Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, 30967-31281 [2013-10835]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 100 (Thursday, May 23, 2013)]
[Proposed Rules]
[Pages 30967-31281]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10835]



[[Page 30967]]

Vol. 78

Thursday,

No. 100

May 23, 2013

Part II





Securities and Exchange Commission





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17 CFR Parts 240, 242, and 249





Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation 
SBSR and Certain Rules and Forms Relating to the Registration of 
Security-Based Swap Dealers and Major Security-Based Swap Participants; 
Proposed Rule

Federal Register / Vol. 78 , No. 100 / Thursday, May 23, 2013 / 
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, and 249

[Release No. 34-69490; File Nos. S7-02-13; S7-34-10; S7-40-11]
RIN 3235-AL25


Cross-Border Security-Based Swap Activities; Re-Proposal of 
Regulation SBSR and Certain Rules and Forms Relating to the 
Registration of Security-Based Swap Dealers and Major Security-Based 
Swap Participants

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules; proposed interpretations.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is publishing for public comment proposed rules and 
interpretive guidance to address the application of the provisions of 
the Securities Exchange Act of 1934, as amended (``Exchange Act''), 
that were added by Subtitle B of Title VII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (``Dodd-Frank Act''), to 
cross-border security-based swap activities. Our proposed rules and 
interpretive guidance address the application of Subtitle B of Title 
VII of the Dodd-Frank Act with respect to each of the major 
registration categories covered by Title VII relating to market 
intermediaries, participants, and infrastructures for security-based 
swaps, and certain transaction-related requirements under Title VII in 
connection with reporting and dissemination, clearing, and trade 
execution for security-based swaps. In this connection, we are re-
proposing Regulation SBSR and certain rules and forms relating to the 
registration of security-based swap dealers and major security-based 
swap participants. The proposal also contains a proposed rule providing 
an exception from the aggregation requirement, in the context of the 
security-based swap dealer definition, for affiliated groups with a 
registered security-based swap dealer. Moreover, the proposal addresses 
the sharing of information and preservation of confidentiality with 
respect to data collected and maintained by SDRs. In addition, the 
Commission is proposing rules and interpretive guidance addressing the 
policy and procedural framework under which the Commission would 
consider permitting compliance with comparable regulatory requirements 
in a foreign jurisdiction to substitute for compliance with 
requirements of the Exchange Act, and the rules and regulations 
thereunder, relating to security-based swaps (i.e., ``substituted 
compliance''). Finally, the Commission is setting forth our view of the 
scope of our authority, with respect to enforcement proceedings, under 
Section 929P of the Dodd-Frank Act.

DATES: Submit comments on or before August 21, 2013.

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);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-02-13, and File Numbers S7-34-10 (Regulation SBSR) and/
or S7-40-11 (registration of security-based swap dealers and major 
security-based swap participants), as applicable, 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 Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number S7-02-13, and File 
Numbers S7-34-10 (Regulation SBSR) and/or S7-40-11 (registration of 
security-based swap dealers and major security-based swap 
participants), as applicable. This file number should be included on 
the subject line if email 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 also are available for Web 
site viewing and printing in the Commission's Public Reference Room, 
100 F Street NE., Washington, DC 20549, on official business days 
between the hours of 10:00 a.m. and 3:00 p.m. All comments received 
will be posted without change; we do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Matthew A. Daigler, Senior Special 
Counsel, at 202-551-5578, Wenchi Hu, Senior Special Counsel, at 202-
551-6268, Richard E. Grant, Special Counsel, at 202-551-5914, or 
Richard Gabbert, Special Counsel, at 202-551-7814, Office of 
Derivatives Policy, Division of Trading and Markets, regarding 
security-based swap dealers and major security-based swap participants; 
Jeffrey Mooney, Assistant Director, Matthew Landon, Senior Special 
Counsel, or Stephanie Park, Special Counsel, Office of Clearance and 
Settlement, Division of Trading and Markets, at 202-551-5710, regarding 
security-based swap clearing agencies, security-based swap data 
repositories, and the security-based swap clearing requirement; David 
Michehl, Senior Counsel, Office of Market Supervision, Division of 
Trading and Markets, at 202-551-5627, regarding security-based swap 
reporting; Leah Mesfin, Special Counsel, at 202-551-5655, or Michael P. 
Bradley, Special Counsel, at 202-551-5594, Office of Market 
Supervision, Division of Trading and Markets, regarding the trade 
execution requirement and swap execution facilities; Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing new rules and 
interpretive guidance under the Exchange Act relating to the 
application of Subtitle B of Title VII of the Dodd-Frank Act to cross-
border activities and re-proposing Regulation SBSR and certain rules 
and forms relating to the registration of security-based swap dealers 
and major security-based swap participants.
    The Commission is proposing the following rules under the Exchange 
Act: Rule 0-13 (Substituted Compliance Request Procedure); Rule 3a67-10 
(Foreign Major Security-Based Swap Participants); Rule 3a71-3 (Cross-
Border Security-Based Swap Dealing Activity); Rule 3a71-4 (Exception 
from Aggregation for Affiliated Groups with Registered Security-Based 
Swap Dealers); Rule 3a71-5 (Substituted Compliance for Foreign 
Security-Based Swap Dealers); Rule 3Ca-3 (Application of the Mandatory 
Clearing Requirement to Cross-Border Security-Based Swap Transactions); 
Rule 3Ch-1 (Application of the Mandatory Trade Execution Requirement to 
Cross-Border Security-Based Swap Transactions); Rule 3Ch-2 (Substituted 
Compliance for Mandatory Trade Execution); Rule 13n-4(d) (Exemption 
from the Indemnification Requirement); Rule 13n-12 (Exemption from 
Requirements Governing Security-Based Swap Data Repositories for 
Certain Non-U.S. Persons); Rule 18a-4(e) (Segregation Requirements for 
Foreign Security-Based Swap Dealers); and Rule 18a-4(f) (Segregation 
Requirements for Foreign Major

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Security-Based Swap Participants). The Commission also is re-proposing 
the following rules and forms: 17 CFR 242.900-242.911 (Regulation SBSR) 
(RIN 3235-AK80) and 17 CFR 249.1600 (Form SBSE), 249.1600a (Form SBSE-
A), and 249.1600b (Form SBSE-BD) (RIN 3235-AL05).

Table of Contents

I. Background
    A. The Dodd-Frank Wall Street Reform and Consumer Protection Act
    B. Overview of the Cross-Border Proposal
    C. Consultation and Coordination
    D. Substituted Compliance
    E. Conclusion
II. Overview of the Security-Based Swap Market and the Legal and 
Policy Principles Guiding the Commission's Approach to the 
Application of Title VII to Cross-Border Activities
    A. Overview of the Security-Based Swap Market
    1. Global Nature of the Security-Based Swap Market
    2. Dealing Structures
    (a) U.S. Bank Dealer
    (b) U.S. Non-Bank Dealer
    (c) Foreign Subsidiary Guaranteed by a U.S. Person
    (d) Foreign-Based Dealer
    i. Direct Dealing
    ii. Intermediation in the United States
    3. Clearing Practices
    4. Reporting Practices
    5. Trade Execution Practices
    6. Broad Economic Considerations of Cross-Border Security-Based 
Swaps
    (a) Major Economic Considerations
    (b) Global Nature and Interconnectedness of the Security-Based 
Swap Market
    (c) Central Clearing
    (d) Security-Based Swap Data Reporting
    B. Scope of Title VII's Application to Cross-Border Security-
Based Swap Activity
    1. Commenters' Views
    2. Scope of Application of Title VII in the Cross-Border Context
    (a) Overview and General Approach
    (b) Territorial Approach to Application of Title VII Security-
Based Swap Dealer Registration Requirements
    (c) Application of Other Title VII Requirements to Registered 
Entities
    (d) Application of Title VII Regulatory Requirements to 
Transactions of Foreign Entities Receiving Guarantees From U.S. 
Persons
    (e) Regulations Necessary or Appropriate To Prevent Evasion of 
Title VII
    C. Principles Guiding Proposed Approach to Applying Title VII in 
the Cross-Border Context
    D. Conclusion
III. Security-Based Swap Dealers
    A. Introduction
    B. Registration Requirement
    1. Introduction
    2. Background Discussion Regarding the Registration of Foreign 
Brokers and Dealers
    3. Comment Summary
    (a) Market Participants
    (b) Foreign Regulators
    4. Application of the De Minimis Exception to Cross-Border 
Security-Based Swap Dealing Activity
    (a) Meaning of the Term ``Person'' in the Security-Based Swap 
Dealer Definition
    (b) Proposed Rule
    5. Proposed Definition of ``U.S. Person''
    (a) Introduction
    (b) Discussion
    i. Natural Persons
    ii. Corporations, Organizations, Trusts, and Other Legal Persons
    iii. Accounts of U.S. Persons
    iv. International Organizations
    (c) Conclusion
    6. Proposed Definition of ``Transaction Conducted Within the 
United States''
    7. Proposed Treatment of Transactions With Foreign Branches of 
U.S. Banks
    8. Proposed Rule Regarding Aggregation of Affiliate Positions
    9. Treatment of Inter-Affiliate and Guaranteed Transactions
    10. Comparison With Definition of ``U.S. Person'' in Regulation 
S
    C. Regulation of Security-Based Swap Dealers in Title VII
    1. Introduction
    2. Comment Summary
    3. Title VII Requirements Applicable to Security-Based Swap 
Dealers
    (a) Transaction-Level Requirements
    i. External Business Conduct Standards
    ii. Segregation of Assets
    (b) Entity-Level Requirements
    i. Capital
    ii. Margin
    iii. Risk Management
    iv. Recordkeeping and Reporting
    v. Internal System and Controls
    vi. Diligent Supervision
    vii. Conflicts of Interest
    viii. Chief Compliance Officer
    ix. Inspection and Examination
    x. Licensing Requirements and Statutory Disqualification
    4. Application of Certain Transaction-Level Requirements
    (a) Proposed Rule
    (b) Discussion
    i. External Business Conduct Standards
    a. Foreign Security-Based Swap Dealers
    b. U.S. Security-Based Swap Dealers
    ii. Segregation Requirements
    a. Foreign Security-Based Swap Dealers
    b. Non-Cleared Security-Based Swaps
    c. Cleared Security-Based Swaps
    d. Disclosure
    5. Application of Entity-Level Rules
    (a) Introduction
    (b) Proposed Approach
    D. Intermediation
    1. Introduction
    2. Comment Summary
    3. Discussion
    E. Registration Application Re-Proposal
    1. Introduction
    2. Discussion
IV. Major Security-Based Swap Participants
    A. Introduction
    B. Comment Summary
    C. Proposed Approach
    1. In General
    2. Guarantees
    (a) Guarantees Provided by U.S. Persons to Non-U.S. Persons
    (b) Guarantees Provided by Non-U.S. Persons to U.S. Persons and 
Guarantees Provided by Non-U.S. Persons to Non-U.S. Persons
    (c) Limited Circumstances Where Attribution of Guaranteed 
Security-Based Swap Positions Does Not Apply
    (d) Operational Compliance
    3. Foreign Public Sector Financial Institutions (FPSFIs)
    D. Title VII Requirements Applicable to Major Security-Based 
Swap Participants
    1. Transaction-Level Requirements Related to Customer Protection
    (a) Overview
    (b) Proposed Rules
    2. Entity-Level Requirements
    3. Substituted Compliance
V. Security-Based Swap Clearing Agencies
    A. Introduction
    B. Proposed Title VII Approach
    1. Clearing Agency Registration
    (a) Clearing Agencies Acting as CCPs
    (b) Proposed Interpretive Guidance
    2. Exemption From Registration Under Section 17A(k)
    3. Application of Alternative Standards to Certain Registrants
VI. Security-Based Swap Data Repositories
    A. Introduction
    B. Application of the SDR Requirements in the Cross-Border 
Context
    1. Introduction
    2. Comment Summary
    3. Proposed Approach
    (a) U.S. Persons Performing SDR Functions Are Required To 
Register With the Commission
    (b) Interpretive Guidance and Exemption for Non-U.S. Persons 
That Perform the Functions of an SDR Within the United States
    C. Relevant Authorities' Access to Security-Based Swap 
Information and the Indemnification Requirement
    1. Information Sharing Under Sections 21 and 24 of the Exchange 
Act
    2. Comment Summary
    3. Proposed Guidance and Exemptive Relief
    (a) Notification Requirement
    (b) Determination of Appropriate Regulators
    (c) Option for Exemptive Relief From the Indemnification 
Requirement
    i. Impact of the Indemnification Requirement
    ii. Proposed Rule 13n-4(d): Indemnification Exemption
VII. Security-Based Swap Execution Facilities
    A. Introduction
    B. Registration of Foreign Security-Based Swap Markets
    C. Registration Exemption for Foreign Security-Based Swap 
Markets
VIII. Regulation SBSR--Regulatory Reporting and Public Dissemination 
of Security-Based Swap Information
    A. Background
    B. Modifications to the Definition of ``U.S. Person''
    C. Additional Modifications to Scope of Regulation SBSR
    1. Revisions to Proposed Rule 908(a)
    2. Revisions to Proposed Rule 908(b)

