddFrank Act. The Commission has
received comments that the scope of
those SB swaps that are made available
for trading would be important in this
market because of the mandatory trade
execution requirement and the nature of
the SB swap market,145 which is
relatively illiquid and has a smaller
number of market participants in
comparison to the cash equities and
listed options markets.146
In the Regulation MC Proposing
Release, the Commission identified
conflicts of interest that could arise
when a small number of market
participants exercise control or undue
influence over a SB SEF.147 When
trading of SB swaps is dominated by a
small number of participants, those
144 See Section 3C(h) of the Exchange Act. The
requirement in Section 3C(h) of the Exchange Act
that a SB swap that is made available to trade on
an exchange or a SB SEF shall be traded on an
exchange or SB SEF (and not in the OTC market)
only applies to SB swaps subject to mandatory
clearing. Section 3C(h) of the Exchange Act
generally states that, with respect to transactions
involving SB swaps subject to the clearing
requirement of paragraph (a)(1) of Section 3C,
counterparties shall: (1) Execute the transaction on
an exchange; or (2) execute the transaction on a
registered SB SEF or a SB SEF that is exempt from
registration. However, these requirements shall not
apply if no exchange or SB SEF makes the SB swap
available to trade or for SB swap transactions
subject to the clearing exception in paragraph (g) of
Section 3C.
In a separate proposed rulemaking, the
Commission, among other matters, is seeking
comment generally on how the factors identified in
the statute relating to the mandatory clearing
requirement should be applied in making
determinations as to whether particular SB swaps
are or should be required to be cleared. See
Securities Exchange Act Release No. 63557
(December 15, 2010), 75 FR 82490 (December 30,
2010) (File No. S7–44–10).
145 See, e.g., Commentary by Yves P. Denize,
´
Director & Associate General Counsel, TIAA–CREF,
at the Roundtable. Webcast available at https://
www.sec.gov/news/openmeetings/2010/
jac091510.shtml.
146 The market for SB swaps today is concentrated
in the hands of a few dealers. See supra note 81,
stating that five large commercial banks represent
97% of the total banking industry notional
amounts.
147 See Regulation MC Proposing Release, supra
note 82, 75 FR at 65890.
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participants may have competitive
incentives to, among other things, limit
the number of SB swaps that are made
available for trading by a SB SEF to keep
those SB swaps trading in the OTC
market. This could be true even for SB
swaps that would have sufficient
trading activity to trade on a SB SEF.148
On the other hand, once the
determination has been made that a SB
swap that is subject to mandatory
clearing is available to trade on an
exchange or a SB SEF, then such SB
swap can no longer trade in the OTC
market, even if trading of the SB swap
on the exchange or SB SEF were
virtually nonexistent. Thus, a
determination by even one SB SEF or
national securities exchange that a SB
swap was available to trade on the
exchange or SB SEF could have
unintended consequences for the
trading of such SB swap.
In light of these competing incentives
stated above, the Commission
preliminarily believes that it would be
appropriate that the decision as to when
a SB swap would be considered to be
‘‘made available to trade’’ on an
exchange or a SB SEF pursuant to
Section 3C(h) of the Exchange Act
should be made pursuant to objective
measures established by the
Commission, rather than by one or a
group of SB SEFs. Such objective
measures could provide that a SB swap
that is subject to mandatory clearing
would be ‘‘made available to trade’’
unless the SB swap fails to meet a
threshold test that the Commission may
adopt or, conversely, that no SB swap
would be ‘‘made available to trade’’
unless the SB swap passed a threshold
test that the Commission may adopt. In
either case, under this approach the
Commission would in effect interpret
the phrase ‘‘made available to trade’’ in
Section 3C(h) of the Exchange Act as
meaning something more than the
decision to simply trade, or essentially
list, a SB swap on a SB SEF or an
exchange.149 This approach would have
the further effect of permitting SB swaps
to be made subject to mandatory
clearing independently of whether they
are required to be traded exclusively on
SB SEFs and exchanges, because there
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148 Id.
149 Pursuant to proposed Rule 811(c), the swap
review committee of each SB SEF would be
responsible for determining which SB swaps the SB
SEF permits to be traded on the SB SEF. Under the
proposed approach, however, this decision would
not be the same as a determination that such SB
swap had been made available for trading within
the meaning of Section 3C(h) of the Exchange Act.
The swap review committee’s decision, therefore,
would not in and of itself be the sole determinant
of when a SB swap could no longer trade in the
OTC market.
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would not be an automatic requirement
that SB swaps subject to mandatory
clearing trade only on a SB SEF or
exchange simply because they are listed
on one.
The Commission does not, however,
have sufficient data at this time to
propose the objective standards
pursuant to which a determination
whether a SB swap is ‘‘made available
to trade’’ would be made. The
Commission preliminarily anticipates
that it will separately address how to
determine when a particular SB swap
would be considered to be ‘‘made
available for trading’’ on an exchange or
SB SEF pursuant to the directive of
Section 3C(h) of the Exchange Act. We
solicit comment in this release,
however, on how the Commission
should craft an objective standard for
whether a SB swap is ‘‘made available
to trade.’’ For example, an objective
determination could be based on a
formula measuring the percentage of
trading in a particular SB swap that was
taking place on exchanges and SB SEFs
compared to the aggregate percentage of
trading that was taking place in the SB
swap on exchanges and SB SEFs, and in
the OTC market.150 Alternatively, such
a determination could be based on
overall volume in the SB swap,
wherever executed. In addition, such a
test could require that a baseline trading
threshold for each SB swap be met. For
example, such a threshold could be that,
within a given measurement period, a
minimum number of transactions in the
SB swap be executed or that a minimum
notional value in the SB swap be traded.
There may be instances when, because
of a low total number of transactions in
a SB swap, it may not be appropriate to
determine that such SB swap should be
made available to trade.
It also may be appropriate to utilize
objective measures to determine when a
SB swap should no longer be considered
to be made available for trading. If it
were determined that a SB swap should
no longer be considered to be made
available for trading because, for
example, among other objective
measures very little trading in such SB
swap on SB SEFs has occurred over a
specified time period, such SB swap
would be able to trade in the OTC
market, as well as on exchanges and SB
SEFs.
Proposed Rule 811(c)(4) would
require the swap review committee to
periodically review each SB swap
150 Because all SB swap transactions would be
required to be reported to a registered SDR, whether
they occur on an exchange, a SB SEF, or in the OTC
market, the Commission would have access to
complete information on trading volume regarding
each SB swap.
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trading on the SB SEF to determine
whether the trading characteristics of
each such SB swap justify a change to
the trading platform being used for that
particular SB swap. In making such a
determination, the swap review
committee would need to consider
whether (1) the liquidity in each SB
swap is at an appropriate level for the
SB swap’s trading platform on which it
trades; and (2) such SB swap would be
more suited for trading on a different
type of platform, including a platform
that provides for increased price
transparency for participants entering
quotes, orders, or other trading interest.
The first review could not be earlier
than 120 days after the initiation of
trading for a given SB swap.
Proposed Rule 811(c)(4) is designed to
ensure that SB swaps that are trading on
the SB SEF are trading on an
appropriate platform. For example, if a
SB swap is trading in an RFQ
mechanism but trading in the SB swap
becomes sufficiently liquid, the SB SEF
should consider moving the SB swap to
a platform with greater transparency.
There could be reasons why the SB SEF
prefers not to do so, e.g., because the
predominant dealers on the market
prefer to continue trading the SB swap
in the RFQ platform that does not have
the same degree of transparency and
thus competition, as a limit order book.
Having such decisions made by the
swap review committee, and reported
promptly to the CCO and annually to
the ROC and the Board (as discussed in
the next paragraph), appear to lessen
any undue influence that any one class
of participants may have in keeping the
SB swap trading on a platform that does
not afford the appropriate level of price
transparency for that SB swap.
Proposed Rule 811(c)(5) would
require the swap review committee to
report decisions on each SB swap
promptly to the CCO and annually to
the ROC. This would include initial
decisions on trading SB swaps as well
as ongoing determinations pursuant to
the reviews of the swap review
committee. This would help ensure that
the CCO is kept apprised of changes in
the trading of SB swaps so that trading
can be properly monitored.
The Commission requests comment
on all aspects of the rules relating to the
swap review committee and its
responsibilities. Is the Commission’s
proposed rule concerning the
composition of the swap review
committee appropriate and sufficiently
clear? Should the Commission’s rule
contain more detail about the
requirements for the composition of the
committee? If so, what should those
requirements be? Should the
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Commission require independent
director representation on the swap
review committee?
Is the Commission’s proposed Rule
811(c)(3) concerning how the SB SEF
should determine whether to trade a SB
swap appropriate and sufficiently clear?
Should the Commission include any
particular factors that the SB SEF
should consider, and, if so, what should
those factors be and why?
As discussed above, under the
proposal the Commission would
interpret the phrase ‘‘made available to
trade’’ in Section 3C(h) of the Exchange
Act as meaning something more than
the decision to simply trade, or
essentially list, a SB swap on a SB SEF
or an exchange. The Commission
requests comment on whether
commenters agree with this approach,
or if, instead, we should consider a SB
swap to be ‘‘made available to trade’’ if
it is listed on an exchange or a SB SEF
in compliance with applicable rules and
regulations. What are the advantages
and disadvantages of such an approach?
Would the approach be more or less
simple and cost-effective than the
proposal, which would involve the
Commission in determining whether a
SB swap is ‘‘available to trade’’ and
distinguishes this from the
determination under proposed Rule
811(c)(3) of whether a SB swap should
be traded or listed on a SB SEF? Does
the review under proposed Rule
811(c)(3) accomplish many or all of the
Commission’s regulatory objectives?
Would an approach that deems a SB
swap ‘‘available to trade’’ if it is listed be
more or less susceptible to manipulation
or gaming than the proposed approach?
Would an approach that deems a SB
swap ‘‘available to trade’’ if it is listed
generally result in more or less trading
of SB swaps on exchanges or SB SEFs?
If the Commission were to take the
position that listing of a SB swap on an
exchange or a SB SEF is the same as
‘‘made available to trade,’’ could the
Commission’s potential concerns about
permitting SB SEFs and exchanges to
determine whether a SB swap is
‘‘available to trade’’ be addressed
through an exemptive process that
could consider potential adverse effects
or unintended consequences as to
particular SB swaps? Are the
Commission’s potential concerns about
permitting SB SEFs and exchanges to
determine whether a SB swap is
‘‘available to trade’’ affected by the types
of trading permitted on a SB SEF, such
as the ability to send an RFQ to only one
or few other participants? If the
Commission were to take the position
that listing of a SB swap on an exchange
or SB SEF is the same as ‘‘made
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available to trade,’’ the Commission
could subject SB swaps to mandatory
clearing independently of whether such
SB swaps are required to be traded on
SB SEFs or exchanges by, for example,
using an exemptive process or
specifying, at the time the mandatory
clearing determination is made, that a
SB swap is not ‘‘available to trade’’
unless certain criteria are met. What
would be the advantages and
disadvantages of such an approach
compared to the Commission’s
proposal?
The Commission requests comment
on whether it would be appropriate for
the decision as to when a SB swap
would be considered to be ‘‘made
available to trade’’ on an exchange or a
SB SEF pursuant to Section 3C(h) of the
Exchange Act to be made pursuant to
objective measures established by the
Commission, rather than by one or a
group of SB SEFs. If not, why not? If
not, is there another method that
commenters would suggest, other than
having the determination made by SB
SEFs? If so, what is that method?
The Commission requests comment
on the manner in which the
determination to make a particular SB
swap available for trading would be
made. What would be an appropriate
method or standards to determine
whether a SB swap should be made
available for trading? Should the test be
based on the aggregate amount of
trading in the SB swap on exchanges
and SB SEFs and in the OTC market, or
on overall volume, wherever the SB
swap may be executed? What would be
an appropriate volume threshold for
each alternative, and why? Should a
volume threshold vary by asset class? Is
one test more appropriate for some asset
classes and the other test more
appropriate for others? If so, why, and
what is the appropriate volume
threshold for each asset class with each
test? What would be the appropriate
measurement period for a volume
threshold and why? On what other
characteristics could the test be based?
Frequency of trading? The number of SB
SEFs on which the SB swap is also
trading?
Should there be some minimum level
of liquidity in both the OTC market and
on SB SEFs and exchanges in
connection with the determination that
a SB swap has been made available to
trade? If so, what is the appropriate
level of liquidity? What is a baseline
threshold that SB swaps made available
to trade should meet? Should it be based
on the number of transactions, the
notional value for a given SB swap, or
both, over a set time period? Or, is there
another baseline threshold that the
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Commission should consider? If so,
what is it? Over what time period
should the activity be measured?
What would be an appropriate test to
determine that a SB swap should no
longer be considered to be made
available for trading? Because such a SB
swap would not be trading in the OTC
market, a volume test similar to one of
the suggested tests above to determine
whether a SB swap should be
considered to be made available for
trading—comparing the aggregate
percentage of trading on exchanges and
SB SEFs to overall trading—may not be
feasible. How little trading on SB SEFs
should be taking place before the
Commission determines that the SB
swap should be permitted to trade again
in the OTC market (because it is no
longer considered to be ‘‘made available
for trading’’)? Is there a specific number
of trades that would make it appropriate
to determine that a SB swap is no longer
considered to be made available for
trading? If so, what should that number
be? Or, should a test be based on a
percentage trading volume comparison
of trading activity in a SB swap to a time
period prior to when it was considered
to be made available to trade? What
period of time would be appropriate to
determine if a pattern of lack of trading
has set in? Should such a determination
be based on a test based on something
other than trading volume? If so, what
should such a test be? How should the
Commission take into account the
possibility that market participants
might engage in gaming behavior to
affect the outcome of a test based on
trading frequency or volume?
Should the presumption be that no SB
swap is deemed made available to trade
unless it meets the threshold established
by any test that the Commission may
adopt, or should the presumption be
that all SB swaps are deemed available
to trade unless they fail to meet the
threshold established by any such test?
What would be the costs and benefits of
each approach?
Has the Commission correctly
identified the potential conflicts with
SB SEFs that could arise in decisions to
make a SB swap available to trade?
Would the proposal the Commission has
outlined here help to mitigate those
conflicts? If not, why not?
How, if at all, would having the
determination about what SB swaps are
made available for trading be made
pursuant to an objective formula, as the
Commission is considering to propose,
rather than allowing each SB SEF to
make the determination, impact the
incentives for creating a SB SEF? Would
the proposal have the effect of chilling
the creation of SB SEFs because trading
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could simply continue in the OTC
market until trading meets the objective
test? If so, how should the
determination of what is made available
to trade be made? How should the
Commission guard against the concern
that, if a distinction is not made
between ‘‘listing’’ or ‘‘trading’’ of a SB
swap, and ‘‘making available to trade,’’
OTC trading could effectively be cut off
in SB swaps that were made available to
trade, even if market participants
believe that they would benefit from
continued OTC trading? Is this concern
mitigated if the Commission adopts an
interpretation of the definition of SB
SEF that permits an RFQ to be sent to
only one other participant? Why or why
not? Under such approach, would there
still remain benefits for the OTC trading
of certain types of SB swaps by market
participants? If so, what would be these
benefits and under which
circumstances, and for what types of SB
swaps, would this be the case? How
should those benefits, if any, be
weighed with the Dodd-Frank Act’s goal
of moving trading in SB swaps onto
regulated markets?
Would the idea of looking at volume
trading on SB SEFs and SBS exchanges
versus trading in the OTC market be
subject to gaming? For example, would
it be possible for firms to avoid having
SB swaps designated as made available
to trade, for example, by suppressing SB
SEF trading volume by posting inferior
quotes on SB SEFs while continuing to
offer the identical product in the OTC
market at a better price? If so, what
impact would such behavior have on
the SB swap market? If so, how could
the Commission guard against such
behavior?
If the Commission has not adopted a
standard for determining when a SB
swap is made available to trade by the
time a SB swap is determined to be
subject to mandatory clearing, what
action, if any, should the Commission
take to clarify the impact of a SB SEF
or exchange listing a SB swap for
trading on its market? Would it be
necessary or appropriate for the
Commission to clarify the meaning of
‘‘made available to trade’’ in these
circumstances and, if so, what type of
clarification should the Commission
provide? Commenters should address
the impact, if any, of any action or
inaction by the Commission in these
circumstances on market participants
and on the trading of SB swaps,
including the impact of any
clarifications that commenters may
propose.
Is the Commission’s proposed Rule
811(c)(4) requiring review by the swap
review committee of the liquidity of SB
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swaps, and its potential requirement for
an SB SEF to move trading of the SB
swap to a different type of platform
operated by the SB SEF that would
provide for greater pre-trade price
transparency, once certain volume
thresholds are met, sufficiently clear? Is
it necessary for a swap review
committee to review SB swaps trading
on limit order book platforms, as well as
multiple dealer RFQ platforms? If not,
why not? Should the Commission
establish a trading activity threshold
that, if exceeded, would require a SB
SEF to move the trading of SB swaps to
a limit order book platform? If so, what
would be the appropriate factors and
threshold? For example, should such
factors include the liquidity of the SB
swap? If so, how should such liquidity
be measured (e.g., average daily trading
volume, frequency of trades, size of
trades)? What would be an appropriate
measurement period for any such
threshold(s)? Should a threshold vary
depending on the type of SB swap?
Should a threshold be relative (e.g.,
based on a specified percentage of
overall volume) or absolute (e.g., based
on a specific number of trades in a given
measurement period)? What are the
benefits and drawbacks of mandating a
trading activity threshold that, if
exceeded, would require a SB SEF to
move the trading of SB swaps to a limit
order book platform?
C. Trading Procedures
Proposed Rule 811(d) would require
every SB SEF to establish and enforce
rules governing the procedures for
trading on the SB SEF, including but not
limited to: doing business on the SB
SEF; types of orders or other trading
interest available; the manner in which
trading interest would be handled on
the SB SEF, including a proposed
requirement that the rules provide for
the fair treatment of all trading interest;
the manner in which price transparency
for participants entering orders, requests
for quotations, responses, quotations, or
other trading interest into the system
would be promoted; the manner in
which trading interest, including orders,
requests for quotations, responses,
quotations, and transaction data, would
be disseminated, including whether
dissemination would be only to
participants of the SB SEF or more
broadly, and whether or not for a fee;
prohibited trading practices; the
handling of clearly erroneous trades;
trading halts; the manner in which
block trades would be handled, if
different from the handling of non-block
trades; and any other rules concerning
trading on the facility. The Commission
believes that it is important for a SB SEF
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10971
to have rules concerning doing business
on the SB SEF because such rules would
provide participants with a uniform set
of expectations for how the SB SEF
would operate.
The Commission expects that such
rules would include information as
basic as the hours the SB SEF is
available for trading, as well as rules
concerning the manner in which trading
interest would be handled by the SB
SEF. Such rules also would help to
inform participants as to the types of
orders or other trading interest that they
could enter into the system for
execution. The Commission also
believes that rules concerning
prohibited trading practices would be
important to every SB SEF, so that
participants would be aware of the
scope of allowable behavior on the SB
SEF. Such rules would help to support
the requirement in Core Principle 2 that
every SB SEF would have to establish
rules that would deter abuses and have
the capacity to detect, investigate and
enforce those rules.
The Commission believes that it is
important to the efficient trading on a
SB SEF that the SB SEF provide for the
fair treatment of all trading interest on
its market. In other words, a SB SEF
should have rules designed to enhance
liquidity, including rules that are not
designed to disadvantage participants’
orders, thereby causing them to miss out
on trading opportunities. Such rules
might include, for example, price/time
priority or price/size priority rules.151
The SB SEF would need to apply these
rules consistently and fairly with regard
to all participants.
In addition, as discussed in Section III
above, the Commission believes that
transparency of prices on a SB SEF is a
critical element with respect to the
operation of a SB SEF. Although the
Commission is not proposing to dictate
a certain type of trading system or
trading rules for SB SEFs, it believes
that a SB SEF would have to meet
certain basic standards to comply with
the requirements that its rules provide
for the fair treatment of all trading
interest and that these rules address the
manner in which price transparency for
participants entering trading interest
into the system would be promoted. In
this regard, under its proposed
interpretation of the definition of SB
151 Generally, when orders are filled in price/time
priority, if there are two orders at the same price,
the order that arrived first would be given priority.
Alternatively, size may be used to determine
priority among trading interest at the same price.
For example, orders may be filled pro-rata, or in
certain proportions based on other factors the SB
SEF may determine are appropriate. See, e.g.,
International Securities Exchange Rule 713, Priority
of Quotes and Orders.
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SEF, if the SB SEF operates a RFQ or
similar trading model, the rules of the
SB SEF should include a functionality
that allows the quote requesting
participant to submit a RFQ to all
participants that are willing to respond
to requests, i.e., those participants
willing to provide liquidity. The SB
SEF, however, could determine to
provide the functionality for the
requesting participant to choose to send
the RFQ to less than all other
participants at the request of its
customer or when the participant is
exercising investment discretion. In
addition, the requestor would be able to
determine to whom to send the RFQ.
Further, for example, if the SB SEF
operates a RFQ mechanism, the rules of
the SB SEF should specify that any
response to an RFQ that is provided to
the participant submitting the RFQ
should be included in the composite
indicative quote of the SB SEF.152 In
addition, if a SB SEF displays firm,
executable trading interest, it must
display such interest to all participants.
The Commission believes that it is
important to foster pre-trade
transparency to encourage greater price
competition. However, the Commission
is cognizant of comments received from
market participants in the SB swap
market, both from customers (‘‘buyside’’) and liquidity providers (‘‘sellside’’), who are concerned about the
level of pre-trade price transparency
that may be required. Some of these
commenters have expressed the concern
that pre-trade price transparency could
potentially have an impact on dealers’
incentives or ability to provide
competitive prices if others can use the
information that would be made
available through increased pre-trade
price transparency to trade ahead of the
order. The proposed rules relating to the
dissemination of trading interest are
designed to increase transparency from
current levels, while at the same time
recognizing the concerns that have been
voiced about the potential effects of pretrade transparency in certain
circumstances. In this regard, proposed
Rule 811(d)(5) has been drafted to allow
maximum flexibility by a SB SEF to
determine the best manner to
152 The composite indicative quote screen would
be the quote screen available to all participants of
the SB SEF. The composite quote shows an average
quote for each SB swap available on the SB SEF.
The composite indicative quote includes both
composite indicative bids and composite indicative
offers. As discussed below, proposed Rule 811(e)
would require a SB SEF that operates a RFQ
platform to create and disseminate through the SB
SEF a composite indicative quote for SB swaps
traded on or through the SB SEF and to make that
screen available for viewing by all participants in
the SB SEF.
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disseminate trading interest by such SB
SEF. The Commission believes that it is
important for a SB SEF to make clear to
its participants, in a rule, how trading
interest would be disseminated. At the
same time, the Commission recognizes
that different platforms may require
different means of disseminating trading
interest, and that each SB SEF is in the
best position to determine how such
dissemination should occur on its own
platform. In particular, the Commission
believes that proposed Rule 811(d)(5)
would require a SB SEF to develop rules
that would incorporate responses
received on an RFQ system into a
composite indicative quote that is
available to all participants, and that
would not limit the number of dealers
from whom a participant could request
a quote.
The Commission also believes that SB
SEFs should have rules that concern any
prohibited trading practices. A SB SEF
should determine those trading
practices that it believes are
inappropriate to the functioning of its
market.
The Commission also believes that a
SB SEF should have rules concerning
the handling of clearly erroneous trades,
and that those rules should provide for
a fair and nondiscriminatory manner of
handling such trades, as well as a
procedure to resolve any resulting
disputes. Although under ordinary
circumstances trades that are executed
between parties should be honored, the
Commission believes that clearly
erroneous execution rules are necessary
because, on rare occasions, the terms of
the executed trade may indicate that an
obvious error may exist. In such
instances, it could be unrealistic to
expect that the parties to the trade had
come to a meeting of the minds
regarding the terms of the transaction. In
such case, a clearly erroneous
transaction may have taken place. The
Commission believes that any clearly
erroneous execution rule should
provide for a clear and transparent
process for resolving erroneous trades
and for a fair process for hearing appeals
of clearly erroneous decisions.
The Commission further believes that
it is critical for a SB SEF to have rules
concerning trading halts, so that trading
on the SB SEF would not continue
when trading has been halted or
suspended in the underlying security or
securities pursuant to the rules or an
order of a regulatory authority with
authority over the underlying security
or securities.153 The Commission
153 The
Commission notes that the options and
securities futures markets have rules providing for
a trading halt in the event that the underlying
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believes that when trading has been
halted on an underlying security, it is
appropriate that derivative markets,
such as the options markets and the SB
swap market, also halt trading to avoid
inefficient pricing and disruptions to
the market.
Core Principle 2 requires that SB SEFs
establish (and have the capability to
enforce) rules regarding trading
procedures. The items enumerated in
proposed Rule 811(d) are not meant to
be an exhaustive list of rules relating to
trading procedures and SB SEFs may
put in place additional types of
categories of rules that they deem to be
necessary to govern the procedures for
trading on the SB SEF. The Commission
preliminarily believes that each SB SEF
would be in the best position to
determine precisely those rules that are
necessary and appropriate to ensure that
its market functions in a fair and orderly
fashion. The rules of each SB SEF
would be required to be filed as part of
the initial Form SB SEF application, as
well as in connection with the rule
filing process in proposed Rules 805
and 806 of Regulation SB SEF.154
The Commission requests comment
on all aspects of proposed Rule 811(d).
What are commenters’ views on the
proposed rules relating to trading
procedures? Are the Commission’s
proposed rules concerning trading
procedures, the need to promote pretrade price transparency (proposed Rule
811(d)(4)) and the rule concerning
dissemination of trading interest
(proposed Rule 811(d)(5)) sufficiently
clear? Would proposed Rule 811(d)(4)
make a difference in price transparency
in the SB swap market? How would it
impact behavior? Are there any specific
concerns with this proposed rule? If so,
what are they? Should the proposed rule
be refined? If so, how? Please provide
specific suggestions.
What are commenters’ views on the
proposed requirement that responses to
an RFQ must be included in the SB
SEF’s composite indicative quote?
Would this requirement in fact promote
pre-trade price transparency? What
would be the benefits and drawbacks of
the Commission’s proposal to include
RFQ responses in the composite
indicative quote? Should the
Commission instead require that only
the response to an RFQ accepted by the
party submitting the RFQ be included in
a composite indicative quote? Should
the Commission require that any
participant responding to an RFQ have
security has been paused in the equity markets. See,
e.g. Chicago Board Options Exchange Rule 43.4(b).
154 See infra Section XXIII for a discussion of the
proposed rule filing process for SB SEFs.
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the ability to see other participants’
responses? Would such a requirement
make a difference with respect to pretrade price transparency? What would
be the benefits and drawbacks of such
a proposal? Should the Commission
require that all requests for quote be
shown to all participants? Would such
a requirement make a difference with
respect to pre-trade price transparency?
What would be the benefits and
drawbacks of such proposals?
Should the Commission require a SB
SEF to have a rule prohibiting the SB
SEF from disclosing to any liquidity
provider that has received an RFQ
information about how many
participants were queried? What would
be the impact of such a prohibition,
taking into account such factors as the
type of SB swap and the size of the
transaction, on the liquidity provider’s
incentives in determining at what price
to provide a response? Should the
participant submitting the RFQ be able
to waive any such prohibition in the
exercise of its investment discretion?
For SB SEFs that choose to allow
trading of uncleared SB swaps should
the Commission require such SB SEFs
to have additional trading rules related
to uncleared SB swaps, such as rules for
disclosing the counterparties to such
transactions or other rules related to
counterparty risks? Please provide
specific suggestions.
Proposed Rule 811(e) would require a
SB SEF that operates an RFQ platform
to create and disseminate through the
SB SEF a composite indicative quote for
SB swaps traded on or through the SB
SEF.155 The composite indicative quote
would need to be made available to all
participants of the SB SEF. The
composite indicative quote would
include both composite indicative bids
and composite indicative offers. The
Commission preliminarily believes that
a composite indicative quote would
provide valuable pricing information to
the participants of a SB SEF, while at
the same time not disclosing specific
trading interest of individual
participants when that interest is not
firm. As discussed above, the
Commission believes that including
responses to an RFQ in the composite
indicative quote also may be
appropriate as a means to further
increase pre-trade price transparency. A
composite indicative quote would
provide some information on pricing
but would take into account concerns
expressed by some market participants
about information leakage that could
occur, particularly with respect to larger
sized orders.156 In addition, the
Commission understands that many
platforms operating today in the SB
swaps market create and disseminate a
composite indicative quote.
The Commission requests comment
on all aspects of proposed Rule 811(e).
What are commenters’ views on the
proposed requirement that a SB SEF
must disseminate a composite
indicative quote? What would be the
benefits or drawbacks of such a
proposal? Would such a requirement
provide an increased level of pre-trade
price transparency compared to the
level that is available today? Are there
other measures the Commission should
impose at this time to foster pre-trade
price transparency? If so, what are they?
For example, should the Commission
require a SB SEF to provide
functionality to enable market
participants to post individual
indicative quotes, in addition to a
composite indicative quote? What
would be the advantages and
disadvantages of such a proposal?
Considering the early stage of
development of the regulatory
framework for the SB swap market and
the existing structure of the SB swap
market, the Commission is mindful that
its interpretation of the definition of SB
SEF, and the rules it is proposing herein
to implement the Dodd-Frank Act,
could have unforeseen consequences,
either beneficial or undesirable, with
respect to the shape that this market
will take. In the Commission’s view, it
is important that the regulatory
structure will provide incentives for the
trading of SB swaps on regulated
markets that are designed to foster
greater transparency and competition
that are subject to Commission
oversight, while at the same time
allowing for the efficient operation and
continued evolution of the SB swap
market. With that in mind, should the
Commission mandate greater pre-trade
price transparency at the outset of
trading of SB swaps on SB SEFs? What
would be the benefits of mandating
greater pre-trade price transparency at
the start of trading of SB swaps on a SB
SEF and what would be the drawbacks
of such an approach? Would the
benefits outweigh the drawbacks and
vice versa? Commenters should explain
their reasoning. Should the Commission
propose additional trading rules to be
required of SB SEFs? If so, what should
those rules cover with regard to trading
procedures?
155 See supra note 152 for a description of a
composite indicative quote.
156 See infra Section VIII.D for a discussion of
block trades.
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D. Block Trades
Core Principle 2 requires a SB SEF to
establish rules governing the operation
of the facility, including rules specifying
trading procedures to be used in
entering and executing orders traded or
posted on the facility, including block
trades.157 The issue of block trades on
a SB SEF has two components: (1) How
should a ‘‘block trade’’ be defined, i.e.,
at what threshold would a trade be
considered block size; and (2) how
should block trades be handled on a SB
SEF. Issues relating to the execution, as
well as the reporting, of a block trade,
have been a particular focus of market
participants. Market participants that
execute block trades in SB swaps,
including dealers and buy-side
customers, have raised concerns
regarding pre-trade transparency of
block trades. They believe that if other
market participants know the terms of a
block trade prior to the time it is
executed, those other market
participants could attempt to profit from
the information about the block to the
detriment of the initiator of the block
trade. If the information is disclosed
before the block trader’s liquidity
provider is ‘‘on risk,’’ other market
participants could buy or sell ahead of
the block trade initiator, moving the
market against the block trade initiator
(but not adversely affecting its
counterparty). If the liquidity provider
for the block trade initiator is ‘‘on risk’’
when the information is disclosed, other
market participants could buy or sell
ahead of the liquidity provider, making
it more costly for the liquidity provider
to hedge the transaction. If the liquidity
provider anticipates such price
movement, front-running by market
participants could make the transaction
more costly for the block trade initiator,
as the liquidity provider may provide it
with less favorable quotations in order
to protect itself from the impact of such
disclosure.158 Some market participants
also are concerned that if a block trade
were required to interact with other
trading interest on a SB SEF, there
might not be enough liquidity on the SB
SEF to execute the entire block trade,
leaving a portion of the block trade
unexecuted. These market participants
are worried about the execution risk of
doing block trades on a SB SEF. Not
having a large trade filled, or having it
filled at a disadvantageous price as a
result of having to enter into more than
one trade as part of the execution
157 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(2)(C) of the Exchange Act).
158 See Reporting and Dissemination Release,
supra note 6, for a discussion of the concerns
surrounding post-trade transparency.
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process, could hurt investment
performance.159
For these reasons, market participants
have urged exceptions for the handling
of block trades, including the ability to
negotiate and execute block trades
without having to interact with trading
interest on the SB SEF. Market
participants even have indicated a
willingness to forego available pre-trade
transparency in order to keep their
proprietary block trading strategies
private.
The Commission is sensitive to these
concerns. However, the Commission
also is concerned that allowing the
execution of block trades on a SB SEF
in a manner that is subject to less pretrade transparency than the minimum
level that would be required by
Commission rules, for example, by
allowing block trades to be executed off
of the SB SEF and then reported to the
SB SEF without interacting with trading
interest on the SB SEF (i.e., using the SB
SEF as a ‘‘print facility’’), could
circumvent the mandatory trade
execution requirement and undermine
the goals of providing for more
transparent and competitive trading on
a SB SEF. Therefore, although the
Commission believes that it is
permissible for a SB SEF to establish
different trading rules for block trades
generally, block trades would still be
subject to the various minimum
requirements that the Commission has
established with respect to pre-trade
transparency160 and interaction with
other trading interest on the SB SEF, as
discussed above.161
SB SEFs would have flexibility,
therefore, to establish different rules for
the trading of block trades on their
facilities, as long as those rules were
clear as to how block trades would be
handled and would comply with the
rules being proposed today.162 A SB
SEF could, for example, allow a limit
159 See, e.g., Hendrik Bessembinder & Kumar
Venkataraman, Does an Electronic Stock Exchange
Need an Upstairs Market? J. of Fin. Econ., Vol. 73
(2004) (‘‘Bessembinder Paper’’), finding that
execution costs of a block trade in an ‘‘upstairs’’
market are much lower than would be if the block
trade were executed in a ‘‘downstairs’’ market.
160 See, for example, supra Sections III.B and
VIII.C, discussing the proposed requirement that SB
SEFs that operate a RFQ mechanism disseminate a
composite indicative quote and make it available to
all participants, the aspects of the proposed
interpretation that all responses to a request for
quote be included within the composite indicative
quote and that SB SEFs cannot limit the number of
liquidity providers to whom a request for quote is
sent.
161 See, for example, supra Section VIII.C.
162 Proposed Rule 811(d) would require that a SB
SEF establish and enforce rules governing the
procedures for trading on the SB SEF including the
handling of block trades if different from other
trades.
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order book platform to use a separate
multi-dealer RFQ component to execute
block trades, as long as the block trade
interacts with existing interest on the SB
SEF (i.e., the limit order book portion of
the SB SEF that handles orders that are
not blocks) and otherwise complies with
the proposed requirements that are part
of this rulemaking. Also, under the
Commission’s proposed interpretation
of the definition of SB SEF, a SB SEF
that operates a RFQ platform and that
requires an RFQ to be disseminated to
all participants, could, for example,
permit participants to choose to send an
RFQ to fewer than all participants,
including just one. In a system that
allows participants to display firm
quotes, the system (and rules) would
need to be designed to provide that a
block trade, like any other trade, would
interact with the displayed orders based
on a fair method. Thus, to the extent
that liquidity exists on a central limit
order book trading platform of the SB
SEF, a block trade would be required to
interact with those pre-existing resting
bids and offers.163 The Commission also
notes that, until a SB swap that is
determined to be subject to the
mandatory clearing requirement and is
determined to have been made
‘‘available to trade’’ on a SB SEF or an
exchange, the SB swap could be traded
in block size off a SB SEF or exchange.
The Commission is proposing to
require that a SB SEF define a ‘‘block
trade’’ to have the same meaning as in
Rule 900 of Regulation SBSR relating to
trade reporting.164 This would mean
that each SB SEF would use the same
163 If a SB SEF operated a central limit order book
and a separate RFQ mechanism, the SB SEF’s
systems would be required to ensure that any trade
to be executed in the RFQ mechanism interacted
with any existing firm interest on the central limit
order book at the same or better price before
interacting with interest on the RFQ platform. For
example, assume that such a SB SEF had a 5,000
notional resting order on its limit order book in SB
swap A and that a 100,000 notional RFQ in SB
swap A was entered into and disseminated to
liquidity providers in the RFQ mechanism. If the
resting limit order has a price equal to or greater
than the price at which a response(s) comes back
in the RFQ mechanism to execute the RFQ order,
the SB SEF system would be required to execute
5,000 of the RFQ order against the resting limit
order and 95,000 against the response(s).
164 See proposed Rule 800 (defining ‘‘block trade’’
as having the same meaning as in Rule 900 of
Regulation SBSR under the Exchange Act) and
Reporting and Dissemination Release, supra note 6.
Rule 900 of Regulation SBSR would define a block
trade to mean a large notional SB swap transaction
that meets the criteria set forth in Rule 907(b) of
Regulation SBSR, which states that a registered SDR
shall establish and maintain written policies and
procedures for calculating and publicizing block
trade thresholds for all security-based swap
instruments reported to the registered SDR in
accordance with the criteria and formula for
determining block size as specified by the
Commission.
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threshold for determining what
constitutes a block trade for a particular
‘‘security-based swap instrument,’’ as
calculated by a registered SDR.165 The
Commission believes that it is important
for each SB SEF to use the same
threshold for block trades to ensure
consistency and uniformity across SB
SEFs.166 The Commission notes,
however, that until it establishes the
criteria and formula for determining a
block trade pursuant to proposed Rule
907(b) of Regulation SBSR, proposed
Rule 800 of Regulation SB SEF would
permit a SB SEF to set its own criteria
and formula for determining what
constitutes a block trade as long as such
criteria and formula are consistent with
the Core Principles and the rules and
regulations thereunder.
The Commission seeks comments on
its proposed definition and treatment of
block trades. Should the definition of
block trade have the same meaning in
the context of a SB SEF and in the
context of trade dissemination and
reporting? Is there anything about pretrade versus post-trade transparency
that warrants having different
definitions of a block trade in the
context of proposed Regulation SB SEF
and proposed Regulation SBSR? 167 Are
there other definitions of block trade
that the Commission should consider?
Do commenters agree with the proposed
approach to block trades on SB SEFs? Is
pre-trade transparency for block trades
desirable? If so, why? If not, why not?
Should SB SEFs be permitted to have
discretion regarding implementation of
rules governing the handling of block
trades? For example, should block
trades be permitted to be executed in
‘‘one participant to one participant’’
transactions and then ‘‘printed’’ on the
SB SEF? If the Commission were to
adopt its proposed interpretation of the
definition of SB SEF, would such
flexibility be necessary in light of the
fact that, under the proposed
interpretation, a requester can choose to
165 See Reporting and Dissemination Release,
supra note 6, and proposed Rule 900 for a
definition of ‘‘security-based swap instrument.’’
166 The Commission notes that even if more than
one registered SDR establishes the block trade
threshold for a SB swap, the thresholds would be
identical because each SDR in the same class of SB
swap would use the same data to calculate the
threshold. See Reporting and Dissemination
Release, supra note 6, for a more detailed
discussion.
167 See, e.g., Memorandum by the Staff of the
Division of Risk, Strategy and Financial Innovation
of the U.S. Securities and Exchange Commission to
File No. S7–34–10, Release No. 34–63346, dated
January 13, 2011. The memorandum is submitted as
a comment letter to the Reporting and
Dissemination Release, supra note 6, and is
available at: https://www.sec.gov/comments/s7-3410/s73410-12.pdf.
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submit an RFQ fewer than all
participants, including to just one
participant? Should there be other
exceptions for block trades, such as an
exception for a clean cross? 168 What
would be the benefits and drawbacks of
such proposals? Should any such
proposals be subject to any conditions,
such as allowing block trades an
exemption from the minimum pre-trade
transparency and order interaction
requirements on a temporary basis or
not permitting ‘‘one participant to one
participant’’ transactions to be printed
on a SB SEF after trading activity in the
SB swap crosses a specified liquidity
threshold?
What would be the effect of requiring
block trades to interact with existing
interest on the SB SEF, to the extent
firm trading interest is available? What
impact, if any, would that requirement
have on price competition occurring on
the SB SEF in that particular SB swap?
If hidden trading interest were
permitted on a SB SEF’s trading system,
how should such interest be handled
under the interaction requirement? If
block trades were required to interact
with hidden trading interest, would that
encourage hidden interest and
discourage displayed interest? What
would be the impact of allowing block
trades to be executed off of the SB SEF
and then ‘‘printed’’ on a SB SEF, or to
execute without interaction with
existing interest? What impact, if any,
would that have on price competition
on the SB SEF in that particular SB
swap? What impact would such a
proposal have on the incentives of
market participants to post firm interest
in that SB swap? Would this proposal
create a significant disincentive for
market participants to enter any sizeable
volume for execution on the SB SEF?
What other requirements, if any, should
the Commission impose to promote
incentives to post firm quotes? Are there
any alternative methods to provide for
pre-trade transparency for block trades
without requiring block trades to
interact with other bids and offers on a
SB SEF? If so, how would these
alternative methods impact the
requirements and goals of the DoddFrank Act? Are there alternative trading
mechanisms, such as crossing systems,
that could be used to trade blocks? How
would these alternative trading
mechanisms comply with the pre-trade
transparency requirements? Are there
168 See, e.g., National Stock Exchange Rule 11.12
describing acceptable clean cross orders as a cross:
(1) That is for at least 5,000 shares and has an
aggregate value of at least $100,000; (2) with a size
greater than the size of the interest at each side of
the top of book; and (3) with a price equal to or
better than the Protected NBBO.
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other special provisions that should
apply to block trades? If so, what are
they, and why would they be
appropriate?
The Commission recognizes that the
SB swap market is different in certain
respects than the market for cash
equities and listed options. For
example, many fewer market
participants account for a significant
amount of the trading in SB swaps. In
addition, there is not at this time any
direct retail participation in the SB
swap market. Further, trading in SB
swaps generally is much less liquid than
for many NMS stocks and listed options.
How, if at all, do these factors, or other
factors regarding the structure of the SB
swap market, impact the handling of
block trades in the SB swap market, and
how should they, if at all, impact the
proposed treatment of block trades on
SB SEFs?
E. Trade Processing Procedures
Proposed Rule 811(f) would require a
SB SEF to establish and enforce rules
concerning the reporting of trades
executed on the SB SEF to a clearing
agency and procedures for the
processing of transactions in SB swaps
that occur on or through the SB SEF,
including, but not limited to,
procedures to resolve any disputes
concerning the execution of a trade.
The Commission believes that the
types of rules contemplated by proposed
Rule 811(f) are important to contributing
to the fair and orderly functioning of
any SB SEF, and to ensure that trades
executed on a SB SEF are properly
transmitted to the applicable registered
clearing agency. In the Commission’s
view, these types of rules would aid a
SB SEF in contributing to the operation
of an orderly market. The Commission
believes that the rules of the SROs could
provide appropriate models to SB SEFs
concerning the types of rules that would
satisfy the requirements of this
proposed rule. Alternatively, the
Commission could find the rules of
other regulated entities appropriate for
use as models as well, upon review.
The Commission requests comment
generally on all aspects of proposed
Rule 811(f). Is the Commission’s
proposed rule sufficiently clear? Are
there other aspects of trading
procedures, aside from the reporting of
trades to a clearing agency and
procedures for the processing of
transactions in SB swaps and for the
handling of disputes that should be
addressed? If so, what additional
information should be included in such
a rule? Should the Commission require
SB SEFs to compare and report
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10975
confirmed trades 169 to clearing
agencies, or is it appropriate to leave the
choice to SB SEFs? Please be specific.
F. Disciplinary Rules and Procedures
Proposed Rule 811(g) would require a
SB SEF to establish rules and
procedures concerning the disciplining
of its participants including, but not
limited to: authorizing the SB SEF’s staff
to recommend and take disciplinary
action for alleged violations of the SB
SEF’s rules; specifying the sanctions
that may be imposed on participants for
violations of the SB SEF’s rules
(provided that each sanction is
commensurate with the corresponding
violation); and establishing fair and
non-arbitrary procedures for any
disciplinary process, and appeals
thereof.
SB SEFs are required by Section
3D(d)(2) of the Exchange Act to enforce
compliance with their rules. Proposed
Rule 811(g) is designed to require the SB
SEF to have baseline rules relating to its
disciplinary process to help it carry out
its statutory responsibilities.170
Proposed Rule 811(h) would require
the SB SEF to make and keep specific
records of all disciplinary proceedings
and sanctions imposed, and all appeals,
and to disclose disciplinary actions on
an annual amendment to Form SB SEF
and on the SB SEF’s annual report of the
CCO required by Section 3D(d)(14) of
the Exchange Act and proposed Rule
823.171 While this proposed
requirement also would be part of the
recordkeeping requirement of the SB
SEF under Core Principle 9, the
Commission is restating it in connection
with Core Principle 2, since these
records would need to be maintained
and information about disciplinary
actions disclosed by the SB SEF. This
information, which could be used by the
Commission to review the disciplinary
process at a SB SEF, would provide the
Commission with an additional tool to
169 This would parallel certain reporting
requirements for locked-in trades in the equity and
debt markets. A locked-in trade is one in which all
of the terms and conditions of the trade are agreed
to and accepted by the buyer and the seller. See,
e.g., https://www.amex.com/servlet/
AmexFnDictionary?pageid=display&titleid=3784.
170 In fashioning their disciplinary rules, SB SEFs
may be informed by the rules on disciplinary
proceedings maintained by the national securities
exchanges. See, e.g., Chicago Board Options
Exchange, Chapter XVII (Disciplinary Rules) and
New York Stock Exchange Rules 475–477
(Disciplinary Rules).
171 See infra Sections XXI (discussing Core
Principle 14) and XXIII (discussing proposed Form
SB SEF). The Commission notes that information
provided on proposed Form SB SEF is public.
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carry out its oversight responsibilities
with respect to SB SEFs.172
The Commission requests comment
generally on all aspects of proposed
Rule 811(h). Is the Commission’s rule
concerning disciplinary rules and
procedures sufficiently clear? Should
the proposed rule include greater
specificity regarding the disciplinary
processes for SB SEFs, including the
review of disciplinary actions? If so,
what provisions should be included in
any such rule? Should participants in
the SB SEF, or customers of
participants, be involved in the
disciplinary process? If so, in what
regard? Should the CCO be required to
be involved in any disciplinary process?
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G. Surveillance for Rule Violations
Proposed Rule 811(i) would require a
SB SEF to establish rules and
procedures to assure that the
information to be used to determine
whether rule violations have occurred is
captured and retained in a timely
manner. Proposed Rule 811(j) would
require the SB SEF to have the capacity
to capture information that may be used
in establishing whether rule violations
have occurred, including through the
use of automated surveillance systems
as set forth in proposed Rule 813(b),173
maintain appropriate resources to fulfill
these obligations, and investigate
possible rule violations.
The Commission believes that, to be
able to effectively carry out its
obligations to enforce compliance with
its rules, a SB SEF must have the
capability to monitor trading activity to
determine whether rule violations are
occurring or have occurred.174 The rules
proposed in Rules 811(h) and (i) are
designed to require a SB SEF to have
baseline rules relating to surveillance of
its market to help it carry out its
statutory responsibilities.
The Commission requests comment
generally on all aspects of proposed
Rule 811(i). Are the Commission’s
proposed rules on surveillance of rule
violations sufficiently clear? If not, what
172 See Regulation MC Proposing Release, supra
note 82, 75 FR at 65912, discussing the requirement
in proposed Rule 702(g) under Regulation MC
relating to compositionally balanced disciplinary
panels for SB SEFs.
173 See infra Section X (discussing Core Principle
4). Core Principle 4, which would be implemented
in proposed Rule 813, requires a SB SEF, among
other things, to monitor trading in SB swaps to
prevent manipulation, price distortion, and
disruptions of the delivery or cash settlement
process through surveillance, compliance, and
disciplinary practices and procedures, including
methods for conducting real-time monitoring of
trading and comprehensive and accurate trade
reconstructions.
174 See infra Section X (discussing Core Principle
4).
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additional information is required?
Please be specific. Should SB SEFs be
required to exchange information with
other SB SEFs that have listed the same
SB swaps for trading to properly surveil
trading in those SB swaps on its market?
How would any exchange of
information with other SB SEFs be
accomplished? Should SB SEFs have
access to trading information for similar
SB swaps trading in the OTC derivatives
market? If so, how would this be
accomplished? What guidelines should
the Commission use to determine what
SB swaps are sufficiently similar to
require such access? Should SB SEFs be
required to share information with other
regulatory authorities? For example, if a
SB SEF detects unusually high activity
in a particular SB swap, what guidelines
would be appropriate for the sharing of
this information with the Commission
and other regulatory authorities that
regulate the underlying asset?
IX. Core Principle 3—Manipulation
Section 3D(d)(3) of the Exchange Act
(Core Principle 3) provides that a SB
SEF shall permit trading only in SB
swaps that are not readily susceptible to
manipulation.175 To implement Core
Principle 3, the Commission is
proposing Rule 812.
Proposed Rule 812(a) would
implement the requirements of Core
Principle 3. Proposed Rule 812(b) would
provide that before a SB SEF may
permit the trading of a SB swap on the
SB SEF, the SB SEF’s swap review
committee must have determined, after
taking into account all of the terms and
conditions of the SB swap and the
markets for the SB swap and any
underlying security or securities, that
such SB swap is not readily susceptible
to manipulation. The proposed
requirement that the swap review
committee consider not only the market
for the SB swap, but also the market for
any underlying security or securities is
intended to make clear that the swap
review committee must consider
whether an underlying or reference
security could make a SB swap readily
susceptible to manipulation.176 Under
175 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(3) of the Exchange Act).
176 The Commission notes that it is not unusual
for national securities exchanges to include in their
listing standards for derivatively-priced securities
provisions concerning the market for the underlying
components. See, e.g., Chicago Board Option
Exchange Rule 5.3 (listing standards for options
contracts which include, among other things,
requirements relating to the trading volume and
number of holders of the underlying security);
NYSE Arca Rule 5.2(j)(3) Commentary .01(a) (listing
standards for index-based exchange-traded funds,
which include, among other things, requirements
relating to the trading volume and market value of
underlying components).
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proposed Rule 812(c), after a SB SEF
commences trading of a SB swap, its
swap review committee would be
required to periodically review trading
in the SB swap. If the swap review
committee cannot determine, after
taking into account all of the terms and
conditions of the SB swap, the markets
for the SB swap and any underlying
security or securities, and trading in the
SB swap, that such SB swap is not
readily susceptible to manipulation, the
SB SEF would be required to no longer
permit the trading of the SB swap.
Because Core Principle 3 permits a SB
SEF to trade only SB swaps that are not
readily susceptible to manipulation, the
Commission preliminarily believes that
the proposal to require every SB SEF’s
swap review committee to consider the
terms and conditions of the SB swap
and the markets for the SB swap and
any underlying security or securities,
and make an affirmative determination
that the SB swap is not readily
susceptible to manipulation before a SB
SEF trades a SB swap, and to
periodically review that determination
after trading commences, is a reasonable
approach to implementing the statutory
language of Core Principle 3. Further, as
discussed above, proposed Rule
811(c)(1) would require a SB SEF’s swap
review committee to determine whether
to trade a SB swap and whether a SB
swap that has commenced trading
should continue to trade on the SB
SEF.177 Under proposed Rule 812, the
swap review committee would be
required to also consider whether a SB
swap raises manipulation concerns
before trading such product.
The Commission generally requests
comment on all aspects of proposed
Rule 812. Additionally, the Commission
requests comment as to whether there
are any types of SB swaps trading today
that a SB SEF’s swap review committee
should presume are not readily
susceptible to manipulation. What
factors would or should a SB SEF take
into consideration when making a
determination whether a SB swap
would be readily susceptible to
manipulation? Should the Commission
provide more guidance regarding what
being ‘‘readily susceptible to
manipulation’’ means in the context of
SB swaps? If so, what guidance should
the Commission provide? Should the
Commission require a SB SEF to
consider objective criteria concerning
177 Pursuant to proposed Rule 811(c)(3), a SB SEF
would be required to establish criteria that its swap
review committee should consider in determining
which SB swaps should trade on the SB SEF. See
supra Section VIII.B.
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the underlying security or securities? If
so, what should these criteria be? 178
The Commission recognizes that it
might be difficult to determine whether
a particular SB swap is readily
susceptible to manipulation. Further,
individual SB SEFs—as well as various
market participants and investors—may
have differing views on whether a
particular SB swap is readily
susceptible to manipulation. In light of
the potential need for further clarity on
this question, the Commission therefore
requests comment on whether it should
consider adopting a safe harbor
consisting of objective criteria for
purposes of meeting the requirements of
Section 3D(d)(1) of the Exchange Act
with respect to Core Principle 3. If so,
what would be appropriate objective
criteria for such a safe harbor provision?
Should the criteria relate to
characteristics of the SB swap or the
market for the underlying, or the
procedures to be followed by the SB
SEF in making a determination as to
whether an SB swap is readily
susceptible to manipulation, or a
combination of both? For example,
should the Commission consider
adopting a safe harbor that includes
thresholds relating to trading volume,
number of holders, and/or market value
of the underlying security or
securities? 179 Should the criteria to be
included in any safe harbor be the same
as or different from any criteria that the
Commission may adopt with respect to
the mandatory clearing determination or
the determination of when a SB swap is
made available to trade? Commenters
are requested to be as specific as
possible as to what the appropriate
criteria for a safe harbor would be.
Is the proposed periodic review
requirement necessary or appropriate?
Should the Commission define how
frequently a SB SEF must review its
determination that a SB swap is not
readily susceptible to manipulation? If
so, what would be an appropriate
frequency for such a review?
X. Core Principle 4—Monitoring of
Trading and Trade Processing
Section 3D(d)(4) of the Exchange Act
(Core Principle 4) requires a SB SEF to
establish and enforce rules or terms and
conditions defining or specifications
detailing: (i) trading procedures to be
used in entering and executing orders
traded on or through the facilities of the
178 See supra note 176, noting examples of
national securities exchanges that have included in
their listing standards for derivatively-priced
securities required consideration of factors such as
the trading volume, number of holders, and market
value of the underlying security or securities.
179 See supra note 176.
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SB SEF; and (ii) procedures for trade
processing of SB swaps on or through
the facilities of the SB SEF.180 This Core
Principle also requires SB SEFs to
monitor trading in SB swaps to prevent
manipulation, price distortion, and
disruptions of the delivery or cash
settlement process through surveillance,
compliance and disciplinary practices
and procedures, including methods for
conducting real-time monitoring of
trading and comprehensive and accurate
trade reconstructions.181 The
Commission is proposing Rule 813 of
Regulation SB SEF to implement Core
Principle 4. The Commission believes
that the requirements of proposed Rule
813 would aid potential registrants in
evaluating whether the rules they
propose to implement and the
mechanisms they would establish to
monitor trading in SB swaps would
comply with the Core Principle.
Proposed Rule 813(a) would
implement the statutory language of the
Core Principle. Proposed Rule 813(b)
would require a SB SEF to have the
capacity and appropriate resources to
electronically monitor trading in SB
swaps on its market by establishing an
automated surveillance system,
including real time monitoring of
trading and the use of automated alerts,
that is designed to detect and deter any
fraudulent or manipulative acts or
practices, including insider trading or
other unlawful conduct or any
violations of the rules of the SB SEF; to
detect and deter market distortions or
disruptions of trading that may impact
the entry and execution of trading
interest or the processing of trading
interests; to conduct real-time
monitoring of trading to provide for
comprehensive and accurate trade
reconstruction; and to collect and assess
data to allow the SB SEF to respond
promptly to market abuses or
disruptions. The Commission
preliminarily believes that requiring a
SB SEF to establish such an automated
surveillance system would enable the
SB SEF to comply with the
requirements of Core Principle 4 that SB
SEFs monitor trading in SB swaps to
prevent price manipulation, price
distortion, and disruptions of the
delivery or cash settlement process. In
addition, Core Principle 4 specifically
requires SB SEFs to have methods for
conducting real-time monitoring of
trading.182
Proposed Rule 813(c) would require a
SB SEF to establish and enforce rules
180 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(4) of the Exchange Act).
181 Id.
182 Id.
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that require any participant that enters
an order, request for quote, or other
trading interests, or executes any
transaction on the SB SEF to maintain
books and records of any such order,
request for quote or other trading
interests, or transaction, and any
positions in any SB swap that is the
result of any such order, request for
quote, or other trading interest or
transaction on the SB SEF, and to
provide prompt access to such books
and records to the SB SEF and the
Commission. Finally, proposed Rule
813(d) would require a SB SEF to
establish and maintain procedures to
investigate possible rule violations, to
prepare reports of the findings and
recommendations of such
investigations, and to take corrective
actions, as necessary.
The proposed rule’s requirement that
participants maintain books and records
of their activity on the SB SEF and make
them available to the SB SEF and the
Commission would aid the SB SEF in
detecting and deterring fraudulent and
manipulative acts with respect to
trading on its market, as well as help it
to fulfill the statutory requirement in
Core Principle 4 that a SB SEF monitor
trading in SB swaps, including through
comprehensive and accurate trade
reconstructions. The proposed rule also
would aid the Commission in carrying
out its responsibility to oversee the SB
SEF. The proposed rule’s requirement
that the SB SEF establish and enforce
procedures to investigate possible rule
violations and prepare reports is
designed to ensure that the SB SEF
fulfills its statutory obligation under this
Core Principle to prevent manipulation,
price distortions, and disruptions in the
market.
The Commission requests comment
on all aspects of proposed Rule 813. Is
the proposed rule sufficiently clear? Do
commenters believe that SB SEFs would
encounter issues in establishing an
automated surveillance system for realtime monitoring of trading and in
collecting or assessing data to allow the
SB SEF to respond promptly to market
abuses or disruptions? Would proposed
Rule 813(c), which would require
participants to provide access to their
books and records to the SB SEF and the
Commission, be difficult for any
particular group of participants (e.g.,
non-registered ECPs or foreign
participants) to comply with? If so, how
should the Commission modify the rule
to address any such issues?
Should SB SEFs be required to
exchange information with each other
regarding trading by their mutual
participants to facilitate surveillance
and investigation of potential
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manipulative or otherwise violative
activity? If so, under what
circumstances? Should SB SEFs be
required to become members of the
Intermarket Surveillance Group
(‘‘ISG’’),183 or to form a similar group
among themselves? If so, should all SB
SEFs be required to join? If not, what
types of SB SEFs should be required to
join? For example, should SB SEFs be
required to join if they trade a certain
volume threshold of SB swaps? If so,
what should that volume threshold be?
Should SB SEFs be required to share
information with other regulatory
authorities (including SROs)? For
example, if a SB SEF detects an
unusually high activity in a particular
SB swap, what guidelines would be
appropriate for the sharing of this
information with the Commission and
the other regulatory authorities that
regulate the underlying asset?
XI. Core Principle 5—Ability To Obtain
Information
jdjones on DSKHWCL6B1PROD with PROPOSALS2
Section 3D(d)(5) of the Exchange Act
(Core Principle 5) requires a SB SEF to
establish and enforce rules that would
allow the SB SEF to obtain any
necessary information to perform any of
the functions described in the Core
Principles for SB SEFs, provide the
information to the Commission on
request, and have the capacity to carry
out such international informationsharing agreements as the Commission
may require.184 To implement Core
Principle 5, the Commission is
proposing Rule 814 of Regulation SB
SEF.
Proposed Rule 814(a) would require
each SB SEF to establish and enforce
rules requiring its participants to
furnish to the SB SEF, upon request and
in the form and manner prescribed by
the SB SEF, any information that is
necessary for the SB SEF to perform its
responsibilities including, without
limitation, surveillance, investigating,
examinations and discipline of
participants. Such information may
include, without limitation, financial
information, books, accounts, records,
files, memoranda, correspondence, and
any other information pertaining to
orders, requests for quotes, responses,
quotations, or other trading interest
entered and transactions executed on or
183 ISG was established in the early 1980s and is
comprised of an international group of exchanges,
market centers and market regulators. ISG states
that its purpose is to effectively detect and prevent
unfair transactions across markets through market
information sharing among its members. See ISG’s
Web site at https://www.isgportal.org for additional
information on ISG.
184 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(5) of the Exchange Act).
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through the SB SEF.185 Proposed Rule
814(a) further would require each SB
SEF to establish and enforce rules
requiring its participants to cooperate
with the SB SEF and any representative
of the Commission and allow access by
the SB SEF and any representative of
the Commission at such reasonable
times as the SB SEF or the Commission
representative may request to examine
the books and records of the SB SEF
participant, or to obtain or verify other
information related to orders, requests
for a quote, responses, quotations, or
other trading interest entered and
transactions executed on or through, the
SB SEF’s facilities. These provisions
would permit a SB SEF and any
representative of the Commission to
have access to any information that the
SB SEF participants are required to
make, keep, and preserve pursuant to
any Commission or other rule, and
should therefore assist the SB SEF to
more effectively perform its obligations,
as required by the Core Principles, and
the Commission to perform its oversight
responsibilities for SB SEFs.
Proposed Rule 814(b) would similarly
require the SB SEF to cooperate with
any representative of the Commission
and allow access by any representative
of the Commission to examine the books
and records required to be kept by the
SB SEF pursuant to proposed Rule 818,
to obtain or verify other information
related to orders, requests for quote,
responses, quotations, or other trading
interest entered and transactions
executed on or through its facilities, and
otherwise provide to any representative
of the Commission, upon request, such
information that the SB SEF may
possess or obtain from its participants
pursuant to proposed Rule 814(a). The
Commission preliminarily believes that
these provisions would be instrumental
in enabling the Commission to carry out
its oversight and regulation of SB SEFs
and the SB swap market and would
support the requirement in Core
Principle 5 that the SB SEF establish
185 The requirement that SB SEF participants
make, keep and preserve books and records is
independent of proposed Rule 814. See 17 CFR
240.17a–3 and 240.17a–4, which are applicable to
registered broker-dealers. See also Public Law 111–
203, § 764(a) (adding Section 15F(f)(B) of the
Exchange Act, requiring each registered SB swap
dealer and major SB swap participant to keep books
and records as may be prescribed by the
Commission). See also proposed Rule 809(c)(2)(i),
requiring registered SB swap dealers and registered
major SB swap participants to meet the minimum
recordkeeping and reporting requirements imposed
by the Commission. With respect to eligible
contract participants, proposed Rule 809(c)(2)(ii)
would require eligible contract participants to meet
the recordkeeping and reporting requirements
established by the SB SEF pursuant to proposed
Rule 813.
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and enforce rules that would allow the
SB SEF to obtain any necessary
information to perform any of the
functions described in the Core
Principles and provide the information
to the Commission on request.
The Commission preliminarily
believes that proposed Rule 814 would
reasonably clarify the statutory language
of Core Principle 5, which requires a SB
SEF to have the ability to ‘‘obtain
information’’ and ‘‘provide the
information to the Commission on
request.’’ Specifically, the Commission
believes that it is important to its ability
to regulate and oversee SB SEFs for the
Commission to be able to obtain
information by specifying that SB SEFs
and SB SEF participants must
cooperate, furnish information upon
request, provide access to books and
records, and be subject to
examination.186 These proposed
requirements also would enable the SB
SEF to monitor participants on its
system and enforce compliance with its
rules, as required by Section 3D(d) of
the Exchange Act.
Further, proposed Rule 814(b)(3)
would require a SB SEF to have the
capacity to carry out such international
information-sharing agreements as the
Commission may require.187 Proposed
Rule 814(b)(4) would require every SF
SEF to certify at the time of registration
on Form SB SEF, and annually
thereafter as part of the annual
compliance report described in Rule
823, that the SB SEF has the capacity to
fulfill its obligations under any
international information-sharing
agreements to which it is a party as of
the date of such certification.
These proposed regulations would
implement the provision of Core
Principle 5 requiring SB SEFs to have
the capacity to carry out such
186 The proposed requirements are analogous to
the provisions of Section 17(b) of the Exchange Act,
which provides that the records of a national
securities exchange, among other things, shall be
subject to reasonable periodic, special or other
examinations by representatives of the Commission,
and Rule 17a–4(j) under the Exchange Act,
requiring exchange members, brokers and dealers to
furnish promptly copies of records that are required
to be preserved under the rule to representatives of
the Commission. 15 U.S.C. 78q(b)(1) and 17 CFR
240.17a–4(j).
187 The Commission notes that it is not unusual
for a national securities exchange to enter into an
information-sharing agreement with a foreign
exchange for the purpose of securing information in
connection with trading in securities on the foreign
exchange that could impact the trading of securities
on the U.S. exchange. See, e.g., Securities Exchange
Act Release No. 59835 (April 28, 2009), 74 FR
21041 (May 6, 2009) (noting, in connection with
proposed listing standards, that NYSE Arca, Inc.
had in place an information sharing agreement with
the London Metal Exchange (‘‘LME’’) for the purpose
of providing information in connection with trading
in or related to futures contracts traded on LME.
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international information-sharing
agreements as the Commission may
require. The Commission preliminarily
believes that the proposed rule would
help ensure that the SB SEF has the
ability to fulfill its regulatory and
reporting responsibilities with respect to
its market place and its participants,
and that the Commission has the
information necessary to fulfill its
oversight and regulatory responsibilities
related to the SB swaps market. The
proposed rule also would facilitate
information-sharing in the global SB
swaps market.
The Commission requests comment
on all aspects of proposed Rule 814
relating to the ability to obtain
information. Is the proposal that a SB
SEF require its participants to furnish
information upon request, cooperate
with and provide access to the SB SEF
too burdensome? Is the proposal that the
SB SEF require its participants to
furnish information upon request,
cooperate with and provide access to
any representative of the Commission
appropriate?
Is the proposal to similarly require the
SB SEF to furnish information upon
request, cooperate with and provide
access to any representative of the
Commission at reasonable times as
requested, appropriate? Are there other
approaches that the Commission should
take to implement the requirement that
the SB SEF have the ability to obtain
information and provide it to the
Commission? Is there information that
SB SEFs should be required to provide
to the Commission on a regular,
periodic basis? If so, what types of
information should be provided in such
a manner? How often should such
information be provided?
Are there any other requirements with
respect to international informationsharing agreements that a SB SEF
should be required to comply with? Are
the proposed requirements too
burdensome? If so, why? What are the
costs and benefits of the proposed
requirements? Should the Commission
require a SB SEF to enter into
information-sharing agreements with
U.S. trading venues for SB swaps, as the
Commission may require, or as
necessary or appropriate to fulfill its
regulatory and reporting
responsibilities? Are there any other
requirements with respect to domestic
information-sharing agreements with
which a SB SEF should be required to
comply? If so, please explain.
XII. Core Principle 6—Financial
Integrity of Transactions
Section 3D(d)(6) of the Exchange Act
(Core Principle 6) requires every SB SEF
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to establish and enforce rules and
procedures for ensuring the financial
integrity of SB swaps entered on or
through the facilities of the SB SEF,
including the clearance and settlement
of SB swaps pursuant to Section
3C(a)(1) of the Exchange Act.188
Pursuant to Section 3C(a)(1) of the
Exchange Act, SB swap transactions
must be cleared through a clearing
agency registered with the Commission
or a clearing agency exempt from
registration, if the Commission has
determined that the SB swap is required
to be cleared.189
The Commission believes that it is
important that SB SEFs set specific
standards designed to ensure the
financial integrity of all their
participants. Proposed Rule 815(a)
would implement the requirements of
Section 3D(d)(6) of the Exchange Act.
Proposed Rule 815(b) would permit the
rules of a SB SEF to allow a participant
trading a SB swap that will not be
cleared through a registered clearing
agency to consider counterparty credit
risk in selecting potential
counterparties, notwithstanding the
requirements of proposed Rule
810(b)(2).190 The Commission believes
that these requirements, taken together,
should strengthen the financial integrity
of SB swap transactions that occur on
the SB SEFs by reducing the
counterparty credit risks associated with
uncleared SB swaps transactions.
As noted above,191 the Commission
identified in the Regulation MC
Proposing Release certain conflicts of
interest that may provide incentives for
certain dominant market participants to
limit access by potential competing
market participants to SB SEFs. A SB
SEF could put in place participant
standards, including capital
requirements and other financial
requirements, in a way that would
188 See Public Law 111–203, § 763(a) (adding
Section 3C(a)(1) of the Exchange Act).
189 The clearing requirement in Section 3C(a) of
the Exchange Act contains certain exceptions. For
example, Section 3C(g) of the Exchange Act states
that a counterparty that is not a financial entity that
is using a SB swap to hedge or mitigate commercial
risk is not subject to the clearing requirement.
Section 3C(g)(1)(C) requires each such counterparty
to notify the Commission of how it generally meets
its financial obligations associated with entering
into non-cleared SB swaps. See Section 3C of the
Exchange Act for all applicable exceptions and
exemptions to the clearing requirements for SB
swaps and the requirements relating to clearing
agencies of SB swaps.
190 Proposed Rule 810(b)(2) would prohibit a SB
SEF’s rules from unreasonably limiting any person
in respect to access to the services offered by such
SB SEF in an unfair or discriminatory manner. See
supra Section VII for a discussion of proposed Rule
810(b)(2).
191 See supra Section VI, discussing access to SB
SEFs.
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unfairly restrict access to a SB SEF. For
example, a SB SEF could have a very
high capital requirement for
participation that may exclude some
smaller dealers from participation in the
SB SEF. On the one hand, while
appropriate participation standards,
including financial requirements, would
support this Core Principle that requires
SB SEFs to have rules and procedures
for ensuring the financial integrity of SB
swaps entered on or through the
facilities of the SB SEF, unduly high
standards may without justification
exclude persons who are otherwise
qualified to trade on the SB SEF. On the
other hand, the Commission is mindful
that broadening access could come at
the expense of sound risk management
practices. Thus, lessening capital or
other financial requirements to increase
participation beyond a certain level may
increase the overall risk of the SB SEF’s
operations.
The Commission seeks comments on
all aspects of this proposed Rule 815.
The Commission seeks comments on
whether an SB SEF should be
prohibited from imposing higher capital
requirements than the capital
requirements imposed by any rules or
regulations that the Commission may
impose on participants of SB SEFs
because such higher standards could be
utilized as a means to deter access to a
SB SEF. If such a prohibition were
adopted, would it be appropriate for the
SB SEF to tailor capital requirements to
the status of the participant on an
objective basis, e.g., having different
capital requirements for a liquidity
provider with market maker obligations
than a participant without such
obligations? If adopted, should such
prohibition apply to trading in cleared
and uncleared SB swaps? In addition,
the Commission seeks comment on
what additional safeguards, if any,
would be necessary to ensure the
financial integrity of SB swap
transactions executed on a SB SEF. For
swaps cleared by a registered clearing
agency, should a SB SEF be required to
ensure that it has the capacity to route
transactions to the clearing agency?
With respect to swaps that are not
cleared, should a SB SEF be required to
have rules requiring the transacting
members to have entered into a credit
arrangement for the transaction,
demonstrate an ability to exchange
collateral, and have appropriate credit
filters in place?
XIII. Core Principle 7—Emergency
Authority
Section 3D(d)(7) of the Exchange Act
(Core Principle 7) requires SB SEFs to
adopt rules to provide for the exercise
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of emergency authority, in consultation
or cooperation with the Commission, as
is necessary and appropriate, including
the authority to liquidate or transfer
open positions in any SB swap or to
suspend or curtail trading in a SB
swap.192 The Commission is proposing
Rule 816 to implement Core Principle 7.
Proposed Rule 816(a) would require
that every SB SEF establish rules and
procedures to provide for the exercise of
emergency authority, in consultation or
cooperation with the Commission, as
necessary or appropriate. ‘‘Emergency’’
would be defined in proposed Rule 800
to have the same meaning as set forth in
Section 12(k)(7) of the Exchange Act.193
The Commission believes that the
definition of ‘‘emergency’’ in Section
12(k)(7) of the Exchange Act has the
advantage of being broad enough to
cover unusual or extreme circumstances
without being unduly restrictive. The
Commission also believes that the
proposed use of the Exchange Act’s
definition of emergency would foster
consistency among rules regarding the
exercise of emergency authority and
promote the use of a consistent
definition across securities markets
generally.
Proposed Rule 816(c) would require
that every SB SEF have rules that permit
the SB SEF to immediately take any or
all of the following actions during an
emergency: (1) Impose or modify trading
limits, price limits, position limits, or
other market restrictions, including
suspending or curtailing trading on its
market in any SB swap or class of SB
swaps; (2) extend or shorten trading
hours; (3) coordinate trading halts with
markets trading a security or securities
underlying any SB swap; (4) coordinate
with a registered clearing agency to
liquidate or transfer positions in any
open SB swap of one of its participants;
and (5) any action directed by the
Commission. The Commission
preliminarily believes that the actions
proposed in proposed Rule 816(c)(1)
through (4) would be important powers
for a SB SEF to have immediately
192 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(7) of the Exchange Act).
193 See 15 U.S.C. 78l(k)(7) (defining the term
emergency to mean ‘‘(A) a major market disturbance
characterized by or constituting—(i) sudden and
excessive fluctuations of securities prices generally,
or a substantial threat thereof, that threaten fair and
orderly markets; or (ii) a substantial disruption of
the safe or efficient operation of the national system
for clearance and settlement of transactions in
securities, or a substantial threat thereof; or (B) a
major disturbance that substantially disrupts, or
threatens to substantially disrupt—(i) the
functioning of securities markets, investment
companies, or any other significant portion or
segment of the securities markets; or (ii) the
transmission or processing of securities
transactions.’’
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without the need to seek additional
authority from the Commission when an
emergency has occurred. The proposed
rule would enable a SB SEF to respond
promptly during an emergency to
maintain fair and orderly markets and
foster market integrity and efficiency
when ordinary authority would be
insufficient.
In light of the breadth of the proposed
emergency authority for SB SEFs,
proposed Rule 816 also would require
that every SB SEF have rules governing
the exercise of such emergency
authority. Pursuant to proposed Rule
816(b), SB SEF rules and procedures
would be required to specify: the person
or persons authorized by the SB SEF to
declare an emergency; how the SB SEF
would notify the Commission and the
public of its decision to exercise its
emergency authority; the processes for
decision making by facility personnel
with respect to exercise of emergency
authority, including alternate lines of
communication and guidelines to avoid
conflicts of interest in the exercise of
such authority; and the processes for
determining that an emergency no
longer exists and notifying the
Commission and the public of such
decision. The Commission believes that
it is important that SB SEFs put in place
a process for exercising emergency
authority in order to help ensure that a
SB SEF is prepared prior to any
emergency situation and to help ensure
that a SB SEF exercises emergency
authority appropriately and uniformly.
Proposed Rule 816(d) would require
every SB SEF to promptly notify the
Commission of the exercise of its
emergency authority and, within two
weeks following cessation of the
emergency, submit written
documentation explaining the basis for
declaring an emergency, how conflicts
of interest were minimized, and the
extent to which the facility considered
the effect of its emergency action on the
markets for the SB swap and any
security or securities underlying the SB
swap. Proposed Rule 816(d) also would
provide that, if a SB SEF implements
any rule or rule amendment in the
exercise of its emergency authority, it
shall file such rule or rule amendment
with the Commission pursuant to Rule
806 prior to the implementation of such
rule or rule amendment, or, if not
practicable, within 24 hours after
implementation of such rule or rule
amendment. The Commission
preliminarily believes that while it is
important to provide SB SEFs with the
tools necessary to react in emergency
situations, requiring SB SEFs to submit
a notice and, if applicable, file a
certified emergency rule or rule
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amendment in accordance with
proposed Rule 806, would help to deter
SB SEFs from using such tools
inappropriately. In addition, requiring a
SB SEF to notify the Commission and,
if applicable, file a certified emergency
rule or rule amendment, would allow
the Commission to determine whether a
SB SEF acted in compliance with
proposed Rule 816 and should provide
the Commission timely information
with respect to the actions taken in any
emergency situation.
While some national securities
exchanges have rules providing for the
exercise of emergency authority by the
exchange,194 there is no specific
Commission rule detailing how national
securities exchanges should address the
issue of emergency authority. In light of
the mandate in Core Principle 7 that SB
SEFs adopt rules governing the exercise
of emergency authority, and in light of
the fact that it is likely the same entities
will be registered as SB SEFs and SEFs,
the Commission’s approach to
implementing Core Principle 7 is guided
by the approach the CFTC has taken
with respect to the CEA’s requirement
that a designated contract market adopt
rules to provide for the exercise of
emergency authority.195
The Commission generally requests
comment on all aspects of the proposed
rule regarding emergency authority.
Additionally, the Commission requests
comments as to whether the proposed
list of emergency actions that a SB SEF
may take is appropriate. Are there any
additional actions that should be
included? Are there any proposed
actions that should not be included?
Why or why not?
The Commission notes that it is
common for a national securities
exchange to consult and cooperate with
the Commission prior to responding to
highly unusual or emergency market
194 See, e.g., NYSE Rule 49 and Nasdaq Bylaws
Article IX, Section 5.
195 See Section 5(d) of the CEA, 7 U.S.C. 7(d)
(requiring a board of trade to adopt rules to provide
for the exercise of emergency authority, in
consultation or cooperation with the CFTC, where
necessary and appropriate). See also 17 CFR part
38, Appendix B to part 38 implementing Section
5(d) of the CEA. Appendix B to part 38 provides,
in part, that a designated contract market should
have clear procedures for the exercise of emergency
authority and should, among other things, be able
to impose or modify price limits, order the
liquidation or transfer of open positions, order the
fixing of a settlement price, order a reduction in
positions, extend or shorten the expiration date or
the trading hours, suspend or curtail trading on the
market, order the transfer of customer contracts and
the margin for such contracts from one member
including non-intermediated market participants of
the contract market to another, or alter the delivery
terms or conditions, or, if applicable, should
provide for such actions through its agreements
with its third-party provider of clearing services.
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conditions and expects that a SB SEF
would likely do the same before
exercising its emergency authority
pursuant to proposed Rule 816.
However, the Commission requests
comment on whether it should require
that a SB SEF consult and cooperate
with the Commission before it takes any
emergency action. Why or why not? Is
the proposed definition of emergency
appropriate? Is there another definition
of emergency that would be more
appropriate? Would it be preferable for
the Commission not to define the term
emergency? If not, why not? The
Commission further requests comment
on whether the proposed list of rules
specifying processes for exercising
emergency authority in proposed Rule
816(b) is appropriate. Are there any
additional processes that should be
included? Are there any proposed
processes that should not be included?
Why or why not?
XIV. Core Principle 8—Timely
Publication of Trading Information
Section 3D(d)(8) of the Exchange Act
(Core Principle 8) requires SB SEFs to
make public timely information on
price, trading volume, and other trading
data on SB swaps to the extent
prescribed by the Commission and to
have the capacity to electronically
capture and transmit and disseminate
trade information with respect to
transactions executed on or through the
facility.196 Section 13(m)(1) of the
Exchange Act separately authorizes the
Commission to make SB swap
transaction, volume and pricing data
available to the public in such form and
at such times as the Commission
determines appropriate to enhance price
discovery.197 The Commission has
separately proposed rules relating to the
reporting and public dissemination of
SB swap transaction and pricing data.198
To implement Core Principle 8, the
Commission is proposing Rule 817.
Proposed Rule 817(a) enumerates the
requirements of Section 3D(d)(8) of the
Exchange Act. Thus, every SB SEF
would be required to: (1) Have the
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196 See
Public Law 111–203, § 763(c) (adding
Section 3D(d)(8) of the Exchange Act).
197 See Public Law 111–203, § 763(i), (adding
Section 13(m) of the Exchange Act).
198 The Commission recently proposed Regulation
SBSR that would require reporting and real-time
public dissemination of certain information
regarding SB swap transactions. Proposed
Regulation SBSR identifies the SB swap
information that would be required to be reported
and disseminated, establishes reporting obligations,
and specifies the time frames for reporting and
disseminating. Proposed Regulation SBSR would
require a registered SDR to publicly disseminate
certain SB swap information that is reported to it
in real time. See Reporting and Dissemination
Release, supra note 6.
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capacity to electronically capture,
transmit, and disseminate information
on price, trading volume, and other
trading data on all SB swaps executed
on or through the SB SEF; and (2) make
public timely information on price,
trading volume, and other trading data
on SB swaps, to the extent and in the
manner prescribed by the Commission.
As noted, the Commission has
separately proposed rules relating to the
public dissemination of SB swap
transaction and pricing data.199 The
Commission is not at this time
proposing any additional requirements
on SB SEFs relating to the public
dissemination of such data.200
In addition, proposed Rule 817(b)
would require that, if any SB SEF makes
available information regarding a SB
swap transaction to any person other
than a counterparty to the transaction,
then the SB SEF must make that
information available to all participants
on terms and conditions that are fair
and reasonable and not unfairly
discriminatory. This proposed
requirement is designed to prevent a SB
SEF from providing information on SB
swap transactions to certain persons
(other than counterparties) and not to
others, or provide such information
pursuant to different terms that are not
justified. The Commission believes that
fair, reasonable, non-discriminatory
access to market information is essential
to providing a level playing field for all
market participants and that the
proposed requirement in Rule 817(b)
would prevent developments in the SB
swap market that could undermine the
goal of post-trade price transparency.
Proposed Rule 817(c) would also
prohibit a SB SEF from making any
information regarding a SB swap
transaction publicly available prior to
the time a SDR is permitted to do so
under proposed Rule 902 of Regulation
SBSR under the Act.201
199 Id.
200 The rules proposed by the Commission
pursuant to Section 13(m) of the Exchange Act
would limit the public dissemination of SB swap
transaction information by any person other than a
registered SDR. Specifically, proposed Rule
242.902(d) of Regulation SBSR would prohibit any
person other than a registered SDR from making
available to one or more persons (other than a
counterparty) information relating to a SB swap
before the earlier of: (1) 15 minutes after the time
of execution of the SB swap; or (2) the time that
a registered SDR publicly disseminates a report of
that SB swap. This prohibition on dissemination to
one or more persons (other than a counterparty)
during such time period would apply to SB SEFs
and its participants, as it would to all other persons.
See Reporting and Dissemination Release supra
note 6.
201 The Commission recently proposed Regulation
SBSR, which would require reporting and real-time
public dissemination of certain information
regarding SB swap transactions. Proposed
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10981
The Commission understands,
however, that for business reasons
counterparties to a SB swap transaction
may prefer to have a SB SEF act as its
reporting agent for purposes of
complying with the counterparty’s
responsibility under proposed
Regulation SBSR to report required
transaction information to a registered
SDR. Proposed Rule 817(b) therefore
would permit a SB SEF, acting as agent,
to report transaction information on
behalf of a counterparty responsible for
submitting transaction information to a
registered SDR. Under proposed Rule
817(c), SB SEFs would be permitted to
publicly disseminate SB swap
transaction information, but could not
do so prior to the time SDRs would be
permitted to do so under proposed Rule
902 of Regulation SBSR under the Act.
Thus, a SB SEF could not publicly
disseminate complete transaction
reports for block trades (i.e., including
the transaction ID and the full notional
size) until the times specified in Rule
902(b)(1) through (3).202
The Commission believes that its
proposed rules for implementation of
Core Principle 8 would clarify the
extent and manner in which SB SEFs
could make information on transactions
executed on the SB SEF available in a
manner consistent with the
requirements of proposed Regulation
SBSR. The Commission requests
comment on all aspects of proposed
Rule 817 with respect to the timely
publication of trading information.
Additionally, the Commission requests
comment on whether the proposed role
of SB SEFs in the public dissemination
of transaction information is
appropriate. Should SB SEF’s be able to
compete with SDRs for potential
customers of transaction data? How, if at
all, would the prohibition on
dissemination of transaction
information in proposed Rule 902 of
Regulation SBSR impact the
development of the market for SB
swaps? Should the Commission prohibit
Regulation SBSR identifies the SB swap
information that would be required to be reported
and disseminated, establishes reporting obligations,
and specifies the timeframes for reporting and
disseminating. Proposed Regulation SBSR would
require a registered SDR to publicly disseminate
certain SB swap information that is reported to it
in real time. See Reporting and Dissemination
Release supra note 6.
202 As proposed, subject to some exceptions, Rule
902(b) of Regulation SBSR would prohibit the
public dissemination of the complete transaction
report of a block trade (including the transaction ID
and the full notional size): (1) Executed on or after
5:00 UTC and before 23:00 UTC of the same day,
until 7:00 UTC of the following; and (2) executed
on or after 23:00 UTC and up to 5:00 UTC of the
following day, until 13:00 UTC of that following
day.
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a SB SEF from disseminating the full
size of a block trade after the period
specified in Rule 902(d), which could be
after 15 minutes, but before a SDR has
disseminated the full size of the block
trade? Would such a prohibition be
necessary? Or is it reasonable to expect
that a SB SEF would not disseminate
block trade information before a SDR if
the SB SEF’s market participants did not
want dissemination of such
information? With respect to data that a
SDR is required to disseminate under
proposed Rule 902 of Regulation SBSR,
would proposed Rule 817(c) be effective
in ensuring that SB SEF data feeds do
not have any advantage over SDR data
feeds? If not, should the proposed rule
be revised, and if so, how so? Are SB
SEFs likely to sell or otherwise
disseminate market data following
dissemination of data by a registered
SDR? If not, why not?
XV. Core Principle 9—Recordkeeping
Section 3D(d)(9) of the Exchange Act
(Core Principle 9) requires SB SEFs to
maintain records of all activities relating
to the business of the facility, including
a complete audit trail, in a form and
manner acceptable to the Commission
for a period of five years. This Core
Principle also requires SB SEFs to report
to the Commission, in a form and
manner acceptable to the Commission,
such information as the Commission
determines to be necessary or
appropriate for the Commission to
perform the duties of the Commission
under the Exchange Act. In addition,
this Core Principle requires the
Commission to adopt data collection
and reporting requirements for SB SEFs
that are comparable to corresponding
requirements for clearing agencies and
SDRs.
The Commission is proposing Rule
818 setting forth the recordkeeping and
reporting obligations of SB SEFs to
implement this Core Principle. This
proposed rule is comparable to the
recordkeeping and reporting obligations
of national securities exchanges and
ATSs under the Exchange Act.203
Proposed Rule 818(a) would require
every SB SEF to keep and preserve at
least one copy of all documents,
including all correspondence,
memoranda, papers, books, notices,
accounts, and other such records,
including the audit trail records, as shall
be made and received in the conduct of
its business. Proposed Rule 818(b)
would require SB SEFs to keep and
preserve such documents and other
records for a period of not less than five
203 See, e.g., 17 CFR 240.17a–1, 240–17a–3, and
17a–4, and 17 CFR 242.301–03.
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years, the first two years in an easily
accessible place. Proposed Rule 818(c)
would require SB SEFs to establish and
maintain the records necessary to create
a meaningful audit trail. Specifically,
the Commission proposes that SB SEFs
establish and maintain accurate, timesequenced records of all inquiries,
responses, orders, quotations or other
trading interest, and transactions that
are received by, originated on, or
executed on the SB SEF.204 These
records must include the key terms of
each inquiry, response, order, quotation
or other trading interest or transaction
and must document the complete life of
each inquiry, response, order, quotation
or other trading interest or transaction
on the SB SEF, including any
modification, cancellation, execution, or
any other action taken with respect to
such order, inquiry, response, quotation,
or transaction.205 Further, proposed
Rules 818(e) and (f) would require a SB
SEF to report to the Commission such
information as the Commission may,
from time to time, determine to be
necessary for the Commission to
perform its duties under the Exchange
Act, and upon request of any
representative of the Commission, to
promptly furnish to each representative
copies of any documents, in such form
and manner acceptable to such
representative, required to be kept and
preserved by the SB SEF pursuant to
proposed Rules 818(a) and (b).
The Commission would use the
information required under proposed
Rules 818(a) through (c) to carry out its
oversight responsibility over SB SEFs.
The records required to be kept,
maintained, and provided to the
Commission under these provisions
would provide an additional tool to
help the Commission to determine
whether a SB SEF is operating in
compliance with the Exchange Act and
the rules and regulations thereunder.
The audit trail information required to
be maintained under proposed Rule
818(c) would facilitate the ability of the
SB SEF and the Commission to examine
the complete history of all trading
interest entered into and transactions
executed on a SB SEF. This audit trail
information would help the SB SEF and
the Commission to detect and deter
fraudulent and manipulative acts and
prepare reconstructions of activity on a
SB SEF or in the SB swaps market, and
generally to understand the causes of
unusual market activity.
Proposed Rule 818(d) would require a
SB SEF to establish, maintain, and
enforce written policies and procedures
204 Id.
205 See
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to verify the accuracy of the transaction
data it collects and reports.206 This
requirement is based on the premise
that transaction data is only useful if it
is accurate. If it is not accurate, then it
will not enhance transparency. The SB
swaps market participants must be able
to trust that the information they receive
is accurate in order to make appropriate
investment decisions. Further, a SB SEF
must have accurate information if it is
to effectively carry out its obligations to
surveil the market and enforce it rules.
Similarly, the Commission must be able
to trust that the information it receives
is accurate so that it can oversee the
market and properly determine whether
the SB SEF is carrying out its statutory
mandate.
The Commission requests comment
on all aspects of proposed Rule 818. Are
the documents required to be preserved
pursuant to proposed Rule 818(a)
appropriate? Are there additional
documents that a SB SEF should be
required to preserve? Is the proposed
time period for record retention
appropriate? Should SB SEF’s be
required to keep such records for a
longer or shorter period of time? Are the
records required to be preserved to
maintain an audit trail pursuant to
proposed Rule 818(c) appropriate? Are
there additional records that a SB SEF
should be required to keep? Should the
Commission require SB SEFs to keep
audit trail records in a particular
format? What are the benefits and
drawbacks of allowing each SB SEF to
determine its own format to keep audit
trail records? Would allowing each SB
SEF to determine its own format for the
maintenance of an audit trail hamper
the Commission’s ability to analyze
trading activity across multiple SB
SEFs? If yes, then how?
Is it appropriate to require SB SEFs to
have policies and procedures to verify
the accuracy of transaction data? If not,
why not? In the absence of such
requirements, how should the
Commission ensure the integrity of
transaction data that originates on or
passes through a SB SEF? What are the
specific benefits and drawbacks of any
suggested approaches?
Proposed Rules 818(e) and (f) require
a SB SEF to promptly furnish
information and records required to be
kept under the Rule to the Commission
upon request. What, if any, additional
reports or records should be furnished
to the Commission upon request? What,
206 Nothing in proposed Regulation SBSR would
prohibit a SB SEF from serving as the reporting
agent on behalf of the counterparty with the
obligation to report a trade to the SDR, if the
counterparty effected the trade on the SB SEF. See
Reporting and Dissemination Release, supra note 6.
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if any, reports or records should the
Commission require on a periodic basis?
A SB SEF is required to promptly
furnish information to the Commission
in a manner that is acceptable to the
Commission. Are there particular time
or format constraints or challenges that
the Commission should be aware of
with respect to such requests? Would
the recordkeeping and reporting
requirements be overly burdensome to
SB SEFs? If so, why? Or, should the
Commission require SB SEFs to provide
the Commission direct electronic access
to such information and records? Would
such direct access be more or less
burdensome to SB SEFs than the
proposed requirements? If so, what
requirements should the Commission
consider limiting to reduce the burdens?
What would be the basis, if any, to
justify reducing the recordkeeping and
reporting requirements for SB SEFs that
are, as proposed, comparable to
requirements for national securities
exchanges that also trade SB swaps?
XVI. Core Principle 10—Antitrust
Concerns
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Section 3D(d)(10) of the Exchange Act
(Core Principle 10) 207 provides that,
unless necessary or appropriate to
achieve the purposes of the Exchange
Act, a SB SEF shall not: (1) Adopt any
rules or take any actions that result in
any unreasonable restraint of trade, or
(2) impose any material anticompetitive
burden on trading or clearing. The
Commission is proposing to implement
this Core Principle in proposed Rule
819 by incorporating the statutory
language.208 The Commission requests
comment on all aspects of the proposed
Rule 819. What do commenters believe
would be a ‘‘material anticompetitive
burden’’ on trading and clearing? Should
the Commission prescribe specific rules
207 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(10) of the Exchange Act).
208 As discussed further in Section XVII below,
the Commission proposed a number of
requirements in Regulation MC designed to mitigate
conflicts of interest relating to SB SEFs. The
additional rules the Commission is proposing
herein are designed to work together with proposed
Regulation MC to help mitigate potential conflicts
of interest, as identified in the Regulation MC
Proposing Release. In addition, as discussed in
Section XVII, the Commission is proposing
governance rules that also are designed to help
mitigate potential conflicts of interest relating to SB
SEFs.
The Commission notes that the statutory language
of Section 3D(d)(10)(B) of the Exchange Act differs
somewhat from the requirements in the Exchange
Act relating to national securities exchanges.
Section 6(b)(8) of the Exchange Act, 15 U.S.C.
78f(b)(8), requires that the rules of a national
securities exchange not impose any burden on
competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
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or offer guidance to address such
situations?
XVII. Core Principle 11—Conflicts of
Interest
Section 3D(d)(11) of the Exchange Act
(Core Principle 11) requires a SB SEF to
establish and enforce rules to minimize
conflicts of interest in its decisionmaking process and establish a process
for resolving the conflicts of interest.209
Pursuant to this directive, the
Commission is proposing Rule 820 to
mitigate conflicts of interest through
governance arrangements applicable to
SB SEFs.
The Commission recently proposed
new Regulation MC as part of its
rulemaking 210 mandated by Section 765
of the Dodd-Frank Act.211 Section 765 of
the Dodd-Frank Act requires the
Commission to adopt rules to mitigate
specified conflicts of interest relating to
SB SEFs, security-based swap clearing
agencies, and SBS exchanges.212 As the
Commission explained in the
Regulation MC Proposing Release, a
conflict of interest could arise when a
small number of market participants
exercise control or influence over a SB
SEF, either through ownership of voting
interests or participation in the
governance of the SB SEF. When a small
group of market participants also
dominate much of the trading in SB
swaps, control of a SB SEF by these
participants raises a heightened
concern. Such market participants,
through ownership interest in or
influence over the governance of a SB
SEF, potentially could exercise their
influence to limit the number of direct
participants in the SB SEF and restrict
the scope of SB swaps that are listed for
trading on a SB SEF in an effort to limit
competition and increase their ability to
maintain higher profit margins.213 The
Commission also believes that a SB
SEF’s ownership and governance
structure could create an incentive for
behaviors that would promote its
owners’ commercial interests over its
market oversight responsibilities.214
209 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(11) of the Exchange Act).
210 See Regulation MC Proposing Release, supra
note 82.
211 See Public Law 111–203, § 765.
212 Id.
213 See Regulation MC Proposing Release, 75 FR
at 65890, supra note 82.
214 The Commission notes that an entity that
registers as a SB SEF would have oversight
responsibility over its market pursuant to the
Exchange Act (as amended by the Dodd-Frank Act),
and rules adopted thereunder. See Public Law 111–
203, § 763(c). Similarly, all national securities
exchanges, including those that may post or make
available for trading SB swaps, have oversight
responsibilities over their markets and their
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10983
Each of these potential conflicts of
interest could limit the benefits of
centralized trading in the SB swap
market and potentially undermine the
mandatory trading requirement in
Section 3C(h) of the Exchange Act,
thereby negatively affecting efficiency
and competition in the SB swap
markets.215
Accordingly, the Commission
proposed in Regulation MC to, among
other things, impose a 20% limit on
ownership (based on interests entitled
to vote) and voting interest by any direct
participants of SB SEFs; require the
board of a SB SEF be composed of a
majority of independent directors;
require a fully independent nominating
committee; require a fully independent
ROC; and require the SB SEF to inform
the Commission when a
recommendation of the ROC is not
implemented by the board.216
As discussed above, in this proposal,
the Commission is proposing rules
relating to impartial access to SB SEFs
and a review process for those SB swaps
to be traded on a SB SEF, that are
designed to work together with
Regulation MC to help mitigate
potential conflicts of interest.217 As
described in this section, the
Commission also is proposing
additional governance rules that are
designed to mitigate potential conflicts
of interest.218 The proposed rules in this
proposal—regarding both impartial
access and governance—seek to address
the same conflicts of interest issues as
identified in proposed Regulation MC,
but using different mechanisms. The
Commission will consider both
rulemaking proposals as a whole,
including how they interact with each
other, when considering how best to
address these conflicts of interest issues.
As requested in detail below, in
reviewing the proposed rules,
commenters are encouraged to do the
same.
The Commission’s proposal for SB
SEFs is informed by the Commission’s
experience with national securities
exchanges. Historically, national
securities exchanges were owned by
their members and were structured as
members pursuant to the Exchange Act. See Section
6 of the Exchange Act, 15 U.S.C. 78(f).
215 See Public Law 111–203, § 763(a). Section
3C(h) of the Exchange Act imposes a mandatory
trading requirement, which provides that
counterparties shall execute a transaction in a SB
swap subject to the clearing requirement of Section
3C(a)(1) on an exchange or a registered SB SEF or
a SB SEF that is exempt from registration pursuant
to Section 3D(e).
216 See Regulation MC Proposing Release, supra
note 82.
217 See supra Sections VI and VII.
218 See proposed Rule 820.
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not-for-profit or similar
organizations.219 With the advent of
shareholder-owned exchanges, the
Commission became concerned that the
introduction of a class of owner that
does not trade on the exchange could
exacerbate the possibility that an
exchange would put its commercial
interests ahead of its responsibilities as
a regulator.220 The Commission also
recognizes the potential for any person
that directly or indirectly controls an
exchange or facility thereof to direct its
operation so as to cause the exchange to
neglect its regulatory obligations under
the Exchange Act or to improperly
interfere with or restrict the ability of
the Commission to effectively carry out
its oversight responsibilities.221
The Commission has considered the
conflicts between an exchange’s
regulatory responsibilities and its
commercial interests in operating a
marketplace for the trading of
securities.222 To address these types of
concerns, the Commission has approved
proposed procedures, consistent with
the requirements of Section 6 of the
Exchange Act,223 for an approach to
mitigate conflicts of interest for national
securities exchanges through the
Commission’s review of proposals by
exchanges with respect to their
ownership 224 and governance structures
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219 A
‘‘member’’ when used with respect to a
national securities exchange means (i) any natural
person permitted to effect transactions on the floor
of the exchange without the services of another
person acting as broker, (ii) any registered broker or
dealer with which such a natural person is
associated, (iii) any registered broker or dealer
permitted to designate as a representative such a
natural person, and (iv) any other registered broker
or dealer which agrees to be regulated by such
exchange and with respect to which the exchange
undertakes to enforce compliance with the
provisions of the Exchange Act, the rules and
regulations thereunder, and its own rules. See
Section 3(a)(3)(A) of the Exchange Act, 15 U.S.C.
78c(a)(3)(A).
220 See, e.g., Securities Exchange Act Release No.
62158 (May 24, 2010), 75 FR 30082 (May 28, 2010)
(order approving the demutalization of CBOE)
(‘‘Exchange Act Release No. 62158’’).
221 Because ATSs do not have the regulatory
obligations that are required of national securities
exchanges under the Exchange Act, the Commission
has not to date required ATSs to have governance
structures that are similar to those of national
securities exchanges.
222 The Commission’s recognition of potential
conflicts of interest at exchanges and its approach
to date in reviewing and approving measures
designed to mitigate those conflicts of interest are
a useful point of reference as the Commission
identifies and develops proposals to mitigate the
conflicts of interest potentially faced by SB SEFs as
the trading of SB Swaps moves to regulated
markets. However, the Commission recognizes that
a SB SEF’s regulatory obligations are not the same
as a national securities exchange’s regulatory
obligations.
223 See Section 6(b) of the Exchange Act, 15
U.S.C. 78f(b).
224 The Commission is not proposing rules with
respect to ownership and voting limitations for SB
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(generally from member-owned to
shareholder-owned organizations) or of
applications by entities to register as
national securities exchanges.225 In its
review, the Commission has examined
the way in which an exchange addresses
certain governance principles. Among
other things, the Commission looks to
assure that an exchange provides fair
representation of members in the
selection of directors and the
administration of its affairs, and provide
that one or more directors be
representative of issuers and investors
and not be associated with a member of
the exchange, broker or dealer,
consistent with the requirement in
Section 6(b)(3) of the Exchange Act.226
To complement the governance
requirements proposed in Regulation
MC, the Commission proposes
additional substantive requirements
with respect to the governance of SB
SEFs that are designed to address the
conflict of interest concerns identified
above. The Commission proposes that
SB SEF participants be provided ‘‘fair
representation’’ in the selection of
directors of the SB SEF and
administration of its affairs. Thus, the
proposed rule would require the rules of
a SB SEF to assure a fair representation
of its participants 227 in the selection of
SEFs as part of this rulemaking. The Commission
has proposed ownership and voting limitations for
participants in a SB SEF, as well as for participants
in a SBS exchange, as part of Regulation MC. See
proposed Rule 702 of Regulation MC.
225 See, e.g., Exchange Act Release No. 62158,
supra note 220; Securities Exchange Act Release
No. 61698 (March 12, 2010), 75 FR 13151 (March
18, 2010) (In the Matter of the Applications of
EDGX Exchange, Inc., and EGDA Exchange, Inc. for
Registration as National Securities Exchanges;
Findings, Opinion, and Order of the Commission)
(‘‘Exchange Act Release No. 61698’’); Securities
Exchange Act Release No. 58375 (August 18, 2008),
73 FR 49498 (August 21, 2008) (In the Matter of the
Application of BATS Exchange, Inc. for Registration
as a National Securities Exchange; Findings,
Opinion, and Order of the Commission) (‘‘Exchange
Act Release No. 58375’’); and Securities Exchange
Act Release No. 53382 (February 27, 2006), 71 FR
11251 (March 6, 2006) (order approving the merger
of NYSE and Archipelago and NYSE’s
demutualization).
226 15 U.S.C. 78f(b)(3). Specifically, Section
6(b)(3) of the Exchange Act requires that the rules
of an exchange assure a fair representation of its
members in the selection of its directors and
administration of its affairs, and must provide that
one or more directors be representative of issuers
and investors and not be associated with a member
of the exchange, broker or dealer. 15 U.S.C.
78f(b)(3). Pursuant to Section 6(b)(3), the
Commission has approved SRO rules requiring that
at least 20% of the directors on the board be
selected by exchange members, as well as SRO rules
requiring that exchange members be permitted to
participate in the nomination process of such
representative directors, with the right to petition
for alternative candidates. See, e.g., Exchange Act
Release No. 58375, 73 FR at 49500, id .
227 See proposed Rule 800 (defining the term
‘‘participant’’ as a person that is permitted to
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its directors and administration of its
affairs, but no less than 20% of the total
number of directors of the SB SEF must
be selected by the SB SEF’s
participants.228 The Commission
preliminarily believes that the proposed
20% requirement strikes a proper
balance by giving SB SEF participants a
practical voice in the governance of the
SB SEF and the administration of its
affairs, without undermining the overall
independence of the Board.229
To ensure that SB SEF participants
truly have a voice in the selection of
directors, the Commission also proposes
that SB SEF participants be permitted to
participate in the nomination process of
such representative directors, with the
right to petition for alternative
candidates. The proposed rule would
require the rules of a SB SEF to establish
a fair process for SB SEF participants to
nominate an alternative candidate or
candidates to the Board by petition and
the percentage of SB SEF participants
that is necessary to put forth such
alternative candidate or candidates.230
A SB SEF would have some flexibility
in implementing a fair process for
members to select Board candidates.231
In adopting such rules, a SB SEF should
endeavor to strike an appropriate
balance that provides SB SEF
participants a practical mechanism to
put forth alternative candidates, without
jeopardizing the overall integrity of the
nominating process. The SB SEF
participant candidates, of course, would
directly engage in or effect transactions on the SB
SEF).
228 See proposed Rule 820(a). The Commission
notes that national securities exchanges have
established a 20% member director requirement for
their boards of directors. See, e.g., EDGX Exchange,
Inc. Amended and Restated Bylaws, Article III,
Section 2(a)(iv) and BATS Y-Exchange Amended
and Restated by-Laws Article III, Section 2(b)(ii).
The Commission proposes to define the term
‘‘Board’’ as the Board of Directors or Board of
Governors of the SB SEF or any equivalent body.
See proposed Rule 800 under Regulation SB SEF.
The proposed definition is substantially identical to
that proposed in the Regulation MC Proposing
Release with respect to SB SEFs. See supra note 82.
229 Proposed Regulation MC would require that a
Board of a SB SEF be composed of a majority of
independent directors. See proposed Rule 702(c)(1)
under proposed Regulation MC and the Regulation
MC Proposing Release, supra note 82.
230 See proposed Rule 820(c).
231 The Commission notes that national securities
exchanges have implemented the 20% member
director requirement by various means. For
example, the BATS Y-Exchange, Inc. has a separate
member nominating committee that will nominate
candidates for each member representative director
position on the exchange’s board. BATS Global
Markets, as the sole shareholder of BATS YExchange, Inc., will elect those candidates
nominated by the member nominating committee as
member representative directors. See BATS YExchange Amended and Restated by-Laws Article
III, Section 4.
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be required to satisfy all relevant
eligibility criteria for directors.
Further, the Commission proposes
that SB SEF participant-owners be
restricted in their ability to participate
in the ‘‘fair representation’’ process. The
rules of a SB SEF would therefore
require the SB SEF to preclude any SB
SEF participant, or any group or class of
participants, either alone or together
with its related persons, that
beneficially owns, directly or indirectly,
an interest in the SB SEF from
dominating or exercising
disproportionate influence in the
selection of the fair representation
directors if the participant or
participants may thereby dominate or
exercise disproportionate influence in
the selection or appointment of the
entire Board.232 For example, if a group
of five participants together owned the
SB SEF and, as a result of such
ownership, were effectively able to
select the directors on the Board of the
SB SEF, those owners would be
precluded from also being the fair
representation directors on the Board.
The Commission believes that such a
requirement should help mitigate any
conflicts of interest that may arise
between SB SEF participants who are
also owners of the SB SEF. Given the
nature of the conflict concerns for the
trading of SB swaps and the structure of
the SB swaps market—namely, the
dominance by a small group of dealers
and the concerns with respect to undue
influence in the operation of the SB
SEF 233—the Commission believes that
it is necessary and appropriate for the
Commission to require that a SB SEF
take means to prevent a SB SEF
participant or group of participants from
exerting undue influence in the
nomination and selection of the entire
Board.
Finally, the Commission proposes
that at least one director on the Board
of a SB SEF shall be representative of
investors who are not SB swap dealers
or major SB swap participants and such
director must not be a person associated
with a SB SEF participant.234 The
232 See
proposed Rule 820(a).
further discussion of the current structure
of the SB swaps market, see the Regulation MC
Proposing Release, supra note 82, at Section III.B.
234 See proposed Rule 820(b). The term ‘‘person
associated with a participant’’ is proposed to mean
any partner, officer, director, or branch manager of
such participant (or any person occupying a similar
status or performing similar functions), any person
directly or indirectly controlling, controlled by, or
under common control with such participant, or
any employee of such participant. See proposed
Rule 800. The proposed definition is substantially
identical to the definition of ‘‘person associated
with a security-based swap execution facility
participant’’ that has been proposed under
Regulation MC. See proposed Rule 700(t) under
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Commission believes that requiring
representation by investors who are not
SB swap dealers or major SB swap
participants, or associated with SB SEF
participants, would provide an
important perspective to the governance
and administration of a SB SEF. Investor
directors could provide unique and
different perspectives from dealers and
other participants of the SB SEF, which
should enhance the ability of the Board
to address issues in an impartial fashion
and consequently support the integrity
of a SB SEF’s governance.
The Commission believes that the
proposed governance requirements,
described above, are important to help
ensure that all SB SEF participants and
investors have a voice in the
administration and governance of the
SB SEF. The proposed requirements
should reduce the possibility that a
single group of market participants has
the ability to unfairly disadvantage
other market participants through the
SB SEF governance process. Moreover,
the proposed requirements for SB SEFs
would be consistent with Exchange Act
requirements for national securities
exchanges.235 The Commission believes
that similar requirements for SB SEFs
would help to minimize conflicts of
interest in the SB SEF decision-making
process.
The Commission requests comments
on all aspects of the proposed rules
related to governance of the SB SEF. Are
there provisions of the proposed rules
that are unnecessary or are there other
provisions that should be added? If so,
why? Are there aspects of the proposed
rules that would be difficult for SB SEFs
to implement and, if so, why would that
be the case?
Should the Commission adopt
compositional requirements to provide
certain constituencies a guaranteed
voice in the selection of the SB SEF’s
directors and the administration of its
affairs, in addition to those proposed?
For example, the proposed ‘‘fair
representation’’ requirement relates to
the fair representation of a SB SEF’s
participants. Should the requirement
instead specifically require fair
representation of specific categories of
participants, such as SB swap dealers
and major SB swap participants? Are
there constituencies that commenters
believe should be entitled to
representation in the election of the
Board of a SB SEF that are not
addressed in this proposal?
Regulation MC and Regulation MC Proposing
Release, supra note 82.
235 See Section 6(b)(3) of the Exchange Act, 15
U.S.C. 78f(b)(3).
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Should the ‘‘fair representation’’
proposal be broadened to include nonparticipant dealers? Would
representation by non-participant
dealers be useful to help assure that SB
SEFs implement rules and procedures
that are designed to provide impartial
access? If commenters believe that such
representation should be required,
should non-participant dealers be
provided representation in addition to
any required independent directors,236
or should they be a subset of
independent directors?
Are the provisions relating to the ‘‘fair
representation’’ requirements
appropriate? Should the proposed 20%
minimum threshold for ‘‘fair
representation’’ be higher or lower? Do
commenters agree that it is appropriate
for a SB SEF to restrict the ability of a
SB SEF participant that is also an owner
to dominate or exercise influence in the
selection of ‘‘fair representation’’
directors, particularly if the SB SEF
would thereby dominate the selection or
appointment of the entire Board? If not,
why not? If so, why? Is the proposed
rule’s requirement that the Board
include at least one investor
representative appropriate? Should SB
SEFs be required to have more than one
investor representative on its Board? If
so, how many, and why?
Should the Commission require a
specific percentage of the total number
of SB SEF participants to put forth
alternative member candidate or
candidates by petition that would be
required to be set forth in the SB SEF’s
rules? If so, what percentage would be
appropriate? In the SRO Governance
Proposing Release, the Commission
proposed a threshold of 10% as the
percentage of members necessary to put
forth an alternative member candidate
or candidates for the exchange board of
directors.237 Would a 10% threshold be
appropriate for SB SEFs as well? Should
investors who are not SB SEF
participants be provided with further
representation in the governance and
administration of a SB SEF beyond
representation on the SB SEF Board? 238
236 See Regulation MC Proposing Release, supra
note 82.
237 See Securities Exchange Act Release No.
50699 (November 18, 2004), 69 FR 71126
(December 8, 2004) at 71137–71138. See also, e.g.,
NASDAQ Stock Market LLC, Bylaws, Article II,
Section 1(b)(ii) stating that Nasdaq members may
submit a petition in support of an alternate
candidate (i.e., candidate not selected by the
nominating committee) provided that the petition is
executed by ‘‘10% or more of all Nasdaq Members.’’
238 See discussion supra at Section VIII.B
discussing proposed Rule 811(c)(2), which would
provide that the SB SEF must establish a swap
review committee that would provide for the fair
representation of participants of the SB SEF and
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Should the Commission require SB
SEFs to have a participation committee
that would, for example, determine the
standards and requirements for
participant eligibility and review
denials of participation applications? If
so, should there be any requirements as
to the composition of such a committee?
For example, should any such
committee be required to have a
majority of independent directors?
Would some other percentage of
independence be appropriate for a
participation committee? Should the
Commission require investor
representation on a participation
committee? If so, should the
Commission require a minimum
percentage of investor representation
and if so what percentage and why?
As noted above, various provisions of
proposed Regulation SB SEF, such as
the impartial access requirements of
proposed Rule 811(b) and the
governance requirements of proposed
Rule 820 are intended to be
complementary measures, along with
proposed Regulation MC, designed to
mitigate conflicts of interest for SB
SEFs. The Commission seeks
commenters’ views regarding the
interaction of proposed Regulation SB
SEF with proposed Regulation MC.
Taking into account both proposals,
commenters should address whether the
proposals contained in Regulation SB
SEF would appropriately address
conflicts of interest concerns or whether
they should be revised either as
unnecessary or insufficient to address
conflicts of interest. Are there any
redundancies or gaps for mitigating
conflicts of interest that should be
addressed?
In reviewing proposed Rule 820
specifically, commenters are asked to
consider how this proposed rule would
work together with Regulation MC. Are
the requirements of proposed Rule 820
and the requirements of Regulation MC
mutually supportive? Are any of the
requirements of proposed Rule 820
redundant with, or otherwise
unnecessary in light of, the proposed
requirements of Regulation MC? Are
there additional or different measures
that the Commission should take to
mitigate conflicts of interest? For
example, should the Commission
require SB SEFs to make publicly
available, or available to the
Commission but not to the public, Board
and committee decisions with respect to
the listing of SB swaps? Should the
other market participants, such that each class of
participant and other market participants would be
given the right to participate in such committee and
no single class of participant or category of market
participant would predominate.
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Commission require that the
independent directors of the Board
conduct and submit to the Commission,
or make publicly available, an annual
governance self-assessment, which
would include ways in which the SB
SEF addressed conflicts of interest? If
so, are there particular areas that should
be the focus of any such annual
governance self-assessment? What
would be the benefits and drawbacks of
any such annual governance selfassessment? Should proposed Form SB
SEF require SB SEFs to provide details
about the background of each
independent director and why it
believes that each independent director
qualifies as independent? 239
A number of commenters on
Regulation MC raised concerns about
the overall approach of, and the
proposed requirements in, Regulation
MC and expressed a range of views.240
Several other commenters on Regulation
MC, however, generally supported the
overall approach to mitigate conflicts of
interest and expressed a range of views
on the proposed requirements.241 In
particular, the Commission notes that
some commenters who have submitted
comment letters on proposed Regulation
239 See Section XXII for a description of proposed
Form SB SEF, which would require the disclosure
of certain information relating to directors of an SB
SEF. Proposed Exhibit C to Form SB SEF would
require that an applicant provide a list of the
officers and directors of the SB SEF, or persons
performing similar functions, who presently hold or
have held their offices or positions during the
previous year, and a list of all standing committees
and their members, indicating the following for
each: their name and title; date of commencement
and termination of term of office or position; the
type of business in which each is primarily engaged
(e.g., SB swap dealer, major SB swap participant,
inter-dealer broker, end-user etc.); and, if such
person is a director, whether such director qualifies
as an ‘‘independent director’’ pursuant to proposed
Rule 800 under Regulation SB SEF and whether
such director is a member of any standing
committees or committees that have the authority
to act on behalf of the Board or the nominating
committee.
240 See, e.g., Letter from Nancy C. Gardner,
Executive Vice President & General Counsel,
Thomson Reuters Markets, to Elizabeth M. Murphy,
Secretary, Commission, dated November 24, 2010,
Letter from Lee H. Olesky, Chief Executive Officer,
and Douglas L. Friedman, General Counsel,
Tradeweb Markets LLC, to David A. Stawick,
Secretary, CFTC, dated November 17, 2010, and
Letter from Ernest C. Goodrich, Jr., Managing
Director, Deutsche Bank AG, and Marcelo Riffaud,
Managing Director, Deutsche Bank AG, to Elizabeth
M. Murphy, Secretary, Commission, and David A.
Stawick, Secretary, CFTC, dated November 8, 2010.
241 See, e.g., Letter from U.S. Department of
Justice, Antitrust Division, In the Matter of: RIN
3235–AK47, File No. S7–27–10, dated December 28,
2010, Letter from Mark Scanlan, Vice President,
Agriculture and Rural Policy, Independent
Community Bankers of America, to Elizabeth M.
Murphy, Secretary, Commission, dated November
26, 2010, and Letter from Laurel Leitner, Senior
Analyst, Council of Institutional Investors, to
Elizabeth M. Murphy, Secretary, Commission, dated
November 19, 2010.
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MC raised additional sources of
conflicts to consider.242 These
commenters suggested that the
Commission should focus on conflicts
arising from dealers directing volume to
SBS exchanges and SB SEFs, dealer
concentration of market activity, and
close association of the dealers with
decision-making in SBS exchanges and
SB SEFs. Namely, the commenters
believed that the Commission should
address the incentives SB SEFs and SBS
exchanges may use to attract business,
such as volumetric or profit-based
incentives. The commenters argued that
if arrangements to attract large liquidity
providers’ business are overly generous,
such arrangements may undermine any
improvements made by the proposed
voting and ownership limitations and
governance requirements in Regulation
MC. Do commenters agree with these
concerns? If not, why not? If so, do
commenters believe that the
Commission should take any measures
to mitigate these concerns? For example,
should the Commission prohibit, or take
other measures with respect to, revenue
sharing, volume discounts, rebates, and
other similar arrangements by a SB SEF
to attract order flow? Should SB SEFs be
required to file with the Commission
any arrangements with participants,
potential participants, or other market
participants that would promote the
sending of order flow to the SB SEF,
such as equity incentive plans? Would
such requirements help to mitigate
conflicts of interest?
XVIII. Core Principle 12—Financial
Resources
Section 3D(d)(12)(A) of the Exchange
Act (Core Principle 12) requires SB SEFs
to have adequate financial, operational,
and managerial resources to discharge
each responsibility of the SB SEF, as
determined by the Commission. In
addition, Section 3D(d)(12)(B) of the
Exchange Act states that the financial
resources of a SB SEF shall be
considered to be adequate if the value
of the financial resources (i) enables the
organization to meet its financial
obligations to its members and
242 Letter from U.S. Senator Carl Levin, Michigan,
to Elizabeth M. Murphy, Secretary, Commission,
dated December 20, 2010; Letter from Dennis M.
Kelleher, President & CEO, and Wallace C.
Turbeville, Derivatives Specialist, Better Markets,
Inc. to Elizabeth M. Murphy, Secretary,
Commission, dated November 26, 2010; Letter from
U.S. Senator Sherrod Brown, Ohio, to Elizabeth M.
Murphy, Secretary, Commission, and David A.
Stawick, Secretary, CFTC, dated November 17,
2010; Letter from U.S. Senator Tom Harkin, Iowa,
to Elizabeth M. Murphy, Secretary, Commission,
and David A. Stawick, Secretary, CFTC, dated
November 17, 2010; and Letter from Americans for
Financial Reform, to Elizabeth M. Murphy,
Secretary, Commission, dated November 16, 2010.
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participants notwithstanding a default
by the member or participant creating
the largest financial exposure for that
organization in extreme but plausible
market conditions; and (ii) exceeds the
total amount that would enable the SB
SEF to cover the operating costs of the
SB SEF for a one year period, as
calculated on a rolling basis. The
Commission believes that the financial
strength of a SB SEF is vital to ensure
that a SB SEF can discharge its
regulatory responsibilities in accordance
with the Exchange Act. Strong, viable
SB SEFs will be a key to market
continuity and efficiency. Therefore, the
Commission believes that it is important
to install safeguards to ensure that a SB
SEF’s resources are adequate.
The Commission proposes to
implement in proposed Rule 821 the
requirements of Section 3D(d)(12) of the
Exchange Act. Specifically, proposed
Rule 821(a) would require every SB SEF
to have adequate financial, operational,
and managerial resources to discharge
each responsibility of the SB SEF, as
determined by the Commission.
Proposed Rule 821(b) would state in
part that the financial resources of a SB
SEF shall be considered to be adequate
if the value of the financial resources
enables the SB SEF to meet its financial
obligations to participants
notwithstanding a default by the
participant creating the largest financial
exposure for the SB SEF in extreme but
plausible market conditions. This
requirement would help ensure that the
financial failure of one participant
would not be able to destroy the
financial viability of the entire SB SEF.
Proposed Rule 821(b) would require that
in making this calculation (which is
required by Section 3D(d)(12)(B) of the
Exchange Act), a SB SEF shall use
reasonable estimates and assumptions
and not overestimate resources or
underestimate expenses, liabilities, and
financial exposure. This requirement
should provide guidance to SB SEFs on
the estimates they should use to comply
with the requirements of Core Principle
12.
Proposed Rule 821(b) also would state
in part that the financial resources of a
SB SEF shall be considered to be
adequate if the value of the financial
resources exceeds the total amount that
would enable the SB SEF to cover its
operating costs for a one year period, as
calculated on a rolling basis. This test
would help to ensure that a SB SEF is
in a sufficiently strong financial
position to sustain operations through
unpredictable business cycles. As with
the first requirement, in making this
calculation (which is required by
Section 3D(d)(12)(B) of the Exchange
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Act), a SB SEF must use reasonable
assumptions and estimates and not
overestimate resources or underestimate
expenses, liabilities, and financial
exposure. Each of these requirements
would be an ongoing requirement and a
SB SEF must always be in
compliance.243 The Commission seeks
comments in general regarding all
aspects of these financial requirements.
XIX. Core Principle 13—Systems
Safeguards
Section 3D(d)(13)(A) of the Exchange
Act (Core Principle 13) requires that a
SB SEF shall establish and maintain a
program of risk analysis and oversight to
identify and minimize sources of
operations risk, through the
development of appropriate controls
and procedures, and automated systems,
that: (1) Are reliable and secure and (2)
have adequate scalable capacity.
Additionally, Section 3D(d)(13)(B) of
this Core Principle requires that a SB
SEF establish and maintain emergency
procedures, backup facilities, and a plan
for disaster recovery that allow for: (1)
Timely recovery and resumption of
operations and (2) the fulfillment of the
responsibilities and obligations of the
SB SEF. Further, Section 3D(d)(13)(C) of
this Core Principle requires that a SB
SEF shall periodically conduct tests to
verify that the backup resources of the
SB SEF are sufficient to ensure
continued: (1) Order processing and
trade matching, (2) price reporting, (3)
market surveillance, and (4)
maintenance of a comprehensive and
accurate audit trail. The Commission is
proposing Rule 822 to implement this
Core Principle.
The Commission is proposing Rule
822 to provide standards for SB SEFs
with regard to their automated systems’
capacity, resiliency, and security.244
These standards are comparable to the
standards applicable to SROs, including
national securities exchanges and
clearing agencies, pursuant to the
Commission’s Automation Review
Policy (‘‘ARP’’) standards.245 Systems
failures can limit access to quotes or
other trading interest, call into question
243 In addition to the requirements of proposed
Rule 821, a SB SEF would be required to submit
annual financial reports in accordance with the
requirements discussed in Section XXII of this
release.
244 Proposed Rule 822 is being promulgated under
Section 3D(d)(13) of the Exchange Act.
245 See Securities Exchange Act Release Nos.
27445 (Nov. 16, 1989), 54 FR 48703, 48706–48707
(November 24, 1989) (‘‘ARP I Release’’) and 29185
(May 9, 1991), 56 FR 22490 (May 15, 1991) (‘‘ARP
II Release’’). See also Rule 301(b)(6) of Regulation
ATS, 17 CFR 242.301(b)(6) and Securities Exchange
Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844
(December 22, 1998).
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the integrity of quotes or other trading
interest, and prevent market
participants from being able to post
quotes or other trading interest, and
thereby have a large impact on market
confidence, risk exposure, and market
efficiency. To promote the maintenance
of stable and orderly SB swap markets,
the Commission believes that SB SEFs
should be required to meet the ARP
capacity, resiliency and security
standards.246
Proposed Rule 822 would require a
SB SEF to establish, maintain, and
enforce written policies and procedures
designed to ensure that its systems
provide adequate levels of capacity,
resiliency, and security; and submit to
the Commission annual reviews of its
automated systems, systems outage
notices, and prior notices of planned
system changes. These proposed
requirements essentially codify and
parallel the ARP requirements that have
been in place for almost twenty years.
Commission staff has found these
standards to be effective in overseeing
the capacity, resiliency, and security of
major automated systems in use in the
securities markets. These proposed
requirements, as applied to the market
for SB swaps, are designed to prevent
and minimize the impact of systems
failures that might negatively impact the
stability of this market.
A. Requirements for SB SEFs’
Automated Systems
1. Policies and Procedures
Proposed Rule 822(a)(1) would
require a SB SEF to establish, maintain,
and enforce written policies and
procedures reasonably designed to
ensure that its systems provide adequate
levels of capacity, resiliency, and
security. Such policies and procedures
would require a SB SEF to, at a
minimum: (1) Establish reasonable
current and future capacity estimates;
(2) conduct periodic capacity stress tests
of critical systems to determine such
systems’ ability to process transactions
in an accurate, timely, and efficient
manner; (3) develop and implement
reasonable procedures to review and
keep current its system development
and testing methodology; (4) review the
246 Because SB SEFs would be an integral part of
the market for SB swaps, and therefore an integral
part of the national market system, the Commission
believes that it is appropriate to model a SB SEF’s
rules on system safeguards on ARP. Proposed Rule
822 will impose data maintenance standards on SB
SEFs that are comparable to those imposed by the
Commission on national securities exchanges by
applying the ARP standards to them. In addition,
nearly identical rules have been proposed by the
Commission for SDRs, also applying the ARP
standards to those entities. See SDR Release, supra
note 6.
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vulnerability of its systems and data
center computer operations to internal
and external threats, physical hazards,
and natural disasters; and (5) establish
adequate contingency and disaster
recovery plans which shall include
plans to resume trading of SB swaps by
the SB SEF no later than the next
business day following a wide-scale
disruption. In developing such
contingency and disaster recovery
plans, the SB SEF would be required to
take into account: (1) The extent of
alternative trading venues for the SB
swaps traded by the SB SEF, including
the number of SB swaps traded on the
SB SEF, the market share of the SB SEF,
and the number of participants in its SB
SEF; and (2) the necessity of geographic
diversity and diversity of infrastructure
between the SB SEF’s primary site and
any back-up sites.
This list of proposed requirements is
based on existing ARP requirements
applied to significant-volume ATSs
under Rule 301(b)(6) of Regulation
ATS.247 In addition, Commission staff
has applied these requirements to SROs
and other entities in the securities
markets for a number of years in the
context of its ARP inspection program.
As a general matter, the Commission
preliminarily believes that, if a SB SEF’s
policies and procedures satisfy industry
best practices standards, then these
policies and procedures would be
adequate for purposes of proposed Rule
822(a)(1).248 However, in the event that
industry best practices standards of
widely recognized professional
organizations are not consistent with the
public interest, protection of investors,
or the maintenance of fair and orderly
markets, the Commission would have
flexibility to establish such standards
that a SB SEF would be required to meet
to comply with proposed Rule
822(a)(1).249
The proposed rule would require a SB
SEF to quantify, in appropriate units of
measure, the limits of the SB SEF’s
247 See
17 CFR 242.301(b)(6)(D)(ii).
Rule 822(a)(1) would require a SB
SEF to establish, maintain, and enforce written
policies and procedures reasonably designed to
ensure that its systems provide adequate levels of
capacity, resiliency, and security. A SB SEF’s
policies and procedures may still meet the
requirement to be reasonably designed to ensure
that its systems provide adequate levels of capacity,
resiliency, and security without necessarily being
identical to industry best practices standards.
However, generally speaking, industry best
practices standards would provide an objective,
easily identifiable standard.
249 Industry best practices standards currently are
established by organizations such as: the
Information Systems Audit and Control Foundation
(‘‘ISACF’’); the Federal Financial Institutions
Examination Council’s (‘‘FFIEC’’); the Institute of
Internal Auditors (‘‘IIA’’); and the SANS Institute.
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capacity to receive (or collect), process,
store, or display the data elements
included within each function, and
identify the factors (mechanical,
electronic, or other) that account for the
current limitations.250 This would make
it easier for the Commission to detect
any potential capacity constraints of a
SB SEF, which, if left unaddressed,
could compromise the ability of a SB
SEF to collect and maintain SB swap
data. A SB SEF’s failure to clearly
understand and have procedures to
address its capacity limits would
increase the likelihood that it would
experience a loss or disruption of
system operations.
2. Objective Review
Proposed Rule 822(a)(2) would
require a SB SEF to submit an objective
review of its systems that support or are
integrally related to the performance of
its activities to the Commission, on an
annual basis, within thirty calendar
days of completion. This proposed
requirement is critical to help ensure
that SB SEFs have adequate capacity,
resiliency, and security and that their
automated systems are not subject to
critical vulnerabilities. Proposed Rule
800 would define ‘‘objective review’’ as
‘‘an internal or external review,
performed by competent, objective
personnel following established
procedures and standards, and
containing a risk assessment conducted
pursuant to a review schedule.’’ 251 The
proposed definition of ‘‘objective
review’’ is based on the standard for the
review of automated systems set forth in
the ARP II Release.252
As in the current ARP program, the
Commission preliminarily believes that
a reasonable basis for determining that
a review is objective for purposes of
proposed Rule 822(a)(2) is if the level of
objectivity of a SB SEF’s reviewers
complied with standards set by widely
recognized professional
organizations.253 However, in the event
250 See
proposed Rule 822(a)(1)(i).
Rule 800 would define ‘‘competent,
objective personnel’’ as ‘‘a recognized information
technology firm or a qualified internal department
knowledgeable of information technology systems.’’
This proposed definition is based on the standard
for reviewers of automated systems set forth in the
ARP II Release. See ARP II Release, 56 FR 22490,
supra note 245. Proposed Rule 800 would define
‘‘review schedule’’ as ‘‘a schedule in which each
element contained in paragraph (a)(1) of Rule 822
would be assessed at specific, regular intervals.’’
This proposed definition codifies the Commission’s
policy set forth in the ARP II Release. See ARP II
Release, 56 FR 22490, supra note 245.
252 See ARP II Release, 56 FR 22490, supra note
245.
253 Such standards are currently established by
organizations such as the IIA, the Information
Systems Audit and Control Association (‘‘ISACA’’)
251 Proposed
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that industry best practices standards of
widely recognized professional
organizations are not consistent with the
public interest, protection of investors,
or the maintenance of fair and orderly
markets, the Commission would have
flexibility to establish standards that a
SB SEF would be required to meet to
comply with proposed Rule 822(a)(2).
The decision on which type of
reviewer, an internal department or an
external firm, should perform the
review is a decision for each SB SEF to
make. The Commission preliminarily
believes that, as long as the reviewer has
the competence, knowledge,
consistency, and objectivity sufficient to
perform the role, the review can be
performed by either recognized
information technology firms or by a
qualified internal department
knowledgeable of information
technology systems.
Proposed Rule 822(a)(2) would further
require that, where the objective review
is performed by an internal department,
an objective, external firm must assess
the internal department’s objectivity,
competency, and work performance
with respect to the review performed by
the internal department. Proposed Rule
822(a)(2) would require that the external
firm issue a report of that review, which
the SB SEF must submit to the
Commission on an annual basis, within
thirty calendar days of completion of
the review.
The proposed requirement in
proposed Rule 822(a)(2) that a SB SEF
submit an annual objective review to the
Commission is drawn from the ARP II
Release.254 In addition, the proposed
requirement in proposed Rule 822(a)(2)
that, where the objective review is
performed by an internal department, an
objective, external firm must assess the
internal department’s objectivity,
competency, and work performance, is
similarly drawn from the ARP II
Release.255
The proposed annual review would
not be required to address each element
contained in proposed paragraphs (i)
through (v) of Rule 822(a)(1) every year.
(formerly the Electronic Data Processing Auditors
Association (‘‘EDPAA’’)), and the American Institute
of Certified Public Accountants (‘‘AICPA’’).
Proposed Rule 822(a)(2) would require a SB SEF
to submit an objective review of its systems that
support or are integrally related to the performance
of its activities to the Commission, on an annual
basis, within thirty calendar days of completion. A
SB SEF’s policies and procedures may still meet
this requirement without necessarily being identical
to industry best practices standards. However,
generally speaking, industry best practices
standards would provide an objective, easily
identifiable standard.
254 See ARP II Release, 56 FR 22490, supra note
245.
255 See id.
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Rather, using its own risk assessment, a
SB SEF’s reviewer would review each
element on a ‘‘review schedule,’’ as
defined in proposed Rule 800, in which
each element would be assessed at
specific, regular intervals, thus
facilitating systematic and timely review
of each element. This should provide a
reasonable and cost-effective level of
assurance that automated systems of SB
SEFs are being adequately developed
and managed with respect to capacity,
security, development, and contingency
planning concerns.
The proposed requirement to submit
an objective review within thirty days of
completion assures the Commission will
have timely notice of the information
required. The Commission has found
through its experience with the current
ARP program for SROs and other
entities in the securities market that an
entity generally requires approximately
thirty calendar days after completion of
the review to complete the internal
review process necessary to submit an
annual review to the Commission. A
shorter timeframe might not provide a
SB SEF with sufficient time to complete
its internal review of the document; a
longer timeframe might serve to
encourage unnecessary delays.
3. Material Systems Outages
Under proposed paragraph (3) of Rule
822(a), a SB SEF would be required to
promptly notify the Commission in
writing of material system outages and
any remedial measures that have been
implemented or are contemplated,
including: (1) Immediately notifying the
Commission when a material systems
outage is detected; (2) immediately
notifying the Commission when
remedial measures are selected to
address the material systems outage; (3)
immediately notifying the Commission
when the material systems outage is
addressed; and (4) submitting to the
Commission within five business days
of when the material systems outage
occurred a detailed written description
and analysis of the outage and any
remedial measures that have been
implemented or are contemplated.
This paragraph would codify the
procedures followed by SROs and
certain other entities under the
Commission’s current ARP program
with respect to providing the staff with
notification of material system outages.
In particular, proposed paragraph (3)
would clarify that the Commission
expects to receive immediate
notification that an outage has been
detected, that remedial measures have
been selected to address the outage, and
that the outage has been addressed.
Proposed paragraph (3) also would
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clarify that a SB SEF should submit a
detailed written description and
analysis of the outage within five
business days of the occurrence of the
outage.
The Commission preliminarily
believes that the proposed rule would
assist the Commission in assuring that
a SB SEF has diagnosed and is taking
steps to correct system disruptions, so
that systems of the SB SEF are
reasonably equipped to accept and
securely maintain transaction data. The
Commission preliminarily believes that
requiring a SB SEF to submit
notifications of material system outages
to the Commission is essential to help
ensure that the Commission can
continue to effectively oversee the SB
SEF.
Proposed Rule 800 would define
‘‘material systems outage’’ as an
unauthorized intrusion into any system,
or an event at a SB SEF involving
systems or procedures that results in: (1)
A failure to maintain accurate, timesequenced records of all orders,
quotations, and transactions that are
received by, or originated on, the SB
SEF; (2) a disruption of normal
operations, including switchover to
back-up equipment with no possibility
of near-term recovery of primary
hardware; (3) a loss of use of any
system; (4) a loss of transactions; (5)
excessive back-ups or delays in
processing; (6) a loss of ability to
disseminate vital information; (7) a
communication of an outage situation to
other external entities; (8) a report or
referral of an event to the SB SEF’s
Board or senior management; (9) a
serious threat to systems operations
even though systems operations were
not disrupted; (10) a queuing of data
between system components or queuing
of messages to or from participants of
such duration that a participant’s
normal service delivery is affected; or
(11) a failure to maintain the integrity of
systems that results in the entry of
erroneous or inaccurate inquiries,
responses, orders, quotations, other
trading interest, transactions, or other
information in the SB SEF or the
securities markets.
Based on its experience in requiring
SROs and other entities to report
material systems outages in the context
of the current ARP program, the
Commission preliminarily believes that
this proposed definition is appropriate
for SB SEFs. The Commission
preliminarily believes that each of the
events listed in paragraphs (1) through
(11) of proposed Rule 800 are significant
events that warrant reporting to the
Commission because such material
systems outages could negatively impact
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the stability of the SB swap market. The
application of the proposed definition is
relatively straightforward, and it focuses
on the types of events that the
Commission preliminarily believes
should require notification to the
Commission under proposed Rule
822(a)(3), so that the Commission can
respond appropriately to the event that
caused the loss or disruption.
Specifically, the Commission
preliminarily believes that proposed
paragraphs (1), (2), (3), (4), and (5) of
proposed Rule 800 address events that
cause a significant loss or disruption of
normal system operations sufficient to
warrant notification to the Commission.
In addition, the Commission
preliminarily believes that proposed
paragraph (6) of proposed Rule 800
addresses a type of event that impairs
transparency or accurate and timely
regulatory reporting.
The Commission also preliminarily
believes that proposed paragraphs (7)
and (8) of proposed Rule 800 are
appropriate because communications of
an outage to entities outside of the SB
SEF or to the SB SEF’s Board or senior
management are indicia of a significant
system outage sufficient to warrant
notification to the Commission.
Specifically, proposed paragraph (8)’s
reference to ‘‘a report or referral of an
event * * *’’ seeks to address situations
in which a SB SEF might seek to apply
an overly narrow definition of an
‘‘outage situation’’ in proposed
paragraph (7), in order to avoid
reporting a problem that nevertheless
has a significant impact on the
performance of the SB SEF’s systems
and therefore warrants reporting to the
Commission. For example, where a SB
SEF experiences a slowing, but not a
stoppage, of its ability to accept orders
or quotes, and that slowing is
sufficiently significant to have been
reported or referred to the SB SEF’s
Board or senior management, the
Commission preliminarily believes that
this situation would constitute a
material system outage under proposed
paragraph (8) that must be reported to
the Commission. By including proposed
paragraph (8) in the definition of
‘‘material systems outage,’’ the
Commission seeks to ensure that it is
informed of events that most entities
subject to current ARP standards would
already understand should be covered
under the current program. This should
permit the Commission to effectively
monitor the operation of SB SEF’s
automated systems. The Commission
preliminarily believes that proposed
paragraphs (9) and (10) are appropriate
because threats to system operations
and queuing of data are events that may
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result in a significant disruption of
normal system operations warranting
notification to the Commission.
Proposed paragraph (11) of proposed
Rule 800 covers a failure to maintain the
integrity of systems that results in the
entry of erroneous or inaccurate
inquiries, responses, orders, quotations,
other trading interests, transactions, or
other information in a SB SEF or to
market participants. This paragraph is
designed to address the unique role of
SB SEFs in the SB swaps market. In
particular, it is intended to cover such
events as breakdowns in a SB SEF’s
internal controls that result in the entry
of erroneous orders into the market. For
example, it is possible that a SB SEF
could, while in the process of testing its
systems, inadvertently retain ‘‘test’’ data
in its database. This, in turn, could
result in erroneous reporting of SB
swaps to the SB SEF’s participants,
registered SDRs, the Commission, other
regulators, and counterparties.
Counterparties may become uncertain of
their positions, leading to market
disruptions. This, in turn, could erode
investor confidence in the integrity of
the SB swaps market, damaging
liquidity and impeding the capital
formation process. Accordingly, the
Commission preliminarily believes that
this type of breakdown in a SB SEF’s
systems controls should be reported to
the Commission.
By including proposed paragraph (11)
of proposed Rule 800 in the definition
of ‘‘material systems outage,’’ the
Commission is seeking to ensure that it
is informed of events that could
negatively impact the integrity of
systems that result in the entry of
erroneous or inaccurate transaction data
or other information in a SB SEF or the
securities markets. This should permit
the Commission to monitor effectively
the operation of each SB SEF’s
automated systems.
The definition of material systems
outage also includes an unauthorized
intrusion into any system. This includes
unauthorized intrusions by outside
parties, insiders, or parties unknown.
The Commission preliminarily believes
that including this in the definition
would assist the Commission’s review
by requiring SB SEFs to notify the
Commission of unauthorized intrusions
into systems or networks, and should
permit the Commission to continue to
effectively monitor the operation of SB
SEF’s automated systems. SB SEFs
would need to immediately report
unauthorized intrusions regardless of
whether the intrusions were part of a
cyber attack, potential criminal activity,
other unauthorized attempts to retrieve,
manipulate or destroy data or to disrupt
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or destroy systems or networks, or any
other malicious activity affecting data,
systems, or networks. If unauthorized
intrusions were successful in breaching
systems or networks, SB SEFs would
need to report these intrusions even if
the parties conducting the unauthorized
intrusion were unsuccessful in
achieving their apparent goals (such as
the introduction of malware or other
means of disrupting or manipulating
data, systems, or networks). SB SEFs
would need to follow up on their initial
reports by sending the Commission
updates on any harm to data, systems,
or networks as well as any remedial
measures that the SB SEFs are
contemplating or undertaking to address
the unauthorized intrusions. SB SEFs,
however, would not need to report
unsuccessful attempts at unauthorized
intrusions that did not breach systems
or networks.
The Commission preliminarily
believes that the proposed five business
day requirement regarding submission
of a written description of material
systems outages is an appropriate time
period. In the Commission’s experience
with the current ARP program for SROs
and other entities in the securities
market, an entity generally requires
approximately five business days after
the occurrence of a material systems
outage to gather all the relevant details
regarding the scope and cause of the
outage. A shorter timeframe might not
provide sufficient time for the SB SEF
to gather all relevant details
surrounding the outage and describe
them in a written submission; a longer
timeframe might encourage unnecessary
delays.
4. Material Systems Changes
Under proposed paragraph (4) of Rule
822(a), a SB SEF would be required to
notify the Commission in writing at
least thirty calendar days before
implementation of any planned material
systems changes. Proposed Rule 800
would define ‘‘material systems change’’
as ‘‘a change to automated systems that:
(1) Significantly affects existing capacity
or security; (2) in itself, raises
significant capacity or security issues,
even if it does not affect other existing
systems; (3) relies upon substantially
new or different technology; (4) is
designed to provide a new service or
function; or (5) otherwise significantly
affects the operations of the securitybased swap execution facility.’’
Based on its experience in requiring
SROs and other entities to report
material systems changes in the context
of the current ARP program, the
Commission preliminarily believes that
this proposed definition is appropriate
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for SB SEFs. Each of the events listed in
paragraphs (1) through (5) are
significant events that warrant reporting
to the Commission because any of those
events can lead to a material systems
outage that could negatively affect the
stability of the SB swap market. The
application of the proposed definition is
relatively straightforward, and it focuses
on the types of events that should
require notification to the Commission
under proposed Rule 822(a)(4).
Specifically, the proposed paragraphs
(1) through (4) are events that concern
the adequacy of capacity estimates,
testing, and security measures taken by
a SB SEF, and thus are sufficiently
significant to warrant notification to the
Commission. Proposed paragraph (5)
covering a change that ‘‘otherwise
significantly affects the operations of the
security-based swap execution facility’’
is more open-ended in order to require
notification of other major systems
changes. Examples of changes that fall
within proposed paragraph (5) include,
but are not limited to: Major systems
architectural changes; reconfigurations
of systems that cause a variance greater
than five percent in throughput or
storage; 256 introduction of new business
functions or services; material changes
in systems; changes to external
interfaces; changes that could increase
susceptibility to major outages; changes
that could increase risks to data
security; changes that were, or will be,
reported to or referred to a SB SEF’s
Board or senior management; and
changes that may require allocation or
use of significant resources.
The Commission preliminarily
believes that the proposed thirty
calendar day requirement regarding preimplementation written notification to
the Commission of planned material
systems changes is an appropriate time
period. The Commission has found
through its experience with the current
ARP program that this amount of time
is necessary for the Commission staff to
evaluate the issues raised by a planned
material systems change. A shorter
timeframe might not provide sufficient
time for the Commission staff to analyze
the issues raised by the systems change;
a longer timeframe might unnecessarily
delay the covered entity in
implementing the change.
256 The Commission has identified the five
percent threshold as triggering the definition of
‘‘material systems change’’ in proposed Rule 800
because, based on experience in administrating the
ARP program in the equities markets for almost
twenty years, it believes that reconfigurations that
exceed five percent in throughput or storage
typically have the greatest potential to cause
significant disruptions to automated systems.
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The Commission requests comment
on all aspects of proposed Rule 822(a).
Should the Commission consider
imposing other requirements or
standards? Should any of the proposed
requirements be eliminated or refined?
If so, please explain your reasoning.
Would it be appropriate to impose the
proposed systems safeguards
requirements on SB SEFs only after they
account for a certain percentage of the
total volume of transactions, as
measured by the aggregate total volume
received by all SB SEFs? If so, what is
the appropriate volume level? Five
percent? Ten percent? Please be
specific. In addition, the Commission is
mindful of the potential costs of a SB
SEF’s compliance with the proposed
systems safeguards and seeks
commenters’ views on whether there are
ways to minimize those costs while
assuring adequate systems safeguards.
Would it be appropriate to delay
implementing the proposed systems
safeguards requirements on SB SEFs
until after a specified period of time,
such as one year after Commission
approval of the SB SEF’s registration? If
so, is one year an appropriate time
period? If not, what would be an
appropriate time period for any delay
and why? Would it be appropriate to
delay implementation of systems
safeguard requirements until either a
specified time period after the
Commission’s approval of the SB SEF’s
registration and/or a particular volume
threshold such as those discussed above
is reached? If so, why? If not, why not?
Are there other circumstances in which
a SB SEF should be excepted from
systems safeguards requirements? If so,
commenters should provide a rationale.
Are there factors specific to SB swap
transactions that would make applying
a system that is traditionally used in the
equity markets inappropriate? What is
the likely impact of these requirements
on the SB swaps market, including the
impact on the incentives and behaviors
of SB SEFs, the willingness of persons
to register as SB SEFs, and the
technologies used for maintaining SB
swap data at the SB SEF?
Should the Commission require a SB
SEF’s contingency and disaster recovery
plans (required in proposed paragraph
(a)(1)(v) of proposed Rule 822) to be
tested periodically to assure their
effectiveness and adequacy? 257 Should
the Commission require such
contingency and disaster recovery plans
to cover at a minimum: Preparation for
257 This requirement would be similar to what is
required of clearing agencies and proposed to be
required of SDRs. See Exchange Act Release No.
16900 (June 17, 1980), 45 FR 41920 (June 20, 1980)
and SDR Release, supra note 6.
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contingencies through such devices as
appropriate remote and on-site
hardware back-up and periodic
duplication and off-site storage of data
files? Off-site storage of up-to-date,
duplicative software, files and critical
forms and supplies needed for
processing operations, including a
geographically diverse back-up site that
does not rely on same infrastructure
components (e.g., transportation,
telecommunications, water supply, and
electric power) as the SB SEF primary
operations center? Immediate
availability of software modifications,
detailed procedures, organizational
charts, job descriptions, and personnel
for the conduct of operations under a
variety of possible contingencies?
Emergency mechanisms for establishing
and maintaining communications with
participants, regulators and other
entities involved? 258
Should the Commission require a SB
SEF’s contingency and disaster recovery
plans (required in proposed paragraph
(a)(1)(v) of proposed Rule 822) to
include resources, emergency
procedures, and backup facilities
sufficient to enable timely recovery and
resumption of its operations following
any disruption of its operations? If so,
what should the recovery time objective
be? Should the SB SEF’s contingency
and disaster plans and resources
generally enable resumption of the SB
SEF’s operations during the next
business day following the disruption?
Should the Commission require a SB
SEF, to the extent practicable,
coordinate its contingency and disaster
recovery plans (required in proposed
paragraph (a)(1)(v) of proposed Rule
822) with those of the SDRs, clearing
agencies, SB swap dealers, and major SB
swap participants, and with those of
regulators in a manner adequate to
enable effective resumption of the SB
SEF’s operations following a disruption
causing activation of the SB SEF’s
contingency and disaster recovery
plans, including participating in
periodic, synchronized testing of its
contingency and disaster recovery
plans?
Should the Commission require a SB
SEF ensure that its contingency and
disaster recovery plans (required in
proposed paragraph (a)(1)(v) of
proposed Rule 822) take into account
the business continuity-disaster
258 These requirements are similar to
requirements related to disaster recovery plans of
clearing agencies and proposed to be required of
SDRs. See id. and SDR release, supra note 6. The
requirement for geographical diversity is currently
applicable to securities firms. See Exchange Act
Release No. 47638 (April 7, 2003), 68 FR 17809
(April 11, 2003) (the ‘‘BCP Whitepaper’’).
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10991
recovery plans of its
telecommunications, power, water, and
other essential service providers?
Should the Commission require a SB
SEF to identify the potential risks that
can arise as a result of interoperability
and/or interconnectivity with other
market infrastructures and venues from
which data can be submitted to the SB
SEF (such as exchanges, SDRs, clearing
agencies, SB swap dealers, and major SB
swap participants) and service providers
and how the SB SEF mitigates such
risks?
Should the Commission require a SB
SEF to abide by substantive
requirements (in addition to, or in place
of, the policies and procedures
approach of proposed Rule 822(a)(1)),
such as (i) having robust system controls
and safeguards to protect the data from
loss and information leakage, (ii) having
high-quality safeguards and controls
regarding the transmission, handling,
and protection of data to ensure the
accuracy, integrity, and confidentiality
of the trade information recorded in the
SB SEF, or (iii) having reliable and
secure systems and having adequate,
scalable capacity?
Should the Commission require a SB
SEF to establish, maintain, and enforce
written policies and procedures
reasonably designed to ensure that the
transaction data that it accepts is from
the entity it purports to be from, such
as requiring robust passwords?
Are the time periods specified in
proposed Rule 822(a)(2) through (4)
with respect to submission of annual
reviews and written notices of material
system outages and material systems
changes the correct time periods to use?
Should any of the proposed time
periods be shortened or lengthened?
Should the time periods be replaced
with less specific requirements, such as
‘‘promptly’’ or ‘‘timely’’? If so, please
explain your reasoning.
Should the Commission require the
notification required by proposed Rule
822(a)(4) to be sufficiently detailed to
explain the new system development
process, the new configuration of the
system, its relationship to other systems,
the timeframes or schedule for
installation, any testing performed or
planned, and an explanation on the
impact of the change on the SB SEF’s
capacity estimates, contingency
protocols and vulnerability
estimates? 259
Are there specific provisions in the
proposed definitions that should be
eliminated or refined? Are there some
events which should be included in the
259 See
ARP II Release, 56 FR 22490, supra note
245.
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definitions of ‘‘material systems outage’’
and ‘‘material systems change’’ that are
not, or events that should not be
included in these definitions but are? If
so, please explain your reasoning.
Are the definitions ‘‘objective review’’
and ‘‘competent, objective personnel’’
parallel to the requirements for SROs
and other entities in the securities
markets in the context of the current
ARP program? Should the objective
review required in proposed Rule
822(a)(2) be done on a regular, periodic
basis, rather than on an annual basis?
The proposed requirement for an
objective review focuses on a review of
the SB SEF’s automated systems that
support or are integrally related to the
performance of its activities. Is this an
appropriate scope, or should other
aspects of the SB SEF’s operations be
included? If so, which? In addition is
this scope sufficiently understandable
or should it be further defined?
Is the requirement in proposed Rule
822(a)(2) for an objective, external firm
to assess the objectivity, competency,
and work performance of an internal
department that performed an objective
review necessary or appropriate? If the
objective review is done by an internal
department, should the Commission
require that the objective review be
done by a department or persons other
than those responsible for the
development or operation of the systems
being tested?
Do the proposed requirements for SB
SEFs establish sufficient criteria against
which an evaluation can be performed
by a third party? If not, should the
Commission impose a specific
framework for the SB SEFs to use in
establishing automated systems and
related controls? If so, what would the
critical components of the framework
include? Are existing frameworks
available that are suitable for this
purpose and, if so, which ones would be
considered appropriate?
Should the Commission require the
use of a specific framework by outside
or inside parties for evaluating whether
SB SEFs have adequate capacity,
resiliency, and security and that their
automated systems are not subject to
critical vulnerabilities? If so, what
would the critical components of the
framework include? Are existing
frameworks available that are suitable
for this purpose and, if so, which ones
would be considered appropriate?
For reviews performed by internal
audit departments, are the requirements
for an external firm involvement
appropriate? If not, what improvements
could be made to promote appropriate
reviews by external firms in these
circumstances?
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B. Electronic Filing
Proposed Rule 822(b) would require
that every notification, review, or
description and analysis required to be
submitted to the Commission under
proposed Rule 822 be submitted in an
appropriate electronic format to the
Office of Market Operations at the
Division of Trading and Markets at the
Commission’s principal office in
Washington, DC. This proposed
requirement is intended to make
proposed Rule 822 consistent with
electronic-reporting standards set forth
in other Commission rules under the
Exchange Act, such as Rule 17a–-25
(Electronic Submission of Securities
Transaction Information by Exchange
Members, Brokers, and Dealers) 260 and
Rule 19b–4 (Filings with respect to
Proposed Rule Changes by Selfregulatory Organizations).261
The Commission preliminarily
believes that the proposed provision
would benefit SB SEFs by automating
the process by which they submit
notifications, reviews, and descriptions
and analyses under proposed Rule 822
to the Commission. The Commission
currently receives this type of
information from SROs and other
entities in the securities market in
electronic format. Moreover, as noted
above, this provision is intended to be
consistent with other Commission rules.
Proposed Rule 822(b) would require
submission of notifications, reviews,
and descriptions and analyses in an
‘‘appropriate electronic format.’’ The
Commission anticipates that, if the
provision is adopted, the staff would
work with SB SEFs to determine
appropriate electronic formats that
could be used.
The Commission requests comment
on all aspects of proposed Rule 822(b)
as well as on the following specific
issues. Are there specific provisions in
proposed Rule 822(b) that should be
eliminated or refined? If so, please
explain your reasoning.
What is the likely impact of this
requirement on the SB swap market,
including the impact on the incentives
and behaviors of SB SEFs, the
willingness of persons to register as SB
SEFs, and the technologies used for
reporting information to the
Commission?
C. Confidential Treatment
Proposed Rule 822(c) would provide
that a person who submits a
notification, review, or description and
analysis pursuant to this Rule for which
he or she seeks confidential treatment
260 17
261 17
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CFR 240.19b–4.
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should clearly mark each page or
segregable portion of each page with the
words ‘‘Confidential Treatment
Requested.’’ Proposed Rule 822(c) would
state that ‘‘[a] notification, review, or
description and analysis submitted
pursuant to this [Rule] will be accorded
confidential treatment to the extent
permitted by law.’’
The Commission would use the
information collected under proposed
Rule 822 to evaluate whether SB SEFs
are reasonably equipped to handle
market demand. For this reason,
requiring SB SEFs to submit this
information would be critical to the
Commission’s ability to effectively
oversee SB SEFs.
Much of the information that the
Commission expects to receive from SB
SEFs under proposed Rule 822 is, by its
nature, competitively sensitive. If the
Commission were unable to afford
confidential protection to the
information that it expects to receive,
then the SB SEFs may hesitate to submit
the required information to the
Commission. This result could
potentially undermine the
Commission’s ability effectively to
oversee SB SEFs, which, in turn, could
undermine investor confidence in the
SB swap market.
The Freedom of Information Act
(‘‘FOIA’’) provides at least two
exemptions under which the
Commission has authority to grant
confidential treatment for the
information submitted under proposed
Rule 822. First, FOIA Exemption 4
provides an exemption for ‘‘trade secrets
and commercial or financial information
obtained from a person and privileged
or confidential.’’ 262 As specified in
proposed Rule 822(c), ‘‘a notification,
review, or description and analysis
submitted pursuant to this [Rule] will be
accorded confidential treatment to the
extent permitted by law.’’ The
information required to be submitted to
the Commission under proposed Rule
822 may contain proprietary
information regarding automated
systems that is privileged or
confidential and thus subject to
protection from disclosure under
Exemption 4 of the FOIA.
Second, FOIA Exemption 8 provides
an exemption for matters that are
‘‘contained in or related to examination,
operating, or condition reports prepared
by, on behalf of, or for the use of an
agency responsible for the regulation or
supervision of financial institutions.’’ 263
Similarly, Commission Rule 80(b)(8),
Commission Records and Information,
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implementing Exemption 8, states that
the Commission generally will not
publish or make available to any person
matters that are ‘‘[c]ontained in, or
related to, any examination, operating,
or condition report prepared by, on
behalf of, or for the use of, the
Commission, any other Federal, State,
local, or foreign governmental authority
or foreign securities authority, or any
securities industry self-regulatory
organization, responsible for the
regulation or supervision of financial
institutions.’’ 264
The Commission requests comment
on the following specific issues. Are
there specific provisions in proposed
Rule 822(c) that should be eliminated or
refined? If so, please explain your
reasoning. What is the likely impact of
this requirement on the SB swaps
market, including the impact on the
incentives and behaviors of SB SEFs
and the willingness of persons to
register as SB SEFs?
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XX. Core Principle 14—Chief
Compliance Officer
Section 3D(d)(14) of the Exchange Act
(Core Principle 14), requires registered
SB SEFs to designate a CCO and
requires the CCO to perform certain
duties and to file compliance reports
and financial reports annually.265
Proposed Rule 823 would incorporate
the requirements of Core Principle 14
and provide certain additional
requirements for its implementation.
A. Appointment and Duties of CCO
Proposed Rule 823(a) would require a
registered SB SEF to identify on its
Form SB SEF a person who has been
designated by the Board to serve as the
CCO. The compensation and removal of
the CCO would require the approval of
a majority of the Board.266 Proposed
Rule 823(b) would incorporate the
duties of the CCO contained in Core
Principle 14.267 Specifically, proposed
Rule 823(b) would provide that each
CCO shall: (1) Report directly to the
Board or the senior officer of the SB
SEF; (2) review the compliance of the
SB SEF with respect to the Core
Principles in Section 3D of the
Exchange Act and the rules and
regulations thereunder; (3) in
consultation with the Board or the
senior officer, resolve any conflicts of
interest that may arise; (4) be
responsible for establishing each policy
and procedure that is required to be
CFR 200.80(b)(8).
Public Law 111–203, § 763(c) (adding
Section 3D(d)(14) of the Exchange Act).
266 See proposed Rule 823(a).
267 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(14)(B) of the Exchange Act).
established under Section 3D of the
Exchange Act and the rules and
regulations thereunder; (5) monitor
compliance with the Exchange Act and
the rules and regulations thereunder
relating to its business as a SB SEF,
including each rule prescribed by the
Commission under Section 3D of the
Exchange Act; (6) establish procedures
for the remediation of noncompliance
issues identified by the CCO through
any (i) compliance office review, (ii)
look-back, (iii) internal or external audit
finding, (iv) self-reported error, or (v)
validated complaint; and (7) establish
and follow appropriate procedures for
the handling, management response,
remediation, retesting, and closing of
noncompliance issues.
The CCO would be responsible for,
among other things, keeping the SB
SEF’s Board or senior officer apprised of
significant compliance issues and
advising of needed changes in the SB
SEF’s policies and procedures. Given
the critical role that a CCO is intended
to play in ensuring a SB SEF’s
compliance with the Exchange Act and
the rules and regulations thereunder,
the Commission believes that a SB SEF’s
CCO should be competent and
knowledgeable regarding the Federal
securities laws and should be
empowered with full responsibility and
authority to develop and enforce
appropriate policies and procedures for
the SB SEF.268 To meet the statutory
obligations, a CCO also should have a
position of sufficient seniority and
authority within the SB SEF to compel
others to adhere to the SB SEF’s policies
and procedures. The Commission notes,
however, that the SB SEF would not be
required to hire an additional person to
serve as its CCO. Instead, the SB SEF
could designate an individual already
employed by the SB SEF to serve as its
CCO.
The Commission is concerned that a
SB SEF’s commercial interests might
discourage its CCO from making
forthright disclosure to the Board or the
senior officer about any compliance
failures. To mitigate this potential
conflict of interest, the Commission
believes that the CCO should be
independent from the SB SEF’s
management so as not to be conflicted
in reporting or addressing any
compliance failures. To support this
independence, the proposed rule would
allow only a majority of the Board to
approve the CCO’s compensation and to
264 17
265 See
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268 The Commission believes that the person that
is designated by the Board to serve as the CCO
should have the background and qualifications
necessary to fulfill the responsibilities of the
position.
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remove the CCO from his or her
responsibilities.
The Commission notes that proposed
Regulation MC would require a SB SEF
to establish a fully independent ROC,
which would be the Board committee
that would be responsible for
monitoring a SB SEF’s regulatory
program for sufficiency, effectiveness,
and independence.269 The Board of a SB
SEF should consider the appropriate
reporting structure for the CCO, taking
into account the potential conflicts of
interest between the CCO and other
senior officers of the SB SEF. Because
the SB SEF would be required to have
a ROC, the Board could elect to delegate
to the ROC the duty of overseeing the
CCO.
The Commission generally requests
comments on all aspects of the proposed
rules relating to the appointment and
duties of the CCO. Should the
Commission require a CCO to meet
minimum competency standards? If so,
what background, skills and other
qualifications should a CCO be required
to have? Does the proposed requirement
that the CCO report directly to the Board
or the senior officer balance the CCO’s
needs to work effectively with
management and to have an adequate
separation of business and regulatory
influence? Are there situations when the
CCO’s ability to conduct his or her
duties under the Exchange Act could be
compromised if he or she were required
to report to the senior officer? If so, are
there steps that the SB SEF could take
to resolve differences between the CCO
and the senior officer? Should the
Commission require a CCO to report to
a specific senior officer? If so, to whom
and why? Would it be preferable for the
CCO to report to the Board? If so, would
it be preferable for the Board to delegate
the responsibility for oversight of the
CCO to its ROC?
Is the Commission’s proposed
requirement regarding the Board’s
approval of a CCO’s compensation and
removal necessary or appropriate?
Absent specific requirements imposed
by Federal statute or rules, in general,
the entity has the discretion to create
the governance structure that it believes
best promotes compliance with
applicable laws and regulations, in
accordance with the relevant laws of the
entity’s jurisdiction of incorporation or
formation. As noted above, the
Commission has identified potential
conflict concerns between a SB SEF’s
commercial interests and its regulatory
obligations. To mitigate such concerns
269 See Regulation MC Proposing Release, supra
note 82, (proposing that the SB SEF establish a ROC
composed solely of independent directors).
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and support the independence of the
CCO from management of the SB SEF,
the Commission is proposing the
requirement described above.270 Do
commenters believe that it would be
appropriate to impose this requirement,
or do commenters believe that SB SEFs
would be able to comply with their
regulatory obligations without this
requirement? Would the removal of this
requirement affect the ability of a CCO
to comply with the extensive duties
required of the CCO under the DoddFrank Act? If commenters do not agree
that the proposed requirements are
necessary or appropriate, why and what
would be a better alternative, if any, to
promote the independence and
effectiveness of the CCO? For example,
should the required percentage of Board
approval be lower or higher? Or, should
the Commission require that the CCO
meet separately with the independent
directors of the SB SEF, without anyone
else present? 271 Would such a
requirement promote the independence
and effectiveness of the CCO by
supporting his or her ability to speak
freely with the independent directors
about any sensitive compliance issues of
concern to any of them? Do commenters
believe that it would be appropriate to
impose this type of requirement, or do
commenters believe that SB SEFs would
be able to comply with their regulatory
obligations without a requirement such
as this?
Should the Commission add a rule
explicitly prohibiting any officers,
directors, or employees of a SB SEF
from, directly or indirectly, taking any
action to coerce, manipulate, mislead, or
fraudulently influence the CCO in the
performance of his other
responsibilities?
Are there any terms in proposed Rule
823(b) regarding the duties of the CCO
that should be clarified or modified
(e.g., ‘‘look-back,’’ ‘‘self-reported error,’’
or ‘‘validated complaint’’)? If so, which
terms and how should they be defined?
Are the duties of the CCO in proposed
Rule 823(b) sufficiently clear? Should
the Commission provide further
guidance or rules on how the CCO
270 The Commission proposed this same
requirement in its proposal relating to the
registration and regulation of security-based swap
data repositories. See SDR Release, supra note 6.
271 The concept of an individual with regulatory
oversight responsibilities having mandated access
to the independent directors without the presence
of non-independent directors on the entity’s board
is not novel, although it has not to date been
specifically mandated by the Exchange Act or rules
thereunder. See, e.g., Article IV, Sec. 7 of the
Nasdaq Bylaws (requiring the Chief Regulatory
Officer of Nasdaq to meet in executive session with
the Regulatory Oversight Committee of Nasdaq,
which is a fully independent committee of the
Nasdaq board).
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should comply with these duties? If so,
what kinds of guidance or rules would
be appropriate to adopt in this context?
Should the Commission provide
guidance in its proposed rules about the
CCO’s procedures for the remediation of
noncompliance issues? Should the
Commission provide guidance in its
proposed rules on what would be
considered ‘‘appropriate procedures’’ for
the handling, management response,
remediation, retesting, and closing of
noncompliance issues? If so, what
factors should the Commission take into
consideration?
Would the CCO have difficulty
discharging any of the obligations under
proposed Rule 823? Would any of the
CCO’s obligations under proposed Rule
823 conflict with current obligations
imposed on a CCO? If so, which ones
and why? Should the Commission
impose any additional duties on the
CCO that are not already enumerated in
Section 3D(d)(14) of the Exchange Act
and incorporated in the proposed rule?
What is the likely impact of the
Commission’s proposed rule on the SB
swap market? Would the proposed rule
potentially promote or impede the
establishment of SB SEFs? With respect
to entities that currently provide a
marketplace for trading SB swaps and
that may be required to register under
the Dodd-Frank Act, how do current
practices compare to the practices that
the Commission proposes to require in
this rule? What are the incremental
costs to potential SB SEFs in connection
with adding to or revising their current
practices in order to implement the
Commission’s proposed rule?
How might the evolution of the SB
swaps market over time affect SB SEFs
and impact the Commission’s proposed
rule?
B. Annual Reports
Section 3D(d)(14)(C) of the Exchange
Act requires the CCO to prepare and
sign an annual report, in accordance
with rules prescribed by the
Commission.272 Proposed Rule 823(c)
would prescribe the rules to implement
this statutory provision.273 Proposed
Rule 823(c)(1) would implement the
requirements in Section 3D(d)(14)(C)(i)
under Exchange Act for the CCO to
annually prepare and sign a report that
contains a description of: (i) The
compliance of the SB SEF with respect
to the Exchange Act and the rules and
regulations thereunder; and (ii) the
policies and procedures of the SB SEF
(including the code of ethics and
272 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(14)(C) of the Exchange Act).
273 See proposed Rule 823(c).
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conflicts of interest policies of the SB
SEF).274
The Commission also is proposing
certain minimum requirements in
proposed Rule 823(c)(1) for the
information that should be provided in
the CCO’s annual report.275 The
proposed minimum requirements would
provide guidance for including in the
report certain key disclosures about the
SB SEF’s compliance with the Core
Principles. However, this proposed
provision is not intended to be an
exhaustive list; any other relevant
descriptions of the SB SEF’s compliance
with the Exchange Act and the policies
and procedures of the SB SEF related
thereto, consistent with the broader
statutory requirement in Section
3D(d)(14)(C) of the Exchange Act, also
should be included in the CCO’s annual
report.276
Proposed Rule 823(c)(1)(i) through (ii)
would require the annual report to
include a description of the SB SEF’s
enforcement of its policies and
procedures and information on all
investigations, inspections,
examinations, and disciplinary cases
opened, closed, and pending during the
reporting period. Proposed Rule
823(c)(1)(iii) would require the annual
report to include a description of all
grants of access (including, for all
participants, the reasons for granting
such access) and all denials or
limitations of access (including, for each
applicant, the reasons for denying or
limiting access), consistent with Rule
811(b)(3). The disclosures in proposed
Rule 823(c)(i) through (iii) would
provide a basis for evaluating the
effectiveness of the SB SEF’s
compliance program under the
standards in Core Principle 2, which
generally requires the SB SEF to
establish and enforce compliance with
its rules.
Proposed Rule 823(c)(1)(iv) through
(v) would require the annual report to
include any material changes to the SB
SEF’s policies and procedures since the
date of the preceding compliance report
and any recommendation for material
changes to the policies and procedures
as a result of the annual review
(including the rationale for such
recommendation, and whether such
policies and procedures were or will be
modified by the SB SEF to incorporate
such recommendation).277 The
274 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(14)(C)(i) of the Exchange Act) and
proposed Rule 823(c)(1).
275 See proposed Rule 823(c)(1).
276 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(14)(C) of the Exchange Act).
277 The term ‘‘material change’’ would be defined
as a change that a CCO would reasonably need to
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proposed requirements should
demonstrate the kinds of compliance
issues the SB SEF is facing and how the
CCO is addressing those issues.
Proposed Rule 823(c)(1)(vi) through
(vii) would require the annual report to
include the results of the SB SEF’s
surveillance program (including
information on the number of reports
and alerts generated, and the reports
and alerts that were referred for further
investigation or for an enforcement
proceeding) and any complaints
received on the SB SEF’s surveillance
program. The proposed requirements
should provide a demonstration of the
effectiveness of the SB SEF’s
compliance program in detecting
violations and the appropriateness of
the SB SEF’s response in addressing
such detected violations.
Finally, proposed Rule 823(c)(1)(viii)
would require the CCO’s annual report
to include any material compliance
matters identified since the date of the
preceding compliance report.278 This
proposed requirement would indicate
the most significant compliance matters
that the SB SEF is dealing with on its
market. The Commission notes that
individual compliance matters may not
be material when viewed in isolation,
but may collectively suggest a material
compliance matter.
Although the proposed rule would
require only annual reviews, the CCO
should consider the need for interim
reviews in response to significant
compliance events, changes in business
arrangements, and regulatory
developments. For example, if there is
an organizational restructuring of a SB
SEF, its CCO should evaluate whether
the SB SEF’s policies and procedures
are adequate to guard against potential
conflicts of interest. Additionally, if a
new rule regarding SB SEFs is adopted
by the Commission, then the CCO
should review its policies and
procedures to ensure compliance with
the rule.
Proposed Rule 823(c)(2) would
implement the requirement in Section
3D(d)(14)(C)(ii)(I) of the Exchange Act
for the CCO to submit the annual report
with the appropriate financial reports of
know in order to oversee compliance of the SB SEF.
See proposed Rule 800.
278 The term ‘‘material compliance matter’’ would
be defined as any compliance matter that the Board
would reasonably need to know to oversee the
compliance of the SB SEF and includes, without
limitation: (1) A violation of the Federal securities
laws by the SB SEF, its officers, directors,
employees, or agents; (2) a violation of the policies
and procedures of the SB SEF, by the SB SEF, its
officers, directors, employees, or agents; or (3) a
weakness in the design or implementation of the SB
SEF’s policies and procedures. See proposed Rule
800.
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the SB SEF at the time of filing.279 The
proposed rule also would implement
the requirement in Section
3D(d)(14)(C)(ii)(II) of the Exchange Act
that the CCO include a certification in
its report, under penalty of law, that the
report is accurate and complete.280
Under proposed Rule 823(d), the CCO
would be required to submit the annual
compliance report to the Board for its
review prior to the submission of the
report to the Commission.281 The
Commission notes, however, that the
CCO should promptly bring serious
compliance issues to the attention of the
full Board or the Board’s independent
directors rather than wait until an
annual report is prepared.