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    D. Modifications to ``Reporting Party'' Rules and Assigning Duty 
To Report
    E. Other Technical and Conforming Changes
    F. Cross-Border Inter-Affiliate Transactions
    G. Foreign Privacy Laws versus Duty To Report Counterparty ID
    H. Foreign Public Sector Financial Institutions
    I. Summary and Additional Request for Comment
IX. Mandatory Security-Based Swap Clearing Requirement
    A. Introduction
    B. Summary of Comments
    C. Application of Title VII Mandatory Clearing Requirements to 
Cross-Border Transactions
    1. Statutory Framework
    2. Proposed Rule
    3. Discussion
    (a) Security-Based Swap Transactions Involving U.S. Persons or 
Non-U.S. Persons Receiving Guarantees From U.S. Persons
    i. Proposed Rule
    ii. Proposed Exception for Certain Transactions Involving 
Foreign Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    (b) Transactions Conducted Within the United States
    i. Proposed Rule
    ii. Proposed Exception for Transactions Conducted Within the 
United States by Certain Non-U.S. Persons
X. Mandatory Security-Based Swap Trade Execution Requirement
    A. Introduction
    B. Application of the Mandatory Trade Execution Requirement to 
Cross-Border Transactions
    1. Statutory Framework
    2. Proposed Rule
    3. Discussion
    (a) Security-Based Swap Transactions Involving U.S. Persons or 
Non-U.S. Persons Receiving Guarantees From U.S. Persons
    i. Proposed Rule
    ii. Proposed Exception for Certain Transactions Involving 
Foreign Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    (b) Transactions Conducted Within the United States
    i. Proposed Rule
    ii. Proposed Exception for Transactions Conducted Within the 
United States by Certain Non-U.S. Persons
XI. Substituted Compliance
    A. Introduction
    B. Process for Making Substituted Compliance Requests
    C. Security-Based Swap Dealer Requirements
    1. Proposed Rule--Commission Substituted Compliance 
Determinations
    2. Discussion
    D. Regulatory Reporting and Public Dissemination
    1. General
    2. Security-Based Swaps Eligible and Not Eligible for 
Substituted Compliance
    3. Requests for Substituted Compliance
    4. Findings Necessary for Substituted Compliance
    5. Modification or Withdrawal of Substituted Compliance Order
    6. Regulatory Reporting and Public Dissemination Considered 
Together in the Commission's Analysis of Substituted Compliance
    E. Clearing Requirement
    F. Trade Execution Requirement
XII. Antifraud Authority
XIII. General Request for Comment
    A. General Comments
    B. Consistency With CFTC's Cross-Border Approach
XIV. Paperwork Reduction Act
    A. Introduction
    B. Re-Proposal of Form SBSE, Form SBSE-A, and Form SBSE-BD
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    (a) Paperwork Burden Associated With Filing Application Forms
    (b) Paperwork Burden Associated With Amending Schedule F
    (c) Paperwork Burden Associated With Amending Application Forms
    5. Request for Comment on Paperwork Burden Estimates
    C. Disclosures by Certain Foreign Security-Based Swap Dealers 
and Major Security-Based Swap Participants
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting Burdens
    5. Request for Comment on Paperwork Burden Estimates
    D. Reliance on Counterparty Representations Regarding Activity 
Within the United States
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    5. Request for Comment on Paperwork Burden Estimates
    E. Requests for Cross-Border Substituted Compliance 
Determinations
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    (a) Proposed Rule 3a71-5
    (b) Re-Proposed Rule 242.908(c)(2)(ii) of Regulation SBSR
    (c) Proposed Rule 3Ch-2(c)
    F. Reporting and Dissemination of Security-Based Swap 
Information
    1. Background on the Re-Proposed Rules
    2. Modifications to ``Reporting Party'' Rules
    (a) Summary of Collection of Information
    (b) Proposed Use of Information
    (c) Respondents
    (d) Total Initial and Annual Reporting and Recordkeeping Burdens
    i. Baseline Burdens
    ii. Re-Proposed Burdens
    iii. Summary of Re-Proposed Burdens
    iv. Recordkeeping Requirements
    (e) Collection of Information Is Mandatory
    (f) Confidentiality
    3. Rules 902, 905, 906, 907, and 909
    (a) Rule 902
    (b) Rule 905
    (c) Rule 906
    (d) Rule 907
    (e) Rule 909
    i. Impact of Re-Proposed Rules 902, 905, 906, 907, and 909 on 
the Commission's PRA Analysis
    4. Rules 900, 903, 908, 910, and 911
    (a) Modification of the Definition of ``U.S. Person''
    (b) Rule 903
    (c) Re-Proposed Rules 908(a) and 908(b)
    (d) Rule 910
    (e) Rule 911
    G. Request for Comments by the Commission and Director of OMB
XV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Overview
    2. Current Security-Based Swap Market
    (a) Security-Based Swap Market Participants
    (b) Levels of Security-Based Swap Trading Activity
    (c) Market Participant Domiciles
    (d) Level of Current Cross-Border Activity in Single-Name CDS
    (e) Levels of Security-Based Swap Clearing
    C. Analysis of Potential Effects on Efficiency, Competition, and 
Capital Formation
    1. Introduction
    2. Competition
    (a) Security-Based Swap Dealers
    (b) Security-Based Swap Market Infrastructure Requirements
    i. Registration of Clearing Agencies, SDRs and SB SEFs
    ii. Application of Mandatory Clearing, Public Dissemination, 
Regulatory Reporting, and Trade Execution Requirements in the Cross-
Border Context
    3. Efficiency
    4. Capital Formation
    D. Economic Analysis of Proposed Rules Regarding ``Security-
Based Swap Dealers'' and ``Major Security-Based Swap Participants''
    1. Programmatic Costs and Benefits
    (a) Registration of Security-Based Swap Dealers and Major 
Security-Based Swap Participants
    (b) Security-Based Swap Dealers--De Minimis Exception
    (c) Major Security-Based Swap Participants--``Substantial 
Position'' and ``Substantial Counterparty Exposure'' Thresholds
    2. Assessment Costs
    (a) Security-Based Swap Dealers--De Minimis Exception
    (b) Major Security-Based Swap Participants--``Substantial 
Position'' and ``Substantial Counterparty Exposure'' Thresholds
    3. Alternatives Considered
    (a) De Minimis Exception
    i. Alternatives to the Proposed Definition of U.S. Person
    ii. Alternatives to the Proposed Rule Regarding Application of 
the De Minimis Exception

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    a. Calculation of U.S. Persons' Transactions for De Minimis 
Exception
    b. Calculation of Non-U.S. Persons' Transactions for De Minimis 
Exception (Including Transactions Conducted Within the United 
States)
    iii. Aggregation of Affiliate Dealing Activity
    (b) Major Security-Based Swap Participants
    E. Economic Analysis of the Proposed Application of the Entity-
Level and Transaction-Level Requirements to Security-Based Swap 
Dealers and Major Security-Based Swap Participants
    1. Entity-Level Requirements
    2. Transaction-Level Requirements
    (a) Proposed Rule 3a71-3(c)--Application of Customer Protection 
Requirements
    i. Programmatic Benefits and Costs
    ii. Assessment Costs
    iii. Alternatives
    (b) Proposed Rule 18a-4(e)--Application of Segregation 
Requirements
    i. Programmatic Benefits and Costs
    a. Pre-Dodd Frank Segregation Practice
    b. Benefits of the Segregation Requirements
    c. Costs of the Segregation Requirements
    d. Costs and Benefits of Proposed Rules 18a-4(e)(1) and (2) 
Regarding Application of Segregation Requirements to Foreign 
Security-Based Swap Dealers
    e. Costs and Benefits of Proposed Rule 18a-4(e)(3) Regarding 
Disclosures
    ii. Assessment Costs
    F. Economic Analysis of Application of Rules Governing Security-
Based Swap Clearing in Cross-Border Context
    1. Programmatic Benefits and Costs Associated With the Clearing 
Agency Registration
    (a) Proposed Interpretive Guidance Regarding Clearing Agency 
Registration
    (b) Proposed Exemption of Foreign Clearing Agency From 
Registration
    (c) Programmatic Effects of Alternative Standards
    2. Programmatic Benefits and Costs Associated With the Mandatory 
Clearing Requirement of Section 3C(a)(1) of the Exchange Act
    (a) Programmatic Effects of the Mandatory Clearing Requirement
    (b) Programmatic Benefits and Costs of the Mandatory Clearing 
Requirement
    3. Programmatic Benefits and Costs of Proposed Rule 3Ca-3
    (a) Programmatic Effect of Proposed Rule 3Ca-3
    (b) Programmatic Benefits and Costs of Proposed Rule 3Ca-3
    (c) Alternatives
    (d) Assessment Costs
    G. The Economic Analysis of Application of Rules Governing 
Security-Based Swap Trading in the Cross-Border Context
    1. Programmatic Benefits and Costs of the Proposed Application 
of the Registration Requirements of Section 3D of the Exchange Act 
to Foreign Security-Based Swap Markets
    (a) Programmatic Benefits
    (b) Programmatic Costs
    (c) Alternatives
    2. Programmatic Benefits and Costs of the Potential Availability 
of Exemptive Relief to Foreign Security-Based Swap Markets
    (a) Programmatic Benefits
    (b) Programmatic Costs
    (c) Alternatives
    (d) Assessment Costs
    3. Programmatic Benefits and Costs Associated With the Mandatory 
Trade Execution Requirement of Section 3C(h) of the Exchange Act
    (a) Programmatic Effect of the Statutory Mandatory Trade 
Execution Requirement
    (b) Programmatic Benefits of the Statutory Mandatory Trade 
Execution Requirement
    (c) Programmatic Costs of the Statutory Mandatory Trade 
Execution Requirement
    4. Programmatic Benefits and Costs of Proposed Rule 3Ch-1 
Regarding Application of the Mandatory Trade Execution Requirement 
in Cross-Border Context
    (a) Programmatic Effect of Proposed Rule 3Ch-1
    (b) Programmatic Benefits and Costs of Proposed Rule 3Ch-1
    H. Application of Rules Governing Security-Based Swap Data 
Repositories in Cross-Border Context
    1. Benefits and Costs Associated With Application of the SDR 
Requirements in the Cross-Border Context
    (a) Benefits of Proposed Approach to SDR Requirements
    i. Programmatic Benefits of Proposed Guidance Regarding 
Registration
    ii. Programmatic Benefits of the SDR Exemption
    (b) Costs of Proposed Approach to SDR Requirements
    i. Programmatic Costs of the Commission's Proposed Approach
    ii. Assessment Costs
    (c) Alternative to Proposed Approach
    2. Relevant Authorities' Access to Security-Based Swap 
Information and the Indemnification Requirement
    (a) Benefits and Costs of Relevant Authorities' Access to 
Security-Based Swap Data Under the Dodd-Frank Act
    i. Benefits of Relevant Authorities' Access to Security-Based 
Swap Data
    ii. Costs of Relevant Authorities' Access to Security-Based Swap 
Data
    (b) Benefits and Costs of Proposed Guidance and Exemptive Rule
    i. Notification Requirement
    ii. Determination of Appropriate Regulators
    iii. Exemptive Relief From the Indemnification Requirement
    (c) Alternatives to Proposed Guidance and Exemptive Relief
    i. Notification Requirement
    ii. Determination of Appropriate Regulators
    iii. Exemptive Relief From the Indemnification Requirement
    3. Economic Analysis of the Re-Proposal of Regulation SBSR
    (a) Modifications to ``Reporting Party'' Rules and 
Jurisdictional Reach of Regulation SBSR--Re-Proposed Rules 901(a) 
and 908(a)
    i. Initial Proposal
    a. Programmatic Benefits of Initial Proposal
    b. Programmatic Costs of Initial Proposal
    ii. Re-Proposal
    a. Programmatic Benefits
    b. Programmatic Costs
    (b) Proposed Modification of the Definition of ``U.S. Person''
    (c) Revisions to Proposed Rule 908(b)
    i. Initial Proposal
    ii. Re-Proposal
    a. Programmatic Benefits
    b. Programmatic Costs
    (d) Other Technical Revisions in Re-Proposed Regulation SBSR
    (e) Aggregate Total Quantifiable Costs
    I. Economic Analysis of Substituted Compliance
    1. Programmatic Benefits and Costs
    2. Alternatives
    3. Assessment Costs
    J. General Request for Comments
XVI. Consideration of Impact on the Economy
XVII. Regulatory Flexibility Act Certification
Statutory Basis and Text of Proposed Rules
Appendix A: Application of Subtitle B of Title VII in the Cross-
Border Context
    Table I--Registered U.S. Security-Based Swap Dealers
    Table II--Registered Non-U.S. Security-Based Swap Dealer with 
U.S. Guarantee
    Table III--Unregistered Non-U.S. Dealer (or Market Participant) 
With U.S. Guarantee
    Table IV--Registered Non-U.S. Security-Based Swap Dealer Without 
U.S. Guarantee
    Table V--Unregistered Non-U.S. Dealer (or Market Participant) 
Without U.S. Guarantee
Appendix B: Registration of Security-Based Swap Dealers
Appendix C: Re-Proposal of Registration Forms
Appendix D: List of Commenters

I. Background

    The global nature of the security-based swap market highlights the 
critical importance of addressing the application of the Title VII of 
the Dodd-Frank Act \1\ (``Title VII'') to cross-border activities.\2\ 
The Commission has received numerous inquiries and comments from market 
participants, foreign regulators, and other interested parties 
concerning how Title VII and the Commission's implementing regulations 
thereunder will apply to the cross-border activities of U.S. and non-
U.S. market participants. To respond to these inquiries and comments, 
the Commission is providing our preliminary views on the application of 
Title VII to cross-border security-based swap activities \3\ and non-
U.S. persons

[[Page 30972]]

that act in capacities regulated under the Dodd-Frank Act in the 
proposed rules and interpretations discussed below.
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    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Unless otherwise indicated, references to Title VII of the 
Dodd-Frank Act in this release are to Subtitle B of Title VII.
    \3\ Generally, in this release, the application of Title VII to 
``cross-border activities'' refers to the application of Title VII 
to a security-based swap transaction involving (i) A U.S. person and 
a non-U.S. person, (ii) two non-U.S. persons where one or both are 
located within the United States, or (iii) two non-U.S. persons 
conducting a security-based swap transaction that otherwise occurs 
in relevant part within the United States, including by negotiating 
the terms of the security-based swap transaction within the United 
States or where performance of one or both counterparties under the 
security-based swap is guaranteed by a U.S. person.
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A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

    The Dodd-Frank Act was enacted, among other reasons, to promote the 
financial stability of the United States by improving accountability 
and transparency in the financial system.\4\ The 2008 financial crisis 
highlighted significant issues in the over-the-counter (``OTC'') 
derivatives markets, which have experienced dramatic growth in recent 
years \5\ and are capable of affecting significant sectors of the U.S. 
economy.\6\ Title VII of the Dodd-Frank Act provides for a 
comprehensive new regulatory framework for swaps and security-based 
swaps, including by: (i) Providing for the registration and 
comprehensive regulation of swap dealers, security-based swap dealers, 
major swap participants, and major security-based swap participants; 
(ii) imposing clearing and trade execution requirements on swaps and 
security-based swaps, subject to certain exceptions; (iii) creating 
recordkeeping and real-time reporting regimes and public dissemination; 
and (iv) enhancing the rulemaking and enforcement authorities of the 
Commission and the Commodity Futures Trading Commission (``CFTC'').\7\
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    \4\ The Dodd-Frank Act was enacted ``[t]o promote the financial 
stability of the United States by improving accountability and 
transparency in the financial system, to end `too big to fail', to 
protect the American taxpayer by ending bailouts, to protect 
consumers from abusive financial services practices, and for other 
purposes.'' Public Law 111-203, Preamble.
    \5\ From their beginnings in the early 1980s, the notional value 
of these markets grew to approximately $650 trillion globally by the 
end of 2011. See Bank for International Settlements, Statistical 
Release: OTC Derivatives Statistics at End-December 2011 (May 2012) 
at 1, available at:  https://www.bis.org/publ/otc_hy1205.pdf.
    \6\ See Section II.A.6(b), infra.
    \7\ See Public Law 111-203 sections 701-774.
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    Specifically, the Dodd-Frank Act provides that the CFTC will 
regulate ``swaps,'' the Commission will regulate ``security-based 
swaps,'' \8\ and both the CFTC and the Commission (together, the 
``Commissions'') will regulate ``mixed swaps.'' \9\ Title VII also 
amends the Exchange Act to include many specific provisions governing 
security-based swaps that could apply to cross-border security-based 
swap transactions and to non-U.S. persons who act in capacities 
regulated under the Dodd-Frank Act.\10\ These provisions primarily 
relate to Commission oversight of security-based swap dealers,\11\ 
major security-based

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swap participants,\12\ security-based swap data repositories 
(``SDRs''),\13\ security-based swap clearing agencies,\14\ security-
based swap execution facilities (``SB SEFs''),\15\ and mandatory 
security-based swap reporting and dissemination,\16\ clearing,\17\ and 
trade execution.\18\
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    \8\ The definition of ``security'' in both the Exchange Act and 
the Securities Act of 1933 (``Securities Act''), 15 U.S.C. 77a et 
seq., was amended by the Dodd-Frank Act to include security-based 
swaps. Public Law 111-203, Section 761(a)(2) (inserting ``security-
based swap'' after ``security future'' in Section 3(a)(10) of the 
Exchange Act, 15 U.S.C. 78c(a)(10)) and Section 768(a)(1) (inserting 
``security-based swap'' after ``security future'' in Section 2(a)(1) 
of the Securities Act, 15 U.S.C. 77b(a)(1)). The revision of the 
Exchange Act's definition of ``security'' raises, among other 
things, issues related to the definition of ``broker'' in Section 
3(a)(4) of the Exchange Act, 15 U.S.C. 78c(a)(4), the definition of 
``dealer'' in Section 3(a)(5) of the Exchange Act, 15 U.S.C. 
78c(a)(5), the exchange registration requirements in Sections 5 and 
6 of the Exchange Act, 15 U.S.C. 78e and 78f, respectively, and the 
requirement in Section 12 of the Exchange Act that securities be 
registered before a transaction is effected on a national securities 
exchange. See 15 U.S.C. 78l(a). The Securities Act requires that any 
offer and sale of a security must either be registered under the 
Securities Act (see Section 5 of the Securities Act, 15 U.S.C. 77e) 
or made pursuant to an exemption from registration (see, e.g., 
Sections 3 and 4 of the Securities Act, 15 U.S.C. 77c and 77d, 
respectively). In addition, the Securities Act requires that any 
offer to sell, offer to buy or purchase or sell a security-based 
swap to any person who is not an eligible contract participant 
(``ECP'') must be registered under the Securities Act. See Section 
5(e) of the Securities Act, 15 U.S.C. 77e(e). Because of the 
statutory language of Section 5(e), exemptions from this requirement 
in Sections 3 and 4 of the Securities Act are not available. This 
release does not address the requirements under Section 5 of the 
Securities Act.
    The Commission adopted interim final rules that provide 
exemptions from certain provisions of the Securities Act, the 
Exchange Act, and the Trust Indenture Act of 1939 (``Trust Indenture 
Act''), 15 U.S.C. 77aaa et seq., for those security-based swaps that 
prior to July 16, 2011 were ``security-based swap agreements'' and 
are defined as ``securities'' under the Securities Act and the 
Exchange Act as of July 16, 2011 due solely to the provisions of 
Title VII of the Dodd-Frank Act. See Exemptions for Security-Based 
Swaps, Securities Act Release No. 9231 (July 1, 2011), 76 FR 40605 
(July 11, 2011); see also Extension of Exemptions for Security-Based 
Swaps, Securities Act Release No. 9383 (Jan. 29, 2013), 78 FR 7654 
(Feb. 4, 2013). The Commission also issued temporary exemptions 
under the Exchange Act regarding certain issues raised by the 
inclusion of security-based swaps in the definition of ``security.'' 
See Order Extending Temporary Exemptions Under the Securities 
Exchange Act of 1934 in Connection With the Revision of the 
Definition of ``Security'' To Encompass Security-Based Swaps, and 
Request for Comment, Exchange Act Release No. 68864 (Feb. 7, 2013), 
78 FR 10218 (Feb. 13, 2013); see also Order Granting Temporary 
Exemptions Under the Securities Exchange Act of 1934 in Connection 
With the Pending Revision of the Definition of ``Security'' To 
Encompass Security-Based Swaps, and Request for Comment, Exchange 
Act Release No. 64795 (July 1, 2011) 76 FR 39927 (July 7, 2011).
    \9\ In addition, the Dodd-Frank Act adds to the Commodity 
Exchange Act (``CEA'') and Exchange Act definitions of the terms 
``swap dealer,'' ``security-based swap dealer,'' ``major swap 
participant,'' and ``major security-based swap participant,'' and 
amends the CEA definition of the term ``eligible contract 
participant.'' 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 CEA, 7 U.S.C. 1a(18), as 
redesignated and amended by Section 721 of the Dodd-Frank Act. 
Section 712(d)(1) of the Dodd-Frank Act provides that the CFTC and 
the Commission, in consultation with the Board of Governors of the 
Federal Reserve System, shall jointly 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.'' 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,'' and Section 761(b)(3) of the 
Dodd-Frank Act permits the Commission to 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 or the amendments made by Title VII.
    The Commission and the CFTC jointly adopted rules and 
interpretive guidance further defining the terms ``swap,'' 
``security-based swap,'' and ``security-based swap agreement,'' and 
regulations regarding mixed swaps. See Further Definition of 
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap 
Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR 
48208 (Aug. 13, 2012) (``Product Definitions Adopting Release''). 
The Commission and the CFTC also jointly adopted rules further 
defining the terms ``swap dealer,'' ``security-based swap dealer,'' 
``major swap participant,'' ``major security-based swap 
participant,'' and ``eligible contract participant.'' See Further 
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' 
``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant,'' Exchange Act 
Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) 
(``Intermediary Definitions Adopting Release'').
    \10\ The provisions of the Exchange Act relating to security-
based swaps that were enacted by Title VII also are referred to 
herein as ``Title VII requirements'' or ``requirements in Title 
VII.''
    \11\ See Section 764(a) of the Dodd-Frank Act. The Commission, 
jointly with the CFTC, adopted rules further defining the term 
``security-based swap dealer.'' See Intermediary Definitions 
Adopting Release, 77 FR 30596.
    The Commission has proposed rules regarding the registration and 
substantive requirements for security-based swap dealers and major 
security-based swap participants. See Proposed Rules Governing 
Capital, Margin, and Segregation Requirements for Security-Based 
Swap Dealers and Major Security-Based Swap Participants and Capital 
Requirements for Broker-Dealers, Exchange Act Release No. 68071 
(Oct. 18, 2012) 77 FR 70214 (Nov. 23, 2012) (``Capital, Margin, and 
Segregation Proposing Release''); Registration of Security-Based 
Swap Dealers and Major Security-Based Swap Participants, Exchange 
Act Release No. 65543 (Oct. 12, 2011) (RIN 3235-AL05), 76 FR 65784 
(Oct. 24, 2011) (``Registration Proposing Release''); Business 
Conduct Standards for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 64766 
(June 29, 2011), 76 FR 42396 (July 18, 2011) (``External Business 
Conduct Standards Proposing Release''); and Trade Acknowledgment and 
Verification of Security-Based Swap Transactions, Exchange Act 
Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011) 
(``Trade Acknowledgment Proposing Release''). The Commission has not 
yet proposed rules governing the recordkeeping, reporting, and 
notification requirements for security-based swap dealers and major 
security-based swap dealers pursuant to Section 15F(f) of the 
Exchange Act, 15 U.S.C. 78o-10(f), as added by Section 764(a) of the 
Dodd-Frank Act.
    \12\ See Section 764(a) of the Dodd-Frank Act. The Commission, 
jointly with the CFTC, adopted rules further defining the term 
``major security-based swap participant.'' See Intermediary 
Definitions Adopting Release, 77 FR 30596. In a number of releases, 
the Commission also has proposed rules regarding the registration 
and substantive requirements for major security-based swap 
participants. See note 11, supra.
    \13\ See Section 763(i) of the Dodd-Frank Act. The Commission 
has proposed rules regarding the registration and regulation of 
SDRs. See Security-Based Swap Data Repository Registration, Duties, 
and Core Principles, Exchange Act Release No. 63347 (Nov. 19, 2010), 
75 FR 77306 (Dec. 10, 2010), corrected at 75 FR 79320 (Dec. 20, 
2010) and 76 FR 2287 (Jan. 13, 2011) (``SDR Proposing Release'').
    \14\ See Section 763(b) of the Dodd-Frank Act. The Commission 
adopted rules regarding the standards for risk management practices 
and operations of registered clearing agencies, including security-
based swap clearing agencies. See Clearing Agency Standards, 
Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 
2012) (``Clearing Agency Standards Adopting Release'').
    \15\ See Section 763(c) of the Dodd-Frank Act. The Commission 
has proposed rules regarding the registration and regulation of SB 
SEFs. See Registration and Regulation of Security-Based Swap 
Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 
76 FR 10948 (Feb. 29, 2011) (``SB SEF Proposing Release'').
    \16\ See Sections 763 and 766 of the Dodd-Frank Act. The 
Commission has proposed rules on trade reporting, data elements, and 
real-time public reporting for security-based swaps. See Regulation 
SBSR--Reporting and Dissemination of Security-Based Swap 
Information, Exchange Act Release No. 63346 (Nov. 19, 2010) (RIN 
3235-AK80), 75 FR 75208 (Dec. 2, 2010) (``Regulation SBSR Proposing 
Release'').
    \17\ See Section 763(b) of the Dodd-Frank Act. The Commission 
has proposed or adopted rules relating to the end-user clearing 
exception and the process for submitting for review of security-
based swaps for mandatory clearing. See Process for Submissions for 
Review of Security-Based Swaps for Mandatory Clearing and Notice 
Filing Requirements for Clearing Agencies; Technical Amendments to 
Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory 
Organizations, Exchange Act Release No. 67286 (June 28, 2012), 77 FR 
41602 (July 13, 2012) (``Clearing Procedures Adopting Release''); 
End-User Exception to Mandatory Clearing of Security-Based Swaps 
(Corrected), Exchange Act Release No. 63556 (Dec. 15, 2010), 75 FR 
79992 (Dec. 21, 2010) (``End-User Exception Proposing Release'').
    \18\ See Section 763(b) of the Dodd-Frank Act.
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B. Overview of the Cross-Border Proposal