The Commission generally requests
comments on all aspects of the proposed
rules regarding annual compliance
reports. Are the Commission’s proposed
rules regarding annual compliance
reports appropriate and sufficiently
clear? If not, why not and what would
be a better approach?
Are the proposed definitions of
‘‘material change’’ and ‘‘material
compliance matter’’ appropriate? If not,
are they over-inclusive or underinclusive, and how else should these
terms be defined?
Proposed Rule 823(c)(1) lists specific
disclosures that would need to be
included in each annual compliance
report. Are there other specific items
that should be required? For example,
should disclosures about instances
when the SB SEF or the Board has not
accepted the recommendations of the
swap review committee be required to
be included in the annual compliance
report? Would such information be
helpful to the Commission in evaluating
whether conflicts of interest are
impacting decisions about whether to
trade, or how to trade, a particular SB
swap?
Should the Commission propose a
timeframe for the CCO to submit his or
her annual compliance report for the
review by the Board? If so, what would
be an appropriate timeframe? Should
the Commission permit the SB SEF to
request an extension to file an annual
compliance report (e.g., due to
substantial, undue hardship)?
If a CCO reports to the senior officer
of the SB SEF rather than to the Board,
should the Commission permit the CCO
to submit his or her annual compliance
report for prior review to the senior
279 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(14)(C)(ii)(I) of the Exchange Act) and
proposed Rule 823(c)(2).
280 See Public Law 111–203, § 763(c) (adding
Section 3D(d)(14)(C)(ii)(II) of the Exchange Act) and
proposed Rule 823(c)(2).
281 See proposed Rule 823(d).
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officer rather than to the Board, in
addition to the Board, or only when the
SB SEF does not have a Board? Would
any of these alternatives lessen the
independence of the CCO in any way?
Should the Commission prohibit a SB
SEF’s Board from requiring its CCO to
make any changes to the annual
compliance report? If the Commission
permits the CCO to submit his or her
annual compliance report to the senior
officer for prior review, instead of to the
Board or in addition to the Board,
should a similar prohibition be applied
to the senior officer? Would such a
prohibition be necessary, in either case,
in light of the CCO’s statutory
requirement to certify that the
compliance report is accurate and
complete?
Is the Commission’s proposed
requirement that the CCO meet
separately with the independent
directors of a SB SEF appropriate? If
not, why not and what would be a better
alternative?
Are the Commission’s proposed
minimum disclosure requirements in
the CCO’s annual compliance report
appropriate? If not, why not and what
would be a better alternative? Should
the Commission require any other
disclosures in the CCO’s annual
compliance report?
Would keeping the compliance
reports confidential encourage the CCO
to be more forthcoming about sensitive
compliance issues or would it likely not
have any impact on the disclosure of
such issues? Are there any
disadvantages to keeping the CCO’s
compliance report confidential? How
could the Commission address any such
disadvantage? Would making the CCO’s
compliance report public be useful to
the public or other regulators?
What is the likely impact of the
Commission’s proposed rule on the SB
swap market? Would the proposed rule
potentially promote or impede the
establishment of SB SEFs? With respect
to entities that currently provide a
marketplace for trading SB swaps and
that may be required to register under
the Exchange Act, as amended by the
Dodd-Frank Act, how do current
practices compare to the practices that
the Commission proposes to require in
this rule? What would be the
incremental costs to potential SB SEFs
in connection with adding to or revising
their current practices in order to
implement the Commission’s proposed
rule?
How might the evolution of the SB
swaps market over time affect SB SEFs
and impact the Commission’s proposed
rule?
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C. Financial Reports
Section 3D(d)(14)(C)(ii)(I) of the
Exchange Act requires a compliance
report filed by the CCO to be
accompanied by each appropriate
financial report of the SB SEF that is
required to be furnished to the
Commission pursuant to Section 3D of
the Exchange Act. The Commission is
proposing Rule 823(e), which would set
forth the appropriate financial reports
that a SB SEF would be required to
include with its annual compliance
reports.282 Proposed Rule 823(e)(1)
would require the financial reports of
the SB SEF to: (1) Be a complete set of
financial statements of the SB SEF that
are prepared in accordance with U.S.
generally accepted accounting
principles for the most recent two fiscal
years of the SB SEF; (2) be audited in
accordance with standards of the Public
Company Accounting Oversight Board
(‘‘PCAOB’’) by a public accounting firm
that is registered with the PCAOB and
is qualified and independent in
accordance with Rule 2–01 of
Regulation S–X (17 CFR 210.2–01); (3)
include a report of the registered public
accounting firm that complies with
paragraphs (a) through (d) of Rule 2–02
of Regulation S–X (17 CFR 210.2–02);
and (iv) include the SB SEF’s
accounting policies and practices.283
Under Proposed Rule 823(e)(1)(v), if
the SB SEF’s financial statements
contain consolidated information of the
SB SEF’s subsidiaries, then the SB SEF’s
financial statements also would need to
provide condensed financial
information, in a financial statement
footnote, as to the financial position,
changes in financial position and results
of operations of the SB SEF, as of the
same dates and for the same periods for
which audited consolidated financial
statements are required.284 Such
financial information would need not be
presented in greater detail than is
required for condensed statements by
Rules 10–01(a)(2), (3), and (4) of
Regulation S–X. Detailed footnote
disclosure that would normally be
included with complete financial
statements may be omitted with the
exception of disclosures regarding
282 The financial statements required by these
proposed rules are the same as the requirements for
the annual financial statements that would be
required to be submitted pursuant to Exhibits F and
H of proposed Form SB SEF. See infra Section XXII.
To avoid submitting duplicative financial
statements, the CCO may represent in the annual
compliance report that the financial statements
required by proposed Rule 823(e) have been
submitted to the Commission as part of the annual
update of Form SB SEF required by proposed Rule
802(f).
283 See proposed Rule 823(e)(1).
284 See proposed Rule 823(e)(1)(v).
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material contingencies, long-term
obligations, and guarantees.
Descriptions of significant provisions of
the SB SEF’s long-term obligations,
mandatory dividend or redemption
requirements of redeemable stocks, and
guarantees of the SB SEF would also be
required to be provided along with a
five-year schedule of maturities of debt.
If the material contingencies, long-term
obligations, redeemable stock
requirements and guarantees of the SB
SEF have been separately disclosed in
the consolidated statements, then they
would not need to be repeated in this
schedule.285 This proposed requirement
is substantially similar to Rule 12–04 of
Regulation S–X, which pertains to
condensed financial information of
registrants.286
Under proposed Rule 823(e)(2), for SB
SEFs with affiliated entities (any
subsidiary in which the applicant has,
directly or indirectly, a 25% interest
and for every entity that has, directly or
indirectly, a 25% interest in the
applicant), for each affiliated entity, the
financial report would also be required
to include a complete set of
unconsolidated financial statements (in
English) for the latest two fiscal years
and such footnotes and other
disclosures as are necessary to avoid
rendering the financial statements
misleading.287 The Commission notes
that information on affiliated entities is
currently requested for national
securities exchanges 288 and is
important information for the
Commission to obtain because the
financial health of affiliated entities
could potentially have an impact on the
financial condition of the SB SEF.
Proposed Rule 823(e)(4) also would
require the financial statements to be
provided in XBRL, consistent with
Rules 405(a)(1), (a)(3), (b), (c), (d), and
(e) of Regulation S–T.289 Specifically,
information in the financial statements
would be required to be tagged 290 using
XBRL to allow the Commission to assess
and analyze effectively the SB SEF’s
financial and operational condition.
Finally, annual compliance reports
and financial reports filed pursuant to
proposed Rule 823 would be required to
be filed within 60 days after the end of
285 Id.
286 See
17 CFR 210.9–06.
proposed Rule 823(e)(2).
288 See Form 1 and instructions thereunder.
289 See 17 CFR 232.405 (imposing content, format,
submission and Web site posting requirements for
an interactive data file, as defined in Rule 11 of
Regulation S–T).
290 Tagging refers to labeling fields of data
electronically so that it can be searched
electronically by categories. See proposed Rule 800.
287 See
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the fiscal year covered by such
reports.291
The Commission notes that with
respect to its other registrants, the
Commission has required, at a
minimum, the proposed financial
information and in some instances,
significantly more information.292 The
Commission believes that it would be
important to obtain an audited annual
financial report covering two years from
each registered SB SEF to understand
the SB SEF’s financial and operational
condition, particularly because SB SEFs
are intended to play a pivotal role in
improving the transparency of the OTC
derivatives markets.293 Among other
things, the financial statements could
help the Commission evaluate whether
a SB SEF has adequate financial
resources to comply with its statutory
obligations or is having financial
difficulties. If a SB SEF ultimately
ceases doing business, it could create a
significant disruption in the OTC
derivatives market. The Commission
believes that the financial information
that it is seeking pertaining to the
affiliates of the SB SEF is relevant and
necessary as the financial condition of
the affiliates could have an immediate
or future impact on the condition of the
SB SEF.
The Commission requests comments
on all aspects of the proposed rules
relating to financial statements. Is the
Commission’s proposed rule regarding a
SB SEF’s financial report appropriate
and sufficiently clear? If not, why not
and what would be a better alternative?
Should the Commission permit a
financial report by a SB SEF that is a
foreign private issuer to be in
compliance with International Financial
Reporting Standards as an alternative to
GAAP? If so, why and what are the costs
and benefits to permitting this?
Is the Commission’s proposed rule
requiring financial reports to cover the
most recent two fiscal years of a SB SEF
appropriate? If not, should the lookback
timeframe be greater (e.g., the most
recent three fiscal years) or shorter (e.g.,
the most recent fiscal year)?
Is the Commission’s proposed
requirement regarding a SB SEF’s
condensed financial information
appropriate and sufficiently clear? If
not, why not and what would be a better
alternative?
Is the Commission’s proposed 60-day
timeframe for a SB SEF to file the
annual and financial report appropriate?
291 See
proposed Rule 823(f).
e.g., Rule 17a–5(d) under the Exchange
Act, 17 CFR 240.17a–5(d).
293 See Public Law 111–203, § 763(c) (adding
Section 3D of the Exchange Act).
292 See,
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If not, should the timeframe be shorter
or longer (e.g., 30 days or 90 days)?
Would a SB SEF’s financial report be
useful to the public or other regulators?
If so, explain.
Are the financial report requirements
relating to certain affiliates of SB SEFs
too broad or overly burdensome? Are
there any terms in the Commission’s
proposed rule regarding a SB SEF’s
financial report that need to be defined
or clarified? If so, which terms?
What is the likely impact of the
Commission’s proposed rule on the SB
swap market? Would the proposed rule
potentially promote or impede the
establishment of SB SEFs? With respect
to entities that currently provide a
marketplace for trading SB swaps and
that may be required to register under
the Dodd-Frank Act, how do current
practices compare to the practices that
the Commission proposes to require in
this rule? What would be the
incremental costs to potential SB SEFs
in connection with adding to or revising
their current practices in order to
implement the Commission’s proposed
rule?
How might the evolution of the SB
swaps market over time affect SB SEFs
and impact the Commission’s proposed
rule relating to the CCO?
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XXI. Registration of Security-Based
Swap Execution Facilities
As stated above, a primary goal of the
Dodd-Frank Act is to improve the
transparency and oversight of the OTC
derivatives market and to guard against
systemic risk in the trading of these
instruments. A key aim of the legislation
is to bring the trading of mandatorily
cleared OTC derivatives onto regulated
markets. In this regard, the Dodd-Frank
Act amends the Exchange Act to add
new Section 3D of the Exchange Act.294
Section 3D(a)(1) of the Exchange Act
provides that no person may operate a
facility for the trading or processing of
SB swaps, unless the facility is
registered as a SB SEF or as a national
securities exchange.295 Core Principle 1
for SB SEFs, as set forth in Section
3D(d)(1)(A) of the Exchange Act,296
provides that, to be registered and
maintain its registration as a SB SEF, a
SB SEF must comply with the 14 Core
Principles governing SB SEFs and any
requirement that the Commission may
impose by rule or regulation.297
The Commission’s rules currently
provide for registration frameworks for
294 See Public Law 111–203, § 763(c) (adding
Section 3D of the Exchange Act).
295 Id.
296 Id.
297 Id.
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two types of trading venues for
securities, namely national securities
exchange registration and broker-dealer
registration for ATSs. SB SEFs represent
an additional category of registered
entities under the Exchange Act and the
Commission preliminarily believes that
it would be appropriate to adopt a
registration process for SB SEFs that is
similar to the Commission’s existing
registration framework for national
securities exchanges. SB SEFs, like
national securities exchanges, have
regulatory obligations pursuant to the
Exchange Act.298 Also, pursuant to the
Dodd-Frank Act, both national
securities exchanges and SB SEFs
would be permitted to trade SB swaps,
although exchange trading of SB swaps
is governed by Section 6 of the
Exchange Act 299 and other provisions of
the Exchange Act relevant to SROs.300
The registration process for national
securities exchanges is already
established, but no process exists for SB
SEFs. Thus, the Commission is
proposing rules that would require an
application registration process for SB
SEFs and a form for such application,
which would be subject to approval by
the Commission.
A. Initial SB SEF Registration
1. Procedures for Registration
Proposed Rule 801(a) provides that an
application for the registration of a SB
SEF would need to be filed
electronically in a tagged data format 301
with the Commission on the new
proposed Form SB SEF, in accordance
with the instructions contained in the
Form SB SEF.302 Proposed Form SB SEF
also would be used by a SB SEF for
submitting all amendments to the Form
298 For example, pursuant to Section 3D(d)(2) of
the Exchange Act, Public Law 111–203, § 763(c), a
SB SEF is required to: (1) Establish and enforce
compliance with any rule established by it,
including (i) the terms and conditions of the SB
swaps traded or processed on or through the facility
and (ii) any limitation on access to the facility; (2)
establish and enforce trading, trade processing, and
participation rules that will deter abuses and have
the capacity to detect, investigate, and enforce those
rules, including means (i) to provide market
participants with impartial access to the market;
and (ii) to capture information that may be used in
establishing whether rule violations have occurred;
and (3) establish rules governing the operation of
the facility, including rules specifying trading
procedures to be used in entering and executing
orders traded or posted on the facility, including
block trades.
299 15 U.S.C. 78f.
300 See, e.g., Section 19 of the Exchange Act, 15
U.S.C. 78s.
301 Proposed Rule 800 would define the term ‘‘tag’’
or ‘‘tagged’’ to mean an identifier that highlights
specific information submitted to the Commission
and that is in the format required by the EDGAR
Filer Manual, as described in Rule 301 of
Regulation S–T, 17 CRF 232.301.
302 See proposed Rule 801(a).
PO 00000
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10997
SB SEF.303 The Commission’s proposal
contemplates the use of an online filing
system through which a SB SEF would
be able to file a completed Form SB
SEF, which would be available on the
Commission’s Web site and accessible
from any computer with Internet
access.304 Based on the widespread use
and availability of the Internet, the
Commission believes that filing Form
SB SEF in an electronic format would be
less burdensome and a more efficient
filing process for SB SEFs, the
Commission, and the public.
The Commission’s proposal requires a
Form SB SEF to be filed with the
Commission in a tagged data format. As
part of the Commission’s longstanding
efforts to increase transparency and the
usefulness of information, the
Commission has been implementing
data-tagging of information contained in
electronic filings to improve the
accuracy of financial information and
facilitate its analysis.305 Data becomes
303 See Section XXI.B infra for a discussion of the
amendments to Form SB SEF required in proposed
Rule 802. An application for registration or any
amendment thereto filed pursuant to Regulation SB
SEF would be considered a ‘‘report’’ filed with the
Commission for purposes of Sections 18(a) and
32(a) of the Exchange Act and the rules and
regulations thereunder. See proposed Rule 801(f).
Exchange Act Sections 18(a) and 32(a) set forth the
potential liability for a person who makes, or causes
to be made, any false or misleading statement in
any ‘‘report’’ filed with the Commission (e.g., Form
SDR). Specifically, Exchange Act Section 18(a)
provides, in part, that ‘‘[a]ny person who shall make
or cause to be made any statement in any * * *
report * * * which statement was at the time and
in the light of the circumstances under which it was
made false or misleading with respect to any
material fact, shall be liable to any person (not
knowing that such statement was false or
misleading) who, in reliance upon such statement,
shall have purchased or sold a security at a price
which was affected by such statement, for damages
caused by such reliance, unless the person sued
shall prove that he acted in good faith and had no
knowledge that such statement was false or
misleading.’’ 15 U.S.C. 78r(a). Exchange Act Section
32(a) provides, in part, that ‘‘[a]ny person who
willfully and knowingly makes, or causes to be
made, any statement in any * * * report * * *
which statement was false or misleading with
respect to any material fact, shall upon conviction
be fined not more than $5,000,000, or imprisoned
not more than 20 years, or both, except that when
such person is a person other than a natural person,
a fine not exceeding $25,000,000 may be imposed.’’
15 U.S.C. 78ff(a).
304 If the Commission adopts the rule as
proposed, it is possible that SB SEFs may be
required to file Form SB SEF in paper until such
time as an electronic filing system is operational
and capable of receiving the form. In such a case,
SB SEFs would be notified as soon as the electronic
system is operational to accept filings on Form SB
SEF.
305 See Regulation S–T, 17 CFR 232. See also
Securities Act Release No. 8891 (Feb. 6, 2008), 73
FR 10592 (Feb. 27, 2008); Securities Act Release No.
9002 (Jan. 30, 2009), 74 FR 6776 (Feb. 10, 2009);
Securities Act Release No. 9006 (Feb. 11, 2009), 74
FR 7748 (Feb. 19, 2009); Exchange Act Release No.
61050 (Nov. 23, 2009), 74 FR 63832 (Dec. 4, 2009);
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machine-readable when it is labeled, or
tagged, using a computer markup
language that can be processed by
software programs for analysis. Such
computer markup languages use
standard sets of definitions, or
‘‘taxonomies,’’ that translate text-based
information in Commission filings into
structured data that can be retrieved,
searched, and analyzed through
automated means. Requiring the
information to be tagged in a machinereadable format using a data standard
that is freely available, consistent, and
compatible with the tagged data formats
already in use for Commission filings
would enable the Commission to review
and analyze effectively Form SB SEF
submissions.
Proposed Rule 801(a) provides that a
registration application on Form SB SEF
must include information sufficient to
demonstrate compliance with the
Exchange Act and rules and regulations
thereunder. The proposed rule provides
that if a registration application is not
complete, the Commission will notify
the applicant that the application will
not be deemed to have been submitted
for purposes of the Commission’s
review.306 Pursuant to the proposed
rule, an application on Form SB SEF
would not be considered to be complete
unless an applicant has submitted, at a
minimum, the Execution Page and
Exhibits as required in proposed Form
SB SEF, and any other material that the
Commission may require, upon request,
in order to be able to determine whether
the applicant is able to comply with the
Exchange Act and rules and regulations
thereunder. Such other material may
include, but is not limited to,
information regarding the applicant’s
system test procedures, contingency or
disaster recovery plans, and the manner
in which the applicant would conduct
market and financial surveillance.
Proposed Rule 801(b) sets forth the SB
SEF registration application processes
for (i) applications received during the
initial implementation phase of
Regulation SB SEF, from the date of
Regulation SB SEF’s effectiveness up to
and including July 31, 2014 (‘‘initial
implementation period’’), and (ii)
applications received after the initial
implementation period (i.e., after July
31, 2014).
Proposed Rule 801(b)(1) would
provide that for applications for
registration as a SB SEF filed on Form
SB SEF with the Commission on or
before July 31, 2014, within 360 days of
the date of the filing of such application
Investment Company Release No. 29132 (Feb. 23,
2010), 75 FR 10060 (Mar. 4, 2010).
306 See Proposed Rule 801(a).
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(or within such longer period as to
which the applicant consents), the
Commission would be required to either
grant the registration or institute
proceedings to determine whether
registration should be denied. Such
proceedings would include notice of the
grounds for denial under consideration
and opportunity for hearing and would
be required to be concluded within 450
days after the date on which the
application for registration is furnished
to the Commission. At the conclusion of
such proceedings, the Commission, by
order, would be required to grant or
deny such registration. The Commission
would be able to extend the time for
conclusion of such proceedings for up
to 90 days if it finds good cause for such
extension and publishes its reasons for
so finding or for such longer period as
to which the applicant consents.
Proposed Rule 801(b)(2) would
provide that for applications for
registration as a SB SEF filed on Form
SB SEF with the Commission after July
31, 2014, within 180 days of the date of
filing of such application (or within
such longer period as to which the
applicant consents), the Commission
would be required to either grant the
registration or institute proceedings to
determine whether registration should
be denied. Such proceedings would
include notice of the grounds for denial
under consideration and opportunity for
hearing and would be required to be
concluded within 270 days after the
date on which the application for
registration is furnished to the
Commission. At the conclusion of such
proceedings, the Commission, by order,
would be required to grant or deny such
registration. The Commission would be
able to extend the time for conclusion
of such proceedings for up to 90 days
if it finds good cause for such extension
and publishes its reasons for so finding
or for such longer period as to which the
applicant consents.
The proposed rule further provides
that the Commission would grant the
registration of an applicant if it finds
that the requirements of the Exchange
Act and the rules and regulations
thereunder with respect to the applicant
are satisfied, and would deny such
registration if it does not make such
finding.307
The proposed process for SB SEF’s to
apply for initial registration would
provide a mechanism for an applicant to
demonstrate that it has the operational
and financial capability to operate as a
SB SEF and can comply with the
Federal securities laws and the rules
and regulations thereunder, including
307 See
PO 00000
proposed Rule 801(b)(3).
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the Core Principles, and would allow
the Commission to consider the
materials provided by the SB SEF and
to make an informed determination as to
whether the SB SEF complies with the
Exchange Act and the rules and
regulations thereunder. In addition, the
application process would allow the
Commission staff to ask questions and,
as needed, to require amendments or
changes to the application or additional
information to address legal and
regulatory concerns before approving an
application for registration. Further,
providing a process and timeframes for
the application process would provide
certainty to applicants as to the
procedural aspects of registering as a SB
SEF.
As no SB SEF is currently registered
with the Commission and a number of
entities have informed the Commission
that they may seek to register as a SB
SEF, the Commission contemplates
receiving a large volume of applications
for registration as a SB SEF within the
first 3 years following any adoption of
rules applicable to SB SEFs. The
proposed timeframes for the
Commission to review applications for
registration as a SB SEF set forth in
proposed Rule 801(b) recognize that, as
the Commission has limited resources,
the Commission may require an
extended period of time to review these
applications. For applications filed after
the initial implementation period, the
proposed timeframes for the
Commission to review applications for
registration as a SB SEF would be
decreased to mirror those set forth in
Section 19(a)(1) of the Exchange Act
applicable to the review of SRO
registration applications. The
Commission believes that the
timeframes for Commission review
during and after the initial
implementation period are appropriate
in light of the anticipated volume of
registration applications during the
initial implementation period. The
Commission also believes that the
temporary registration provisions of
proposed Rule 801(c), discussed below,
should work in combination with the
proposed review and approval process
to allow both the Commission and
entities seeking to register as SB SEFs to
comply with the provisions of the
Exchange Act, as amended by the DoddFrank Act, in a timely manner. In
addition, the Commission notes that the
process for the Commission to review
registration applications for SB SEFs
would be similar to the process for
reviewing applications of other
registrants by the Commission (e.g.,
national securities exchanges, national
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securities associations, and clearing
agencies).308
The Commission requests comments
on all aspects of the proposed rules
relating to the registration process for
SB SEFs. Is the Commission’s proposed
registration process appropriate and
sufficiently clear? If not, why not and
what would be a better alternative? Are
the timeframes in the proposed
registration process appropriate? If not,
why not and what would be more
appropriate timeframes? Should
timeframes be omitted from the process?
Should different time periods apply to
the Commission’s review of applications
during the initial implementation
period? If not, why not? Should the
Commission have greater flexibility to
extend the timeframes?
Are the proposed factors in
determining whether the Commission
should grant or deny an application for
registration appropriate and sufficiently
clear? If not, why not? Should the
Commission take into consideration any
other factors in determining whether to
grant or deny an application for
registration?
In order to form a more complete and
informed basis on which to determine
whether to grant, deny, or revoke a SB
SEF’s registration, the Commission is
considering whether to adopt a
requirement that a SB SEF file with the
Commission, as a condition of
registration or continued registration, a
review relating to the SB SEF’s
operational capacity and ability to meet
its regulatory obligations. The
Commission could require such a
review to be in the form of a report
conducted by the SB SEF, an
independent third party, or both. This
review could be required as an exhibit
to Form SB SEF at the time of
registration or as an amendment to Form
SB SEF at a later date (e.g., one year
after the registration becomes effective)
to allow the review to evaluate the SB
SEF’s capabilities after some operational
experience following registration.
Should the Commission require a SB
SEF to conduct or obtain a review
relating to the SB SEF’s operational
capacity and ability to meet its
regulatory obligations? If not, why not?
If so, how should the Commission
define the nature and scope of this
review? Should the Commission
identify a specific framework for SB
SEFs or independent third parties to
follow when conducting a review? If so,
308 See Section 19(a)(1) of the Exchange Act, 15
U.S.C. 78s(a)(1). In addition, the Commission notes
that the SEC Rules of Practice would be applicable
to the Commission’s review of registration
applications for SB SEFs. See 17 CFR 201.100, et
seq.
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what would the critical components of
the framework include? Are existing
frameworks available that are suitable
for this purpose and, if so, which ones
would be considered appropriate?
Should the review resemble a report,
audit, or something else?
Should the Commission require the
SB SEF, an independent third party, or
some other entity to conduct the
review? What are examples of such a
review? Should the Commission require
a review on a case-by-case basis or for
all SB SEFs? Should the Commission
require that the review be filed with the
Commission? If not, why not? If so,
should it be required to be filed with the
Commission as a condition of
registration pursuant to proposed Rule
801? If not, why not? When should the
Commission require the filing of any
review? Would conducting or obtaining
a review, or filing such review with the
Commission, impose impracticable
burdens and costs on SB SEFs? Please
explain the burdens and quantify the
costs of such a review.
If the Commission were to adopt a
rule requiring a review by an
independent third party, should the rule
specify some minimum standard of
review or the types of review that
should be performed? If so, what should
the standards be? Should there be
minimum qualification standards for the
independent third party? Are there any
particular types of third party service
providers that should not be permitted
to conduct a review of a SB SEF?
Should the Commission also require
that a SB SEF certify the accuracy of the
review and provide disclosure regarding
the nature of the review, findings, and
conclusions? To what extent should a
SB SEF be permitted to rely on a third
party that it hired to perform the
review? Should the Commission
condition the ability of a SB SEF to rely
on a third party’s review? Would a
review by an independent third party be
necessary in light of the CCO’s annual
compliance report or proposed Rule
822?
could grant such temporary registration
to the SB SEF, which temporary
registration would expire on the earlier
of: (1) The date that the Commission
grants or denies registration of the SB
SEF; or (2) the date that the Commission
rescinds the temporary registration of
the SB SEF. In considering whether to
grant a request for temporary
registration, the Commission would
review and consider the information
and materials provided by the SB SEF
in its registration application on Form
SB SEF that the Commission believes to
be relevant, including, but not limited
to: Whether the applicant’s trading
system satisfies the definition of a
‘‘security-based swap execution facility’’
in Section 3(a)(77) of the Exchange Act
and any Commission rules,
interpretations or guidelines regarding
such definition; 310 any access
requirements or limitations imposed by
the SB SEF; 311 the ownership and
voting structure of the SB SEF; 312 and
any certifications made by the SB SEF,
including with respect to its capacity to
function as a SB SEF and its compliance
with the Exchange Act and the rules and
regulations thereunder.313 In addition,
the Commission would expect that SB
SEFs registered on a temporary
registration basis demonstrate that they
have the capacity and resources to
comply with their regulatory obligations
on an ongoing basis as their business
evolves. After granting a temporary
registration to a SB SEF, the
Commission could rescind such
temporary registration if, upon further
review, the Commission found that the
applicant did not meet the requirements
for granting the registration of a SB SEF
set forth in proposed Rule 801(b)(3),314
or if the conditions for revoking or
canceling the registration of a SB SEF in
proposed Rules 804(d) and (e) under
Regulation SB SEF were met.315
The Dodd-Frank Act provides that,
unless otherwise provided, the
provisions of Title VII shall be effective
on the later of 360 days after the date
2. Temporary Registration
Proposed Rule 801(c) under
Regulation SB SEF would provide a
method for the Commission to grant
temporary registration to SB SEFs.309
Specifically, for any application for
registration as a SB SEF filed with the
Commission in accordance with the
provisions of proposed Rule 801(a) on
or before July 31, 2014 for which the SB
SEF indicates on the Execution Page
that it would like to be considered for
temporary registration, the Commission
SEF.
309 See
PO 00000
proposed Rule 801(c).
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310 See
Exhibit I, Item 1 of proposed Form SB
311 See Exhibit I, Item 2 and Exhibit L of proposed
Form SB SEF.
312 See Exhibit E of proposed Form SB SEF.
313 See Execution Page of proposed Form SB SEF.
314 See proposed Rule 801(b)(3).
315 See proposed Rule 804(c) and discussion infra
Section XXI.C. Proposed Rule 804(c) provides that
the Commission may, by order, cancel or revoke a
SB SEF’s registration if the Commission finds that
the SB SEF obtained its registration by making a
false or misleading statements with respect to any
material fact, is no longer in existence, has ceased
to do business in the capacity specified in its
application for registration, or has violated or failed
to comply with any provision of the Federal
securities laws and the rules and regulations
thereunder.
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of the enactment of Title VII or not less
than 60 days after the publication of
final rules or regulations implementing
such provisions.316 The Commission
preliminarily believes that the proposed
temporary registration process for SB
SEFs could serve as a useful tool during
the initial implementation period to
allow the Commission to temporarily
register an applicant as a SB SEF
following an initial review of a SB SEF’s
application for registration where it
believes such temporary registration is
appropriate. The Commission
preliminarily believes that this would
be beneficial in order to allow SB SEFs
to comply with the timeframe set forth
in the Dodd-Frank Act while still giving
the Commission sufficient time to
review an application more thoroughly
before granting a registration that is not
limited in duration. A SB SEF that is
temporarily registered with the
Commission would still need to comply
with all provisions of the Exchange Act
and the rules and regulations
thereunder, including Section 3D of the
Exchange Act and proposed Regulation
SB SEF.
The Commission requests comments
on all aspects of the proposed rules with
respect to temporary registration. Is the
Commission’s proposed rule regarding
temporary registration appropriate? If
not, why not? Is the Commission’s
proposed rule for temporary registration
sufficiently clear? If not, how can it be
clarified? What is the best method for a
SB SEF to request temporary registration
from the Commission? Is it appropriate
to include a check box on Form SB SEF
as proposed? Would a different method
be more appropriate? Are there more
appropriate methods other than
temporary registration that would allow
SB SEFs to meet the timelines for
compliance set forth in the Dodd-Frank
Act? If so, what are those methods?
As discussed above, the Commission
anticipates receiving a large volume of
applications for registration as a SB SEF
within the first 3 years following the
adoption of the proposed rules, and the
ability to grant temporary registration
during such initial implementation
period could be an important tool for
the Commission to allow SB SEFs to
comply with the provisions of the
Exchange Act, as amended by the DoddFrank Act, while providing the
Commission with additional time to
conduct a thorough review of the SB
SEF prior to granting permanent
registration. Should temporary
registration be limited to those
registration applications filed during the
initial implementation period as
316 See
317 See infra Section XXV for a discussion
regarding a potential phased-in approach.
Public Law 111–203, § 774.
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proposed? If not, why not? Should the
Commission be able to grant temporary
registration to any registration
application, regardless of when filed? If
temporary registration should be limited
to a specific time period, would a time
period other than the initial
implementation period be appropriate?
If so, what time period would be
appropriate?
Should temporary registration be
granted only after the filing of a
completed registration application?
Should there be a separate application
for temporary registration other than
proposed Form SB SEF? Should the
proposed rule specify the items the
Commission must review prior to
granting temporary registration? Should
temporary registration be granted by the
Commission only when certain
conditions are met? If so, what should
those conditions be? Should the
proposed rule specify the findings the
Commission must make in order to
grant a temporary registration? In what
instances should a temporary
registration be denied? For example,
should a temporary registration be
denied if a Form SB SEF is not
sufficiently complete? Are there any
reasons not specified in this release
upon which a temporary registration
should be rescinded?
Should the Commission be required
to grant temporary registration within a
specified time frame? If so, what time
period would be appropriate? Is it
appropriate to stay the time period for
Commission action on a registration
application if the Commission grants a
SB SEF temporary registration? If so,
should such stay be limited in duration?
What would be the appropriate time
period for such stay?
Would it be feasible for a SB SEF to
comply with Section 3D of the Exchange
Act and the rules and regulations
thereunder within 60 days after
publication of the final rules applicable
to SB SEFs? If not, which requirement(s)
would be difficult for a SB SEF to
comply with upon the effective date?
Should any requirement(s) be imposed
on an incremental basis or with a
phased-in approach? If so, what would
be an appropriate timeframe for such
requirement(s) to be met? 317
Is it essential that a SB SEF that is
temporarily registered be required to
comply with all provisions of the
Exchange Act and the rules and
regulations thereunder? If not, are there
specific requirements that the
Commission should consider not
requiring a SB SEF to comply with
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during a temporary registration period?
If so, what are such requirements and
for what reasons should the
Commission consider not requiring
them?
3. Non-Resident Persons and Control
Persons
Proposed Rule 801(d) would require
each SB SEF applying for registration
with the Commission to designate and
authorize on Form SB SEF an agent in
the United States, other than a
Commission member, official, or
employee, to accept notice or service of
process, pleadings, or other documents
in any action or proceedings brought
against the SB SEF to enforce the
Federal securities laws and the rules
and regulations thereunder.318
The Commission preliminarily
believes that before granting registration
to a SB SEF, it is appropriate to obtain
assurance that such person has an agent
for service of process in the United
States in order to facilitate proper
notification to the SB SEF of any actions
or proceedings the Commission may
wish to bring against such SB SEF.
Proposed Rule 801(e) would require
any person applying for registration on
Form SB SEF that is controlled by
another person 319 to certify on Form SB
SEF and provide an opinion of counsel
that any person that controls such
applicant will consent to and can, as a
matter of law, (1) provide the
Commission with prompt access to its
books and records, to the extent such
books and records are related to the
activities of the SB SEF; and (2) submit
to onsite inspection and examination by
representatives of the Commission with
respect to the activities of the SB
SEF.320 In addition, proposed Rule
802(c) would require any SB SEF
controlled by any other person to file an
amendment to Exhibit P on Form SB
SEF within 5 business days after any
changes in the legal or regulatory
framework of any person that controls
318 See
proposed Rule 801(d).
purposes of Regulation SB SEF, proposed
Rule 800 would define the term ‘‘control’’ or any
derivatives thereof as the direct or indirect
possession of the power to direct or cause the
direction of the management and policies of a
person, whether through the ownership of voting
securities, by contract, or otherwise. Proposed Rule
800 would provide that a person would be
presumed to control another person if the person:
(1) Is a director, general partner, or officer
exercising executive responsibility (or having
similar status or functions); (2) directly or indirectly
has the right to vote 25% or more of a class of
voting securities or has the power to sell or direct
the sale of 25% or more of a class of voting
securities; or (3) in the case of a partnership, has
the right to receive, upon dissolution, or has
contributed, 25% or more of the capital. See
Instructions to Form 1.
320 See proposed Rule 801(e).
319 For
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the SB SEF that would impact the
ability of or the manner in which any
such person consents to or provides the
Commission prompt access to its books
and records, to the extent such books
and records are related to the activities
of the SB SEF, or impacts the
Commission’s ability to inspect and
examine any such person with respect
to the activities of the SB SEF.321 Such
amendment would be required to
include a revised opinion of counsel
pursuant to Exhibit P describing how, as
a matter of law, any person that controls
the SB SEF would continue to meet its
obligations to consent to and provide
the Commission with prompt access to
its books and records, to the extent such
books and records are related to the
activities of the SB SEF, and to consent
to and be subject to onsite inspection
and examination by representatives of
the Commission with respect to the
activities of the SB SEF under such new
legal or regulatory framework.322 The
Commission emphasizes that the
proposed provisions would be
applicable only to those books and
records or activities that are related to
the activities of the SB SEF. The
Commission believes that it is important
for the SB SEF to have access to books
and records that are related to the
activities of a SB SEF and to have
examination and inspection authority
with respect to activities of a SB SEF,
in order for a SB SEF to be able to
effectively carry out its regulatory
responsibilities. Similarly, the
Commission believes that it is important
for the Commission to have access to
those books and records and such
examination and inspection authority so
that it may effectively conduct its
oversight and regulatory responsibilities
under the Exchange Act.
Proposed Rule 801(f) would require
that any non-resident person 323 seeking
to register as a SB SEF certify on Form
SB SEF and provide an opinion of
counsel that the SB SEF can, as a matter
of law, (1) provide the Commission with
prompt access to the books and records
of such SB SEF and (2) submit to onsite
inspection and examination by
representatives of the Commission.324
321 See
proposed Rule 802(c).
jdjones on DSKHWCL6B1PROD with PROPOSALS2
322 Id.
323 The term ‘‘non-resident person’’ would be
defined to mean: (1) In the case of an individual,
one who resides in or has his principal place of
business in any place not in the United States; (2)
in the case of a corporation, one incorporated in or
having its principal place of business in any place
not in the United States; and (3) in the case of a
partnership or other unincorporated organization or
association, one having its principal place of
business in any place not in the United States. See
proposed Rule 800.
324 See proposed Rule 801(f).
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The Commission preliminarily
believes that before granting registration
to a non-resident SB SEF, it is
appropriate to obtain assurance that
such person is legally permitted to
provide the Commission with prompt
access to its books and records and to
be subject to inspection and
examination by the Commission.
Similarly, the Commission preliminarily
believes that before granting registration
to a SB SEF controlled by another
person, it is appropriate to obtain
assurance that the person controlling
such SB SEF is legally permitted to
provide the Commission with prompt
access to its books and records related
to the SB SEF and to be subject to
inspection and examination by the
Commission with respect to activities of
the SB SEF. The Commission
preliminarily believes that the
certifications and opinions of counsel
required by proposed Rules 801(e) and
(f) would be important to confirm that
each non-resident SB SEF or control
person of a SB SEF has taken the
necessary steps to be in the position to
provide the Commission with prompt
access to its books and records and to
be subject to inspection and
examination by the Commission.
Certain foreign jurisdictions may have
laws that complicate the ability of
financial institutions, such as SB SEFs
located in their jurisdictions, from
sharing or transferring certain
information, including personal
financial data of individuals that
financial institutions come to possess
from third parties (i.e., personal data
relating to the identity of market
participants or their customers).
Providing an opinion of counsel that the
SB SEF can provide prompt access to
books and records and can be subject to
inspection and examination would
allow the Commission to better evaluate
a SB SEF’s ability to meet the
requirements of registration and ongoing
supervision. In addition, certain persons
controlling a SB SEF may not be under
the jurisdiction of the Commission or
may be non-resident persons. Providing
an opinion of counsel that such control
persons have consented to and can
provide prompt access to books and
records and be subject to inspection and
examination would help the
Commission to monitor and oversee
individuals that control SB SEFs in
cases where such individuals may not
otherwise subject to the jurisdiction of
the Commission or may be subject to
foreign jurisdictions. Failure to make
these certifications or provide an
opinion of counsel may be a basis for
the Commission to deny an application
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11001
for registration. Similarly, if a registered
non-resident SB SEF or a registered SB
SEF that is controlled by another person
becomes unable to comply with these
certifications or provide such opinions
of counsel, then this may be a basis for
the Commission to revoke the SB SEF’s
registration.325
The Commission requests comments
on all aspects of the proposed rules
relating to non-resident persons and
applicants controlled by other persons
seeking to register as SB SEFs. Is the
Commission’s proposed rule regarding
service of process appropriate and
sufficiently clear? If not, why not and
what would be a better alternative?
Should the Commission impose any
minimum requirements on the agent
whom a person designates to accept any
notice or request for service of process?
Are there any factors that the
Commission should take into
consideration to help provide effective
service of process on a non-resident
person or a person controlled by another
person applying for registration as a SB
SEF?
If a non-resident SB SEF that is
registered in a similar capacity in a
foreign jurisdiction seeks to apply for
registration as a SB SEF with the
Commission, should the registration
process for the non-resident SB SEF be
any different than the Commission’s
proposed registration process? For
example, should the registration process
incorporate additional registration
requirements for such non-resident SB
SEF? Should the Commission consider
any other factors relating to a nonresident SB SEF with respect to the
Commission’s registration rules or in
general?
Are there any factors that the
Commission should take into
consideration to ensure that a nonresident person seeking to register as a
SB SEF can, in compliance with
applicable foreign laws, provide the
Commission with access to its books
and records and can submit to
inspection and examination by the
Commission? Should such a nonresident person be required to provide
any additional information or
documents on proposed Form SB SEF to
establish its ability to comply with the
Federal securities laws and the rules
and regulations thereunder?
Are there any factors that the
Commission should take into
consideration to ensure that a person
controlling a person seeking to register
as a SB SEF can provide the
Commission with access to its books
325 See proposed Rule 804(d) and discussion infra
Section XXI.C.
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and records and can submit to
inspection and examination by the
Commission? Should such control
persons or the SB SEFs which they
control be required to provide any
additional information or documents on
proposed Form SB SEF to establish the
ability of the SB SEF to comply with the
Federal securities laws and the rules
and regulations thereunder? For
example, should a SB SEF controlled by
another person be required to provide
on proposed Form SB SEF a copy of the
document evidencing the consent by the
controlling person to the books and
records and examination and
inspections requirements contained in
proposed Rule 801(e)?
B. Proposed Filing Requirements for
Maintaining SB SEF Registration
Proposed Rule 802 under Regulation
SB SEF would require SB SEFs
registered with the Commission to
submit certain amendments and updates
to Form SB SEF. Proposed Rule 803
under Regulation SB SEF would require
SB SEFs registered with the
Commission to file certain supplemental
information with respect to the trading
of SB swaps.
Proposed Rule 802(a) would require a
SB SEF to file an amendment to its
Form SB SEF promptly, but in no event
later than five business days, after
discovering that any information filed
on Form SB SEF, any statement therein,
or any exhibit or amendment thereto,
was inaccurate when filed in order to
correct such inaccuracies.
Proposed Rule 802(b) would require a
registered SB SEF to file an amendment
on Form SB SEF with the Commission
within five business days after any
action is taken that renders inaccurate,
or that causes to be incomplete, any
information filed on the Execution Page
of the SB SEF’s Form SB SEF, or any
amendment thereto, or any information
filed as part of Exhibits C, E, G, or N,326
or any amendments thereto.327 Any
such amendments must set forth the
nature and effective date of the action
taken, provide any new information,
and correct any information rendered
inaccurate. Proposed Rule 802(c) would
require a SB SEF that is under the
control of any other person to file an
amendment to Exhibit P to its Form SB
SEF within 5 business days after any
changes in the legal or regulatory
framework of any person that controls
326 These exhibits pertain to the list of officers,
governors and committees of the SB SEF (Exhibit
C), ownership of the SB SEF (Exhibit E), certain
material operating agreements (Exhibit G), and
criteria for determining what securities may be
traded (Exhibit N).
327 See proposed Rule 802(b).
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the SB SEF that would impact the
ability of or the manner in which any
such person consents to or provides the
Commission prompt access to its books
and records, to the extent such books
and records are related to the activities
of the SB SEF, or impacts the
Commission’s ability to inspect and
examine any such person with respect
to the activities of the SB SEF.328 Such
amendment would be required to
include a revised opinion of counsel
pursuant to Exhibit P describing how, as
a matter of law, any person that controls
the SB SEF will continue to meet its
obligations to consent to and provide
the Commission with prompt access to
its books and records, to the extent such
books and records are related to the
activities of the SB SEF, and to consent
to and be subject to onsite inspection
and examination by representatives of
the Commission under such new legal
or regulatory framework.329 Proposed
Rule 802(d) would require non-resident
SB SEFs to file an amendment to Exhibit
P to their Form SB SEF within five
business days after any changes in legal
or regulatory framework that would
impact the SB SEF’s ability to or the
manner in which it provides the
Commission prompt access to its books
and records or impacts the
Commission’s ability to inspect and
examine the SB SEF.330 Such
amendment would be required to
include a revised opinion of counsel
describing how, as a matter of law, the
entity will continue to: (1) meet its
obligations to provide the Commission
with prompt access to its books and
records and (2) be subject to onsite
inspection and examination by
representatives of the Commission
under such new legal or regulatory
framework.331
The Commission preliminarily
believes that it is appropriate to require
the updating of only the Execution Page
and Exhibits C, E, G, and N to proposed
Form SB SEF on a continuous basis. The
exhibits required to be updated
pursuant to proposed Rule 802(b) are
substantially similar to the exhibits to
Form 1 required to be updated on a
continuous basis by national securities
exchanges pursuant to Rule 6a–2 under
the Exchange Act.332 The Commission
believes that it is important for the
Commission to receive updates to the
information included in the enumerated
exhibits, namely information regarding
a SB SEF’s governance, ownership,
328 See
proposed Rule 802(c).
329 Id.
330 See
proposed Rule 802(d).
331 Id.
332 17
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operations, and criteria used to
determine the SB swaps that may be
traded on the SB SEF, on a real-time
basis to allow the Commission to
effectively oversee SB SEFs to ensure
compliance with the Exchange Act. The
Commission also believes that it is
important for the Commission to receive
updated opinions of counsel under
Exhibit P pursuant to proposed Rules
802(c) and (d) to ensure that the
Commission can oversee and ensure
compliance with the Exchange Act of
non-resident SB SEFs and control
persons of SB SEFs. Although the
comparable amendments to the Form 1
for national securities exchanges are
required to be filed within 10 days
pursuant to Rule 6a–2, given the
improvements in technology since the
adoption of Rule 6a–2, the Commission
preliminarily believes that five business
days should provide SB SEFs sufficient
time to prepare and file a Form SB SEF
amendment. In addition, the proposed
time frame would ensure that the
relevant exhibits remain timely and that
the Commission has up-to-date
information in a timely manner.
Proposed Rule 802(e) also would
provide that if the number of changes to
be reported in an amendment, or the
number of amendments filed, are so
great that the purpose of clarity will be
promoted by the filing of a new
complete Form SB SEF and exhibits, a
SB SEF may elect to, or upon request of
any representative of the Commission
shall, file as an amendment a complete
new Form SB SEF together with all
exhibits thereto.
Under proposed Rule 802(f), a
registered SB SEF would be required to
update its Form SB SEF on an annual
basis. Specifically, within 60 days of the
end of its fiscal year, a registered SB
SEF would be required to file an
amendment to its Form SB SEF to
update the Form SB SEF in its
entirety.333 Each exhibit to the amended
Form SB SEF would be required to be
up-to-date as of the end of the latest
fiscal year of the SB SEF.334 The
purpose of this requirement is to
provide the Commission and the public
with updated information on all the
exhibits required in the Form SB SEF,
particularly those exhibits that are not
otherwise required to be updated under
proposed Rules 802(b), (c) and (d), on an
annual basis. The Commission
preliminarily believes that a 60-day
filing deadline would give SB SEFs
sufficient time in which to file an
annual amendment to Form SB SEF.
333 See
CFR 240.6a–2.
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Proposed Rule 803 would require a
registered SB SEF to file with the
Commission any material relating to the
trading of SB swaps (including notices,
circulars, bulletins, lists, and
periodicals) issued or made generally
available to SB SEF participants. A SB
SEF would be required to file such
supplementary material with the
Commission upon issuing or making the
material available to SB SEF
participants.335 However, if such
information is available continuously on
an Internet Web site controlled by the
SB SEF, the SB SEF may indicate to the
Commission the location of the Web site
and certify that such information is
accurate instead of filing with the
Commission.336
The Commission preliminarily
believes that the amendments required
by proposed Rule 802 and the
supplemental material required by
proposed Rule 803 would provide a
useful tool for the Commission to carry
out its oversight of SB SEFs and their
compliance with the Exchange Act and
the rules and regulations thereunder.
Requiring SB SEFs to provide consistent
and up-to-date disclosures about
significant changes in their governance,
ownership, operations and criteria used
to determine the SB swaps that may be
traded on the SB SEF, and requiring
non-resident SB SEFs and SB SEFs
controlled by another person to update
the opinion of counsel whenever
changes in legal or regulatory
framework would impact their ability to
comply with proposed Rules 801(e) and
(f), respectively, pursuant to proposed
Rules 802(b), (c) and (d) would provide
the Commission with important
information in monitoring whether a SB
SEF is in compliance with the Core
Principles throughout its fiscal year.
Requiring a SB SEF to update its Form
SB SEF and the exhibits thereto on an
annual basis pursuant to proposed Rule
802(f) would provide updated
information on the parts of the Form SB
SEF that are not required to be updated
within five business days and thus
enable the Commission to have a full
picture of the changes at a SB SEF on
a year-to-year basis. Requiring SB SEFs
to provide to the Commission material
made available to SB SEF participants
regarding the trading of SB swaps
pursuant to proposed Rule 803 would
provide the Commission with important
information to monitor the trading of SB
swaps on the SB SEF and whether such
trading is being conducted in
compliance with the Federal securities
335 See
336 See
proposed Rule 803(a).
proposed Rule 803(b).
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laws and the rules and regulations
thereunder.
Providing the Commission with the
necessary information it needs to
effectively regulate SB SEFs and the
trading of SB swaps on SB SEFs is
especially important because SB SEFs
would be new entities and SB SEFs, and
the trading of SB swaps on SB SEFs,
would be newly regulated by the
Commission. The operation of SB SEFs
and trading of SB swaps on SB SEFs is
likely to change as the regulated market
for SB swaps and the trading of SB
swaps on trading venues regulated by
the Commission continue to develop.
The proposed amendments to Form SB
SEF, including the proposed annual
update, and the proposed supplemental
information filing, would help the
Commission keep abreast of the changes
that may occur with respect to the
trading of SB swaps on SB SEFs, and the
operation and ownership of SB SEFs,
and thus should enable the Commission
to more effectively regulate the trading
of SB swaps and SB SEFs.
The Commission requests comments
on all aspects of the proposed rules
relating to required amendments and
updates to proposed Form SB SEF and
the required filing of supplemental
information. Are the Commission’s
proposed rules appropriate and
sufficiently clear? If not, why not and
what would be a better alternative? Are
the exhibits to proposed Form SB SEF
that would require prompt updating
pursuant to proposed Rule 802(b)
appropriate? Are there other exhibits to
Form SB SEF that should be updated on
a continuous basis? Are there exhibits
that should not be updated on a
continuous basis? Is it appropriate to
require SB SEF’s to update their
registration statement annually? Would
a different time period be more
appropriate? What would be the cost to
SB SEFs of the proposed rules requiring
amendments?
Is the material required to be filed
pursuant to proposed Rule 803
appropriate? Is there other information
that the Commission should require to
be filed with respect to the trading of SB
swaps? Is there information that the
Commission should not request? Should
the Commission request any
information at all? Is it appropriate, in
lieu of requiring a SB SEF to file
supplemental material with the
Commission pursuant to proposed Rule
803(a), to allow the SB SEF to direct the
Commission to a Web site where such
information is located and certify that
the information is accurate pursuant to
proposed Rule 803(b)? Should the
Commission make such an allowance
for SB SEFs with respect to required
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11003
amendments pursuant to proposed Rule
802?
C. Withdrawal or Revocation of
Registration of SB SEF
Proposed Rule 804 under Regulation
SB SEF would permit a registered SB
SEF to withdraw from registration by
filing a written notice of withdrawal
with the Commission, which notice
must designate a person associated with
the SB SEF to serve as the custodian of
the SB SEF’s books and records.337 Prior
to filing a notice of withdrawal, a SB
SEF would be required to file an
amended Form SB SEF to update any
inaccurate information.338 A notice of
withdrawal from registration filed by a
SB SEF would become effective on the
60th day after the filing thereof with the
Commission, or within such longer
period of time as to which such SB SEF
consents or which the Commission, by
order, may determine as necessary or
appropriate in the public interest or for
the protection of investors, or within
such shorter period of time as the
Commission may determine.339
The Commission preliminarily
believes that is appropriate to provide
for a mechanism for SB SEFs to
withdraw from registration. In addition,
the Commission preliminarily believes
that 60 days following notice of
withdrawal is an appropriate effective
date for any SB SEF registration
withdrawal. Providing a period between
filing of notice of withdrawal and the
effective date of any withdrawal should
enable the Commission to allow a SB
SEF to withdraw its registration with
the Commission and cease operating as
a SB SEF and market participants to
react to any such withdrawal without
dislocating the SB swap market or
causing any other unintended
consequences with respect to the
trading of SB swaps.
Proposed Rule 804(d) would provide
that the Commission may, by order,
revoke the registration of a registered SB
SEF if the Commission finds, on the
record after notice and opportunity for
hearing, that the SB SEF obtained its
registration by making false or
misleading statements with respect to
any material fact or has violated or
failed to comply with any provision of
the Federal securities laws or the rules
337 See proposed Rule 804(a). A notice of
withdrawal filed pursuant to proposed Rule 804
would be considered a ‘‘report’’ filed with the
Commission for purposes of Sections 18(a) and
32(a) of the Exchange Act and the rules and
regulations thereunder. See proposed Rule 804(c).
See also supra note 303.
338 See proposed Rule 804(a).
339 See proposed Rule 804(b).
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and regulations thereunder.340 Pending
a final determination as to whether the
registration of a SB SEF shall be
revoked, the Commission may, by order,
suspend the registration of the SB SEF
if such suspension appears to the
Commission, after notice and
opportunity for hearing, to be necessary
or appropriate in the public interest or
for the protection of investors.341 The
Commission believes that it is
appropriate to provide a mechanism for
the Commission to revoke a SB SEF’s
registration if a SB SEF obtained its
registration unlawfully or has violated
the Federal securities laws or rules or
regulations thereunder.
Proposed Rule 804(e) would provide
that the Commission may, by order,
cancel the registration of a SB SEF if the
Commission finds that the SB SEF is no
longer in existence or has ceased to do
business in the capacity specified in its
application for registration.342 The
Commission believes that it is
appropriate to provide a mechanism for
the Commission to cancel a SB SEF’s
registration if a SB SEF is no longer in
existence or has ceased to do business
in the manner set forth in the
registration application.
The Commission requests comments
on all aspects of the proposed rule
relating to withdrawal or revocation of
registration. Is the Commission’s
proposed rule regarding the withdrawal,
revocation and cancellation of a SB
SEF’s registration appropriate and
sufficiently clear? If not, why not and
what would be a better alternative?
Should a SB SEF be required to file an
amendment on Form SB SEF before
withdrawing its registration? If not, why
not and what would be a better
alternative? Should the Commission
require a SB SEF to file a form to request
withdrawal of registration? If so, why
and what should the SB SEF be required
to disclose in the form? Should this
form be required in lieu of or in
addition to an amendment on Form SB
SEF? Is the proposed effective date of 60
days from the filing of the notice of
withdrawal with the Commission
appropriate? If not, would an earlier or
later date be more appropriate? Are the
findings required by the Commission to
revoke, suspend or cancel a SB SEF’s
registration appropriate? Are any other
instances not specified in this proposed
rule in which the Commission should
revoke, suspend or cancel a SB SEF’s
registration?
340 See
proposed Rule 804(d).
341 Id.
342 See
proposed Rule 804(e).
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XXII. New Proposed Form SB SEF for
the Registration of Security-Based
Swap Execution Facilities
The Commission is proposing that
applications for registration as a SB SEF,
and amendments to such registration, be
submitted on new proposed Form SB
SEF. Proposed Form SB SEF is similar
in style and format to the existing Form
1 for registration as a national securities
exchange. Proposed Form SB SEF,
however, is tailored to solicit
information that the Commission
believes would be useful for considering
whether a SB SEF meets the
requirements for registration in Section
3D of the Exchange Act, including
whether the SB SEF can comply with
the Core Principles contained in Section
3D(d) of the Exchange Act, and the rules
thereunder, including proposed
Regulation SB SEF.
The Execution Page to proposed Form
SB SEF would require an applicant to
provide certain identifying information.
The Execution Page would include a
box for the applicant to indicate
whether the applicant was seeking
consideration for temporary registration
pursuant to proposed Rule 801(c). In
addition, the Execution Page would
require the applicant to designate and
authorize an individual, other than a
Commission official, for service of
process, pleadings, or other documents
in connection with any action or
proceeding against the applicant, as
required by proposed Rule 801(d).
The Execution Page to proposed Form
SB SEF further would require the
applicant to certify that the statements
contained therein are current, true and
complete, and that the applicant is
currently in compliance with, and is
currently operating its business in a
manner consistent with, the Exchange
Act and all rules and regulations
thereunder. The applicant also would be
required to certify that it is so organized,
and has the capacity, to assure the
prompt, accurate, and reliable
performance of its functions as a SB
SEF, and that it has the capacity to
fulfill its obligations under all
international information-sharing
agreements to which it is a party. In
addition, the applicant would be
required to certify that any person that
controls the applicant has consented to
and can, as a matter of law, (1) provide
the Commission with prompt access to
its books and records, to the extent such
books and records are related to the
activities of the security-based swap
execution facility; and (2) submit to
onsite inspection and examination by
representatives of the Commission with
respect to the activities of the SB SEF,
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as required by proposed Rule 801(e).
Finally, the applicant would be required
to certify that, if it is a non-resident
person, it can, as a matter of law, (1)
provide the Commission with prompt
access to its books and records and (2)
submit to an onsite inspection and
examination by representatives of the
Commission, as required by proposed
Rule 801(f).
Proposed Exhibit A to Form SB SEF
would require the applicant to provide
a copy of the governing documents of
the applicant, including but not limited
to a corporate charter, articles of
incorporation or association, limited
liability company agreement, or
partnership agreement, with all
subsequent amendments, and by-laws or
corresponding rules or instruments,
whatever the name, of the applicant.
This information is intended to be used
to assess the applicant’s compliance
with Core Principle 1 (Compliance with
Core Principles), Core Principle 2
(Compliance with Rules), and Core
Principle 11 (Conflicts of Interest). The
information provided in this proposed
exhibit is designed to allow the
Commission to confirm that the
applicant has the appropriate authority
to operate the trading system and to
regulate its participants, and that the
ownership structure is consistent with
the Exchange Act and the rules and
regulations thereunder relating to the
governance of SB SEFs.
Proposed Exhibit B to Form SB SEF
would require the applicant to provide
a copy of all written rulings, settled
practices having the effect of rules,
stated policies and interpretations of the
Board or other committee of the
applicant in respect of any provisions of
the governing documents, rules or
trading practices of the applicant which
are not included in Exhibit A. This
information required in proposed
Exhibit B would be critical to the
Commission’s ability to assess the
applicant’s compliance with all of the
Core Principles that require SB SEFs to
establish and enforce rules relating to a
variety of matters (e.g., Core Principle 2
(Compliance with Rules); Core Principle
4 (Monitoring of Trade and Trade
Processing); Core Principle 5 (Ability to
Obtain Information); Core Principle 6
(Financial Integrity of Transactions);
Core Principle 7 (Emergency Authority);
Core Principle 10 (Antitrust
Considerations); and Core Principle 11
(Conflicts of Interest)). Consequently,
the Commission believes that such
information is necessary for the
Commission to confirm that the
applicant’s rules meet the requirements
of those Core Principles and of the
Exchange Act and the rules and
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regulations thereunder, including
proposed Regulation SB SEF.
Proposed Exhibit C to Form SB SEF
would require the applicant to provide
a list of the officers and directors of the
SB SEF, or persons performing similar
functions, who presently hold or have
held their offices or positions during the
previous year, and a list of all standing
committees and their members,
indicating the following for each: their
name and title; date of commencement
and termination of term of office or
position; the type of business in which
each is primarily engaged (e.g., SB swap
dealer, major SB swap participant, interdealer broker, end-user etc.); and, if
such person is a director, whether such
director qualifies as an ‘‘independent
director’’ pursuant to proposed Rule 800
under Regulation SB SEF and whether
such director is a member of any
standing committees or committees that
have the authority to act on behalf of the
Board or the nominating committee. The
Commission believes that mandating SB
SEFs to disclose this information should
better inform the Commission about SB
SEF officers, the persons responsible for
the day-to-day operation of the SB SEF,
and SB SEF directors, the persons that
comprise the Board. In addition, the
Commission believes that the
information required in Exhibit C is
necessary for the Commission to
determine the applicant’s compliance
with the governance requirements of
Core Principle 11 (Conflicts of Interest)
and the proposed rules under
Regulation SB SEF relating thereto, and
would aid the Commission in
ascertaining any affiliations and
relationships that would preclude
directors from being considered
independent.
Proposed Exhibit D to Form SB SEF
would require an applicant to provide a
chart or charts illustrating fully the
internal organizational structure of the
SB SEF. The charts would need to
indicate the internal divisions or
departments, the responsibilities of each
such division or department, and the
reporting structure of each division or
department, including its oversight by
committees or their equivalent. The
charts should be sufficiently detailed to
permit the Commission and the public
to gain a complete understanding of the
manner in which the SB SEF is
structured and should be able to provide
the Commission with an overview of the
entity’s organizational structure. The
Commission preliminarily believes that
disclosure of these organizational charts
would be an important means by which
to provide the Commission with a better
understanding of the governance
structure of the SB SEF and would
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enable the Commission to determine the
applicant’s compliance with Core
Principle 11 (Conflicts of Interest) and
the proposed rules under Regulation SB
SEF relating thereto. In addition, the
Commission preliminary believes that
these organizational charts would
inform the Commission’s view on the
ability of the SB SEF to carry out its
regulatory and oversight responsibilities
with respect to its markets.
Proposed Exhibit E to Form SB SEF
would require an applicant to provide
certain ownership information.
Specifically, Exhibit E would require a
list of each person that has a direct or
indirect ownership or voting interest in
the SB SEF that equals or exceeds 5%,
and a list of all related persons of such
persons that have an ownership or
voting interest in the SB SEF or that are
SB SEF participants. For each of the
persons and related persons listed in the
Exhibit E, an applicant would also need
to provide such person’s name, title or
legal status and whether such person is
a SB SEF participant; the date such title,
status or participation in a SB SEF was
acquired or commenced; the percentage
ownership interest held; the type of
ownership held, including whether
such ownership interest qualifies as
‘‘beneficial ownership’’ under proposed
Rule 800 or is entitled to vote; the
percentage of voting interest held; and
the type of voting interest held. The
purpose of this information is to provide
the Commission, participants of the SB
SEF, and investors with detailed
information about which persons or
groups of persons potentially could
control or influence the SB SEF. In
addition, the information proposed to be
required by Exhibit E relating to
ownership of a SB SEF would provide
the Commission, as well as participants
in the SB SEF, with up-to-date
information regarding a change or
potential change in control of a SB SEF.
The Commission expects that the
disclosure of information concerning
persons that hold ownership or voting
interests of more than 5% of a SB SEF
should help the Commission more
effectively oversee and regulate SB
SEFs, especially if the SB SEF is owned
or controlled by persons who are not
regulated by the Commission.
Proposed Exhibit F to Form SB SEF
would require an applicant to provide,
for the latest two fiscal years of the
applicant, audited financial statements,
which would be prepared in accordance
with the same requirements for the
preparation of financial statements
submitted pursuant to the proposed
rules under Regulation SB SEF relating
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to Core Principle 14.343 The
Commission preliminarily believes that
this information would enable the
Commission to assess the applicant’s
compliance with Core Principle 12
(Financial Resources) and the proposed
rules under Regulation SB SEF relating
thereto. In addition, the Commission
believes that disclosure of audited
financial statements would permit the
Commission to better understand the
financial resources and decisions of SB
SEFs. The Commission preliminarily
believes that these statements should be
submitted by SB SEFs pursuant to Form
SB SEF in addition to the rules relating
to Core Principle 14, because documents
submitted pursuant to Form SB SEF will
be disclosed to the public. This would
allow the public to be informed about
the financial position of these SB SEFs
and should facilitate investor
confidence in the markets. In addition,
because Exhibit F and the rules relating
to Core Principle 14 have the same
requirements with respect to the
preparation and presentation of such
financial statements, this should not
create an additional burden on SB SEFs.
Proposed Exhibit G to Form SB SEF
would require an applicant to provide
an executed or executable copy of any
agreements or contracts entered into or
to be entered into by the applicant, or
a subsidiary or an affiliate of the
applicant, including partnership or
limited liability company, third-party
regulatory service, or other agreements
relating to the operation of an electronic
trading system to be used to effect
transactions on the SB SEF (‘‘System’’)
that enable or empower the applicant to
comply with Section 3D of the Exchange
Act. The Commission believes that the
provision of these material agreements
would be useful for the Commission and
the public. They would enable the
Commission to understand how and
through what parties the System is
being operated and to have a better
understanding of the arrangements that
the SB SEF has entered into to meet its
obligations under the Exchange Act. The
information required in this exhibit
would allow the Commission generally
to ascertain the applicant’s compliance
with all Core Principles.
Proposed Exhibit H to Form SB SEF
would require an applicant to provide
unconsolidated financial statements (in
English) for the latest two fiscal years
for every subsidiary in which the
applicant has, directly or indirectly, a
25% interest and every entity that has,
directly or indirectly, a 25% interest in
343 See supra Section XX.C for a discussion of the
financial statement requirements pursuant to Core
Principle 14. See also proposed Rule 823.
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the applicant, which would be prepared
in accordance with the same
requirements for the preparation of
financial statements submitted pursuant
to the proposed rules under Regulation
SB SEF relating to Core Principle 14.344
Such financial statements would be
required to contain such footnotes and
other disclosures as are necessary to
avoid rendering the financial statements
misleading, and be provided in
eXtensible Business Reporting Language
consistent with Rules 405(a)(1), (a)(3),
(b), (c), (d), and (e) of Regulation S–T.345
In addition to the foregoing, for all other
affiliates of the applicant not listed,
such information would be required to
be made available to the Commission
upon request.346 The Commission
preliminarily believes that the
information required in this exhibit
would allow the Commission to assess
the SB SEF’s compliance with Core
Principle 12 (Financial Resources) and
the proposed rules under Regulation SB
SEF relating thereto. In addition, the
Commission believes that the required
financial statement would enable the
Commission to better understand the
financial resources and decisions of SB
SEFs and their affiliates. Finally, while
evaluating an applicant’s registration
application on Form SB SEF, the
Commission may determine that
additional affiliates of the applicant that
do not meet the 25% threshold may be
material to the applicant’s operation as
a SB SEF. Therefore, the Commission
preliminarily believes that it is
appropriate to require an applicant to
provide financial information regarding
other affiliates upon request of the
Commission.
Proposed Exhibit I to Form SB SEF
would require an applicant to describe
the manner of operation of the System.
This description would be required to
include: (1) A detailed description of
the manner in which the System
satisfies the definition of ‘‘security-based
swap execution facility’’ in Section
3(a)(77) of the Exchange Act and any
Commission rules, interpretations or
344 See supra Section XX.C for a discussion of the
financial statement requirements pursuant to Core
Principle 14. See also proposed Rule 823.
345 These requirements are the same as the
requirements for the preparation of financial
statements for affiliated entities that would be
submitted pursuant to the proposed rules under
Regulation SB SEF relating to Core Principle 14. See
supra Section XX.C for a discussion of the financial
statement requirements pursuant to Core Principle
14.
346 This requirement to provide the information
for all other affiliates of the applicant upon request
is not contained in the rules under Regulation SB
SEF relating to Core Principle 14, as the financial
report submitted by the SB SEF pursuant to such
rules is an annual report, rather than a registration
application.
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guidelines regarding such definition,
including a description of how the
System displays all orders, quotes,
requests for quote, responses, and trades
in an electronic or other form, and the
timelines in which the system does so;
how trading interest interacts on the
System; the ability of market
participants to see and transact with
orders, quotes, requests for quotes, and
responses; and an explanation of the
trade-matching algorithm if it is based
on order priority factors other than price
and time; (2) the means of access to the
System, including any limitations on
access; (3) procedures governing entry
and display of trading interest in the
System; (4) procedures governing the
execution, reporting, clearance and
settlement of transactions in connection
with the System; (5) proposed fees; (6)
procedures for ensuring compliance
with System usage guidelines and rules;
(7) the hours of operation of the System,
and the date on which the applicant
intends to commence operation of the
System; (8) a copy of the users’ manual
or equivalent document; (9) if applicant
proposes to hold funds or securities on
a regular basis, a description of the
controls that would be implemented to
ensure safety of those funds or
securities; and (10) the name of any
entity, other than the SB SEF, that will
be involved in operation of the System,
including the execution, trading,
clearing and settling of transactions on
behalf of the SB SEF, and a description
of the role and responsibilities of each
entity.
The Commission believes that Exhibit
I would allow the Commission to
determine if the applicant meets the
definition of SB SEF under the
Exchange Act and rules and regulations
hereunder, and in accordance with the
guidance set forth in Section III above.
In addition, Exhibit I would address the
applicant’s compliance with several
Core Principles, including Core
Principle 1 (Compliance with Rules),
Core Principle 4 (Monitoring of Trade &
Trade Processing), Core Principle 6
(Financial Integrity of Transactions),
Core Principle 8 (Timely Publication of
Trading Information), Core Principle 9
(Recordkeeping and Reporting), and
Core Principle 13 (System Safeguards),
and the proposed rules under
Regulation SB SEF relating to such Core
Principles.
Proposed Exhibit J to Form SB SEF
would require an applicant to provide a
complete set of all forms pertaining to:
(1) Applications for participation or
subscription to or use of the SB SEF; (2)
applications for approval as a person
associated with a SB SEF participant, or
user of the SB SEF; and (3) any other
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similar materials. The applicant would
have to provide a table of contents
listing the forms included. The
Commission believes that the
information required in proposed
Exhibit J would provide the
Commission with important information
on the ability of persons to directly
access the SB SEF. Such information
would enable the Commission to assess
the applicant’s compliance with Core
Principle 2 (Compliance with Rules),
Core Principle 5 (Ability to Obtain
Information), and Core Principle 6
(Financial Integrity of Transactions) and
the proposed rules under Regulation SB
SEF related to such Core Principles.
Proposed Exhibit K to Form SB SEF
would require an applicant to provide a
complete set of all forms of financial
statements, reports, or questionnaires
required of SB SEF participants,
subscribers or any other users relating to
financial responsibility or minimum
capital requirements for such
participants or any other users. The
applicant also would have to provide a
table of contents listing the forms
included. The Commission
preliminarily believes that the
information collected in this proposed
exhibit would provide the Commission
with the financial information that SB
SEF’s require of their participants and
users and enable the Commission to
assess the applicant’s compliance with
Core Principle 6 (Financial Integrity of
Transactions) and the proposed rules
under Regulation SB SEF related
thereto.
Proposed Exhibit L to Form SB SEF
would require an applicant to describe
the applicant’s criteria for participation
in or use of the SB SEF. The applicant
would be required to describe
conditions under which SB SEF
participants or persons associated with
SB SEF participants may be subject to
suspension or termination with regard
to access to the SB SEF, and any
procedures that would be involved in
the suspension or termination of a SB
SEF participant or person associated
with a SB SEF participant. Proposed
Exhibit L would require a SB SEF to
provide a list of all grants of access
(including, for all participants, the
reasons for granting such access) and all
denials or limitations of access
(including, for each applicant or
participant, the reasons for denying or
limiting access). In addition, proposed
Exhibit L would require a SB SEF to
provide a list of all disciplinary actions
taken by the SB SEF. The Commission
preliminarily believes that proposed
Exhibit L would provide the
Commission with information regarding
access to, limitations of access by, and
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denials of access by a SB SEF, and
disciplinary actions taken by a SB SEF
against participants, and would allow
the Commission to ascertain the
applicant’s compliance with Core
Principle 2 (Compliance with Rules)
and Core Principle 4 (Monitoring of
Trading and Trade Processing) and the
proposed rules under Regulation SB
SEF relating to such Core Principles.
Proposed Exhibit M to Form SB SEF
would require an applicant to provide
an alphabetical list of all SB SEF
participants or other users of the SB
SEF, including the following
information: name; date of acceptance
as a participant or other user; principal
business address and telephone number;
if participant or other user is an
individual, the name of the entity with
which such individual is associated and
the relationship of such individual to
the entity (e.g., partner, officer, director,
employee, etc.); a description of the type
of activities primarily engaged347 in by
the participant or other user (e.g., SB
swap dealer, major SB swap participant,
inter-dealer broker, non-broker dealer,
non-security-based swap dealer,
commercial end-user, inactive or other
functions); and the class of participation
or other access. The Commission
preliminarily believes that this exhibit
would provide the Commission with
information relating to who has access
to trading on the SB SEF and would
enable the Commission to determine
whether a SB SEF is in compliance with
Core Principle 2 (Compliance with
Rules), Core Principle 6 (Financial
Integrity of Transactions) and Core
Principle 11 (Conflicts of Interest) and
the proposed rules under Regulation SB
SEF related to such Core Principles.
Proposed Exhibit N to Form SB SEF
requires an applicant to provide a
description of the criteria used to
determine the SB swaps that may be
traded on the SB SEF. The Commission
preliminarily believes that this
requirement would provide the
Commission with information regarding
the process by which a SB SEF
determines what SB swaps would be
traded on the SB SEF and the factors the
SB SEF would consider in making such
determination. Proposed Exhibit O to
Form SB SEF requires an applicant to
provide a schedule of the SB swaps to
be traded on the SB SEF, including a
347 A person would be ‘‘primarily engaged’’ in an
activity or function for purposes of this item when
that activity or function is the one in which that
person is engaged for the majority of their time.
When more than one type of person at an entity
engages in any of the types of activities or functions
enumerated in this item, the applicant would be
required to identify each type and state the number
of participants or other users in each.
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description of each SB swap. The
Commission believes that proposed
Exhibits N and O would enable the
Commission to determine whether a SB
SEF is complying with Core Principle 2
(Compliance with Rules), Core Principle
6 (Financial Integrity of Transactions)
and Core Principle 3 (Security-based
Swaps not Readily Susceptible to
Manipulation) and the proposed rules
under Regulation SB SEF relating to
such Core Principles.
Proposed Exhibit P to Form SB SEF
would require an applicant that is
controlled by any other person to
provide an opinion of counsel that any
person that controls the SB SEF has
consented to and can, as a matter of law,
(1) provide the Commission with
prompt access to its books and records,
to the extent such books and records are
related to the activities of the SB SEF;
and (2) submit to onsite inspection and
examination by representatives of the
Commission with respect to the
activities of the SB SEF. Proposed
Exhibit P to Form SB SEF also would
require an applicant that is a nonresident person to provide an opinion of
counsel that the applicant can, as a
matter of law, (1) provide the
Commission with prompt access to the
books and records of such applicant and
(2) submit to onsite inspection and
examination by representatives of the
Commission. As discussed in Section
XXI above, these requirements would
allow the Commission to better evaluate
an applicant’s ability to comply with the
books and records and inspection
requirements set forth in proposed
Rules 801(e) and (f).
A national securities exchange that
seeks to operate a SB SEF would be
required to separately register such SB
SEF with the Commission as a SB SEF
pursuant to proposed Rule 801 and
proposed Form SB SEF, and would be
required to comply with Section 3D of
the Exchange Act, the rules and
regulations thereunder, and any other
provisions of the Exchange Act and
rules thereunder applicable to SB SEFs
with respect to the operations of such
SB SEF.
National securities exchanges could,
under the rules the Commission is
proposing today, form subsidiaries or
affiliates that operate SB SEFs. If a
national securities exchange chose to
form such a subsidiary or affiliate, the
exchange itself could remain registered
as a national securities exchange, while
the subsidiary or affiliate registers and
operates as a SB SEF. Section 3D(c) of
the Exchange Act requires a national
securities exchange to identify whether
electronic trading of SB swaps is taking
place on or through the national
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securities exchange or a SB SEF to the
extent that the exchange also operates a
SB SEF and uses the same electronic
trade execution system for listing and
executing trades of SB swaps. The
Commission notes that any subsidiary
or affiliate of a registered exchange
could not integrate, or otherwise link
the SB SEF with the exchange,
including using the premises or
property of such exchange for effecting
or reporting a transaction, without being
considered a ‘‘facility of the
exchange.’’348 In the event that a
national securities exchange begins
trading SB swaps either on the exchange
or on a facility of the exchange, it would
be required to file rule filings under
Rule 19b–4 under the Exchange Act in
connection with the trading of SB swaps
on the exchange or its facility, and such
facility would have to comply with the
provisions of the Exchange Act and the
rules and regulations thereunder
applicable to national securities
exchanges.
The Commission generally requests
comments on all aspects of the proposed
Form SB SEF. Is the format of the
proposed Form SB SEF appropriate and
sufficiently clear? If not, why not and
how could it be improved? Are the
instructions to the proposed Form SB
SEF appropriate and sufficiently clear?
If not, why not and how could they be
improved? Are the defined terms
included on proposed Form SB SEF
appropriate and sufficiently clear? If
not, why not and how could they be
improved?
Are the disclosure items contained on
the Execution Page of the proposed
Form SB SEF appropriate? Are there
other useful disclosure items that
should be added? If so, please describe
such items and why they should be
added. Or, are there proposed items on
the Execution Page that should be
deleted? If so, please describe why such
items are not necessary. Are the
certifications contained on the
Execution Page of the proposed Form
SB SEF appropriate? Are there other
useful certifications that the
Commission should require the
applicant to make? If so, please describe
such items and why they should be
added. Or, are there proposed
certifications that should be deleted? If
so, please describe why such
certifications are not necessary.
Are the proposed exhibits to the Form
SB SEF appropriate? Would the
348 See Section 3(a)(2) of the Exchange Act, 15
U.S.C. 78c(a)(2) (defining the term ‘‘facility of the
exchange’’). The Commission gave a similar analysis
regarding facilities of exchanges with regard to
ATSs in the ATS Adopting Release, supra note 94,
at note 437.
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information requested adequately allow
the Commission to determine whether
to grant or deny the registration of a SB
SEF pursuant to proposed Rule 801(b)?
Are there other useful disclosure items
that should be added to the exhibits or
added as exhibits? If so, please describe
such items and why they should be
added. Are there any registration
requirements proposed by the CFTC for
SEFs that the Commission should adopt
for SB SEFs? 349 For example, should
the Commission require a SB SEF to
provide a description of material
pending legal proceedings? 350 Should
the Commission require a SB SEF to
provide a description of the personnel
qualifications for each category of
professional employees employed by
the applicant? 351 Should the
Commission require a SB SEF to
provide an analysis of the staffing
requirements necessary to carry out
operations of the applicant and the
name and qualifications of each key
staff person? 352 Is the information
requested on Form SB SEF and the
exhibits thereto overly burdensome for
SB SEFs? If so, how could any such
burdens be reduced? Are there proposed
exhibits or items of information in
proposed exhibits that should be
deleted from proposed Form SB SEF? If
so, please describe why such proposed
exhibits would not be necessary. Should
certain proposed exhibits be required to
be made available to the Commission
only upon request? If so, which
proposed exhibits and why? For
example, should an applicant be
required to provide the information
regarding SB SEF participants required
by proposed Exhibit M upon request by
the Commission following the filing of
the applicant’s Form SB SEF, rather
than as an exhibit to the applicant’s
initial filing of proposed Form SB SEF?
Commenters are requested to consider
the totality of the information required
by proposed Form SB SEF in framing
their responses.
The Commission also requests that
commenters address whether there are
confidentiality issues with any
information required by the proposed
exhibits to proposed Form SB SEF? If
so, what information presents issues
and what are the issues? Further, the
349 See Notice of proposed SEF rulemaking by the
CFTC Release, supra note 17.
350 See proposed Exhibit H to proposed Form
SEF; see also Notice of proposed SEF rulemaking
by the CFTC, supra note 17.
351 See proposed Exhibit E to proposed Form SEF;
see also Notice of proposed SEF rulemaking by the
CFTC, supra note 17.
352 See proposed Exhibit F to proposed Form SEF;
see also Notice of proposed SEF rulemaking by the
CFTC, supra note 17.
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Commission notes that proposed Form
SB SEF would be filed electronically
and thus is expected to be made
available publicly on the Commission’s
Web site. The Commission seeks
comment on whether the information to
be filed on proposed Form SB SEF
would be useful to the public.
XXIII. Rule Filing Processes for
Changes to a SB SEF’s Rules
A. Introduction
The Commission is proposing to
adopt rules requiring registered SB SEFs
to comply with certain rule filing
processes for any new rules or rule
amendments. Specifically, the
Commission is proposing new Rules 805
and 806, which set forth, respectively, a
process for the voluntary submission of
rules for Commission review and
approval, and a self-certification rule
filing process.353 The processes
proposed under these rules are
substantially similar to the two rule
filing processes that the CFTC has in its
existing rules,354 as modified by the
new authority the CFTC has received
under Section 745 of the Dodd-Frank
Act.355 It is important for the
Commission to receive notice of
proposed rule changes to understand
how each SB SEF operates and is
governed to help the Commission with
its oversight of SB SEFs. The
Commission intends to coordinate
efforts with the CFTC, as appropriate, to
have the processes offered in proposed
Rules 805 and 806 resemble the rule
filings processes that the CFTC
ultimately adopts for SEFs, in large part
to streamline and simplify compliance
for joint SEF/SB SEF entities.
B. Voluntary Submission of Rules for
Commission Review and Approval
Proposed Rule 805 gives a registered
SB SEF the option of voluntarily
submitting a proposed new rule or rule
amendment for approval by the
Commission prior to its
implementation. Paragraph (a) of
proposed Rule 805 would require such
filings to: (1) Be filed electronically with
the Commission in a format specified by
the Commission; (2) set forth the text of
the proposed rule or rule amendment
(in the case of a rule amendment,
deletions and additions must be
indicated); (3) indicate the proposed
effective date of the proposed rule, any
353 Proposed Rule 806(d) also provides a limited
exception to the certification requirement for
certain kinds of filings. See proposed Rule 806(d).
See also discussion infra notes 382 to 384 and
accompanying text.
354 17 CFR 40.5 and 17 CFR 40.6.
355 See Public Law 111–203 § 745 (amending
Section 5c of the CEA, 7 U.S.C. 7a–2).
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action taken or anticipated to be taken
to adopt the proposed rule by the SB
SEF or by its governing board or by any
committee thereof, and the cite for the
rules of the SB SEF that authorize the
adoption of the proposed rule change;
(4) explain the operation, purpose, and
effect of the proposed rule, including, as
applicable, a description of the
anticipated benefits to market
participants or others, any potential
anticompetitive effects on market
participants or others, and how the rule
fits into the SB SEF’s framework of
regulation; (5) certify that the SB SEF
posted a notice of pending rule filing
and a copy of the submission,
concurrent with the filing of a
submission on its Web site; (6) include
the documentation relied on to establish
the basis for compliance with the
applicable provisions of the Exchange
Act and the Commission’s regulations
thereunder, including the Core
Principles; (7) provide additional
information which may be beneficial to
the Commission in analyzing the new
rule or rule amendment; (8) describe
briefly any substantive opposing views
expressed to the SB SEF by the Board
or committee members, participants of
the SB SEF, or market participants with
respect to the new rule or rule
amendment that were not incorporated
into the new rule or rule amendment;
(9) identify any Commission regulation
that the Commission may need to
amend, or sections of the Exchange Act
or the Commission’s regulations that the
Commission may need to interpret, in
order to approve the new rule or rule
amendment; (10) in the case of proposed
amendments to the terms and
conditions of a SB swap product,
include a written statement verifying
that the registered SB SEF has
undertaken a due diligence review of
the legal conditions, including
conditions relating to contractual and
intellectual property rights, that may
materially affect the trading of the
product; and (11) request confidential
treatment, if appropriate.356
Proposed Rule 805(a) sets forth the
information a SB SEF would be required
to provide the Commission when
seeking Commission approval of a
proposed change to a SB SEF rule, or a
proposed change to the terms and
conditions of a SB swap that has already
commenced trading. Most of the
proposed items of information to be
included are substantially similar to the
items of information a national
securities exchange is required to
provide on Form 19b–4 357 when
356 See
357 See
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17 CFR 240.19b–4.
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seeking approval of a proposed rule
change in accordance with Section 19(b)
of the Exchange Act.358 Specifically, the
requirements in proposed Rule 805(a)(1)
through (4) regarding electronic
submission, submission of proposed
rule text highlighting additions and
deletions, inclusion of background
information on how and why a
proposed change is authorized, and
explanation of the operation, purpose,
and effect of the proposed rule change
are similar to the requirements
applicable to national securities
exchanges seeking to implement a
proposed rule change. Further, the
requirements in proposed Rule 805(a)(7)
through (9) to include additional
information beneficial to the
Commission in analyzing the new rule
or rule amendment, a description of
substantive opposing views expressed to
the SB SEF regarding the proposal, and
to identify any Commission regulation
that the Commission may need to
amend or interpret in order to approve
the new rule or rule amendment also are
similar to the requirements of Form
19b–4 applicable to national securities
exchanges. These requirements are
designed to ensure that a SB SEF
seeking to implement a new or proposed
rule change provides all relevant
information and context regarding the
proposal that would allow the
Commission to evaluate the proposal for
consistency with the Exchange Act and
rules and requirements thereunder.