    With limited exceptions, the Commission has not proposed specific 
provisions of rules or forms or provided guidance regarding the 
application of Title VII to cross-border activities.\19\ Rather than 
addressing these issues in a piecemeal fashion through the various 
substantive rulemaking proposals implementing Title VII, the Commission 
instead is addressing the application of Title VII to cross-border 
activities holistically in a single proposing release.\20\ This 
approach provides market participants, foreign regulators, and other 
interested parties with an opportunity to consider, as an integrated 
whole, the Commission's proposed approach to the application of Title 
VII to cross-border security-based swap activities and non-U.S. persons 
that act in capacities regulated under the Dodd-Frank Act.\21\
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    \19\ The Commission has proposed a rule addressing the 
application of the security-based swap trade reporting requirement 
to cross-border transactions and to non-U.S. persons. See Regulation 
SBSR Proposing Release, 75 FR 75239-40, as discussed in Section 
VIII, infra. The Commission also has proposed rules imposing special 
requirements on ``nonresident security-based swap dealers,'' 
``nonresident major security-based swap participants,'' ``non-
resident swap data repositories,'' and ``non-resident SB SEFs.'' See 
Registration Proposing Release, 76 FR 65799-801, as discussed in 
Section III.E, infra; SDR Proposing Release, 75 FR 77310, as 
discussed in Section VI, infra; and SB SEF Proposing Release, 76 FR 
11000-3, as discussed in Section VII, infra.
    \20\ Tables reflecting the Commission's proposed approach as it 
would apply to security-based swap transactions between different 
types of entities are included in this release as Appendix A. Each 
table focuses on a specific type of security-based swap dealing 
entity or market participant and sets out the Title VII requirements 
that would apply to such person under different transaction 
scenarios.
    \21\ Cf. CFTC Proposed Interpretive Guidance and Policy 
Statement, Cross-Border Application of Certain Swaps Provisions of 
the Commodity Exchange Act, 77 FR 41214 (July 12, 2012) (``CFTC 
Cross-Border Proposal''); Exemptive Order Regarding Compliance with 
Certain Swap Regulations, 77 FR 41110 (July 12, 2012) (``CFTC 
Proposed Cross-Border Exemptive Order''); Final Exemptive Order 
Regarding Compliance with Certain Swap Regulations, 78 FR 858 (Jan. 
7, 2013) (``Final CFTC Cross-Border Exemptive Order''); Further 
Proposed Guidance Regarding Compliance With Certain Swap 
Regulations, 78 FR 909 (Jan. 7, 2013) (``CFTC Further Proposed 
Guidance''). In Section XIII.B below, we solicit general comment on 
the differences between our proposed approach and the CFTC's 
proposed approach.
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    After providing an overview of the security-based swap market, the 
Commission's preliminary views on the scope of application of Title VII 
to cross-border security-based swap activity, and the legal and policy 
principles guiding the Commission's approach to the application of 
Title VII to cross-border activities in Section II, we set forth our 
proposed approach in the subsequent sections of the release.
    In Sections III and IV, we propose rules and interpretive guidance 
regarding the registration and regulation of security-based swap 
dealers and major security-based swap participants, including the 
treatment of foreign branches of U.S. banks and the provision of 
guarantees in the cross-border context. In connection with this, we are 
re-proposing the following rules and forms: 17 CFR 249.1600 (Form 
SBSE), 249.1600a (Form SBSE-A), and 249.1600b (Form SBSE-BD).\22\
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    \22\ See Registration Proposing Release, 76 FR 65784, as 
discussed in Section III.E, infra.
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    In Sections V-VII, we propose rules and interpretive guidance 
regarding the registration of security-based swap clearing agencies, 
SDRs, and SB SEFs, as well as discuss generally under what 
circumstances the Commission would consider granting exemptions from 
registration for these infrastructures. To facilitate relevant 
authorities' access to security-based swap data collected and 
maintained by Commission-registered SDRs, the Commission also is 
proposing interpretive guidance to specify how SDRs may comply with the 
notification requirement in the Exchange Act and specifying how the 
Commission proposes to determine whether a relevant authority is 
appropriate for purposes of receiving security-based swap data from an 
SDR.\23\ In addition, the Commission is proposing a tailored exemption 
from the indemnification requirement in the Exchange Act.\24\
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    \23\ See Section VI.C, infra.
    \24\ Id.
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    In Sections VIII-X, we propose rules and interpretive guidance 
regarding the application of Title VII to cross-border activities with 
respect to certain transactional requirements in connection with 
reporting and dissemination, clearing, and trade execution for 
security-based swaps. As discussed further below, these requirements 
apply to persons independent of their registration status. In 
connection with this, we are re-proposing the following rules: 17 CFR 
242.900-242.911 (Regulation SBSR).\25\
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    \25\ See Regulation SBSR Proposing Release, 75 FR 75208, as 
discussed in Section VIII, infra.
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    In Section XI, we set forth a proposed policy and procedural 
framework under which we would consider permitting compliance with 
comparable regulatory requirements in a foreign jurisdiction to 
substitute for compliance with certain requirements of the Exchange 
Act, and the rules and regulations thereunder, relating to security-
based swaps (i.e., ``substituted compliance'').\26\ Generally speaking, 
the Commission is proposing a policy and procedural framework that 
would allow for the possibility of substituted compliance in 
recognition of

[[Page 30974]]

the potential, in a market as global as the security-based swap market, 
for market participants who engage in cross-border security-based swap 
activity to be subject to conflicting or duplicative compliance 
obligations.\27\ In addition, the Commission is proposing a rule that 
would set forth procedures for requesting a substituted compliance 
determination.
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    \26\ See Section XI, infra. As discussed in Section XI, in 
permitting substituted compliance, the Commission might use 
different procedural approaches depending on the different 
substantive requirements that are the subject of the substituted 
compliance determinations. See also note 27, infra.
    \27\ Separately, in Sections V-VII below, the Commission also 
discusses generally when we would consider exempting non-resident 
security-based swap clearing agencies and SB SEFs that are subject 
to comparable, comprehensive supervision and regulation in their 
home countries, and certain SDRs that are non-U.S. persons, from 
certain obligations under the Exchange Act, including the 
requirement to register.
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    In Section XII, the Commission sets forth our view of the scope of 
our authority, with respect to enforcement proceedings, under Section 
929P of the Dodd-Frank Act.\28\ Section XIII sets forth a general 
request for comment, including request for comment on the consistency 
of our proposed approach with the CFTC's proposed approach to applying 
the provisions of the CEA that were enacted by Title VII in the cross-
border context.
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    \28\ The rules, forms, and interpretive guidance proposed herein 
and discussed in Sections II-XI below relate solely to the 
applicability of the registration (and the attendant substantive 
regulation) and reporting and dissemination, clearing, and trade 
execution requirements in Title VII, and are not intended to limit 
or address the cross-border reach or extraterritorial application of 
the antifraud or other provisions of the federal securities laws.
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    Finally, in Section XIV, the Commission addresses the Paperwork 
Reduction Act, and Section XV provides an economic analysis of the 
proposed approach, including a discussion of the associated costs and 
benefits of the proposals discussed in Sections III-XI, as well as a 
discussion of issues related to efficiency, competition, and capital 
formation.
    Because this release is directly related to security-based swap 
data reporting and dissemination, clearing, and trade execution, as 
well as the regulation of various persons required to register as a 
result of amendments made to the Exchange Act by Title VII, we 
anticipate that some of the rules, forms, and interpretive guidance 
proposed herein, and comments received thereon, will be addressed in 
the adopting releases relating to the impacted substantive rules. In 
some areas, we may decide to address comments received on the proposals 
contained in this release by adopting rules in a separate 
rulemaking.\29\
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    \29\ The Commission is not addressing in this release issues 
relating to compliance dates of final rules adopted pursuant to 
amendments made to the Exchange Act by Title VII. Compliance issues, 
including compliance dates, will be addressed in connection with the 
various Title VII final rules. See Statement of General Policy on 
the Sequencing of the Compliance Dates for Final Rules Applicable to 
Security-Based Swaps Adopted Pursuant to the Securities Exchange Act 
of 1934 and the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Exchange Act Release No. 67177 (June 11, 2012), 77 
FR 35625 (June 14, 2012) (``Implementation Policy Statement''). See 
also Reopening of Comment Periods for Certain Rulemaking Releases 
and Policy Statement Applicable to Security-Based Swaps Proposed 
Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Exchange Act Release 
No. 34-69491 (May 1, 2013).
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C. Consultation and Coordination

    As discussed more fully below, a number of market participants, 
foreign regulators, and other interested parties have already provided 
their views on the application of Title VII to cross-border activities 
through both written comment letters to the Commission and/or the CFTC 
and meetings with Commissioners and Commission staff.\30\ The 
Commission has taken the commenters' views expressed thus far into 
consideration in developing these proposed rules, forms, and 
interpretive guidance.\31\ In addition, in developing this proposal, 
the Commission has, in compliance with Sections 712(a)(2)\32\ and 
752(a)\33\ of the Dodd-Frank Act, consulted and coordinated with the 
CFTC, the prudential regulators,\34\ and foreign regulatory 
authorities.
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    \30\ The views expressed in comment letters and meetings are 
collectively referred to as the views of ``commenters.'' See 
Appendix D for a list of commenters referred to in this release and 
the location of their comment letters on the Commission's (or the 
CFTC's) Web site.
    \31\ In addition, the Commission and the CFTC held a joint 
public roundtable regarding the application of Title VII to cross-
border activities. See Joint Public Roundtable on International 
Issues Relating to the Implementation of Title VII of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Exchange Act Release 
No. 64939 (July 21, 2011), 76 FR 44507 (July 26, 2011).
    \32\ Section 712(a)(2) of the Dodd-Frank Act states, in part, 
that ``the Securities and Exchange Commission shall consult and 
coordinate to the extent possible with the Commodity Futures Trading 
Commission and the prudential regulators for the purposes of 
assuring regulatory consistency and comparability, to the extent 
possible.''
    \33\ Section 752(a) of the Dodd-Frank Act states, in part, that 
``[i]n order to promote effective and consistent global regulation 
of swaps and security-based swaps, the Commodity Futures Trading 
Commission, the Securities and Exchange Commission, and the 
prudential regulators (as that term is defined in Section 1a(39) of 
the Commodity Exchange Act), as appropriate, shall consult and 
coordinate with foreign regulatory authorities on the establishment 
of consistent international standards with respect to the regulation 
(including fees) of swaps.''
    \34\ The term ``prudential regulator'' is defined in Section 
1a(39) of the CEA, 7 U.S.C. 1a(39), and that definition is 
incorporated by reference in Section 3(a)(74) of the Exchange Act, 
15 U.S.C. 78c(a)(74). Pursuant to the definition, the Board of 
Governors of the Federal Reserve System (``Federal Reserve Board''), 
the Office of the Comptroller of the Currency, the Federal Deposit 
Insurance Corporation, the Farm Credit Administration, or the 
Federal Housing Finance Agency (collectively, the ``prudential 
regulators'') is the ``prudential regulator'' of a security-based 
swap dealer if the entity is directly supervised by that agency.
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    Efforts to regulate the swaps market are underway not only in the 
United States but also abroad. In 2009, leaders of the Group of 20 
(``G20'')--whose membership includes the United States, 18 other 
countries, and the European Union (``EU'')--called for global 
improvements in the functioning, transparency, and regulatory oversight 
of OTC derivatives markets. Specifically, the G20 leaders declared 
that:

[a]ll standardised OTC derivative contracts should be traded on 
exchanges or electronic trading platforms, where appropriate, and 
cleared through central counterparties by end-2012 at the latest. 
OTC derivative contracts should be reported to trade repositories. 
Non-centrally cleared contracts should be subject to higher capital 
requirements. We ask the [Financial Stability Board] and its 
relevant members to assess regularly implementation and whether it 
is sufficient to improve transparency in the derivatives markets, 
mitigate systemic risk and protect against market abuse.\35\
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    \35\ G20 Meeting, Pittsburgh, United States, September 25, 2009, 
available at: https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.

In subsequent summits, the G20 leaders have reiterated their commitment 
to OTC derivatives regulatory reform.\36\ The Commission has 
participated in numerous bilateral and multilateral discussions with 
foreign regulatory authorities addressing the regulation of OTC 
derivatives.\37\ Through these

[[Page 30975]]

discussions and our participation in various international task forces 
and working groups,\38\ we have gathered information about foreign 
regulatory reform efforts and have discussed the possibility of 
conflicts and gaps, as well as inconsistencies and duplications, 
between U.S. and foreign regulatory regimes. We have taken these 
discussions into consideration in developing these proposed rules, 
forms, and interpretations.
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    \36\ For example, on June 18-19, 2012, the leaders of the G20 
convened in Los Cabos, Mexico, and reaffirmed their commitments with 
respect to the regulation of the OTC derivatives markets. See the 
G20 Leaders Declaration (June 2012), para. 39, available at: https://www.g20.org/documents/.
    \37\ Senior representatives of OTC derivatives market regulators 
from G20 jurisdictions have met on a number of occasions to discuss 
international coordination of OTC derivatives regulations. See, 
e.g., Joint Press Statement of Leaders on Operating Principles and 
Areas of Exploration in the Regulation of the Cross-Border OTC 
Derivatives Market (Dec. 4, 2012), available at: https://www.sec.gov/news/press/2012/2012-251.htm; Joint Statement on Regulation of OTC 
Derivatives Markets (May 7, 2012), available at: https://www.sec.gov/news/press/2012/2012-85.htm; and Joint Statement on Regulation of 
OTC Derivatives Markets (Dec. 9, 2011), available at: https://www.sec.gov/news/press/2011/2011-260.htm . See also Financial 
Stability Board (``FSB''), OTC Derivatives Market Reforms, Fifth 
Progress Report on Implementation (April 15, 2013) (``FSB Progress 
Report April 2013''), at 47, available at: https://www.financialstabilityboard.org/publications/r_130415.pdf (noting 
that SEC staff has regularly consulted its counterparts in other 
jurisdictions to discuss and compare approaches to the application 
of Title VII of the Dodd-Frank Act in cross-border contexts); FSB 
Progress Report April 2013 at 5 and 45-46 (discussing meetings of 
the group of market regulators ``to identify and explore ways to 
address issues and uncertainties in the application of rules in a 
cross-border context, including options to address identified 
conflicts, inconsistencies, and duplication.'').
    \38\ The Commission participates in the FSB's Working Group on 
OTC Derivatives Regulation (``ODWG''), both on its own behalf and as 
the representative of the International Organization of Securities 
Commissions (``IOSCO''), which is co-chair of the ODWG. The 
Commission also serves as one of the co-chairs of the IOSCO Task 
Force on OTC Derivatives Regulation.
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    In addition, the Commission and the CFTC have conducted staff 
studies to assess developments in OTC derivatives regulation abroad. As 
directed by Congress in Section 719(c) of the Dodd-Frank Act, on 
January 31, 2012, the Commission and the CFTC jointly submitted to 
Congress a ``Joint Report on International Swap Regulation'' (``Swap 
Report'').\39\ The Swap Report discussed swap and security-based swap 
regulation and clearinghouse regulation in the Americas, Asia, and the 
European Union, and identified similarities and differences in 
jurisdictions' approaches to areas of regulation, as well as other 
areas of regulation that could be harmonized. The Swap Report also 
identified major clearinghouses, clearing members, and regulators in 
each geographic area and described the major contracts (including 
clearing volumes and notional values), methods for clearing swaps, and 
the systems used for setting margin in each geographic area.\40\
---------------------------------------------------------------------------

    \39\ See CFTC and SEC, Joint Report on International Swap 
Regulation (Jan. 31, 2012), available at: https://www.sec.gov/news/studies/2012/sec-cftc-intlswapreg.pdf.
    \40\ In addition, Commission and CFTC staff submitted a joint 
study to Congress on the feasibility of requiring the derivatives 
industry to adopt standardized computer-readable algorithmic 
descriptions which may be used to describe complex and standardized 
financial derivatives. See Joint Study on the Feasibility of 
Mandating Algorithmic Descriptions for Derivatives: A Study by the 
Staff of the Securities and Exchange Commission and the Commodity 
Futures Trading Commission as Required by Section 719(c) of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Apr. 7, 
2011), available at: https://www.sec.gov/news/studies/2011/719b-study.pdf. In preparing this report, Commission and CFTC staff 
coordinated extensively with international financial institutions 
and foreign regulators.
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D. Substituted Compliance

    As noted above, we recognize the potential, in a market as global 
as the security-based swap market, that market participants who engage 
in cross-border security-based swap activity may be subject to 
conflicting or duplicative compliance obligations. To address this 
possibility, we are proposing a ``substituted compliance'' framework 
under which we would consider permitting compliance with requirements 
in a foreign\41\ regulatory system to substitute for compliance with 
certain requirements of the Exchange Act relating to security-based 
swaps, provided that the corresponding requirements in the foreign 
regulatory system are comparable to the relevant provisions of the 
Exchange Act.\42\ The availability of substituted compliance should 
reduce the likelihood that market participants would be subject to 
potentially conflicting or duplicative sets of rules.
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    \41\ In this release, the term ``foreign'' is used 
interchangeably with the term ``non-U.S.'' See, e.g., note 372, 
infra (discussing the definition of ``foreign security-based swap 
dealer'').
    \42\ See Section XI, infra.
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    As discussed more fully below, the Commission would perform 
comparability analysis and make substituted compliance determinations 
with respect to four separate categories of requirements.\43\ If, for 
example, a foreign regulatory system achieves comparable regulatory 
outcomes in three out of the four categories, then the Commission would 
permit substituted compliance with respect to those three categories of 
comparable requirements, but not for the one, non-comparable category 
for which comparable regulatory outcomes are not achieved. In other 
words, we are not proposing an ``all-or-nothing'' approach. In 
addition, in making comparability determinations within each category 
of requirements, the Commission is proposing to take a holistic 
approach; that is, we would ultimately focus on regulatory outcomes 
rather than a rule-by-rule comparison. Substituted compliance therefore 
should accept differences between regulatory regimes when those 
differences nevertheless accomplish comparable regulatory outcomes.
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    \43\ Specifically, the Commission is proposing to make 
substituted compliance determinations with respect to the following 
categories of requirements: (i) Requirements applicable to 
registered security-based swap dealers in Section 15F of the 
Exchange Act and the rules and regulations thereunder; (ii) 
requirements relating to regulatory reporting and public 
dissemination of security-based swaps; (iii) requirements relating 
to clearing for security-based swaps; and (iv) requirements relating 
to trade execution for security-based swaps. See Section XI, infra.
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E. Conclusion

    In proposing these rules, forms, and interpretations, the 
Commission is mindful that the security-based swap market is global in 
nature and developed prior to the enactment of the Dodd-Frank Act.\44\ 
There are challenges involved in imposing a comprehensive regulatory 
regime on existing markets, particularly ones that have not been 
subject to the particular regulation that the Dodd-Frank Act provides. 
Any rules and interpretive guidance we adopt governing the application 
of Title VII to cross-border activities could significantly affect the 
global security-based swap market. As discussed further below, to the 
extent practicable and consistent with our statutory mandate,\45\ the 
Commission has proposed these rules and interpretations with the intent 
to achieve the regulatory benefits intended by the Dodd-Frank Act and 
to facilitate a well-functioning global security-based swap market, 
including by taking into account the impact these proposed rules and 
interpretations will have on counterparty protection, transparency, 
systemic risk, liquidity, efficiency, and competition in the market. In 
addition, the Commission is mindful of the fact that the application of 
Title VII to cross-border activities raises issues of potential 
conflict or overlap with foreign regulatory regimes. Furthermore, the 
Commission is attentive to the fact that a number of registrants may be 
registered with both us and the CFTC.\46\
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    \44\ See Section II, infra.
    \45\ See Section II.C, infra (discussing the principles guiding 
proposed approach to applying Title VII in the cross-border 
context).
    \46\ All references in this release to an entity that is 
``registered'' indicate an entity that is registered with the 
Commission, unless otherwise indicated.
---------------------------------------------------------------------------

    The rules and interpretations proposed today represent the 
Commission's preliminary views regarding the application of Title VII 
to cross-border security-based swap activities and to non-U.S. persons 
who act in capacities regulated under the Dodd-Frank Act. We note that 
these proposed rules and interpretations are tailored to the unique 
circumstances of the security-based swap market, and as such would not 
necessarily be appropriate to apply to the Commission's regulation of 
traditional securities markets. We also recognize that there are a 
number of possible alternative approaches to applying Title VII in the 
cross-border context. Accordingly, the Commission invites public 
comment regarding all aspects of

[[Page 30976]]

the proposed approach, including each proposed rule and interpretation 
contained herein, and potential alternative approaches. In particular, 
data and comment from market participants and other interested parties 
with respect to the likely effect of each proposed rule and 
interpretation regarding application of a specific Title VII 
requirement, and the effect of such proposed application in the 
aggregate, will be particularly useful to the Commission in evaluating 
possible modifications to the proposal and understanding the 
consequences of the substantive rules that have not yet been adopted 
under Title VII.

II. Overview of the Security-Based Swap Market and the Legal and Policy 
Principles Guiding the Commission's Approach to the Application of 
Title VII to Cross-Border Activities

    In this section, the Commission provides a general overview of the 
security-based swap market that informs our proposed implementation of 
Title VII, including a description of the various dealing structures 
used by U.S.-based and foreign-based entities to conduct their 
security-based swap businesses, and existing clearing, reporting, and 
trade execution practices. We also discuss the Commission's preliminary 
views on the scope of application of Title VII and the principles 
guiding our proposed approach to applying Title VII in the cross-border 
context.

A. Overview of the Security-Based Swap Market

1. Global Nature of the Security-Based Swap Market
    The security-based swap market is a global market.\47\ Security-
based swap business currently takes place across national borders, with 
agreements negotiated and executed between counterparties often in 
different jurisdictions (and at times booked and risk-managed in still 
other jurisdictions).\48\
---------------------------------------------------------------------------

    \47\ See, e.g., IIB Letter at 1 (noting the ``truly global 
nature of the OTC derivatives market''); Cleary Letter IV at 2 
(noting that swaps and security-based swaps trade in a ``unique 
global market''); Soci[eacute]t[eacute] G[eacute]n[eacute]rale 
Letter II at 2 (noting the ``global nature of the derivatives 
business''); see also Bank of International Settlements (``BIS''), 
Committee on the Global Financial System, No. 46, The macro 
financial implications of alternative configurations for access to 
central counterparties in OTC derivatives markets (Nov. 2011) at 1, 
available at: https://www.bis.org/publ/cgfs46.pdf (referring to the 
``globalized nature of the market, in which a significant proportion 
of OTC derivatives trading is undertaken across borders'').
    \48\ See, e.g., SIFMA Letter I at 2.
---------------------------------------------------------------------------

    The global nature of the security-based swap market is evidenced by 
the data available to the Commission.\49\ Based on market data in the 
Depository Trust and Clearing Corporation's Trade Information Warehouse 
(``DTCC-TIW''),\50\ viewed from the perspective of the domiciles of the 
counterparties booking credit default swap (``CDS'') transactions, 
approximately 49% of U.S. single-name CDS transactions in 2011 were 
cross-border transactions between a U.S.-domiciled \51\ counterparty 
and a foreign-domiciled counterparty \52\ and an additional 44% of such 
CDS transactions were between two foreign-domiciled counterparties.\53\ 
Thus, approximately 7% of the U.S. single-name CDS transactions in 2011 
were between two U.S.-domiciled counterparties.\54\ These statistics 
indicate that cross-border transactions are the norm, not the 
exception, in the security-based swap market.\55\ Accordingly, the 
question of how the Commission is implementing Title VII with respect 
to security-based swaps will, to a large extent, be affected by how the 
Commission applies Title VII to the cross-border transactions that are 
the majority of security-based swaps.
---------------------------------------------------------------------------

    \49\ See Section XV.B, infra (discussing in detail the global 
nature of the security-based swap market).
    \50\ The information was made available to the Commission in 
accordance with the agreement between DTCC-TIW and the OTC 
Derivatives Regulatory Forum (``ODRF'').
    \51\ The domicile classifications in DTCC-TIW are based on the 
market participants' own reporting and may not have been verified. 
Prior to enactment of the Dodd-Frank Act, funds and accounts did not 
formally report their domicile to DTCC-TIW because there was no 
systematic requirement to do so. After enactment of the Dodd-Frank 
Act, the DTCC-TIW has collected the registered office location of 
the account or fund. This information is self-reported on a 
voluntary basis. It is possible that some market participants may 
misclassify their domicile status because the databases in DTCC-TIW 
do not assign a unique legal entity identifier to each separate 
entity. Notwithstanding this limitation, we believe that the cross-
border and foreign activity presented in the analysis by the 
Commission's Division of Risk, Strategy, and Financial Innovation 
demonstrates the nature of the CDS market. See Section XV.B.2.c, 
infra.
    \52\ DTCC-TIW classified a foreign branch or foreign subsidiary 
of a U.S. domiciled entity as foreign-domiciled. Therefore, CDS 
transactions with a foreign-domiciled counterparty include CDS 
transactions with a foreign branch or foreign subsidiary of a U.S.-
domiciled entity as counterparty.
    \53\ Put another way, in 2011, a vast majority (approximately 
93%) of U.S. single-name CDS transactions directly involved at least 
one foreign-domiciled counterparty. This observation is based on the 
data compiled by the Commission's Division of Risk, Strategy, and 
Financial Innovation on single-name CDS transactions with U.S. 
reference entities from the DTCC-TIW between January 1, 2011, and 
December 31, 2011. See Section XV.B.2.d, infra.
    \54\ Id.
    \55\ We note, however, that, in addition to classifying 
transactions between a U.S. counterparty and a foreign branch of a 
U.S. bank as a cross-border transaction (see note 51, supra), these 
statistics characterize as cross-border transactions those in which 
all or substantially all of the activity takes place in the United 
States and all or much of the risk of the transactions ultimately is 
borne by U.S. persons.
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2. Dealing Structures
    Dealers use a variety of business models and legal structures to 
conduct security-based swap dealing business \56\ with counterparties 
in jurisdictions all around the world.\57\ Commenters have indicated 
that both U.S.-based and foreign-based entities use certain dealing 
structures for a variety of legal, tax, strategic, and business reasons 
that often pre-date the enactment of the Dodd-Frank Act.\58\ Among the 
reasons cited for the variety of dealing structures is the desire of 
counterparties to reduce risk and enhance credit protection based on 
the particular characteristics of each entity's business.\59\
---------------------------------------------------------------------------