In addition, similar to the
requirements for national securities
exchanges, the proposal in Rule
805(a)(5) would require a SB SEF to
certify that it has posted a notice of
pending rule filing and a copy of the
submission, concurrent with the filing
of a submission on its Web site. This
proposal is intended to ensure that
market participants would receive
prompt notice of new requests for
approval filed with the Commission.359
Proposed Rule 805(a)(6) also would
require a SB SEF to include the
documentation relied on to establish the
basis for compliance with the applicable
provisions of the Exchange Act and the
Commission’s regulations thereunder,
including the Core Principles. In the
case of proposed changes to the terms
and conditions of a SB swap, this
provision would require, without
limitation, inclusion of documentation
relied on to establish the basis for
compliance with Section 3D(d)(3) of the
358 15
U.S.C. 78s(b).
359 Rule 19b–4(l) under the Exchange Act requires
each national securities exchange to post proposed
rule changes on its Web site within two business
days of filing with the Commission. See 17 CFR
240.19b–4(l).
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Exchange Act and proposed Rule 812
thereunder, which would require a SB
SEF’s swap review committee to have
determined, after taking into account all
of the terms and conditions of the SB
swap and the markets for the SB swap
and any underlying securities, that a SB
swap proposed to be traded is not
readily susceptible to manipulation.360
Also with regard to proposed changes
to the terms and conditions of a SB
swap, proposed Rule 805(a) would
require a SB SEF to provide a written
statement verifying that it has
undertaken a due diligence review of
the legal conditions, including
conditions relating to contractual and
intellectual property rights, that may
materially affect the trading the product.
This proposed requirement is designed
to prevent a SB SEF from seeking to
trade a proprietary product of another
SB SEF or other entity. The Commission
preliminarily believes that the
information to be included pursuant to
proposed Rule 805(a) in a request for
approval of a new or proposed rule
change or change to the terms and
conditions of a SB swap is necessary to
assist the Commission in making a
reasoned determination as to whether
such proposed change is consistent with
the Exchange Act.
Proposed Rule 805(b) would require
the Commission to approve a new rule
or rule amendment unless the rule or
rule amendment is inconsistent with the
Exchange Act or the Commission’s
regulations promulgated thereunder.361
The Commission has coordinated with
the CFTC and the proposed standard for
approval is the same as that standard for
approval under the CFTC’s proposed
rule approval process, which is
intended to provide consistency to
market participants who may operate a
SB SEF and a SEF.
Proposed Rule 805(c) would give the
Commission a 45-day review period,
starting from the date that the filing is
received by the Commission, to consider
whether the proposed rule or rule
amendment is consistent with the
Exchange Act and the regulations
thereunder.362 Unless the Commission
notifies the SB SEF otherwise, the
proposed rule change would be deemed
approved by the Commission at the end
of the 45-day review period (or at the
end of any extension period, as
applicable), provided that: (1) The
submission of the rule change complies
with the requirements of paragraph (a)
of proposed Rule 805, and (2) the SB
SEF has not amended the filing during
360 See
Proposed Rule 812.
proposed Rule 805(b).
362 See proposed Rule 805(c).
361 See
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11009
the review period, except as requested
by the Commission during that
period.363
Under paragraph (d) of proposed Rule
805, the Commission would be able to
extend the review period by an
additional 45 days if the proposed rule
raises novel or complex issues that
require additional time for review or is
of major economic significance, the
submission is incomplete, or the
requestor does not respond completely
to Commission questions in a timely
manner.364 In this case, the Commission
would be required to notify the
submitting SB SEF within the initial 45day review period and briefly describe
the nature of the specific issues for
which additional time for review is
required. In addition, the Commission
would be able to extend the review
period to any period, beyond the
additional 45 days initially requested, to
which the SB SEF agrees in writing.365
Under paragraph (e) of proposed Rule
805, the Commission would have the
authority to issue a notice of nonapproval if it finds that the new rule or
rule amendment is or appears to be
inconsistent with the Exchange Act or
the regulations thereunder.366 At any
time during its review under proposed
Rule 805, the Commission would be
able to notify the SB SEF that it will not
approve the new rule or rule
amendment because it believes that the
new rule or rule amendment is
inconsistent with the Exchange Act or
Commission rules or regulations
thereunder. The Commission would
provide, in its notice, the nature of the
issues raised and the specific provision
of the Exchange Act or the
Commission’s rules or regulations with
which the new rule or rule amendment
is or appears to be inconsistent.
Pursuant to proposed Rule 805(f), the
receipt of a notice of non-approval
would not prevent the SB SEF from
subsequently submitting a revised
version of the proposed rule or rule
amendment for Commission review and
approval, and the revised submission
would be reviewed without
prejudice.367 However, the receipt of a
notice of non-approval would be
presumptive evidence that the SB SEF
could not truthfully submit the same, or
substantially the same, proposed rule or
363 Id. Any amendment or supplementation not
requested by the Commission would be treated as
the submission of a new filing.
364 See proposed Rule 805(d).
365 Id.
366 See proposed Rule 805(e).
367 See proposed Rule 805(f)(1).
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rule amendment for self-certification
under proposed Rule 806.368
Proposed Rule 805(g) would allow the
Commission to provide for expedited
approval for rule changes, including
rule changes to terms and conditions of
a product that are consistent with the
Exchange Act and the rules and
regulations thereunder, at such time and
under such conditions as the
Commission may specify in a written
notification.369 However, proposed Rule
805(g) would also allow the
Commission to grant expedited approval
to a proposed rule or rule amendment,
at any time, and also to alter or revoke
the applicability of such a notice to any
particular rule or rule amendment.
The Commission is proposing the
time periods in paragraphs 805(c)
through (g) to align its procedure for
reviewing proposed rules and rule
amendments with the CFTC’s
procedure.370 The Commission believes
that a parallel procedure would be
beneficial for SB SEFs and SEFs that are
dually registered. Furthermore, the
Commission believes that the proposed
prior approval process would allow the
SB SEF the opportunity to achieve
greater certainty about the
Commission’s views on whether a new
rule or rule amendment is consistent
with the Exchange Act and the rules and
regulations thereunder prior to taking
steps to implement the rule or
amendment.
C. Self-Certification of Rules
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Proposed Rule 806 would allow a SB
SEF, as an alternative to complying with
proposed Rule 805, to implement a new
rule or rule amendment pursuant to selfcertification.371 This process would
provide the Commission ten business
days to review a self-certification filing
and to stay the certification within such
review period, if warranted.
Specifically, under proposed Rule
806(a), a registered SB SEFs would be
required to submit the self-certification
electronically at least ten business days
prior to the implementation date of the
new rule or rule amendment.372 The
368 See proposed Rule 805(f)(2). See infra Section
XXIII for a discussion of the certification process.
369 See proposed Rule 805(g).
370 See 17 CFR 40.5 and 40.6. See also Public Law
111–203, § 745 (amending Section 5c of the
Commodity Exchange Act, 7 U.S.C. 7a–2). See also
75 FR 67282 (November 2, 2010) (CFTC proposal
to amend 17 CFR 40.5 and 40.6).
371 See proposed Rule 806.
372 See proposed Rule 806(a)(1) and proposed
Rule 806(a)(3). Proposed Rule 806(a)(3) would
provide an exception to the 10 day requirement for
new rules or rule amendments that the SB SEF
seeks to implement in the exercise of its emergency
authority pursuant to Rule 816, requiring instead
that the SB SEF file such emergency rule or rule
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proposed rule would require that the SB
SEF publish on its Web site a notice of
pending certification with the
Commission and copy of the submission
concurrent with the filing of a
submission with the Commission.373
Similar to proposed Rule 805,
proposed Rule 806 would require the
submission to include certain specific
items: (1) The text of the rule (in the
case of a rule amendment, deletions and
additions must be indicated); (2) the
date of intended implementation; (3) a
certification by the SB SEF that the rule
complies with the Exchange Act and the
Commission’s regulations thereunder;
(4) the documentation relied on to
establish the basis for compliance with
the applicable provisions of the
Exchange Act and the Commission’s
regulations thereunder, including the
Core Principles; 374 (5) a brief
explanation of any substantive opposing
views expressed to the registered SB
SEF by the Board or committee
members, participants, or market
participants that were not incorporated
into the rule, or a statement that no such
opposing views were expressed; (6) a
request for confidential treatment, if
appropriate; and (7) in the case of
proposed amendments to the terms and
conditions of a SB swap, a written
statement verifying that the registered
SB SEF has undertaken a due diligence
review of the legal conditions, including
conditions relating to contractual and
intellectual property rights, that may
materially affect the trading the
product.375 The proposed Rule would
also require the SB SEF to provide, if
requested by Commission staff,
additional evidence, information or data
amendment with the Commission prior to the
implementation of such rule or rule amendment, or,
if not practicable, within twenty-four hours after
implementation of such emergency rule or rule
amendment.
373 See proposed Rule 806(a)(2). The proposed
Rule would require the SB SEF to provide such
information in its submission to the Commission,
but would permit the SB SEF to redact information
that it seeks to keep confidential from the
documents that it publishes on its Web site. If,
however, a determination is made pursuant to the
Freedom of Information Act that such information
may not be kept confidential, the proposed rule
would require the SB SEF to republish its filing on
its Web site including such information.
374 In the case of proposed changes to the terms
and conditions of a SB swap, this provision would
require, without limitation, inclusion of
documentation relied on to establish the basis for
compliance with Section 3D(d)(3) of the Exchange
Act and proposed Rule 812 thereunder, which
would require a SB SEF’s swap review committee
to have determined, after taking into account all of
the terms and conditions of the SB swap and the
markets for the SB swap and any underlying
securities, that a SB swap proposed to be traded is
not readily susceptible to manipulation. See
proposed Rule 812.
375 See proposed Rule 806(a)(5).
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that may be beneficial to the
Commission in conducting a due
diligence assessment of the filing and
the SB SEF’s compliance with any of the
requirements of the Exchange Act or the
Commission’s rules or regulations
thereunder.376 The proposed items of
information are similar to those required
by proposed Rule 805(a) as well as those
in CFTC Rule 40.6.377 The Commission
preliminarily believes that inclusion of
the items of information set forth in
proposed Rule 806(a) would assist the
Commission in considering whether a
SB SEF’s implementation of a new rule,
rule amendment, or modification to the
terms and conditions of a SB swap
pursuant to self-certification is
appropriate and consistent with the
Exchange Act and the rules and
requirements thereunder.
Under paragraph (b) of proposed Rule
806, the Commission would have 10
business days to review the submission
and the self-certification would become
effective at the end of the 10 businessday period, unless the Commission
notifies the registered entity, during
such 10 business-day period, that it
intends to issue a stay of the
certification.378 Proposed Rule 806(c)(1)
would provide that the Commission
would be able to stay the certification of
a new rule or rule amendment by
issuing a notification to the SB SEF
informing it that the Commission is
staying the certification and stating the
grounds for doing so.379 The proposed
rule also would provide that the
certification of a rule could be stayed by
the Commission on the grounds that the
new rule or rule amendment presents
novel or complex issues, is
accompanied by an inadequate
explanation, or is potentially
inconsistent with the Exchange Act or
the Commission’s regulations
thereunder. Once the Commission
issues a notification of stay to the
registered entity, the Commission would
have 90 days to conduct a review. A
stay of a rule certification may be
appropriate, for example, where a
registered entity certifies a rule that
raises unique issues not previously
reviewed by Commission staff. In
addition, the Commission believes that
new rules or rule amendments may raise
a number of complex issues if they
appear to have a material impact on
other securities and financial markets.
Thus, such rules are more likely to be
376 See
proposed Rule 806(a)(6).
proposed Rule 805(a) and 17 CFR 40.6.
See also Public Law 111–203, § 745 (amending
Section 5c of the Commodity Exchange Act, 7
U.S.C. 7a–2).
378 See proposed Rule 806(b).
379 See proposed Rule 806(c)(1).
377 See
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subject to an extended review period to
allow the Commission to adequately
identify and address complex regulatory
issues.
Proposed Rule 806(c)(2) would
require the Commission to provide a 30day public comment period within the
90-day period that the stay is in effect
and to publish a notice of the 30-day
comment period on the Commission’s
Web site.380 Unless the Commission
notifies the SB SEF that it objects to the
certification within the 90-day period
on the grounds that the proposed rule is
inconsistent with the Exchange Act or
the rules or regulations thereunder, the
rule would become effective, pursuant
to certification, upon the expiration of
the 90-day review period.381 If the
Commission decides to lift the stay prior
to the expiration of the 90-day review
period, the Commission would notify
the SB SEF of its action and the rule
would become certified at such time.
Finally, proposed Rule 806(d) would
permit SB SEFs to implement certain
new rules or rule amendments on the
following business day without
certification to the Commission.382
Pursuant to proposed Rule 806(d)(1), the
rules permitted to be implemented
pursuant to this summary process
would be limited to rules regarding
corrections of typographical errors,
renumbering, periodic routine updates
to identifying information about
approved entities and other such nonsubstantive revisions of a product’s
terms and conditions that have no effect
on the economic characteristics of the
product.383 Proposed Rule 806(d)(2)
would require SB SEFs to provide to the
Commission electronically, in a format
to be specified by the Commission, at
least weekly, a summary notice of all
rule amendments made effective
thereunder.384 Such notice would not be
required for weeks during which no
such actions have been taken. Proposed
Rule 806(e) would allow a SB SEF to
implement certain other new rules or
rule amendments without certification
or notice to the Commission, provided
that the SB SEF maintains
documentation regarding all changes to
rules and posts all such rule changes on
its Web site.385 These rules and rule
amendments would be those that
govern: (1) The organization and
administrative procedures of a SB SEF
governing bodies such as a Board,
officers, and committees, but not any of
proposed Rule 806(c)(2).
proposed Rule 806(c)(3).
382 See proposed Rule 806(d).
383 See proposed Rule 806(d)(2).
384 See proposed Rule 806(d)(1).
385 See proposed Rule 806(e).
381 See
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D. Request for Comment
The Commission generally requests
comments on all aspects of the proposed
rules relating to the proposed rule filing
process. Are the Commission’s proposed
rules for the filing process for new rules
and rule amendments appropriate and
sufficiently clear? If not, why not and
what would be better alternatives? Is it
preferable to have a rule filing process
for SB SEFs that closely aligns to the
process for SEFs under the CFTC’s rules
as proposed? By doing this, would the
proposed rules achieve the goal of
streamlining and simplifying the effort
to have rules implemented for entities
that are both SB SEFs and SEFs? If not,
386 The process for submission of rule filings
would be the subject of a separate rulemaking.
387 See 17 CFR 40.5 and 40.6. See also Public Law
111–203, § 745 (amending Section 5c of the
Commodity Exchange Act, 7 U.S.C. 7a–2). See also
75 FR 67282 (November 2, 2010) (CFTC proposal
to amend 17 CFR 40.5 and 40.6.
380 See
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the following: Voting requirements;
Board or committee composition
requirements or procedures; decision
making procedures; use or disclosure of
material non-public information gained
through the performance of official
duties, or requirements relating to
conflicts of interest; or (2) the routine,
daily administration, direction and
control of employees, requirements
relating to gratuity and similar funds,
but not any of the following: Guaranty;
reserves; or similar funds; declaration of
holidays; and changes to facilities
housing the market.
The Commission notes that the
certification process in proposed Rule
806 does not call for any final action by
the Commission. In cases where a SB
SEF seeks final agency action, a SB SEF
could choose to file a proposed rule or
rule amendment under proposed Rule
805.
The Commission intends to allow
registered SB SEFs to submit filings
under proposed Rules 805 and 806
electronically through a portal similar to
the electronic rule filing system used for
proposed rule changes by national
securities exchanges and national
securities associations.386
The Commission notes that the
process under proposed Rules 805 and
806 closely parallel the CFTC’s Rules
40.5 and 40.6.387 The Commission
preliminarily believes that allowing SB
SEFs to file new rules and rule
amendments in this manner would
simplify the filing process and also
provide the Commission with prompt
access for review. The Commission
intends to propose forms for these
electronic filings as part of a separate
rulemaking.
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what other alternatives should the
Commission consider? What other
burdens should the Commission take
account of that joint SB SEF/SEF
entities would face under the proposed
rules? Is the voluntary prior approval
process in proposed Rule 805 a useful
option for SB SEFs? If not, what would
be a better alternative?
Does the automatic effectiveness for a
rule or rule amendment submitted
under proposed Rule 806, once the
review period has expired and in the
absence of non-approval, provide
sufficient legal clarity and certainty
about the change? Or, would an
approval order by the Commission be
more instructive or helpful? Are the
time periods for review, and extensions
for review, in proposed Rule 805
appropriate? If so, what would be more
appropriate? Should the submissions for
prior approval be published by the
Commission for public comment? Why
or why not?
Is the provision of a notice of nonapproval to the SB SEF, as described
under proposed Rule 805(e), a sufficient
means of informing the SB SEF of the
basis for non-approval? Would more
information or another form of notice be
more appropriate? If so, please explain.
Should such notice of non-approval be
published on the Commission’s Web
site or otherwise be made publicly
available? Would the proposed selfcertification process in proposed Rule
806 be a useful alternative to the prior
approval process for rule changes? Why
or why not?
Are the proposed grounds for staying
a certification under proposed Rule
806(c) appropriate? If not, why not? Are
there other grounds that would also be
appropriate for staying a certification?
Under proposed Rule 806 (for selfcertification), would the 10 businessday review period and, if a stay is put
in place, the 90-day review period be
appropriate timeframes for Commission
review and consideration? If not, why
not and what would be a better
alternative? Please provide support for
any alternative suggestions.
Should the 90-day review period,
subsequent to a stay of a certification, in
proposed Rule 806(c) include a 30-day
public comment period? Why or why
not? Is the means for determining
whether a rule or rule amendment has
been certified or objected to provided
for in proposed Rule 806(c)(3)
sufficiently clear? If not, how could
such determination be made more clear?
Should the Commission publish notice
of either the effective certification or the
notice of an objection for the public on
its Web site or through other means?
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Are the proposed processes for
providing notice, without a certification,
for certain kinds of rule changes in
proposed Rule 806(d) appropriate? If
not, why not? Are the proposed rule
changes that would be eligible for notice
without certification in proposed Rule
806(d) and (e) appropriate? If not, which
ones should not be eligible for these
processes? Are there other kinds of rule
changes that should be eligible for these
processes?
Would an electronic method for
submitting all rule submissions under
proposed Rules 805 and 806 be an
appropriate and efficient way of making
such submissions? If not, why not?
Would an electronic system such as the
existing system for submitting rule
changes by national securities
exchanges and associations, Electronic
Form 19b–4 Filing System, or
‘‘EFFS,’’ 388 be a good model for the
system for SB SEF submissions under
these proposed rules? If not, what
would be a better model for such an
electronic system?
XXIV. Filing Processes for Trading
Security-Based Swaps
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A. Introduction
The Commission is proposing to
adopt rules requiring SB SEFs to comply
with certain filing processes prior to
trading SB swaps. Specifically, the
Commission is proposing new Rules 807
and 808 of Regulation SB SEF, which
set forth filing processes for
commencement or continued trading of
SB swaps on a SB SEF. The processes
proposed under these rules are
substantially similar to the parallel
processes that the CFTC has in its
existing rules, 17 CFR 40.2 and 17 CFR
40.3, as modified by the new authority
the CFTC has received under Section
745 of the Dodd-Frank Act.389
The proposed filing processes
pursuant to which a SB SEF may trade
a SB swap each require that a SB SEF
describe the proposed product’s ‘‘terms
and conditions.’’ The Commission is not
proposing a definition of ‘‘terms and
conditions,’’ but requests comment on
whether it should adopt a definition of
‘‘terms and conditions’’ and, if so, what
specifically should such a definition
include.390 Specifically, should a
388 See Securities Exchange Act Release No.
50486 (October 4, 2004), 69 FR 60287 (October 8,
2004) (File No. S7–18–04).
389 See Public Law 111–203, § 745 (amending
Section 5c of the Commodity Exchange Act, 7
U.S.C. 7a–2). See also 75 FR 67282 (November 2,
2010) (CFTC proposal to amend 17 CFR 40.2 and
40.3).
390 The Commission notes that the CFTC, in 17
CFR 40.1, defines ‘‘terms and conditions’’ as
referring to a description of the security underlying
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Commission definition of ‘‘terms and
conditions’’ refer to the rights and
obligations of the counterparties to a SB
swap? Should it include such items as:
(1) Notional values; (2) relevant dates,
tenor, and day count conventions; (3)
index; (4) relevant prices, rates or
coupons; (5) currency; (6) stub,
premium, or initial cash flow
components along with subsequent life
cycle events; (7) payment and reset
frequency; (8) business calendars; (9)
accrual type; (10) spread or points; and
(11) description of the underlying
security or securities or reference
asset(s)? Should it include other items
that appear in the CFTC’s definition?
Are there any other items that should be
included? Should the ISDA Master
Agreement be referenced in a
definition? If so, why and how?
B. Trading SB Swaps Pursuant to
Certification
Proposed Rule 807 would require
every SB SEF to comply with certain
submission requirements prior to
trading a SB swap product if such
product has not been approved under
proposed Rule 808. Pursuant to
proposed Rule 807 every submission
must be filed electronically in a form to
be determined by the Commission and
be received by the Commission by the
open of business on the business day
preceding the day the SB swap would
commence trading. In addition, every
submission would be required to
include: (1) A copy of the SB swap
product’s terms and conditions; (2) the
intended date on which the SB swap
may begin trading; (3) a certification by
the registered SB SEF that the SB swap
to be traded complies with the Exchange
Act and the rules and regulations
thereunder; (4) the documentation
relied on to establish the basis for
compliance with the Exchange Act and
the rules and regulations thereunder,
including the Core Principles; 391 (5) a
written statement verifying that the
registered SB SEF has undertaken a due
a swap, specification of cash settlement, and the
rights and obligations of the counterparties to the
swap. The CFTC’s definition also notes that
whenever possible, all proposed swap terms and
conditions should conform to industry standards or
those terms and conditions adopted by comparable
contracts. Further, the CFTC’s definition sets forth
a list of items covered by the phrase ‘‘terms and
conditions.’’
391 As discussed in note 374 supra, this provision
would require, without limitation, inclusion of
documentation relied on to establish the basis for
compliance with Section 3D(d)(3) of the Exchange
Act and proposed Rule 812 thereunder, which
would require a SB SEF’s swap review committee
to have determined, after taking into account all of
the terms and conditions of the SB swap and the
markets for the SB swap and any underlying
securities, that a SB swap proposed to be traded is
not readily susceptible to manipulation.
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diligence review of the legal conditions,
including legal conditions that relate to
contractual and intellectual property
rights, that may materially affect the
trading of the SB swap; (6) a
certification that the registered SB SEF
posted on its Web site a notice of
pending certification with the
Commission and a copy of the
submission, concurrent with the filing
of a submission with the Commission;
and (7) a request for confidential
treatment, if appropriate.
Pursuant to proposed Rule 807(b),
upon request of any representative of
the Commission, a SB SEF would be
required to provide any additional
evidence, information or data
demonstrating that the SB swap product
meets, initially or on a continuing basis,
all of the requirements of the Exchange
Act and its rules.
Proposed Rule 807(c) would provide
that the Commission would be able to
stay the certification of a SB swap by
issuing a notification to the SB SEF
informing it that the Commission is
staying the certification and stating the
grounds for doing so.392 The proposed
rule also would provide that the
certification could be stayed by the
Commission on the grounds that the SB
swap presents novel or complex issues,
is accompanied by an inadequate
explanation, or is potentially
inconsistent with the Exchange Act or
the Commission’s regulations
thereunder. Once the Commission
issues a notification of stay to the
registered entity, the Commission would
have 90 days to conduct a review. A
stay of a certification may be
appropriate, for example, where a
registered entity certifies a SB swap that
raises unique issues not previously
reviewed by Commission staff.
Proposed Rule 807(c) would require
the Commission to provide a 30-day
public comment period within the 90day period that the stay is in effect and
to publish a notice of the 30-day
comment period on the Commission’s
Web site.393 Unless the Commission
notifies the SB SEF that it objects to the
certification within the 90-day period
on the grounds that the proposed SB
swap is inconsistent with the Exchange
Act or the rules or regulations
thereunder, the SB swap would become
effective, pursuant to certification, upon
the expiration of the 90-day review
period.394 If the Commission decides to
lift the stay prior to the expiration of the
90-day review period, the Commission
would notify the SB SEF of its action
392 See
proposed Rule 807(c)(1).
proposed Rule 807(c)(2).
394 See proposed Rule 807(c).
393 See
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and the SB swap would become
certified at such time.395
The Commission preliminarily
believes that proposed Rule 807, which
closely parallels CFTC proposed new
Rule 40.2, provides a reasonable process
pursuant to which a SB SEF may trade
SB swaps through a certification
process. Any dually registered SB SEF
would be following very similar
procedures for certification of swaps
under CFTC proposed new Rule 40.2.
The proposed rule would give the
Commission notice of any new SB
swaps for which a SB SEF would permit
trading and would allow the
Commission to stay a proposed SB
swap’s certification in certain
circumstances. In addition, because the
proposed rule closely parallels the
CFTC’s proposed rule, it would provide
for greater harmonization of the
regulatory process applied to SEFs and
SB SEFs.
The Commission also preliminarily
believes that it is appropriate to include
in any submissions under proposed
Rule 807 documentation demonstrating
that the product is in compliance with
the SB SEF Core Principles—in
particular, core principles that apply
specifically to products, such as Core
Principle 3 concerning manipulation.
The Commission preliminarily believes
that it is appropriate to require a SB SEF
to document the basis for a
determination that a SB swap is not
readily susceptible to manipulation and
notes that the self-certification in
proposed Rule 807 is drawn from
analogous processes that the CFTC
currently has in place with respect to
new financial futures products proposed
to be traded on a designated contract
market.396 The Commission further
notes that CFTC regulations require that
prior to trading a new product, a
designated contract market must
demonstrate that the terms and
conditions of a proposed contract ‘‘will
not be conducive to price manipulation
395 The stay provision in proposed Rule 807(c) is
more similar to the stay provision in proposed Rule
806 and proposed CFTC Rule 40.6 than it is to the
stay provision in proposed CFTC Rule 40.2.
Proposed CFTC Rule 40.2 would permit the CFTC
to stay a certification of a SB swap during the
pendency of a CFTC proceeding for filing a false
certification or during the pendency of a petition to
alter or amend the contract terms and conditions
pursuant to Section 8a(7) of the Commodity
Exchange Act. The Commission notes that the
Exchange Act does not provide for procedures
analogous to those in proposed CFTC Rule 40.2,
and thus is proposing it to align proposed Rule 807
with proposed CFTC Rule 40.2.
396 See 17 CFR 40.2, 40.3. See also 17 CFR 40,
Appendix A to Part 40—Guideline No. 1.
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or distortion.’’ 397 The Commission also
preliminarily believes that SB SEFs
should be conducting due diligence
before listing a new SB swap product.
In evaluating any certification,
information on such due diligence
would be essential to the Commission.
The Commission preliminarily
believes that SB SEFs would make use
of the certification process in the same
way that registered entities have been
making use of the parallel process under
the CFTC’s existing rules. The
Commission understands from CFTC
staff that entities generally use the
CFTC’s current certification process if
they reasonably believe that the new
product does not raise any novel issues
or questions. However, the Commission
notes that the proposed certification
process does not include any final
action of the Commission. In cases
where a SB SEF desired final agency
action, Proposed Rule 808 would be
available.398
The Commission requests comment
on all aspects of Proposed Rule 807. Is
the proposed rule text clear? Should a
SB SEF be required to include in its
certification disclosure of whether a
proposed product is or is not subject to
mandatory clearing? Should a SB SEF
be required to include additional
information when certifying a new SB
swap product? If so, what additional
information should be included? Should
the proposed rule enumerate what
additional evidence, information or data
would need to be provided pursuant to
proposed paragraph (a) of Rule 807, or
what the time frame for such a request
should be? Is the proposed stay of
certification process clear? Should the
Commission consider adopting another
stay procedure? If so, what should that
process be?
C. Trading SB Swaps Pursuant to
Commission Review and Approval
Proposed Rule 808 would permit a SB
SEF to request that the Commission
approve a SB swap prior to permitting
trading of the SB swap, or if a SB swap
product was initially submitted under
Rule 807, subsequent to commencement
of trading of the SB swap. Under
proposed Rule 808, a submission
requesting approval would be required
to be submitted electronically in a form
to be determined by the Commission
and include: (1) A copy of the SB swap
product’s terms and conditions; (2) the
documentation relied on to establish the
397 Id. The Commission understands that the
CFTC expect to propose a similar requirement for
SEFs.
398 See infra Section XXIV, discussing trading of
SB swaps pursuant to Commission review and
approval.
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11013
basis for compliance with the Exchange
Act and rules and regulations
thereunder, including the Core
Principles; 399 (3) a written statement
verifying that the registered SB SEF has
undertaken a due diligence review of
the legal conditions, including legal
conditions that relate to contractual and
intellectual property rights, that may
materially affect the trading of the SB
swap; (4) if appropriate, a request for
confidential treatment as permitted
pursuant to the applicable provisions of
FOIA 400 and applicable Commission
regulations; 401 and (5) a certification
that the registered SB SEF has published
on its Web site a notice of pending
request for approval with the
Commission and a copy of the
submission, concurrent with the filing
of a submission with the Commission.
In addition, under proposed Rule
808(b), if requested by a representative
of the Commission, a SB SEF would be
required to provide additional evidence,
information or data that demonstrates
that the SB swap product meets,
initially and on a continuing basis, all
of the requirements of the Exchange Act
and any applicable rules and
regulations. Under proposed Rule 808(c)
the Commission would approve a new
SB swap product unless the terms and
conditions of such product were
inconsistent with the Exchange Act or
rules and regulations thereunder.402
Under proposed Rule 808(d), all
products submitted for Commission
approval under the proposed section
would be deemed approved by the
Commission 45 days after receipt by the
Commission, or at the conclusion of an
extended period as provided under
proposed Rule 808(e), provided that: (1)
The submission complied with the
requirements of proposed Rule 808(a);
and (2) the SB SEF making the
399 See
supra note 374.
U.S.C. 552.
401 17 CFR 200.83.
402 The standard for approval in proposed Rule
808 would differ from the standard for approval in
proposed CFTC Rule 40.3. Proposed CFTC Rule
40.3 provides that the CFTC shall approve a new
swap product unless the terms and conditions of
such product ‘‘violate’’ the Commodity Exchange
Act. See 75 FR 67282 (November 2, 2010) (CFTC
proposal to amend 17 CFR 40.2–40.5). Notably,
proposed CFTC Rule 40.5 provides that the CFTC
shall approve an amendment to the terms and
conditions of a swap product unless the amended
product would be ‘‘inconsistent’’ with the
Commodity Exchange Act. See id. The Commission
believes that it is preferable to have the same
standard for approval in proposed Rules 805 and
808 and therefore proposes that the standard for
approval in proposed Rule 808 be the same as the
standard for proposed CFTC Rule 40.5. The
Commission notes that the proposed standard is
similar to the standard for Commission approval of
a proposed rule change filed under Section 19(b)(2)
of the Exchange Act. See 15 U.S.C. 78s(b)(2).
400 5
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submission did not amend the terms
and conditions of the proposed SB swap
product or supplement its request for
approval during that period, except in
response to a request by the
Commission or for correction of
typographical errors, renumbering or
other non-substantive revisions. In
addition, under proposed Rule 808(d),
any voluntary, substantive amendment
by the SB SEF would be treated as a
new submission.
Under proposed Rule 808(e) the
Commission would be able to extend
the 45-day review period for an
additional 45 days, if the proposed SB
swap product raised novel or complex
issues that required additional time for
review. In that event, the Commission
would need to notify the SB SEF within
the initial 45 day review period and
would need to briefly describe the
nature of the specific issues.
Alternatively, the SB SEF could agree to
any extended review period in writing.
Under proposed Rule 808(f), the
Commission could notify the SB SEF at
any time during its review of the
submission that the Commission will
not or is unable to approve the proposed
SB swap product. Such notification
would be required to specify the nature
of the issues raised by the proposed SB
swap product and the specific
provisions of the Exchange Act rules
and regulations involved.
Proposed Rule 808(g) would address
the effect of non-approval by the
Commission. Under proposed paragraph
(g) notification to a SB SEF of the
Commission’s determination not to
approve a proposed SB swap product
would not prejudice the SB SEF from
subsequently submitting a revised
version of the proposed product for
Commission approval or from
submitting the product as initially
proposed pursuant to a supplemented
submission. However, notification to a
SB SEF of the Commission’s refusal to
approve SB swap would be presumptive
evidence that the entity would not be
able to truthfully certify under Rule 807
that the same, or substantially the same,
SB swap complies with the Exchange
Act or the rules thereunder.
As with proposed Rule 807, proposed
Rule 808 is substantially similar to the
applicable CFTC proposed rule, new
proposed Rule 40.3. The Commission
believes that this approach would allow
dually registered entities to more easily
comply with applicable rules and
regulations. The Commission expects
that the SB SEF would include in its
submission all documentation relied
upon to determine that the new product
complies with applicable core
principles—in particular, core
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principles that apply specifically to
products, such as Core Principle 3
concerning manipulation. The
Commission preliminarily believes that
it is appropriate to require a SB SEF to
document the basis for a determination
that a SB swap is not readily susceptible
to manipulation and notes that the
proposed certification in proposed Rule
808 is drawn from analogous processes
that the CFTC currently has in place
with respect to new financial futures
products proposed to be traded on a
designated contract market.403 The
Commission further notes that the CFTC
regulations require that prior to trading
a new product, a designated contract
market must demonstrate that the terms
and conditions of a proposed contract
‘‘will not be conducive to price
manipulation or distortion.’’ 404 The
Commission also preliminarily believes
that SB SEFs should be conducting due
diligence before permitting trading of a
new SB swap product. In evaluating any
certification, information on such due
diligence would be essential to the
Commission.
As noted above in the discussion
concerning self-certification of new SB
swaps, the Commission preliminarily
believes that SB SEFs would use the
product approval process in instances
where they believe novel or difficult
issues are presented and they desire
final agency action.
The Commission intends to allow
registered SB SEFs to submit filings
under proposed Rules 807 and 808
electronically through a portal similar to
the electronic rule filing system used for
proposed rule changes by national
securities exchanges and national
securities associations.405 The
Commission preliminarily believes that
allowing SB SEFs to file new rules and
rule amendments in this manner would
simplify the filing process and also
provide the Commission with prompt
access for review. The Commission
intends to propose forms for these
electronic filings as part of a separate
rulemaking.
The Commission requests comment
on all aspects of proposed Rule 808. Is
the process required by proposed Rule
808 clear? If not, what elements of the
process need to be added to the
proposed rule? Under what
circumstances would a SB SEF that had
already certified a new SB swap product
request approval of the product
pursuant to the proposed rule? Should
403 See 17 CFR 40.2, 40.3. See also 17 CFR 40,
Appendix A to Part 40—Guideline No. 1.
404 Id.
405 The process for submission of rule filings will
be the subject of a separate rulemaking.
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product approval be mandatory for
certain types of SB swaps, as opposed
to certification? If so, what products?
Please be specific. Is the proposed
standard for approval of a SB swap
appropriate? If not, why not?
XXV. Discussion of Exemptive
Authority Pursuant to Section 36 of the
Exchange Act and Compliance Matters
Pursuant to Section 36 of the
Exchange Act, the Commission may
grant an exemption from any provision
of Section 3D of the Exchange Act, any
rule or any provision of any rule under
Regulation SB SEF, or any provision of
the definition of ‘‘security-based swap
execution facility’’ in Section 3(a)(77) of
the Exchange Act and any Commission
rules regarding such definition to the
extent that such exemption is necessary
or appropriate in the public interest and
is consistent with the protection of
investors. Any such exemption could be
subject to conditions and could be
revoked by the Commission at any time.
Generally, the Commission would
consider entertaining an application for
an exemption where the exemption is
necessary or appropriate in the public
interest and consistent with the
protection of investors. The Commission
in its sole discretion would determine
whether to grant or deny a request for
an exemption. In addition, the
Commission could revoke an exemption
at any time, including if a SB SEF could
no longer demonstrate that such
exemption is necessary or appropriate
in the public interest, or is consistent
with the protection of investors.
The Commission requests comment
on all aspects of the exemptive
authority. Would such exemptive
authority be useful to facilitate the
purposes of the Dodd-Frank Act? If so,
in what circumstances should the
Commission grant exemptions? Should
exemptions only be granted in limited
circumstances? Should the Commission
consider granting exemptions from all
rules under Regulation SB SEF or are
exemptions only warranted for specific
rules or specific entities? For example,
should exemptions only be available
with respect to certain Core Principles?
Should the Commission consider
granting exemptions from all provisions
of Section 3(a)(77) of the Exchange Act,
or should exemptions only be available
with respect to certain aspects of the
definition of ‘‘security-based swap
execution facility?’’ What specific
factors should the Commission consider
in determining whether to grant an
exemption? Are there cases where
exemptions may not be appropriate and
should not be considered?
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The Commission acknowledges that it
may take a period of time, as well as
require the expenditure of resources, for
an SB SEF to implement a number of
the requirements set forth in proposed
Regulation SB SEF, should those
requirements be part of any final rules
the Commission may adopt. A potential
SB SEF would not be able to determine
the final rules governing SB SEFs with
which it would need to comply until the
Commission adopts those rules. While
the Commission is committed to
implementing Congress’s directive to
require SB SEFs to register with the
Commission and comply with the Core
Principles, the Commission understands
that some or all potential SB SEFs may
need a period of time in which to
acquire or configure the necessary
systems, engage and train the necessary
staff, and develop and implement the
necessary policies and procedures in
order to comply with any final rules that
the Commission may adopt.
The Commission requests comment as
to whether it should provide a SB SEF
a certain amount of time to comply with
the proposed requirements of
Regulation SB SEF applicable to a
registered SB SEF once the SB SEF has
become registered, and, if so, which
provisions, why, and how much time
should be provided. For example,
proposed Rule 820 relates to the fair
representation of participants on the SB
SEF’s Board. Should the Commission
provide for a delayed compliance date
for this provision to allow the SB SEF
sufficient time to establish the requisite
procedures relating to the election of
fair representation candidates, including
through a petition process, and to align
compliance with the date of its election
of other directors? 406 Should the
Commission consider a delayed
compliance date for the CCO’s annual
report required by proposed Rule 823,
for example, if the SB SEF’s fiscal year
ended shortly after the SB SEF’s
registration application was approved
by the Commission? Are there other
proposed rules or provisions of such
rules for which a SB SEF should be
provided more time to comply after
becoming registered? If so, which ones
and under what conditions should the
Commission permit a delayed
compliance date? For example, would it
be appropriate to delay the date for an
SB SEF to comply with the automated
surveillance requirements of proposed
Rule 813, as long as the SB SEF had
other means to satisfy its surveillance
406 See Regulation MC Proposing Release, supra
note 82.
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obligations? If so, how long of a delay
would be appropriate?
The Commission notes that, under the
proposed rules, it would have the
authority to temporarily register a SB
SEF and, under proposed Regulation SB
SEF, a temporarily registered SB SEF
would need to comply with Regulation
SB SEF, including the rules
implementing the Core Principles.
Should a phased-in compliance
approach apply only with respect to
those SB SEFs that are temporarily
registered with the Commission? Should
phased-in compliance be built into the
temporary registration process?
Alternatively, should the Commission
consider using its Section 36 exemptive
authority to exempt SB SEFs from
certain of the requirements of
Regulation SB SEF on a case-by-case
basis? If commenters favor a phased-in
compliance approach for certain
proposed rules, they should provide
specific recommendations, a rationale
for each such recommendation, and the
conditions under which any such
phased-in approach should be granted.
The Commission also seeks comment
on whether it is necessary or
appropriate for SB SEFs that do not
meet certain objective thresholds, such
as a trading or volume threshold, to
comply with all of the requirements of
proposed Regulation SB SEF. To avoid
unnecessary barriers to entry that could
preclude small SB SEFs from entering
this market and better facilitate
competition and innovation in the SB
swap markets that could be used to
promote more efficient trading in
organized, transparent and regulated
venues, would it be necessary or
appropriate to except an SB SEF from
certain requirements of proposed
Regulation SB SEF under certain
conditions, e.g., if the SB SEF does not
reach a specified volume or liquidity
threshold with respect to the trading of
SB swaps. For example, should a SB
SEF be excepted from provisions of
proposed Rule 816 regarding emergency
authority and proposed Rule 822
regarding systems safeguards if the SB
SEF does not reach a specified volume
or liquidity threshold with respect to
the trading of SB swaps? Are there
circumstances when it would be
burdensome for a SB SEF to undertake
electronic surveillance of SB swaps, e.g.,
if the SB SEF had a low threshold of
trading in SB swaps? In that case, would
it be appropriate to except the SB SEF
from the automated surveillance
requirements of proposed Rule 813, as
long as the SB SEF had other means to
satisfy its surveillance obligations? How
should any low volume or other
liquidity-based exception be measured,
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particularly at the outset of trading of
SB swaps on registered SB SEFs? Are
there other conditions that should be
considered in any Commission
determination that a SB SEF need not
comply with certain provisions of SB
SEF and, if so, what are those
conditions? In lieu of granting
exceptions from certain proposed rules
under certain conditions on an omnibus
basis, should the Commission instead
consider granting exemptions from the
provisions of Regulation SB SEF on a
case-by-case basis?
XXVI. General Request for Comments
The Commission seeks comment on
the proposed interpretation of the
definition of SB SEF; creation of a
registration framework for SB SEFs; and
establishment of rules with respect to
the Dodd-Frank Act requirement that a
SB SEF must comply with the
enumerated fourteen Core Principles
and enforce compliance with those
principles. The Commission particularly
requests comment on possible
alternatives to the proposals in this
release. The Commission also seeks
comments on the general impact the
proposals would have on the market for
SB swaps.
The Commission invites commenters
to address whether the proposed rules
are appropriately tailored to achieve the
goal of transparency, competition, and
efficiency in the SB swap market,
including with respect to the
administration of the SB SEFs’
regulatory activities. The Commission
also requests comment on the necessity
and appropriateness of mandating the
proposed requirements set forth in this
release. The Commission seeks
comment on the proposals as a whole,
including their interaction with the
other provisions of the Dodd-Frank Act.
The Commission further seeks comment
on whether the proposals would help
achieve the broader goals of increasing
transparency and accountability in the
SB swap market.
Commenters should, where possible,
provide the Commission with empirical
data to support their views. Commenters
suggesting alternative approaches
should provide comprehensive
proposals, including any conditions or
limitations that they believe should
apply; the reasons for their suggested
approaches; and their analysis regarding
why their suggested approaches would
satisfy the statutory mandate contained
in Section 763 of the Dodd-Frank Act.
In considering the proposal, the
Commission requests that commenters
consider not only each individual
proposal contained in proposed
Regulation SB SEF but also the totality
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of the Commission’s proposals relating
to SB SEFs, including the proposed
interpretation of the definition of SB
SEF, the proposed rules relating to SB
SEFs, and the proposed registration
requirements for SB SEFs. Do the
proposed interpretation of the definition
of SB SEF and proposed Regulation SB
SEF in their entirety provide an efficient
and effective way to implement the
requirements of the Dodd-Frank Act
relating to SB SEFs? Are the proposed
interpretation of the definition of SB
SEF and proposed Regulation SB SEF in
their entirety properly tailored so that a
SB SEF can meet the proposed
regulatory requirements and yet be an
economically viable business? Are there
aspects of the Commission’s proposals
relating to the regulation of SB SEFs
that, when viewed as a whole, are too
burdensome, especially in light of the
nascent stage of the SB swap market? If
so, what are those features and are there
ways in which they can be revised?
With respect to the proposed rules to
implement the Core Principles,
commenters are invited to consider, in
addition to the costs of each proposed
rule, the totality of the costs of all of the
proposed rules taken as a whole. Are
there any instances in which aspects of
the Commission’s proposals should not
apply? For example, should a system or
platform that otherwise would meet the
proposed interpretation of the definition
of SB SEF, but that does a minimal
business in the SB swap market, be
exempt from all or some of the
requirements of Regulation SB SEF
either temporarily or permanently? In
general, are there additional steps that
the Commission could take that would
implement the requirements of the
Dodd-Frank Act that apply to SB SEFs
and at the same time allow the SB swap
market to continue to develop?
Title VII of the Dodd-Frank Act
requires that the SEC consult and
coordinate to the extent possible with
the CFTC for the purposes of assuring
regulatory consistency and
comparability, to the extent possible,407
and states that in adopting rules, the
CFTC and SEC shall treat functionally
or economically similar products or
entities in a similar manner.408
The CFTC is adopting rules relating to
SEFs as required under Section 733 of
the Dodd-Frank Act. Understanding that
the Commission and the CFTC regulate
different products and markets, and as
such, appropriately may be proposing
alternative regulatory requirements, the
Commission requests comments on the
impact of any differences between the
407 See
408 See
Public Law 111–203, § 712(a)(2).
Public Law 111–203, § 712(a)(7).
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Commission and CFTC approaches to
the regulation of SB SEFs and SEFs.
Specifically, do the regulatory
approaches under the Commission’s
proposed rulemaking pursuant to
Section 763 of the Dodd-Frank Act and
the CFTC’s proposed rulemaking
pursuant to Section 733 of the DoddFrank Act result in duplicative or
inconsistent efforts on the part of market
participants subject to both regulatory
regimes or result in gaps between those
regimes? If so, in what ways do
commenters believe that such
duplication, inconsistencies, or gaps
should be minimized? Do commenters
believe the approaches proposed by the
Commission and the CFTC to regulate
SB SEFs and SEFs are comparable? If
not, why? Do commenters believe there
are approaches that would make the
regulation of these facilities more
comparable? If so, what are those
approaches? Do commenters believe
that it would be appropriate for the
Commission to adopt an approach
proposed by the CFTC that differs from
the Commission’s proposal? If so, which
one? The Commission requests
commenters to provide data, to the
extent possible, supporting any such
suggested approaches.
The Commission seeks comment on
whether its proposed rules, either
individually or collectively, could
permit regulatory arbitrage or have the
effect of driving SB swaps and other
derivatives transactions to financial
centers in other jurisdictions. In this
regard, how do the proposed rules
compare with comparable existing or
proposed rules of other jurisdictions? If
the Commission were to adopt the
proposed rules, would market
participants, end users, and others find
it less costly to transact their SB swaps
and other derivatives transactions in
other jurisdictions? If so, please provide
specific details on those jurisdictions
that could be regarded as having
preferential regulation for trading SB
swaps and please identify all the
specific rules and circumstances that
could lead to such preferences. The
Commission also seeks comment on
specific actions that it could take to
harmonize its proposed rules with those
of other jurisdictions consistent with the
mandates and goals of the Dodd-Frank
Act.
XXVII. Paperwork Reduction Act
Certain provisions of the proposed
rules contain new ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act of 1995 (‘‘PRA’’).409 The
409 44
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Commission is submitting the proposed
collection of information to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with 44 U.S.C.
3507 and 5 CFR 1320.11. The title of the
new collection of information is
Regulation SB SEF. As proposed,
Regulation SB SEF would implement
the provisions of Title VII of the DoddFrank Act relating to the registration
and regulation of SB SEFs. Proposed
Regulation SB SEF would include rules
regarding the registration of a
prospective SB SEF on Form SB SEF,
rule-writing, reporting, recordkeeping,
timely publication of trading
information, the filing of new or
amended rules or new products with the
Commission, reports of the SB SEF’s
CCO, surveillance systems to capture
certain required information and access
to SB SEFs by ECPs.410 An agency may
not conduct or sponsor, and a person is
not required to respond to, a collection
of information unless it displays a
currently valid OMB control number.
A. Summary of Collection of
Information
1. Registration Requirements for SB
SEFs and Form SB SEF
A number of the proposed rules under
Regulation SB SEF relate to registration
with the Commission by an applicant
that seeks status as a registered SB SEF.
Proposed Rules 801, 802, 803, 804, and
proposed Form SB SEF each would
contain requirements relating to
registration with the Commission by an
applicant seeking to register as a SB SEF
that would result in a paperwork
burden.
Proposed Rule 801(a) would require
an applicant to apply for registration
with the Commission as a SB SEF by
filing electronically, in a tagged data
format, a registration application on
Form SB SEF in accordance with the
instructions contained therein. Under
proposed Rule 801(d), an applicant
would be required to designate and
authorize on Form SB SEF an agent in
the United States to accept notice or
service of process, pleadings, or other
documents in any suit, action or
proceedings brought against it to enforce
the Federal securities laws or the rules
or regulations thereunder. Under
410 As proposed, Regulation SB SEF would
contain 24 rules that are designated Rule 800
through Rule 823 inclusive; not all of these
proposed rules would include a collection of
information. The proposed form for registering as a
SB SEF under Regulation SB SEF is Form SB SEF.
This collection of information includes any
collections of information required by proposed
Form SB SEF. Unless identified otherwise, all
proposed rules referred to in this section would be
contained in Regulation SB SEF.
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proposed Rule 801(e), an applicant that
is controlled by any other person 411
would be required to certify on Form SB
SEF and provide an opinion of counsel
that any person that controls such SB
SEF will consent to and can, as a matter
of law, provide the Commission with
prompt access to its books and records,
to the extent such books and records are
related to the activities of the SB SEF,
and submit to onsite inspection and
examination by representatives of the
Commission with respect to the
activities of the SB SEF. Under
proposed Rule 801(f), a non-resident
person applying for registration would
be required to certify on Form SB SEF
and provide an opinion of counsel that
it can, as a matter of law, provide the
Commission with prompt access to its
books and records and submit to onsite
inspection and examination by
representatives of the Commission. In
addition, proposed Rule 814(b)(4)
would require the applicant to certify at
the time of registration on Form SB SEF
that the SB SEF has the capacity to
fulfill its obligations under international
information sharing agreements to
which it is a party as of the date of such
certification.
Proposed Rule 802 relates to
amendments to Form SB SEF. Proposed
Rule 802(a) would require a SB SEF to
file an amendment to Form SB SEF
promptly, but in no case later than 5
business days, after the discovery that
any information filed on Form SB SEF,
any statement therein, or any exhibit or
amendment thereto, was inaccurate
when filed. Proposed Rule 802(b) would
require a SB SEF to file an amendment,
on Form SB SEF, within 5 business days
after any action is taken that renders
inaccurate, or causes to be incomplete,
information filed on the Execution Page
of the Form SB SEF or as part of
Exhibits C, E, G or N,412 or any
amendments thereto. Proposed Rule
802(c) would require a SB SEF that is
controlled by any other person to file an
amendment to Exhibit P on Form SB
SEF within 5 business days after any
changes in the legal or regulatory
framework of any person that controls
the SB SEF that would impact the
ability of or the manner in which any
such person consents to or provides the
Commission prompt access to its books
and records, to the extent such books
and records relate to the activities of the
411 See supra note 319 and accompanying text
regarding the definition of ‘‘control.’’
412 These Exhibits pertain to the list of officers,
directors and committees of the SB SEF (Exhibit C);
ownership of the SB SEF (Exhibit E); certain
material operating agreements (Exhibit G); and
criteria for determining what securities may be
traded (Exhibit N).
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SB SEF, or impacts the Commission’s
ability to inspect and examine any such
person with respect to the activities of
the SB SEF. Proposed Rule 802(d)
would require a non-resident SB SEF to
file an amendment to Exhibit P on Form
SB SEF within 5 business days after any
changes in the legal or regulatory
framework that would impact the SB
SEF’s ability to or the manner in which
it provides the Commission with
prompt access to its books and records
or impacts the Commission’s ability to
inspect and examine the SB SEF.
Proposed Rule 802(f) would require a
SB SEF to file an annual update to Form
SB SEF within 60 days of the end of its
fiscal year.
Proposed Rule 803(a) would require a
registered SB SEF to provide to the
Commission material relating to the
trading of SB swaps (including notices,
circulars, bulletins, lists, and
periodicals) issued or made generally
available to SB SEF participants. If the
information required to be filed
pursuant to proposed Rule 803(a) is
available continuously on an Internet
Web site controlled by a SB SEF,
proposed Rule 803(b) would allow the
SB SEF to indicate the location of the
Web site where the information may be
found and certify that the information
available at such Web site is accurate as
of its date in lieu of filing such
information with the Commission
pursuant to proposed Rule 803(a).
Proposed Rule 804(a) would allow a
SB SEF to withdraw from registration by
filing with the Commission a written
notice of withdrawal and an amended
Form SB SEF to update any inaccurate
information.
Proposed Rules 811(b)(4) and
811(h)(2) would require a SB SEF to
report information regarding grants,
denials and limitations of access on
Form SB SEF and to disclose all
disciplinary actions taken annually on
its annual update to From SEF,
respectively.
2. Rule-Writing Requirements for SB
SEFs
A number of the proposed rules under
Regulation SB SEF would require a SB
SEF to establish rules, policies and
procedures with respect to various
matters. These are proposed Rules
809(c), 810(b), 811(a)(2), 811(a)(3),
811(b)(1), 811(b)(5), 811(c), 811(d),
811(f), 811(g), 811(i), 813(a), 813(c),
813(d), 814(a), 815(a), 816(a), 816(b),
818(d), 820(a), 820(c) and 822(a)(1).
Proposed Rule 809(c) would require a
SB SEF to establish rules setting forth
requirements for an eligible person to
become a participant in the SB SEF.
Such rules would require a participant,
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at a minimum, to: (1) Be a member of,
or have an arrangement with a member
of, a registered clearing agency to clear
trades in the SB swaps that are subject
to mandatory clearing and entered into
by the participant on the SB SEF; (2) (i)
meet the minimum financial
responsibility and recordkeeping and
reporting requirements imposed by the
Commission by virtue of its registration
as a SB swap dealer, major SB swap
participant, or broker; or (ii) in the case
of an eligible contract participant, meet
the recordkeeping and reporting
requirements that the SB SEF would
establish pursuant to proposed Rule
813; (3) agree to comply with the rules,
polices, and procedures of the SB SEF;
and (4) consent to the disciplinary
procedures of the SB SEF for violations
of the SB SEF’s rules.
Proposed Rule 810(b) would require a
SB SEF to establish: (1) Rules that
provide for the equitable allocation of
reasonable dues, fees, and other charges
among its participants and any other
users of its system; (2) rules and systems
that are not designed to permit unfair
discrimination among participants and
any other users of the SB SEF’s system;
(3) rules that promote just and equitable
principles of trade; and (4) rules to
provide, in general, a fair procedure for
disciplining participants for violations
of the rules of the SB SEF.
Proposed Rule 811(a)(2) would
require a SB SEF to establish and
enforce trading, trade processing, and
participation rules that would deter
abuses and have the capacity to detect,
investigate, and enforce those rules,
including means to provide market
participants with impartial access to the
market and to capture information that
may be used in establishing whether
rule violations have occurred. Proposed
Rule 811(a)(3) would require a SB SEF
to establish rules governing the
operation of the SB SEF, including rules
specifying trading procedures to be used
in entering and executing orders traded
or posted on the SB SEF, including
block trades. Proposed Rule 811(b)(1)
would require a SB SEF to establish fair,
objective and not unreasonably
discriminatory standards for granting
impartial access to trading on the SB
SEF. Proposed Rule 811(b)(5) would
require a SB SEF to establish a fair
process for the review of any
prohibition or limitation on access with
respect to a participant or any refusal to
grant access with respect to an
applicant. Proposed Rule 811(c) would
require a SB SEF to establish rules
concerning the terms and conditions of
the SB swaps traded on the SB SEF and
to have rules stipulating the method by
which representation on the swap
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review committee of the SB SEF shall be
chosen by the Board.
Proposed Rule 811(d) would require a
SB SEF to establish rules governing the
procedures for trading on the SB SEF
including, but not limited to: (1) Doing
business on the SB SEF; (2) the types of
trading interest 413 that would be
available on the SB SEF; (3) the manner
in which trading interest would be
handled on the SB SEF and a
requirement for fair treatment of all
trading interest; (4) the manner in which
price transparency for participants
entering trading interest into the system
would be promoted; (5) the manner in
which trading interest and transaction
data would be disseminated, whether to
the SB SEF’s participants or otherwise,
and whether for a fee or otherwise; (6)
prohibited trading practices; (7) the
prevention of the entry of orders,
requests for quotations, responses,
quotations, or other trading interest that
might result in a trade that is clearly
erroneous with respect to the terms of
the trade, a fair and non-discriminatory
manner of handling any trade that is
clearly erroneous, and resolution of any
disputes concerning a clearly erroneous
trade; (8) trading halts in any SB swap,
which rules would be required to
include procedures for halting trading
in a SB swap when trading has been
halted or suspended in the underlying
security or securities pursuant to the
rules or an order of a regulatory
authority with authority over the
underlying security or securities; (9) the
manner in which block trades would be
handled, if different from the handling
of non-block trades; and (10) any other
rules concerning trading on the SB SEF.
Proposed Rule 811(f) would require a
SB SEF to establish rules concerning the
reporting of trades executed on the SB
SEF to a clearing agency if the
transaction is subject to clearing and the
procedures for the processing of
transactions in SB swaps that occur on
or through the SB SEF including, but
not limited to, procedures to resolve any
disputes concerning the execution of a
trade.
Proposed Rule 811(g) would require a
SB SEF to establish rules and
procedures concerning the disciplining
of participants including, but not
limited to, rules authorizing its staff to
recommend and take disciplinary action
for violations of the rules of the SB SEF;
specifying the sanctions that may be
imposed upon participants for
violations of the rules of the SB SEF
413 For purposes of this PRA, references to
‘‘trading interest’’ includes any order, request for
quotation response, quotation, or any other trading
interest on the SB SEF.
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such that each sanction is
commensurate with the corresponding
violation; and establishing fair and nonarbitrary procedures for any disciplinary
process and appeal thereof.
Proposed Rule 811(i) would require a
SB SEF to establish rules and
procedures to assure that information to
be used to determine whether rule
violations have occurred is captured
and retained in a timely manner.
Proposed Rule 813(a) would require a
SB SEF to establish and enforce rules or
terms and conditions defining, or
specifications detailing trading
procedures to be used in entering and
executing orders traded on or through
the facilities of the SB SEF and
procedures for trade processing of SB
swaps on or through the facilities of the
SB SEF. Proposed Rule 813(c) would
require a SB SEF to establish rules
requiring any participant that enters any
order or trading interest or executes any
transaction on the SB SEF to maintain
books and records of any such trading
interest or transaction and of any
position in any SB swap that is the
result of any such trading interest or
transaction and to provide prompt
access to such books and records to the
SB SEF and to the Commission.
Proposed Rule 813(d) would require a
SB SEF to establish and maintain
procedures to investigate possible rule
violations, to prepare reports concerning
the findings and recommendations of
investigations, and to take corrective
action, as necessary.
Proposed Rule 814(a) would require a
SB SEF to establish and enforce rules
requiring its participants 414 to furnish
to the SB SEF, upon request, and in the
form and manner prescribed by the SB
SEF, any information necessary to
permit the SB SEF to perform its
responsibilities, including, without
limitation, surveillance, investigations,
examinations and discipline of
participants; such information may
include, without limitation, financial
information, books, accounts, records,
files, memoranda, correspondence, and
any other information pertaining to
trading interest entered and transactions
executed on or through the SB SEF, and
to cooperate with and allow access by
the SB SEF and representatives of the
Commission.
Proposed Rule 815(a) would require a
SB SEF to establish and enforce rules
and procedures for ensuring the
financial integrity of SB swaps entered
on or through the facilities of such SB
SEF, including the clearance and
414 See supra note 227 and accompanying text
regarding the definition of ‘‘participant.’’
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settlement of SB swaps pursuant to new
section 3C(a)(1) of the Exchange Act.
Proposed Rule 816(a) would require a
SB SEF to establish rules and
procedures to provide for the exercise of
emergency authority in consultation or
cooperation with the Commission as
necessary or appropriate. Proposed Rule
816(b) would require a SB SEF to
establish rules and procedures that
would specify: (1) The person or
persons authorized by the SB SEF to
declare an emergency; (2) how the SB
SEF would notify the Commission of its
decision to exercise its emergency
authority; (3) how the SB SEF would
notify the public of its decision to
exercise its emergency authority; (4) the
processes for decision making by the SB
SEF personnel with respect to the
exercise of emergency authority,
including alternate lines of
communication and guidelines to avoid
conflicts of interest in the exercise of
such authority; and (5) the processes for
determining that an emergency no
longer exists and notifying the
Commission and the public of such
decision.
Proposed Rule 818(d) would require a
SB SEF to establish, maintain, and
enforce written policies and procedures
to verify the accuracy of the transaction
data that it collects and reports.
Proposed Rule 820(a) would require
the rules of a SB SEF to assure fair
representation of participants in the
selection of the SB SEF’s Board.
Proposed Rule 820(c) would require the
rules of a SB SEF to include a fair
process for participants to nominate an
alternative candidate or candidates to
the Board by petition.
Proposed Rule 822(a)(1) would
require a SB SEF, with respect to those
systems that support or are integrally
related to the performance of its
activities, to establish, maintain, and
enforce written policies and procedures
reasonably designed to ensure that its
systems provide adequate levels of
capacity, resiliency, and security. These
policies and procedures would, at a
minimum, require the security-based
swap execution facility to: (1) Establish
reasonable current and future capacity
estimates, including quantifying in
appropriate units of measure the limits
of the SB SEF’s capacity to receive (or
collect), process, store or display (or
disseminate for display or other use) the
data elements included within each
function, and identifying the factors
(mechanical, electronic, or other) that
account for the current limitations; (2)
conduct periodic capacity stress tests of
critical systems to determine such
systems’ ability to process transactions
in an accurate, timely, and efficient
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manner; (3) develop and implement
reasonable procedures to review and
keep current its system development
and testing methodology; (4) review the
vulnerability of its systems and data
center computer operations to internal
and external threats, physical hazards,
and natural disasters, and; (5) establish
adequate contingency and disaster
recovery plans which shall include
plans to resume trading of securitybased swaps by the SB SEF no later than
the next business day following a widescale disruption.
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3. Reporting Requirements for SB SEFs
A number of the proposed rules under
Regulation SB SEF would require SB
SEFs, SB SEF participants and other
persons to report or provide information
to the Commission or to a SB SEF.
Proposed Rules 814, 816(d), 818(a)(3),
818(e), 818(f), 822(a)(2), 822(a)(3), and
822(a)(4) each would contain a reporting
requirement.415 These requirements to
report or provide information to the
Commission would result in a
paperwork burden.
Proposed Rule 814 addresses the
ability of a SB SEF to obtain information
from its participants, and the ability of
Commission representatives to obtain
information from a SB SEF and its
participants. Proposed Rule 814(a)
would require a SB SEF to establish and
enforce rules requiring its participants
to provide information or documents to
the SB SEF upon request. The
information or documents requested
may include any information that is
necessary to permit the SB SEF to
perform its regulatory responsibilities,
including, without limitation, any
financial information, books, accounts,
records, files, memoranda,
correspondence, and any other
information pertaining to trading
interest entered and transactions
executed on or through the SB SEF.
Proposed Rule 814(a) also would direct
a SB SEF to require its participants to
allow access by any Commission
representative to examine the
participant’s books and records and to
obtain or verify information related to
trading interest entered or transactions
executed on or through the SB SEF.416
415 In addition, proposed Rule 823 would require
the SB SEF’s CCO to submit to the Commission an
annual compliance report, along with a financial
report. The paperwork burden associated with the
CCO’s reports, including for proposed Rules
811(b)(4) and 811(g), and 814(b) that set forth
certain items to be addressed in the CCO’s reports,
is addressed separately in Section XXVII.A.7.,
below.
416 The Commission notes that proposed Rule
813(c)(2) similarly requires a SB SEF to establish
and enforce rules that require any participant that
enters any trading interest or executes any
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Proposed Rule 814(b) would direct a SB
SEF to allow access by any Commission
representative to examine the SB SEF’s
books and records and to obtain or
verify information related to trading
interest entered or transactions executed
on or through the SB SEF. Proposed
Rule 814(b)(3) would require a SB SEF
to have the capacity to carry out such
international information-sharing
agreements as the Commission may
require.
Proposed Rule 816(d) would require a
SB SEF to notify the Commission
promptly of any exercise of its
emergency authority, and within two
weeks following cessation of an
emergency, submit to the Commission a
report explaining the basis for declaring
an emergency, how conflicts of interest
were minimized in the SB SEF’s
exercise of its emergency authority, and
the extent to which the SB SEF
considered the effect of its emergency
action on the markets for the SB swap
and any security or securities
underlying the SB swap.
Proposed Rule 818 would establish
both recordkeeping and reporting
obligations for SB SEFs. Proposed Rule
818(e) would require a SB SEF to report
to the Commission such information as
the Commission may, from time to time,
determine to be necessary to perform
the duties of the Commission under the
Exchange Act. Proposed Rule 818(f)
would require a SB SEF to provide to
any representative of the Commission,
upon request, copies of documents
required to be kept and preserved
pursuant to the recordkeeping
requirements of proposed Rules 818(a)
and (b).
Proposed Rule 822 addresses system
safeguards for the SB SEF. Proposed
Rule 822(a)(2) would require a SB SEF
to submit to the Commission on an
annual basis an objective review with
respect to those systems that support or
are integrally related to the performance
of the SB SEF’s activities. If the
objective review is performed by an
internal department, an objective,
external firm would be required to
assess the internal department’s
objectivity, competency, and work
performance. Proposed Rule 822(a)(3)
would require a SB SEF to promptly
notify the Commission in writing of
material systems outages and any
remedial measures implemented or
contemplated and submit to the
Commission within five business days
transaction on the SB SEF to provide the
Commission with prompt access to its books and
records. The Commission considers the prompt
access requirement of proposed Rule 813(c)(2) to be
included in the burden estimates of proposed Rule
814(a) for purposes of this PRA analysis.
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11019
of when the outage occurred a written
description and analysis of the outage
and any remedial measures that have
been implemented or are contemplated.
Proposed Rule 822(a)(4) would require a
SB SEF to notify the Commission in
writing at least thirty calendar days
before implementation of any planned
material systems changes.
4. Recordkeeping Required Under
Regulation SB SEF
Proposed Rule 818(a) would require a
SB SEF to keep and preserve at least one
copy of all documents, including all
correspondence, memoranda, papers,
books, notices, accounts, and other such
records, including the audit trail records
required pursuant to proposed Rule
818(c), as shall be made and received in
the conduct of its business. Proposed
Rule 818(b) would require SB SEFs to
keep and preserve such documents and
other records for a period of not less
than five years, the first two years in an
easily accessible place. Proposed Rule
818(c) would require SB SEFs to
establish and maintain accurate, timesequenced records of all trading interest
and transactions received by, originated
on, or executed on the SB SEF. In
addition, proposed Rule 811(b)(3)
would require that a SB SEF make and
keep records relating to all grants of
access and the basis for such grant, and
all denials or limitations of access to the
SB SEF and the reasons for such denial
or limitation. Proposed Rule 811(h)
would require a SB SEF to make and
keep records relating to all disciplinary
proceedings, sanctions imposed, and
appeals thereof.417
5. Timely Publication of Trading
Information Requirement for SB SEFs
Proposed Rule 817(a)(1) would
require a SB SEF to have the capacity
to electronically capture, transmit, and
disseminate information on price,
trading volume, and other trading data
on all SB swaps executed on or through
the SB SEF.418
417 The records required by proposed Rules
811(b)(3) and 811(g) would be included in the
business records required to be kept pursuant to
proposed Rule 818. Therefore, the Commission
preliminarily believes that the paperwork burden
for these rules would be included in the estimated
burden for proposed Rule 818. See infra note 493
and accompanying text.
418 Proposed Rule 817(a)(2) requires every SB SEF
to make public timely information on price, trading
volume, and other trading data on SB swaps to the
extent required by the Commission. The
Commission notes that proposed Rule 817(a)(2)
does not require a SB SEF to make public timely
information on price, trading volume, and other
trading data on SB swaps. Rather, the Commission
has proposed that other parties be responsible for
timely publication of trading information. See
Reporting and Dissemination Release supra note 6.
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6. Rule Filing and Product Filing
Processes for SB SEFs
Proposed Rules 805 and 806 relate to
the submission to the Commission of
filings of new or amended rules, while
proposed Rules 807 and 808 relate to
the submission to the Commission of
filings to make SB swap products
available to trade. Proposed Rules 805,
806, 807, and 808 would impose a
collection of information burden on SB
SEFs.419
Rule Filings: Proposed Rules 805 and
806 would require a SB SEF to submit
rule filings for new rules or rule
amendments, including changes to an
existing product’s terms or
conditions.420 Under proposed Rules
805(a) and 806(a), a SB SEF could
submit either a voluntary request for
prior approval or a self-certified rule
filing, respectively, for any new rules or
rule amendments. Under both proposed
rules, a SB SEF would be required to
submit the rule filings electronically to
the Commission in a format to be
specified by the Commission.421 Both
proposed Rules 805(a) and 806(a) would
require the SB SEF to include the
following information in the requisite
rule filings: (1) The text of the proposed
rule or rule amendment (in the case of
a rule amendment, deletions and
additions would need to be indicated);
(2) the proposed effective date or
intended date of implementation, as
applicable; (3) the documentation relied
on by the SB SEF to establish the basis
for compliance with the applicable
provisions of the Exchange Act and the
rules and regulations thereunder
(including Section 3D(d) of the
Exchange Act and the rules and
regulations thereunder); (4) a
certification or written statement, as
applicable, that the SB SEF has
published a notice of pending new rule
or rule amendment, or a notice of
pending certification, as applicable, on
the SB SEF’s Web site and a copy of the
submission, concurrent with its filing
with the Commission; (5) a description
of any substantive opposing views on
the rule that were expressed to the SB
SEF by the Board or committee
members, participants or market
participants that were not incorporated
419 The Commission expects to conduct a separate
rulemaking that would propose the form for the
electronic submission of such filings to the
Commission and the procedures pertinent to such
form. Should the Commission propose any such
form and associated procedures, it would include
a collection of information burden as part of that
proposed rulemaking.
420 Filings that relate to proposed changes to an
existing SB swap’s terms or conditions would be
submitted under proposed Rules 806 or 807.
421 See supra Section XXIII.
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into the rule (or, with respect to a selfcertification filing under Rule 806(a), a
statement that no such opposing views
were expressed, if applicable); (6) a
request for confidential treatment, if
appropriate; and (7) for proposed
amendments to a product’s terms and
conditions, a written statement that the
SB SEF has undertaken a due diligence
review of the legal conditions, including
conditions relating to contractual and
intellectual property rights, that may
materially affect the trading of the
product.
In addition, for voluntary requests for
prior approval rule filings, proposed
Rule 805(a) would also require SB SEFs
to include: (1) A description of any
action taken or anticipated to be taken
to adopt the proposed rule by the SB
SEF or its Board, or by any committee
thereof, and a citation to the rules of the
SB SEF that authorize the adoption of
the proposed rule change; (2) an
explanation of the operation, purpose
and effect of the proposed new rule or
rule amendment, including, as
applicable, a description of the
anticipated benefits to market
participants or others, any potential
anticompetitive effects on market
participants or others, and how the rule
fits into the SB SEF’s framework of
regulation; (3) any additional
information that may be beneficial to
the Commission in analyzing the new
rule or rule amendment (and if the
proposed rule affects, directly or
indirectly, the application of any other
rule of the SB SEF, the pertinent text of
any such rule must be set forth and the
anticipated effect described); and (4)
and the identification of any
Commission rule or regulation that
Commission may need to amend or
interpret in order to approve the new
rule or rule amendment and, to the
extent that such an amendment or
interpretation is necessary to
accommodate the new rule or rule
amendment, a reasoned analysis
supporting the proposed amendment or
interpretation.
For self-certification rule filings,
proposed Rule 806(a) also would require
a SB SEF to include: (1) A certification
by the SB SEF that the rule complies
with the Exchange Act and Commission
rules and regulations thereunder; and
(2) upon request of any representative of
the Commission, additional evidence,
information, or data that may be
beneficial to the Commission in
conducting a due diligence assessment
of the filing and the SB SEF’s
compliance with any of the
requirements of the Exchange Act or the
rules and regulations thereunder.
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Product Filings: Proposed Rules 807
and 808 would require a SB SEF to
submit product filings prior to trading a
SB swap. Under proposed Rules 807(a)
and 808(a), a SB SEF could submit
either a self-certified product
submission or voluntary request for
prior approval product filing,
respectively, before trading a SB swap.
Under both proposed rules, a SB SEF
would be required to submit the product
filings electronically to the Commission
in a format specified by the
Commission. Both proposed Rules
807(a) and 808(a) would require SB
SEFs to include the following
information in the product filings: (1) A
copy of the SB swap’s terms and
conditions, (2) the documentation relied
on to establish the basis for compliance
with the Exchange Act and rules and
regulations thereunder (including
Section 3D(d) of the Exchange Act and
the rules and regulations thereunder);
(3) a written statement verifying that the
SB SEF has undertaken a due diligence
review of the legal conditions, including
legal conditions that relate to
contractual and intellectual property
rights, that may materially affect the
trading of the SB swap; (4) a request for
confidential treatment, if appropriate;
and (5) a certification that the SB SEF
has published on its Web site a notice
of pending request for approval, or a
notice of pending certification, as
applicable, and a copy of the
submission, concurrent with the filing
of the submission with the Commission.
In addition, for self-certification product
filings, proposed Rule 807(a) also would
require a SB SEF to include the
following information: (1) The intended
date on which the SB swap may begin
trading, and (2) a certification by the SB
SEF that the SB swap to be traded
complies with the Exchange Act and the
rules and regulations thereunder,
including Section 3D(d) of the Exchange
act and the rules and regulations
thereunder.
In addition, proposed Rules 807(b)
and 808(b) would require a SB SEF to
provide, upon request of any
representative of the Commission,
additional evidence, information, or
data that demonstrates that the SB swap
meets, initially or on a continuing basis,
all of the requirements of the Exchange
Act and rules and regulations
thereunder.
7. Requirements Relating to the SB
SEF’s Chief Compliance Officer
Proposed Rule 823 addresses the
obligations of the SB SEF’s CCO,
including the CCO’s performance of his
or her statutory duties with respect to
the SB SEF and its statutory
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requirement to prepare and submit to
the Commission annual compliance and
financial reports.
Proposed Rule 823(a) would require
the SB SEF’s Board to designate a CCO
to perform the duties identified in
proposed Rule 823(b) through (e). Under
proposed Rule 823(b)(6) and (7), the
CCO would be responsible for
establishing procedures for the
remediation of noncompliance issues
identified by the CCO identified through
any compliance office review, lookback, internal or external audit finding,
self-reported error or validated
complaint, and establishing appropriate
procedures for the handling,
management response, remediation,
retesting, and closing of noncompliance
issues.
The CCO also would be required
under proposed Rule 823(c) and (d) to
prepare and submit annual compliance
reports to the Commission and the SB
SEF’s Board containing, at a minimum:
(1) A description of the SB SEF’s
enforcement of its policies and
procedures; (2) information on all
investigations, inspections,
examinations, and disciplinary cases
opened, closed, and pending during the
reporting period; (3) all grants of access
(including, for all participants, the
reasons for granting such access) and all
denials or limitations of access
(including for each applicant, the
reasons for denying or limiting access),
consistent with proposed Rule 811(b)(3);
(4) any material changes to the policies
and procedures since the date of the
preceding compliance report; (5) any
recommendation for material changes to
the policies and procedures as a result
of the annual review, the rationale for
such recommendation, and whether
such policies and procedures were or
will be modified by the SB SEF to
incorporate such recommendation; (6)
the results of the SB SEF’s surveillance
program, including information on the
number of reports and alerts generated,
and the reports and alerts that were
referred for further investigation or for
an enforcement proceeding; (7) any
complaints received regarding the SB
SEF’s surveillance program; and (8) any
material compliance matters identified
since the date of the preceding
compliance report.
The CCO is required under proposed
Rule 823(e)(1) and (2) to submit
annually a financial report for the SB
SEF and for certain affiliated entities of
the SB SEF. Among other things, the
annual financial report for the SB SEF
must be audited by a registered public
accounting firm that is qualified and
independent in accordance with Rule 2–
01 of Regulation S–X (17 CFR 210.2–01),
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be a complete set of financial statements
of the SB SEF that are prepared in
accordance with U.S. generally accepted
accounting principles for the two most
recent fiscal years of the SB SEF. For
certain affiliated entities (every
subsidiary in which the applicant has,
directly or indirectly, a 25% interest
and for every entity that has, directly or
indirectly, a 25% interest in the
applicant), the SB SEF must provide a
financial report consisting of a complete
set of unconsolidated financial
statements (in English) for the latest two
fiscal years and include such footnotes
and other disclosures as are necessary to
avoid rendering the financial statements
misleading. As proposed, the reports for
the SB SEF and for the SB SEF’s
affiliated entities would be provided in
XBRL consistent with Rules 405(a)(1),
(a)(3), (b), (c), (d) and (e) of Regulation
S–T.422 The Commission notes that
these annual financial reports are the
same as those required to be produced
upon registration and annually pursuant
to Exhibits F and H to proposed Form
SB SEF for the SB SEF. In addition,
pursuant to Exhibit H to proposed Form
SB SEF, the Commission may request
unaudited financial information for any
other affiliated entity not covered by the
25% interest threshold discussed above.
8. Surveillance Systems Requirements
for SB SEFs
Several proposed rules under
Regulation SB SEF would require a SB
SEF to electronically surveil its market
and to maintain an automated
surveillance system. To the extent that
such surveillance and systems would
require a SB SEF to collect and assess
data and other information, such rules
would result in a collection of
information.
Proposed Rule 811(j) would require a
SB SEF to have the capacity to capture
information that may be used in
establishing whether rule violations
have occurred, including through the
use of automated surveillance systems
as set forth in proposed Rule 813(b).
Proposed Rule 813(a)(2) would require a
SB SEF to monitor trading in SB swaps
to prevent manipulation, price
distortion, and disruptions of the
delivery or cash settlement practices
and procedures, including methods for
conducting real-time monitoring of
trading and comprehensive and accurate
trade reconstructions. Proposed Rule
813(b) would require a SB SEF to have
the capacity and appropriate resources
to electronically monitor trading in SB
swaps on its market by establishing an
automated surveillance system,
422 See
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11021
including through real-time monitoring
of trading and use of automated alerts.
423
9. Access by Non-Registered Eligible
Contract Participants
Proposed Rule 809(d)(1) would
require a SB SEF that provides direct
access to non-registered ECPs as
participants to establish, document, and
maintain a system of risk management
controls and supervisory procedures
reasonably designed to manage the
financial, regulatory, and other risks of
this business activity.424 Proposed Rule
809(d)(2) would require that the risk
management controls and supervisory
procedures for granting access to ECPs
as participants of the SB SEF to be
reasonably designed to ensure
compliance with all regulatory
requirements.425
10. Composite Indicative Quote and
Executable Bids and Offers
Proposed Rule 811(e) would require a
SB SEF that operates an RFQ platform
to create and disseminate through the
SB SEF a composite indicative quote,
made available to all participants, for SB
swaps traded on or through the SB SEF.
The Commission’s proposed
interpretation of SB SEF would require
each SB SEF, at the minimum, to
provide any participant with the ability
to make and display executable bids or
offers accessible to all participants on
the SB SEF, if the participant wishes to
do so.
B. Proposed Use of Information
1. Registration Requirements for SB
SEFs and Form SB SEF
As discussed above, proposed Rules
801, 802, 803 and 804 would require an
applicant to register on Form SB SEF,
file certain amendments and updates to
Form SB SEF, file other supplemental
information with the Commission with
respect to the trading of SB swaps, and
provide notice to the Commission of the
SB SEF’s withdrawal of registration. The
information collected pursuant to these
proposed rules would enhance the
ability of the Commission to determine
whether to approve the registration of
an entity as a SB SEF; to monitor and
oversee SB SEFs; to determine that SB
423 The collection of information burdens
associated with the audit trail provisions of
proposed Rule 818(a) and (c) are discussed in the
sections of this PRA analysis relating to
recordkeeping.
424 See proposed Rule 809(d)(1). Non-registered
ECPs are eligible contract participants that are not
registered with the Commission as a SB swap
dealer, major SB swap participant, or broker (as
defined in section 3(a)(4) of the Exchange Act).
425 See proposed Rule 809(d)(2).
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SEFs initially comply, and continue to
operate in compliance, with the
Exchange Act, including the Core
Principles applicable to SB SEFs, and
the rules and regulations thereunder; to
carry out its statutorily mandated
oversight functions; and to maintain
accurate and updated information
regarding SB SEFs. Because the
registration information would be
publicly available, it could also be
useful to SB SEF’s participants, other
market participants, other regulators,
and the public generally.
2. Rule-Writing Requirements for SB
SEFs
The proposed provisions of
Regulation SB SEF requiring that SB
SEFs establish certain rules, policies
and procedures would help SB SEFs
comply with the Exchange Act,
including the Core Principles applicable
to SB SEFs, and the rules and
regulations thereunder. The rules also
would be useful to the SB SEF’s
participants in understanding and
complying with the requirements of the
SB SEF and to other market
participants, other regulators, and the
public generally.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
3. Reporting Requirements for SB SEFs
The information that would be
collected under the proposed provisions
of Regulation SB SEF requiring SB SEFs,
SB SEF participants, and other persons
to submit certain reports and provide
certain information upon request would
be used by the Commission to assist in
its oversight of SB SEFs and the SB
swap markets.
4. Recordkeeping Required Under
Regulation SB SEF
Proposed Rule 813(c) would aid the
SB SEF in detecting and deterring
fraudulent and manipulative acts with
respect to trading on its market, as well
as help it to fulfill the statutory
requirement in Core Principle 4 that a
SB SEF monitor trading in SB swaps,
including through comprehensive and
accurate trade reconstructions. The
proposed rule also would aid the
Commission in carrying out its
responsibility to oversee SB SEFs.
Proposed Rules 818(a) and (b) would
help to ensure that records exist, and
thus would be available to the
Commission pursuant to the proposed
reporting requirements. Access to these
records would provide a valuable tool to
help the Commission carry out its
oversight responsibility over SB SEFs
and the SB swap markets in general.
The audit trail information required to
be maintained under the proposed Rule
818(c) would facilitate the ability of the
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SB SEF and the Commission to carry out
their respective obligations under the
Exchange Act, by providing a record of
the complete history of all trading
interest entered and transactions
executed on the SB SEF, which data
could be used to help detect abusive or
manipulative trading activity, prepare
reconstructions of activity on the SB
SEF or in the SB swaps market, and
generally to understand the causes of
unusual market activity. In addition,
proposed Rule 811(b)(3) would require
every SB SEF to make and keep records
of all grants, denials, or limitations of
access to the SB SEF, which would
provide the Commission an important
tool to help it assess whether the SB
SEF is meeting its duty to provide fair
and impartial access to its facility.
Further, proposed Rule 811(h) would
require the SB SEF to make and keep
records specifically of all disciplinary
proceedings and appeals, which would
allow the Commission to review the
disciplinary process at a SB SEF and
would provide the Commission an
additional tool to carry out its oversight
responsibilities.
5. Timely Publication of Trading
Information Requirement for SB SEFs
The requirement contained in
proposed Rule 817 that a SB SEF have
the capacity to electronically capture,
transmit, and disseminate information
on price, trading volume, and other
trading data on all SB swaps executed
on or through the SB SEF, would assist
the SB SEF in carrying out its regulatory
responsibilities under the Exchange Act,
including, without limitation, the
proposed requirements that every SB
SEF must keep and preserve books and
records of activities related to its
business, and allow access by the
Commission to obtain or verify other
information related to orders entered
and transactions executed on or through
the SB SEF’s facilities. In addition, the
Commission believes that every SB SEF
must have the capacity to capture this
information to enable the SB SEF to
comply with reasonable requests to
provide information to others,
including, SB SEF participants,
counterparties, registered SDRs, or
regulatory authorities.
6. Rule Filing and Product Filing
Processes for SB SEFs
Proposed Rules 805 and 806 would
require a SB SEF to submit new rule or
rule amendments as rule filings either
through a voluntary prior approval
process or a self-certification process.
The information that would be collected
under these proposed rules would help
ensure compliance by the SB SEF with
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the provisions of the Exchange Act,
including the Core Principles applicable
to SB SEFs, and the rules and
regulations thereunder, as well as assist
the Commission in overseeing the SB
SEF’s compliance with its regulatory
obligations. This information also
would be useful to the SB SEF’s
participants, because they would be
subject to such new or amended rules
and thus would have an interest in
learning about those rules and
potentially in submitting to the
Commission comments on any proposed
new or amended rules. Other market
participants, other SB SEFs, and other
regulators, as well as the public
generally, may find information about
proposed new or amended rules useful.
Proposed Rules 807 and 808 would
require a SB SEF to submit filings for
new products that they make available
for trading either through a selfcertification process or a voluntary prior
approval process. The information that
would be collected under these
proposed rules would help ensure that
any SB swap that is available to trade on
the SB SEF would comply with the
provisions of the Exchange Act,
including the Core Principles applicable
to SB SEFs, and the rules and
regulations thereunder, as well as assist
the Commission in overseeing the SB
SEF’s compliance with its regulatory
obligations. In particular, the
requirements of proposed Rules 807(a)
and 808(a) should help the Commission
determine the SB SEF’s compliance
with the Core Principles that apply
specifically to products, such as Core
Principle 3 which would require a SB
SEF to ensure that a SB swap trading on
its facility is not readily susceptible to
manipulation. Other market
participants, other SB SEFs, and other
regulators, as well as the public
generally, may find information about
the new products useful.
7. Requirements Relating to the SB
SEF’s CCO
As discussed above, proposed Rule
823 would require that a SB SEF’s CCO
establish certain policies relating to
noncompliance issues as well as prepare
and submit to the Commission both an
annual compliance report and an annual
financial report. The information that
would be collected under this proposed
rule would help ensure compliance by
SB SEFs with the provisions of the
Exchange Act, including the Core
Principles applicable to SB SEFs, and
the rules and regulations thereunder, as
well as assist the Commission in
overseeing the SB SEFs. The
Commission could use the annual
compliance report to help it evaluate
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whether the SB SEF is carrying out its
statutorily-mandated regulatory
obligations and, among other things, to
discern the scope of any denials of
access or refusals to grant access by the
SB SEF and to obtain information on the
status of the SB SEF’s regulatory
compliance program. The annual
financial report would provide the
Commission with important information
on the financial health of the SB SEF.
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8. Surveillance Systems Requirements
for SB SEFs
The proposed rules requiring a SB
SEF to maintain certain surveillance
systems and monitor trading would
enable the SB SEFs to have the capacity
and resources to fulfill its obligations
under the Exchange Act to oversee
trading on its market, and to prevent
manipulation and other unlawful
activity or disruption of the market.
These systems would help the SB SEF
to identify and investigate market
behavior that may be improper and
bring any necessary disciplinary
actions.
9. Access by Non-Registered Eligible
Contract Participants
Proposed Rule 809 would permit a SB
SEF to provide access to the SB SEF by
non-registered ECPs, provided that the
conditions of the proposed rule relating
to such access would be satisfied.
Proposed Rule 809(d) would require a
SB SEF that would permit access to
non-registered ECPs 426 to establish,
document, and maintain a system of risk
management controls and supervisory
procedures reasonably designed to
manage the financial, regulatory, and
other risks of this business activity. The
risk management controls and
supervisory procedures for granting
access to non-registered ECPs would be
required to be reasonably designed to
ensure compliance with all regulatory
requirements. Since non-registered ECPs
are not directly subject to capital or
other financial requirements, there is a
concern that, in the absence of risk
management controls and supervisory
procedures, they could enter into trades
that exceed appropriate capital or credit
limits. The proposal relating to risk
management controls and supervisory
procedures is intended to help manage
these risks associated with allowing
non-registered ECPs to have direct
access to an SB SEF’s market.
10. Composite Indicative Quote and
Executable Bids and Offers
As discussed above, proposed Rule
811(e) would require a SB SEF that
426 See
proposed Rule 809.
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operates an RFQ platform to create and
disseminate through the SB SEF a
composite indicative quote, made
available to all participants, for SB
swaps traded on or through the SB SEF.
The Commission preliminarily believes
that a composite indicative quote would
provide a certain level of pre-trade
transparency for an RFQ platform. In
addition, the Commission’s proposed
interpretation of SB SEF would require
each SB SEF, at the minimum, to
provide any participant with the ability
to make and display executable bids or
offers accessible to all participants on
the SB SEF, if the participant wishes to
do so. The Commission preliminarily
believes that this functionality would
provide greater access to the SB SEF for
participants.
C. Respondents
The collection of information
associated with the proposed Regulation
SB SEF would apply to entities seeking
to register as, and to registered, SB SEFs.
In the Dodd-Frank Act, Congress
incorporated into the Exchange Act a
definition of SB SEF and mandated the
registration and regulation of these new
facilities.427 There currently are no
registered SB SEFs. Based on
conversations with the CFTC and
industry sources, the Commission
preliminarily believes that
approximately 10 to 20 entities could
seek to register as SB SEFs and thus be
subject to the collection of information
requirements of these proposed rules.
The Commission is using the higher
estimate of 20 SB SEFs for this PRA
analysis.428
In addition, proposed Rules 813(c)
and 814(a) would impose collection of
information burdens on SB SEF
participants. Based on conversations
with industry sources, the Commission
preliminarily believes that there could
be a total of 275 persons that could
become SB SEF participants and would
thus be subject to the collection of
information requirements of the
proposed rules.429
427 See
Public Law 111–203, § 761(a) (adding
Section 3(a)(77) of the Exchange Act), defining the
term ‘‘security-based swap execution facility.’’ See
also Public Law 111–203, § 763(c) (adding Section
3D of the Exchange Act).
428 This estimate comports with the estimated
number of SB SEFs contained in the Regulation MC
Proposing Release, supra note 82.
429 275 = 50 (estimated number of SB swap
dealers that would be SB SEF participants) + 5
(estimated number of major SB swap participants
that would be SB SEF participants) + 10 (estimated
number brokers that would be SB SEF participants)
+ 210 (estimated number of ECPs that would be SB
SEF participants). The Commission recently
proposed rules to define a number of terms used in
Title VII, including, among others, ‘‘security-based
swap dealer’’ and ‘‘major security-based swap
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11023
Except with regard to the collection of
information burdens imposed on SB
SEF participants pursuant to proposed
Rules 813(c) and 814(a), as discussed
further in the sections of this PRA
discussing the reporting and
recordkeeping requirements of
Regulation SB SEF, the respondents
subject to the collection of information
burdens associated with proposed
Regulation SB SEF would be SB SEFs.
D. Total Annual Reporting and
Recordkeeping Burden
1. Registration Requirements for SB
SEFs and Form SB SEF
Initial filings on Form SB SEF by a
prospective SB SEF seeking to register
with the Commission pursuant to
proposed Rule 801 would be made on
a one-time basis. As discussed above, no
SB SEFs currently are registered with
the Commission and the Commission
preliminarily estimates that 20 entities
initially would seek to register with the
Commission as SB SEFs. The
Commission’s estimate regarding the
initial burden that a SB SEF would
incur to file a Form SB SEF is informed
by its estimate of the number of hours
necessary to complete a Form 1 for
registration of a national securities
exchange. The Commission calculated
in 2010 that Form 1 takes 47 hours to
complete.430 Although the requirements
of Form 1 are not identical to the
requirements of proposed Form SB SEF,
the Commission preliminarily believes
that they are substantially similar for
PRA purposes. Similar to Form 1, the
information that would be required on
Form SB SEF generally would consist of
copies of existing documents that would
be prepared by a SB SEF in the ordinary
course of its business. As noted above,
no SB SEFs currently are registered with
the Commission and no framework for
registration of SB SEFs currently exists.
Therefore, the Commission
preliminarily believes that, during the
initial implementation period of
participant.’’ See Securities Exchange Act Release
No. 63452 (December 7, 2010), 75 FR 80174
(December 21, 2010). As part of that proposal, the
Commission preliminarily estimated that
approximately 50 entities may be required to
register as SB swap dealers under the proposed
rules. See 75 FR at 80209 n.188. The Commission
further estimated that no more than ten entities
would have SB swap positions large enough that
they would have to monitor whether they meet the
thresholds defining a major SB swap participant.
See 75 FR at 80207–08. For purposes of these
proposed rules, the Commission conservatively
assumes that there would be a total of five major
SB swap participants, while recognizing that in fact
there may be fewer than five.
430 See 75 FR 32824 (June 9, 2010) (outlining the
most recent Commission calculations regarding the
PRA burdens for Form 1 and Rules 6a-1 and 6a-2
under the Exchange Act).
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Regulation SB SEF, it could take a SB
SEF more time to compile the necessary
documents and information required by
the exhibits to Form SB SEF than it
would for an applicant to become a
national securities exchange to compile
documents and information to comply
with requirements of Form 1. The
procedures for registration as a national
securities exchange are well-settled and,
therefore, an entity that intends to
register as national securities exchange
could anticipate the form of the
documents and other information that it
would need to compile to register on
Form 1.431 Based on these factors, the
Commission preliminarily estimates
that an applicant would incur an
average burden of 100 hours to prepare
and file an initial Form SB SEF,
including all exhibits thereto, except
Exhibits F and H requiring certain
financial reports, and Exhibit P
requiring certain opinions of counsel,
which are discussed separately
below.432 Therefore, the Commission
431 For example, because an entity seeking to
register as a national securities exchange would
know that Exhibit E to Form 1 requires an applicant
to describe the manner and operation of the
electronic trading system to be used to effect
transactions on the exchange, such entity likely
would prepare such a description in the ordinary
course of its business in anticipation of applying for
registration as a national securities exchange on
Form 1. However, because the requirements of
Form SB SEF would be set forth for the first time
in connection with this proposed rulemaking, a SB
SEF previously may not have prepared a
description of the manner and operation of its
trading system in the ordinary course of business
and would have to do so to comply with Exhibit
I to Form SB SEF.
432 As discussed above, proposed Rule 801(d)
would require a SB SEF to designate and authorize
on Form SB SEF an agent in the U.S. to accept
notice or service of process, pleadings, or other
documents in any action or proceedings brought
against it to enforce the Federal securities laws and
the rules and regulations thereunder. Proposed Rule
801(e) would require an applicant that is controlled
by any other person to certify on Form SB SEF that
any person that controls such SB SEF would
consent to and could, as a matter of law, provide
the Commission with prompt access to its books
and records, to the extent such books and records
are related to the activities of the SB SEF, and
submit to onsite inspection and examination by
representatives of the Commission with respect to
the activities of the SB SEF. Proposed Rule 801(f)
would require a non-resident person applying for
registration to certify on Form SB SEF that it could,
as a matter of law, provide the Commission with
prompt access to its books and records and submit
to onsite inspection and examination by
representatives of the Commission. Proposed Rule
814(b)(4) would require a SB SEF to certify at the
time of registration on Form SB SEF that the SB SEF
would have the capacity to fulfill its obligations
under international information sharing agreements
to which it is a party. The Commission
preliminarily believes that the burden associated
with these requirements would be included in the
100-hour burden associated with the initial
registration on Form SB SEF required by proposed
Rule 801(a). These proposed requirements currently
are not included on Form 1. In addition, proposed
Rules 801(e) and (f) would require SB SEFs that are
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preliminarily estimates that the
aggregate one-time burden for all
respondents to file the initial Form SB
SEF, including all exhibits thereto,
except Exhibits F and H requiring
certain financial reports and Exhibit P
requiring opinions of counsel, would be
2,000 hours.433 The Commission
preliminarily believes that SB SEFs
would prepare Form SB SEF internally.
The Commission requests comment on
the accuracy of this estimate.
Exhibits F and H to proposed Form
SB SEF would require an applicant to
submit an annual financial report that
would have to satisfy a number of
requirements, including the requirement
that a registered public accounting firm
that is qualified and independent in
accordance with Rule 2–01 of
Regulation S–X 434 audit each financial
report relating to the SB SEF (unaudited
for certain affiliated entities). The
Commission preliminarily believes that
it is unlikely that, during the initial
implementation period of Regulation SB
SEF, a SB SEF would have prepared
such reports in the ordinary course of
business prior to applying for
registration on Form SB SEF. Therefore,
in connection with its efforts to register
as a SB SEF with the Commission on
proposed Form SB SEF, an applicant
would incur an initial burden to
generate such financial reports. Based
on conversations with operators of
current trading platforms and the
Commissions experience with entities of
similar size, the Commission
preliminarily estimates that the
financial reports relating to the SB SEF
would generally require, on average, 500
hours per respondent to complete and
cost $500,000 for independent public
accounting services per respondent.
The Commission believes that the
unaudited reports required for certain
affiliated entities and to be made
available upon request by the
Commission for other affiliated entities
would not be overly time consuming to
produce because, based on the
Commission’s experience with Form 1
filers, a respondent’s accounting system
should have this information available.
Furthermore, because the information
would not have to be audited, a
respondent would be able to compile
the required information using a
controlled by other persons and non-resident SB
SEFs to provide certain opinions of counsel. The
Commission preliminarily believes that the burden
associated with these requirements would be
included in the burden associated with Exhibit P
to Form SB SEF discussed below.
433 2,000 hours = 20 (number of SB SEF
respondents) x 100 hours (initial hourly burden to
comply with Form SB SEF, except for Exhibits F,
H and P).
434 See 17 CFR 210.2–01.
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computer and commercially available
software that it generally would own for
pre-existing accounting purposes and
then would submit the information to
the Commission. Based on the number
of unaudited financial statements the
Commission receives from filers of Form
1 and the substance contained in these
reports, the Commission estimates that
it would take 40 hours to compile,
review, and submit these reports.
However, as proposed, all of these
reports would be required to be
provided in XBRL, as required in Rules
405(a)(1), (a)(3), (b), (c), (d) and (e) of
Regulation S–T.435 This would create an
additional burden on respondents. The
Commission preliminarily estimates,
based on its experience with other data
tagging initiatives, that these
requirements would add an additional
burden of an average of 54 hours and
$23,000 in outside software and other
costs per respondent. Thus, for
complying with the financial statement
requirements under Exhibits F and H in
connection with an initial application
on proposed Form SB SEF, the
Commission estimates an aggregate total
initial burden of 11,880 hours 436 and
$10,460,000 for all respondents.437 The
Commission solicits comments as to the
accuracy of these estimates.
Pursuant to the requirements of
proposed Rule 801(e), Exhibit P to
proposed Form SB SEF would require
an applicant that is controlled by any
other person to provide an opinion of
counsel that any person that controls
such SB SEF has consented to and can,
as a matter of law, provide the
Commission with prompt access to its
books and records, to the extent such
books and records are related to the
activities of the SB SEF, and submit to
onsite inspection and examination by
representatives of the Commission with
respect to the activities of the SB SEF.
This creates an additional burden for SB
SEFs controlled by other persons. Based
on similar requirements on Form 20–F,
the Commission preliminarily estimates
that this additional burden would add 1
hour and $900 in outside legal costs for
each affected SB SEF.438 For PRA
435 See
17 CFR 232.405.
hours = 20 (number of SB SEF
respondents) × 594 hours (500 hours for audited SB
SEF financial statements + 40 hours for unaudited
financial statements of affiliated entities + 54 hours
for XBRL formatting of submission).
437 $10,460,000 = 20 (number of SB SEF
respondents) × $523,000 ($500,000 for outside
accounting services for auditing SB SEF’s financial
statements + $23,000 in outside software and other
cost for formatting financial statement submissions
in XBRL format).
438 See Securities Exchange Act Release No.
49616 (Apr. 26, 2004), 69 FR 24016 (Apr. 30, 2004)
(outlining the Commission’s calculations regarding
436 11,880
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purposes and in order to provide an
estimate that is not under-inclusive, the
Commission preliminarily estimates
that all respondents applying for
registration as a SB SEF pursuant to
proposed Rule 801, or 20 SB SEFs, may
be controlled by other persons and
therefore subject to the additional
burden imposed on SB SEF’s controlled
by other persons by Exhibit P. Thus, the
Commission preliminarily estimates a
total additional burden for all SB SEFs
that are controlled by other persons to
comply with the opinion of counsel
requirements of Exhibit P of 20 hours 439
and $18,000.440 The Commission
solicits comments as to the accuracy of
these estimates.
Pursuant to the requirements of
proposed Rule 801(f), Exhibit P to
proposed Form SB SEF would require a
non-resident SB SEF to provide an
opinion of counsel that the SB SEF can,
as a matter of law, provide the
Commission with access to the books
and records of the SB SEF and submit
to onsite inspection and examination by
representatives of the Commission. This
creates an additional burden for nonresident SB SEFs. Based on similar
requirements on Form 20–F, the
Commission preliminarily estimates
that this additional burden would add 1
hour and $900 in outside legal costs per
respondent.441 For PRA purposes, the
Commission preliminarily estimates
that one out of the 20 estimated persons
applying for registration as a SB SEF
pursuant to proposed Rule 801 may be
‘‘non-resident’’ SB SEFs and therefore
subject to the additional burden
imposed on non-resident SB SEFs by
Exhibit P. Thus, the Commission
preliminarily estimates a total
additional burden for all non-resident
SB SEFs to comply with the opinion of
the PRA burdens resulting from having to provide
a legal opinion and additional disclosure required
by Instruction 3 to Item 7.B to Form 20–F). The
Commission calculated that such requirements
would result in an additional burden to affected
foreign private issuers of 3 hours, of which 25%,
or approximately 1 hour, would be incurred by the
foreign private issuers themselves, and 75% would
be incurred by outside firms, including legal
counsel, which would cost approximately $900
($900 = 3 hours (estimated burden to comply with
proposed Rule 801(f)) × 0.75 (portion of estimated
burden incurred by outside legal counsel × $400
(hourly rate for an outside attorney)). The
Commission preliminarily continues to estimate the
hourly rate for an outside attorney at $400 per hour,
based on industry sources. See Securities Exchange
Act Release No. 62184A (May 27, 2010), 75 FR
33100 at note 505 (June 10, 2010) (‘‘Municipal
Securities Disclosure Release’’).
439 20 hours = 20 (number of SB SEF respondents
controlled by other persons) × 1 (hourly burden to
comply with Exhibit P).
440 $18,000 = 20 (number of SB SEF respondents
controlled by other persons) × $900 (cost for outside
legal services to comply with Exhibit P).
441 See supra note 438.
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counsel requirements of Exhibit P of 1
hour 442 and $900.443
Therefore, the Commission
preliminarily estimates that the total
one-time burden for a SB SEF to prepare
and file the initial Form SB SEF,
including all exhibits thereto except for
Exhibit P, would be 694 hours 444 and
$523,000.445 In addition, SB SEFs
controlled by other persons and nonresident SB SEFs would incur an
additional one-time burden of 1 hour
and $900 to prepare and file Exhibit P
to proposed Form SB SEF. This would
result in a total initial burden for all SB
SEFs of 13,901 hours 446 and
$10,478,900.447 The Commission
requests comment on the accuracy of
these estimates.
The Commission preliminarily
estimates that each SB SEF would file
four amendments to Form SB SEF
pursuant to proposed Rules 802(a) and
(b) per year, and that each SB SEF
would incur an average burden of 25
hours to prepare each amendment
pursuant to proposed Rules 802(a) and
(b), for a total annual burden of 100
hours. The Commission bases this
estimate on previous Commission
estimates relating to amendments to
Form 1 filed by national securities
exchanges pursuant to Rule 6a–2 under
the Exchange Act.448 The Commission
442 1 hour = 1 (number of non-resident SB SEF
respondents) × 1 (hourly burden to comply with
Exhibit P).
443 $900 = 1 (number of non-resident SB SEF
respondents) × $900 (cost for outside legal services
to comply with Exhibit P).
444 694 hours = 100 hours to comply with Form
SB SEF except for Exhibits F, H and P + 500 hours
for audited SB SEF financial statements + 40 hours
for unaudited financial statements of affiliated
entities + 54 hours for XBRL formatting of
submission.
445 $523,000 = $500,000 for outside accounting
services for auditing SB SEF’s financial statements
+ $23,000 in outside software and other cost for
formatting financial statement submission in XBRL
format.
446 13,901 = (20 (number of SB SEF respondents)
× 694 hours (total initial burden to comply with
Form SB SEF except for Exhibit P)) + (20 (number
of SB SEF respondents controlled by other persons)
× 1 hour (total initial burden to comply with Exhibit
P)) + (1 (number of non-resident SB SEF
respondents) × 1 hour (total initial burden to
comply with Exhibit P).
447 $10,478,900 = (20 (number of SB SEF
respondents) × $523,000 (total initial cost to comply
with Form SB SEF except for Exhibit P)) + (20
(number of SB SEF respondents controlled by other
persons) × $900 (total initial cost to comply with
Exhibit P)) + (1 (number of non-resident SB SEF
respondents) × $900 (total initial cost to comply
with Exhibit P)).
448 The Commission calculated in 2010 that
national securities exchanges file four amendments
or periodic updates to Form 1 per year, incurring
an average burden of 25 hours per amendment to
comply with Rule 6a–2. See 75 FR 32824, supra
note 430. While the requirements of Rule 6a–2 are
not identical to the requirements of proposed Rules
802(a) and (b), the Commission believes that there
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11025
preliminarily believes that SB SEFs
would prepare these amendments to
Form SB SEF internally.
The Commission preliminarily
believes that two registered SB SEFs
that are controlled by other persons out
of all registered SB SEFs that are
controlled by other persons per year
would be required to file an amendment
to Exhibit P to Form SB SEF pursuant
to proposed Rule 802(c) due to changes
in the legal or regulatory framework of
any person that controls such SB SEFs.
The Commission preliminarily believes
that a SB SEF controlled by another
person would incur the same burden to
prepare an amended Exhibit P as it
would to prepare the initial Exhibit P.
Therefore, the Commission
preliminarily estimates that a SB SEF
controlled by another person would
incur an average burden of 1 hour and
$900 to prepare an amended Exhibit P
pursuant to proposed Rule 802(c) per
year,449 and that all SB SEFs controlled
by other persons would incur an
aggregate burden of 2 hours 450 and
$1,800 per year 451 to prepare amended
Exhibit Ps pursuant to proposed Rule
802(c).
The Commission preliminarily
believes that one non-resident SB SEF
would be required to file one
amendment to Exhibit P to Form SB SEF
pursuant to proposed Rule 802(d) per
year. The Commission preliminarily
believes that a non-resident SB SEF
would incur the same burden to prepare
an amended Exhibit P as it would to
prepare the initial Exhibit P. Therefore,
the Commission preliminarily estimates
that a non-resident SB SEF would incur
an average burden of 1 hour and $900
to prepare each amended Exhibit P
pursuant to proposed Rule 802(d) per
year,452 and that this estimate represents
the aggregate burden for all non-resident
SB SEFs per year.
The Commission believes that each
SB SEF would file one update to Form
SB SEF pursuant to proposed Rule
802(f) per year, and that it would take
a SB SEF a longer time to file an annual
update to Form SB SEF pursuant to
proposed Rule 802(f) than it would take
a SB SEF to file an amendment to Form
SB SEF pursuant to proposed Rules
is sufficient similarity for PRA purposes that the
burden would be equivalent.
449 See supra note 438 and accompanying text.
450 2 = 2 (number of SB SEFs controlled by other
persons required to file an amended Exhibit P
pursuant to proposed Rule 802(c) per year) × 1 hour
(total annual burden to file an amended Exhibit P).
451 $1,800 = 2 (number of SB SEFs controlled by
other persons required to file an amended Exhibit
P pursuant to proposed Rule 802(c) per year) × $900
(total annual cost burden to file an amended Exhibit
P).
452 See supra note 441 and accompanying text.
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802(a) and (b), but less time than it
would take a SB SEF to prepare an
initial application on Form SB SEF. For
each annual update to Form SB SEF, the
SB SEF should be able to compile and
submit the information more readily
than it would take for the initial Form
SB SEF submission because the SB SEF
should already have much of the
information required by the annual
update in its possession. Therefore, the
Commission preliminarily estimates
that each SB SEF would incur an
average burden of 50 hours to prepare
each annual update to the Form SB SEF
pursuant to proposed Rule 802(f).453
The Commission estimates that the
annual burden for all respondents to file
amendments and periodic updates to
the Form SB SEF pursuant to proposed
Rule 802 would be 3,003 hours 454 and
$2,700.455 The Commission requests
comment on the accuracy of its
estimates.
The Commission preliminarily
estimates that the preparation and filing
of supplemental information pursuant
to proposed Rule 803(a) generally would
involve photocopying existing
documents and therefore should take
less than one-half hour per response.
The Commission similarly preliminarily
estimates that where a SB SEF chooses
to comply with the requirements of
453 Proposed Rules 811(b)(4) and 811(g)(2) would
require SB SEFs to report information regarding
grants, denials and limitations of access on Form SB
SEF and to disclose all disciplinary actions taken
annually on an amendment to Form SB SEF,
respectively. In addition, proposed Rule 804(a)
would require that a SB SEF intending to file a
notice of withdrawal from registration as a SB SEF
with the Commission file an amended Form SB SEF
to update any inaccurate information at the time of
such notice of withdrawal. The Commission
preliminarily believes that the burdens associated
with these requirements would be included in the
burden associated with the annual update to Form
SB SEF required by proposed Rule 802(f).
The Commission notes that, pursuant to proposed
Rules 823(e)(1) and (2), the CCO of a SB SEF would
be required to prepare annual updates to the
financial reports required by Exhibits F and H.
Therefore, the Commission preliminarily believes
that any burden resulting from the requirement to
update Exhibits F and H annually pursuant to
proposed Rule 802(f) would be included in the
burden associated with proposed Rule 823(e)(1) and
(2) discussed in the sections of this PRA analysis
relating to the duties of the SB SEF’s CCO.
454 3,003 hours = (20 (number of SB SEF
respondents) × 4 (number of filings pursuant to
proposed Rules 802(a) and (b)) × 25 hours (burden
per filing)) + (2 (number of respondents) × 1
(number of filings pursuant to proposed Rule
802(c)) × 1 hour (burden per filing)) + (1 (number
of respondents) × (1 (number of filings pursuant to
proposed Rule 802(d)) × 1 hour (burden per filing))
+ (20 (number of SB SEF respondents) × (1 (number
of filings pursuant to proposed Rule 802(f)) × 50
hours (burden per filing)).
455 $2,700 = (2 (number of respondents) × 1
(number of filings pursuant to proposed Rule
802(c)) × $900 (burden per filing)) + (1 (number of
respondents) × 1 (number of filings pursuant to
proposed Rule 802(d)) × $900 (burden per filing)).
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proposed Rule 803(b), which relates to
supplemental information being made
available continuously on the SB SEF’s
Web site, instead of proposed Rule
803(a), which relates to filing of the
actual supplemental information, the
response required by proposed Rule
803(b) should take less than one-half
hour as well. The Commission
preliminarily estimates that each SB
SEF would make approximately 15
filings on an annual basis pursuant to
proposed Rules 803(a) and (b)
combined. The Commission bases these
estimates on previous Commission
estimates relating to supplemental
material filed by national securities
exchanges pursuant to Rule 6a–3.456
Therefore, the Commission estimates
that the total annual reporting burden
under proposed Rule 803 for all SB
SEFs would be 150 hours.457 The
Commission requests comment on the
accuracy of this estimate.
Proposed Rule 804 would require that
a SB SEF provide the Commission
notice of withdrawal of registration and
file an amended Form SB SEF to update
any inaccurate information at the time
of such notice of withdrawal. The
Commission preliminarily estimates
that one SB SEF per year would seek to
withdraw its registration with the
Commission and therefore be subject to
the collection of information
requirements in proposed Rule 804. The
Commission preliminarily estimates
that a SB SEF would incur an average
burden of 1 hour to prepare and file
with the Commission a notice of
withdrawal of registration. The
Commission preliminarily believes that
the burden incurred by a SB SEF
withdrawing its registration to file an
amended Form SB SEF pursuant to
proposed Rule 804 would be included
in the estimated burden under proposed
Rule 802(f) requiring annual updates to
Form SB SEF. Therefore, the
Commission estimates that the annual
456 The Commission calculated in 2010 that Rule
6a–3 would require national securities exchanges to
make 25 filings per year at a burden of 0.5 hours
per filing. 75 FR 32822 (June 9, 2010) (outlining the
most recent Commission calculations regarding the
PRA burdens for Rule 6a–3). While the
requirements of Rule 6a–3 are not identical to those
of proposed Rule 803, the Commission believes that
there is sufficient similarity for PRA purposes that
the burden would be equivalent. However, Rule 6a–
3 contains a requirement for national securities
exchanges to file certain monthly reports, while
proposed Rule 803 contains no such requirement
with respect to SB SEFs. Therefore, the Commission
preliminarily estimates that a SB SEF would make
15 filings per year pursuant to proposed Rule 803,
rather than 25 filings as estimated in connection
with Rule 6a–3.
457 150 hours = 20 (number of SB SEF
respondents) × 15 (number of filings per
respondent) × .5 hours (burden per filing).
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burden for all respondents pursuant to
proposed Rule 804 would be 1 hour.
The Commission preliminarily
estimates that the total annual hourly
burden for all SB SEFs combined to
comply with the registration
requirements under Regulation SB SEF
would be 3,154 hours 458 and the total
one time hourly burden would be
13,901 hours.459 The Commission
preliminarily estimates that the total
annual cost burden for all SB SEFs to
comply with the registration
requirements under Regulation SB SEF
would be $2,700,460 and the total onetime cost burden for all SB SEFs would
be $10,478,900.461 The Commission
requests comment on the accuracy of
these estimates.
2. Rule-Writing Requirements for SB
SEFs
The proposed rules that would
require a SB SEF to establish rules,
policies and procedures to meet the
requirements of various proposed rules
in Regulation SB SEF are summarized in
Section XXII.A.2. above. Based on its
experience with the rule-writing process
conducted by national securities
exchanges and applicants to become
national securities exchanges, the
Commission believes that a SB SEF
would spend an average of 10 hours to
draft each rule, policy or procedure
required to be established under
Regulation SB SEF and that the SB SEF
would handle this work internally. The
Commission recognizes that in some
cases, the SB SEF may take longer than
10 hours to draft a particular rule,
policy or procedure, but in other cases,
the SB SEF may take fewer than 10
hours to draft a particular rule, policy or
procedure. Therefore, the Commission
preliminarily believes that the 22
proposed rules, policies and procedures
that a SB SEF would be required to draft
under proposed Regulation SB SEF
would carry a one-time paperwork
burden of 220 hours per respondent, for
a maximum total of 4,400 hours.462 The
estimated 220 hours per respondent also
would include the time expended for
review of the draft rules, policies or
procedures by the SB SEF’s
management. The Commission requests
458 3,154 hours = 3,003 (estimated hourly burden
to comply with proposed Rule 802) + 150
(estimated hourly burden to comply with proposed
Rule 803) + 1 (estimated hourly burden to comply
with proposed Rule 804).
459 See supra note 446.
460 See supra note 455.
461 See supra note 447.
462 4,400 hours = 20 (number of SB SEF
respondents) × 220 hours (one-time burden to draft
22 proposed rules, policies and procedures).
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comment on the accuracy of this
estimate.
The Commission preliminarily
estimates that once a SB SEF has drafted
the written rules, policies and
procedures that it is required to
establish pursuant to Regulation SB
SEF, a SB SEF would spend
approximately 10 hours per month to
review its written rules, policies and
procedures to ensure that they are upto-date and remain in compliance with
proposed Regulation SB SEF and to
prepare any necessary new or amended
rules, policies and procedures.463
Therefore, the Commission
preliminarily estimates that the
provisions of proposed Regulation SB
SEF requiring that a SB SEF establish
certain rules, policies and procedures
would result in an ongoing annual
burden of 120 hours per respondent,464
for a total estimated ongoing annual
burden of 2,400 hours.465 The
Commission requests comment on the
accuracy of this estimate.
3. Reporting Requirements for SB SEFs
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Proposed Rule 814: Proposed Rule
814(a) would require a SB SEF to
require its participants to provide
information or documents to the SB SEF
upon request. Proposed Rule 814(a) also
would require the SB SEF to require its
participants to provide information or
documents to any representative of the
Commission upon request.
As noted above, the Commission
estimates that each SB SEF would have
275 participants.466 Based on industry
sources, the Commission believes it is
likely that each participant would elect
to be a member of each SB SEF. The
Commission therefore estimates that
each of these estimated 275 participants
would be a participant of each SB SEF.
The Commission therefore estimates
that there would be a total of 275 SB
SEF participants subject to the
collection of information requirements
of proposed Rule 814(a). The
Commission requests comment on the
accuracy of this estimate.
Based on its experience in requesting
information from exchanges and
463 This burden estimate does not include the
burden that would be incurred by a SB SEF in
connection with submitting rule filings in
connection with new rules or rule amendments to
the Commission, which burden would be included
in the burden for proposed Rules 805 and 806
discussed in the sections of this PRA relating to the
rule filing processes for SB SEFs.
464 120 hours = 10 hours (monthly burden) × 12
(months per year).
465 2,400 hours = 20 (number of SB SEF
respondents) × 120 hours (annual burden to update
rules, policies and procedures required by proposed
Regulation SB SEF).
466 See supra note 429.
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exchange members for various purposes,
the Commission estimates that it would
require an average of 25 hours per
response for a SB SEF participant to
compile and transmit documents and
information requested pursuant to
proposed Rule 814(a) and that such
requests would occur a total of 4 times
each year per SB SEF participant.467
Thus, the Commission estimates that the
annual burden on each SB SEF
participant to report documents or
information pursuant to proposed Rule
814(a) would be 100 hours.468 The
Commission therefore estimates that the
annual aggregate burden on SB SEF
participants for all SB SEFs would be
27,500 hours.469 The Commission
believes that this work, should it be
required, would be conducted
internally. The Commission seeks
comment on these proposed estimates.
Proposed Rule 814(b)(2) would
require a SB SEF to provide information
or documents to any representative of
the Commission upon request. For PRA
purposes, the Commission estimates
that it would request information or
documents under proposed Rule
814(b)(2) two times per year, per
respondent. The amount of time that it
would take for a respondent to comply
with a request would vary depending on
the nature and extent of the request.
Based on its experience in requesting
information from exchanges for a variety
of purposes, the Commission estimates
that it would require an average of 25
hours per response for a SB SEF to
compile and transmit documents and
information requested by the
Commission, for an annual hourly
burden of 50 hours per respondent.
Thus, the Commission preliminarily
estimates the aggregate annual burden
on a SB SEF to comply with requests for
documents or information pursuant to
proposed Rule 814(b)(2) would be 1,000
hours.470 The Commission believes that
this work, should it be required, would
be conducted internally. The
Commission solicits comment as to the
accuracy of these estimates.
Proposed Rule 814(b)(3) would
require a SB SEF to have the capacity
467 The estimate of 4 annual requests assumes that
each SB SEF participant would receive, on average,
one request for information per calendar quarter.
468 100 hours = 4 (number of requests annually)
× 25 (annual hourly burden for each participant to
comply with SB SEF rules imposed pursuant to
proposed Rule 814(a)).
469 27,500 hours = 4 (total number of annual
requests made of a SB SEF participant directly or
indirectly) × 25 (hours per respondent) × 275
(number of SB SEF participants required to comply
with proposed rules imposed by a SB SEF pursuant
to proposed Rule 814(a)).
470 1,000 hours = 50 (annual hourly burden to
comply with proposed Rule 814(b)(2)) × 20 (number
of SB SEF respondents).
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to carry out such international
information-sharing agreements as the
Commission may require. If so directed
by the Commission, a SB SEF could be
required to carry out one or more
international-information sharing
agreements. It is difficult to estimate
how many international informationsharing agreements the Commission
may direct a SB SEF to carry out or what
the reporting requirements under such
agreements may be.
The Commission estimates, for PRA
purposes only, that SB SEFs would need
to carry out such an agreement, on
average, once per year. The Commission
further estimates that each such
agreement could require 40 hours per
respondent to prepare, review and
finalize. The Commission therefore
preliminarily estimates that the
paperwork burden for SB SEFs
associated with having the capacity to
carry out international informationsharing agreements as the Commission
may require pursuant to proposed Rule
814(b)(3) would be 800 hours.471 The
Commission believes that these
agreements initially would be created or
reviewed internally, but also reviewed
by outside counsel. The Commission
estimates that the SB SEF’s outside
counsel would require 10 hours to
review these documents for a cost of
$4,000 per respondent, and a total cost
of $80,000 for all respondents.472 The
Commission solicits comment as to the
accuracy of these estimates.
In addition, the Commission
preliminarily estimates that a SB SEF
would be required to provide
information pursuant to an international
information-sharing agreement a total of
twice per year and that, similar to
complying with a Commission request
for information pursuant to other
provisions of proposed Rule 814, it
would require 25 hours per response to
comply with a request for information,
for a total annual burden of 50 hours per
year per SB SEF. The Commission
believes that this work, should it be
required, would be conducted
internally. The Commission therefore
estimates that aggregate annual
paperwork burden on SB SEFs
associated with reporting under
international information-sharing
agreements entered into under proposed
471 800 hours = 40 (annual hourly burden to enter
into an international information-sharing agreement
pursuant to proposed Rule 814(b)(3) × 20 (number
of SB SEF respondents). The Commission believes
there would be no separate initial burden.
472 These figures are based on an hourly cost of
outside counsel at $400. See Municipal Securities
Disclosure Release, supra note 438.
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Rule 814(b)(3) would be 1,000 hours.473
The Commission solicits comment as to
the accuracy of these estimates.
The Commission therefore estimates
the aggregate annual paperwork burden
associated with proposed Rule 814 to be
27,500 hours for SB SEF participant
respondents and 2,800 474 hours and
$80,000 for SB SEF respondents.
Proposed Rule 816: Proposed Rule
816 would require a SB SEF to notify
the Commission of any exercise of its
emergency authority, and within two
weeks following cessation of an
emergency, submit to the Commission a
report explaining the basis for declaring
an emergency, how conflicts of interest
were minimized, and the extent to
which the SB SEF considered the effect
of its emergency action on the markets
for the SB swap and any security or
securities underlying the SB swap. The
collection of information associated
with proposed Rule 816 would apply
only during and following an
emergency.475
The Commission notes that
emergencies in the securities markets
are rare, but when they do occur, they
require significant time and resources to
address. For PRA purposes only, the
Commission estimates that a SB SEF
would exercise its emergency authority
once per year. Based on its experience
with national securities exchanges, the
Commission estimates that the time that
would be necessary for a SB SEF to
prepare and transmit the notice and
report regarding emergency authority
pursuant to proposed Rule 816 would
be 40 hours per respondent. Thus, the
Commission estimates that the total
annual reporting burden associated with
proposed Rule 816 would be 800
hours.476 The Commission believes that
this work, should it be required, would
be conducted internally. The
473 1,000 hours = 50 (annual hourly burden to
comply with reporting requirements pursuant to
international information-sharing agreements × 20
(number of SB SEF respondents).
474 2,800 hours = 1,000 (aggregate burden on SB
SEF respondents to comply with proposed Rule
814(b)(2)) + 1,800 hours (aggregate burden on SB
SEF respondent to comply with proposed Rule
814(b)(3)).
475 Proposed Rule 816(d)(2) provides that if a SB
SEF implements any rule or rule amendment in the
exercise of its emergency authority, it must file such
rule or rule amendment with the Commission
pursuant to proposed Rule 806 prior to the
implementation of such rule or rule amendment, or,
if not practicable, within 24 hours after
implementation of such rule or rule amendment.
The annual hourly burden to comply with proposed
Rule 816(d)(2) is included in the estimated annual
hourly burden for a SB SEF to comply with
proposed Rule 806.
476 800 hours = 40 (annual hourly burden to
comply with proposed Rule 816) × 20 (number of
SB SEF respondents).
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Commission solicits comment on these
estimates.
Proposed Rule 818: Proposed Rule
818(e) would require a SB SEF to report
to the Commission such information as
the Commission may, from time to time,
determine to be necessary to perform
the duties of the Commission. For PRA
purposes only, the Commission
estimates that the Commission may
request such information from a SB SEF
once each year. For PRA purposes only,
the Commission estimates that any
request for information would be
information easily accessible to the SB
SEF, but could require an analysis of
such information by the SB SEF. Based
on the Commission’s experience with
information requested of other
registered entities, the Commission
preliminarily estimates that each
request pursuant to proposed Rule 818
would require 20 hours to collect,
review, draft any accompanying
analysis or report, and transmit, which
would result in an annual hourly
burden of 20 hours per SB SEF
respondent. Thus, the Commission
estimates that the aggregate annual
reporting burden on SB SEFs associated
with proposed Rule 818(e) would be 400
hours.477 The Commission solicits
comment on these estimates.
Proposed Rule 818(f) would require a
SB SEF to provide to any representative
of the Commission, upon request, copies
of documents required to be kept and
preserved pursuant to the recordkeeping
requirements of proposed Rule 818. For
PRA purposes only, the Commission
preliminarily estimates that it would
request information or documents under
proposed Rule 818(f) twice per year and
would require no more than 25 hours
per response to compile and transmit,
resulting in an annual hourly burden of
50 hours per SB SEF respondent.478 The
Commission therefore estimates the
annual aggregate paperwork burden
associated with proposed Rule 818(f)
would be 1,000 hours.479 The
Commission solicits comment on these
estimates.
The Commission therefore estimates
the total annual reporting burden on SB
477 400 hours = 20 (annual hourly burden to
comply with proposed Rule 818(e)) × 20 (number
of SB SEF respondents). The Commission believes
there would be no separate initial burden.
478 Based on its experience in requesting
information from exchanges for a variety of
purposes, the Commission estimates that it would
require an average of 25 hours per response for a
SB SEF to compile and transmit documents and
information requested by the Commission.
479 1,000 hours = 25 (annual hourly burden to
comply with proposed Rule 818(f)) × 20 (number of
SB SEF respondents).
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SEFs associated with proposed Rule 818
would be 1,400 hours.480
Proposed Rule 822: Proposed Rule
822(a)(2) would require a SB SEF to
submit to the Commission an annual
objective review of the capability of SB
SEF systems that support or are
integrally related to the performance of
the SB SEF’s activities. If the objective
review is performed by an internal
department, an objective, external firm
would be required to assess the internal
department’s objectivity, competency,
and work performance. Based on its
experience with its ARP program, the
Commission believes that the annual
burden per respondent of conducting an
internal audit would be approximately
625 hours.481 Further, the Commission’s
experience with the ARP program has
indicated that an additional 200 hours
per respondent per year would be
required on average to oversee and
establish the independent review of
these audits. 482 Thus, the Commission
estimates the aggregate annual burden
on SB SEFs to comply with requirement
to submit these reports would be 16,500
hours.483 In addition, based on its
experience with the ARP program,484
the Commission estimates that the
annual cost to hire an objective, external
firm to be approximately $90,000 per
respondent annually. For this reason,
the Commission estimates the total
annual cost of hiring an objective,
external firm to review internal audits
as $1,800,000 for all respondents.485
The Commission solicits comment as to
the accuracy of this information.
In addition, proposed Rule 822(a)(3)
would require a SB SEF to promptly
notify the Commission in writing of
material systems outages and submit to
the Commission within five business
days of when the outage occurred a
written description and analysis of the
outage and any remedial measures that
have been implemented or are
480 1,400 hours = 400 (hourly burden to comply
with proposed Rule 818(e)) + 1,000 (hourly burden
to comply with proposed Rule 818(f)).
481 See SDR Release, supra note 6.
482 Id.
483 16,500 hours = 825 (annual hourly burden to
comply proposed Rule 822(a)(2)) × 20 (number of
SB SEF respondents).
484 Under the Commission’s ARP inspection
program of SROs and certain ATSs, the Commission
staff conducts on-site inspections and attends
periodic technology briefings presented by SRO and
ATS staff for the Commission’s ARP staff, which
generally covers systems capacity and testing,
review of system vulnerability, review of planned
system development, and business continuity
planning. Under the ARP inspection program, the
Commission staff also monitors system failures and
planned system changes on a daily basis.
485 $1,800,000 = $90,000 (annual external dollar
cost per respondent to comply with proposed Rule
822(a)(2)) × 20 (number of SB SEF respondents).
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contemplated. The Commission
estimates, based on its experience with
the ARP program, that the burden
imposed by these requirements would
be 15.4 hours on average per respondent
per year, for a total estimated burden of
308 hours per year for all
respondents.486 The Commission
believes that this work would be
conducted internally. The Commission
solicits comments as to the accuracy of
this estimate.
Proposed Rule 822(a)(4) would
require a SB SEF to notify the
Commission in writing at least thirty
calendar days before implementation of
any planned material systems changes.
The Commission estimates that there
would be an average of 60 such events
per respondent per year.487 Based on the
Commission’s experience with the ARP
program, the Commission estimates that
each of these notices would require an
average of 2 hours for a total burden for
all respondents of 2,400 hours
annually.488 The Commission believes
that this work would be conducted
internally. The Commission solicits
comments as to the accuracy of this
estimate.
The Commission therefore
preliminarily estimates that the total
annual hourly reporting burden
associated with proposed Rule 822
would be 19,208 hours 489 and
$1,800,000.490
The Commission preliminarily
estimates that the total annual hourly
burden for all SB SEFs combined for
reporting would be 24,208 hours.491
There is no one time initial hourly
burden associated with the proposed
reporting requirements. The
Commission preliminarily estimates
that the total annual cost burden for all
486 308 hours = 15.4 annual hourly burden per
respondent to comply proposed Rule 822(a)(3)) × 20
(number of SB SEF respondents). This annual
hourly burden comports with the Commission’s
estimate for similar proposed requirements to be
imposed on SDRs to comply with similar proposed
requirements. See SDR Release, supra note 6.
487 This estimate would account for any weekly
maintenance that would meet the standard of a
‘‘material systems change,’’ as well as for any
software upgrades, throughout the year, that would
meet such standard.
488 2,400 hours = 60 (notices per SB SEF) × 2
(annual hourly burden per notice) × 20 (number of
SB SEF respondents). See SDR Release, supra note
6.
489 19,208 hours = 16,500 (annual hourly burden
to comply with proposed Rule 822(a)(2)) + 308
(annual hourly burden to comply with proposed
Rule 822(a)(3)) + 2,400 (annual hourly burden to
comply with proposed Rule 822(a)(4)).
490 See supra note 485.
491 24,208 = 2,800 (annual hourly burden to
comply with proposed Rule 814) + 800 (annual
hourly burden to comply with proposed Rule 816)
+ 1,400 (annual hourly burden to comply with
proposed Rule 818) + 19,208 (annual hourly burden
to comply with proposed Rule 822).
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SB SEFs combined for reporting would
be $1,880,000.492 In addition, the
Commission preliminarly estimates that
the total annual hourly burden on all SB
SEF participants for reporting under
proposed Regulation SB SEF would be
28,000 hours.
4. Recordkeeping Required Under
Regulation SB SEF
The annual recordkeeping
requirements that are contained in
proposed Rules 818(a) and (b) are
similar to the requirements that apply to
SROs pursuant to Rules 17a–1(a) and (b)
under the Exchange Act.493 The
Commission currently estimates that an
SRO, including a national securities
exchange, would expend approximately
50 hours per year to comply with the
collection of information requirement of
Rule 17a–1.494 Based on the
Commission’s experience with Rule
17a–1(a) and (b), the Commission
believes that 50 hours would be an
appropriate estimate for the hourly
burden that would apply to SB SEFs to
comply with proposed Rule 818(a) and
(b). The Commission notes that SB SEFs
generally would be electronic platforms
and that the vast preponderance of its
records thus should be retained
electronically in the ordinary course of
its business. Therefore, the Commission
preliminarily estimates that it would
take a SB SEF approximately 50 hours
annually to comply with proposed Rule
818(a) and (b) for an aggregate annual
burden of 1,000 hours.495 This
estimated amount includes, but is not
limited to, the annual hourly burden to
492 $1,880,000 = $80,000 (annual cost burden to
comply with proposed Rule 814(b)(3)) + $1,800,000
(annual cost burden to comply with proposed Rule
822(a)(2)).
493 17 CFR 240.17a–1(a) and (b). In addition,
proposed Rule 811(b)(3) would require that a SB
SEF make and keep records relating to all grants
and denials of access to the SB SEF and proposed
Rule 811(g) would require a SB SEF to make and
keep records relating to all disciplinary
proceedings. The records required by proposed
Rules 811(b)(3) and 811(g) would be included in the
business records required to be kept pursuant to
proposed Rule 818. Therefore, the Commission
preliminarily believes that the paperwork burden
for these rules would be included in the estimated
burden for proposed Rule 818. See supra note 417
and accompanying text.
494 Rule 17a–1 also states generally that SROs
shall, upon the request of any representative of the
Commission, promptly furnish copies of documents
required to be kept and preserved under the rule.
See 17 CFR. 240.17a–1. The Commission’s
estimated burden of 50 hours per respondent
reflects compliance with all of the recordkeeping
provisions of this rule. See 2010 Extension of Rule
17a–1 Supporting Statement, Office of Management
and Budget, available at https://www.reginfo.gov/
public/do/PRAViewDocument?ref_nbr=2010073235-003.
495 1,000 hours = 20 (number of SB SEF
respondents) x 50 hours (annual hourly burden to
comply with proposed Rule 818(a) and (b)).
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11029
generate, collect, organize and preserve
all of the documents and other records
required under proposed Rule 818(a)
and (b). The Commission requests
comment on the accuracy of this
estimate.
In addition, proposed Rule 818(c)
would require a SB SEF to keep certain
records with respect to trading activity
on and through the SB SEF.
Specifically, a SB SEF would be
required to make and keep accurate,
time-sequenced records of all trading
interest and transactions that are
received by, originated on, or executed
on the SB SEF. This recordkeeping rule
is similar to the audit trail requirement
that applies to ATSs pursuant to Rule
302 of Regulation ATS under the
Exchange Act.496 The Commission
currently estimates that an ATS would
expend approximately 130 hours per
year to comply with the collection of
information requirements of Rule 302 of
Regulation ATS. Based on the
Commission’s experience with Rule 302
of Regulation ATS, which contains the
requirement that an ATS make and keep
records necessary to create a meaningful
audit trail, the Commission
preliminarily estimates that the annual
hourly paperwork burden for a SB SEF
to comply with proposed Rule 818(c)
would be approximately 130 hours,
which would result in an aggregate
annual burden of 2,600 hours.497 The
Commission requests comment on the
accuracy of this estimate.
The Commission preliminarily
believes that the records that a SB SEF
would have to keep and preserve to
comply with proposed Rule 818 would
be the same records that a SB SEF
would already have to keep and
preserve in the ordinary course of its
business. A SB SEF would be required
to keep and preserve these records to,
among other things, pay taxes, defend
against legal actions, resolve conflicts
between participants, and generally to
ensure the smooth functioning of the SB
SEF’s business operations. Therefore,
the Commission preliminarily believes
that, while there would be a collection
of information required by proposed
496 Rule 302 of Regulation ATS under the
Exchange Act generally requires an ATS to keep a
record of subscribers, daily summaries of trading
and time sequenced records of order information in
the ATS. See 17 CFR 242.302. The Commission’s
estimated burden of 130 hours per respondent
reflects compliance with all of the recordkeeping
provisions of this rule. See 2010 Extension of Rule
302 Supporting Statement, Office of Management
and Budget, available at https://www.reginfo.gov/
public/do/PRAViewDocument?ref_nbr=2010063235-008.
497 2,600 hours = 20 (number of SB SEF
respondents) x 130 hours (annual hourly burden to
comply with proposed Rule 818(c)).
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Rule 818 related to recordkeeping, there
would not be a paperwork burden for
PRA purposes associated with the SB
SEF’s complying with proposed Rule
818 aside from establishing or
modifying recordkeeping systems as
noted below, because these records
would be maintained in the ordinary
course of its business.498
For purposes of the PRA, however,
the Commission preliminarily estimates
that a SB SEF could incur a one-time
burden to set up or modify an existing
recordkeeping system to comply with
the proposed Rule 818. Based on the
Commission’s experience with
recordkeeping costs and consistent with
prior burden estimates for similar
recordkeeping provisions,499 the
Commission estimates that setting up or
modifying a recordkeeping system
would create an initial burden of 345
hours 500 and $1,800 in information
technology costs per respondent to
purchase recordkeeping software,501 for
a total initial burden of 6,900 hours 502
and $36,000.503 The Commission
requests comment on the accuracy of
this estimate.
Additionally, the Commission
preliminarily estimates that each SB
SEF may have a one-time burden to
upgrade its existing systems to ensure
that the audit trail component of their
systems complies with proposed Rule
818(c). Based on industry sources, the
Commission preliminarily believes that
this work would be done internally by
two programmers over the course of
approximately four weeks. Therefore,
the Commission preliminarily estimates
that it would take a total of 320 hours
for a SB SEF to upgrade its existing
498 See 5 CFR 1320.3(b)(2). This section generally
provides that the time, effort, and financial
resources necessary to comply with a collection of
information that would be incurred by persons in
the normal course of their activities (e.g., in
compiling and maintaining business records) are
excluded from the definition of ‘‘burden’’ in the PRA
if they are usual and customary.
499 See Securities Exchange Act Release No.
59342 (February 2, 2009); 74 FR 6456 (February 9,
2009) (Amendments to Rules for Nationally
Recognized Statistical Rating Organizations)
(‘‘NRSRO Adopting Release’’).
500 See NRSRO Adopting Release, supra note 499,
74 FR at 6472, n. 154 (estimated average one-time
hourly burden of 345 hours for each nationally
recognized statistical ratings organization
(‘‘NRSRO’’) to implement a recordkeeping system to
comply with Rule 17g–2 under the Exchange Act,
17 CFR 240.17g–2).
501 See NRSRO Adopting Release, id., 74 FR at
6472 (estimated average cost of $1,800 for each
NRSRO to purchase recordkeeping software).
502 6,900 hours = 345 hours (estimated hourly
burden for each SB SEF to implement a
recordkeeping system) × 20 (number of SB SEF
respondents).
503 $36,000 = $1,800 (estimated cost to purchase
recordkeeping software) × 20 (number of SB SEF
respondents).
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systems for an aggregate one-time
hourly burden of 6,400 hours.504
Therefore, the Commission
preliminarily believes that the total
aggregate annual hourly burden for 20
SB SEFs to comply with proposed Rule
818(a) through (c) would be
approximately 3,600 hours.505 The total
one time hourly burden for 20 SB SEFs
to comply with proposed Rule 818
would be approximately 13,300
hours 506 and $36,000. The Commission
requests comment on the accuracy of
this estimate.
As discussed above, proposed Rule
813(c)(1) would require a SB SEF to
establish rules requiring any participant
that enters any trading interest or
executes any transaction on the SB SEF
to maintain books and records of any
such trading interest or transaction and
of any position in any security-based
swap that is the result of any such
trading interest or transaction. The
Commission preliminarily believes that
proposed Rule 813(c)(1) could impose a
collection of information burden on
some SB SEF participants.507 However,
the Commission also preliminarily
believes that the records that many SB
SEF participants would have to
maintain pursuant to proposed Rule
813(c)(1) would be the same records that
these participants would have to
maintain under other Commission
recordkeeping provisions to the extent
they are regulated entities or in the
ordinary course of their business.508
504 6,400 hours = 320 hours (estimated one-time
hourly burden for two senior programmers working
40 hours per week for four weeks at each SB SEF
to upgrade systems to comply with proposed Rule
818(c)) × 20 (number of SB SEF respondents).
505 3,600 hours = 1,000 hours (estimated annual
hourly burden to comply with proposed Rule 818(a)
and (b)) + 2,600 hours (estimated annual hourly
burden to comply with proposed Rule 818(c)).
506 13,300 hours = 6,900 hours (total estimated
one-time hourly burden for all SB SEF respondents
combined to set-up or modify recordkeeping
software to comply with proposed Rule 818) +
6,400 hours (total estimated one-time hourly burden
for all SB SEF respondents combined to modify
existing systems to comply with audit trail
requirements of proposed Rule 818(c)).
507 The Commission also notes that proposed
809(c)(2)(i) would require non-registered ECPs to
meet the recordkeeping and reporting requirements
established by the SB SEF pursuant to proposed
Rule 813. The collection of information associated
with 809(c)(2)(i) is encompassed in the burden
estimates for the collection of information
associated with proposed Rule 813.
508 Section 764 of the Dodd-Frank Act requires
the Commission to adopt rules governing reporting
and recordkeeping for SB swap dealers and major
SB swap participants. See Public Law 111–203,
§ 764. The Commission is proposing reporting and
recordkeeping rules for SB swap dealers and major
SB swap participants as part of a separate
Commission rulemaking. See also, e.g., Rules
17a–3 (records to be made by certain exchange
members, brokers and dealers) and 17a–4 (records
to be preserved by certain exchange members,
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Therefore, the Commission
preliminarily believes that the
paperwork burden for a number of SB
SEF participants is either already
encompassed in the collection of
information for other recordkeeping
obligations that they must comply with
or would not be required to be
calculated for purposes of this PRA
analysis because such burden relates to
the maintenance of records that are
usually or customarily maintained.509
However, the Commission believes
that proposed Rule 813(c)(1) could
impose a new obligation to maintain
books and records on those ECPs that
would become participants of the SB
SEF. For PRA purposes the Commission
believes that it is appropriate to estimate
that all 210 ECPs would be subject to
the collection of information
requirement of proposed Rule
813(c)(1).510 Based on the Commission’s
experience with similar recordkeeping
rules,511 the Commission preliminarily
estimates that it would take each ECP
that is a SB SEF participant
approximately 40 hours on an annual
basis to comply with the collection of
information requirement of proposed
Rule 813(c)(1) for a total annual burden
for all ECP respondents combined of
8,400 hours.512 The Commission
requests comment on the accuracy of
this estimate.
For purposes of the PRA, the
Commission also preliminarily
estimates that ECPs that would be SB
SEF participants could incur a one-time
burden to set up or modify an existing
recordkeeping system to comply with
the proposed Rule 813(c)(1). Based on
the Commission’s experience with
recordkeeping costs and consistent with
prior burden estimates for similar
recordkeeping provisions,513 the
Commission estimates that setting up or
modifying a recordkeeping system
would create an initial burden of 345
hours 514 and $1,800 in information
technology costs per ECP to purchase
brokers and dealers) under the Exchange Act, 17
CFR 240.17a–3 and 17 CFR 240.17a–4.
509 See 5 CFR 1320.3(b)(2).
510 See supra note 429 and accompanying text.
511 See, e.g., 17 CFR 240.17a–3 and 17 CFR
240.17a–4.
512 8,400 hours = 210 (estimated number of ECPs
that could be subject to the collection of
information under proposed Rule 813(c)(1)) × 40
hours (estimated annual burden for each ECPs to
comply with the collection of information under
proposed Rule 813(c)(1)).
513 See NRSRO Adopting Release supra note 499.
514 See NRSRO Adopting Release, supra note 499,
74 FR at 6472, n. 154 (estimated average one-time
hourly burden of 345 hours for each NRSRO to
implement a recordkeeping system to comply with
Rule 17g–2 under the Exchange Act).
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recordkeeping software,515 for a total
initial burden of 72,450 hours 516 and
$378,000 for all ECPs combined.517 The
Commission requests comment on the
accuracy of this estimate.
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5. Timely Publication of Trading
Information Requirement for SB SEFs
Proposed Rule 817(a) would require a
SB SEF to: (1) have the capacity to
electronically capture, transmit, and
disseminate information on price,
trading volume, and other trading data
on all SB swaps executed on or through
the SB SEF; and (2) make public timely
information on price, trading volume,
and other trading data on SB swaps to
the extent required by the Commission.
The Commission notes that proposed
Rule 817(a)(1) would incorporate
Section 3D(d)(8) of the Exchange Act
but would not otherwise require a SB
SEF to report SB swap transactions to a
registered SDR or make public timely
information on price, trading volume,
and other trading data on SB swaps.
Rather, the Commission has proposed
that other parties be responsible for
reporting of SB swap transactions to a
registered SDR and for the public
dissemination of certain SB swap
transaction information.518
However, because proposed Rule
817(a) would require a SB SEF to have
the capacity to electronically capture,
transmit, and disseminate information
on price, trading volume, and other
trading data on all SB swaps executed
on or through the SB SEF so that it
could make such information public if
required, the Commission preliminarily
believes that each SB SEF could have a
one-time hourly burden to modify its
systems so that they have this
functionality.519 The Commission
515 See NRSRO Adopting Release, supra note 499,
74 FR at 6472 (estimated average cost of $1,800 for
each NRSRO to purchase recordkeeping software).
516 72,450 hours = 345 hours (estimated hourly
burden for each SB SEF participant to implement
a recordkeeping system) × 210 (estimated number
of ECP SB SEF participants that could seek to set
up or modify a recordkeeping system to comply
with proposed Rule 813(c)(1)).
517 $378,000 = $1,800 (estimated cost to purchase
recordkeeping software) × 210 (estimated number of
ECP SB SEFs that could seek to purchase
recordkeeping software to comply with proposed
Rule 813(c)(1)).
518 See Reporting and Dissemination Release
supra note 6.
519 The Commission believes that a SB SEF would
seek to ensure that it has the capacity to
electronically capture, transmit, and disseminate
information on price, trading volume, and other
trading data on all SB swaps executed on or through
its facilities in the ordinary course of its business.
Therefore the Commission is not including the onetime burden of developing and implementing
systems having the capacity to electronically
capture, transmit, and disseminate information on
price, trading volume, and other trading data on all
SB swaps executed on or through the SB SEF in its
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believes that for a SB SEF to ensure it
has the capacity to electronically
capture, transmit, and disseminate
information on price, trading volume,
and other trading data on all SB swaps
executed on or through the SB SEF, as
required by Section 3D(d)(8) and as
proposed to be incorporated in
proposed Rule 817(a), a SB SEF would
need two computer programmers, each
working four weeks. This would result
in a one-time hourly burden of 320
hours 520 per SB SEF respondent, for a
total annual burden on all SB SEFs of
6,400 hours.521 The Commission solicits
comment on the accuracy of these
estimates.
6. Rule Filing and Product Filing
Processes for SB SEFs
Under proposed Rules 805 and 806, a
SB SEF would be required to submit
rule filings for new rules or rule
amendments, including changes to a
product’s terms or conditions. As noted
above, the Commission estimates a total
of 20 SB SEF respondents for this
requirement. The proposed rules are
modeled on the rule filing and product
filing processes proposed by the
CFTC.522 Based on the Commission
staff’s consultation with CFTC staff,523
the Commission estimates that on
average these requirements would
require 2.5 hours of work per rule filing,
with an estimated average of 60
responses per year per respondent. This
would result in a total estimated burden
of 150 hours per respondent 524 and
3,000 hours for all the respondents
annually.525 Based on the Commission
staff’s consultation with CFTC staff, the
Commission believes that the SB SEF
would handle the rule filing process
internally. The Commission solicits
comments regarding the accuracy of its
estimates.
Under proposed Rules 807 and 808, a
SB SEF would be required to submit
filings for new products that it makes
available for trading. As outlined above,
the Commission estimates a total of 20
SB SEF respondents for this
paperwork burden estimate for proposed Rule
817(a). See 5 CFR 1320.3(b)(2).
520 320 hours = 2 (number of senior programmers)
× 40 (hours in a standard full-time work week) ×
4 (number of weeks required).
521 6,400 hours = 320 (estimated one-time hourly
burden per SB SEF respondent pursuant to
proposed Rule 817(a)) × 20 (number of SB SEF
respondents).
522 See 75 FR 67282 (November 2, 2010) (CFTC
proposal to amend 17 CFR 40.2–40.5).
523 See id.
524 150 hours = 60 (number of responses per year
per respondent) × 2.5 hours (burden per response).
525 3,000 hours = 150 hours (annual burden per
respondent pursuant to proposed Rules 805 and
806) × 20 (number of respondents).
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11031
requirement. Based on the Commission
staff’s consultation with CFTC staff,526
the Commission estimates that on
average these requirements would
require 2.5 hours of work per product
filing, with an estimated average of 34
responses per year per respondent. The
Commission estimates that this would
result in a total burden of 85 hours per
respondent 527 and 1,700 hours for all
the respondents annually.528 Based on
the Commission staff’s consultation
with the CFTC staff, the Commission
believes that the SB SEF would handle
product filings internally. The
Commission solicits comments
regarding the accuracy of its estimates.
The Commission preliminarily
estimates that the total annual hourly
burden for all SB SEFs to prepare and
submit rule filings under proposed
Rules 805 and 806 would be 3,000
hours. The Commission preliminarily
estimates that the total annual hourly
burden for all SB SEFs to prepare and
submit product filings under proposed
Rules 807 and 808 would be 1,700
hours.
7. Requirements Relating to the SB
SEF’s CCO
The SB SEF’s CCO would have
several initial and annual paperwork
burdens under proposed Rule 823(b)(6)
and (7) and also under proposed Rule
823(c) through (e).
Under proposed Rule 823(b)(6) and
(7), the CCO would be responsible for:
(1) Establishing procedures for the
remediation of noncompliance issues
identified by the CCO identified through
any compliance office review, lookback, internal or external audit finding,
self-reported error or validated
complaint, and (2) establishing
appropriate procedures for the handling,
management response, remediation,
retesting, and closing of noncompliance
issues. As noted above, the Commission
estimates a total of 20 respondents for
this requirement. Based on the
Commission’s paperwork burden
estimates for compliance program rules
adopted under the Investment Company
Act of 1940 (‘‘ICA’’) and the Investment
Advisers Act of 1940,529 the
526 See 75 FR 67282 (November 2, 2010) (CFTC
proposal to amend 17 CFR 40.2–40.5).
527 85 hours = 34 (number of responses per year
per respondent) × 2.5 hours (burden per response).
528 1,700 hours = 85 hours (annual burden per
respondent pursuant to proposed Rules 807 and
808) × 20 (number of SB SEF respondents).
529 Rule 38a–1 under the ICA (17 CFR 270.38a–
1) requires each registered investment company and
business development company to adopt and
implement policies and procedures reasonably
designed to prevent violations of the Federal
securities laws. See Investment Company Act
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Commission estimates that, on average,
the requirements of proposed Rule
823(b)(6) and (7) would mean that each
SB SEF would expend 160 hours
initially 530 to create the required two
policies and procedures, for a total
estimated burden for all respondents of
3,200 hours initially.531 Also, due to the
novel nature of the CCO requirements in
the SB SEF industry and the new
requirements under the Dodd-Frank
Act, the Commission estimates that an
initial one-time burden of $40,000 in
outside legal costs 532 would be incurred
per respondent, for a total outside cost
burden for all respondents of
$800,000.533 The Commission solicits
comments regarding the accuracy of
these estimates.
A CCO also would be required under
proposed Rule 823(c) and (d) to prepare
and submit an annual compliance report
to the Commission and to the SB SEF’s
Board. Based upon the Commission’s
estimates for similar annual reviews and
reports by CCOs of investment
companies, the Commission estimates
that these reports would require an
average of 92 hours per respondent per
year.534 Thus, the Commission estimates
Release No. IC–26299 (December 17, 2003); 68 FR
74714 (December 24, 2003) (adopting release) and
see 2010 Extension of Rule 38a–1 Supporting
Statement, Office of Management and Budget,
available at: https://www.reginfo.gov/public/do/
PRAViewDocument?ref_nbr=201002-3235-028
(‘‘ICA PRA’’). The ICA PRA estimates a burden of
80 hours initially for the creation of such policies
and procedures.
530 160 hours = 80 hours (burden per policy and
procedure requirement) × 2 (number of policy and
procedure requirements).
531 3,200 hours = 160 hours (initial burden per
respondent) × 20 (number of SB SEF respondents).
532 $40,000 = $400 (estimated hourly cost for
outside counsel) × 50 hours (estimated amount of
external legal work require per policy and
procedure requirement) × 2 (number of policy and
procedure requirements). The estimate of 50 hours
of external legal work is from the Commission’s
estimate for external legal costs for complying with
the requirements of Rule 611 of Regulation NMS for
establishing polices and procedures thereunder. See
Securities Exchange Act Release No. 51808 (June 9,
2005); 70 FR 37496 (June 29, 2005). See also 2008
Extension of Rule 611, Supporting Statement, Office
of Management and Budget, available at: https://
www.reginfo.gov/public/do/
PRAViewICR?ref_nbr=200802-3235-021. The
Commission preliminarily estimates an hourly cost
of outside counsel at $400. See Municipal
Securities Disclosure Release, supra note 438.
533 $800,000 = $40,000 (initial burden per
respondent) × 20 (number of SB SEF respondents).
534 The ICA PRA estimated that CCOs of
investment companies would expend 42 hours
annually to conduct the annual review and prepare
the annual compliance report under Rule 38a–1
under the ICA. See ICA PRA supra note 529.
Because proposed Rule 823 would require slightly
more than double the information that is required
for CCO annual reports under Rule 38a–1, the
Commission preliminarily estimates that the burden
associated with the CCO’s annual compliance
report requirements of proposed Rule 823(c) and (d)
would be 220% that of Rule 38a–1, which estimate
would be approximately 92 hours.
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a total annual burden of 1,840 hours for
all respondents.535 Because the report
would be submitted by the CCO, the
Commission does not expect that the SB
SEF would incur any external costs. The
Commission solicits comments on the
accuracy of its estimates.
A CCO would be required under
proposed Rule 823(e)(1) and (2) and
Exhibits F and H to proposed Form SB
SEF to submit an annual financial report
that would need to satisfy a number of
requirements, including the requirement
that a registered public accounting firm
that is qualified and independent in
accordance with Rule 2–01 of
Regulation S–X (17 CFR 210.2–01) audit
each financial report relating to the SB
SEF (unaudited for certain affiliated
entities). Based on conversations with
operators of current trading platforms
and the Commission’s experience with
entities of similar size, the Commission
preliminarily estimates that the reports
relating to the SB SEF generally would
require, on average, 500 hours per
respondent to complete and cost
$500,000 for independent public
accounting services per respondent. The
Commission believes that the unaudited
reports required for certain affiliated
entities and available upon request by
the Commission for other affiliated
entities would not be overly time
consuming to produce because, based
on the Commission’s experience with
Form 1 filers, a respondent’s accounting
system should have this information
available. Furthermore, because the
information would not have to be
audited, a respondent would only have
to compile the information using a
computer and commercially available
software that it generally would own for
pre-existing accounting purposes and
then submit the information to the
Commission. Based on the number of
unaudited financial statements that the
Commission receives from filers of Form
1 and the substance in these reports, the
Commission estimates that it would take
a SB SEF 40 hours to compile, review,
and submit these reports. However, all
of these reports would need to be
provided in XBRL, as required in Rules
405(a)(1), (a)(3), (b), (c), (d) and (e) of
Regulation S–T.536 This would create an
additional burden on respondents. The
Commission preliminarily estimates
that, based on its experience with other
data tagging initiatives, these
requirements would add an additional
burden of an average of 54 hours and
$23,000 in outside software and other
costs per respondent per year. Thus, for
535 1,840 hours = 92 hours (annual burden per
respondent) × 20 (number of SB SEF respondents).
536 See 17 CFR 232.405.
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Sfmt 4702
purposes of complying with the
financial statement requirements under
proposed Rule 823(e)(1) and (2) and
Exhibits F and H to proposed Form SB
SEF, the Commission estimates a total
annual burden of 11,880 hours 537 and
$10,460,000 for respondents.538 The
Commission solicits comments as to the
accuracy of this information.
As a result, the Commission estimates
that the total burdens for compliance
with proposed Rule 823 would be:
(1) Initially, for the creation of the
policies and procedures required in
proposed Rule 823(b)(6) and (7), 160
hours and $40,000, per respondent, and
3,200 hours and $800,000, for all
respondents; and (2) on an annual basis,
for the annual compliance report and
financial reports required under
proposed Rule 823(c) through (e), 686
hours 539 and $523,000, per respondent,
and 13,720 540 hours and
$10,460,000,541 for all respondents.
The Commission preliminarily
estimates that the total annual hourly
burden for all SB SEFs combined for the
CCO requirements in proposed Rule 823
would be 13,720 hours and the total
one-time hourly burden would be 3,200.
The Commission preliminarily
estimates that the total annual cost
burden for all SB SEFs to comply with
the CCO requirements in proposed Rule
823 would be $10,460,000 and the total
one-time cost burden would be
$800,000.
8. Surveillance Systems Requirements
for SB SEFs
As discussed above, proposed Rule
813(b) requires SB SEFs to have the
capacity and resources to electronically
monitor trading in SB swaps on its
market by establishing an automated
surveillance system, including through
real-time monitoring of trading and use
of automated alerts, to, among other
things, detect and deter fraudulent or
manipulative acts or practices, detect
537 11,880 hours = 20 (number of SB SEF
respondents) × 594 hours (500 hours for audited SB
SEF financial statements + 40 hours for unaudited
financial statements of affiliated entities + 54 hours
for XBRL formatting of submission).s
538 $10,460,000 = 20 (number of SB SEF
respondents) × $523,000 ($500,000 for outside
accounting services for auditing SB SEF’s financial
statements + $23,000 in outside software and other
cost for formatting financial statement submission
in XBRL format).
539 686 hours = 594 hours for financial report +
92 hours for annual compliance report.
540 13,720 hours = 686 hours (burden per
respondent) × 20 (number of SB SEF respondents).
541 $10,460,000 = 20 (number of SB SEF
respondents) × $523,000 ($500,000 for outside
accounting services for auditing SB SEF’s financial
statements + $23,000 in outside software and other
cost for formatting financial statement submission
in XBRL format).
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and deter market distortions or
disruptions of trading, conduct real-time
monitoring of trading to provide for
comprehensive and accurate trade
reconstruction, and collect and assess
data to allow SB SEFs to respond to
market abuses and disruptions.542
Based on industry sources, the
Commission preliminarily estimates
that establishing an automated
surveillance system would require one
senior programmer and three additional
programmers working for a year to
create and implement such a system.
Assuming a 1,800 hour work year, the
Commission preliminarily estimates
that the average one-time initial burden
per respondent of establishing an
automated surveillance system
compliant with these requirements,
would be 7,200 hours.543 In addition,
the Commission believes that a one-time
capital expenditure of $1,500,000 in
information technology costs would be
necessary to establish such a system.
This estimate is based on the
Commission’s discussions with market
participants currently operating
platforms that trade OTC swaps. Based
on the estimated number of 20 SB SEF
respondents, the Commission estimates
a total start-up cost of 144,000 hours 544
and $30,000,000 in information
technology costs.545 Based on
discussions with operators of current
trading platforms, the Commission
further estimates that to maintain these
systems, a SB SEF would have to
employ two programmer/analysts.
Therefore, assuming a 1,800 hour work
year, the Commission preliminarily
estimates the average ongoing annual
costs of these systems to be 3,600 hours
per respondent 546 for a total of 72,000
542 Proposed Rule 811(i) would require a SB SEF
to have the capacity to capture information that
may be used in establishing whether rule violations
have occurred, including through the use of
automated surveillance systems as set forth in
proposed Rule 813(b). Proposed Rule 813(a)(2)
would require a SB SEF to monitor trading in SB
swaps to prevent manipulation, price distortion,
and disruptions of the delivery or cash settlement
practices and procedures, including methods for
conducting real-time monitoring of trading and
comprehensive and accurate trade reconstructions.
The Commission preliminarily believes that the
information collection burden associated with these
requirements would be included in the information
collection burden for proposed Rule 813(b).
543 7,200 hours = 1,800 (initial hours burden per
employee) × 4 (number of employees).
544 144,000 hours = 7,200 hours (initial burden
per respondent) × 20 (number of SB SEF
respondents).
545 $30,000,000 = $1,500,000 (initial cost burden
per respondent) × 20 (number of SB SEF
respondents).
546 3,600 hours = 1,800 (annual hours burden per
employee) × 2 (number of employees).
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Jkt 223001
hours for all respondents.547 In
addition, the Commission estimates that
these systems may incur an ongoing
information technology cost of and
$500,000 per respondent, for a total
ongoing annual burden of
$10,000,000548 The Commission solicits
comments on the accuracy of its
estimates.
9. Access by Non-Registered Eligible
Contract Participants
As discussed above, proposed Rule
809(d)(1) would require a SB SEF that
permits non-registered ECPs to be
participants in the SB SEF to establish,
document, and maintain a system of risk
management controls and supervisory
procedures reasonably designed to
manage the financial, regulatory, and
other risks of this business activity.549
Proposed Rule 809(d)(2) would require
that the risk management controls and
supervisory procedures for granting
access to certain ECPs as participants of
the SB SEF be reasonably designed to
ensure compliance with all regulatory
requirements.550 The Commission notes
that proposed Rule 809(d) is modeled
on recently adopted Rule 15c3–5 under
Exchange Act.551 The PRA analysis
prepared in connection with that rule
has informed the Commission’s
estimates of the paperwork burdens that
would apply to SB SEFS under the
proposed Rule 809(d).552 Although the
Commission reviewed the burden
estimates it prepared in connection with
Rule 15c3–5 to inform its burden
estimates of the proposed Rule 809(d),
the Commission recognizes that a
number of entities that seek to become
SB SEFs may not currently be regulated
entities.
The Commission preliminarily
believes that proposed Rule 809(d)(1)
and (2) would impose a one-time
collection of information burden on SB
SEFs to establish or modify risk
management systems, if they permit
access by non-registered ECPs. The
Commission preliminarily believes that
547 72,000 hours = 3,600 hours (annual burden
per respondent) × 20 (number of SB SEF
respondents).
548 $10,000,000 = $500,000 (annual cost burden
per respondent) × 20 (number of SB SEF
respondents).
549 See proposed Rule 809(d)(1).
550 See proposed Rule 809(d)(2).
551 See 17 CFR.240.15c3–5. Though the
Commission is relying on the PRA estimates it
prepared in connection with Rule 15c3–5 to inform
its PRA estimates for this proposed rule, the
Commission notes that some of the specific
requirements, controls and procedures in Rule
15c3–5 are not contained in the proposed Rule
809(d) for SB SEFs.
552 See Securities Exchange Act Release No.
63241 (November 3, 2010), 75 FR 69792 (November
15, 2010).
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11033
the majority of entities that would seek
to become SB SEFs would already have
some risk management systems and
supervisory procedures and controls to
protect the integrity of their business
and to comply with other requirements
already specified, analyzed and
accounted for herein (e.g., requirements
relating to surveillance systems,
recordkeeping, reporting, and the CCO).
However, some entities that seek to
become SB SEFs could have to change
their systems and procedures and other
entities that currently do not have such
systems and procedures could have to
establish new systems and procedures
to comply with the requirement of
proposed Rule 809(d).
The Commission preliminarily
believes that each SB SEF would have
a one-time burden to establish or modify
its technology and systems to add the
controls necessary to comply with the
requirement of the proposed Rule
809(d). The Commission estimates that
each SB SEF would spend an average of
225 hours to develop or modify their
systems to bring them into compliance
with the proposed rule for a total onetime burden for all SB SEFs combined
of 4,500 hours.553 Based on industry
sources, the Commission preliminarily
believes that the development or
modification of the required technology
and systems would be performed
internally.
The Commission also preliminarily
believes that proposed Rules 809(d)(1)
and (2) would impose an annual
paperwork burden on each SB SEF to
maintain its risk management system.
The Commission preliminarily
estimates that the ongoing annual
burden for a SB SEF to maintain its risk
management system would be 172.5
hours on average for a total annual
burden for all SB SEFs combined of
3,450 hours.554 The Commission
believes that the ongoing burden of
complying with the proposed rule’s
collection of information burden would
include, among other things, updating
systems to address any issues detected,
updating risk management controls to
reflect changes in the SB SEF’s business
model, and documenting and preserving
its written description of risk
management controls. Based on
industry sources, the Commission
preliminarily believes that the
553 4,500 hours = 225 (estimated average one-time
burden to set up or modify systems to comply with
collection of information under proposed Rule
809(d)) × 20 (number of SB SEF respondents).
554 3,450 hours = 225 hours (estimated average
annual burden to establish or maintain risk
management systems to comply with collection of
information under proposed Rule 809(d)) × 20
(number of SB SEF respondents).
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maintenance of a SB SEF’s risk
management systems would performed
internally by one or more programmers.
The Commission preliminarily
believes that proposed Rule 809(d)
would impose a one-time legal and
compliance burden on each SB SEF to
comply with the requirement to
establish, document, and maintain risk
management controls and supervisory
procedures. Based on the Commission’s
experience with broker-dealers and
ATSs, the Commission preliminarily
estimates that the average initial onetime legal and compliance burden
would be approximately 52.5 hours per
SB SEF for a total one-time legal and
compliance burden for all SB SEFs
combined of 1,050 hours.555 The
Commission preliminarily estimates
that one internal compliance attorney
and one internal compliance manager
would spend on average 7.5 hours each
to evaluate appropriate access controls
and procedures. The Commission also
preliminarily estimates that one internal
compliance attorney and one
compliance manager would each require
approximately 15 hours, and the CCO
would require approximately 7.5 hours,
to set up or modify compliance policies
and procedures to comply with the
proposed rule, which includes
establishing written policies and
procedures for reviewing the overall
effectiveness of risk management
controls and supervisory procedures.
The Commission also preliminarily
believes that proposed Rule 809(d)
would impose an annual paperwork
burden on SB SEFs to review and
document their written risk
management controls and supervisory
procedures. Based on the Commission’s
experience with broker-dealers and
ATSs, the Commission believes that a
SB SEF’s ongoing annual burden would
be approximately 75 hours on average
for a total annual burden for all SB SEFs
combined of 1,500 hours.556 This
estimate includes an average of 30 hours
per year for each of an internal
compliance attorney and compliance
manager, and 15 hours per year for the
CCO, to review, document and updated
these policies and procedures.
Therefore, the Commission
preliminarily estimates that the total
555 1,050 hours = 52.5 hours (estimated average
one-time burden to establish, document, and
maintain risk management controls and supervisory
procedures to comply with collection of
information under proposed Rule 809(d)) × 20
(number of SB SEF respondents).
556 1,500 hours = 75 hours (estimated average
annual burden to establish, document, and
maintain risk management controls and supervisory
procedures to comply with collection of
information under proposed Rules 809(d)(1) and
(2)) × 20 (estimated number of SB SEF respondents).
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one-time burden for all SB SEFs to
comply with the collection of
information requirements of proposed
Rule 809(d) would be 5,550 hours 557
and the total annual burden to comply
with the proposed Rule would be 4,950
hours.558
10. Composite Indicative Quote and
Executable Bids and Offers
Proposed Rule 811(e) would require a
SB SEF that operates an RFQ platform
to create and disseminate through the
SB SEF a composite indicative quote,
made available to all participants, for SB
swaps traded on or through the SB SEF
and the Commission’s proposed
interpretation of SB SEF would require
each SB SEF, at the minimum, to
provide any participant with the ability
to make and display executable bids or
offers accessible to all participants on
the SB SEF, if the participant wishes to
do so. The Commission preliminarily
believes that most if not all of the
respondents that operate RFQ platforms
already have systems that collect and
disseminate a composite indicative
quote for other securities traded on or
through the respondents’ platforms. The
Commission also preliminarily believes
that SB SEFs currently have the
capability to offer the executable bids
and offers function to its participants.
Thus, the Commission preliminarily
believes that the composite indicative
quote and the executable bids and offers
requirements would result in little or no
collection of information burden for
such entities. The Commission
recognizes, however, that some SB SEFs
may have a one-time burden to establish
or update their systems to collect and
disseminate composite indicative quote
information and to offer the executable
bids and offers function and an ongoing
annual burden to determine that such
composite indicative quote mechanisms
and executable bids and offers function
are operating properly. The Commission
does not know how many SB SEFs
would have to establish or update their
systems to collect and disseminate
composite indicative quote information
or to provide the executable bids and
offer function. Therefore, for PRA
purposes the Commission estimates that
all of the estimated 20 SB SEF
respondents would incur the paperwork
burdens associated with these
requirements.
557 See supra notes 553 and 555 and
accompanying text for calculations of total one-time
burden to comply with collection of information
under proposed Rules 809(d).
558 See supra notes 554 and 556 and
accompanying text for calculations of total annual
burden to comply with collection of information
under proposed Rules 809(d).
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The Commission preliminarily
believes that this work would be
performed internally by one senior
programmer and one programmer. The
Commission preliminarily believes that
one senior programmer and one
programmer would spend
approximately 40 hours each to
establish or update the SB SEF’s
systems to include the composite
indicative quote and executable bids
and offers functions. The total one-time
burden, on average, for a SB SEF to
establish or update its system to include
these functions would be 80 hours for
a total one-time burden for all SB SEFs
combined of 1,600 hours.559 Further, the
Commission preliminarily believes that
one programmer would spend
approximately 50 hours annually, on
average, monitoring and updating the
system to determine that the composite
indicative quote and the executable bids
and offers functions would be operating
appropriately. The total annual burden
to all SB SEFs combined for monitoring
and updating these mechanisms would
be 1,000 hours.560
11. Total Paperwork Burden Under
Regulation SB SEF
Based on the foregoing, the
Commission preliminarily believes that
the total one-time hourly burden for all
SB SEFs and SB SEF participants
combined pursuant to the requirements
under Regulation SB SEF is equal to
264,801 hours 561 and $41,692,900.562
The Commission preliminarily
believes that annual ongoing burden for
all SB SEFs and SB SEF participants
combined pursuant to the requirements
559 1,600 hours = 80 hours (estimated one-time
collection of information burden to establish or
update systems to comply with proposed Rule
811(e) and the Commission’s proposed
interpretation of the definition of SB SEF as it
relates to executable bids and offers functions) × 20
(estimated number of SB SEF respondents).
560 1,000 hours = 50 hours (estimated annual
collection of information burden to comply with
proposed Rules 811(e)) × 20 (estimated number of
SB SEF respondents).
561 263,201 hours = 13,901 hours (registration) +
4,400 hours (rule-writing) + 13,300 (SB SEF
recordkeeping) + 72,450 (SB SEF participant
recordkeeping) + 6,400 (timely publication of
trading information) + 3,200 (CCO requirements) +
144,000 (surveillance systems) + 5,550 (access by
ECPs) + 1,600 (composite indicative quote).
562 $41,692,900 = $10,478,900 (registration) +
$36,000 (SB SEF recordkeeping) + $378,000 (SB
SEF participant recordkeeping) + $800,000 (CCO
requirements) + $30,000,000 (surveillance systems).
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under Regulation SB SEF are equal to
165,632 hours 563 and $22,342,700.564
E. Collection of Information Is
Mandatory
The collections of information
pursuant to Regulation SB SEF would
be mandatory for all registered SB SEFs
and SB SEF participants, as applicable.
F. Responses to Collection of
Information Will Not Be Confidential
Other than information for which a
SB SEF or a SB SEF participant requests
confidential treatment, or as may
otherwise be kept confidential by the
Commission, and which may be
withheld from the public in accordance
with the provisions of the Freedom of
Information Act (‘‘FOIA’’), 5 U.S.C. 522,
the collection of information pursuant
to the proposed rules would not be
confidential and would be publicly
available.