    \56\ As used in this release, ``security-based swap dealing,'' 
``security-based swap dealing activity,'' ``dealing activity,'' and 
related concepts have the meaning described in the Intermediary 
Definitions Adopting Release, 77 FR 30596, unless otherwise 
indicated in this release.
    \57\ See, e.g., Cleary Letter IV at 5; Davis Polk Letter I at 2-
3; IIB Letter at 7.
    \58\ See, e.g., Cleary Letter at 3.
    \59\ See, e.g., SIFMA Letter at 2.
---------------------------------------------------------------------------

    In this subsection, we describe certain dealing structures that 
U.S.-based entities and foreign-based entities in the security-based 
swap market might use. In each of these dealing structures, because the 
booking entity is the counterparty to the security-based swap 
transaction resulting from the dealing activity (i.e., the principal) 
and bears the ongoing risk of performance on the transaction, we view 
the booking entity, and not the intermediary that acts as an agent on 
behalf of the booking entity to originate the transaction, as the 
dealing entity.\60\
---------------------------------------------------------------------------

    \60\ See Intermediary Definitions Adopting Release, 77 FR 30617 
n.264 (``A sales force, however, is not a prerequisite to a person 
being a security-based swap dealer. For example, a person that 
enters into security-based swaps in a dealing capacity can fall 
within the dealer definition even if it uses an affiliated entity to 
market and/or negotiate those security-based swaps (e.g., the person 
is a booking entity).''). See also Section III.D, infra.
---------------------------------------------------------------------------

(a) U.S. Bank Dealer
    A U.S. bank holding company may use a U.S. subsidiary that is a 
banking entity to deal directly with U.S. and foreign counterparties. 
Such U.S. bank dealer may use a sales force in its U.S. home office to 
originate security-based swap transactions in the United States and use 
separate sales force in foreign branches to originate security-based 
swap transactions with counterparties in foreign local markets.\61\ The 
resulting security-based swap transactions may be

[[Page 30977]]

booked in the home office of the U.S. bank or in a foreign branch of 
the bank.\62\
---------------------------------------------------------------------------

    \61\ See Sullivan & Cromwell Letter at 2.
    \62\ See id. at 3-4.
---------------------------------------------------------------------------

(b) U.S. Non-bank Dealer
    A U.S.-based holding company may use a non-bank subsidiary to 
conduct security-based swap dealing activity in the U.S. market and 
foreign local markets. The U.S. non-bank dealer may act as principal to 
originate and book transactions in the United States and use a sales 
force in the foreign local markets (e.g., salespersons employed by its 
foreign affiliate) as agent to originate transactions on its behalf, 
and then centrally book the resulting transactions in the U.S. non-bank 
dealer. In some situations, such as where the holding company has rated 
debt, but the U.S. non-bank dealer does not, the U.S. non-bank dealer's 
performance under security-based swaps may be supported by a parental 
guarantee provided by the holding company.\63\ The guarantee would 
typically give counterparties to the U.S. non-bank dealer direct 
recourse to the holding company for obligations owed by such non-bank 
dealer under the security-based swaps as though the guarantor had 
entered into the transactions directly with the counterparties.\64\
---------------------------------------------------------------------------

    \63\ See Cleary Letter IV at 10 (discussing a U.S. holding 
company providing a guarantee of performance on the obligations of 
its foreign swap dealing subsidiary).
    \64\ See Intermediary Definitions Adopting Release, 77 FR 30689. 
See also Product Definitions Adopting Release, 77 FR 48227 (stating 
that the Commission would consider issues involving cross-border 
guarantees of security-based swaps in a separate release addressing 
the application of Title VII in the cross-border context).
---------------------------------------------------------------------------

(c) Foreign Subsidiary Guaranteed by a U.S. Person
    A U.S.-based holding company also may conduct dealing activity in 
both U.S. markets and foreign markets out of a foreign subsidiary.\65\ 
The foreign subsidiary may use a sales force in the United States 
(e.g., salespersons employed by its U.S. affiliate) to originate 
security-based swap transactions with counterparties in the U.S. 
markets, or may directly solicit, negotiate, and execute security-based 
swap transactions with counterparties in the U.S. markets from outside 
the United States, and centrally book the resulting transactions 
itself. The foreign subsidiary also may conduct security-based swap 
dealing activity in various foreign markets using local salespersons as 
agent to originate and centrally book the resulting security-based swap 
transactions itself. In some situations, such as where the U.S.-based 
holding company has rated debt, but the foreign subsidiary does not, 
the foreign subsidiary's performance under security-based swaps may be 
supported by a parental guarantee provided by the holding company.\66\ 
Such guarantee would typically give its counterparty direct recourse to 
the U.S. parent acting as guarantor for obligations owed by such 
foreign subsidiary under the security-based swaps. As a result, a 
guarantee provided by a U.S. person of another person's obligations 
owed under a security-based swap transaction poses the same degree of 
risk to the United States as the risk posed by a transaction entered 
into directly by such U.S. person.
---------------------------------------------------------------------------

    \65\ See, e.g., Sullivan & Cromwell Letter, at 3-4 (stating that 
Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co. 
conduct swap activities overseas through subsidiaries of the bank 
holding company, Edge Corporation subsidiaries of their U.S. banks 
and non-U.S. branches of the bank); Cleary Letter IV at 10-11.
    \66\ See Cleary Letter IV at 10 (discussing a U.S. holding 
company providing a guarantee of performance on the obligations of 
its foreign swap dealing subsidiary).
---------------------------------------------------------------------------

    In circumstances where a foreign non-bank subsidiary of a U.S. 
holding company has sufficient credit-worthiness and does not rely on a 
U.S. parental guarantee to support its creditworthiness, the risk of 
the security-based swaps entered into by the foreign subsidiary of a 
U.S.-based holding company resides in the foreign subsidiary outside 
the United States.
(d) Foreign-Based Dealer
i. Direct Dealing
    Foreign-based entities also may use a number of business models and 
legal structures to conduct global security-based swap dealing activity 
in both the U.S. and foreign markets. Like U.S. dealers, foreign 
dealers may deal directly with U.S. counterparties and non-U.S. 
counterparties without using any agents in the local market to 
intermediate and book the resulting transactions in the foreign 
entities themselves.\67\
---------------------------------------------------------------------------

    \67\ See Cleary Letter VI at 3, 13 (discussing direct dealing by 
a foreign dealer from abroad); IIB Letter at 7.
---------------------------------------------------------------------------

ii. Intermediation in the United States
    Foreign dealers also may use local personnel with knowledge of and 
expertise on the local markets to intermediate security-based swap 
transactions in each local market, for instance, using salespersons in 
the United States to originate security-based swaps in the U.S. market, 
and either book the resulting transactions in an entity based in the 
United States (such as a U.S. affiliate) or centrally book the 
resulting transactions in a foreign central booking affiliate.\68\
---------------------------------------------------------------------------

    \68\ See Cleary Letter IV at 4, 21 (discussing the use of U.S. 
affiliate to intermediate) and IIB Letter at 7.
---------------------------------------------------------------------------

    Intermediation activity within the United States on behalf of 
foreign entities may occur in two principal legal structures.
    First, foreign dealers that are banking entities may conduct 
dealing activity with U.S. counterparties out of their U.S. branches. 
In this structure, a foreign banking entity may originate and book 
transactions in its U.S. branch, or the U.S. branch may originate 
transactions that are booked in the foreign home office.\69\
---------------------------------------------------------------------------

    \69\ See IIB Letter at 8.
---------------------------------------------------------------------------

    Second, both bank and non-bank foreign dealers may conduct dealing 
activity out of their U.S. subsidiaries. The U.S. subsidiaries may act 
as principal to originate and book security-based swaps in the United 
States and enter into inter-affiliate back-to-back transactions with 
the foreign central booking entity (usually the foreign parent) for 
purposes of centralized booking and centralized risk management.\70\ 
The U.S. subsidiary also may act as agent to originate security-based 
swaps in the United States on behalf of the foreign entity and the 
resulting transactions would be booked in a centralized foreign booking 
entity, usually the foreign parent. In some situations, such as where 
the foreign-based entity has rated debt, but the U.S. subsidiary does 
not, the U.S.-based subsidiary's performance under security-based swaps 
that it enters into as principal may be supported by a parental 
guarantee provided by the foreign-based entity.\71\
---------------------------------------------------------------------------

    \70\ See Cleary Letter IV at 10 (discussing inter-affiliate 
transactions).
    \71\ See id. (discussing a non-U.S. holding company providing a 
guarantee on the obligations of its U.S. swap dealing subsidiary).
---------------------------------------------------------------------------

    The transactions originated by the U.S. branch of a foreign bank or 
a U.S. subsidiary of a foreign bank or non-bank entity may not be 
limited to those with U.S. counterparties in the U.S. security-based 
swap market. Foreign bank or non-bank entities may utilize their U.S. 
branches or U.S. subsidiaries to conduct dealing activity with, for 
instance, non-U.S. counterparties located in various jurisdictions 
within the same region or same time zones, such as Canada or Latin 
America, and centrally book the resulting transactions in the home 
offices of the foreign entities themselves. For example, a Canadian 
counterparty might enter into a security-based swap with a non-U.S.-
based dealer that solicits and negotiates the transaction out of a U.S 
subsidiary

[[Page 30978]]

acting as agent but books the transaction itself outside the United 
States.
3. Clearing Practices
    Prior to the enactment of the Dodd-Frank Act, there was no 
provision in the Exchange Act or any other laws in the United States 
for the mandatory clearing of OTC derivatives. Although initiatives 
related to central clearing had been considered before 2008, the 2008 
financial crisis brought a new focus on CDS as a source of systemic 
risk and contributed to a more general recognition that central 
clearing parties (``CCPs'') could play a role in helping to manage 
bilateral counterparty credit risk in OTC CDS.\72\
---------------------------------------------------------------------------

    \72\ The President's Working Group on Financial Markets made the 
central clearing of OTC derivatives a top policy objective in 2008. 
See Policy Objectives for the OTC Derivatives Market (Nov. 14, 
2008), available at: https://www.treasury.gov/resource-center/fin-mkts/Documents/policyobjectives.pdf; see also Policy Statement on 
Financial Market Developments (Mar. 13, 2008), available at: https://www.law.du.edu/images/uploads/presidents-working-group.pdf; and 
Progress Update on March Policy Statement on Financial Market 
Developments (Oct. 2008), available at: https://www.treasury.gov/resource-center/fin-mkts/Documents/q4progress%20update.pdf.
---------------------------------------------------------------------------

    In November 2008, the Commission, in consultation and coordination 
with the Federal Reserve Board and the CFTC, took steps to help 
facilitate the prompt development of CCPs for OTC derivatives.\73\ 
Specifically, the Commission authorized the clearing of OTC security-
based swaps by permitting certain clearing agencies to clear CDS on a 
temporary conditional basis.\74\ As the Commission and other regulatory 
agencies monitored the activities of those clearing agencies, a 
significant volume of interdealer OTC CDS transactions and a smaller 
volume of dealer-to-non-dealer OTC CDS transactions were centrally 
cleared on a voluntary basis.\75\ The level of voluntary clearing in 
swaps and security-based swaps has steadily increased since that time. 
Although the volume of interdealer CDS cleared to date is quite 
large,\76\ many security-based swap transactions are still ineligible 
for central clearing, and many transactions in security-based swaps 
eligible for clearing at a CCP continue to settle bilaterally.
---------------------------------------------------------------------------