G. Retention Period of Recordkeeping
Requirements
Although recordkeeping and retention
requirements have not yet been
established for SB SEFs under the
Exchange Act provisions added by the
Dodd-Frank Act, the Commission is
authorized to adopt such rules under
proposed Regulation SB SEF as part of
this proposed rulemaking.565 Proposed
Rule 818 under Regulation SB SEF
would require a SB SEF to maintain
records of all documents made or
received by it in the conduct of its
business for a period of not less than
five years, the first two years in an
easily accessible place.
H. Request for Comment
Pursuant to 44 U.S.C. 3505(c)(2)(B),
the Commission solicits comment to:
1. Evaluate whether the proposed
collection of information is necessary
for the performance of the functions of
the agency, including whether the
information shall have practical utility;
jdjones on DSKHWCL6B1PROD with PROPOSALS2
563 164,632
hours = 3,154 (registration) + 2,400
hours (rule-writing) + 24,208 hours (SB SEF
reporting) + 27,500 hours (SB SEF participant
reporting) + 3,600 hours (SB SEF recordkeeping) +
8,400 hours (SB SEF participant recordkeeping) +
4,700 hours (rule and product filings) + 13,720
hours (CCO requirements) + 72,000 hours
(surveillance systems) + 4,950 (access by ECPs) +
1,000 (composite indicative quote).
564 $22,342,700 = $2,700 (registration) +
$1,880,000 (SB SEF reporting) + $10,460,000 (CCO
requirements) + $10,000,000 (surveillance systems).
565 As discussed above, new Section 3D of the
Exchange Act sets forth 14 Core Principles that a
SB SEF would need to satisfy, including one
relating to recordkeeping and reporting, and
provides the Commission with rulemaking
authority with respect to implementation of these
Core Principles. See Public Law 111–203, § 763(c)
(adding Section 3D of the Exchange Act).
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2. Evaluate the accuracy of the
agency’s estimate of the burden of the
proposed collection of information;
3. Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected; and
4. Minimize the burden of collection
of information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology.
Persons wishing to submit comments
on the collection of information
requirements should direct them to the
following persons: (1) Desk Officer for
the Securities and Exchange
Commission, Office of Information and
Regulatory Affairs, OMB, Room 3208,
New Executive Office Building,
Washington, DC 20503; and (2)
Secretary, Securities and Exchange
Commission, Station Place, 100 F Street,
NE., Washington, DC 20549–1090 with
reference to File No. S7–06–11. OMB is
required to make a decision concerning
the collection of information between 30
and 60 days after publication, so a
comment to OMB is best assured of
having its full effect if OMB receives it
within 30 days of publication. The
Commission has submitted the
proposed collection of information to
OMB for approval. Requests for the
materials submitted to OMB by the
Commission with regard to this
collection of information should be in
writing, refer to File No. S7–06–11, and
be submitted to the Securities and
Exchange Commission, Office of
Investor Education and Advocacy,
Station Place, 100 F Street, NE.,
Washington, DC 20549–0213.
XXVIII. Consideration of Costs and
Benefits
A. Overview
To increase the transparency and
oversight of the OTC derivatives market,
Title VII of the Dodd-Frank Act requires
the Commission to undertake a number
of rulemakings to implement the
regulatory framework for SB swaps that
is set forth in the legislation, including
the registration and regulation of SB
SEFs.566 Pursuant to Section 763(c) of
the Dodd-Frank Act, the Commission is
required to adopt rules providing for: (1)
The registration and regulation of SB
SEFs; and (2) the compliance by SB
SEFs with the Core Principles set forth
thereunder.567 To satisfy this statutory
566 See
Public Law 111–203 Preamble.
Core Principles applicable to SB SEFs are
captioned: (1) Compliance with Core Principles; (2)
Compliance with Rules; (3) Security-Based Swaps
Not Readily Susceptible to Manipulation; (4)
Monitoring of Trading and Trade Processing; (5)
567 The
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11035
mandate, the Commission is proposing
Regulation SB SEF, which would
contain several rules setting forth the
requirements for a platform or system to
register with the Commission, and to
maintain that registration, as a SB SEF,
and Form SB SEF, which would contain
the application form and the materials
that an applicant would have to provide
as part of the registration process. In
addition, proposed Regulation SB SEF
would contain a series of rules that are
designed to implement the 14 Core
Principles with which a SB SEF is
statutorily required to comply. The
proposed registration form and rules
contained in Regulation SB SEF are
designed to promote the goals of the
Dodd-Frank Act of having SB swaps
trade on a regulated market. In
conjunction with other rulemakings
proposed by the Commission under the
Dodd-Frank Act, including rule
proposals relating to SB swap trade
reporting,568 SB swap data
repositories,569 the mitigation of
conflicts of interest relating to SB SEFs,
SBS exchanges and SB swap clearing
agencies,570 and SB swap anti-fraud and
anti-manipulation prohibitions,571 the
proposed registration form and rules
governing SB SEFs are intended to lead
to a more robust, transparent, and
competitive environment for the market
for SB swaps.
Currently, SB swaps trade in the OTC
market, rather than on regulated
markets. The existing market for SB
swaps is opaque, with little, if any, pretrade or post-trade transparency. A key
goal of the Dodd-Frank Act is to bring
more transparency to the OTC
derivatives markets and to bring the
trading of SB swaps onto regulated
markets.572 The Commission, in drafting
rules to implement the SB SEF
provisions of the Dodd-Frank Act, is
proposing to put in place a regulatory
structure that will foster a transparent,
fair, and competitive market for the
Ability to Obtain Information; (6) Financial
Integrity of Transactions; (7) Emergency Authority;
(8) Timely Publication of Trading Information; (9)
Recordkeeping and Reporting; (10) Antitrust
Considerations; (11) Conflicts of Interest; (12)
Financial Resources; (13) System Safeguards; and
(14) Designation of Chief Compliance Officer.
568 See Reporting and Dissemination Release,
supra note 6.
569 See SDR Release, supra note 6.
570 See Regulation MC Proposing Release, supra
note 82.
571 See Prohibition Against Fraud, Manipulation,
and Deception in Connection with Security-Based
Swaps, Exchange Act Rel. No. 63236, proposed on
Nov. 3, 2010.
572 See Public Law 111–203 Preamble. See also
Section 3C(h) of the Exchange Act, Public Law 111–
203, requiring that, subject to certain exceptions,
any SB swap subject to mandatory clearing must be
traded on a SB SEF or an exchange.
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trading of SB swaps. Considering the
early stage of regulatory development
and the existing structure of the SB
swaps market, however, the
Commission is mindful that the
proposed rules could have unforeseen
consequences, either beneficial or
undesirable, with respect to the shape
that this market will take. In the
Commission’s view, it is important that
the regulatory structure provides
incentives for the trading of SB swaps
on regulated markets that are designed
to foster greater transparency and
competition and are subject to
Commission oversight, while at the
same time allowing for the continued
efficient innovation and evolution of the
SB swaps market. In this regard, rather
than proposing a rule that establishes a
prescribed format for the system or
platform that constitutes a SB SEF, the
Commission is proposing to provide
baseline principles, consistent with the
requirements of the Exchange Act, that
any potential SB SEF would need to
meet as a condition to registration as a
SB SEF. Such an approach would allow
flexibility to those trading venues that
plan to register as SB SEFs and would
permit the continued development of
organized markets for the trading of SB
swaps. This more flexible approach also
would allow the Commission to monitor
the market for SB swaps and propose
adjustments, as necessary, as this
market evolves.
The Commission believes that the
proposed registration form and rules
under Regulation SB SEF would create
a comprehensive structure for the
registration and regulation of SB SEFs,
but would also impose costs on market
participants. The Commission is
sensitive to the costs and benefits that
would result from proposed Regulation
SB SEF and has identified certain costs
and benefits of these proposals, as
described more fully below. The
Commission requests comment on the
costs and benefits associated with the
proposed registration form and rules
contained in proposed Regulation SB
SEF, and its cost-benefit analysis
thereof, including identification and
assessments of any costs and benefits
not discussed in this analysis. The
Commission also seeks comment on the
accuracy of any of the benefits and costs
it has identified below and also
welcomes comments on the accuracy of
any of its cost estimates. Finally, the
Commission encourages commenters to
identify, discuss, analyze, and supply
relevant data, information, or statistics
regarding any such costs or benefits.
Because the structure of the SB swaps
market and the behavior of its market
participants is likely to change after the
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effective date of the Dodd-Frank Act and
implementation of the Commission’s
rules promulgated thereunder, the
impact of—and the costs and benefits
that may result from—proposed
Regulation SB SEF may change over
time. As commenters review proposed
Regulation SB SEF, they are urged to
consider generally the role that
regulation may play in fostering or
limiting the development of the market
for SB swaps.
B. Benefits
SB SEFs are expected to play a critical
role in enhancing the pre-trade
transparency and oversight of the
market for SB swaps. SB SEFs should
help further the statutory objective of
financial stability and greater
transparency for SB swaps 573 by
providing a venue for counterparties to
execute trades in SB swaps and also by
serving as a conduit for information
regarding trading interest in SB swaps.
In addition, because the proposed rules
would impose certain regulatory
responsibilities on SB SEFs, such as
monitoring trading, assuring the ability
to obtain information, and establishing
and enforcing rules and procedures to
ensure the financial integrity of SB
swaps entered on or though the SB SEF,
SB SEFs would be charged with an
important role in helping to oversee
trading in the market for SB swaps on
an ongoing basis and allowing
regulators to quickly assess information
regarding the potential for systemic risk
across trading venues.
Broadly, the Commission anticipates
that Regulation SB SEF may bring
several overarching benefits to the SB
swap market. These include the
following:
Improved Transparency. The
proposed rules on the registration and
regulation of SB SEFs could have
significant benefits to the market for SB
swaps. The trading of SB swaps on
regulated markets, i.e., SB SEFs, should
bring more transparency to the currently
opaque market for SB swaps. In
addition, the Commission’s proposed
interpretation of the definition of a SB
SEF, combined with the proposed rules
relating to pre-trade transparency,
should increase overall transparency in
the market for SB swaps. Increased pretrade price transparency should help
alleviate informational asymmetries that
may exist today in the SB swaps
markets and allow an increased number
of market participants to be able to see
the trading interest of other market
participants prior to trading, which
should lead to increased price
573 See
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competition among market
participants.574 The Commission
preliminarily believes that the proposed
requirements with respect to pre-trade
price transparency should lead to more
efficient pricing in the SB swaps
market,575 but is mindful that, under
certain circumstances, pre-trade price
transparency could also discourage the
provision of liquidity by some market
participants.576
The Commission preliminarily
believes that proposed Rule 811(e),
which would require a SB SEF that
operates an RFQ platform to create and
disseminate through the SB SEF a
composite indicative quote, made
available to all participants, for SB
swaps traded on or through the SB SEF,
would provide a certain level of pretrade transparency for an RFQ platform.
Displaying the composite indicative
quote would include displaying both
composite indicative bids and
composite indicative offers for SB swaps
traded on or through the SB SEF. As a
result of this proposal, an average
indicative pricing interest would be
available to all of the SB SEF’s
participants. The Commission also
believes that including RFQ responses
in the composite indicative quote would
be an appropriate method to inform SB
SEF participants of changes in the
average level of pricing interest due to
responses.577 At the same time, the
dissemination of a composite indicative
quote would provide a greater level of
anonymity for the execution of trades on
an RFQ platform compared with the
dissemination of an individual
participant’s indications of interest or
responses to an RFQ.
In addition, the Commission
preliminary believes that proposed Rule
817(c), which prohibits a SB SEF from
making any information regarding a SB
swap transaction publicly available
prior to the time that a SDR would be
permitted to disseminate the trade
information, could positively impact the
market for block trades. Under proposed
Rule 817(c), a SB SEF could not
574 See, e.g., Ananth Madhavan, Market
Microstructure: A Practitioner’s Guide, Fin.
Analysts J., Vol. 58, at 38 (2002) (nondisclosure of
pre-trade price information benefits dealers by
reducing price competition).
575 See, e.g., Ekkehart Boehmer, et al., Lifting the
Veil: An Analysis of Pre-trade Transparency at the
NYSE, J. of Fin., Vol. LX (2005) (greater pre-trade
price transparency leads to more efficient pricing).
576 See, e.g., Ananth Madhavan, et al., Should
Securities Markets Be Transparent? J. of Fin.
Markets, Vol. 8 (2005) (finding that an increase in
pre-trade price transparency leads to lower liquidity
and higher execution costs, because limit-order
traders are reluctant to submit orders given that
their orders essentially represent free options to
other traders).
577 See supra Section VIII.C.1.
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publicly disseminate complete
transaction reports for block trades (i.e.,
including the transaction ID and the full
notional size) prior to the time SDRs
would be permitted to do so. The
Commission believes that proposed
Rule 817(c) would provide parties to
block trades some flexibility in timing
their transactions. Based on discussions
with market participants, the
Commission believes that parties to
block trades favor a consistent approach
to the timing of the public reporting of
such trades. Therefore, the Commission
preliminary believes that parties to
block trades, especially dealers, would
be able to have more flexibility in
effecting a block trade and any
associated hedging transactions, because
trade information about the block could
not be made publicly available by the
SB SEF prior to the time that it is
permitted to be disseminated by a
SDR.578 Furthermore, if the market
participants choose to utilize this
functionality, the display of executable
bids or offers should also improve pretrade price transparency.
Improved Oversight. The proposed
rules would require SB SEFs to
maintain an audit trail and surveillance
systems to monitor trading. Regulation
SB SEF also would require
comprehensive reporting and
recordkeeping by SB SEFs. These
requirements would put in place a
structure that would provide the SB SEF
with information to better enable it to
oversee trading on its market by its
participants, including detecting and
deterring fraudulent and manipulative
acts. Regulation SB SEF would also
provide the Commission with greater
access to information on the trading of
SB swaps to support its responsibilities
to oversee the SB swaps market.
Further, Regulation SB SEF would
enable the Commission to share that
information with other Federal financial
regulators in instances of broad market
turmoil.
This framework could in turn lead to
increased confidence in a well-regulated
market among SB swaps market
participants. To the extent market
participants consider a well-regulated
market as significant to their investment
decisions, trust, which is a component
of investor confidence, is improved and
market participants may be more willing
to participate in the SB swaps market.
An increase in participation in the SB
swaps market can potentially benefit the
SB swaps market as a whole. Further, to
578 See Reporting and Dissemination Release,
supra note 6, and proposed Rule 904(d) of
Regulation SBSR. See also proposed Rule 817(c) of
Regulation SB SEF.
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the extent that market participants
utilize SB swaps to better manage their
risk with respect to a position in
underlying securities or assets, the
extent they are willing to participate in
the SB swaps market may impact their
willingness to participate in the
underlying asset’s market. Thus, the
Commission preliminarily believes that
the proposal could benefit the securities
markets overall by encouraging a more
efficient, and potentially higher, level of
capital investment.
Improved Access and Competition.
Currently, the market for SB swaps is
dominated by a small group of
dealers.579 The Dodd-Frank Act’s
mandate to bring SB swaps that are
subject to the mandatory clearing
requirement onto regulated markets,
unless the SB swap is not made
available to trade,580 and proposed
Regulation SB SEF, which is intended to
help implement the statutory directive,
should help foster greater competition
in the trading of SB swaps by increasing
access to SB swap trading venues. The
proposed rules would provide a
framework to allow a number of trading
platforms or systems to register as SB
SEFs and thus more effectively compete
for business in SB swaps. Proposed Rule
809(b) would require a SB SEF’s rules
to permit all eligible persons that meet
the requirements for becoming a
participant as set forth in the SB SEF’s
rules to become participants in the SB
SEF.581 Proposed Rule 809(b) would
also give a SB SEF the option to not
permit any non-registered ECP to
become participants in the SB SEF. As
such, proposed Rule 809(b) provides SB
SEFs with flexibility in choosing
whether or not to provide access to nonregistered ECPs. Proposed Rule 809(d)
would require that, if a SB SEF chooses
to permit non-registered ECPs to become
participants, it would be responsible for
establishing risk management controls
and supervisory procedures reasonably
designed to manage financial,
regulatory, and other risks associated
with the non-registered ECP’s access.
These proposed requirements should
reduce risks associated with access to
SB SEFs by non-registered ECPs (e.g., if
they enter into trades that exceed
appropriate credit or capital limits or
submit erroneous orders). In addition,
579 See
supra note 81.
Section 3C(h) of the Exchange Act.
581 Proposed Rule 809(a) would require SB SEFs
to only permit a person to become a participant in
the security-based swap execution facility if such
person is registered with the Commission as a
security-based swap dealer, major security-based
swap participant, or broker (as defined in section
3(a)(4) of the Act, 15 U.S.C. 78c(a)(4)), or if such
person is an eligible contract participant (as defined
in section 3(a)(65) of the Act, 15 U.S.C. 78c(a)(65)).
580 See
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the Commission preliminarily believes
that a SB SEF is best positioned to
implement the proposed controls and
procedures.
Proposed Rule 811(b)(1) would
require every SB SEF to establish fair,
objective and not unreasonably
discriminatory standards for granting
impartial access to trading on the SB
SEF. In addition, proposed Rule
811(b)(3)–(4) would require every SB
SEF to make and keep records of all
denials, or limitations, of access to the
SB SEF, and to report such information
to the Commission. These proposed
requirements would further the
requirement in the Exchange Act that
SB SEFs provide market participants
with impartial access.582 Taken
together, these proposed rules should
foster greater direct access to SB SEFs
by dealers, major SB swap participants,
brokers and ECPs. This impartial access
should, in turn, promote greater
participation by liquidity providers and
competition on each SB SEF. Increased
participation could lead to reduced
information asymmetries among market
participants, while increased
competition could lead to more efficient
and better pricing in the SB swaps
market. Further, a more competitive
environment should lead to lower
trading costs, which may lead to
increased participation in the SB swaps
market. Impartial access requirements
also would help guard against situations
where certain participants in a SB SEF
(who also might be owners of the SB
SEF) might seek to limit the number of
other participants in the SB SEF in
order to limit competition and increase
their own profits. Thus, the impartial
access should, in turn, promote greater
participation by liquidity providers and
competition on each SB SEF.
As proposed, SB SEFs would remain
free to establish standards for impartial
access consistent with the requirement
that they be fair and objective and do
not unfairly discriminate, and that they
do not apply the standards in an unfair
or unreasonably discriminatory manner.
Therefore, SB SEFs could choose the
most cost-effective methods to ensure
that all their participants and would-be
participants are evaluated on a fair and
impartial basis.
To address the problem of restricting
the scope of SB swaps that trade on SB
SEFs, the Commission is proposing to
require that each SB SEF have a swap
review committee that would determine
which SB swaps would trade on the SB
SEF, as well as the SB swaps that
should no longer trade on the SB
582 See
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SEF.583 Proposed Rule 811(c)(2) would
require that the composition of the swap
review committee must provide for the
fair representation of participants of the
SB SEF as well as other market
participants such that each class of
participant and other market
participants would be given the right to
participate in such swap review
committee and that no single class of
participant or category of market
participant would predominate. Having
a swap review committee that provides
for the fair representation of participants
and other market participants should
help assure that the process of
determining those SB swaps that should
trade on the SB SEF would be fair and
that various classes of participants in
the SB SEF, as well as other market
participants, would have a voice in
those decisions.
Consequently, the Commission
believes that the proposed rules
requiring impartial access to trading on
the SB SEF and providing for fair
representation on the swap review
committee to determine which SB
swaps should be traded on SB SEFs
should help mitigate the inappropriate
exercise of market power by any given
market participant or group of market
participants. In addition, the
Commission believes that, in a
competitive market, new SB SEFs could
be created to attract market participants
that are unable to meet the objective
requirements of more exclusive SB SEFs
or to trade the SB swaps other SB SEFs
decide not to trade.
The Commission also believes that its
proposed interpretation of which
facilities fall within the term SB SEF,
providing, at the minimum, any
participant with the ability to make and
display executable bids or offers
accessible to all participants on the SB
SEF, if the market participant wishes to
do so, would also improve access to the
SB SEF by participants because it
provides participants an additional
method with which to execute
transactions on the SB SEF.
Improved Commission and SB SEF
Oversight. The Commission believes
that one of the goals of the Dodd-Frank
Act is to increase the regulatory
583 See proposed Rule 811(c). See also Core
Principle 3 and proposed Rule 812, which permit
a SB SEF to trade only SB swaps that are not readily
susceptible to manipulation. Prior to trading any SB
swap, proposed Rule 812 would require the swap
review committee to determine whether, after
taking into account all of the terms and conditions
of the SB swap and the markets for the SB swap
and any underlying security or securities, that such
SB swap is not readily susceptible to manipulation.
Proposed Rule 812 also would require the swap
review committee to periodically review that
determination.
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oversight over the currently unregulated
OTC derivative markets.584 Proposed
Regulation SB SEF would provide the
means for the Commission to gain better
insight into and oversight of the market
for SB swaps. The proposed rules would
provide the Commission the ability to,
among other things, review the rules of
SB SEFs, obtain data and records from
SB SEFs, and inspect and examine SB
SEFs, all of which would support the
Commission’s oversight function over
the SB swaps market, as directed by
Congress in the Dodd-Frank Act.
Specifically, proposed Rule 818(a)
would require each SB SEF to keep and
preserve all documents, including all
correspondence, memoranda, papers,
books, notices, accounts, and other such
records that would be made or received
by it in the conduct of its business. In
addition, proposed Rule 818(c) would
require SB SEFs to keep audit trail
records relating to all orders, requests
for quotations, responses, quotations,
other trading interest, and transactions
that are received by, originated on, or
executed on, the SB SEF. The records
required to be kept, preserved and
maintained by a SB SEF under proposed
Rule 818 would help the Commission to
determine whether an SB SEF is
operating in compliance with the
Exchange Act and the rules and
regulations thereunder. The audit trail
information required to be maintained
under proposed Rule 818(c) would
facilitate the ability of the SB SEF and
the Commission to carry out their
respective obligations under the
Exchange Act, by providing a record of
the complete history of all trading
interest entered and transactions
executed on the SB SEF. This audit trail
could be used to help detect abusive or
manipulative trading activity, prepare
reconstructions of activity on the SB
SEF or in the SB swaps market, and
generally to understand the causes of
unusual market activity.
Furthermore, proposed Rule 811(h)
would require the SB SEF to make and
keep records specifically of all
disciplinary proceedings and appeals,
which would allow the Commission to
review the disciplinary process at a SB
SEF, providing the Commission an
additional tool to carry out its oversight
responsibilities. The proposed
registration requirements and related
proposed Form SB SEF, and the CCO’s
annual compliance report, which are
further discussed below, should also aid
the Commission in its oversight
responsibilities. As a whole, proposed
Regulation SB SEF should facilitate the
Commission’s work in preparing the
584 See
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semi-annual and annual public reports
of SB swap data required by Section 763
of the Dodd-Frank Act, because the
Commission would be able to obtain
information about the SB swap market
through its oversight of SB SEFs.585
Improved Automation. In order to
comply with the requirements of
proposed Regulation SB SEF relating to
recordkeeping and surveillance, SB
SEFs would need to invest in and
develop automated technology systems
to store, monitor and communicate a
variety of trading data, including orders,
requests for quotations, responses and
quotations, among others. The
Commission preliminary believes that
the proposed rules should bring about
increased automation in the SB swaps
markets. This increased automation
could help market participants more
efficiently track their trading and risk
exposures in SB swaps. In addition, the
automation and systems development
associated with the regulation of SB
SEFs, as required by proposed
Regulation SB SEF, could provide SB
swaps market participants with new
platforms and tools to execute and
process transactions in SB swaps at a
lower expense per transaction. Such
increased efficiency would enable
participants of the SB SEF to handle
increased volumes of SB swaps with
greater efficiency.
In addition to the broad benefits that
the Commission anticipates that
Regulation SB SEF may bring to the SB
swaps market, the Commission
preliminarily believes that its individual
proposed rules may bring particular
benefits to the SB swap market. These
include the following:
Interpretation of SB SEF Definition.
The Commission believes that its
proposed interpretation of the scope of
the definition of SB SEF 586 should
provide sufficient flexibility for market
participants in creating and operating a
variety of SB SEFs to trade SB swaps.
The Commission preliminary believes
that a system or a platform which allows
a participant the ability to send an RFQ
to all participants, as well as the choice
to send an RFQ to fewer than all
participants, would provide flexibility
to the market, because participants
would be able to trade SB swaps by
accepting bids and offers from multiple
participants, while still preserving the
ability of each participant to decide how
585 See Section 763(i) of the Dodd-Frank Act
requiring the Commission to provide SB swap data
to the public.
586 See supra Section III.B for a detailed
discussion of the proposed interpretation of the
definition of SB SEF.
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broadly or narrowly to disseminate his
or her RFQ.
The Commission believes that this
proposed interpretation would likely
encourage a greater number of SB swaps
to trade on SB SEFs because, as
mentioned above, it would give
requestors the flexibility to determine
how best to broadcast their interests.
The Commission believes that, rather
than proposing a rule that establishes a
prescribed format for a system or
platform that constitutes a SB SEF, the
better approach is to provide baseline
principles, as outlined in the proposed
interpretation consistent with the
requirements of the Exchange Act, that
any potential SB SEF would need to
meet as a condition to registration as a
SB SEF. Such an approach should
provide flexibility to those trading
venues that plan to register as SB SEFs
and would permit the continued
development of organized markets for
the trading of SB swaps.
Exemptions from Definition of
Exchange and Certain Regulatory
Requirements Applicable to a Broker.
The proposed rules would include
exemptions for SB SEFs from the
definition of ‘‘exchange’’ and from most
regulations governing brokers. Using its
exemptive authority under Section 36 of
the Exchange Act, the Commission is
proposing: (1) To amend Rule 3a1–1
under the Exchange Act to exempt any
SB SEF from the definition of
‘‘exchange,’’ if such SB SEF provides a
marketplace solely for the trading of
security-based swaps (and no other
security) and complies with the
provisions of proposed Regulation SB
SEF; 587 and (2) new Rule 15a–12 to
allow a person that meets the definition
of a SB SEF and broker, to satisfy the
broker registration requirements by
registering as a SB SEF. The
Commission believes that Congress
specifically provided a comprehensive
regulatory framework for SB SEFs in the
Dodd-Frank Act and, therefore, SB SEFs
should not also be required to be
regulated as national securities
exchanges or as brokers. Without these
proposed exemptions, SB SEFs would
be required to register with the
Commission not only as SB SEFs, but
also as exchanges and brokers. Given
the regulatory framework for SB SEFs
required by the Exchange Act and
proposed Regulation SB SEF, the
Commission preliminarily believes that
requiring a SB SEF to register in such
multiple capacities would not be
efficient. The Commission believes that
reducing or eliminating such
inefficiency will confer an overall
benefit to the SB swaps market by
reducing the costs of complying with
unnecessary rules or regulations.
Registration. The registration of SB
SEFs is a requirement under the DoddFrank Act.588 Proposed Rule 810(a)
incorporates the requirement under the
Dodd-Frank Act that a SB SEF, in order
to be registered and maintain
registration, comply with the Core
Principles in Section 3D(d) of the
Exchange Act and any requirement that
the Commission may impose by rule or
regulation. The proposed registration
process is intended to implement this
requirement and assist the Commission
in overseeing and regulating the SB
swaps market. The information to be
provided on proposed Form SB SEF is
designed to enable the Commission to
assess whether an applicant has the
capacity and the means to perform the
duties of a SB SEF and to comply with
the Core Principles and other
requirements imposed on registered SB
SEFs.
In addition, the amendments,
supplemental information and notices
that the Commission proposes to require
registered SB SEFs to file pursuant to
proposed Rules 802, 803 and 804 are
designed to further the ability of the
Commission to efficiently monitor SB
SEFs’ compliance with the provisions of
the Exchange Act and to oversee the
marketplace for SB swaps and,
specifically, the trading of SB swaps on
SB SEFs.
Rule and Product Filings. Proposed
Rules 805 and 806 set forth two
alternative filing processes for a new
rule or rule amendment of a registered
SB SEF, and proposed Rules 807 and
808 set forth two alternative filing
processes for SB SEFs to submit filings
for new products that it trades. The
proposed rules are intended to assist the
Commission in overseeing and
regulating the trading of SB swaps and
to help ensure that SB SEFs operate in
compliance with the Exchange Act. The
self-certification processes of Rules 806
and 807 require SB SEFs to include a
certification that the proposed new rule
or rule amendment or SB swap, as the
case may be, complies with the
Exchange Act and Commission rules
and regulations thereunder.589
The information to be provided by the
SB SEF under proposed Rules 805 and
806 would further the ability of the
Commission to assess whether a SB SEF
has the capacity to perform the duties of
a SB SEF and to comply with the duties,
Core Principles, and other requirements
588 See
Section 3D(a)(1) of the Exchange Act.
proposed Rules 806(a)(5)(iii) and
807(a)(4)(iii).
589 See
587 See
proposed Rule 3a1–1(a)(4).
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11039
imposed on registered SB SEFs, and to
ensure that a registered SB SEF
continues to comply with the
requirements imposed on registered SB
SEFs under the Exchange Act. In
addition, proposed Rule 805(a)(4),
which would require a SB SEF to
explain the anticipated benefits and
potential anticompetitive effects on
market participants of a proposed new
rule or rule amendment should help
foster a competitive SB swaps market
because it would require SB SEFs to
disclose the positive as well as negative
aspects of the SB SEF’s proposed rules.
The information to be provided by the
SB SEF under proposed Rules 807 and
808 would further the ability of the
Commission to obtain information
regarding SB swaps that a SB SEF
intends to trade on its market. In
addition, because these processes are
comparable to the parallel processes of
the CFTC, they would promote
efficiency for SB SEFs that are also
registered as SEFs.
Chief Compliance Officer. The
submission of the CCO’s annual
compliance report and the annual
financial report to the Commission as
would be required by proposed Rule
823 would help the Commission
monitor the compliance activities and
financial state of SB SEFs. These reports
would also assist the Commission in
carrying out its oversight of the SB SEFs
and the SB swaps market by providing
the Commission the information
necessary to review instances, for
example, of non-compliance and denials
of access.
Conflicts of Interest. Proposed Rule
820 sets forth certain governance
arrangements that would be required of
SB SEFs. Proposed Rule 820(a) would
require the rules of a SB SEF to assure
a fair representation of its participants
in the selection of its directors and
administration of its affairs. No less than
20% of the total number of directors of
the SB SEF would be required to be
selected by the SB SEF participants.
Further, the Commission proposes that
SB SEF participant owners be restricted
in their ability to participate in the ‘‘fair
representation’’ process. In addition,
proposed Rule 820(b) would require that
at least one director on the Board be
representative of investors (‘‘investor
director’’) who are (1) not SB swap
dealers or major SB swap participants
and (2) not associated with a
participant. Finally, proposed Rule
820(c) would require the rules of a SB
SEF to establish a fair process for SB
SEF participants to nominate an
alternative candidate or candidates to
the Board by petition.
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The requirements of proposed Rule
820 are important to help ensure that SB
SEF participants and investors have a
voice in the administration and
governance of the SB SEF, without
jeopardizing the overall independence
of the Board.590 The proposed
governance requirements should also
help to mitigate any conflicts of interest
that may arise between SB SEF
participants who also could be owners
of the SB SEF, by reducing the
possibility that a small group of market
participants would have the ability to
unfairly disadvantage other market
participants through the SB SEF
governance process. In order to further
mitigate conflicts of interest and achieve
fairness in the governance process of a
SB SEF, the proposal would also
provide for the ability of SB SEF
participants to have alternative
candidates by requiring the SB SEF to
establish a fair process for SB SEFs to
nominate an alternative candidate or
candidates by petition. Finally, the
Commission believes that requiring
representation on the SB SEF Board by
investors who are not SB swap dealers
or major SB swap participants, or
associated with SB SEF participants,
would provide an important perspective
to the governance and administration of
a SB SEF. Investor directors could
provide unique and different
perspectives from dealers and other
participants of the SB SEF, which
should enhance the ability of the Board
to address issues in an impartial fashion
and consequently support the integrity
of a SB SEF’s governance.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
C. Costs
Although the Commission believes
that proposed Regulation SB SEF would
result in significant benefits to the
market for SB swaps, the Commission
recognizes that the proposed registration
form and rules would also entail
significant costs. Some costs are
difficult to precisely quantify and are
discussed below.
The Commission is mindful that any
rules it may adopt with respect to SB
SEFs under the Dodd-Frank Act may
impact the incentives of market
participants with respect to where and
how they trade SB swaps. The
Commission is cognizant that its
proposed interpretation of the definition
of SB SEF, coupled with the level of
pre-trade transparency that would be
required for trading on a SB SEF, will
impact the development of the SB
590 Proposed Rule 702(d) under Regulation MC
would require the Board of a SB SEF to have at least
a majority of independent directors. See Regulation
MC Proposing Release, supra note 82.
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swaps market. Further, if the rules
proposed by the Commission are, or are
perceived to be, too costly for trading
venues to comply with, fewer entities
than expected may seek to register as SB
SEFs, thus impacting competition. In
addition, if the proposed rules for
trading on a SB SEF are perceived as too
burdensome by market participants,
some trading of SB swaps may move to
foreign markets whose regulations are
perceived to be less restrictive, thus
frustrating the goals of the Dodd-Frank
Act. At the same time, if the proposed
rules relating to SB SEFs are too lenient,
they may have little or no impact on the
market structure and surveillance of the
SB swaps markets, which could result
in the loss of many of the benefits
discussed above and fail to achieve the
goals of the Dodd-Frank Act of greater
transparency. In addition, because the
trading mechanisms in the OTC market
will continue to be largely unregulated,
OTC-traded SB swaps may be perceived
by some market participants to be less
expensive to trade than SB SEF-traded
swaps, i.e., in the sense that they are
subject to less regulation.
In addition, SB swaps traded on SB
SEFs may be perceived to be subject to
increased costs, monetary and
otherwise. For example, some industry
participants have expressed their belief
that any proposed requirement of pretrade transparency would force market
participants to reveal valuable economic
information regarding their trading
interest more broadly than they may
believe would be economically prudent
and could discourage participation in
the SB swaps market. An additional
impact of pre-trade transparency are
perceived costs associated with front
running, if customers or dealers are
required to show their trading interest
before a trade is executed. These
potential costs of pre-trade transparency
may change market participants’ trading
strategies, which could result in them
working more orders or finding ways to
attempt to hide their interest.591 If
market participants view the
Commission’s proposal as too
burdensome with respect to pre-trade
transparency, dealers may be less
willing to supply liquidity for SB swaps
that trade on SB SEFs or exchanges,
thus impacting liquidity and
competition. On the other hand, if the
requirement with respect to pre-trade
transparency is too loose, the result
could be that there would be no
substantive change from the status quo,
including no benefits of alleviating
591 See, e.g., Ananth Madhavan, Market
Microstructure: A Survey, J. of Fin. Markets, Vol. 3
(2000).
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informational asymmetries, increasing
price competition and supplying better
executions beyond the changes in
response to the other requirements of
Dodd-Frank. However, the Commission
believes that this concern depends on
the degree of pre-trade transparency
required and the characteristics of the
trading market. The proposed rules are
intended to provide for greater pre-trade
transparency than currently exists
without requiring pre-trade
transparency in a manner that would
cause participants to avoid providing
liquidity on SB SEFs.
The requirements of the proposed
rules would impose the same minimum
level of pre-trade transparency and
order interaction on block trades as on
non-block trades. This can potentially
have an impact on the liquidity
available on those types of platforms
that would provide for block trading.
Today, many block trades are transacted
through voice brokerage, without pretrade transparency and order
interaction. Block trading enables,
among other things, entities with large
exposures to certain business risks to
hedge those risks. For example,
investors considering making
investments in, or lenders considering
making loans to, certain corporate
borrowers may seek to purchase credit
default swap (‘‘CDS’’) protection to
hedge some portion of the credit risk the
investor does not want to retain. The
availability of such credit risk
protection in large block transaction size
may therefore influence investment or
lending decisions which in turn may
influence the cost of borrowing for
corporations whose investors rely on
block size CDS.
Generally, economic studies have
shown that block trades benefit from
different market structures than nonblock trades.592 These studies suggest
that pre-trade transparency can be
particularly costly for block trades as
prices are likely to move adversely if the
existence of a large unexecuted order
becomes known. Other traders may
front run the block trade order or simply
infer information about future price
movements from its presence, thus
potentially making it more costly for the
block-initiating participant to find a
counterparty willing to trade at an
acceptable price. In addition, if a block
trade interacts with other trading
interest on a SB SEF, there might not be
enough liquidity on the SB SEF to
execute the entire block trade, leaving a
portion of the block trade unexecuted,
or requiring the block to be broken into
smaller order sizes, which also could
592 See,
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lead to increased transaction costs and
a decreased willingness of market
participants to participate in block
trades.
The Commission recognizes these
potential costs and believes that the
proposal mitigates these costs, because
it would allow SB SEFs flexibility in
setting their market structure and
trading rules concerning block trades.
This should allow SB SEFs to create
certain trading structures, e.g., multidealer RFQ platforms, that cater to block
trades and others that cater to nonblocks. Moreover, under the proposed
interpretation of the definition of SB
SEF, for a transaction on an RFQ
platform, the person exercising
investment discretion for the
transaction, whether it is the participant
itself or the participant’s customer,
could choose to send the RFQ to less
than all participants. Under this
proposed interpretation, market
participants would have the choice to
determine how broad or how narrow to
disseminate their intent to trade blocks.
The Commission further notes that, if
overall trading costs decline, then the
costs of breaking up a block into smaller
parcels and spreading out those parcels
by market participants seeking to
execute a block transaction may not
actually increase.593
According to industry sources
consulted by Commission staff,594 the
monetary cost of forming a SB SEF is
estimated to range from approximately
$15 million to $20 million per SB SEF
for the first year of operation, if an
entity were to establish a SB SEF
without the benefit of modifying an
already existing trading system. The
industry sources consulted by
Commission staff estimate that, for the
first year of operation, the cost of
software and product development
would range from approximately $6.5
million to $10.5 million per SB SEF.
The technological costs would be
expected to decline considerably during
the second and subsequent years of
operation, and are estimated to be in the
range of $3 million to $4 million per
year per SB SEF. For entities that
currently own and/or operate platforms
593 See, e.g., Amber Anand, et al., Market Crashes
and Institutional Trading, Working Paper, Social
Science Research Network (2010).
594 In discussing estimated costs with
Commission staff, these industry sources were
generally familiar with the requirements of the
Dodd-Frank Act and the Core Principles and related
requirements specified therein, but were not aware
of the specifics of the rules being proposed. Thus,
they were able to provide the broad general
estimates of projected costs, which are described
here. More specific estimates as to the costs
associated with specific rules are detailed further
below.
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for the trading of OTC derivatives, the
cost of forming a SB SEF would be more
incremental, given that these entities
already have viable technology that
could be modified to comply with the
requirements that the Commission may
impose for SB SEFs. According to
industry sources, the incremental costs
of enhancing a trading platform to be
compatible with any SB SEF
requirements established by the
Commission would range from as low as
$50,000 to as much as $3 million per SB
SEF, depending on the enhancements
needed to establish a platform
compatible with any Commission rules
governing SB SEFs. The annual ongoing
cost of maintaining the technology and
any improvements is estimated to be in
the range of $2 million to $4 million.595
In addition, the regulatory
requirement of complying with the
statutory Core Principles would increase
the regulatory obligations of registered
SB SEFs with respect to operating as a
SB SEF and with respect to overseeing
the participants that trade on their
facilities. Industry sources estimate that
the cost to an SB SEF of complying with
the rules relating to surveillance and
oversight they expected the Commission
to propose would be in the range of $1
million to $3 million annually, with
initial costs likely to be at the higher
end of such range, since a SB SEF
would need to create the technology
necessary to monitor and surveil its
market participants, as well as to create
a rule book in compliance with the Core
Principles and related rules. The
ongoing annual compliance costs are
estimated by industry sources to be
approximately $1 million, which would
include the salary of a CCO and at least
two junior compliance personnel,
expected to be attorneys.
The Commission requests comments
on the accuracy of these estimates.
Specifically, the Commission requests
comment on how the Commission can
most accurately estimate the cost and
benefits of the proposed rules and
interpretations. Are there any important
benefits and costs not currently
discussed? How would the costs and
benefits differ between operators of
current platforms or systems trading SB
swaps? What are the potential costs and
benefits of the pre-trade transparency
requirement, block trade requirement,
order interaction requirement and other
market structure requirements included
in the proposal?
595 Although there currently are trading systems
that trade SB swaps on an OTC basis, the
Commission preliminarily believes that no such
systems are currently in operation that would
comply, without modifications, with the
requirements of proposed Regulation SB SEF.
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We detail below cost estimates for
specifics parts of the proposed rules.
Many of these costs estimates are based
on the PRA estimates of costs and
burdens from Section XXVII, as well as
other costs associated with the proposed
rules.
Registration. The Commission
preliminary estimates that the aggregate
initial costs to all potential SB SEF
registrants to file Form SB SEF,
including all exhibits thereto, would be
approximately $13,505,940,596 or
approximately $675,297 597 per SB SEF.
The Commission estimates the initial
costs (aside from the costs associated
with Exhibits F, H and P, which are
separately discussed below) associated
with proposed Form SB SEF would be
$32,000 per SB SEF, or $640,000 for all
potential SB SEFs.598 This would
include the time required to compile the
information required by proposed Form
SB SEF, prepare the proposed Form SB
SEF itself, and file it with the
Commission. In addition, Exhibits F and
H to proposed Form SB SEF would
require an applicant to submit financial
reports that would need to satisfy a
number of requirements, including the
requirement that a certified public
account audit each financial report
relating to the SB SEF and a
requirement that unaudited financial
information be provided for certain
affiliated entities of the SB SEF.599 The
Commission preliminarily believes that
it is unlikely that during the initial
implementation period a potential
registrant would have audited financial
statements for the SB SEF in the
ordinary course of business prior to
applying for registration on Form SB
SEF. Therefore, in order to register as a
SB SEF with the Commission on Form
SB SEF and comply with Exhibits F and
H thereto, potential registrants would
incur an initial cost to generate such
financial statements. Based on
conversations with operators of current
596 See
infra note 597.
potential SB SEF registrants =
$675,297.
598 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
imposed by proposed Form SB SEF (other than
Exhibits F, H and P of Form SB SEF) for SB SEF
registration would be 100 hours per SB SEF. See
supra Section XXVII. Assuming an hourly cost of
$320 for a compliance attorney to meet these
requirements, the one-time estimated dollar cost to
register as a SB SEF would be $32,000 (100 hours
× $320), or $640,000 ($32,000 × 20 SB SEFs) in the
aggregate. The hourly rate for the compliance
attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
599 See supra Section XXVII.D.1.
597 $13,505,940/20
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trading platforms and the Commission’s
experience with entities of similar size,
the Commission preliminarily estimates
that each potential SB SEF registrant
would incur, on average, a cost of
$99,000 to complete the financial
statements,600 and a cost of $500,000 for
independent public accounting services.
In the aggregate, these costs are
estimated to be $1,980,000 601 and
$10,000,000,602 respectively.603
The Commission also estimates that it
would cost approximately $7,920 per
respondent to compile, review, and
submit the financial reports for certain
affiliated entities as required pursuant
to Exhibit H to proposed Form SB SEF,
or $158,400 in the aggregate.604 All of
the financial statements required by
Exhibits F and H to proposed Form SB
SEF would need to be provided in
XBRL, as required in Rules 405(a)(1),
(a)(3), (b), (c), (d) and (e) of Regulation
S–T.605 This would create an additional
cost for potential SB SEF respondents.
The Commission preliminarily
estimates, based on its experience with
other data tagging initiatives, that these
requirements would add an additional
cost on average of approximately
$12,096 606 and $23,000 in outside
600 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
would be 500 hours per SB SEF. See supra Section
XXVII. Assuming an hourly cost of $198 for a senior
accountant to meet these requirements, the onetime estimated dollar cost to register as a SB SEF
would be $99,000 (500 hours × $198), or $1,980,000
($99,000 × 20 SB SEFs) in the aggregate. The hourly
rate for the senior accountant is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
601 $1,980,000 = $99,000 × 20 SB SEFs.
602 $10,000,000 = $500,000 × 20 SB SEFs.
603 See also Section XXVII.D.1.
604 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
to comply with the financial statement
requirements of Exhibit H to proposed Form SB SEF
would be 40 hours per SB SEF. See supra Section
XXVII. Assuming an hourly cost of $198 for a senior
accountant to meet these requirements, the onetime estimated dollar cost per SB SEF would be
$7,920 (40 hours × $198), or $158,400 ($7,920 × 20
SB SEFs) in the aggregate. The hourly rate for the
senior accountant is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
605 See 17 CFR 232.405.
606 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
would be 54 hours per SB SEF. See supra Section
XXVII. Assuming an hourly cost of $224 for a
programmer analyst to meet these requirements, the
initial estimated dollar cost would be $12,096 (54
hours × $224), or $241,920 ($12,096 × 20 SB SEFs)
in the aggregate. The hourly rate for the programmer
analyst is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
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software and other costs per respondent,
or $241,920 607 and $460,000 608 in the
aggregate, respectively. Thus, for
complying with the financial statement
requirements under Exhibits F and H to
proposed Form SB SEF, the Commission
estimates a total initial cost of
approximately $642,016 per
respondent 609 and $12,840,320 in the
aggregate for all respondents.610
Exhibit P to proposed Form SB SEF
would require SB SEFs controlled by
other persons and non-resident SB SEFs
to provide opinions of counsel as
required by Rules 801(e) and (f),
respectively. Therefore, in order to
register as a SB SEF with the
Commission on Form SB SEF, potential
registrants that are controlled by other
persons or that are non-resident persons
would incur an initial cost to generate
such opinions of counsel. As discussed
above, the Commission preliminarily
estimates that the average initial
paperwork cost for each SB SEF
controlled by another person and each
non-resident SB SEF to provide the
opinion of counsel required by Exhibit
P would be one hour and $900 per SB
SEF. As discussed above, the
Commission preliminarily estimates
that all 20 estimated applicants seeking
to register as SB SEFs would be
controlled by other persons and that one
applicant seeking to register as a SB SEF
will be a non-resident person.
Therefore, in the aggregate, the costs to
comply with Exhibit P are estimated to
be $24,400 for all SB SEFs controlled by
other persons 611 and $1,220 for all nonresident SB SEFs.612
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
607 $241,920 = $12,096 × 20 SB SEFs.
608 $460,000 = $23,000 × 20 SB SEFs.
609 $99,000 + $500,000 + $7,920 + $12,096 +
$23,000 = $642,016.
610 $12,840,320 = $642,016 × 20 SB SEFs.
611 The Commission estimates that a SB SEF that
is controlled by another person will assign these
responsibilities to a compliance attorney. Assuming
an hourly cost of $320 for a compliance attorney to
meet these requirements, the one-time estimated
dollar cost for a SB SEF controlled by another
person to comply with Exhibit P would be $1,220
((1 hour × $320) + $900), or $24,400 ($1,220 × 20
SB SEFs controlled by other persons) in the
aggregate. The hourly rate for the compliance
attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
612 The Commission estimates that a non-resident
SB SEF will assign these responsibilities to a
compliance attorney. Assuming an hourly cost of
$320 for a compliance attorney to meet these
requirements, the one-time estimated dollar cost for
a non-resident SB SEF to comply with Exhibit P
would be $1,220 ((1 hour × $320) + $900). This
would also be the aggregate initial cost as the
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Therefore, the Commission
preliminarily estimates that the total
one-time aggregate cost for all
respondents to file the initial Form SB
SEF, including all exhibits thereto,
would be approximately $13,505,940.613
After the initial year in which a SB
SEF would be registered, the
Commission estimates that each
registered SB SEF would submit 4
amendments to Form SB SEF on average
and one annual update, at an annual
cost of $48,000 per SB SEF, or $960,000
in the aggregate.614 In addition, the
Commission estimates that two SB SEFs
controlled by another person would
each submit one amendment to Exhibit
P to Form SB SEF per year, at an annual
aggregate cost of $2,440.615 The
Commission also estimates that one
non-resident SB SEF would submit one
amendment to Exhibit P to Form SB SEF
per year, at an annual cost of $1,220.616
Commission has estimated that only one nonresident person would seek to register as a SB SEF.
The hourly rate for the compliance attorney is from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
613 $13,505,940 = $640,000 (costs other than
Exhibits F, H and P to Form SB SEF) + $12,840,320
(costs relating to Exhibits F and H to Form SB SEF)
+ $24,400 (costs relating to Exhibit P to Form SB
SEF for SB SEFs controlled by other persons) +
$1,220 (costs relating to Exhibit P to Form SB SEF
for all non-resident SB SEFs).
614 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual burden
to prepare and file rule amendments and the annual
update to Form SB SEF would be 150 hours per SB
SEF. See supra Section XXVII. Assuming an hourly
cost of $320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost
would be $48,000 (150 hours × $320), or $960,000
($48,000 × 20 SB SEFs) in the aggregate. The hourly
rate for the compliance attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
615 The Commission estimates that a SB SEF that
is controlled by another person will assign these
responsibilities to a compliance attorney. Assuming
an hourly cost of $320 for a compliance attorney to
meet these requirements, the annual estimated
dollar cost for a SB SEF controlled by another
person to amend Exhibit P would be $1,220 ((1 hour
× $320) + $900), or $2,440 in the aggregate ($1,220
× 2 (estimated number of SB SEFs controlled by
other persons required to amend Exhibit P per year)
× 1 amendment). The hourly rate for the compliance
attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
616 The Commission estimates that a non-resident
SB SEF will assign these responsibilities to a
compliance attorney. Assuming an hourly cost of
$320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost for
a non-resident SB SEF to amend Exhibit P would
be $1,220 ((1 hour × $320) + $900). This would also
be the aggregate annual cost as the Commission has
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In addition, proposed Rule 804 would
impose costs on SB SEFs seeking to
withdraw registration. The Commission
estimates that one SB SEF would seek
to withdraw its registration per year.
Therefore, the Commission estimates
that the aggregate annual estimated
dollar cost for SB SEFs seeking to
withdraw registration would be $320.617
Finally, proposed Rule 803 would
impose costs on SB SEFs to prepare and
file supplemental information with the
Commission. The Commission estimates
that the average annual cost for a SB
SEF to prepare and file such
supplemental information would be
$2,400 for each SB SEF, or $48,000 in
the aggregate.618
Thus, the Commission estimates that
the total annual aggregate cost of making
all required filings related to Form SB
SEF would be approximately
$1,011,980.619
The Commission solicits comments
on the costs associated with the
registration related rules and new Form
SB SEF and exhibits. The Commission
specifically requests comment on initial
costs associated with completing the
registration form and ongoing annual
costs of completing the required
periodic and annual amendments.
estimated that only one non-resident person would
seek to register as a SB SEF, and that such nonresident SB SEF will only file one amendment to
Exhibit P per year. The hourly rate for the
compliance attorney is from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
617 The Commission preliminarily estimates, for
purposes of its PRA, that the average burden for a
SB SEF to withdraw its registration would be 1
hour. See supra Section XXVII. Assuming an hourly
cost of $320 for a compliance attorney to meet these
requirements, the estimated dollar cost to withdraw
the registration of a SB SEF would be $320 (1 hour
× $320). This would also be the aggregate annual
cost as the Commission has estimated that only one
SB SEF would seek to withdraw its registration as
a SB SEF per year. The hourly rate for the
compliance attorney is from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
618 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual burden
to prepare and file supplemental information would
be 7.5 hours per SB SEF. See supra Section XXVII.
Assuming an hourly cost of $320 for a compliance
attorney to meet these requirements, the estimated
annual dollar cost would be $2,400 (7.5 hours ×
$320), or $48,000 ($2,400 × 20 SB SEFs) in the
aggregate. The hourly rate for the compliance
attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
619 $1,011,980 = $960,000 + $2,440 + $1,220 +
$320 + $48,000.
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Please describe and, to the extent
practicable, quantify the costs
associated with any comments that are
submitted. In addition, the Commission
requests comment on the following:
• How can the Commission most
accurately estimate the costs and
benefits arising from proposed
Regulation SB SEF’s registration
requirements?
• What are the costs currently borne
by entities covered by the proposed
registration requirements that may have
been included in the Commission’s
analysis?
• Are there additional costs involved
in complying with the registration
requirements that have not been
identified? If so, what are the types, and
amounts, of such costs?
• Can commenters assess the benefits
of having comprehensive and accurate
registration of SB SEFs, which would
provide access to such information to
the Commission and other regulators?
• Would there be additional benefits
from the proposed registration
requirements that have not been
identified?
Rules Generally. The Commission
estimates that the initial cost for SB
SEFs to comply with the rule writing
requirements of Regulation SB SEF,
including to establish and submit the
rules to the Commission, would be
$73,600 for each SB SEF, for an
aggregate initial cost of $1,472,000.620
The estimated cost would include the
time expended for drafting the rules,
and for review of the draft rules,
policies or procedures by the SB SEF’s
senior management.
The Commission notes that a SB SEF
may choose to refine the rules, policies
or procedures that it would establish in
connection with the requirements of
Regulation SB SEF. Once a SB SEF has
drafted the written rules, policies and
procedures it is required to establish
pursuant to Regulation SB SEF, the
Commission estimates that it would cost
a SB SEF approximately $38,400
annually to update its rules, for an
aggregate estimated ongoing annual cost
620 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
to comply with the rule-writing requirements of
Regulation SB SEF would be 230 hours per SB SEF.
See supra Section XXVII. Assuming an hourly cost
of $320 for a compliance attorney to meet these
requirements, the initial estimated dollar cost
would be $73,600 (230 hours × $320), or $1,472,000
($73,600 × 20 SB SEFs) in the aggregate. The hourly
rate for the compliance attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
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11043
for all SB SEFs of approximately
$768,000.621
The Commission requests comment
on the costs and benefits of the
proposed rule writing requirements
discussed above, as well as any costs
and benefits not already described that
could result. The Commission also
requests data to quantify any potential
costs or benefits. The Commission
requests comment on the costs and
benefits of the proposed registration
requirements discussed above, as well
as any costs and benefits not already
described that could result. The
Commission also requests data to
quantify any potential costs or benefits.
In addition, the Commission requests
comment on the following:
• How can the Commission most
accurately estimate the costs and
benefits arising from the proposed rule
writing requirements of Regulation SB
SEF?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the
costs of the proposed rule writing
requirements?
• Are there additional costs involved
in complying with the rule writing
requirements that have not been
identified? If so, what are the types, and
amounts, of such costs?
• Can commenters assess the benefits
of having a comprehensive and accurate
rule writing requirement for SB SEFs,
which would provide access to such
information to the Commission and
other regulators?
• Would there be additional benefits
from the proposed rule writing
requirements that have not been
identified?
Reporting. The Commission estimates
that the annual cost for SB SEFs to
comply with the reporting requirements
of Regulation SB SEF would be
$387,200 per SB SEF, for an aggregate
annual cost of $7,744,000.622 Further,
621 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual burden
to comply with the rule-writing requirements of
Regulation SB SEF would be 120 hours per SB SEF.
See supra Section XXVII. Assuming an hourly cost
of $320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost
would be $38,400 (120 hours × $320), or $768,000
($38,400 × 20 SB SEFs) in the aggregate. The hourly
rate for the compliance attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
622 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual costs
comply with the reporting requirements of
Regulation SB SEF would be 1,210 hours per SB
SEF. See supra Section XXVII. Assuming an hourly
cost of $320 for a compliance attorney to meet these
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the Commission estimates the total cost
of hiring outside legal counsel to review
an international information sharing
agreement to be $4,000 per SB SEF, for
an aggregate cost of approximately
$80,000 623 for all SB SEFs. In addition,
the Commission estimates the total
annual cost of hiring an objective,
external firm to review internal audits to
be $90,000 per SB SEF, for an aggregate
cost of approximately $1,800,000 624 for
all SB SEFs. Thus, the estimated
aggregate total annual costs associated
with reporting requirements for all SB
SEFs would be approximately
$9,624,000.625
The Commission estimates that the
annual cost for SB SEF participants to
comply with the reporting requirements
of Regulation SB SEF would be $32,000
per SB SEF participant, for an aggregate
annual cost of $8,800,000.626
The Commission requests comment
on the costs and benefits of the
proposed reporting requirements
discussed above, as well as any costs
and benefits not already described that
could result. The Commission also
requests data to quantify any potential
costs or benefits. In addition, the
Commission requests comment on the
following:
• How can the Commission most
accurately estimate the costs and
benefits arising from proposed reporting
requirements?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the
costs of the proposed reporting
requirements?
requirements, the annual estimated dollar cost
would be $387,200 (1,210 hours × $320), or
$7,744,000 ($387,200 × 20 SB SEFs) in the
aggregate. The hourly rate for the compliance
attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
623 $80,000 = $4,000 × 20 SB SEFs.
624 $1,800,000 = $90,000 × 20 SB SEFs.
625 $9,624,000 = $7,744,000 + $80,000 +
$1,800,000.
626 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual costs
to comply with the reporting requirements of
Regulation SB SEF would be 100 hours per SB SEF
participant, with an estimated 275 SB SEF
participants in total for a total of 27,500 hours. See
supra Section XXVII. Assuming an hourly cost of
$320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost
would be $32,000 (100 hours × $320), or $8,800,000
($32,000 × 275 SB SEF participants) in the
aggregate. The hourly rate for the compliance
attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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• Are there additional costs involved
in complying with the reporting
requirements that have not been
identified? If so, what are the types, and
amounts, of such costs?
• Can commenters assess the benefits
of having comprehensive and accurate
reporting requirements for SB SEFs,
which would provide access to such
information to the Commission and
other regulators?
• Would there be additional benefits
from the proposed reporting
requirements that have not been
identified?
Recordkeeping. The Commission
estimates that the annual cost for SB
SEFs to comply with the recordkeeping
requirements of proposed Rule 818(a)–
(b) would be similar to the annual cost
for national securities exchanges to
comply with comparable rules. The
Commission estimates that the annual
cost would be $16,000 per SB SEF, for
an aggregate annual cost of $320,000.627
This figure includes, but is not limited
to, the annual hourly burden to
generate, collect, organize and preserve
all of the documents and other records
required under proposed Rule 818(a)
and (b).
In addition, proposed Rule 818(c)
would require a SB SEF to keep certain
records with respect to trading activity
on and through the SB SEF.
Specifically, a SB SEF must make and
keep accurate, time-sequenced records
of all inquiries, responses, orders,
quotations, other trading interest and
transactions that are received by,
originated on, or executed on the SB
SEF. The Commission estimates that the
annual cost to comply with this
requirement would be $41,600 per SB
SEF, for an aggregate annual cost of
$832,000.628
627 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual burden
to comply with the recordkeeping requirements of
proposed Rule 818(a)–(b) would be 50 hours per SB
SEF. See supra Section XXVII. Assuming an hourly
cost of $320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost
would be $16,000 (50 hours × $320), or $320,000
($16,000 × 20 SB SEFs) in the aggregate. The hourly
rate for the compliance attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
628 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual burden
to comply with the recordkeeping requirements of
proposed Rule 818(c) would be 130 hours per SB
SEF. See supra Section XXVII. Assuming an hourly
cost of $320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost
would be $41,600 (130 hours × $320), or $832,000
($41,600 × 20 SB SEFs) in the aggregate. The hourly
rate for the compliance attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010, modified by the
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The Commission preliminarily
estimates that a SB SEF could incur a
one-time cost to set up or modify an
existing recordkeeping system to
comply with proposed Rule 818. Based
on the Commission’s experience with
recordkeeping costs, and consistent
with prior cost estimates for similar
recordkeeping provisions,629 the
Commission estimates that setting up or
modifying a recordkeeping system
would cost $106,680 per SB SEF, for an
aggregate total of $2,133,600.630
Additionally, the Commission
preliminarily estimates that each SB
SEF may have a one-time burden to
upgrade its existing systems to ensure
that the audit trail component of its
systems complies with proposed Rule
818(c). Based on industry sources, the
Commission preliminarily believes that
this work would be done internally by
two programmers over the course of
approximately four weeks. The
Commission preliminarily estimates
that it would cost a total of $97,280 per
SB SEF, or $1,945,600 in the aggregate
for all SB SEFs.631
As discussed above, proposed Rule
809(d) would require a SB SEF that
permits non-registered ECPs to be
participants in the SB SEF to establish,
document, and maintain a system of risk
management controls and supervisory
procedures reasonably designed to
manage the financial, regulatory, and
other risks of this business activity.
Based on conversations with industry
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
629 See Securities Exchange Act Release No.
59342 (February 2, 2009); 74 FR 6456 (February 9,
2009) (Amendments to Rules for Nationally
Recognized Statistical Rating Organizations)
(‘‘NRSRO Adopting Release’’).
630 The Commission estimates it would take 345
hours for a senior programmer to set up or modify
a recordkeeping system for a cost of $104,880 per
SB SEF (345 hours × $304), or $2,097,600 ($104,880
× 20 SB SEFs). In addition, the Commission
estimates a cost of $1,800 per SB SEF in
information technology expenses to purchase
recordkeeping software for a total initial cost of
$36,000 for all SB SEFs. The total costs would be
$106,680 ($104,880 + $1,800) per SB SEF or a total
of $2,133,600 ($106,680 × 20 SB SEFs) for all SB
SEFs. The hourly rate for the senior programmer is
from SIFMA’s Management & Professional Earnings
in the Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
631 The Commission estimates that it would take
160 hours for two senior programmers to set up or
modify a recordkeeping system for a cost of $97,280
per SB SEF (160 hours × 2 programmers × $304),
or $1,945,600 ($97,280 × 20 SB SEFs) for all SB
SEFs. The hourly rate for the senior programmer is
from SIFMA’s Management & Professional Earnings
in the Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
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sources, the Commission preliminarily
believes that the majority of entities that
would seek to become SB SEFs already
would have risk management systems
and supervisory procedures and
controls to protect the integrity of their
business and to comply with other
requirements already specified and
accounted for herein. The Commission
also believes that only a small number
of entities would have to establish
completely new systems and procedures
to comply with the requirement of
proposed Rule 809(d).
The Commission estimates that each
SB SEF would spend an average of
$68,400 to modify its risk management
systems to bring them into compliance
with the proposed Rule for a total onetime cost of $1,368,000 for all SB SEFs
combined,632 and a total annual ongoing
burden of $1,048,800 on all SB SEFs to
maintain their systems.633 The
Commission preliminarily believes that
proposed Rule 809(d) also would
impose a one-time legal and compliance
cost of $330,300 on all SB SEFs to
comply with the requirement to
establish, document, and maintain
compliance policies and supervisory
procedures,634 and an annual cost of
632 The Commission preliminarily estimates, for
purposes of its PRA, that the average one-time cost
to comply with proposed Rule 809(d) would require
one senior programmer working 225 hours. See
supra Section XXVII. Assuming an hourly cost of
$304 for a senior programmer the one-time cost
would be $68,400 (225 hours × $304), or $1,368,000
($68,400 × 20) in the aggregate. The hourly rate for
the senior programmer is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
633 The Commission preliminarily estimates, for
purposes of its PRA, that the ongoing cost to
comply with proposed Rule 809(d) would require
one senior programmer working 172.5 hours
annually. See supra Section XXVII. Assuming an
hourly cost of $304 for a senior programmer, the
cost would be $52,440 (172.5 hours × $304), or
$1,048,800 ($52,440 × 20 SB SEFs) in the aggregate.
The hourly rate for the senior programmer is from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
634 The Commission preliminarily estimates, for
purposes of its PRA, that the average one-time cost
to comply with proposed Rule 809(d) would require
one compliance attorney and one compliance
manager to spend 7.5 hours each to evaluate
appropriate access thresholds. The Commission
also preliminarily estimates that one compliance
attorney and one compliance manager would each
require approximately 15 hours, and the CCO
would require approximately 7.5 hours, to set up
or modify compliance policies and procedures to
comply with the proposed rule. See supra Section
XXVII. Assuming an hourly cost of $320 for a
compliance attorney, $423 for the CCO, and $273
for a compliance manager the cost for each SB SEF
would be $16,515 = 7,200 (22.5 hours × $320) +
$3,172.5 (7.5 hours × $423) + $6,142.5 (22.5 hours
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$482,700 on all SB SEFs to review their
written compliance policies and
supervisory procedures.635
Therefore, the Commission
preliminarily estimates that the total
one-time burden for all SB SEFs to
comply with the collection of
information requirements of proposed
Rule 809(d) would be $1,698,300,636
and the total annual burden for all SB
SEFs to comply with the proposed Rule
would be $1,531,500.637
The Commission requests comment
on the costs and benefits of the
proposed recordkeeping requirements
discussed above, as well as any costs
and benefits not already described that
could result. The Commission also
requests data to quantify any potential
costs or benefits. In addition, the
Commission requests comment on the
following:
• How can the Commission most
accurately estimate the costs and
benefits arising from the proposed
recordkeeping requirements?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the
costs of the proposed recordkeeping
requirements?
• Are there additional costs involved
in complying with the recordkeeping
requirements that have not been
identified? If so, what are the types, and
amounts, of such costs?
• Can commenters assess the benefits
of having comprehensive and accurate
recordkeeping requirements for SB
× $273), for a total of $330,300 for all SB SEFs
($16,515 × 20). The hourly rate for the compliance
attorney, compliance manager and CCO are from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
635 The Commission preliminarily estimates, for
purposes of its PRA, that the ongoing cost to
comply with proposed Rule 809(d) would require
an average of 30 hours per year for each of an
compliance attorney and compliance manager, and
15 hours per year for the CCO, to review and
document their written compliance policies and
supervisory procedures. Assuming an hourly cost of
$320 for a compliance attorney, $423 for the CCO,
and $273 for a compliance manager, the cost for
each SB SEF would be 24,135 = $9,600 (30 hours
× $320) + $6,345 (15 hours × $423) + $8,190 (30
hours × $273), for a total of $482,700 for all SB SEFs
($24,135 × 20 SB SEFs). The hourly rate for the
compliance attorney, compliance manager and CCO
are from SIFMA’s Management & Professional
Earnings in the Securities Industry 2010, modified
by the Commission’s staff to account for an 1800hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and
overhead.
636 $1,698,300 = $1,368,000 + $330,300. See supra
notes 632 and 634 (discussing the average one-time
costs to comply with Rule 809(d)).
637 $1,531,500 = $1,048,800 + $482,700. See supra
notes 633 and 635 (discussing the ongoing costs to
comply with Rule 809(d)).
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SEFs, which would provide access to
such information to the Commission
and other regulators?
• Are the Commission’s estimates
concerning what it would cost to
implement and maintain technology
systems to comply with the
recordkeeping requirements accurate? If
not, what would the costs, in both time
and dollar figures, be? Please provide
data.
• Would there be additional benefits
from the proposed recordkeeping
requirements that have not been
identified?
Publication of Trading Information.
For the requirement in proposed Rule
817(a) that a SB SEF have the capacity
to electronically capture, transmit, and
disseminate information on price,
trading volume, and other trading data
on all SB swaps executed on or through
the SB SEF, the Commission
preliminarily estimates that a SB SEF
would incur a one-time cost of $92,416
per SB SEF, or $1,848,320 in the
aggregate.638
The Commission requests comment
on the costs and benefits of the
requirements discussed above, as well
as any costs and benefits not already
described that could result. The
Commission also requests data to
quantify any potential costs or benefits.
In addition, the Commission requests
comment on the following:
• How can the Commission most
accurately estimate the costs and
benefits arising from the proposed
publication of trading information
requirements?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the
costs of the proposed publication of
trading information requirements?
• Are there additional costs involved
in complying with the publication of
trading information requirements that
have not been identified? If so, what are
the types, and amounts, of such costs?
• Can commenters assess the benefits
of having these requirements for SB
SEFs, which would provide access to
such information to the Commission
and other regulators?
638 The Commission preliminarily estimates, for
purposes of its PRA, that the average one-time cost
to comply with proposed Rule 817(a) would require
two senior programmers working 160 hours, for a
total of 320 hours. See supra Section XXVII.
Assuming an hourly cost of $304 for a senior
programmer, the one-time cost would be $92,416
(320 hours × $304), or $1,848,320 ($92,416 × 20 SB
SEFs) in the aggregate. The hourly rate for the
senior programmer and programmer analyst are
from SIFMA’s Management & Professional Earnings
in the Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
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• Would there be additional benefits
from the proposed publication of
trading information requirements that
have not been identified?
Composite Indicative Quote and
Executable Bids and Offers. For the two
requirements: (1) The requirement in
proposed Rule 811(e) that a SB SEF
operating a RFQ platform create and
disseminate through the SB SEF a
composite indicative quote, made
available to all participants, for SB
swaps traded on or through the SB SEF;
and (2) the requirement imposed by the
Commission’s proposed interpretation
of the definition of SB SEF that each SB
SEF, at a minimum, provide any
participant with the ability to make and
display executable bids or offers
accessible to all participants on the SB
SEF, if the participant wishes to do so,
the Commission preliminarily estimates
that a SB SEF would incur a one-time
cost of $21,120 per SB SEF, or $422,400
in the aggregate.639 Further, the
Commission preliminarily estimates
that each SB SEF would incur a
recurring annual cost of $11,200 to
monitor and update its systems to
determine if its composite indicative
quote and executable bid and offer
functionalities operate appropriately.640
The Commission requests comment
on the costs and benefits of collecting
and disseminating a composite
indicative quote and of allowing
participants to disseminate executable
bids and offers discussed above, as well
as any costs and benefits not already
described that could result. The
Commission also requests data to
quantify any potential costs or benefits.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
639 The
Commission preliminarily estimates, for
purposes of its PRA, that the average one-time cost
to comply with the above requirements would
require one senior programmer and one
programmer analyst working 40 hours each. See
supra Section XXVII. Assuming an hourly cost of
$304 for a senior programmer and $224 for a
programmer analyst, the one-time cost would be
$21,120 ((40 hours × $304) + (40 hours × $224)), or
$422,400 ($21,120 × 20 SB SEFs) in the aggregate.
The hourly rate for the senior programmer and
programmer analyst are from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
640 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual cost
to comply with the above requirements would
require one programmer analyst working 50 hours.
See supra Section XXVII. Assuming an hourly cost
of $224 for a programmer analyst the one-time cost
would be $11,200 (50 hours × $224), or $224,000
($11,200 × 20 SB SEFs) in the aggregate. The hourly
rate for the senior programmer and programmer
analyst are from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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In addition, the Commission requests
comment on the following:
• How can the Commission most
accurately estimate the costs and
benefits arising from the proposed
requirements to collect and disseminate
a composite indicative quote and
executable bids and offers?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the
costs of the proposed dissemination of
a composite indicative quote?
• Are there additional costs involved
in complying with the requirements to
collect and disseminate a composite
indicative quote and providing the
ability for participants to disseminate
executable bids and offer that have not
been identified? What are the types, and
amounts, of the costs?
• Can commenters assess the benefits
of collecting and disseminating a
composite indicative quote for SB SEFs
and of SB SEFs providing participants
the ability to disseminate executable
bids and offers?
Rule and Product Filings. The
Commission estimates that the annual
cost for SB SEFs to comply with the
proposed rule and product filing
requirements of proposed Rules 805
through 808 would be $75,200 per SB
SEF, for an aggregate annual cost of
$1,504,000.641 These estimated costs
entail preparing, reviewing and
submitting the filings to the
Commission. Based on the Commission
staff’s consultation with CFTC staff, the
Commission believes that SB SEFs
would handle the rule and product
filing processes internally.
The Commission requests comment
on the costs and benefits of the
proposed rule and product filing
requirements discussed above, as well
as any costs and benefits not already
described that could result. The
Commission also requests data to
quantify any potential costs or benefits.
In addition, the Commission requests
comment on the following:
641 Based on the Commission staff’s consultation
with CFTC staff, the Commission preliminarily
estimates for purposes of its PRA that the average
annual burden to comply with the rule filing
requirements of Rules 805 and 806 would be 150
hours, and the average annual burden to comply
with the product filing requirements of Rules 807
and 808 would be 85 hours per SB SEF. See supra
Section XXVII. Assuming an hourly cost of $320 for
a compliance attorney to meet these requirements,
the annual estimated dollar cost would be $75,200
(235 hours × $320), or $1,504,000 ($75,200 × 20 SB
SEFs) in the aggregate. The hourly rate for the
compliance attorney is from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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• How can the Commission most
accurately estimate the costs and
benefits arising from the proposed rule
and product filing requirements?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the
costs of the proposed rule and product
filing requirements?
• Are there additional costs involved
in complying with the rule and product
filing requirements that have not been
identified? If so, what are the types, and
amounts, of such costs?
• Can commenters assess the benefits
of having comprehensive and accurate
rules and product filing requirements
for SB SEFs, which would provide
access to such information to the
Commission and other regulators?
• Would there be additional benefits
from the proposed rule and product
filing requirements that have not been
identified?
Chief Compliance Officer. The
Commission estimates that the initial
cost for SB SEFs to comply with the
CCO requirements of proposed Rule
823(b)(6) and (7), which relate to the
handling of noncompliance issues,
would be $91,200 per SB SEF, for an
aggregate annual cost of $1,824,000.642
A CCO also would be required under
proposed Rule 823(c) and (d) to prepare
and submit an annual compliance report
to the Commission and to the SB SEF’s
Board. The Commission estimates that
the annual cost for SB SEFs to comply
with this requirement is $29,440 per SB
SEF, for an aggregate annual cost of
$588,800.643 Proposed Rule 823(e)(1)
642 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
to comply with the CCO requirements of proposed
Rule 823(b)(6) and (7) would be 160 hours. Also,
due to the novel nature of the CCO requirements
in the SB SEF industry and the new requirements
under the Dodd-Frank Act, the Commission
estimates that there would be an initial one-time
burden of $40,000 per SB SEF in outside legal costs.
See supra Section XXVII. Assuming an hourly cost
of $320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost
would be $51,200 (160 hours × $320) plus $40,000,
for a total of $91,200, or $1,824,000 ($91,200 × 20
SB SEFs) in the aggregate. The hourly rate for the
compliance attorney is from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
643 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
to comply with the CCO requirements of proposed
Rule 823(c) and (d) would be 92 hours. See supra
Section XXVII. Assuming an hourly cost of $320 for
a compliance attorney to meet these requirements,
the annual estimated dollar cost would be $29,440
(92 hours × $320) or $588,800 ($29,440 × 20 SB
SEFs) in the aggregate. The hourly rate for the
compliance attorney is from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
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and (2) and Exhibits F and H to
proposed Form SB SEF also require the
CCO to submit an annual financial
report. Based on conversations with
operators of current trading platforms
and the Commission’s experience with
entities of similar size, the Commission
preliminarily estimates that each SB
SEF would incur, on average, a cost of
$99,500 to complete the reports,644 and
a cost of $500,000 for independent
public accounting services. In the
aggregate, these costs are estimated to be
$1,980,000 and $10,000,000,
respectively.645 The Commission also
estimates that it would cost
approximately $7,920 per respondent to
compile, review, and submit the
financial reports for certain affiliated
entities or $158,400 in the aggregate.646
However, all of these reports would
need to be provided in XBRL, as
required by Rules 405(a)(1), (a)(3), (b),
(c), (d) and (e) of Regulation S–T.647
This would create an additional cost for
SB SEFs. The Commission preliminarily
estimates, based on its experience with
other data tagging initiatives, that these
requirements would add an additional
cost on average of approximately
$12,096 648 and $23,000 in outside
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
644 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
would be 500 hours per SB SEF. See supra Section
XXVII. Assuming an hourly cost of $198 for a senior
accountant to meet these requirements, the onetime estimated dollar cost to register a SB SEF
would be $99,000 (500 hours × $198), or $1,980,000
($99,000 × 20 SB SEFs) in the aggregate. The hourly
rate for the senior accountant is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
645 Id. See also Section XXVII.D.1.
646 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
would be 40 hours per SB SEF. See supra Section
XXVII. Assuming an hourly cost of $198 for a senior
accountant to meet these requirements, the onetime estimated dollar cost per SB SEF would be
$7,920 (40 hours × $198), or $158,400 ($7,920 × 20
SB SEFs) in the aggregate. The hourly rate for the
senior accountant is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
647 See 17 CFR 232.405.
648 The Commission preliminarily estimates, for
purposes of its PRA, that the average initial burden
would be 54 hours per SB SEF. See supra Section
XXVII. Assuming an hourly cost of $224 for a
programmer analyst to meet these requirements, the
initial estimated dollar cost would be $12,096 (54
hours × $224), or $241,920 ($12,096 × 20 SB SEFs)
in the aggregate. The hourly rate for the programmer
analyst is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
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software and other costs per respondent,
or $241,920 and $460,000 in the
aggregate, respectively. Thus, the
Commission estimates a total initial cost
of approximately $762,656 per
respondent 649 and $15,253,120 in the
aggregate for all respondents.650
The Commission requests comment
on the costs and benefits of the
proposed CCO requirements discussed
above, as well as any costs and benefits
not already described that could result.
The Commission also requests data to
quantify any potential costs or benefits.
In addition, the Commission requests
comment on the following:
• How can the Commission most
accurately estimate the costs and
benefits arising from the proposed CCO
requirements?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the cost
of the proposed CCO requirements?
• Are there additional costs involved
in complying with the CCO
requirements that have not been
identified? If so, what are the types, and
amounts, of such costs?
• Can commenters assess the benefits
of having comprehensive and accurate
CCO requirements for SB SEFs, which
would provide access to such
information to the Commission and
other regulators?
• Would there be additional benefits
from the proposed CCO requirements
that have not been identified?
Conflicts of Interest. As described
above, proposed Rule 820 sets forth
certain governance arrangements that
would be required of SB SEFs. A SB
SEF may need to revise the composition
of its Board, if the Board currently is not
composed of at least 20% SB SEF
participants. A SB SEF could comply
with the 20% participant director
requirement by decreasing the size of its
Board and allowing some nonparticipant directors to resign,
maintaining the current size of its Board
and replacing some non-participant
directors with participant directors, or
by increasing the size of its Board and
electing additional participant directors.
In any event, unless a SB SEF currently
complies with proposed Rule 820, it
would incur the cost of adding new
directors or replacing existing directors.
A SB SEF may also need to design or
modify its governance processes to
preclude any participant, either alone or
together with its related persons, that
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
649 $762,656 = $91,200 + $29,440 + $99,000 +
$500,000 + $7,920 + $12,096 + $23,000.
650 $15,253,120 = 20 (number of SB SEFs) ×
$762,656.
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11047
beneficially owns an interest in the SB
SEF from dominating or exercising
disproportionate influence in the
selection of participant directors, if such
participant could thereby dominate or
exercise disproportionate influence in
the selection or appointment of the
entire Board. The Commission estimates
a cost per SB SEF of $4,800, or $96,000
in the aggregate for all SB SEFs to revise
the relevant governing documents.651
A SB SEF may also need to revise the
composition of its Board to include at
least one director that is representative
of investors who are not SB swap
dealers or major SB swap participants,
and are not associated with a
participant. In this regard, SB SEFs
could face difficulties in locating
qualified individuals to serve as
investor directors, particularly because
SB swaps trading is complex and some
potential candidates may decline to
serve as a director if they believe that
they lack sufficient expertise. There
could also be costs in educating investor
directors to become familiar with the
manner in which SB swaps are traded
and the overall market for SB swaps, as
well as the new regulatory structure that
would govern them, which could slow
Board or committee processes at least
initially.
The Commission preliminarily
believes that the cost of securing an
investor director to serve on the Board
of the SB SEF could range from a
relatively low cost for those entities that
have the contacts and resources to be
able to search for one or more investor
directors on their own; to a moderate
cost for those entities that can undertake
the search on their own but would incur
some expenditures, such as placing
advertisements in national media; to a
higher cost for those entities that must
secure the services of a recruitment firm
that specializes in the placement of
outside directors. The Commission
preliminarily estimates that those SB
SEFs that must rely on a recruitment
specialist could incur a cost of
approximately $68,000 per director,652
651 The Commission preliminarily estimates, for
purposes of its PRA, that it would take a
compliance attorney approximately 15 hours to
revise the relevant governing documents. Assuming
an hourly cost of $320 for a compliance attorney to
meet these requirements, the one-time estimated
dollar cost would be $4,800 (15 hours × $320) or
$96,000 ($4,800 × 20 SB SEFs) in the aggregate. The
hourly rate for the senior programmer and
programmer analyst are from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
652 The Commission is basing this estimate on a
recent study noting that the retainer fee for outside
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or $1,360,000 in the aggregate, if all SB
SEFs utilized a recruitment firm.653
The Commission requests comment
on the costs and benefits of the
proposed conflicts requirements
discussed above, as well as any costs
and benefits not already described that
could result. The Commission also
requests data to quantify any potential
costs or benefits. In addition, the
Commission requests comment on the
following:
• How can the Commission most
accurately estimate the costs and
benefits arising from the proposed
conflicts requirements?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the
costs of the proposed conflicts
requirements?
• Are there additional costs involved
in complying with the governance
requirements that have not been
identified? If so, what are the types, and
amounts, of such costs?
• Can commenters assess the benefits
of having governance requirements for
SB SEFs?
• Would there be additional benefits
from the proposed conflicts
requirements that have not been
identified?
Surveillance. The Commission
preliminarily estimates that establishing
an automated surveillance system in
compliance with proposed Rules 811
and 813 would require an initial cost of
$3,256,800 per SB SEF, or $65,136,000
in the aggregate. The initial cost per SB
SEF includes $1,756,800 in initial
programming costs per SB SEF 654 as
well as a one-time capital expenditure
directors is on average $67,624 (rounded to
$68,000). See https://www.hewittassociates.com/
_MetaBasicCMAssetCache_/Assets/Articles/2010/
2010_Outside_Director_Compensation.pdf. The
Commission believes that this amount could serve
as a proxy for the amount of any fee to be charged
by a recruitment firm that would conduct a national
search for a director that meets the requirements of
proposed Rule 820(c)(2).
653 $1,360,000 = 20 (number of SB SEFs) ×
$68,000.
654 The Commission preliminarily estimates, for
purposes of its PRA, that establishing an automated
surveillance system would require one senior
programmer and three additional programmers
working for 1,800 hours each to create and
implement such a system. See supra Section XXVII.
Assuming an hourly cost of $304 for a senior
programmer and $224 for a programmer analyst to
meet these requirements, the initial estimated dollar
cost would be $1,756,800 = (1,800 hours × $304) +
((1,800 hours × $224) × 3), or $35,136,000
($1,756,800 × 20 SB SEFs) in the aggregate. The
hourly rate for the senior programmer and
programmer analyst are from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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per SB SEF of $1.5 million in
information technology costs that would
be necessary to establish such a system.
This capital expenditure estimate is
based on the Commission’s discussions
with market participants currently
operating platforms that trade OTC
swaps.
The Commission preliminarily
estimates that the ongoing annual costs
associated with the automated
surveillance system required by
proposed Rules 811 and 813 would be
$1,306,400 per SB SEF, or $26,128,000
in the aggregate. The annual cost per SB
SEF includes $806,400 in annual
programming costs per SB SEF 655 as
well as an ongoing annual information
technology cost of $500,000 per SB SEF.
The Commission requests comment
on the costs and benefits of the
proposed surveillance system
requirements discussed above, as well
as any costs and benefits not already
described that could result. The
Commission also requests data to
quantify any potential costs or benefits.
In addition, the Commission requests
comment on the following:
• How can the Commission most
accurately estimate the costs and
benefits arising from the proposed
surveillance system requirements?
• What are the costs currently borne
by entities that may have been included
in the Commission’s analysis of the
costs of the proposed surveillance
system requirements?
• Are there additional costs involved
in complying with the surveillance
system requirements that have not been
identified? If so, what are the types, and
amounts, of such costs?
• Can commenters assess the benefits
of having comprehensive and accurate
surveillance system requirements for SB
SEFs, which would provide access to
such information to the Commission
and other regulators?
• Would there be additional benefits
from the proposed surveillance system
requirements that have not been
identified?
655 The Commission preliminarily estimates, for
purposes of its PRA, that the average annual burden
to comply with the automated surveillance system
requirements of proposed Rules 811 and 813 would
require two programmer analysts working for 1,800
hours per SB SEF. See supra Section XXVII.
Assuming an hourly cost of $224 for a programmer
analyst to meet these requirements, the initial
estimated dollar cost would be $806,400 (1,800
hours × $224 × 2), or $16,128,000 ($806,400 × 20
SB SEFs) in the aggregate. The hourly rate for the
programmer analyst is from SIFMA’s Management
& Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to
account for an 1800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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D. General Request for Comments on
Regulation SB SEF
• The Commission requests comment
on any other aspect of the costs and
benefits associated with Regulation SB
SEF.
• Would the obligations imposed on
reporting parties by proposed
Regulation SB SEF be a significant
enough barrier to entry to cause some
firms not to enter the SB swaps market?
If so, how many firms might decline to
enter the market? How can the cost of
their not entering the market be
tabulated? How should the Commission
weigh such costs, if any, against the
anticipated benefits from increased
transparency to the SB swaps market
from the proposal, as discussed above?
• How many entities would be
affected by proposed Regulation SB
SEF?
XXIX. Consideration of Burden on
Competition, and Promotion of
Efficiency, Competition and Capital
Formation
Section 3(f) of the Exchange Act 656
requires the Commission, whenever it
engages in rulemaking and is required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action would promote efficiency,
competition, and capital formation. In
addition, Section 23(a)(2) of the
Exchange Act 657 requires the
Commission, when adopting rules
under the Exchange Act, to consider the
impact of any such rules on
competition. Section 23(a)(2) of the
Exchange Act also prohibits the
Commission from adopting any rule that
would impose a burden on competition
not necessary or appropriate in
furtherance of the purposes of the
Exchange Act.658
The Commission preliminarily
believes that the regulation of SB SEFs,
as required by the Dodd-Frank Act and
proposed to be implemented under
Regulation SB SEF, would promote
efficiency, competition, and capital
formation.