    \73\ On November 14, 2008, the Commission executed a Memorandum 
of Understanding with the Board and the CFTC that established a 
framework for consultation and information sharing on issues related 
to central counterparties for the OTC derivatives market. See https://www.sec.gov/news/press/2008/2008-269.htm.
    \74\ The Commission authorized five entities to clear CDS. See 
CDS clearing by ICE Clear Europe Limited, Exchange Act Release Nos. 
60372 (July 23, 2009), 74 FR 37748 (July 29, 2009) and 61973 (Apr. 
23, 2010), 75 FR 22656 (Apr. 29, 2010); CDS clearing by Eurex 
Clearing AG, Exchange Act Release Nos. 60373 (July 23, 2009), 74 FR 
37740 (July 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 
29, 2010); CDS clearing by Chicago Mercantile Exchange Inc., 
Exchange Act Release Nos. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 
19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009) and 
61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010); CDS clearing by 
ICE Clear Credit LLC (formerly ICE Trust US LLC), Exchange Act 
Release Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 
61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009) and 61662 (Mar. 5, 
2010), 75 FR 11589 (Mar. 11, 2010); Temporary CDS clearing by LIFFE 
A&M and LCH.Clearnet Ltd., Exchange Act Release No. 59164 (Dec. 24, 
2008), 74 FR 139 (Jan. 2, 2009) (``CDS Clearing Exemption Orders'').
    \75\ Voluntary CCP clearing grew out of a series of meetings 
beginning in September 2005 hosted by the Federal Reserve Bank of 
New York with major market participants and their domestic and 
international supervisors for the purpose of discussing problems in 
the processing of CDS, and related risk management and control 
issues. See https://www.ny.frb.org/newsevents/news/markets/2005/an050915.html. In June 2008 the attendees agreed to an agenda for 
improvement in the derivatives market infrastructure that included 
``developing a central counterparty for credit default swaps that, 
with a robust risk management regime, can help reduce systemic 
risk.'' See https://www.ny.frb.org/newsevents/news/markets/2008/ma080609.html; see also https://www.theice.com/marketdata/reports/ReportCenter.shtml.
    \76\ As of April 19, 2012, ICE Clear Credit had cleared 
approximately $15.6 trillion notional amount of CDS contracts based 
on indices of securities and approximately $1.5 trillion notional 
amount of CDS contracts based on individual reference entities or 
securities. As of April 19, 2012, ICE Clear Europe had cleared 
approximately [euro]7.2 trillion notional amount of CDS contracts 
based on indices of securities and approximately [euro]1.2 trillion 
notional amount of CDS contracts based on individual reference 
entities or securities. See Clearing Agency Standards Adopting 
Release, 77 FR 66236 n.184 (citing https://www.theice.com/marketdata/reports/ReportCenter.shtml).
---------------------------------------------------------------------------

    Voluntary clearing of security-based swaps in the United States is 
currently limited to CDS products. Central clearing of security-based 
swaps began in March 2009 for index CDS products, in December 2009 for 
single-name corporate CDS products, and in November 2011 for single-
name sovereign CDS products. At present, there is no central clearing 
in the United States for security-based swaps that are not CDS 
products, such as those based on equity securities. The level of 
clearing activity appears to have steadily increased as more CDS have 
become eligible to be cleared.\77\
---------------------------------------------------------------------------

    \77\ See Section XV.B.2(e), infra.
---------------------------------------------------------------------------

4. Reporting Practices
    The OTC derivatives markets have historically been largely 
opaque.\78\ With respect to CDS, for example, the Government 
Accountability Office found in 2009 that ``comprehensive and consistent 
data on the overall market have not been readily available,'' that 
``authoritative information about the actual size of the CDS market is 
generally not available,'' and that regulators currently are unable 
``to monitor activities across the market.'' \79\ The reporting of 
comprehensive OTC derivative transaction data to trade repositories is 
intended to address the lack of transparency in this market, and as 
such it was one of the G20 regulatory reform commitments previously 
discussed.\80\
---------------------------------------------------------------------------

    \78\ See FSB, Implementing OTC Derivatives Market Reforms (Oct. 
25, 2010) (``FSB October 2010 Report''), at 11, available at: https://www.financialstabilityboard.org/publications/r_101025.pdf.
    \79\ Government Accountability Office, ``Systemic Risk: 
Regulatory Oversight and Recent Initiatives to Address Risk Posed by 
Credit Default Swaps,'' GAO-09-397T (Mar. 2009), at 2, 5, 27, 
available at: https://www.gao.gov/new.items/d09397t.pdf.
    \80\ See note 35 and accompanying text, supra. See also SDR 
Proposing Release, 75 FR 77307 (``Under the Dodd-Frank Act, SDRs are 
intended to play a key role in enhancing transparency in the 
[security-based swap] market by retaining complete records of 
[security-based swap] transactions, maintaining the integrity of 
those records, and providing effective access to those records to 
relevant authorities and the public in line with their respective 
information needs. The enhanced transparency provided by an SDR is 
important to help regulators and others monitor the build-up and 
concentration of risk exposures in the [security-based swap] market. 
Without an SDR, data on [security-based swap] transactions is 
dispersed and not readily available to regulators and others.'').
---------------------------------------------------------------------------

    The first trade repositories were established in the mid-2000s.\81\ 
The development of trade repositories for different asset classes 
accelerated following the 2009 G20 commitment in this area, and as 
legislative and regulatory requirements began to be put in place. As of 
the end of the first quarter of 2013, fourteen FSB member jurisdictions 
had legislation in place either requiring reporting of OTC derivatives 
contracts or authorizing regulators to implement such regulations.\82\ 
In addition, as of the date of publication of the FSB Progress Report 
April 2013, eighteen trade repositories were either registered or in 
the process of becoming registered and twelve were operational, 
meaning, typically, that they were at least accepting transaction 
reports from more than one asset class.\83\
---------------------------------------------------------------------------

    \81\ See Committee on Payment and Settlement Systems (``CPSS'') 
and Technical Committee of IOSCO, Report on OTC Derivatives Data 
Reporting and Aggregation Requirements (Jan. 2012), at 5, available 
at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf (``CPSS-
IOSCO Data Report'').
    \82\ FSB Progress Report April 2013 at 19.
    \83\ Id. at 20-21, 63-65. Ten trade repositories were offering 
trade reporting on interest rate derivatives transactions; eight 
were offering trade reporting on commodity derivative transactions; 
seven were offering trade reporting on equity derivatives 
transactions; eight were offering trade reporting on foreign 
exchange derivative transactions; and seven were offering trade 
reporting on credit derivatives.
---------------------------------------------------------------------------

    Prior to the Dodd-Frank Act, global trade repositories had been 
established for credit, interest rate, and equity

[[Page 30979]]

derivatives.\84\ In addition, in June 2010, the OTC Derivatives 
Regulators' Forum (``ODRF'') \85\ developed indicative guidance for 
Warehouse Trust \86\ aiming to identify data that authorities would 
expect to request from Warehouse Trust to carry out their mandates.\87\
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    \84\ Pursuant to initiatives led by the OTC Derivatives 
Supervisors Group (``ODSG''), in 2009 the largest OTC derivatives 
dealers at the global level committed to reporting all of their CDS 
trades to a trade repository. At that time, a trade repository for 
credit derivatives was already in existence and used by the 
industry. To promote the development of trade repositories for all 
interest rate and equity derivatives, in 2008 and 2009 ISDA sought 
proposals for the creation of central trade repositories for these 
asset classes. Two entities were selected to provide trade 
repository functions for these asset classes. See FSB October 2010 
Report at 44. The ODSG originated in 2005, when the Federal Reserve 
Bank of New York (``New York Federal Reserve'') hosted a meeting 
with representatives of major OTC derivatives market participants 
and their domestic and international supervisors, including the 
Commission, in order to address the emerging risks of inadequate 
infrastructure for the rapidly growing market in credit derivatives. 
The ODSG is chaired by the New York Federal Reserve.
    \85\ The ODRF, formed in January 2009, brings together 
representatives from central banks, prudential supervisors, and 
securities and market regulators to discuss issues of common 
interest, regarding OTC derivatives central counterparties and trade 
repositories. The ODRF's scope and focus include information 
sharing/needs and oversight co-ordination and co-operation.
    \86\ The Warehouse Trust Company LLC (``Warehouse Trust'') today 
provides certain post-trade processing services to DTCC-TIW. DTCC-
TIW provides a centralized electronic trade database for OTC credit 
derivatives contracts.
    \87\ See FSB October 2010 Report at 63. Building on this work, 
CPSS and IOSCO have published a consultation paper setting forth 
more comprehensive guidance regarding trade repositories more 
broadly. The paper provides guidance to authorities that supervise 
trade repositories; regulators, supervisors, resolution authorities, 
central banks, and other public-sector authorities (collectively, 
``authorities'') that request OTC derivative data from trade 
repositories; and trade repositories. This guidance concerns the 
types of data to which authorities will typically require access and 
possible approaches to addressing potential constraints and concerns 
that may prevent effective access to such data. See CPSS and IOSCO, 
Consultative Report on Authorities' Access to Trade Repository Data 
(April 2013), available at: https://iosco.org/library/pubdocs/pdf/IOSCOPD408.pdf?v=1.
---------------------------------------------------------------------------

    Public availability of trade repository data varies globally and 
has changed significantly over time. For example, since October 2008, 
on a weekly basis, DTCC has published aggregated data via its Web 
site.\88\ More generally, in a recent FSB survey, all trade 
repositories that responded stated that they provide or intend to 
provide, transaction data on OTC derivatives to the public. In some 
cases and for some products, trading information is provided on a real-
time basis. Some trade repositories publicly disclose only aggregated, 
end-of-day information.\89\
---------------------------------------------------------------------------

    \88\ See CPSS-IOSCO Data Report at 45-46.
    \89\ See OTC Derivatives Market Reforms, Fourth Progress Report 
on Implementation (Oct. 31, 2012) at 5, available at: https://www.financialstabilityboard.org/publications/r_121031a.pdf.
---------------------------------------------------------------------------

5. Trade Execution Practices
    Unlike the markets for cash equity securities and listed options, 
the market for security-based swaps currently is characterized 
generally by bilateral negotiation directly between two counterparties 
in the OTC market and is largely decentralized; many instruments are 
individually negotiated and often customized; and many security-based 
swaps are not centrally cleared.\90\ The historical one-to-one nature 
of trade negotiation in security-based swaps has fostered various types 
of trading venues and execution practices, ranging among the following:
---------------------------------------------------------------------------

    \90\ See SB SEF Proposing Release, 76 FR 10951.
---------------------------------------------------------------------------

Bilateral Negotiations
    ``Bilateral negotiation'' refers to the execution practice whereby 
one party uses the telephone, email or other means of communication to 
directly contact a potential counterparty to negotiate and execute a 
security-based swap. In bilateral negotiation and execution, only the 
two parties to the transaction are aware of the terms of the 
negotiation and the final terms of the agreement.\91\
---------------------------------------------------------------------------

    \91\ See id.
---------------------------------------------------------------------------

Single-Dealer RFQ Platforms
    A single-dealer request for quote (``RFQ'') platform refers to an 
electronic trading platform where a dealer may post indicative quotes 
for security-based swaps in various asset classes that the dealer is 
willing to trade. Only the dealer's approved customers have access to 
the platform. When a customer wishes to transact in a security-based 
swap, the customer requests an executable quote, the dealer provides 
one, and if the customer accepts the dealer's quote, the transaction is 
executed electronically. This type of platform generally provides 
indicative quotes on a pricing screen, but only from one dealer to its 
customers.\92\
---------------------------------------------------------------------------

    \92\ See id. at 10951.
---------------------------------------------------------------------------

Multi-Dealer RFQ Platforms
    A multi-dealer RFQ electronic trading platform refers to a multi-
dealer RFQ system whereby a requester can send an RFQ to solicit quotes 
on a certain security-based swap from multiple dealers at the same 
time. 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 amount of pricing information, depending on its 
characteristics.\93\
---------------------------------------------------------------------------

    \93\ For example, to the extent that a RFQ platform sets limits 
on the number of dealers to whom a customer may send an RFQ, the 
customer's pre-trade transparency is restricted to that number of 
quotes it receives in response to its RFQ. See SB SEF Proposing 
Release, 76 FR 10952.
---------------------------------------------------------------------------

Central Limit Order Books
    A central limit order book system or similar system refers to a 
trading system 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. In 
general, a limit order book system provides greater pricing information 
than the three platforms described above because all participants can 
view bids and offers before placing their bids and offers.\94\ 
Currently, limit order books for the trading of security-based swaps in 
the United States are utilized by inter-dealer brokers for dealer-to-
dealer transactions.
---------------------------------------------------------------------------

    \94\ See id.
---------------------------------------------------------------------------

Brokerage Trading
    ``Brokerage trading'' refers to an execution practice used by 
brokers to execute security-based swaps 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 security-based swap. The broker then interacts with 
other customers (which may also be dealers) to fill the request and 
execute the transaction. 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, participants may or may not be able 
to see bids and offers of other participants.\95\
---------------------------------------------------------------------------

    \95\ See id.
---------------------------------------------------------------------------

    These various trading venues and execution practices provide 
different degrees of pre-trade pricing information and different levels 
of access. The Commission currently does not have sufficient 
information with respect to the volume of security-based swap 
transactions executed across these different trading venues and 
execution practices to evaluate the individual impact of such venues 
and practices on

[[Page 30980]]

pricing information available in the security-based swap market.
6. Broad Economic Considerations of Cross-Border Security-Based Swaps 
\96\
---------------------------------------------------------------------------

    \96\ See Section XV, infra (providing more detailed commentary 
on the economic effects of the proposed rules, including supporting 
citations).
---------------------------------------------------------------------------