Promotion of Efficiency. The
Commission preliminarily believes that
the regulation of SB SEFs, as required
by the Dodd-Frank Act and proposed to
be implemented under Regulation SB
SEF, would promote efficiency by
encouraging innovation, automation,
and reduction of informational
asymmetries.
656 15
U.S.C. 78c(f).
U.S.C. 78w(a)(2).
657 15
658 Id.
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The proposed rules are designed to be
flexible and to foster innovation in the
SB swaps market, particularly with
respect to the trading of SB swaps by a
diverse group of market participants.
The Commission formulated the
proposed rules, along with the proposed
interpretation of the definition of SB
SEF in a manner that would allow
entities that seek to become SB SEFs to
structure diverse platforms for the
trading of SB swaps, subject to certain
baseline requirements. These proposed
baseline requirements are meant to
permit access by a wide group of market
participants to a range of SB swaps in
keeping with the mandate of the DoddFrank Act. Thus, the Commission
believes that the trading of SB swaps
could evolve to its most efficient
structure while also meeting the
statutory and regulatory requirements
relating to such activity.
The Commission preliminarily
believes that the proposed requirements
with respect to pre-trade price
transparency could lead to more
efficient pricing in the SB swaps market.
The proposed rules are designed to
result in an increase in pre-trade price
transparency for SB swaps, which
should aid market participants in
evaluating current market prices for SB
swaps, thereby furthering more efficient
price discovery. Price transparency,
coupled with the potential increase in
the number of market participants with
access to trading in SB swaps, could
further decrease the spread in quoted
prices, and thus could lead to higher
efficiency in the trading of these
securities.
Some industry participants, however,
have expressed concerns to the
Commission that pre-trade price
transparency could force market
participants to reveal more information
about trading interest than they believe
would be economically desirable. To the
extent that market participants consider
that pre-trade price transparency
requirements are too burdensome and
choose not to participate in the market,
thereby foregoing any potential
economic benefits that may have
resulted from purchasing a particular SB
swap, market efficiency could be
harmed for less liquid instruments and
for large blocks of SB swaps.
The Commission preliminarily
believes that automation and systems
development that would be associated
with the regulation of SB SEFs, as
required by proposed Regulation SB
SEF, would provide market participants
with new platforms and tools to execute
and process transactions in SB swaps,
which could result in lower trading
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costs and thus could lead to more
efficient trading of SB swaps.
The Commission also believes that the
proposed exemptions for SB SEFs from
regulation as national securities
exchanges or as brokers would eliminate
what would be largely an additive
oversight of SB SEFs and therefore
would promote efficiency, because SB
SEFs would not have to expend
resources to comply with these
regulatory obligations from which they
would be exempt.
Promotion of Competition. The
Commission preliminary believes that
the regulation of SB SEFs, as required
by the Dodd-Frank Act and proposed to
be implemented under Regulation SB
SEF, could promote competition. The
proposed rules that would require SB
SEFs to establish fair, objective and not
unreasonably discriminatory standards
for granting impartial access to trading
on the SB SEF would foster greater
access to SB SEFs by SB swap dealers,
major SB swap participants, brokers,
and ECPs. The resulting increase in the
number of participants who could
access venues for the trading of SB
swaps would allow a range of market
participants to compete for business on
the SB SEF through price competition or
other dimensions of service. The
proposed pre-trade transparency
requirements, including the proposed
requirement to create and disseminate a
composite indicative quote, could
further promote price competition by
making available information about
trading interest before execution of the
trade, thereby allowing participants to
improve upon current quotes.
The Dodd-Frank Act’s mandate to
bring SB swaps that are subject to the
mandatory clearing requirement and
that are made available to trade onto
regulated markets as well as the
proposed interpretation of the definition
of SB SEF, and proposed Regulation SB
SEF that are intended to further
implement the statutory directive,
should help foster greater competition
in the trading of SB swaps. The trading
of SB swaps on regulated markets, and
the Commission’s proposals to institute
rules for such trading, should allow
diverse trading platforms or systems to
register as SB SEFs and to compete for
business in the SB swap market.
The Commission proposes to initially
permit temporary registration of SB
SEFs while it considers each applicant’s
full registration application, as long as
the applicant meets certain
requirements for temporary registration.
This proposed temporary registration
should help alleviate burdens associated
with starting up a SB SEF and promote
competition by reducing barriers to
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11049
entry, because entry into the SB swap
market would not be delayed by
procedural matters, such as the timing
of Commission review of the applicant’s
full registration submission. In addition,
the Commission would have the
opportunity to observe the SB SEF in
operation before it grants permanent
registration to the SB SEF, thereby
helping to ensure that the SB SEF
promotes desirable competition.
Promotion of Capital Formation. The
Commission preliminary believes that
the regulation of SB SEFs, as required
by the Dodd-Frank Act and as proposed
to be implemented under Regulation SB
SEF, would promote capital formation
because the proposed interpretation of
the definition of SB SEF, along with the
elements of proposed Rule 811 that
relate to pre-trade price transparency,
are intended to provide a flexible
approach as to the parameters of what
can be traded on a SB SEF. As a result,
entities that currently provide a
platform or system for OTC derivatives
trading should be able to leverage off of
their current trading platforms when
developing a SB SEF-compatible trading
platform. These entities would have
various options available to them when
developing their systems or platforms to
comply with the Commission’s
proposed rulemaking. This flexible
feature of the proposals should help
promote capital formation because
resources would be invested in a more
efficient manner to improve upon or
expand the features of those that plan to
register as a SB SEF.
In addition, proposed Regulation SB
SEF would provide the Commission
with information relating to trading,
recordkeeping, and surveillance of SB
SEFs, as well as access to the books and
records of SB SEFs. A well-regulated SB
swap market, where the Commission
has access to information about SB swap
transactions, would increase the
Commission’s ability to assess risks in
the SB swap market. In addition, the
proposals would provide for various
safeguards to help promote market
integrity, including proposed Rule 809
relating to access to the SB SEF and
proposed Rule 822 relating to systems
safeguards. Proposed Regulation SB SEF
also is intended to support the
statutorily-mandated regulatory
obligations of SB SEFs through
proposed Rule 823 relating to the duties
of the CCO, among other proposed rules.
Any resulting increase in market
integrity would likely increase market
participants’ confidence in the
soundness and fairness of the SB swap
market. Such increased confidence
likely would stimulate financial
investment in SB swaps by corporate
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entities and others that may find that
more transparent venues for the trading
of SB swaps would allow them to
purchase SB swaps to offset business
risks and to meet hedging objectives.
Further, to the extent that market
participants utilize SB swaps to better
manage portfolio risks with respect to
positions in underlying securities, the
extent that they are willing to
participate in the SB swap market may
impact their willingness to participate
in the underlying asset’s market.
Therefore, the Commission
preliminarily believes that the proposed
rules would help encourage capital
formation.
Burden on Competition. Based on
discussions with industry participants,
the Commission preliminarily believes
that the start-up costs to become a SB
SEF for those entities that currently own
and/or operate a platform for the trading
of OTC swaps would be moderate.
According to these industry
participants, any needed modifications
to their systems or operations as a result
of the Commission’s proposals generally
would entail the expenditure of
resources chiefly on regulatory and
compliance matters and on enhancing
electronic systems to support both the
operational and regulatory aspects of a
SB SEF. A trading platform that
currently trades OTC swaps would need
to make some adjustments to its systems
and structure to trade SB swaps in
compliance with proposed Regulation
SB SEF. The Commission preliminarily
believes that the development and
registration of, and introduction of
trading in SB swaps by, a SB SEF would
result in some barriers to entry that
otherwise would not exist. This is
particularly the case because, prior to
the enactment of the Dodd-Frank Act,
there were no statutory provisions
mandating the trading of certain SB
swaps on regulated markets.
The Commission requests comment
on all aspects of this analysis and, in
particular, on whether proposed
Regulation SB SEF and the proposed
interpretation of the definition of SB
SEF would place a burden on
competition, as well as the effect of the
proposals on efficiency, competition,
and capital formation. Commenters are
requested to provide empirical data and
other factual support for their views, if
possible.
XXX. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ the Commission
must advise the OMB as to whether
proposed Regulation SB SEF constitutes
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a ‘‘major’’ rule. Under SBREFA, a rule is
considered ‘‘major’’ where, if adopted, it
results or is likely to result in: (1) An
annual effect on the economy of $100
million or more (either in the form of an
increase or a decrease); (2) a major
increase in costs or prices for consumers
or individual industries; or (3) a
significant adverse effect on
competition, investment or innovation.
If a rule is ‘‘major,’’ its effectiveness will
generally be delayed for 60 days
pending Congressional review.
The Commission requests comment
on the potential impact of proposed
Regulation SB SEF on the economy on
an annual basis, on the costs or prices
for consumers or individual industries,
and any potential effect on competition,
investment, or innovation. Commenters
are requested to provide empirical data
and other factual support for their views
to the extent possible.
XXXI. Regulatory Flexibility Act
Certification
The Regulatory Flexibility Act
(‘‘RFA’’) 659 requires Federal agencies, in
promulgating rules, to consider the
impact of those rules on small entities.
Section 603(a) 660 of the Administrative
Procedure Act,661 as amended by the
RFA, generally requires the Commission
to undertake a regulatory flexibility
analysis of all proposed rules, or
proposed rule amendments, to
determine the impact of such
rulemaking on ‘‘small entities.’’ 662
Section 605(b) of the RFA states that
this requirement shall not apply to any
proposed rule or proposed rule
amendment, which if adopted, would
not have a significant economic impact
on a substantial number of small
entities.663
A. Security-Based Swap Execution
Facilities
The proposed rules and form under
Regulation SB SEF would apply to all
entities that seek to register with the
Commission as a SB SEF and thus to
operate as a SB SEF in compliance with
Regulation SB SEF. In the Dodd-Frank
Act, Congress defined for the first time
the scope of a SB SEF and mandated the
U.S.C. 601 et seq.
U.S.C. 603(a).
661 5 U.S.C. 551 et seq.
662 Although Section 601(b) of the RFA defines
the term ‘‘small entity,’’ the statute permits agencies
to formulate their own definitions. The Commission
has adopted definitions for the term ‘‘small entity’’
for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as
relevant to this proposed rulemaking, are set forth
in Rule 0–10, 17 CFR 240.0–10. See Securities
Exchange Act Release No. 18451 (January 28, 1982),
47 FR 5215 (February 4, 1982) (File No. AS–305).
663 See 5 U.S.C. 605(b).
registration of these new entities. Based
on its understanding of the market and
conversations with industry sources, the
Commission preliminarily believes that
approximately 20 SB SEFs could be
subject to the requirements of proposed
Regulation SB SEF.
For purposes of Commission
rulemaking in connection with the RFA,
a small entity includes: (1i) When used
with reference to an ‘‘issuer’’ or a
‘‘person,’’ other than an investment
company, an ‘‘issuer’’ or ‘‘person’’ that,
on the last day of its most recent fiscal
year, had total assets of $5 million or
less,664 or (2) a broker-dealer with total
capital (net worth plus subordinated
liabilities) of less than $500,000 on the
date in the prior fiscal year as of which
its audited financial statements were
prepared pursuant to Rule 17a–5(d)
under the Exchange Act,665 or, if not
required to file such statements, a
broker-dealer with total capital (net
worth plus subordinated liabilities) of
less than $500,000 on the last day of the
preceding fiscal year (or in the time that
it has been in business, if shorter); and
is not affiliated with any person (other
than a natural person) that is not a small
business or small organization.666 Under
the standards adopted by the Small
Business Administration (‘‘SBA’’),
entities in financial investments and
related activities 667 are considered
small entities if they have $7 million or
less in annual receipts.
Based on the Commission’s existing
information about the SB swap market
and the entities likely to register as SB
SEFs, the Commission preliminarily
believes that the entities likely to
register as SB SEFs would not be
considered small entities. The
Commission preliminarily believes that
most, if not all, of the SB SEFs would
be large business entities or subsidiaries
of large business entities, and that all SB
SEFs would have assets in excess of
$5 million and annual receipts in excess
of $7,000,000. Therefore, the
Commission preliminarily believes that
none of the potential SB SEFs would be
considered small entities.
659 5
660 5
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664 See
17 CFR 240.0–10(a).
17 CFR 240.17a–5(d).
666 See 17 CFR 240.0–10(c).
667 These entities would include firms involved
in investment banking and securities dealing,
securities brokerage, commodity contracts dealing,
commodity contracts brokerage, securities and
commodity exchanges, miscellaneous
intermediation, portfolio management, providing
investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment
activities. See SBA’s Table of Small Business Size
Standards, Subsector 523.
665 See
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B. SB SEF Participants
The proposed rules under Regulation
SB SEF also would impose requirements
on participants of SB SEFs, i.e., SB swap
dealers, major SB swap participants,
brokers and non-registered ECPs.
Among other requirements relating to
participants, SB SEFs would be required
to establish and enforce rules that
require its participants to maintain
books and records of any trading
interest, transaction, or position in any
SB swap pertinent to their activity on
the SB SEF and to provide prompt
access to those books and records to the
SB SEF and to the Commission. Based
on conversations with industry sources,
the Commission preliminarily believes
that there could be a total of 275 persons
that could become SB SEF participants
and thus would thus be subject to the
requirements of the proposed rules.668
For purposes of Commission
rulemaking in connection with the RFA,
a small entity includes: (1) When used
with reference to an ‘‘issuer’’ or a
‘‘person,’’ other than an investment
company, an ‘‘issuer’’ or ‘‘person’’ that,
on the last day of its most recent fiscal
year, had total assets of $5 million or
less,669 or (2) a broker-dealer with total
capital (net worth plus subordinated
liabilities) of less than $500,000 on the
date in the prior fiscal year as of which
its audited financial statements were
prepared pursuant to Rule 17a–5(d)
under the Exchange Act,670 or, if not
required to file such statements, a
broker-dealer with total capital (net
worth plus subordinated liabilities) of
less than $500,000 on the last day of the
preceding fiscal year (or in the time that
it has been in business, if shorter); and
is not affiliated with any person (other
than a natural person) that is not a small
business or small organization.671 Under
the standards adopted by the SBA, small
entities in the finance and insurance
industry include the following: (1) For
entities in credit intermediation and
related activities,672 entities with $175
million or less in assets or, (2) for nondepository credit intermediation and
certain other activities,673 $7 million or
668 See
supra Section XXVII.C.
17 CFR 240.0–10(a).
670 See 17 CFR 240.17a–5(d).
671 See 17 CFR 240.0–10(c).
672 This includes commercial banks, savings
institutions, credit unions, firms involved in other
depository credit intermediation, credit card
issuing, sales financing, consumer lending, real
estate credit, and international trade financing. See
SBA’s Table of Small Business Size Standards,
Subsector 522.
673 This includes firms involved in secondary
market financing, all other non-depository credit
intermediation, mortgage and nonmortgage loan
brokers, financial transactions processing, reserve,
and clearing house activities, and other activities
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less in annual receipts; (3) for entities in
financial investments and related
activities,674 entities with $7 million or
less in annual receipts; (4) for insurance
carriers and entities in related
activities,675 entities with $7 million or
less in annual receipts; and (5) for
funds, trusts, and other financial
vehicles,676 entities with $7 million or
less in annual receipts.
Based on feedback from industry
participants about the SB swap market,
the Commission preliminarily believes
that the entities that will be participants
of SB SEFs, whether SB swap dealers,
major SB swap participants, registered
brokers or non-registered ECPs, would
exceed the thresholds defining ‘‘small
entities’’ set out above. Thus, the
Commission believes it is unlikely that
proposed Regulation SB SEF, as it
would affect SB SEF participants, would
have a significant economic impact on
any small entity.
C. Certification
For the foregoing reasons, the
Commission certifies that the proposed
rules and form under Regulation SB SEF
would not have a significant economic
impact on a substantial number of small
entities for purposes of the RFA. The
Commission requests comments
regarding this certification. The
Commission requests that commenters
describe the nature of any impact on
small entities and provide empirical
data to illustrate the extent of the
impact.
XXXII. Statutory Authority and Text of
Proposed Amendments
Pursuant to the Exchange Act, 15
U.S.C. 78a et seq., and particularly,
Sections 3, 6, 15, 19, 23(a), 30(b), 30(c)
and 36 (15 U.S.C. 78c, 78f, 78o, 78s,
related to credit intermediation. See SBA’s Table of
Small Business Size Standards, Subsector 522.
674 This includes firms involved in investment
banking and securities dealing, securities brokerage,
commodity contracts dealing, commodity contracts
brokerage, securities and commodity exchanges,
miscellaneous intermediation, portfolio
management, providing investment advice, trust,
fiduciary and custody activities, and miscellaneous
financial investment activities. See SBA’s Table of
Small Business Size Standards, Subsector 523.
675 This includes direct life insurance carriers,
direct health and medical insurance carriers, direct
property and casualty insurance carriers, direct title
insurance carriers, other direct insurance (except
life, health and medical) carriers, reinsurance
carriers, insurance agencies and brokerages, claims
adjusting, third party administration of insurance
and pension funds, and all other insurance related
activities. See SBA’s Table of Small Business Size
Standards, Subsector 524.
676 This includes pension funds, health and
welfare funds, other insurance funds, open-end
investment funds, trusts, estates, and agency
accounts, real estate investment trusts and other
financial vehicles. See SBA’s Table of Small
Business Size Standards, Subsector 525.
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11051
78w(a), 78dd(b), 78dd(c) and 78mm),
thereof, and Section 763 of the DoddFrank Act (15 U.S.C. 78c–4), the
Commission is proposing to adopt
§ 240.15a–12, Regulation SB SEF and
Form SB SEF under the Exchange Act
and to amend § 240.3a1–1 under the
Exchange Act.
List of Subjects in 17 CFR Parts 240,
242 and 249
Securities, brokers, reporting and
recordkeeping requirements.
For the reasons stated in the
preamble, the Commission is proposing
to amend Title 17, Chapter II of the
Code of the Federal Regulations as
follows:
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The general authority citation for
Part 240 is revised and the following
citation is added in numerical order to
read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o,
78o–4, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll,
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–
3, 80b–4, 80b–11, and 7201 et seq; 18 U.S.C.
1350 and 12 U.S.C. 5221(e)(3), unless
otherwise noted.
*
*
*
§ 240.15a–12
78c–4.
*
*
also issued under 15 U.S.C.
*
*
*
*
*
2. Section 240.3a1–1 is amended by
adding paragraph (a)(4) and revising
paragraph (b) introductory text to read
as follows:
§ 240.3a1–1 Exemption from the definition
of ‘‘Exchange’’ under Section 3(a)(1) of the
Act.
(a) * * *
(4) Is a security-based swap execution
facility, as that term is defined in
section 3(a)(77) of the Act (15 U.S.C.
78c(a)(77)), that:
(i) Is in compliance with Regulation
SB SEF (17 CFR 242.800 through
242.823); and
(ii) Does not serve as a marketplace
for transactions in securities other than
security-based swaps.
(b) Notwithstanding paragraph (a)(1),
(a)(2), or (a)(3) of this section, an
organization, association, or group of
persons shall not be exempt under this
section from the definition of
‘‘exchange,’’ if:
*
*
*
*
*
3. Add § 240.15a–12 to read as
follows:
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Federal Register / Vol. 76, No. 39 / Monday, February 28, 2011 / Proposed Rules
Sections 242.800 through 242.823 are also
issued under sec. 943, Pub. L. 111–203,
Section 763.
(a) A security-based swap execution
facility (as that term is defined in
section 3(a)(77) of the Act (15 U.S.C.
78c(a)(77))) may register as a broker
under section 15(a)(1) and (b) of the Act
(15 U.S.C. 78o(a)(1) and (b)) by
registering as a security-based swap
execution facility, if such security-based
swap execution facility does not engage
in any activity other than facilitating the
trading of security-based swaps on or
through the security-based swap
execution facility in a manner
consistent with Regulation SB SEF (17
CFR 242.800 through 242.823).
(b) Except for the provisions of the
Act specified in paragraph (c) of this
section, a broker registered under
paragraph (a) of this section that does
not engage in any activity other than
facilitating the trading of security-based
swaps on or through the security-based
swap execution facility in a manner
consistent with the Regulation SB SEF
(17 CFR 242.800 through 242.823) shall
be exempt from the requirements of the
Act and the rules and regulations
thereunder that, by their terms, require,
prohibit, restrict, limit, condition, or
affect activities of a broker unless those
requirements of the Act or any rule,
regulation, or order thereunder specifies
that it applies to a security-based swap
execution facility.
(c) The following provisions of the
Act shall apply to a broker that is a
security-based swap execution facility:
(1) Section 15(b)(4) of the Act (15
U.S.C. 78o(b)(4));
(2) Section 15(b)(6) of the Act (15
U.S.C. 78o(b)(6)); and
(3) Section 17(b) of the Act (15 U.S.C.
78q(b)).
(d) A broker registered under
paragraph (a) of this section that does
not engage in any activity other than
facilitating the trading of security-based
swaps on or through the security-based
swap execution facility in a manner
consistent with Regulation SB SEF (17
CFR 242.800 through 242.823) shall be
exempt from the Securities Investor
Protection Act.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
§ 240.15a–12 Conditional exemption from
the regulation of brokers registered as
security-based swap execution facilities.
5. The heading for part 242 is revised
to read as set forth above.
6. Add §§ 242.800 through 242.823 to
read as follows:
*
*
*
*
*
PART 242—REGULATIONS M, SHO,
ATS, AC, NMS, AND SB SEF AND
CUSTOMER MARGIN REQUIREMENTS
FOR SECURITY FUTURES
4. The authority citation for part 242
is amended by adding the following
citation to read as follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a),
78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–1(c), 78l,
78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a),
78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a–
23, 80a–29, and 80a–37.
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Sec.
242.800 Definitions.
242.801 Application for registration as a
security-based swap execution facility.
242.802 Amendments to application.
242.803 Supplemental material to be filed
by security-based swap execution
facilities.
242.804 Withdrawal from or revocation of
registration for security-based swap
execution facilities.
242.805 Voluntary submission of rules for
Commission review and approval.
242.806 Self-certification of rules.
242.807 Trading security-based swaps
pursuant to certification.
242.808 Trading security-based swaps
pursuant to Commission review and
approval.
242.809 Access to security-based swap
execution facilities.
242.810 Compliance with core principles.
242.811 Compliance with rules.
242.812 Security-based swaps not readily
susceptible to manipulation.
242.813 Monitoring of trading and trade
processing.
242.814 Ability to obtain information.
242.815 Financial integrity of transactions.
242.816 Emergency authority.
242.817 Timely publication of trading
information.
242.818 Recordkeeping and reporting.
242.819 Antitrust considerations.
242.820 Conflicts of interest.
242.821 Financial resources.
242.822 System safeguards.
242.823 Designation of Chief Compliance
Officer of security-based swap execution
facility.
*
*
§ 242.800
*
*
*
Definitions.
Terms used in this Regulation SB SEF
(17 CFR 242.800 through 242.823) that
appear in section 3 of the Act (15 U.S.C.
78c) have the same meaning as in
section 3 of the Act (15 U.S.C. 78c) and
the rules or regulations thereunder. In
addition, the following definitions shall
apply:
The term affiliate means any person
that, directly or indirectly, controls, is
controlled by, or is under common
control with, the person.
The terms beneficial ownership,
beneficially owns, or any derivative
thereof have the same meaning, with
respect to any security or other
ownership interest, as set forth in
§ 240.13d–3 of this chapter, as if (and
whether or not) such security or other
ownership interest were a voting equity
security registered under section 12 of
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the Act (15 U.S.C. 78l); provided that to
the extent any person is a member of a
group within the meaning of section
13(d)(3) under the Act (15 U.S.C.
78m(d)(3)) and § 240.13d–5(b) of this
chapter, such person shall not be
deemed to beneficially own such
security or other ownership interest for
purposes of this section, unless such
person has the power to direct the vote
of such security or other ownership
interest.
The term block trade has the same
meaning as § 242.900, provided
however that until the Commission sets
the criteria and formula for determining
what constitutes a block trade under
§ 242.907(b), a security-based swap
execution facility may set its own
criteria and formula for determining
what constitutes a block trade as long as
such criteria and formula comply with
the Core Principles relating to securitybased swap execution facilities in
section 3D of the Act (15 U.S.C. 78c–4)
and the rules and regulations
thereunder.
The term Board means the Board of
Directors or Board of Governors of the
security-based swap execution facility
or any equivalent body.
The term competent, objective
personnel means a recognized
information technology firm or a
qualified internal department
knowledgeable of information
technology systems.
The term control, controlled by, or
any derivative thereof, for purposes of
§§ 242.800 through 823, means the
possession, direct or indirect, of the
power to direct or cause the direction of
the management and policies of a
person, whether through the ownership
of voting securities, by contract, or
otherwise. For purposes of §§ 242.800
through 823, a person is presumed to
control another person if the person:
(1) Is a director, general partner, or
officer exercising executive
responsibility (or having similar status
or functions);
(2) Directly or indirectly has the right
to vote 25 percent or more of a class of
voting securities or has the power to sell
or direct the sale of 25 percent or more
of a class of voting securities; or
(3) In the case of a partnership, has
the right to receive, upon dissolution, or
has contributed, 25 percent or more of
the capital.
The term director means any member
of the Board.
The term EDGAR Filer Manual has the
same meaning as set forth in § 232.11 of
this chapter.
The term emergency has the same
meaning as set forth in section 12(k)(7)
of the Act (15 U.S.C. 78l(k)(7)).
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Federal Register / Vol. 76, No. 39 / Monday, February 28, 2011 / Proposed Rules
The term immediate family member
means a person’s spouse, parents,
children and siblings, whether by blood,
marriage or adoption, or anyone
residing in such person’s home.
The term independent director means:
(1) A director who has no material
relationship with:
(i) The security-based swap execution
facility or any affiliate of the securitybased swap execution facility; or
(ii) A participant or any affiliate of a
participant.
(2) A director is not an independent
director if any of the following
circumstances exists:
(i) The director, or an immediate
family member, is employed by or
otherwise has a material relationship
with the security-based swap execution
facility or any affiliate thereof, or within
the past three years, was employed by
or otherwise had a material relationship
with the security-based swap execution
facility or any affiliate thereof;
(ii) (A) The director is a participant or,
within the past three years, was
employed by or affiliated with a
participant or any affiliate thereof; or
(B) The director has an immediate
family member that is, or within the
past three years was, an executive
officer of a participant or any affiliate
thereof;
(iii) The director, or an immediate
family member, has received during any
twelve month period, within the past
three years, payments that reasonably
could affect the independent judgment
or decision-making of the director from
the security-based swap execution
facility or any affiliate thereof or from a
participant or any affiliate thereof, other
than the following:
(A) Compensation for Board or Board
committee services;
(B) Compensation to an immediate
family member who is not an executive
officer of the security-based swap
execution facility or any affiliate thereof
or of a participant or any affiliate
thereof; or
(C) Pension and other forms of
deferred compensation for prior
services, not contingent on continued
service;
(iv) The director, or an immediate
family member, is a partner in, or
controlling shareholder or executive
officer of, any organization to or from
which the security-based swap
execution facility or any affiliate thereof
made or received payments for property
or services in the current or any of the
past three full fiscal years that exceed
two percent of the recipient’s
consolidated gross revenues for that
year, other than the following:
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(A) Payments arising solely from
investments in the securities of the
security-based swap execution facility
or any affiliate thereof; or
(B) Payments under non-discretionary
charitable contribution matching
programs;
(v) The director, or an immediate
family member, is, or within the past
three years was, employed as an
executive officer of another entity where
any executive officers of the securitybased swap execution facility serve on
that entity’s compensation committee;
(vi) The director, or an immediate
family member, is a current partner of
the outside auditor of the security-based
swap execution facility or any affiliate
thereof, or was a partner or employee of
the outside auditor of the security-based
swap execution facility or any affiliate
thereof who worked on the audit of the
security-based swap execution facility
or any affiliate thereof, at any time
within the past three years; or
(vii) In the case of a director that is
a member of the audit committee of the
security-based swap execution facility,
such director (other than in his or her
capacity as a member of the audit
committee, the Board, or any other
Board committee), accepts, directly or
indirectly, any consulting, advisory, or
other compensatory fee from the
security-based swap execution facility
or any affiliate thereof or a participant
or any affiliate thereof, other than fixed
amounts of pension and other forms of
deferred compensation for prior service,
provided such compensation is not
contingent in any way on continued
service.
The term material change means a
change that a Chief Compliance Officer
would reasonably need to know in order
to oversee compliance of the securitybased swap execution facility.
The term material compliance matter
means any compliance matter that the
Board would reasonably need to know
to oversee the compliance of the
security-based swap execution facility
and includes, without limitation:
(1) A violation of the Federal
securities laws by the security-based
swap execution facility, its officers,
directors, employees, or agents;
(2) A violation of the policies and
procedures of the security-based swap
execution facility by the security-based
swap execution facility, its officers,
directors, employees, or agents; or
(3) A weakness in the design or
implementation of the security-based
swap execution facility’s policies and
procedures.
The term material systems change
means a change to automated systems
that:
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11053
(1) Significantly affects existing
capacity or security;
(2) In itself, raises significant capacity
or security issues, even if it does not
affect other existing systems;
(3) Relies upon substantially new or
different technology;
(4) Is designed to provide a new
service or function; or
(5) Otherwise significantly affects the
operations of the security-based swap
execution facility.
The term material systems outage
means an unauthorized intrusion into
any system or an event at a securitybased swap execution facility that
causes a problem in systems or
procedures that results in:
(1) A failure to maintain accurate,
time-sequenced records of all orders,
quotations, and transactions that are
received by, or originated on, the
security-based swap execution facility;
(2) A disruption of normal operations,
including switchover to back-up
equipment with no possibility of nearterm recovery of primary hardware;
(3) A loss of use of any system;
(4) A loss of transactions;
(5) Excessive back-ups or delays in
executing trades;
(6) A loss of ability to disseminate
vital information;
(7) A communication of an outage
situation to other external entities;
(8) A report or referral of an event to
the Board or senior management of the
security-based swap execution facility;
(9) A serious threat to systems
operations even though systems
operations were not disrupted;
(10) A queuing of data between
system components or queuing of
messages to or from participants of such
duration that a participant’s normal
activity with the security-based swap
execution facility is affected; or
(11) A failure to maintain the integrity
of systems that results in the entry of
erroneous or inaccurate inquiries,
responses, orders, quotations, other
trading interest, transactions, or other
information in the security-based swap
execution facility or the securities
markets as a whole.
The term non-resident person means:
(1) In the case of an individual, one
who resides in or has his principal place
of business in any place not in the
United States;
(2) In the case of a corporation, one
incorporated in or having its principal
place of business in any place not in the
United States; and
(3) In the case of a partnership or
other unincorporated organization or
association, one having its principal
place of business in any place not in the
United States.
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The term objective review means an
internal or external review, performed
by competent, objective personnel
following established audit procedures
and standards, and containing a risk
assessment conducted pursuant to a
review schedule.
The term participant when used with
respect to a security-based swap
execution facility means a person that is
permitted to directly effect transactions
on the security-based swap execution
facility.
The term person associated with a
participant means any partner, officer,
director, or branch manager of such
participant (or any person occupying a
similar status or performing similar
functions), any person directly or
indirectly controlling, controlled by, or
under common control with such
participant, or any employee of such
participant.
The term related person when used
with respect to a participant means:
(1) Any affiliate of a participant;
(2) Any person associated with a
participant;
(3) Any immediate family member of
a participant, or any immediate family
member of the spouse of such
participant, who, in each case, has the
same home as the person or who is a
director or officer of the security-based
swap execution facility or any of its
parents or subsidiaries; or
(4) Any immediate family member of
a person associated with a participant,
or any immediate family member of the
spouse of such person, who, in each
case, has the same home as the person
associated with the participant or who
is a director or officer of the securitybased swap execution facility or any of
its parents or subsidiaries.
The term review schedule means a
schedule in which each element
contained in § 242.822(a)(1) would be
assessed at specific, regular intervals.
The term tagged means having an
identifier that highlights specific
information submitted to the
Commission that is in the format
required by the EDGAR Filer Manual, as
described in Section 301 of Regulation
S–T (17 CFR 232.301).
jdjones on DSKHWCL6B1PROD with PROPOSALS2
§ 242.801 Application for registration as a
security-based swap execution facility.
(a) An application for registration as
a security-based swap execution facility
shall be filed electronically in a tagged
data format with the Commission on
Form SB SEF (referenced in § 249.1700
of this chapter), in accordance with the
instructions contained therein. The
application must include information
sufficient to demonstrate compliance
with the Act and rules and regulations
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thereunder. Form SB SEF consists of
instructions, an Execution Page, and a
list of Exhibits that the Commission
requires in order to be able to determine
whether an applicant is able to comply
with the Act and rules and regulations
thereunder. An application on Form SB
SEF will not be considered to be
complete unless the applicant has
submitted, at a minimum, the Execution
Page and Exhibits as required in Form
SB SEF, and any other material that the
Commission may require, upon request,
in order to be able to determine whether
an applicant is able to comply with the
Act and rules and regulations
thereunder. If the application is not
complete, the Commission shall notify
the applicant that the application will
not be deemed to have been submitted
for purposes of the Commission’s
review.
(b)(1) In connection with an
application for registration furnished to
the Commission under paragraph (a) of
this section on or before July 31, 2014,
within 360 days of the date of the filing
of such application (or within such
longer period as to which the applicant
consents), the Commission shall:
(i) By order grant registration; or
(ii) Institute proceedings to determine
whether registration should be denied.
Such proceedings shall include notice
of the grounds for denial under
consideration and opportunity for
hearing and shall be concluded within
450 days after the date on which the
application for registration is furnished
to the Commission under paragraph (a)
of this section. At the conclusion of
such proceedings, the Commission, by
order, shall grant or deny such
registration. The Commission may
extend the time for conclusion of such
proceedings for up to 90 days, if it finds
good cause for such extension and
publishes its reasons for so finding, or
for such longer period as to which the
applicant consents.
(2) In connection with an application
for registration furnished to the
Commission under paragraph (a) of this
section after July 31, 2014, within 180
days of the date of the filing of such
application (or within such longer
period as to which the applicant
consents), the Commission shall:
(i) By order grant registration; or
(ii) Institute proceedings to determine
whether registration should be denied.
Such proceedings shall include notice
of the grounds for denial under
consideration and opportunity for
hearing and shall be concluded within
270 days after the date on which the
application for registration is furnished
to the Commission under paragraph (a)
of this section. At the conclusion of
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such proceedings, the Commission, by
order, shall grant or deny such
registration. The Commission may
extend the time for conclusion of such
proceedings for up to 90 days, if it finds
good cause for such extension and
publishes its reasons for so finding, or
for such longer period as to which the
applicant consents.
(3) The Commission shall grant the
registration of a security-based swap
execution facility if the Commission
finds that the requirements of the Act
and the rules and regulations
thereunder with respect to the applicant
are satisfied. The Commission shall
deny the registration of a security-based
swap execution facility if it does not
make such finding.
(c) For any application for registration
as a security-based swap execution
facility filed pursuant to paragraph (a) of
this section on Form SB SEF (referenced
in § 249.1700 of this chapter) on or
before July 31, 2014, for which the
applicant indicates that it would like to
be considered for temporary registration
pursuant to this paragraph (c), the
Commission may grant temporary
registration of the security-based swap
execution facility that shall expire on
the earlier of:
(1) The date that the Commission
grants or denies registration of the
security-based swap execution facility;
or
(2) The date that the Commission
rescinds the temporary registration of
the security-based swap execution
facility.
(d) A security-based swap execution
facility shall designate and authorize on
Form SB SEF (referenced in § 249.1700
of this chapter) an agent in the United
States, other than a Commission
member, official, or employee, who
shall accept any notice or service of
process, pleadings, or other documents
in any suit, action or proceedings
brought against the security-based swap
execution facility to enforce the Federal
securities laws or the rules or
regulations thereunder.
(e) Any person applying for
registration pursuant to paragraph (a) of
this section that is controlled by any
other person shall certify on its Form SB
SEF (referenced in § 249.1700 of this
chapter) and provide an opinion of
counsel that any such person that
controls such security-based swap
execution facility will consent to and
can, as a matter of law:
(1) Provide the Commission with
prompt access to its books and records,
to the extent such books and records are
related to the activities of the securitybased swap execution facility; and
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(2) Submit to onsite inspection and
examination by representatives of the
Commission with respect to the
activities of the security-based swap
execution facility.
(f) Any non-resident person applying
for registration pursuant to paragraph (a)
of this section shall certify on its Form
SB SEF (referenced in § 249.1700 of this
chapter) and provide an opinion of
counsel that the security-based swap
execution facility can, as a matter of
law:
(1) Provide the Commission with
prompt access to the books and records
of such security-based swap execution
facility; and
(2) Submit to onsite inspection and
examination by representatives of the
Commission.
(g) An application for registration or
any amendment thereto that is filed
pursuant to Regulation SB SEF
(referenced in § 249.1700 of this
chapter) shall be considered a ‘‘report’’
filed with the Commission for purposes
of sections 18(a) and 32(a) of the Act (15
U.S.C. 78r(a) and 78ff(a)) and the rules
and regulations thereunder.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
§ 242.802
Amendments to application.
(a) After the discovery that any
information filed on Form SB SEF
(referenced in § 249.1700 of this
chapter), any statement therein, or any
Exhibit or amendment thereto, was
inaccurate when filed, the securitybased swap execution facility shall file
with the Commission an amendment
correcting such inaccuracy promptly,
but in no event later than 5 business
days after such discovery.
(b)(1) The security-based swap
execution facility shall file
electronically with the Commission an
amendment to Form SB SEF (referenced
in § 249.1700 of this chapter), on Form
SB SEF, within 5 business days after
any action is taken that renders
inaccurate, or that causes to be
incomplete, any of the following:
(i) Information filed on the Execution
Page of Form SB SEF (referenced in
§ 249.1700 of this chapter), or
amendment thereto; or
(ii) Information filed as part of
Exhibits C, E, G or N, or any
amendments thereto.
(2) An amendment required under
this paragraph (b) shall set forth the
nature and effective date of the action
taken and shall provide any new
information and correct any information
rendered inaccurate.
(c) Any security-based swap
execution facility that is controlled by
any other person shall file electronically
with the Commission an amendment to
Exhibit P to Form SB SEF (referenced in
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§ 249.1700 of this chapter) on Form SB
SEF, within 5 business days after any
changes in the legal or regulatory
framework of any person that controls
the security-based swap execution
facility that would impact the ability of
or the manner in which any such person
consents to or provides the Commission
prompt access to its books and records,
to the extent such books and records are
related to the activities of the securitybased swap execution facility, or
impacts the Commission’s ability to
inspect and examine any such person
with respect to the activities of the
security-based swap execution facility.
The amendment shall include a revised
opinion of counsel pursuant to Exhibit
P describing how, as a matter of law,
any person that controls the securitybased swap execution facility will
continue to meet its obligations to
consent to and provide the Commission
with prompt access to its books and
records, to the extent such books and
records are related to the activities of
the security-based swap execution
facility, and to consent to and be subject
to onsite inspection and examination by
representatives of the Commission with
respect to the activities of the securitybased swap execution facility under
such new legal or regulatory framework.
(d) A non-resident security-based
swap execution facility shall file
electronically with the Commission an
amendment to Exhibit P to Form SB
SEF, on Form SB SEF (referenced in
§ 249.1700 of this chapter), within 5
business days after any changes in legal
or regulatory framework that would
impact the security-based swap
execution facility’s ability to or the
manner in which it provides the
Commission prompt access to its books
and records or impacts the
Commission’s ability to inspect and
examine the security-based swap
execution facility. The amendment shall
include a revised opinion of counsel
pursuant to Exhibit P describing how, as
a matter of law, the entity will continue
to meet its obligations to provide the
Commission with prompt access to its
books and records and to be subject to
onsite inspection and examination by
representatives of the Commission
under such new legal or regulatory
framework.
(e) Whenever the number of changes
to be reported in an amendment, or the
number of amendments filed, are so
great that the purpose of clarity will be
promoted by the filing of a complete
new statement and exhibits, a securitybased swap execution facility may, at its
election, or shall, upon request of any
representative of the Commission, file as
an amendment a complete new
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11055
statement together with all exhibits
which are prescribed to be filed in
connection with Form SB SEF
(referenced in § 249.1700 of this
chapter).
(f) Within 60 days of the end of its
fiscal year, a security-based swap
execution facility shall file an
amendment to its Form SB SEF
(referenced in § 249.1700 of this
chapter), which shall update the Form
SB SEF in its entirety. Each exhibit to
the amended Form SB SEF shall be up
to date as of the end of the latest fiscal
year of the security-based swap
execution facility.
§ 242.803 Supplemental material to be filed
by security-based swap execution facilities.
(a) A registered security-based swap
execution facility, or a security-based
swap execution facility exempted from
such registration pursuant to section
3D(e) of the Act (15 U.S.C. 78c–4(e)),
shall file electronically with the
Commission any material relating to the
trading of security-based swaps
(including notices, circulars, bulletins,
lists, and periodicals) issued or made
generally available to participants. Such
material shall be filed with the
Commission upon issuing or making
such material available to the
participants.
(b) If the information required to be
filed under paragraph (a) of this section
is available continuously on an Internet
Web site controlled by a security-based
swap execution facility, in lieu of filing
such information with the Commission,
such security-based swap execution
facility may:
(1) Indicate the location of the
Internet Web site where such
information may be found; and
(2) Certify that the information
available at such location is accurate as
of its date.
§ 242.804 Withdrawal from or revocation of
registration for security-based swap
execution facilities.
(a) A registered security-based swap
execution facility may withdraw from
registration by filing a written notice of
withdrawal with the Commission. The
security-based swap execution facility
shall designate on its notice of
withdrawal a person associated with the
security-based swap execution facility
to serve as the custodian of the securitybased swap execution facility’s books
and records. Prior to filing a notice of
withdrawal, a security-based swap
execution facility shall file an amended
Form SB SEF (referenced in § 249.1700
of this chapter) to update any inaccurate
information.
(b) A notice of withdrawal from
registration filed by a security-based
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swap execution facility shall become
effective for all matters (except as
provided in this paragraph (b)) on the
60th day after the filing thereof with the
Commission, within such longer period
of time as to which such security-based
swap execution facility consents or the
Commission, by order, may determine
as necessary or appropriate in the public
interest or for the protection of
investors, or within such shorter period
of time as the Commission may
determine.
(c) A notice of withdrawal that is filed
pursuant to this rule shall be considered
a ‘‘report’’ filed with the Commission for
purposes of sections 18(a) and 32(a) of
the Act (15 U.S.C. 78r(a) and 78ff(a)),
and the rules and regulations
thereunder.
(d) If the Commission finds, on the
record after notice and opportunity for
hearing, that any registered securitybased swap execution facility has
obtained its registration by making any
false or misleading statements with
respect to any material fact or has
violated or failed to comply with any
provision of the Federal securities laws
and the rules and regulations
thereunder, the Commission, by order,
may revoke the registration. Pending
final determination of whether any
registration shall be revoked, the
Commission, by order, may suspend
such registration, if such suspension
appears to the Commission, after notice
and opportunity for hearing, to be
necessary or appropriate in the public
interest or for the protection of
investors.
(e) If the Commission finds that a
registered security-based swap
execution facility is no longer in
existence or has ceased to do business
in the capacity specified in its
application for registration, the
Commission, by order, may cancel the
registration.
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§ 242.805 Voluntary submission of rules
for Commission review and approval.
(a) Request for approval of rules. A
registered security-based swap
execution facility may request that the
Commission approve a new rule or rule
amendment prior to implementation of
the new rule or rule amendment or, if
the request was initially submitted
under § 242.806 or 242.807, subsequent
to implementation of the new rule or
rule amendment. A request for approval
shall:
(1) Be filed electronically with the
Commission in a format specified by the
Commission;
(2) Set forth the text of the new rule
or rule amendment (in the case of a rule
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amendment, deletions and additions
must be indicated);
(3) Describe the proposed effective
date of the new rule or rule amendment
and any action taken or anticipated to
be taken to adopt the proposed rule by
the registered security-based swap
execution facility or by its Board, or by
any committee thereof, and cite the
rules of the registered security-based
swap execution facility that authorize
the adoption of the proposed rule
change;
(4) Explain the operation, purpose,
and effect of the new rule or rule
amendment, including, as applicable, a
description of the anticipated benefits to
market participants or others, any
potential anticompetitive effects on
market participants or others, and how
the rule fits into the registered securitybased swap execution facility’s
framework of regulation;
(5) Certify that the registered securitybased swap execution facility has
published on its Web site a notice of
pending new rule or rule amendment
with the Commission and a copy of the
submission, concurrent with the filing
of the submission with the Commission;
(6) Include the documentation relied
on to establish the basis for compliance
with the applicable provisions of the
Act and Commission rules and
regulations thereunder, including
section 3D(d) of the Act (15 U.S.C. 78c–
4(d)) and the rules and regulations
thereunder;
(7) Provide additional information
that may be beneficial to the
Commission in analyzing the new rule
or rule amendment. If a proposed rule
affects, directly or indirectly, the
application of any other rule of the
registered security-based swap
execution facility, the pertinent text of
any such rule must be set forth and the
anticipated effect described;
(8) Describe briefly any substantive
opposing views expressed to the
registered security-based swap
execution facility by the Board or
committee members, participants, or
market participants with respect to the
new rule or rule amendment that were
not incorporated into the new rule or
rule amendment;
(9) Identify any Commission rule or
regulation that the Commission may
need to amend, or sections of the Act or
the rules or regulations thereunder that
the Commission may need to interpret,
in order to approve the new rule or rule
amendment. To the extent that such an
amendment or interpretation is
necessary to accommodate a new rule or
rule amendment, the submission should
include a reasoned analysis supporting
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the proposed amendment or
interpretation;
(10) In the case of proposed
amendments to the terms and
conditions of a security-based swap,
include a written statement verifying
that the registered security-based swap
execution facility has undertaken a due
diligence review of the legal conditions,
including conditions relating to
contractual and intellectual property
rights, that may materially affect the
trading of the security-based swap; and
(11) A request for confidential
treatment, if appropriate, as permitted
pursuant to the applicable provisions of
the Freedom of Information Act, 5
U.S.C. 552, and Commission rules and
regulations thereunder, 17 CFR 200.83.
(b) Standard for review and approval.
The Commission shall approve a new
rule or rule amendment unless the new
rule or rule amendment is inconsistent
with the Act or Commission rules or
regulations.
(c) Forty-five day review. (1) All rules
submitted for Commission approval
under paragraph (a) of this section shall
be deemed approved by the Commission
45 days after receipt by the Commission,
or at the conclusion of such extended
period as provided under paragraph (d)
of this section, unless the registered
security-based swap execution facility is
notified otherwise within the applicable
period, if:
(i) The submission complies with the
requirements of paragraph (a) of this
section; and
(ii) The registered security-based
swap execution facility does not amend
the new rule or rule amendment or
supplement the submission, except as
requested by the Commission, during
the pendency of the review period. Any
amendment or supplementation not
requested by the Commission will be
treated as the submission of a new filing
under this section.
(d) Extension of time for review. The
Commission may further extend the
review period in paragraph (c) of this
section for any approval request for:
(1) An additional 45 days, if the new
rule or rule amendment raises novel or
complex issues that require additional
time for review, is of major economic
significance, the submission is
incomplete, or the requestor does not
respond completely to the
Commission’s questions in a timely
manner, in which case, the Commission
shall notify the submitting registered
security-based swap execution facility
within the initial 45-day review period
and shall briefly describe the nature of
the specific issues for which additional
time for review shall be required; or
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(2) Any period, beyond the additional
45 days provided in paragraph (d)(1) of
this section, to which the registered
security-based swap execution facility
agrees in writing.
(e) Notice of non-approval. Any time
during its review under this section, the
Commission may notify the registered
security-based swap execution facility
that it will not, or is unable to, approve
the new rule or rule amendment. This
notification will briefly specify the
nature of the issues raised and the
specific provision of the Act or
Commission rules or regulations,
including the form or content
requirements of this section, with which
the new rule or rule amendment is
inconsistent or appears to be
inconsistent with the Commission rules
or regulations.
(f) Effect of non-approval. (1)
Notification to a registered securitybased swap execution facility under
paragraph (e) of this section shall not
prevent the registered security-based
swap execution facility from
subsequently submitting a revised
version of the new rule or rule
amendment for the Commission’s
review and approval or from submitting
the new rule or rule amendment as
initially proposed in a supplemented
submission. The revised submission
will be reviewed without prejudice.
(2) Notification to a registered
security-based swap execution facility
under paragraph (e) of this section of the
Commission’s determination not to
approve the new rule or rule
amendment of the registered securitybased swap execution facility shall be
presumptive evidence that the
registered security-based swap
execution facility may not truthfully
certify the same, or substantially the
same, proposed rule or rule amendment
under § 242.806.
(g) Expedited approval.
Notwithstanding the provisions of
paragraph (c) of this section, a new rule
or rule amendment, including proposed
changes to the terms and conditions of
a security-based swap, that is consistent
with the Act and Commission rules and
regulations and with standards
approved or established by the
Commission may be approved by the
Commission at such time and under
such conditions as the Commission
shall specify in the written notification;
provided, however, that the
Commission may, at any time, alter or
revoke the applicability of such a notice
to any particular product or rule
amendment.
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§ 242.806
Self-certification of rules.
(a) Required certification. A registered
security-based swap execution facility
shall comply with the following
conditions prior to implementing any
rule that has not obtained Commission
approval under § 242.805:
(1) The registered security-based swap
execution facility has filed its
submission electronically in a format
specified by the Commission.
(2) The registered security-based swap
execution facility has provided to the
Commission a certification that it
published on its Web site a notice of
pending certification with the
Commission and a copy of the
submission, concurrent with the filing
of a submission with the Commission.
Information that the registered securitybased swap execution facility seeks to
keep confidential may be redacted from
the documents published on its Web
site but must be republished consistent
with any determination made pursuant
to the applicable provisions of the
Freedom of Information Act, 5 U.S.C.
552, and Commission rules and
regulations thereunder, 17 CFR 200.83.
(3) The Commission has received the
submission not later than the opening of
business on the business day that is 10
business days prior to the registered
security-based swap execution facility’s
proposed implementation of the rule or
rule amendment; provided, however,
that if a security-based swap execution
facility implements any rule or rule
amendment in the exercise of its
emergency authority pursuant to
§ 242.816, it shall file such rule or rule
amendment with the Commission
pursuant to this paragraph (a) prior to
the implementation of such rule or rule
amendment, or, if not practicable,
within 24 hours after implementation of
such emergency rule or rule
amendment.
(4) The Commission has not stayed
the submission pursuant to paragraph
(c) of this section.
(5) The rule submission includes:
(i) The text of the rule (in the case of
a rule amendment, deletions, and
additions must be indicated);
(ii) The date of intended
implementation;
(iii) A certification by the registered
security-based swap execution facility
that the rule complies with the Act and
Commission rules and regulations
thereunder;
(iv) The documentation relied on to
establish the basis for compliance with
the applicable provisions of the Act and
Commission rules and regulations
thereunder, including section 3D(d) of
the Act (15 U.S.C. 78c–4(d)) and the
rules and regulations thereunder;
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(v) A brief explanation of any
substantive opposing views expressed to
the registered security-based swap
execution facility by the Board or
committee members, participants, or
market participants that were not
incorporated into the rule, or a
statement that no such opposing views
were expressed;
(vi) A request for confidential
treatment, if appropriate, as permitted
pursuant to the applicable provisions of
the Freedom of Information Act, 5
U.S.C. 552, and Commission rules and
regulations thereunder, 17 CFR 200.83;
and
(vii) For amendments to the terms and
conditions of a security-based swap, a
written statement verifying that the
registered security-based swap
execution facility has undertaken a due
diligence review of the legal conditions,
including conditions relating to
contractual and intellectual property
rights, that may materially affect the
trading of the product.
(6) The registered security-based swap
execution facility has provided, upon
request of any representative of the
Commission, additional evidence,
information, or data that may be
beneficial to the Commission in
conducting a due diligence assessment
of the filing and the registered securitybased swap execution facility’s
compliance with any of the
requirements of the Act or Commission
rules or regulations thereunder.
(b) Review by the Commission. The
Commission shall have 10 business days
to review the new rule or rule
amendment before the new rule or rule
amendment is deemed certified and can
be made effective, unless the
Commission notifies the registered
security-based swap execution facility
during the 10-business day review
period that it intends to issue a stay of
the certification under paragraph (c) of
this section.
(c) Stay. (1) Stay of certification of
new rule or rule amendment. The
Commission may stay the certification
of a new rule or rule amendment
submitted pursuant to paragraph (a) of
this section by issuing a notification
informing the registered security-based
swap execution facility that the
Commission is staying the certification
of the new rule or rule amendment on
the grounds that the new rule or rule
amendment presents novel or complex
issues that require additional time to
analyze, the new rule or rule
amendment is accompanied by an
inadequate explanation, or the new rule
or rule amendment is potentially
inconsistent with the Act or
Commission rules or regulations
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thereunder. The Commission will have
90 days from the date of the notification
to conduct a review.
(2) Public comment. The Commission
shall provide a 30-day comment period
within the 90-day review period while
the stay is in effect as described in
paragraph (c)(1) of this section. The
Commission shall publish a notice of
the 30-day comment period on the
Commission’s Web site. Comments from
the public shall be submitted as
specified in that notice.
(3) Expiration of a stay of certification
of new rule or rule amendment. A new
rule or rule amendment subject to a stay
pursuant to paragraph (c) of this section
shall become effective, pursuant to the
certification, at the expiration of the 90day review period described in
paragraph (c)(1) of this section unless
the Commission withdraws the stay
prior to that time or the Commission
notifies the registered security-based
swap execution facility during the 90day review period that it objects to the
certification on the grounds that the
new rule or rule amendment is
inconsistent with the Act or
Commission rules or regulations
thereunder.
(d) Notwithstanding paragraph (a) of
this section, a registered security-based
swap execution facility may place the
following new rules or rule amendments
into effect on the following business day
without certification to the Commission
if the following conditions are met:
(1) The rule is limited to corrections
of typographical errors, renumbering,
periodic routine updates to identifying
information about approved entities,
and other such non-substantive
revisions of the terms and conditions of
a security-based swap that have no
effect on the economic characteristics of
the security-based swap; and
(2) The registered security-based swap
execution facility provides to the
Commission at least weekly a summary
notice of all rule amendments made
effective pursuant to this paragraph
during the preceding week. Such notice
must be labeled ‘‘Weekly Notification of
Rule Amendments’’ and need not be
filed for weeks during which no such
actions have been taken. One copy of
each such submission shall be furnished
electronically in a format specified by
the Commission.
(e) Notwithstanding paragraph (a) of
this section, a registered security-based
swap execution facility may place the
following new rules or rule amendments
into effect without certification or notice
to the Commission if the following
conditions are met:
(1) The rule governs:
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(i) Administrative procedures. The
organization and administrative
procedures of a security-based swap
execution facility’s governing bodies,
such as the Board, officers, and
committees, but not any of the
following: Voting requirements, Board
or committee composition requirements
or procedures, decision making
procedures, use or disclosure of material
non-public information gained through
the performance of official duties, or
requirements relating to conflicts of
interest; or
(ii) Administration. The routine, daily
administration, direction and control of
employees, requirements relating to
gratuity and similar funds, but not any
of the following: Guaranty, reserves, or
similar funds; declaration of holidays;
and changes to facilities housing the
market; and
(2) The registered security-based swap
execution facility maintains
documentation regarding all changes to
rules and posts all such rule changes on
its Web site.
§ 242.807 Trading security-based swaps
pursuant to certification.
(a) A registered security-based swap
execution facility shall comply with the
submission requirements of this section
prior to trading a security-based swap
that has not been approved under
§ 242.808. A submission shall comply
with the following conditions:
(1) The registered security-based swap
execution facility has filed its
submission electronically in a format
specified by the Commission;
(2) The Commission has received the
submission by the opening of business
on the business day preceding the day
on which the security-based swap
would begin trading;
(3) The Commission has not stayed
the submission pursuant to paragraph
(c) of this section; and
(4) The submission includes:
(i) A copy of the terms and conditions
of the security-based swap;
(ii) The intended date on which the
security-based swap may begin trading;
(iii) A certification by the registered
security-based swap execution facility
that the security-based swap to be
traded complies with the Act and
Commission rules and regulations
thereunder;
(iv) The documentation relied on to
establish the basis for compliance with
the Act and the rules and regulations
thereunder, including section 3D(d) of
the Act (15 U.S.C. 78c–4(d)) and the
rules and regulations thereunder;
(v) A written statement verifying that
the registered security-based swap
execution facility has undertaken a due
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diligence review of the legal conditions,
including legal conditions that relate to
contractual and intellectual property
rights, that may materially affect the
trading of the security-based swap;
(vi) A certification that the registered
security-based swap execution facility
published on its Web site a notice of
pending certification with the
Commission and a copy of the
submission, concurrent with the filing
of the submission with the Commission.
Information that the registered securitybased swap execution facility seeks to
keep confidential may be redacted from
the documents published on its Web
site, but must be republished consistent
with any determination made pursuant
to the applicable provisions of the
Freedom of Information Act, 5 U.S.C.
552, and Commission rules and
regulations thereunder, 17 CFR 200.83;
and
(vii) A request for confidential
treatment, if appropriate, as permitted
pursuant to the applicable provisions of
the Freedom of Information Act, 5
U.S.C. 552, and Commission rules and
regulations thereunder, 17 CFR 200.83.
(b) A registered security-based swap
execution facility, upon request of any
representative of the Commission, shall
provide any additional evidence,
information, or data that demonstrates
that the security-based swap meets,
initially or on a continuing basis, all of
the requirements of the Act and
Commission rules and regulations
thereunder.
(c) Stay. (1) The Commission may stay
the certification of a security-based
swap pursuant to paragraph (a) of this
section by issuing a notification
informing the registered security-based
swap execution facility that the
Commission is staying the certification
on the grounds that the security-based
swap proposed to begin trading presents
novel or complex issues that require
additional time to analyze, the
certification is accompanied by an
inadequate explanation or the proposed
security-based swap is potentially
inconsistent with the Act or
Commission rules or regulations
thereunder. The Commission will have
90 days from the date of the notification
to conduct the review.
(2) Public comment. The Commission
shall provide a 30-day comment period,
within the 90-day review period while
the stay is in effect as described in
paragraph (c)(1) of this section. The
Commission shall publish a notice of
the 30-day comment period on the
Commission’s Web site. Comments from
the public shall be submitted as
specified in that notice.
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(3) Expiration of a stay. A proposed
security-based swap subject to a stay
pursuant to paragraph (c) of this section
shall become effective, pursuant to the
certification, at the expiration of the 90day review period described in
paragraph (c)(1) of this section unless
the Commission withdraws the stay
prior to that time or the Commission
notifies the registered security-based
swap execution facility during the 90day review period that it objects to the
proposed certification on the grounds
that it is inconsistent with the Act or
Commission rules or regulations
thereunder.
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§ 242.808 Trading security-based swaps
pursuant to Commission review and
approval.
(a) A registered security-based swap
execution facility may request that the
Commission approve a security-based
swap prior to trading such securitybased swap or, if a security-based swap
was initially submitted under § 242.807,
subsequent to the commencement of
trading such security-based swap. A
submission requesting approval shall be
filed electronically with the
Commission in a format specified by the
Commission and include:
(1) A copy of the terms and conditions
of the security-based swap;
(2) The documentation relied on to
establish the basis for compliance with
the Act and rules and regulations
thereunder, including section 3D(d) of
the Act (15 U.S.C. 78c–4(d)) and the
rules and regulations thereunder;
(3) A written statement verifying that
the registered security-based swap
execution facility has undertaken a due
diligence review of the legal conditions,
including legal conditions that relate to
contractual and intellectual property
rights, that may materially affect the
trading of the security-based swap;
(4) A request for confidential
treatment, if appropriate, as permitted
pursuant to the applicable provisions of
the Freedom of Information Act, 5
U.S.C. 552, and Commission rules and
regulations thereunder, 17 CFR 200.83;
(5) A certification that the registered
security-based swap execution facility
has published on its Web site a notice
of pending request for approval with the
Commission and a copy of the
submission, concurrent with the filing
of a submission with the Commission.
Information that the registered securitybased swap execution facility seeks to
keep confidential may be redacted from
the documents published on its Web
site, but must be republished consistent
with any determination made pursuant
to the applicable provisions of the
Freedom of Information Act, 5 U.S.C.
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552, and Commission rules or
regulations thereunder, 17 CFR 200.83;
and
(b) A registered security-based swap
execution facility, upon request of any
representative of the Commission, shall
provide additional evidence,
information, or data that demonstrates
that the security-based swap meets,
initially or on a continuing basis, all of
the requirements of the Act and
Commission rules or regulations
thereunder.
(c) Standard for review and approval.
The Commission shall approve a
security-based swap unless the terms
and conditions of such security-based
swap are inconsistent with the Act or
Commission rules or regulations
thereunder.
(d) Forty-five day review. All securitybased swaps submitted for Commission
approval under this section shall be
deemed approved by the Commission
45 days after receipt by the Commission
or at the conclusion of an extended
period as provided under paragraph (e)
of this section, unless the registered
security-based swap execution facility is
notified otherwise within the applicable
period, if:
(1) The submission complies with the
requirements of paragraph (a) of this
section; and
(2) The registered security-based swap
execution facility making the
submission does not amend the terms
and conditions of the security-based
swap or supplement its request for
approval during that period, except as
requested by the Commission to correct
typographical errors, renumber, or make
other non-substantive revisions, during
that period. Any voluntary, substantive
amendment by the registered securitybased swap execution facility shall be
treated as a new submission under this
section.
(e) Extension of time. The
Commission may extend the 45-day
review period in paragraph (d) of this
section for:
(1) An additional 45 days, if the
proposed security-based swap raises
novel or complex issues that require
additional time for review, in which
case the Commission shall notify the
registered security-based swap
execution facility within the initial 45day review period and shall briefly
describe the nature of the specific issues
for which additional time for review is
required; or
(2) Any extended review period to
which the registered security-based
swap execution facility agrees in
writing.
(f) Notice of non-approval. The
Commission at any time during its
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review under this section may notify the
registered security-based swap
execution facility that it will not, or is
unable to, approve the security-based
swap. This notification will briefly
specify the nature of the issues raised
and the specific provision of the Act or
Commission rules or regulations
thereunder, including the form or
content requirements of paragraph (a) of
this section, with which the securitybased swap is inconsistent, appears to
be inconsistent, or is potentially
inconsistent.
(g) Effect of non-approval. (1)
Notification to a registered securitybased swap execution facility under
paragraph (f) of this section of the
Commission’s determination not to
approve a security-based swap shall not
prejudice the registered security-based
swap execution facility from
subsequently submitting a revised
version of the security-based swap for
Commission approval or from
submitting the security-based swap as
initially proposed pursuant to a
supplemented submission.
(2) Notification to a registered
security-based swap execution facility
under paragraph (f) of this section of the
Commission’s inability to approve the
security-based swap shall be
presumptive evidence that the
registered security-based swap
execution facility may not truthfully
certify under § 242.807 that the same, or
substantially the same, security-based
swap complies with the Act or
Commission rules and regulations
thereunder.
§ 242.809 Access to security-based swap
execution facilities.
(a) A security-based swap execution
facility shall permit a person to become
a participant in the security-based swap
execution facility only if such person is
registered with the Commission as a
security-based swap dealer, major
security-based swap participant, or
broker (as defined in section 3(a)(4) of
the Act, 15 U.S.C. 78c(a)(4)), or if such
person is an eligible contract participant
(as defined in section 3(a)(65) of the Act,
15 U.S.C. 78c(a)(65)).
(b) A security-based swap execution
facility shall permit all eligible persons
that meet the requirements for becoming
a participant in the security-based swap
execution facility under paragraph (a) of
this section and the security-based swap
execution facility’s rules to become
participants of the security-based swap
execution facility, consistent with the
requirements for providing impartial
access in section 3D(d)(6) of the Act (15
U.S.C. 78c–4(d)(6)) and § 242.811(b);
provided, however, that a security-based
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swap execution facility may choose to
not permit any eligible contract
participants that are not registered with
the Commission as a security-based
swap dealer, major security-based swap
participant, or broker (as defined in
section 3(a)(4) of the Act, 15 U.S.C.
78c(a)(4)) to become participants in the
security-based swap execution facility.
(c) A security-based swap execution
facility shall establish rules setting forth
requirements for an eligible person to
become a participant in the securitybased swap execution facility consistent
with the security-based swap execution
facility’s obligations under the Act and
the rules and regulations thereunder.
Such rules must require a participant, at
a minimum, to:
(1) Be a member of, or have an
arrangement with a member of, a
registered clearing agency to clear trades
in the security-based swaps that are
subject to mandatory clearing pursuant
to section 3C(a)(1) of the Act (15 U.S.C.
78c–3(a)(1)) and entered into by the
participant on the security-based swap
execution facility;
(2)(i) Meet the minimum financial
responsibility and recordkeeping and
reporting requirements imposed by the
Commission by virtue of its registration
as a security-based swap dealer, major
security-based swap participant, or
broker; or
(ii) In the case of an eligible contract
participant that is not registered with
the Commission as a security-based
swap dealer, major security-based swap
participant, or broker, meet the
recordkeeping and reporting
requirements that the security-based
swap execution facility shall establish
pursuant to § 242.813;
(3) Agree to comply with the rules,
policies, and procedures of the securitybased swap execution facility; and
(4) Consent to the disciplinary
procedures of the security-based
execution facility for violations of the
security-based swap execution facility’s
rules.
(d)(1) A security-based swap
execution facility that permits an
eligible contract participant that is not
registered as a security-based swap
dealer, major security-based swap
participant or broker to become a
participant in the security-based swap
execution facility pursuant to this
section shall establish, document, and
maintain a system of risk management
controls and supervisory procedures
reasonably designed to manage the
financial, regulatory, and other risks of
this business activity.
(2) The risk management controls and
supervisory procedures for granting
access to eligible contract participants
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that are not registered as a securitybased swap dealer, major security-based
swap participant, or broker as
participants of the security-based swap
execution facility shall be reasonably
designed to ensure compliance with all
regulatory requirements.
§ 242.810
Compliance with core principles.
(a) To be registered, and maintain
registration, as a security-based swap
execution facility, a security-based swap
execution facility shall comply with:
(1) The Core Principles described in
section 3D of the Act (15 U.S.C. 78c–4)
and the rules and regulations
thereunder; and
(2) The requirements of this rule and
any other requirement that the
Commission may impose by rule or
regulation.
(b) A security-based swap execution
facility shall establish:
(1) Rules that provide for the
equitable allocation of reasonable dues,
fees, and other charges among its
participants and any other users of its
system;
(2) Rules and systems that are not
designed to permit unfair
discrimination among its participants
and any other persons using its system;
(3) Rules that promote just and
equitable principles of trade; and
(4) Rules to provide, in general, a fair
procedure for disciplining participants
for violations of the rules of the
security-based swap execution facility.
(c) A security-based swap execution
facility shall not use for non-regulatory
purposes any confidential information it
collects or receives, from or on behalf of
any person, in connection with the
security-based swap execution facility’s
regulatory obligations.
§ 242.811
Compliance with rules.
(a) A security-based swap execution
facility shall:
(1) Establish and enforce compliance
with any rule established by such
security-based swap execution facility,
including:
(i) The terms and conditions of the
security-based swaps traded or
processed on or through the securitybased swap execution facility; and
(ii) Any limitation on access to the
security-based swap execution facility;
(2) Establish and enforce trading,
trade processing, and participation rules
that will deter abuses and have the
capacity to detect, investigate, and
enforce those rules, including means:
(i) To provide market participants
with impartial access to the market; and
(ii) To capture information that may
be used in establishing whether rule
violations have occurred; and
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(3) Establish rules governing the
operation of the security-based swap
execution facility, including rules
specifying trading procedures to be used
in entering and executing orders traded
or posted on the security-based swap
execution facility, including block
trades.
(b) A security-based swap execution
facility shall:
(1) Establish fair, objective, and not
unreasonably discriminatory standards
for granting impartial access to trading
on the security-based swap execution
facility, which standards shall include a
requirement that each participant of the
security-based swap execution facility
submit to the oversight (including the
disciplinary procedures of paragraph (g)
of this section) of the security-based
swap execution facility, with respect to
the participant’s trading on the facility,
as a condition of becoming a participant
in such security-based swap execution
facility;
(2) Not unreasonably prohibit or limit
any person in respect to access to the
services offered by such security-based
swap execution facility by applying the
standards established under paragraph
(b)(1) of this section in an unfair or
unreasonably discriminatory manner;
(3) Make and keep records of:
(i) All grants of access, including, for
all participants, the basis for granting
such access; and
(ii) All denials or limitations of access
for each applicant or participant (as
applicable), and the reasons for denying
or limiting access;
(4) Report the information required
regarding grants, denials, and
limitations of access on Form SB SEF
(referenced in § 249.1700 of this
chapter) and in the annual compliance
report of the Chief Compliance Officer
pursuant to § 242.823(c); and
(5) Establish a fair process for the
review of any prohibition or limitation
on access with respect to a participant
or any refusal to grant access with
respect to an applicant.
(c) A security-based swap execution
facility shall establish and enforce
compliance with rules concerning the
terms and conditions of the securitybased swaps traded on the securitybased swap execution facility.
(1) A security-based swap execution
facility shall establish a swap review
committee to determine:
(i) The security-based swaps that shall
trade on the security-based swap
execution facility; and
(ii) The security-based swaps that
shall no longer trade on the securitybased swap execution facility.
(2) The composition of the swap
review committee shall provide for the
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fair representation of participants of the
security-based swap execution facility
and other market participants, such that
each class of participant and other
market participants shall be given the
right to participate in such swap review
committee and that no single class of
participant or category of market
participant shall predominate. The rules
of the security-based swap execution
facility shall stipulate the method by
which such representation shall be
chosen by the Board.
(3) The security-based swap execution
facility shall establish criteria that the
swap review committee shall consider
in determining which security-based
swaps shall trade on the security-based
swap execution facility.
(4) The swap review committee shall
periodically review, on at least a
quarterly basis, each security-based
swap trading on the security-based swap
execution facility to determine whether
the trading characteristics of each
security-based swap justify a change to
the trading platform for each such
security-based swap. In addition to the
factors set forth in paragraph (c)(3) of
this section in making such a
determination, the swap review
committee shall consider whether:
(i) The liquidity in each securitybased swap is at an appropriate level for
the security-based swap’s trading
platform on which it trades; and
(ii) Such security-based swap would
be more suited for trading on a different
type of platform, including a platform
that provides for increased price
transparency for participants entering
orders, requests for quotations,
responses, quotations, or other trading
interest. The first review shall not be
earlier than 120 days after the initiation
of trading for a given security-based
swap.
(5) The swap review committee shall
report decisions on each security-based
swap promptly to the Chief Compliance
Officer and annually to the regulatory
oversight committee.
(d) A security-based swap execution
facility shall establish and enforce rules
governing the procedures for trading on
the security-based swap execution
facility, including, but not limited to,
rules concerning:
(1) Doing business on the securitybased swap execution facility;
(2) The types of orders, requests for
quotations, responses, quotations, or
other trading interest that will be
available on the security-based swap
execution facility;
(3) The manner in which trading
interest, including orders, requests for
quotations, responses, or quotations will
be handled on the security-based swap
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execution facility. The rules of a
security-based swap execution facility
shall provide for fair treatment of all
trading interest;
(4) The manner in which price
transparency for participants entering
orders, requests for quotations,
responses, quotations, or other trading
interest into the system will be
promoted;
(5) The manner in which trading
interest, including orders, requests for
quotations, responses, quotations, and
transaction data will be disseminated,
whether to participants of the securitybased swap execution facility or
otherwise, and whether for a fee or
otherwise;
(6) Prohibited trading practices;
(7) The prevention of the entry of
orders, requests for quotations,
responses, quotations, or other trading
interest that may result in a trade that
is clearly erroneous with respect to the
terms of the trade; the fair and nondiscriminatory manner of handling any
trade that is clearly erroneous; and the
resolution of any disputes concerning a
clearly erroneous trade;
(8) Trading halts in any security-based
swap, which rules shall include
procedures for halting trading in a
security-based swap when trading has
been halted or suspended in the
underlying security or securities
pursuant to the rules or an order of a
regulatory authority with authority over
the underlying security or securities;
(9) The manner in which block trades
will be handled, if different from the
handling of non-block trades; and
(10) Any other rules concerning
trading on the security-based swap
execution facility.
(e) A security-based swap execution
facility that operates a request-for-quote
platform shall create and disseminate
through the security-based swap
execution facility a composite indicative
quote for security-based swaps traded
on or through such system, which shall
be made available to all participants.
The composite indicative quote shall
include both composite indicative bids
and composite indicative offers.
(f) A security-based swap execution
facility shall establish and enforce rules
concerning:
(1) The reporting of trades executed
on the security-based swap execution
facility to a clearing agency, if the
transaction is subject to clearing; and
(2) The procedures for the processing
of transactions in security-based swaps
that occur on or though the securitybased swap execution facility,
including, but not limited to,
procedures to resolve any disputes
concerning the execution of a trade.
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(g) A security-based swap execution
facility shall establish rules and
procedures concerning the disciplining
of participants, including, but not
limited to, rules:
(1) Authorizing its staff to recommend
and take disciplinary action for
violations of the rules of the securitybased swap execution facility;
(2) Specifying the sanctions that may
be imposed upon participants for
violations of the rules of the securitybased swap execution facility such that
each sanction is commensurate with the
corresponding violation; and
(3) Establishing fair and non-arbitrary
procedures for any disciplinary process
and appeal thereof.
(h) A security-based swap execution
facility shall:
(1) Make and keep records of all
disciplinary proceedings, sanctions
imposed, and appeals thereof; and
(2) Disclose all disciplinary actions
taken annually on an amendment to
Form SB SEF and in the security-based
swap execution facility’s annual
compliance report of the Chief
Compliance Officer required pursuant to
§ 242.823(c). Such report shall include
information summarizing any
disciplinary action taken and the
reasons for such action.
(i) A security-based swap execution
facility shall establish rules and
procedures to assure that information to
be used to determine whether rule
violations have occurred is captured
and retained in a timely manner.
(j) A security-based swap execution
facility shall:
(1) Have the capacity to capture
information that may be used in
establishing whether rule violations
have occurred, including through the
use of automated surveillance systems
as set forth in § 242.813(b);
(2) Maintain appropriate resources to
fulfill its obligations under this section;
and
(3) Investigate possible rule
violations.
§ 242.812 Security-based swaps not
readily susceptible to manipulation.
(a) A security-based swap execution
facility shall permit trading only in
security-based swaps that are not
readily susceptible to manipulation.
(b) Prior to permitting the trading of
any security-based swap, a securitybased swap execution facility’s swap
review committee shall have
determined, after taking into account all
of the terms and conditions of the
security-based swap and the markets for
the security-based swap and any
underlying security or securities, that
such security-based swap is not readily
susceptible to manipulation.
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(c) Periodic Review. The rules of a
security-based swap execution facility
shall require that, after commencement
of trading of a security-based swap, the
swap review committee shall
periodically review the trading in the
security-based swap. If the swap review
committee cannot determine, after
taking into account all of the terms and
conditions of the security-based swap,
the markets for the security-based swap
and any underlying security or
securities, and the trading in the
security-based swap, that such securitybased swap is not readily susceptible to
manipulation, the security-based swap
execution facility shall no longer permit
the trading of such security-based swap.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
§ 242.813 Monitoring of trading and trade
processing.
(a) A security-based swap execution
facility shall:
(1) Establish and enforce rules, terms
and conditions defining, or
specifications detailing:
(i) Trading procedures to be used in
entering and executing orders traded on
or through the facilities of the securitybased swap execution facility; and
(ii) Procedures for trade processing of
security-based swaps on or through the
facilities of the security-based swap
execution facility; and
(2) Monitor trading in security-based
swaps to prevent manipulation, price
distortion, and disruptions of the
delivery or cash settlement practices
and procedures, including methods for
conducting real-time monitoring of
trading and comprehensive and accurate
trade reconstructions.
(b) A security-based swap execution
facility shall have the capacity and
appropriate resources to electronically
monitor trading in security-based swaps
on its market by establishing an
automated surveillance system,
including through real-time monitoring
of trading and use of automated alerts,
that is designed to:
(1) Detect and deter any fraudulent or
manipulative acts or practices,
including insider trading or other
unlawful conduct or any violation of the
rules of the security-based swap
execution facility that has occurred or is
occurring;
(2) Detect and deter market distortions
or disruptions of trading that may
impact the entry and execution of
trading interests or the processing of
trading interests on or through the
security-based swap execution facility;
(3) Conduct real-time monitoring of
trading to provide for comprehensive
and accurate trade reconstruction; and
(4) Collect and assess data to allow
the security-based swap execution
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facility to respond promptly to market
abuses or disruptions.
(c) A security-based swap execution
facility shall establish and enforce rules
that require any participant that enters
any order, request for quotation,
response, quotation, or other trading
interest, or executes any transaction on
the security-based swap execution
facility, to:
(1) Maintain books and records of any
such order, request for quotation,
response, quotation or other trading
interest, or transaction, and of any
position in any security-based swap that
is the result of any such order, request
for quotation, response, quotation, other
trading interest, or transaction; and
(2) Provide prompt access to such
books and records to the security-based
swap execution facility and to the
Commission.
(d) A security-based swap execution
facility shall establish and maintain
procedures to investigate possible rule
violations, to prepare reports concerning
the findings and recommendations of
any such investigations, and to take
corrective action, as necessary.
§ 242.814
Ability to obtain information.
(a) A security-based swap execution
facility shall establish and enforce rules
requiring its participants to:
(1) Furnish to the security-based swap
execution facility, upon request, and in
the form and manner prescribed by the
security-based swap execution facility,
any information necessary to permit the
security-based swap execution facility
to perform its responsibilities under this
section, including, without limitation,
surveillance, investigations,
examinations and discipline of
participants; such information may
include, without limitation, financial
information, books, accounts, records,
files, memoranda, correspondence, and
any other information pertaining to
orders, requests for quotations,
responses, quotations, or other trading
interest entered and transactions
executed on or through the securitybased swap execution facility;
(2) Cooperate with the security-based
swap execution facility and allow access
by the security-based swap execution
facility, at such reasonable times as the
security-based swap execution facility
may request, to examine the books and
records of the participant or to obtain or
verify information related to orders,
requests for quotation, responses,
quotations, or other trading interest
entered and transactions executed on or
through its facilities; and
(3) Cooperate with any representative
of the Commission and allow access by
any representative of the Commission,
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at such reasonable times as any
representative of the Commission may
request, to examine the books and
records of the participant or to obtain or
verify other information related to
orders, requests for quotation,
responses, quotations, or other trading
interest entered and transactions
executed on or through its facilities.
(b) A security-based swap execution
facility shall:
(1) Cooperate with any representative
of the Commission and allow access by
any representative of the Commission,
at such reasonable times as any
representative of the Commission may
request, to:
(i) Examine the books and records
required to be kept by the security-based
swap execution facility pursuant to
§ 242.818; and
(ii) Obtain or verify other information
related to orders, requests for
quotations, responses, quotations, or
other trading interest entered and
transactions executed on or through its
facilities;
(2) Upon request of any representative
of the Commission, promptly furnish to
the possession of such representative
copies of any documents, in such form
and manner acceptable to such
representative, that the security-based
swap execution facility possesses or has
access to pursuant to paragraph (a) of
this section;
(3) Have the capacity to carry out such
international information-sharing
agreements as the Commission may
require; and
(4) Certify at the time of registration
on Form SB SEF, and annually
thereafter as part of the annual
compliance report described in
§ 242.823, that the security-based swap
execution facility has the capacity to
fulfill its obligations under any
international information-sharing
agreements to which it is a party as of
the date of such certification.
§ 242.815 Financial integrity of
transactions.
(a) A security-based swap execution
facility shall establish and enforce rules
and procedures for ensuring the
financial integrity of security-based
swaps entered on or through the
facilities of such security-based swap
execution facility, including the
clearance and settlement of securitybased swaps pursuant to section
3C(a)(1) of the Act (15 U.S.C. 78c–
3(a)(1)).
(b) Notwithstanding the requirements
of § 242.810(b)(2), the rules of a
security-based swap execution facility
relating to the trading on the securitybased swap execution facility, of
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security-based swaps that will not be
cleared at a registered clearing agency
may permit a participant to take into
account counterparty credit risk.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
§ 242.816
Emergency authority.
(a) A security-based swap execution
facility shall establish rules and
procedures to provide for the exercise of
emergency authority, in consultation or
cooperation with the Commission, as
necessary or appropriate, which rules
and procedures shall include the items
set forth in paragraphs (b) and (c) of this
section.
(b) A security-based swap execution
facility shall establish rules and
procedures that specify:
(1) The person or persons authorized
by the security-based swap execution
facility to declare an emergency;
(2) How the security-based swap
execution facility will notify the
Commission of its decision to exercise
its emergency authority;
(3) How the security-based swap
execution facility will notify the public
of its decision to exercise its emergency
authority;
(4) The processes for decision-making
by the security-based swap execution
facility personnel with respect to the
exercise of emergency authority,
including alternate lines of
communication and guidelines to avoid
conflicts of interest in the exercise of
such authority; and
(5) The processes for determining that
an emergency no longer exists and
notifying the Commission and the
public of such decision.
(c) A security-based swap execution
facility shall have rules permitting the
security-based swap execution facility
to immediately take any or all of the
following actions during an emergency:
(1) Impose or modify trading limits,
price limits, position limits, or other
market restrictions, including
suspending or curtailing trading on its
market in any security-based swap or
class of security-based swaps;
(2) Extend or shorten trading hours;
(3) Coordinate trading halts with
markets trading a security or securities
underlying any security-based swap;
(4) Coordinate with a registered
clearing agency to liquidate or transfer
positions in any open security-based
swap of one of its participants; and
(5) Any action, if so directed by the
Commission.
(d)(1) A security-based swap
execution facility shall promptly notify
the Commission of the exercise of its
emergency authority, followed by
submission of written documentation
within two weeks following cessation of
the emergency explaining the basis for
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declaring an emergency, how conflicts
of interest were minimized, and the
extent to which the security-based swap
execution facility considered the effect
of its emergency action on the markets
for the security-based swap and any
security or securities underlying the
security-based swap;
(2) If a security-based swap execution
facility implements any rule or rule
amendment in the exercise of its
emergency authority, it shall file such
rule or rule amendment with the
Commission pursuant to § 242.806 prior
to the implementation of such rule or
rule amendment or, if not practicable,
within 24 hours after implementation of
such rule or rule amendment.
§ 242.817 Timely publication of trading
information.
(a) A security-based swap execution
facility shall:
(1) Have the capacity to electronically
capture, transmit, and disseminate
information on price, trading volume,
and other trading data on all securitybased swaps executed on or through the
security-based swap execution facility;
and
(2) Make public timely information on
price, trading volume, and other trading
data on security-based swaps to the
extent and in the manner prescribed by
the Commission.
(b) If any security-based swap
execution facility makes available
information regarding a security-based
swap transaction to any party other than
a counterparty to the transaction, then
the security-based swap execution
facility must make that information
available to all participants on terms
and conditions that are fair and
reasonable and not unfairly
discriminatory; provided however, that
nothing in this paragraph shall prohibit
a security-based swap execution facility
from acting as the agent of a reporting
party, as defined in § 242.900 ( ), for
purposes of reporting required
information directly to a registered
security-based swap data repository.
(c) A security-based swap execution
facility shall not make any information
regarding a security-based swap
transaction publicly available prior to
the time a security-based swap data
repository is permitted to publicly
disseminate such information under
§ 242.902.
§ 242.818
Recordkeeping and reporting.
(a) A security-based swap execution
facility shall keep and preserve at least
one copy of all documents, including all
correspondence, memoranda, papers,
books, notices, accounts, and other such
records (including the audit trail records
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required pursuant to the provisions of
paragraph (c) of this section) as shall be
made or received by it in the conduct
of its business.
(b) A security-based swap execution
facility shall keep and preserve all such
documents and other records for a
period of not less than five years, the
first two years in an easily accessible
place.
(c) A security-based swap execution
facility shall establish and maintain
accurate, time-sequenced records of all
orders, requests for quotations,
responses, quotations, other trading
interest, and transactions that are
received by, originated on, or executed
on the security-based swap execution
facility. These records shall include the
key terms of each order, request for
quotation, response, quotation, other
trading interest, or transaction and shall
document the complete life of each
order, request for quotation, response,
quotation, other trading interest, or
transaction on the security-based swap
execution facility, including any
modification, cancellation, execution, or
any other action taken with respect to
such order, request for quotation,
response, quotation, other trading
interest, or transaction.
(d) A security-based swap execution
facility shall establish, maintain, and
enforce written policies and procedures
to verify the accuracy of the transaction
data that it collects and reports.
(e) A security-based swap execution
facility shall report to the Commission,
in a form and manner acceptable to the
Commission, such information as the
Commission may, from time to time,
determine to be necessary to perform
the duties of the Commission under the
Act.
(f) A security-based swap execution
facility shall, upon request of any
representative of the Commission,
promptly furnish to the possession of
such representative copies of any
documents, in such form and manner
acceptable to such representative,
required to be kept and preserved by it
pursuant to paragraphs (a) and (b) of
this section.
§ 242.819
Antitrust considerations.
Unless necessary or appropriate to
achieve compliance with the Act and
the rules and regulations thereunder, a
security-based swap execution facility
shall not:
(a) Adopt any rule or take any action
that results in any unreasonable
restraint of trade; or
(b) Impose any material
anticompetitive burden on trading or
clearing.
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Conflicts of interest.
For additional rules relating to the
mitigation of conflicts of interest of
security-based swap execution facilities,
see § 242.702.
(a) The rules of a security-based swap
execution facility shall assure a fair
representation of its participants in the
selection of its directors and
administration of its affairs, but no less
than 20 percent of the total number of
directors of the security-based swap
execution facility must be selected by
the participants; provided, however,
that the security-based swap execution
facility shall preclude any participant,
or any group or class of participants,
either alone or together with its related
persons, that beneficially owns, directly
or indirectly, an interest in the securitybased swap execution facility from
dominating or exercising
disproportionate influence in the
selection of such directors if the
participant may thereby dominate or
exercise disproportionate influence in
the selection or appointment of the
entire Board.
(b) At least one director on the Board
shall be representative of investors who
are not security-based swap dealers or
major security-based swap participants,
and such director must not be a person
associated with a participant.
(c) The rules of a security-based swap
execution facility must establish a fair
process for participants to nominate an
alternative candidate or candidates to
the Board by petition and shall specify
the percentage of the participants that is
necessary to put forth such alternative
candidate or candidates, which
percentage shall not be unreasonable.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
§ 242.821
Financial resources.
(a) A security-based swap execution
facility shall have adequate financial,
operational, and managerial resources to
discharge each responsibility of the
security-based swap execution facility,
as determined by the Commission.
(b) The financial resources of a
security-based swap execution facility
shall be considered to be adequate if,
when using reasonable estimates and
assumptions and not overestimating
resources or underestimating expenses,
liabilities, and financial exposure, the
value of the financial resources:
(1) Enables the security-based swap
execution facility to meet its financial
obligations to participants,
notwithstanding a default by the
participant creating the largest financial
exposure for the security-based swap
execution facility in extreme but
plausible market conditions; and
(2) Exceeds the total amount that
would enable the security-based swap
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execution facility to cover its operating
costs for a one-year period, as calculated
on a rolling basis.
§ 242.822
System safeguards.
(a) Requirements for security-based
swap execution facilities. A securitybased swap execution facility, with
respect to those systems that support or
are integrally related to the performance
of its activities, shall:
(1) Establish, maintain, and enforce
written policies and procedures
reasonably designed to ensure that its
systems provide adequate levels of
capacity, resiliency, and security. These
policies and procedures shall, at a
minimum, require the security-based
swap execution facility to:
(i) Establish reasonable current and
future capacity estimates, including
quantifying in appropriate units of
measure the limits of the security-based
swap execution facility’s capacity to
receive (or collect), process, store, or
display (or disseminate for display or
other use) the data elements included
within each function, and identifying
the factors (mechanical, electronic, or
other) that account for the current
limitations;
(ii) Conduct periodic, capacity stress
tests of critical systems to determine
such systems’ ability to process
transactions in an accurate, timely, and
efficient manner;
(iii) Develop and implement
reasonable procedures to review and
keep current its system development
and testing methodology;
(iv) Review the vulnerability of its
systems and data center computer
operations to internal and external
threats, physical hazards, and natural
disasters;
(v) Establish adequate contingency
and disaster recovery plans that shall
include plans to resume trading of
security-based swaps by the securitybased swap execution facility no later
than the next business day following a
wide-scale disruption. In developing
such plans, the security-based swap
execution facility shall take into
account:
(A) The extent of alternative trading
venues for the security-based swaps
traded by the security-based swap
execution facility, including the number
of security-based swaps traded on the
security-based swap execution facility,
the market share of the security-based
swap execution facility, and the number
of participants on the security-based
swap execution facility; and
(B) The necessity of geographic
diversity and diversity of infrastructure
between the security-based swap
PO 00000
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execution facility’s primary site and any
back-up sites.
(2) On an annual basis, submit an
objective review to the Commission
within 30 calendar days of completion.
Where the objective review is performed
by an internal department, an objective,
external firm shall assess the internal
department’s objectivity, competency,
and work performance with respect to
the review performed by the internal
department. The external firm must
issue a report of the objective review,
which the security-based swap
execution facility must submit to the
Commission on an annual basis, within
30 calendar days of completion of the
review;
(3) Promptly notify the Commission
in writing of material systems outages
and any remedial measures that have
been implemented or are contemplated.
Prompt notification includes the
following:
(i) Immediately notify the
Commission when a material systems
outage is detected;
(ii) Immediately notify the
Commission when remedial measures
are selected to address the material
systems outage;
(iii) Immediately notify the
Commission when the material systems
outage is addressed; and
(iv) Submit to the Commission within
five business days of when the material
systems outage occurred a more detailed
written description and analysis of the
outage and any remedial measures that
have been implemented or are
contemplated.
(4) Notify the Commission in writing
at least 30 calendar days before
implementation of any planned material
systems changes.
(b) Electronic filing. A security-based
swap execution facility shall submit a
notification, review, or description and
analysis that is required to be submitted
to the Commission pursuant to this
section in an appropriate electronic
format. Any such notification, review,
or description and analysis shall be
submitted to the Division of Trading
and Markets, Office of Market
Operations, at the principal office of the
Commission in Washington, DC. Any
such notification, review, or description
and analysis shall be considered
submitted when an electronic version is
received at the Division of Trading and
Markets at the principal office of the
Commission in Washington, DC.
(c) Confidential treatment. A person
who submits a notification, review, or
description and analysis pursuant to
this section for which such person seeks
confidential treatment shall clearly
mark each page or segregable portion of
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each page with the words ‘‘Confidential
Treatment Requested.’’ A notification,
review, or description and analysis
submitted pursuant to this section will
be accorded confidential treatment to
the extent permitted by law.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
§ 242.823 Designation of Chief Compliance
Officer of security-based swap execution
facility.
(a) In general. Each security-based
swap execution facility shall identify on
Form SB SEF (referenced in § 249.1700
of this chapter) a person who has been
designated by the Board to serve as a
Chief Compliance Officer of the
security-based swap execution facility.
The compensation and removal of the
Chief Compliance Officer shall require
the approval of a majority of the Board.
(b) Duties. Each Chief Compliance
Officer designated by a registered
security-based swap execution facility
shall:
(1) Report directly to the Board or the
senior officer of the security-based swap
execution facility;
(2) Review the compliance of the
security-based swap execution facility
with the Core Principles described in
section 3D of the Act (15 U.S.C. 78c–4)
and the rules and regulations
thereunder;
(3) In consultation with the Board or
the senior officer of the security-based
swap execution facility, resolve any
conflicts of interest that may arise;
(4) Be responsible for establishing and
administering each policy and
procedure that is required to be
established pursuant to section 3D of
the Act (15 U.S.C. 78c–4) and the rules
and regulations thereunder;
(5) Monitor compliance with the Act
and the rules and regulations
thereunder relating to its business as a
security-based swap execution facility,
including each rule prescribed by the
Commission under section 3D of the Act
(15 U.S.C. 78c–4);
(6) Establish procedures for the
remediation of noncompliance issues
identified by the Chief Compliance
Officer through any:
(i) Compliance office review;
(ii) Look-back;
(iii) Internal or external audit finding;
(iv) Self-reported error; or
(v) Validated complaint; and
(7) Establish and follow appropriate
procedures for the handling,
management response, remediation,
retesting, and closing of noncompliance
issues.
(c) Annual Reports. (1) In general. The
Chief Compliance Officer shall annually
prepare and sign a report that contains
a description of the compliance of the
registered security-based swap
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execution facility with respect to the
Act and the rules and regulations
thereunder and each policy and
procedure of the security-based swap
execution facility (including the code of
ethics and conflicts of interest policies
of the security-based swap execution
facility). Each compliance report shall
also contain, at a minimum, a
description of:
(i) The security-based swap execution
facility’s enforcement of its policies and
procedures;
(ii) Information on all investigations,
inspections, examinations, and
disciplinary cases opened, closed, and
pending during the reporting period;
(iii) All grants of access (including, for
all participants, the reasons for granting
such access) and all denials or
limitations of access (including, for each
applicant, the reasons for denying or
limiting access), consistent with
§ 242.811(b)(3);
(iv) Any material changes to the
policies and procedures since the date
of the preceding compliance report;
(v) Any recommendation for material
changes to the policies and procedures
as a result of the annual review, the
rationale for such recommendation, and
whether such policies and procedures
were or will be modified by the
security-based swap execution facility
to incorporate such recommendation;
(vi) The results of the security-based
swap execution facility’s surveillance
program, including information on the
number of reports and alerts generated,
and the reports and alerts that were
referred for further investigation or for
an enforcement proceeding;
(vii) Any complaints received
regarding the security-based swap
execution facility’s surveillance
program; and
(viii) Any material compliance
matters identified since the date of the
preceding compliance report.
(2) Requirements. A financial report
of the security-based swap execution
facility shall be filed with the
Commission as described in paragraph
(e) of this section and shall accompany
a compliance report as described in
paragraph (c)(1) of this section. The
compliance report shall include a
certification that, under penalty of law,
the compliance report is accurate and
complete. The compliance report shall
also be filed in a tagged data format in
accordance with the instructions
contained in the EDGAR Filer Manual,
as described in § 232.301 of this chapter.
(d) The Chief Compliance Officer
shall submit the annual compliance
report to the Board for its review prior
to the submission of the report to the
Commission.
PO 00000
Frm 00119
Fmt 4701
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11065
(e) Financial report. With each annual
compliance report, the Chief
Compliance Officer shall also prepare
and submit to the Commission a
financial report of the security-based
swap execution facility. Each financial
report filed with a compliance report
shall:
(1) For the financial statements
relating to the security-based swap
execution facility:
(i) Be a complete set of financial
statements of the security-based swap
execution facility that are prepared in
accordance with U.S. generally accepted
accounting principles for the two most
recent fiscal years of the security-based
swap execution facility;
(ii) Be audited in accordance with
standards of the Public Company
Accounting Oversight Board by a
registered public accounting firm that is
qualified and independent in
accordance with § 210.2–01 of this
chapter;
(iii) Include a report of the registered
public accounting firm that complies
with paragraphs (a) through (d) of
§ 210.2–02 of this chapter;
(iv) Include the accounting policies
and practices of the security-based swap
execution facility; and
(v) If the security-based swap
execution facility’s financial statements
contain consolidated information of the
security-based swap execution facility’s
subsidiaries, then the security-based
swap execution facility’s financial
statement must provide condensed
financial information, in a financial
statement footnote, as to the financial
position, changes in financial position,
and results of operations of the securitybased swap execution facility, as of the
same dates and for the same periods for
which audited consolidated financial
statements are required. Such financial
information need not be presented in
greater detail than is required for
condensed statements by § 210.10–
01(a)(2), (3), and (4) of this chapter.
Detailed footnote disclosure that would
normally be included with complete
financial statements may be omitted
with the exception of disclosures
regarding material contingencies, longterm obligations, and guarantees.
Descriptions of significant provisions of
the security-based swap execution
facility’s long-term obligations,
mandatory dividend or redemption
requirements of redeemable stocks, and
guarantees of the security-based swap
execution facility shall be provided
along with a five-year schedule of
maturities of debt. If the material
contingencies, long-term obligations,
redeemable stock requirements, and
guarantees of the security-based swap
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execution facility have been separately
disclosed in the consolidated
statements, then they need not be
repeated in this schedule.
(2) For the financial statements of a
security-based swap execution facility’s
affiliated entities (any subsidiary in
which the applicant has, directly or
indirectly, a 25% interest and for any
entity that has, directly or indirectly, a
25% interest in the applicant):
(i) Be a complete set of
unconsolidated financial statements (in
English) for the latest two fiscal years;
and
(ii) Include such footnotes and other
disclosures as are necessary to avoid
rendering the financial statements
misleading.
(3) All financial statements must be
provided in eXtensible Business
Reporting Language consistent with
§ 232.405 (a)(1), (a)(3), (b), (c), (d), and
(e) of this chapter; and
(4) If the financial report required by
§ 242.823(e) is submitted to the
Commission on Form SB SEF
(referenced in § 249.1700 of this
chapter) pursuant to § 242.802(f) at the
same time that the Chief Compliance
Officer submits the annual compliance
report required by § 242.823(c) and the
Chief Compliance Officer represents in
the annual compliance report that the
financial report has been submitted on
Form SB SEF pursuant to § 242.802(f),
the Chief Compliance Officer need not
also submit the financial report as part
of the annual compliance report.
(f) Reports filed pursuant to
paragraphs (c) and (e) of this section
shall be filed within 60 days after the
end of the fiscal year covered by such
reports.
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
7. The general authority citation for
Part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; and 18 U.S.C. 1350 unless otherwise
noted.
jdjones on DSKHWCL6B1PROD with PROPOSALS2
Subpart O—[Removed and reserved]
8. Remove and reserve Subpart O to
Part 249.
9. Add Subpart R (consisting of
§ 249.1700) to Part 249 to read as
follows:
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Subpart R—Forms for Security-Based
Swap Execution Facilities
§ 249.1700 Form SB SEF, form for
application for registration as a securitybased swap execution facility and for
amendments to the registration form of a
registered security-based swap execution
facility.
Note: Form SB SEF does not appear in the
Code of Federal Regulations.
FORM SB SEF
APPLICATION FOR, AND
AMENDMENTS TO APPLICATION
FOR, REGISTRATION AS A SECURITYBASED SWAP EXECUTION FACILITY
FORM SB SEF INSTRUCTIONS
A. GENERAL INSTRUCTIONS
1. Form SB SEF (referenced in 17 CFR
249.1700) is the form for the
application for, and amendment to
application for, registration as a
security-based swap execution
facility (‘‘SB SEF’’) pursuant to
Section 3D of the Securities
Exchange Act of 1934 (15 U.S.C.
78c–4) (‘‘Exchange Act’’) and the
rules of Regulation SB SEF
thereunder.
2. UPDATING—An applicant or
registered SB SEF must file
amendments to its Form SB SEF in
accordance with 17 CFR 242.802
and 804, as applicable.
3. CONTACT EMPLOYEE—The
individual listed on the Execution
Page (Page 1) of this Form SB SEF
as the contact employee must be
authorized to receive all contact
information, communications, and
mailings, and is responsible for
disseminating such information
within the applicant’s organization.
4. FORMAT
• Attach an Execution Page (Page 1)
with original manual signatures.
• Please type all information.
• Use only the current version of this
Form SB SEF or a reproduction.
5. If the information called for by any
Exhibit is available in printed form,
the printed material may be filed,
provided it does not exceed 81⁄2 x
11 inches in size.
6. If any Exhibit required is
inapplicable, a statement to that
effect shall be furnished in lieu of
such Exhibit.
7. A SB SEF that is filing this Form SB
SEF as an application may not
satisfy the requirements to provide
certain information by means of an
Internet web page. However, all
materials must be filed with the
Securities and Exchange
Commission (‘‘SEC’’ or
PO 00000
Frm 00120
Fmt 4701
Sfmt 4702
‘‘Commission’’) electronically,
unless the Commission requests
that the materials be filed in paper.
8. WHERE TO FILE AND NUMBER OF
COPIES—Submit one original and
two copies of this Form SB SEF to:
SEC, Division of Trading and
Markets, Office of Market
Supervision, 100 F Street, N.E.,
Washington, DC 20549–7010.
9. PAPERWORK REDUCTION ACT
DISCLOSURE
• This Form SB SEF requires an
applicant seeking to register as a SB
SEF to provide the Commission
with certain information regarding
the operation of the SB SEF.
• §§ 242.802 and 242.804 also require
registered SB SEFs to update certain
information on this Form SB SEF
on a periodic basis and the entire
Form SB SEF annually.
• An agency may not conduct or
sponsor, and a person is not
required to respond to, a collection
of information unless it displays a
currently valid control number.
Sections 3(a)(77), 3C(h), 3D(a),
3D(d), 3D(e), 3D(f) and 23(a) of the
Exchange Act authorize the
Commission to collect information
on this Form SB SEF from SB SEFs.
See 15 U.S.C. §§ 78c(a)(77), 78e,
78c–4(h), 78c–4(a), 78c–4(d), 78c–
4(e), 78c–4(f) and 78w(a).
• Any member of the public may
direct to the Commission any
comments concerning the accuracy
of the burden estimate on the facing
page of this Form SB SEF and any
suggestions for reducing this
burden.
• This Form SB SEF is designed to
enable the Commission to
determine whether a SB SEF
applying for registration is in
compliance with the provisions of
Section 3D of the Exchange Act (15
U.S.C. 78c–4) and the rules under
Regulation SB SEF thereunder.
• It is estimated that a SB SEF will
spend approximately 694 hours and
$523,000 completing the initial
application on Form SB SEF
pursuant to 17 CFR 242.801. It is
estimated that each SB SEF
controlled by another person and
each non-resident SB SEF will
spend approximately an additional
1 hour and $900 to complete
Exhibit P to the initial application
on this Form SB SEF. It is also
estimated that each SB SEF will
spend approximately 25 hours to
prepare each periodic amendment
to its Form SB SEF pursuant to 17
CFR 242.802(a) and (b) and
approximately 50 hours to prepare
each annual update to its Form SB
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SEF pursuant to 17 CFR 242.802(f).
It is estimated that each SB SEF
controlled by another person and
each non-resident SB SEF will
spend approximately 1 hour and
$900 to prepare each amendment to
its Form SB SEF pursuant to 17 CFR
242.802(c) and (d), respectively.
• It is mandatory that an applicant
seeking to register as a SB SEF file
this Form SB SEF with the
Commission. It is also mandatory
that registered SB SEFs file
amendments to this Form SB SEF
under 17 CFR 242.802 and 804.
• No assurance of confidentiality is
given by the Commission with
respect to the responses made in
this Form SB SEF. The public has
access to the information contained
in this Form SB SEF.
• This collection of information has
been reviewed by the Office of
Management and Budget (‘‘OMB’’)
in accordance with the clearance
requirements of 44 U.S.C. § 3507.
The applicable Privacy Act system
of records is SEC–2 and the routine
uses of the records are set forth at
40 FR 39255 (August 27, 1975) and
41 FR 5318 (February 5, 1976).
jdjones on DSKHWCL6B1PROD with PROPOSALS2
FORM SB SEF INSTRUCTIONS
B. EXPLANATION OF TERMS
APPLICANT—The entity or
organization filing an application for
registration as a security-based swap
execution facility, or amending any
such application, on this Form SB
SEF.
AFFILIATE—Shall have the same
meaning as set forth in 17 CFR
242.800.
BOARD—Shall have the same meaning
as set forth in 17 CFR 242.800.
CONTROL—Shall have the same
meaning as set forth in 17 CFR
242.800.
EXCHANGE ACT—The Securities
Exchange Act of 1934 (15 U.S.C. 78a
et seq.).
NON-RESIDENT PERSON—Shall have
the same meaning as set forth in 17
CFR 242.800.
PARTICIPANT—Shall have the same
meaning as set forth in 17 CFR
242.800.
PERSON—Shall have the same meaning
as set forth in section 3(a)(9) of the
Exchange Act (15 U.S.C. 78c(a)(9)).
PERSON ASSOCIATED WITH A
PARTICIPANT—Shall have the same
meaning as set forth in 17 CFR
242.800.
RELATED PERSON—Shall have the
same meaning as set forth in 17 CFR
242.800.
SECURITY-BASED SWAP—Shall have
the same meaning as set forth in
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Jkt 223001
section 3(a)(68) of the Exchange Act
(15 U.S.C. 78c(a)(68)) or any rules or
regulations thereunder.
SECURITY-BASED SWAP DEALER—
Shall have the same meaning as set
forth in section 3(a)(71) of the
Exchange Act (15 U.S.C. 78c(a)(71)) or
any rules or regulations thereunder.
SECURITY-BASED SWAP EXECUTION
FACILITY—Shall have the same
meaning as set forth in section
3(a)(77) of the Exchange Act (15
U.S.C. 78c(a)(77)) or any rules or
regulations thereunder.
REGISTERED SECURITY-BASED
SWAP EXECUTION FACILITY—
Shall mean any security-based swap
execution facility registered pursuant
to Section 3D(a) of the Exchange Act
(15 U.S.C. 78c–4(a)) and the rules of
Regulation SB SEF thereunder.
FORM SB SEF
Execution Page
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, DC 20549
APPLICATION FOR, AND
AMENDMENTS TO APPLICATION
FOR, REGISTRATION AS A
SECURITY–BASED SWAP EXECUTION
FACILITY
WARNING: Failure to keep this form
current and to file accurate
supplementary information on a
timely basis, or the failure to keep
accurate books and records or
otherwise to comply with the
provisions of law applying to the
conduct of the applicant, would
violate the federal securities laws and
may result in disciplinary,
administrative, or criminal action.
INTENTIONAL MISSTATEMENTS OR
OMISSIONS OF FACTS MAY
CONSTITUTE CRIMINAL VIOLATIONS
lAPPLICATION FOR REGISTRATION
l AMENDMENT
If this is an APPLICATION, indicate if
the applicant requests consideration
for temporary registration pursuant to
Rule 801(c) of Regulation SB SEF
under the Exchange Act:
llYES
llNO
If this is an AMENDMENT to an
application, or to an effective
registration (including an annual
amendment), list all items that are
amended:
llllllllllllllllll
l
llllllllllllllllll
l
1. State the name of the applicant: ll
llllllllllllllllll
l
2. Provide the applicant’s primary street
address (Do not use a P.O. Box):
PO 00000
Frm 00121
Fmt 4701
Sfmt 4702
11067
llllllllllllllllll
l
(Number and Street)
llllllllllllllllll
l
(City) (State) (Zip Code)
3. Provide the applicant’s mailing
address (if different):
llllllllllllllllll
l
(Number and Street)
llllllllllllllllll
l
(City) (State) (Zip Code)
4. Provide the applicant’s business
telephone and facsimile number:
llllllllllllllllll
l
(Telephone) (Facsimile)
5. Provide the name, title, and telephone
number of a contact employee:
llllllllllllllllll
l
(Name) (Title) (Telephone)
6. Provide the name and address of
counsel for the applicant:
llllllllllllllllll
l
(Name)
llllllllllllllllll
l
(Number and Street)
llllllllllllllllll
l
(City) (State) (Zip Code)
7. Provide the date applicant’s fiscal
year ends:
llllllllllllllllll
l
8. Indicate legal status of applicant:
l Corporation l Sole Proprietorship l Partnership l Limited
Liability Company l Other
(specify):
If other than a sole proprietor,
indicate the date and place where the
applicant obtained its legal status (e.g.
state where incorporated, place where
partnership agreement was filed or
where the applicant entity was formed),
and the statute under which the
applicant was organized:
llllllllllllllllll
l
(Date) (MM/DD/YYYY)
llllllllllllllllll
l
State/Country of formation:
llllllllllllllllll
l
(Statute under which the applicant was
organized)
9. Applicant understands and consents
that any notice or service of
process, pleadings, or other
documents in connection with any
action or proceeding against the
applicant may be effectuated by
certified mail to the officer
specified or person named below at
the U.S. address given. Such officer
or person cannot be a Commission
member, official or employee.
llllllllllllllllll
l
(Name of Person or, if the Applicant is
a Corporation, Title of Officer)
llllllllllllllllll
l
(Name of the Applicant or Applicable
Entity)
llllllllllllllllll
l
(Number and Street)
E:\FR\FM\28FEP2.SGM
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llllllllllllllllll
l By:
(Signature)
(City) (State) (Zip Code)
l
llllllllllllllllll
l llllllllllllllllll
(Printed Name and Title)
(Telephone)
Subscribed and sworn before me this
EXECUTION: The undersigned, being
llllllllllllllllll
l
first duly sworn, deposes and says
that he/she has executed this form on day of
llllllllllllllllll,
behalf of, and with the authority of,
(Month)
said applicant. The undersigned and
llllllllllllllllll
l
applicant represent that the
(Year)
information and statements contained
herein, including exhibits, schedules, by
llllllllllllllllll
l
or other documents attached hereto,
(Notary Public)
and other information filed herewith,
all of which are made a part hereof,
My Commission expires lllllll
are current, true, and complete. It is
County of lllllllllllll
understood that all required items and State of
llllllllllllll
exhibits are considered integral parts
llllllllllllllllll
l
of this form and that the submission
This page must always be completed
of any amendment represents that all
in full with original, manual
unamended items and Exhibits
signature and notarization. Affix
remain true, current, and complete as
notary stamp or seal where
previously filed. The applicant and
applicable.
the undersigned certify that the
FORM SB SEF
applicant is currently in compliance
with, and is currently operating its
UNITED STATES SECURITIES AND
business in a manner consistent with, EXCHANGE COMMISSION
the Exchange Act and all rules and
WASHINGTON, DC 20549
regulations thereunder. The applicant
APPLICATION FOR, AND
and the undersigned certify that the
applicant is so organized, and has the AMENDMENTS TO APPLICATION
FOR, REGISTRATION AS A
capacity, to assure the prompt,
SECURITY–BASED SWAP EXECUTION
accurate, and reliable performance of
its functions as a security-based swap FACILITY PURSUANT TO SECTION
3D OF THE EXCHANGE ACT
execution facility. The applicant and
the undersigned certify that the
DO NOT WRITE BELOW THIS LINE—
applicant has the capacity to fulfill its FOR OFFICIAL USE ONLY
obligations under all international
EXHIBITS
information-sharing agreements to
File all Exhibits with an application for
which it is a party. If the applicant is
registration as a security-based swap
controlled by another person, the
execution facility pursuant to Section
applicant and the undersigned certify
3D of the Exchange Act and Rule 801
that any person that controls the
of Regulation SB SEF thereunder, or
applicant has consented to and can, as
with amendments to such
a matter of law, (i) provide the
applications pursuant to Rule 802 and
Commission with prompt access to its
804 of Regulation SB SEF. For each
books and records, to the extent such
exhibit, include the name of the
books and records are related to the
applicant, the date upon which the
activities of the security-based swap
exhibit was filed, and the date as of
execution facility; and (ii) submit to
which the information is accurate (if
onsite inspection and examination by
different from the date of the filing).
representatives of the Commission
If any Exhibit required is
with respect to the activities of the
inapplicable, a statement to that effect
security-based swap execution
shall be furnished in lieu of such
facility. If the applicant is a nonExhibit.
resident person, the applicant and the
undersigned further represent that the Exhibit A A copy of the governing
documents of the applicant,
applicant can, as a matter of law, (i)
including but not limited to, a
provide the Commission with prompt
corporate charter, articles of
access to the applicant’s books and
incorporation or association,
records and (ii) submit to an onsite
limited liability company
inspection and examination by
agreement, or partnership
representatives of the Commission.
agreement, with all subsequent
Date:
amendments, and by-laws or
llllllllllllllllll
l
corresponding rules or instruments,
(MM/DD/YY)
whatever the name, of the
llllllllllllllllll
l
applicant.
(Name of applicant)
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Exhibit B A copy of all written rulings,
settled practices having the effect of
rules, stated policies, and
interpretations of the Board or other
committee of the applicant in
respect of any provisions of the
governing documents, rules, or
trading practices of the applicant
which are not included in Exhibit
A.
Exhibit C A list of the officers and
directors, or persons performing
similar functions who presently
hold or have held their offices or
positions during the previous year,
and a list of all standing committees
and their members (including the
nominating committee, regulatory
oversight committee, and all
committees that have the authority
to act on behalf of the Board or the
nominating committee), indicating
the following for each:
1. Name;
2. Title;
3. Dates of commencement and
termination of term of office or
position;
4. Type of business in which each is
primarily engaged (e.g., securitybased swap dealer, major securitybased swap participant, inter-dealer
broker, end-user, etc.);
5. If a director, whether such person
qualifies as an ‘‘independent
director’’ pursuant to Rule 800 of
Regulation SB SEF; and
6. If a director, whether such person
is a member of any standing
committees, committees that have
the authority to act on behalf of the
Board, or the nominating
committee.
Exhibit D A chart or charts illustrating
fully the internal organizational
structure of the applicant. The chart
or charts should indicate the
internal divisions or departments;
the responsibilities of each such
division or department; and the
reporting structure of each division
or department, including its
oversight by committees (or their
equivalent).
Exhibit E A list of all persons that have
either, direct or indirect, ownership
or voting interest in the security
based swap execution facility that
equals or exceeds 5% and a list of
all related persons of such persons;
provided that a related person
(1) has ownership or voting interest
in the security-based swap
execution facility; or (2) is a
participant. For each of the persons
and related persons listed in this
Exhibit E, please provide the
following:
1. Full legal name;
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2. Title or legal status;
3. Whether such person or related
person is a participant;
4. Date that title, legal status, or
participation in a security-based
swap execution facility was
acquired or commenced;
5. Percentage of ownership interest
held;
6. Type of ownership interest held,
including whether the ownership
interest is ‘‘beneficial ownership’’ as
defined in Rule 800 of Regulation
SB SEF or is entitled to vote;
7. Percentage of voting interest held;
and
8. Type of voting interest held.
Exhibit F For the latest two fiscal years
of the applicant, financial
statements that shall: (1) Be a
complete set of financial statements
of the applicant that are prepared in
accordance with U.S. generally
accepted accounting principles for
the most recent fiscal year of the
applicant; (2) be audited in
accordance with standards of the
Public Company Accounting
Oversight Board by a registered
public accounting firm that is
qualified and independent in
accordance with Rule 2–01 of
Regulation S–X (17 CFR 210.2–01);
(3) include a report of the registered
public accounting firm that
complies with paragraphs (a)
through (d) of Rule 2–02 of
Regulation S–X (17 CFR 210.2–02);
(4) include the accounting policies
and practices of the applicant; (4) if
the applicant’s financial statements
contain consolidated information of
a subsidiary of the applicant, then
the applicant’s financial statement
must provide condensed financial
information, in a financial
statement footnote, as to the
financial position, changes in
financial position, and results of
operations of the applicant, as of
the same dates and for the same
periods for which audited
consolidated financial statements
are required. Such financial
information need not be presented
in greater detail than is required for
condensed statements by Rules 10–
01(a)(2), (3), and (4) of Regulation
S–X (17 CFR 210.10–01). Detailed
footnote disclosure that would
normally be included with
complete financial statements may
be omitted with the exception of
disclosures regarding material
contingencies, long-term
obligations, and guarantees.
Descriptions of significant
provisions of the applicant’s longterm obligations, mandatory
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18:03 Feb 25, 2011
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dividend or redemption
requirements of redeemable stocks,
and guarantees of the applicant
shall be provided along with a fiveyear schedule of maturities of debt.
If the material contingencies, longterm obligations, redeemable stock
requirements, and guarantees of the
applicant have been separately
disclosed in the consolidated
statements, then they need not be
repeated in this schedule; and (5) be
provided in eXtensible Business
Reporting Language consistent with
Rules 405 (a)(1), (a)(3), (b), (c), (d),
and (e) of Regulation S–T (17 CFR
232.11).
Exhibit G An executed or executable
copy of any agreements or contracts
entered into or to be entered into by
the applicant, or a subsidiary or an
affiliate of the applicant, including
partnership or limited liability
company, third-party regulatory
service, or other agreements relating
to the operation of an electronic
trading system to be used to effect
transactions on the security-based
swap execution facility (‘‘System’’),
that enable or empower the
applicant to comply with Section
3D of the Exchange Act (15 U.S.C.
78c–4).
Exhibit H For each of the applicant’s
affiliated entities (every subsidiary
in which the applicant has, directly
or indirectly, a 25% interest and for
every entity that has, directly or
indirectly, a 25% interest in the
applicant) provide a complete set of
unconsolidated financial statements
(in English) for the latest two fiscal
years and include such footnotes
and other disclosures as are
necessary to avoid rendering the
financial statements misleading.
The financial statements shall be
provided in eXtensible Business
Reporting Language consistent with
Rules 405 (a)(1), (a)(3), (b), (c), (d),
and (e) of Regulation S–T (17 CFR
232.11). In addition to the
foregoing, for all other affiliates of
the applicant not listed in the
paragraph above, the information
required by the paragraph above
shall be made available upon
request.
Exhibit I Describe the manner of
operation of the System. This
description should include the
following:
1. A detailed description of the
manner in which the System
satisfies the definition of ‘‘securitybased swap execution facility’’ in
Section 3(a)(77) of the Exchange Act
and any Commission rules,
interpretations, or guidelines
PO 00000
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Sfmt 4702
11069
regarding such definition, including
a description of how the System
displays all orders, quotes, requests
for quote, responses, and trades in
an electronic or other form, and the
timelines in which the System does
so; how orders interact on the
System, the ability of market
participants to see and transact with
orders, quotes, requests for quotes,
and responses; and an explanation
of the trade-matching algorithm if it
is based on order priority factors
other than price and time;
2. The means of access to the System,
including any limitations on access;
3. Procedures governing entry and
display of quotations and orders in
the System;
4. Procedures governing the
execution, reporting, clearance and
settlement of transactions in
connection with the System;
5. Proposed fees;
6. Procedures for ensuring compliance
with System usage guidelines and
rules;
7. The hours of operation of the
System and the date on which the
applicant intends to commence
operation of the System;
8. A copy of the users’ manual or
equivalent document;
9. If the applicant proposes to hold
funds or securities on a regular
basis, describe the controls that will
be implemented to ensure safety of
those funds or securities; and
10. The name of any entity, other than
the security-based swap execution
facility, that will be involved in
operation of the System, including
the execution, trading, clearing and
settling of transactions on behalf of
the security-based swap execution
facility, and a description of the
role and responsibilities of each
entity.
Exhibit J A complete set of all forms
pertaining to:
1. Application for participation or use
of the security-based swap
execution facility.
2. Application for approval as a
person associated with a participant
or other user of the security-based
swap execution facility.
3. Any other similar materials.
Provide a table of contents listing the
forms included in this Exhibit J.
Exhibit K A complete set of all forms of
financial statements, reports, or
questionnaires required of
participants or any other users of
the security-based swap execution
facility relating to financial
responsibility or minimum capital
requirements for such participants
or any other users. Provide a table
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of contents listing the forms
included in this Exhibit K.
Exhibit L Describe the applicant’s
criteria for participation in or use of
the security-based swap execution
facility. Provide a list of all grants
of access (including, for all
participants, the reasons for
granting such access) and all
denials or limitations of access
(including, for each applicant or
participant, the reasons for denying
or limiting access). Describe
conditions under which
participants or persons associated
with participants may be subject to
suspension or termination with
regard to access to the securitybased swap execution facility.
Describe any procedures that will
be involved in the suspension or
termination of a participant or
person associated with a
participant. Provide a list of all
disciplinary actions taken.
Exhibit M Provide an alphabetical list of
all participants or other users of the
security-based swap execution
facility, including the following
information:
1. Name;
2. Date of acceptance as a participant
or other user;
3. Principal business address and
telephone number;
4. If participant or other user is an
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individual, the name of the entity
with which such individual is
associated and the relationship of
such individual to the entity (e.g.,
partner, officer, director, employee,
etc.);
5. Describe the type of activities
primarily engaged in by the
participant or other user (e.g.,
security-based swap dealer, major
security-based swap participant,
inter-dealer broker, other market
maker, non-broker dealer, nonsecurity-based swap dealer,
commercial end-user, inactive or
other functions). A person shall be
‘‘primarily engaged’’ in an activity
or function for purposes of this item
when that activity or function is the
one in which that person is engaged
for the majority of their time. When
more than one type of person at an
entity engages in any of the types of
activities or functions enumerated
in this item, identify each and state
the number of participants, or other
users in each; and
6. The class of participation or other
access.
Exhibit N Provide a brief description of
the criteria used to determine what
securities may be traded on the
security-based swap execution
facility.
Exhibit O Provide a schedule of the
security-based swaps to be traded
PO 00000
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Sfmt 9990
on the security-based swap
execution facility, including for
each a description of the securitybased swap.
Exhibit P (1) If the applicant is
controlled by another person,
provide an opinion of counsel that
any person that controls the
applicant has consented to and can,
as a matter of law, (i) provide the
Commission with prompt access to
its books and records, to the extent
such books and records are related
to the activities of the securitybased swap execution facility; and
(ii) submit to onsite inspection and
examination by representatives of
the Commission with respect to the
activities of the security-based swap
execution facility.
(2) If the applicant is a non-resident
person, provide an opinion of
counsel that the applicant can, as a
matter of law, (i) provide the
Commission with prompt access to
the books and records of such
applicant and (ii) submit to onsite
inspection and examination by
representatives of the Commission.
By the Commission.
Dated: February 2, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–2696 Filed 2–25–11; 8:45 am]
BILLING CODE 8011–01–P
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Agencies
[Federal Register Volume 76, Number 39 (Monday, February 28, 2011)]
[Proposed Rules]
[Pages 10948-11070]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2696]
[[Page 10947]]
Vol. 76
Monday,
No. 39
February 28, 2011
Part II
Securities and Exchange Commission
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17 CFR Parts 240, 242, and 249
Registration and Regulation of Security-Based Swap Execution
Facilities; Proposed Rule
Federal Register / Vol. 76 , No. 39 / Monday, February 28, 2011 /
Proposed Rules
[[Page 10948]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240, 242, and 249
[Release No. 34-63825; File No. S7-06-11]
RIN 3235-AK93
Registration and Regulation of Security-Based Swap Execution
Facilities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; proposed interpretation.
-----------------------------------------------------------------------
SUMMARY: In accordance with Section 763 (``Section 763'') of Title VII
(``Title VII'') of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''), the Securities and
Exchange Commission (``SEC'' or ``Commission'') is proposing Regulation
SB SEF under the Securities Exchange Act of 1934 (``Exchange Act'')
that is designed to create a registration framework for security-based
swap execution facilities (``SB SEFs''); establish rules with respect
to the Dodd-Frank Act's requirement that a SB SEF must comply with the
fourteen enumerated core principles (``Core Principles'') and enforce
compliance with those principles; and implement a process for a SB SEF
to submit to the Commission proposed changes to the SB SEF's rules. The
Commission also is proposing an interpretation of the definition of
``security-based swap execution facility'' set forth in Section
3(a)(77) of the Exchange Act to provide guidance on the characteristics
of those systems or platforms that would satisfy the statutory
definition. In addition, the Commission is proposing to amend Rule 3a-1
under the Exchange Act to exempt a registered SB SEF from the Exchange
Act's definition of ``exchange'' and to add Rule 15a-12 under the
Exchange Act to exempt, subject to certain conditions, a registered SB
SEF from regulation as a broker pursuant to Section 15(b) of the
Exchange Act.
DATES: Comments should be submitted on or before April 4, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-06-11 on the subject line; or
Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F St., NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-06-11. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (https://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F St., NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Nancy J. Burke-Sanow, Assistant
Director, at (202) 551-5621; David Liu, Senior Special Counsel, at
(312) 353-6265; Constance Kiggins, Special Counsel, (202) 551-5701;
Molly Kim, Special Counsel, at (202) 551-5644; Leah Mesfin, Special
Counsel, at (202) 551-5655; Susie Cho, Special Counsel, at (202) 551-
5639; Michou Nguyen, Special Counsel, (202) 551-5634; Heidi Pilpel,
Special Counsel, (202) 551-5666; Steven Varholik, Special Counsel, at
(202) 551-5615; Sarah Schandler, Special Counsel, at (202) 551-7145;
and Iliana Lundblad, Attorney, at (202) 551-5871; Office of Market
Supervision, Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is proposing new Regulation
SB SEF under the Exchange Act governing the registration and regulation
of SB SEFs, an interpretation with respect to the definition of a SB
SEF and new Form SB SEF for applicants to register with the Commission
as SB SEFs. The Commission also is proposing certain exemptions to
facilitate the trading of security-based swaps (``SB swaps'') on SB
SEFs.
I. Introduction
On July 21, 2010, the President signed the Dodd-Frank Act into
law.\1\ The Dodd-Frank Act was enacted, among other things, to promote
the financial stability of the United States by improving
accountability and transparency of the nation's financial system.\2\
Title VII of the Dodd-Frank Act provides the Commission and the
Commodity Futures Trading Commission (``CFTC'') with the authority to
regulate over-the-counter (``OTC'') derivatives in light of the recent
financial crisis, which demonstrated the need for enhanced regulation
of the OTC derivatives market. The Dodd-Frank Act is intended to
strengthen the existing regulatory structure concerning, and to provide
the Commission and the CFTC with effective regulatory tools to oversee,
the OTC swaps markets, which have grown exponentially in recent years
and are capable of affecting significant sectors of the U.S. economy.
---------------------------------------------------------------------------
\1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act (Pub. L. 111-203, H.R. 4173).
\2\ See Public Law 111-203 Preamble.
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The Dodd-Frank Act provides that the CFTC will regulate ``swaps,''
the Commission will regulate ``security-based swaps,'' and the CFTC and
the Commission will jointly regulate ``mixed swaps.'' \3\ The Dodd-
Frank Act amends
[[Page 10949]]
the Exchange Act to require, among other things, the following with
respect to transactions in SB swaps regulated by the Commission: (1)
Transactions in SB swaps must be cleared through a clearing agency if
they are of a type that the Commission determines must be cleared,
unless an exemption from mandatory clearing applies; \4\ (2) if the SB
swap is subject to the clearing requirement, the transaction must be
executed on an exchange or on a SB SEF registered under Section 3D of
the Exchange Act or a SB SEF exempt from registration under Section
3D(e) of the Exchange Act, unless no SB SEF or exchange makes such SB
swap available for trading or the SB swap transaction is subject to the
clearing exception in Section 3C(g) of the Exchange Act; \5\ and (3)
transactions in SB swaps (whether cleared or uncleared) must be
reported to a registered security-based swap data repository (``SDR'')
or the Commission.\6\
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\3\ Section 712(d) of the Dodd-Frank Act provides that the
Commission and the CFTC, in consultation with the Board of Governors
of the Federal Reserve System (``Federal Reserve''), shall further
define the terms ``swap,'' ``security-based swap,'' ``swap dealer,''
``security-based swap dealer,'' ``major swap participant,'' ``major
security-based swap participant,'' ``eligible contract
participant,'' and ``security-based swap agreement.'' These terms
are defined in Sections 721 and 761 of the Dodd-Frank Act and, with
respect to the term ``eligible contract participant,'' in Section
1a(18) of the Commodity Exchange Act (``CEA''), 7 U.S.C. 1a(18), as
re-designated and amended by Section 721 of the Dodd-Frank Act.
Further, Section 721(c) of the Dodd-Frank Act requires the CFTC to
adopt a rule to further define the terms ``swap,'' ``swap dealer,''
``major swap participant,'' and ``eligible contract participant'' to
include transactions and entities that have been structured to evade
Title VII of the Dodd-Frank Act. Section 761(b) of the Dodd-Frank
Act provides that the Commission may adopt a rule to further define
the terms ``security-based swap,'' ``security-based swap dealer,''
``major security-based swap participant,'' and ``eligible contract
participant,'' with regard to security-based swaps, for the purpose
of including transactions and entities that have been structured to
evade Title VII of the Dodd-Frank Act. Finally, Section 712(a) of
the Dodd-Frank Act provides that the Commission and CFTC, after
consultation with the Federal Reserve, shall jointly prescribe
regulations regarding ``mixed swaps,'' as may be necessary to carry
out the purposes of Title VII. To assist the Commission and the CFTC
in further defining the terms specified above, and to prescribe
regulations regarding ``mixed swaps'' as may be necessary to carry
out the purposes of Title VII, the Commission and the CFTC have
sought comment from interested parties. See Securities Exchange Act
Release Nos. 63452 (December 7, 2010), 75 FR 80174 (December 21,
2010) (File No. S7-39-10) (proposed rulemaking regarding definitions
contained in Title VII of the Dodd-Frank Act relating to
participants). The Commission also will propose rules regarding
definitions contained in Title VII of the Dodd-Frank Act relating to
products in a separate proposed rulemaking. See also Securities
Exchange Act Release No. 62717 (August 13, 2010), 75 FR 51429
(August 20, 2010) (File No. S7-16-10) (advance joint notice of
proposed rulemaking regarding definitions contained in Title VII of
the Dodd-Frank Act).
\4\ See Public Law 111-203, Sec. 763(a) (adding Section
3C(a)(1) of the Exchange Act).
\5\ See Public Law 111-203, Sec. 763(a) (adding Section 3C(h)
of the Exchange Act). See also Public Law 111-203, Sec. 761(a)
(adding Section 3(a)(77) of the Exchange Act), defining the term
``security-based swap execution facility.'' The Dodd-Frank Act
amends the CEA to provide for a similar regulatory framework with
respect to transactions in swaps regulated by the CFTC.
\6\ See Public Law 111-203, Sec. 761(a)(75) (adding Section
3(a)(75) of the Exchange Act) (defining the term ``security-based
swap data repository''). The registration of an SDR and the
reporting of SB swaps are the subject of separate Commission
rulemakings. See Securities Exchange Act Release Nos. 63347
(November 19, 2010), 75 FR 77306 (December 10, 2010) (File No. S7-
35-10) (``SDR Release'') and 63346 (November 19, 2010), 75 FR 75208
(December 2, 2010) (File No. S7-34-10) (``Reporting and
Dissemination Release'').
---------------------------------------------------------------------------
II. Regulatory Framework of Security-Based Swap Execution Facilities
Currently, SB swaps trade in the OTC market, rather than on
regulated markets. Although some SB swaps have moved to centralized
clearing, prior to the enactment of the Dodd-Frank Act, centralized
clearing of SB swaps was not required. The current market for SB swaps
is opaque, with little, if any, pre-trade transparency (the ability of
market participants to see trading interest prior to a trade being
executed) or post-trade transparency (the ability of market
participants to see transaction information after a trade is executed).
A key goal of the Dodd-Frank Act is to bring trading of SB swaps onto
regulated markets,\7\ as reflected in the statutory requirement that,
subject to certain exceptions, any SB swap subject to mandatory
clearing must be traded on a SB SEF or an exchange, unless no SB SEF or
exchange makes such SB swap available for trading.
---------------------------------------------------------------------------
\7\ See Public Law 111-203, preamble.
---------------------------------------------------------------------------
Section 763 of the Dodd-Frank Act amends the Exchange Act by adding
various new statutory provisions to govern the regulation of SB
SEFs.\8\ Section 3C(h) of the Exchange Act specifies that transactions
in SB swaps that are subject to the clearing requirement of Section
3C(a)(1) of the Exchange Act must be executed on an exchange or on a SB
SEF registered with the Commission (or a SB SEF exempt from
registration), unless no exchange or SB SEF makes the SB swap available
to trade (referred to as the ``mandatory trade execution requirement'')
or the SB swap transaction is subject to the clearing exception in
Section 3C(g) of the Exchange Act (``end-user exception'').\9\ Further,
Section 3D(a)(1) of the Exchange Act states that no person may operate
a facility for the trading or processing of SB swaps, unless the
facility is registered as a SB SEF or as a national securities exchange
under that section.\10\ Under Section 3D(b) of the Exchange Act, a SB
SEF registered with the Commission may make SB swaps available for
trading and facilitate trade processing of SB swaps.\11\ Section 3D(c)
of the Exchange Act requires a national securities exchange, to the
extent it also operates a SB SEF and uses the same electronic trade
execution system for listing and executing trades in SB swaps, to
identify whether electronic trading of SB swaps is taking place on or
through the exchange or the SB SEF.\12\
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\8\ See Public Law 111-203, Sec. 763 (adding Sections 3C and 3D
of the Exchange Act).
\9\ See Public Law 111-203, Sec. 763 (adding Section 3C(h) of
the Exchange Act).
\10\ See Public Law 111-203, Sec. 763(a) (adding Section
3D(a)(1) of the Exchange Act). The Commission views this requirement
as applying only to facilities that meet the definition of
``security-based swap execution facility'' in Section 3(a)(77) under
the Exchange Act. SB swaps that are not subject to the mandatory
trade execution requirement would not have to be traded on a
registered SB SEF and could be traded in the over-the-counter
(``OTC'') market for SB swaps.
\11\ See Public Law 111-203, Sec. 763(c) (adding Section 3D(b)
of the Exchange Act).
\12\ See Public Law 111-203, Sec. 763(c) (adding Section 3D(c)
of the Exchange Act).
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Section 3D(d) of the Exchange Act specifies that to be registered
and maintain registration, a SB SEF must comply with fourteen Core
Principles enumerated therein and any requirement that the Commission
may impose by rule or regulation.\13\ The Core Principles applicable to
SB SEFs are captioned: (1) Compliance with Core Principles; (2)
Compliance with Rules; (3) Security-Based Swaps Not Readily Susceptible
to Manipulation; (4) Monitoring of Trading and Trade Processing; (5)
Ability to Obtain Information; (6) Financial Integrity of Transactions;
(7) Emergency Authority; (8) Timely Publication of Trading Information;
(9) Recordkeeping and Reporting; (10) Antitrust Considerations; (11)
Conflicts of Interest; (12) Financial Resources; (13) System
Safeguards; and (14) Designation of Chief Compliance Officer.\14\ As a
result, a registered SB SEF would have certain regulatory obligations
with respect to overseeing its market and the participants that trade
on its facility. Further, Section 3D(f) of the Exchange Act states that
the Commission shall prescribe rules governing the regulation of SB
SEFs.\15\ Finally, Section 3(a)(77) of the Exchange Act defines a SB
SEF as a trading system or platform in which multiple participants have
the ability to execute or trade SB swaps by accepting bids and offers
made by multiple participants in the facility or system, through any
means of interstate commerce, including any trading facility, that: (1)
Facilitates the execution of SB swaps between persons; and (2) is not a
national securities exchange.\16\
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\13\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(1)(A) of the Exchange Act).
\14\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(1)-(14) of the Exchange Act).
\15\ See Public Law 111-203, Sec. 763(c) (adding Section 3D(f)
of the Exchange Act).
\16\ See Public Law 111-203, Sec. 761(a) (adding Section
3(a)(77) of the Exchange Act).
---------------------------------------------------------------------------
As regulated markets for the trading of SB swaps, SB SEFs, as well
as exchanges that post or trade SB swaps (``SBS exchanges''), are
intended to play an important role in enhancing the transparency and
oversight of the market for SB swaps. SB SEFs should help further the
statutory objective of greater transparency and a more competitive
environment for the trading of SB swaps by providing a venue for
multiple parties to execute trades in SB swaps and also by serving as a
conduit for information regarding trading interest in SB swaps. As a
result of the Dodd-Frank Act's provisions relating to SB SEFs, the
Commission would have access to information on the trading of SB swaps
that occurs on SB SEFs and information regarding trading by their
participants. In addition, because SB SEFs would have certain
regulatory obligations arising from their Core
[[Page 10950]]
Principles, such as monitoring trading, assuring the ability to obtain
information, and establishing and enforcing rules and procedures to
ensure the financial integrity of SB swaps entered on or though the SB
SEF, these facilities can play an important role in helping to oversee
the market for SB swaps on an ongoing basis and allowing regulators to
quickly assess information regarding the potential for systemic risk
across trading venues.
The Commission is mindful that any rules that the Commission may
adopt regarding the regulation of SB SEFs could impact the incentives
for existing or prospective platforms for the trading of SB swaps to
enter or withdraw from this market. On the other hand, the rules to be
adopted by the Commission for the trading of SB swaps should be
sufficient to fulfill the objectives of the Dodd-Frank Act to promote
financial stability and transparency. The Commission also is mindful
that, both over time and as a result of Commission proposals to
implement the Dodd-Frank Act, the further development of the SB swap
market may alter some of the specific calculus for future regulation of
SB SEFs.
The Commission notes that the CFTC is proposing rules relating to
swap execution facilities (``SEFs'') as required under Section 733 of
the Dodd-Frank Act.\17\ Because there are differences between the
markets and products that the Commission and the CFTC currently
regulate, the approach that each agency may take regarding the
regulation of SB SEFs and SEFs, respectively, also may differ in
various respects. The Commission recognizes that commenters may respond
to the Commission's proposals by referring to the CFTC's proposals and
welcomes commenters' views and suggestions on the impact of any
differences between the Commission and CFTC approaches to the
regulation of SB SEFS and SEFs. The Commission is particularly
interested in whether its proposed rulemaking would result in any
duplicative or inconsistent efforts on the part of market participants
subject to both regulatory regimes or would result in gaps between
those regimes.
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\17\ See Public Law 111-203, Sec. 733 (adding Section 5h of the
CEA). See also 76 FR 1214 (January 7, 2011) (``Notice of proposed
SEF rulemaking by the CFTC'').
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Further, the Commission is aware that regulators in other countries
are considering reform of their swaps and derivatives markets and are
interested in achieving a consistent approach to swaps regulation
between the United States, Europe and other jurisdictions to mitigate
the risk of regulatory arbitrage.\18\ Although the Commission must be
guided by the requirements of the Dodd-Frank Act in crafting proposed
rules applicable to markets that trade SB swaps and the participants in
those markets, the Commission recognizes that the particular rules that
it may adopt under the Dodd-Frank Act may impact the incentives of
market participants with respect to where they choose to engage in the
trading of SB swaps.
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\18\ See, e.g., Committee of European Securities Regulators
(``CESR''), CESR Technical Advice to the European Commission in the
context of the MiFID Review and Responses to the European Commission
for Additional Information, dated October 13, 2010, available at
https://www.cesr-eu.org/index.php?page=contenu_groups&id=61&docmore=1.
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Commenters are urged to consider generally the role that regulation
may play in fostering or limiting the development of the market for SB
swaps (or, vice versa, the role that market developments may play in
changing the nature and implications of regulation) and specifically to
focus on this issue with respect to the proposals to establish a
framework for the trading of SB swaps. In addition, commenters are
urged to consider the effect of the Commission's proposals relating to
SB SEFs on the global swaps and derivatives markets and to offer
specific comments regarding how the proposals compare with the existing
or proposed regulations of other jurisdictions.
III. The Definition of Security-Based Swap Execution Facilities
Since the enactment of the Dodd-Frank Act in July 2010, the
Commission has engaged in a number of outreach programs relating to the
legislation's rulemaking mandates, including trading of SB swaps on
regulated markets.\19\ On September 15, 2010, the staff of the
Commission and of the CFTC conducted a joint roundtable to discuss
issues related to the formation and regulation of SEFs and SB SEFs
(``Roundtable'').\20\ Topics discussed at the Roundtable included the
scope of the definition of a SEF and SB SEF; registration of these
facilities; products that would trade on a SEF and SB SEF; block
trades; access to SEFs and SB SEFs; and cross-market issues.\21\ The
purpose of the Roundtable was to provide a forum for the discussion of
these issues and to assist SEC and CFTC staff as they developed
proposed rules to meet the Dodd-Frank Act's mandate to bring the
trading of swaps and SB swaps subject to the mandatory clearing
requirement onto organized markets. Panelists at the Roundtable
provided comments on their experience with the current market structure
for the trading of swaps and SB swaps and offered their views and
suggestions on ways that that structure could change as a result of the
legislation. Pursuant to the Commission's outreach, a range of
individuals and entities, including swap dealers, brokers, end-users,
academics and others, have expressed their views on a variety of
topics, such as the scope of activities or the nature of platforms that
should fall within the statutory definition of ``security-based swap
execution facility.'' \22\
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\19\ See, e.g., Implementing the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Transparency, Public Input on SEC
Regulatory Initiatives under the Dodd-Frank Act Title VII--Wall
Street Transparency and Accountability, Mandatory Exchange Trading
and Swap Execution Facilities, available at https://www.sec.gov/spotlight/dodd-frank.shtml.
\20\ See Securities Exchange Release No. 62864 (September 8,
2010), 75 FR 55574 (September 13, 2010) (File No. 4-612). Webcast
available at https://www.sec.gov/news/openmeetings/2010/jac091510.shtml.
\21\ See Press Release issued by the Commission on September 8,
2010, ``SEC, CFTC To Host Joint September Roundtables On Swap and
Security-Based Swap Matters'' (File No. 2010-166), available at
https://www.sec.gov/news/press/2010/2010-166.htm.
\22\ See, e.g., https://www.sec.gov/spotlight/dodd-frank.shtml.
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Many letters from market participants advocated for a flexible
interpretation of the statutory definition of SB SEF.\23\ In their
letters, they argued that the definition of SB SEF should permit many
different types of existing and new trading and execution
platforms.\24\ Certain market participants noted that the SB swap
market is more customized and illiquid than the cash equities market
and argued that a broad range of trading models would be necessary to
address the SB swap market's unique characteristics and to allow this
market to develop properly.\25\
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\23\ See, e.g., letter from Ben Macdonald, Global Head Fixed
Income, Bloomberg LP, to Commission, dated September 22, 2010
(``Bloomberg Letter''), at 2; letter from Richard H. Baker,
President and CEO, Managed Funds Association, to Elizabeth M.
Murphy, Secretary, Commission, dated September 22, 2010 (``MFA
Letter''), at 16; letter from Ernest C. Goodrich, Jr., Managing
Director--Legal Department, and Marcelo Riffaud, Managing Director--
Legal Department, Deutsche Bank AG, to David A. Stawick, Secretary,
CFTC, and Elizabeth M. Murphy, Secretary, Commission, dated October
6, 2010 (``Deutsche Bank Letter''), at 5-6 and 8-9; and letter from
Larry Tabb, CEO and Founder, Andy Nybo, Head of Derivatives, and
Kevin C. McPartland, Senior Analyst, TABB Group, to Gary Gensler,
Chairman, CFTC, and Mary Schapiro, Chairman, Commission, dated
August 23, 2010 (``TABB Letter''), at 2.
\24\ See, e.g., Bloomberg Letter, id., at 2; MFA Letter, id., at
16; and Deutsche Bank Letter, id., at 7.
\25\ See, e.g., Bloomberg Letter, supra note 23, at 2, and
Deutsche Bank Letter, supra note 23, at 6-7. See also infra, Section
III.B for a discussion of the Commission's interpretation of the
definition of SB SEF.
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[[Page 10951]]
Although many commenters who expressed a view regarding the
definition of SB SEF favored allowing multiple platforms,\26\ some
commenters expressed concern about some types of platforms that
potentially could meet the definition of SB SEF. One commenter believed
that allowing multiple request for quote (``RFQ'') platforms,\27\
without a price mechanism that aggregates prices across platforms, to
meet the definition of SB SEF, could lead to a fragmented market, which
could discourage competition.\28\ Another commenter suggested that
permitting an RFQ platform to be treated as a SB SEF could be viewed as
preserving the status quo of a dealer-dominated market and believed
that the Dodd-Frank Act envisioned that SB swaps would be traded on a
facility akin to a limit order book platform.\29\
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\26\ See supra note 23 and accompanying text.
\27\ In referring to a RFQ platform, the Commission means a
trading platform where a customer who wishes to execute a SB swap
disseminates a request for quote to one or more dealers and one or
more of those dealers respond to the request with an executable
quote.
\28\ See, e.g., Commentary by S. ``Vish'' Viswanathan,
Professor, Fuqua School of Business, Duke University, at the
Roundtable. Webcast available at https://www.sec.gov/news/openmeetings/2010/jac091510.shtml.
\29\ See Commentary by Heather Slavkin, Senior Legal Policy
Advisor for the Office of Investment, AFL-CIO, at the Roundtable.
Webcast available at https://www.sec.gov/news/openmeetings/2010/jac091510.shtml. See also infra, Section III.B discussing the
Commission's interpretation taking into account concerns raised by
commenters.
---------------------------------------------------------------------------
The Commission also received other specific views about platforms
that commenters believed should or should not be included in the
definition of SB SEF. For example, one commenter believed that
platforms that would not trade or execute SB swap transactions, such as
pure trade processing facilities, would not meet the statutory
definition of SB SEF.\30\ A market participant, however, stated that in
its view the statutory definition of SB SEF would encompass pure trade
processing facilities.\31\
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\30\ See letter from Mark D. Young, Skadden, Arps, Slate,
Meagher & Flom LLP, to David A. Stawick, Secretary, CFTC, and
Elizabeth M. Murphy, Secretary, Commission, dated September 22,
2010, at 3.
\31\ See Meetings with SEC Officials: Memorandum from the
Division of Trading and Markets regarding an August 25, 2010 Meeting
with representatives of MarkitSERV, dated September 2, 2010,
MarkitSERV PowerPoint Presentation, dated August 25, 2010 at p. 5-6,
available at https://www.sec.gov/comments/s7-16-10/s71610-96.pdf.
---------------------------------------------------------------------------
The information presented at the Roundtable and received from the
public has helped to inform the proposals relating to SB SEFs that are
part of this rulemaking. The Commission is mindful that there exists a
wide range of views on the part of market participants and others about
the nature of the activities or systems that would constitute, and the
scope of activities permitted by, a SB SEF and therefore encourages
interested persons to provide their views and suggestions, as well as
any materials or data to support their positions, on this aspect of the
proposed rulemaking. The Commission believes that the prudent course is
to take where appropriate a deliberate and attentive approach to its
regulation of SB SEFs that is informed by the state of development of
SB swap trading on regulated markets. The Commission emphasizes,
however, that any actions it may take now or in the future would be
designed to further the overall objectives of the Dodd-Frank Act.?>
A. Current SB Swap Market
1. Trading Models
Unlike the markets for cash equity securities and listed options,
the market for SB swaps currently is characterized by bilateral
negotiation in the OTC swap market; is largely decentralized; many
instruments are not standardized; and many SB swaps are not centrally
cleared. The lack of uniform rules concerning the trading of SB swaps
and the one-to-one nature of trade negotiation in SB swaps has resulted
in the formation of distinct types of venues for the trading of these
securities, ranging from bilateral negotiations carried out over the
telephone, to single-dealer RFQ platforms, to multi-dealer RFQ
platforms, to central limit order books outside the United States, and
others, as more fully described below. The use of electronic media to
execute transactions in SB swaps varies greatly across trading venues,
with some venues being highly electronic whereas others rely almost
exclusively on non-electronic means such as the telephone. The reasons
for use of, or lack of use of, electronic media vary from such factors
as user preference to limitations in the existing infrastructure of
certain trading platforms. The description below of the ways in which
SB swaps may be traded is based in part on discussions with market
participants. The Commission solicits comments on the accuracy of this
description.
The Commission uses the term ``bilateral negotiation'' to refer to
the model whereby one party uses the telephone, e-mail or other
communications to contact directly a potential counterparty to
negotiate a SB swap. Once the terms are agreed, the SB swap transaction
is executed and the terms are memorialized.\32\ In a bilateral
negotiation, there may be no pre-trade or post-trade transparency
available to the marketplace because only the two parties to the
transaction are aware of the terms of the negotiation and the final
terms of the agreement. Further, no terms of the proposed transaction
are firm until the transaction is executed. However, reputational costs
generally serve as a deterrent to either party's failing to honor any
quoted terms. Dealer to customer bilateral negotiation currently is
used for all SB swap asset classes, and particularly for trading in
less liquid SB swaps, in situations where the parties prefer a
privately negotiated transaction, such as in executing block trades, or
in other circumstances in which it is not cost effective for a party to
the trade to use one of the execution methods described below.
---------------------------------------------------------------------------
\32\ For further discussion, see, e.g., Securities Exchange Act
Release No. 63727 (January 14, 2011), 76 FR 3859 (January 21, 2011)
(proposing rules for the trade acknowledgement and verification of
security-based swaps).
---------------------------------------------------------------------------
Another model for the trading of SB swaps is the single-dealer RFQ
electronic trading platform. In a single-dealer RFQ platform, a dealer
may post indicative quotes for SB swaps in various SB swap asset
classes that the dealer is willing to trade. Only the dealer's approved
customers would have access to the platform. When a customer wishes to
transact in a SB swap, the customer requests an executable quote, the
dealer provides one, and if customer accepts the dealer's quote, the
transaction is executed electronically. If the dealer repeatedly
responds to requests for executable quotes with quotes that are
significantly less favorable than the dealer's indicative quotes posted
on the single-dealer electronic trading platform, volume on the
platform presumably would diminish and participants may no longer
transact there. This type of platform generally provides pre-trade
transparency in the form of indicative quotes on a pricing screen, but
only from one dealer to its customer. Currently, there is no post-trade
reporting of transactions on single-dealer platforms and thus there is
no post-trade transparency.
A variant of the single-dealer model is an aggregator-type platform
that combines two or more single-dealer RFQ platforms. In such a
platform, a customer who has access to the platform, which is
determined solely at the discretion of its operator and of the dealers
involved, may see indicative quotes from multiple dealers at once
instead of seeing quotes only from one
[[Page 10952]]
dealer as in the single-dealer RFQ platform. Although a participant can
simultaneously view quotes from multiple dealers, the participant can
request a firm quote from only one dealer at a time. One feature of the
aggregated single-dealer platform as compared to the bilateral
negotiation and single-dealer models described above is the ability of
a participant in the aggregated single-dealer platform to see
indicative quotes from multiple dealers. However, customers are not
afforded an opportunity to send RFQs to multiple dealers at the same
time to promote competitive pricing. Also, like the single-dealer
electronic platform, there is no post-trade reporting of transactions
and thus there is no post-trade transparency.
A third model is the multi-dealer RFQ electronic trading
platform.\33\ In a multi-dealer RFQ system, a requester can send an RFQ
to solicit quotes on a certain SB swap from multiple dealers at the
same time. Currently, dealers on a multi-dealer RFQ platform generally
require the platform to set limits on the number of dealers to whom a
customer may send an RFQ, and also may limit which dealers may
participate on the platform. These platforms are sometimes owned by
dealers themselves. After the RFQ is submitted, the recipients have a
prescribed amount of time in which to respond to the RFQ with a quote.
Responses to the RFQ are firm. The requestor then has the opportunity
to review the responses and accept the best quote. A multi-dealer RFQ
platform provides a certain degree of pre-trade transparency, depending
on its characteristics. But to the extent that a requester is
restricted by platform rules to soliciting quotes from a limited number
of dealers, the customer's pre-trade transparency is restricted to that
number of quotes it receives in response to its RFQ. In some instances
requestors may prefer to limit the number of recipients of an RFQ as a
way to protect proprietary trading strategies as dissemination of their
interest to multiple dealers may increase hedging costs to dealers, and
thus costs to the requestors as reflected in the prices from the
dealers. Pre-trade transparency may also exist through the platform's
dissemination of composite indicative quotes to all participants prior
to trades. Post-trade transparency may exist if the platform chooses to
disseminate information regarding executed transactions.
---------------------------------------------------------------------------
\33\ The single-dealer RFQ platform is an example of a system
that permits customers to submit an RFQ to a single dealer, which is
distinct from a multi-dealer RFQ platform that permits customers to
solicit quotes from multiple dealers simultaneously instead of one
dealer. The multi-dealer RFQ platform differs from a single-dealer
aggregator platform because a participant in the aggregated single-
dealer platform may only send a request to one dealer at a time and
thus would not have the ability to interact with the bids or offers
of multiple dealers simultaneously.
---------------------------------------------------------------------------
A fourth model for the trading of SB swaps is a limit order book
system or similar system, which the Commission understands is not yet
in operation for the trading of SB swaps in the United States but
exists for the trading of SB swaps in Europe. Today, securities and
futures exchanges in the United States display a limit order book in
which firm bids and offers are posted for all participants to see, with
the identity of the parties withheld until a transaction occurs. Bids
and offers are then matched based on price-time priority or other
established parameters and trades are executed accordingly. The quotes
on a limit order book system are firm. A limit order book system may be
a more suitable model for the trading of more liquid, rather than less
liquid, SB swaps. In general, a limit order book system also provides
greater pre-trade transparency than the three platforms described above
because all participants can view bids and offers before placing their
bids and offers. However, broadly communicating trading interest,
particularly about a large trade, may increase hedging costs, and thus
costs to investors as reflected in the prices from the dealers. The
system can also provide post-trade transparency, to the extent that
participants can see the terms of executed transactions.
A fifth type of trading, which the Commission herein refers to as
``brokerage trading,'' is used by brokers to execute SB swap trades on
behalf of customers, often in larger sized transactions. In such a
system, a broker receives a request from a customer (which may be a
dealer) who seeks to execute a specific type of SB swap. The broker
then interacts with other customers to fill the request and execute the
transaction. The mode of interaction can vary depending on the size of
the trade and the type of SB swap being traded. In some cases, the
interaction is done purely by voice over the telephone, while in other
cases, the interaction is electronic or a hybrid of voice and an
electronic system. The level of automation and use of electronic means
also vary depending on the technological state and functionality of the
broker's platform.\34\ This model often is used by dealers that seek to
transact with other dealers through the use of an interdealer broker as
an intermediary. In this model, there may be pre-trade transparency to
the extent that participants are able to see bids and offers of other
participants and post-trade transparency to the extent that
participants can see the terms of executed transactions.
---------------------------------------------------------------------------
\34\ The Commission understands that a small portion of the
brokerage trading in the United States is currently highly automated
and has characteristics of a limit order book. However, while depth
of the order book may be displayed, generally there may be only one
bid or offer, and sometimes only one side of the market would be
displayed (i.e., a bid without an offer and vice versa). Because the
volume in some SB swaps may be low, the electronic systems
maintained by wholesale brokers would not necessarily include a
matching engine that would provide for price-time priority or other
execution parameters, unlike other types of electronic limit order
books. Although the wholesale brokers' systems are electronic, the
customer would need to perform some steps manually (e.g., hit the
bid or lift the offer) to execute a trade.
---------------------------------------------------------------------------
The five foregoing examples represent broadly the various types of
models for the trading of OTC swaps in existence today. These examples
may not represent every single method in existence today and the
discussion above is intended to give an overview of the models without
providing the nuances of each particular type.
2. The SB Swap Market and the Commission's Approach to SB SEF
Definitions
In the Commission's view, the diverse nature of these examples
demonstrates the extent to which, when compared with the equities
markets, certain aspects of the SB swap market are still evolving.\35\
In considering ways in which the Commission could approach the
definition of SB SEF, the Commission has sought to facilitate
competition and innovations in the SB swap market that could be used to
promote more efficient trading in organized, transparent and regulated
trading venues. The Commission does not believe it should simply
overlay the same regulatory structure that is currently in place for
equities, given important differences in the nature and maturity of the
SB swap and equities markets. However, the Commission does believe that
certain elements of equity
[[Page 10953]]
market structure may be directly relevant to the SB swap market.
---------------------------------------------------------------------------
\35\ For example, data from the Depository Trust and Clearing
Corporation covering the period from March 22, 2010 to June 20, 2010
for single name credit default swaps revealed the following: Out of
998 types of swaps (i.e., a swap based on one reference entity),
only 55 had 10 or more trades per day (34 trades being the highest),
and 827 of the swaps had 5 or fewer trades per day (531 of those
only had 2 or fewer trades per day). In the data set, ``trades per
day'' includes all tenors (e.g., duration or expiry) in swaps of the
same reference entity. See https://www.dtcc.com/downloads/products/derivserv/CDS_Snapshot_Analysis_Sep17-2010.pdf; see also https://www.dtcc.com/products/derivserv/data_table_snap0002.php and https://www.dtcc.com/products/deriserv/data_table_snapshot.php.
---------------------------------------------------------------------------
Furthermore, rather than proposing a rule that would establish a
prescribed configuration for SB SEFs that would meet the statutory
definition of SB SEF, the Commission proposes to provide baseline
principles interpreting the definition of SB SEF, consistent with the
requirements of the Exchange Act, as amended by the Dodd-Frank Act,
which any entity would need to be able to meet to register as a SB SEF.
Such an approach is designed to allow flexibility to those trading
venues that seek to register with the Commission as a SB SEF and to
permit the continued development of organized markets for the trading
of SB swaps. This more flexible approach also would allow the
Commission to monitor the market for SB swaps and propose adjustments,
as necessary, to any interpretation that it may adopt as this market
sector continues to evolve.
However, the Commission recognizes that, consistent with the Dodd-
Frank Act, the interpretation of the definition of SB SEF should: (1)
Encourage the migration of trading SB swaps from the OTC market to SB
SEFs (or exchanges), (2) provide a meaningful distinction between a SB
SEF and an OTC trading venue, (3) promote further transparency of the
SB swap market, and (4) to facilitate competition and innovation in the
SB swap markets that could be used to promote more efficient trading in
organized, transparent, and regulated trading venues. In addition, the
interpretation of the definition of SB SEF should complement other
aspects of proposed SB swap regulations, including those related to
post trade transparency, mandatory clearing, and the general
requirement that SB swaps that are subject to mandatory clearing only
be traded on an exchange or SB SEF, unless no exchange or SB SEF makes
the SB swap available to trade.
B. Scope of SB SEF Definition
As noted above, Section 3(a)(77) of the Exchange Act defines a SB
SEF as a trading system or platform in which multiple participants have
the ability to execute or trade SB swaps by accepting bids and offers
made by multiple participants in the facility or system, through any
means of interstate commerce, including any trading facility, that: (1)
Facilitates the execution of SB swaps between persons; and (2) is not a
national securities exchange.\36\
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\36\ As discussed infra Section XXI, an entity that meets the
definition of SB SEF would be required to register as a SB SEF or a
national securities exchange (unless exempted under Section 3D(e) of
the Exchange Act if the Commission finds that the facility is
subject to comparable, comprehensive supervision and regulation on a
consolidated basis by the CFTC). A registered SB SEF would be
required to satisfy all 14 Core Principles and any rules promulgated
by the Commission, including proposed Rule 811(a)(3), which provides
for certain requirements relating trading on a SB SEF. See Public
Law 111-203, Sec. 763(c) (adding Section 3D(a)(1) and (d)(1) of the
Exchange Act).
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A key issue noted at the Roundtable and raised by market
participants generally regarding Dodd-Frank Act implementation is the
scope of the definition of ``security-based swap execution facility.''
\37\ SB swap industry participants have expressed an interest in, and
offered their views on, the parameters of the definition of SB SEF.\38\
Such participants asserted that the interpretation of the definition of
SB SEF is a significant issue for the SB swap industry because, under
the mandatory trade execution requirement in Section 3C(h) of the
Exchange Act, a SB swap subject to mandatory clearing must be executed
on a SB SEF or on an exchange, if made available for trading. The
discussion below sets forth the Commission's preliminary view as to the
meaning of the various elements of this definition.
---------------------------------------------------------------------------
\37\ See, e.g., Bloomberg Letter, supra note 23, at 2, and MFA
Letter, supra note 23, at 16.
\38\ See supra notes 23 to 25.
---------------------------------------------------------------------------
The ``multiple participant to multiple participant'' requirement in
the definition of SB SEF prescribes that ``multiple participants have
the ability to execute or trade security-based swaps by accepting bids
and offers made by multiple participants in the facility or system.''
\39\ Consistent with this requirement, the Commission proposes to
interpret the definition of SB SEF to mean a system or platform that
allows more than one participant to interact with the trading interest
of more than one other participant on that system or platform. The
Commission notes that this definition can be satisfied by various types
of platforms, but some platforms that are currently used to trade SB
swaps in the OTC market would not meet this definition, and would not
be considered SB SEFs. As noted above, the Commission is aware that the
movement of SB swaps trading onto regulated platforms is still in an
emergent stage. Therefore, in considering ways in which the Commission
could approach the definition of SB SEF, the Commission has sought to
facilitate competition and innovations in the SB swaps market that
could be used to promote more efficient trading in organized,
transparent and regulated trading venues to support the Dodd-Frank
Act's goal of moving the trading of SB swaps onto regulated markets.
---------------------------------------------------------------------------
\39\ See Public Law 111-203, Sec. 763(a) (adding Section 3(77)
of the Exchange Act).
---------------------------------------------------------------------------
Under this proposed interpretation, if a system or platform were to
allow an individual participant (of which there must be more than one
on the system, but which do not need to be acting simultaneously) to
send, at the same time, a single RFQ to all other liquidity providing
participants on that system or platform and view responses from those
participants, the Commission believes that such a model would satisfy
the requirements of the statutory definition, even if the quote
requesting participants are acting at different times. A key element to
this model is that the SB SEF would not be able to limit the number of
liquidity providing participants from whom a participant could request
a quote on the SB SEF.\40\
---------------------------------------------------------------------------
\40\ See infra Section VIII.C.
---------------------------------------------------------------------------
The Commission further believes that the requirements of the
statutory definition would be met if the system or platform not only
provided the quote requesting participant with the ability to send a
single RFQ to all liquidity providing participants, but also provided
the quote requesting participant with the ability to choose to send an
RFQ to fewer than all liquidity providing participants. In the
Commission's view, a system or platform that affords a quote requesting
participant the ability to send an RFQ to all participants, but also
permits the quote requesting participant to choose to send an RFQ to
fewer participants, would satisfy the statutory definition because
multiple participants would have the ability to execute or trade SB
swaps by accepting bids or offers made by multiple participants. The
person exercising investment discretion for the transaction, whether it
is the participant itself or the participant's customer, would be the
person that would have the ability to choose to send the RFQ to less
than all participants, as they would be in the best position to
determine the impact on their interest of a broad or narrow
dissemination of their RFQ.\41\
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\41\ Regardless of the number of participants to which a RFQ was
sent, the response(s) to that RFQ would be required to be included
in the composite indicative quote of the SB SEF. See infra note 152
and accompanying text.
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Under the proposed interpretation of the definition of SB SEF, a SB
SEF would be able to offer functionality to a participant (or a
participant's customer) enabling that participant to choose to send a
single RFQ to any number of specific liquidity providing participants
on the SB SEF, including just a single liquidity provider. The
[[Page 10954]]
Commission requests comment on whether in addition to providing this
flexibility to investors initiating RFQs, the interpretation should
also set a floor for the minimum number of liquidity providers that
must be included in an RFQ (and, if so, what that minimum number should
be). Commenters should be mindful that in proposing its interpretation
of the definition of SB SEF, the Commission is trying to balance the
above-stated goal of encouraging SB swap trading to move onto regulated
markets with the goal of promoting greater transparency in the trading
of SB swaps.
On the one hand, providing investors as much choice as possible in
determining how to route an RFQ on a SB SEF may incentivize investors
to trade on a SB SEF when they otherwise might not have made that
choice. Since those investors that have a fiduciary duty must seek best
execution for a transaction, they may have a natural incentive to route
to multiple dealers. However, this incentive may be impacted by the
liquidity characteristics of the SB swap. Market participants,
including dealers and buy-side customers, have raised concerns
regarding pre-trade transparency of SB swap trades, particularly block
trades. They believe that if other market participants know the terms
of a trade prior to the time it is executed, those other market
participants could attempt to profit from the information about the
trade to the detriment of the initiator of the trade.\42\ Therefore,
particularly for illiquid SB swaps, an investor may determine that it
is in its best interest not to broadly project its trading intention,
and may choose to send a RFQ to one dealer.\43\ Other investors could
still benefit by the request because the response to that RFQ would
become part of the composite indicative quote of that SB SEF.\44\
Providing investors the choice to send a RFQ to only one dealer on a SB
SEF--as long as they have the ability to send it to more than one if
they chose to--may encourage investors to execute trades on a SB SEF
even with respect to SB swaps that are not required to be traded on a
SB SEF or an exchange, thus supporting the development of trading on
regulated platforms and venues in the United States, rather than in
other jurisdictions.
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\42\ See discussion in Section VIII.C and D infra.
\43\ See Reporting and Dissemination Release, supra note 6, at
89-93.
\44\ See discussion of proposed Rule 811(d)(5) in Section VIII.C
infra.
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On the other hand, requiring that all RFQs on a SB SEF be sent to
more than one dealer could force competition among dealers more than if
RFQs to a single dealer were permitted. This competition may lead to
lower spreads as dealers compete with each other on price. Further,
this competition may provide for a more robust composite indicative
quote because a greater number of responses would be incorporated into
the composite. In addition, requiring that RFQs be sent to more than
one dealer provides for the possibility that a response from a dealer
other than the one with whom the investor may have ``pre-arranged'' the
transaction will result in a better price. However, market participants
have expressed a concern that requiring a broad level of pre-trade
transparency, particularly for illiquid products, may not lead to
better prices and in certain circumstances may lead to worse prices
provided by dealers if dealer hedging is made more difficult after the
intent to trade has been projected to the entire market.
In addition, the Commission proposes to interpret the statutory
requirement that ``multiple participants have the ability to execute or
trade SB swaps by accepting bids and offers made by multiple
participants in the facility or system'' to require a SB SEF to provide
at least a basic functionality to allow any participant on the SB SEF
the ability to make and display executable bids or offers accessible to
all other participants on the SB SEF, if the participant chooses to do
so. The Commission preliminarily believes that such a requirement would
allow for increased price transparency beyond what would be found in
the bilateral OTC market, if a market participant chooses to utilize
the functionality to display a bid or offer.
Under the proposed interpretation of the definition of SB SEF
(either with or without the additional requirement for a minimum number
of liquidity providers to be included in every RFQ), the traditional
bilateral negotiation model, as described above, would not fall within
the definition of SB SEF because there would be only one party able to
seek a quote and only one party that is able to provide a quote in
response. The Commission believes that the inclusion of the phrase
``through any means of interstate commerce'' in the definition of SB
SEF would not, by itself, support the proposition that bilateral
negotiation would satisfy the definition's terms; the trading system or
platform would still need to meet the other requirements of the
definition, specifically, the requirement that multiple participants
have the ability to execute or trade SB swaps by accepting bids and
offers made by multiple participants in the facility or system
(``multiple participant to multiple participant requirement'').
Likewise, a platform where there is a single dealer interacting
with multiple customers on the other side of the transaction would not
appear to meet the ``multiple participant to multiple participant''
requirement because the dealer is only one person. This would be true
for aggregated single-dealer platforms as well, because a participant
on such a platform may only submit one request at a time and receive
only one response at a time, on a dealer-by-dealer basis.
The Commission proposes that the definition of SB SEF cannot be
satisfied by the simple aggregation of trading interest across trading
systems or platforms to meet the ``multiple participant to multiple
participant'' requirement. That is, each trading method--when viewed in
isolation--would need to individually meet the ``multiple participant
to multiple participant'' requirement on its own. Thus, an entity that
relies on a bilateral negotiation system with one participant on each
end of the telephone or similar communication system, but with several
such conversations occurring simultaneously, could not claim to meet
the definition of SB SEF by asserting that when those conversations are
viewed in the aggregate, i.e., bilateral negotiation between persons A
and B to facilitate one transaction, and bilateral negotiation between
persons C and D, to facilitate a separate transaction, that the
``multiple participant to multiple participant'' requirement is
met.\45\ Two independent single-dealer platforms also may not be
construed in the aggregate in order to meet the ``multiple participant
to multiple participant'' requirement. In each of these situations,
there is no opportunity for interaction among participants, except on a
``one participant to one participant'' basis.
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\45\ However, as discussed further below in the discussion of
the application of the definition of SB SEF to wholesale brokers, if
person A negotiates with persons B, C and D as part of the same
transaction, the ``multiple participant to multiple participant''
requirements may be able to be met. See infra note 46 and
accompanying text.
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However, a system or platform that provides for an auction for a
class of SB swaps to be held at a prescribed time and that allows
multiple participants to interact with each other, with trades executed
pursuant to a pre-determined algorithm, could meet the proposed
interpretation of the definition of SB SEF. In addition, the Commission
believes that a limit order book system as described above for the
trading of SB swaps could satisfy the proposed interpretation of the
definition of SB
[[Page 10955]]
SEF. Such a model generally would allow interaction between multiple
(i.e., two or more) firm orders or bids and offers. Moreover, to
satisfy the definition of SB SEF, a system or platform would not need
to be limited to only one type of trading model. An entity that wishes
to register as a SB SEF could operate different trading models for
different SB swap products, as long as each trading system or platform
on its own meets the interpretation of the definition of SB SEF that
the Commission may adopt. For example, a SB SEF could operate both a
multi-dealer RFQ mechanism for the trading of less liquid SB swaps and
a limit order book for the trading of more liquid SB swaps.
The Commission has considered whether brokerage trading, as
described above, would satisfy its proposed interpretation of the
definition of SB SEF. On the one hand, brokerage trading relies to a
certain degree on ``voice'' communication, such as telephonic
communication between the broker and its customers. On the other hand,
the wholesale broker \46\ acts as an intermediary between various
potential participants to a SB swap transaction, and may utilize
electronic systems to display trading interest with which various
participants could interact to transact in SB swaps. In some respects,
the wholesale broker's role is similar to that of a floor broker on an
exchange, in which the floor broker may use voice communication to find
trading interest on the floor that can interact with an order from its
customer. If after the wholesale broker receives a request from a
customer (of which there must be more than one, but which do not need
to be acting simultaneously) to execute a trade in a SB swap, and the
broker then submits that request to all participants on the system or
platform (or to less than all participants, if the customer has chosen
to have the request sent to less than all participants), the Commission
preliminarily believes that such a model could satisfy the Commission's
proposed interpretation of the definition of SB SEF. Thus, the
brokerage trading model may be able to satisfy the Commission's
proposed interpretation of the definition of SB SEF to the extent that
multiple participants would have access to the system or platform and
their trading interest could interact with bids and offers of multiple
other participants in that system or platform. Unless explicitly
requested by the customer, for any given transaction if a wholesale
broker typically acts only as the intermediary between a given customer
and a single counterparty to facilitate the negotiation of a bilateral
contract, the Commission does not believe this wholesale broker would
meet the proposed interpretation of the definition of SB SEF. Because
of the different variations of the wholesale broker system, however,
each system would have to be evaluated on its own merits to determine
whether it would meet the Commission's proposed interpretation of the
definition of SB