    Our primary economic considerations for promulgating rules and 
interpretations regarding the application of Title VII to cross-border 
activities include the potential risks of security-based swaps to the 
U.S. financial system \97\ that could affect financial stability, the 
level of transparency and counterparty protection in the security-based 
swap market, the costs to market participants, and the impact of such 
rules and interpretations on liquidity, efficiency, and competition in 
the market. Unlike most other securities transactions, a security-based 
swap gives rise to ongoing obligations between transaction 
counterparties during the life of the transaction. This means that each 
counterparty to the transaction undertakes the obligation to perform 
the security-based swap in accordance with its terms and bears the 
counterparty credit risk and market risk until the transaction is 
terminated.\98\ The cross-border rules ultimately adopted by the 
Commission could materially impact the economic effects of the final 
Title VII regulatory requirements.
---------------------------------------------------------------------------

    \97\ The Commission generally understands the ``U.S. financial 
system'' to include the U.S. banking system and the U.S. financial 
markets, including the U.S. security-based swap market, the 
traditional securities markets (e.g., the debt and equity markets), 
and the markets for other financial activities (e.g., lending).
    \98\ See Intermediary Definitions Adopting Release, 77 FR 30616-
17 (noting that ``the completion of a purchase or sale transaction'' 
in the secondary equity or debt markets ``can be expected to 
terminate the mutual obligations of the parties,'' unlike security-
based swap transactions, which often give rise to ``an ongoing 
obligation to exchange cash flows over the life of the agreement'').
---------------------------------------------------------------------------

(a) Major Economic Considerations
    In determining how Title VII requirements should apply to persons 
and transactions in the cross-border context, the Commission is aware 
of the potentially significant trade-offs inherent in our policy 
decisions. For example, it is possible that counterparties excluded 
from the Title VII regulatory framework would not, among other things, 
receive the same level of counterparty protection or impartial access 
to trading venues and information as those included in the Title VII 
regulatory framework. However, it is also possible that market 
participants excluded from the Title VII regulatory framework would 
face lower regulatory burdens and lower compliance costs associated 
with their security-based swap activity. Further, it is possible that 
these trade-offs could alter the incentives for individuals to 
participate in the security-based swap market, which may impact the 
overall market, affecting its liquidity, as well as its efficiency and 
the competitive dynamics among participants. In addition, we also 
recognize that regulators in other jurisdictions are currently engaged 
in implementing their own regulatory reforms of the OTC derivatives 
markets and that our proposed application of Title VII to cross-border 
activities may affect the policy decisions of these other regulators as 
they seek to address potential conflicts or duplication in the 
regulatory requirements that apply to market participants under their 
authority. In proposing our rules and interpretations in this release, 
the Commission has considered the benefits of the Title VII regulatory 
framework, including counterparty protection and access to information, 
as well as the costs of compliance, taking into account the potential 
impact of the rules and interpretations on liquidity, efficiency, and 
competition in the security-based swap market.
    Moreover, the costs and benefits of various Title VII substantive 
requirements may not be the same for each individual market 
participant, depending on the role it plays, the market function it 
performs, and the activity it engages in in the security-based swap 
market. For example, Title VII requirements for security-based swap 
dealers and major security-based swap participants may impose 
significant costs on persons falling within the definitions of 
security-based swap dealer and major security-based swap participant 
that are not borne by other market participants. The costs of these 
requirements may provide economic incentive for some market 
participants falling within the definitions of security-based swap 
dealer and major security-based swap participant to restructure their 
security-based swap business to operate wholly outside of the Title VII 
regulatory framework, exiting the security-based swap market in the 
United States and not transacting with U.S. persons. Conversely, 
certain Title VII requirements may promote financial stability and 
increase market participants' confidence in entering into security-
based swap transactions.
(b) Global Nature and Interconnectedness of the Security-Based Swap 
Market
    In considering the proposed approach to the application of the 
Title VII requirements, the Commission has been informed by the 
analysis of current market activity described in this release,\99\ 
including the extent of cross-border trading activity in the security-
based swap market.\100\ The security-based swap transactions between 
U.S.- and non-U.S. domiciled market participants provide conduits of 
risk into the U.S. financial system, which could affect the safety and 
soundness of the U.S. financial system. Similarly, such transactions 
also provide conduits for liquidity into the U.S. financial system. As 
a consequence, changes to incentives or costs that result from the 
application of U.S. regulatory requirements may have effects on the 
liquidity of the global market, as well as its efficiency and 
competitive dynamics.
---------------------------------------------------------------------------

    \99\ See Section II.A, supra, and Section XV.B.2, infra.
    \100\ For example, review of the DTCC-TIW single-name CDS 
transactions executed in 2011 reveals that approximately 49% of the 
U.S. single-name CDS transactions were between one U.S.-domiciled 
counterparty and one foreign-domiciled counterparty, and 44% of such 
transactions were between two foreign-domiciled counterparties. See 
Section II.A.1, supra, and Section XV.B.2(d), infra.
---------------------------------------------------------------------------

    With respect to conduits of risk, one area of particular concern in 
the current security-based swap market is the risks that arise when a 
large market participant becomes financially distressed, including the 
potential for sequential counterparty failure. A default by one or more 
security-based swap dealers or major security-based swap participants 
could produce spillovers or contagion by reducing the willingness and/
or ability of market participants to extend credit to each other, and 
thus could substantially reduce liquidity and valuations for particular 
types of financial instruments.\101\
---------------------------------------------------------------------------

    \101\ See, e.g., Markus K. Brunnermeier and Lasse Heje Pedersen, 
``Market Liquidity and Funding Liquidity,'' Rev. Financ. Stud. 
(2009); Denis Gromb and Dimitri Vayanos, ``A Model of Financial 
Market Liquidity,'' Journal of the European Economic Association 
(2010).
---------------------------------------------------------------------------

    The experience of American International Group, Inc. (``AIG''), a 
Delaware corporation based in New York, and its subsidiary, AIG 
Financial Products Corp. (``AIG FP''), a Delaware corporation based in 
Connecticut, during and after the 2008 financial crisis both 
illustrates spillovers and contagion arising from security-based swap 
transactions and demonstrates how cross-border transactions could 
contribute to the destabilization of the

[[Page 30981]]

U.S. financial system if the security-based swap market were not 
adequately regulated.\102\ AIG FP sold extensive amounts of credit 
protection in the form of CDS in the years leading up to the 
crisis,\103\ largely on the strength of AIG's AAA rating; AIG FP's 
obligations were guaranteed by its parent AIG.\104\ AIG FP's CDS 
business reflected the global nature of the security-based swap market 
because, although both AIG and AIG FP were headquartered in the United 
States, much of AIG FP's CDS business was run out of its London 
office,\105\ and AIG FP sold credit protection to counterparties both 
within the United States and around the world.\106\
---------------------------------------------------------------------------

    \102\ More generally, the Lehman Brothers Holding Inc. 
bankruptcy offers an example of how risk can spread across 
affiliated entities of multinational financial institutions. See 
Lehman Brothers International (Europe) in Administration, Joint 
Administrators' Progress Report for the Period 15 September 2008 to 
14 March 2009 (Apr. 14, 2009), available at: https://www.pwc.co.uk/assets/pdf/lbie-progress-report-140409.pdf (``The global nature of 
the Lehman business with highly integrated, trading and non-trading 
relationships across the group led to a complex series of inter-
company positions being outstanding at the date of Administration. 
There are over 300 debtor and creditor balances between LBIE and its 
affiliates representing $10.5B of receivables and $11.0B of payables 
as at 15 September 2008.'').
    \103\ In 2007, AIG FP's CDS portfolio reached a peak of $527 
billion. Congressional Oversight Panel, June Oversight Report, ``The 
AIG Rescue, Its Impact on Markets, and the Government's Exit 
Strategy,'' June 2010, at 23, available at: https://www.gpo.gov/fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT-111JPRT56698.pdf (``AIG 
Report'').
    \104\ See Intermediary Definitions Adopting Release, 77 FR 30689 
n.1133 (``AIGFP's obligations were guaranteed by its highly-rated 
parent company . . . an arrangement that facilitated easy money via 
much lower interest rates from the public markets, but ultimately 
made it difficult to isolate AIGFP from its parent, with disastrous 
consequences'') (quoting AIG Report at 20).
    \105\ See AIG Report at 18.
    \106\ See Office of the Special Inspector General for the 
Troubled Asset Relief Program, Factors Affecting Efforts to Limit 
Payments to AIG Counterparties, at 20 (Nov. 17, 2009) (listing AIG 
FP's CDS counterparties, including a variety of U.S. and foreign 
financial institutions), available at: https://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf.
---------------------------------------------------------------------------

    As the subprime mortgage market in the United States collapsed, the 
ongoing obligations borne by AIG FP and, through its guarantees, its 
parent AIG, arising from AIG FP's CDS transactions produced losses that 
threatened to overwhelm both AIG FP and AIG. The Federal Reserve Bank 
of New York established a credit facility to prevent AIG from 
collapsing. These funds were later supplemented by financial support 
from the U.S. Treasury and the Federal Reserve, resulting in over $180 
billion in financial assistance.\107\
---------------------------------------------------------------------------

    \107\ See AIG Report at 2.
---------------------------------------------------------------------------

    As we discuss in more detail below, security-based swap market 
regulators need to take into account the spillover and contagion effect 
of security-based swap risk to avoid overburdening the financial 
system. One way to mitigate the spillover effect of a firm failure is 
to impose capital standards that take into account the security-based 
swap risk the firm undertakes while allowing flexibility in how it 
conducts security-based swap business.\108\ At the same time, the 
Commission is mindful that the application of Title VII prudential 
requirements such as capital and margin impose costs on market 
participants that could provide economic incentives to restructure or 
separate their security-based swap activity according to geographical 
or jurisdictional regions, or to engage in less security-based swap 
activity, which may reduce the liquidity or efficiency of the overall 
market.\109\
---------------------------------------------------------------------------

    \108\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70218.
    \109\ See id. at 70303-06.
---------------------------------------------------------------------------

    There are circumstances where risk generated by security-based 
swaps may reside in the United States while conduits of such risk 
(e.g., security-based swap transactions or persons engaged in security-
based swap transactions) could take place or reside outside the United 
States or outside the scope of application of the Title VII 
requirements. In these instances, the Commission has considered the 
nature of the risk, the magnitude of the risk, and the existence of 
other financial regulations, such as regulation of systemically 
important financial institutions in Title I and Title II of the Dodd-
Frank Act and banking regulations.
    The Commission is mindful that the same interconnectedness in the 
security-based swap market that may provide conduits for risk also may 
mean that changes to incentives or costs caused by the application of 
U.S. regulatory requirements may have effects on the liquidity of the 
global market, as well as its efficiency and competitive dynamics. As 
described below in Section XV.C, there are a myriad of paths for 
liquidity as well as risk to move throughout the financial system in 
this interconnected market. In addition, differences in regulatory 
requirements between the United States and non-U.S. jurisdictions may 
also impact markets by changing the competitive dynamics currently at 
play in the interconnected global market. For example, as articulated 
in Section XV.C, some potential responses by market participants to the 
proposed rules and interpretations in this release may result in 
lessened competition in the security-based swap market within the 
United States. Among other considerations, some entities may determine 
that the compliance costs arising from the requirements of Title VII 
warrant exiting the security-based swap market in the United States and 
not transacting with U.S. persons. These exits could result in higher 
spreads and affect the ability and willingness of end users to engage 
in security-based swaps.
(c) Central Clearing
    Many of the bilateral counterparty credit risks associated with 
security-based swaps can be mitigated by central clearing. Central 
clearing of security-based swaps provides a mechanism for market 
participants to engage in security-based swap activity without having 
to assess the creditworthiness of each counterparty. Clearing of 
security-based swaps shifts the counterparty risk from individual 
counterparties to CCPs whose members collectively share the default 
risk of all members.\110\ Central clearing also requires consistent 
application of mark-to-market pricing and margin requirements, which 
standardizes the settling of payment or collateral delivery resulting 
from market movements and minimizes the risk of clearing member 
defaults.\111\
---------------------------------------------------------------------------

    \110\ See, e.g., Darrell Duffie and Haoxiang Zhu, ``Does a 
Central Clearing Counterparty Reduce Counterparty Risk?'' Stanford 
University, Working Paper (2010), available at: https://
www.stanford.edu/~duffie/DuffieZhu.pdf; Nout Wellink, ``Mitigating 
systemic risk in OTC derivatives markets,'' Banque de France, 
Financial Stability Review, No. 14--Derivatives--Financial 
innovation and stability (July 2010), available at: https://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etude15_rsf_1007.pdf.
    \111\ See Christopher Culp, ``OTC-Cleared Derivative: Benefits, 
Costs, and Implications of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act,'' Journal of Applied Finance No. 2 (2010), 
available at: https://www.rmcsinc.com/articles/OTCCleared.pdf.
---------------------------------------------------------------------------

    However, central clearing may also pose risk to financial systems. 
Because a CCP necessarily concentrates a large number of otherwise 
bilateral contracts into a single location, a CCP could itself become 
systemically important.\112\

[[Page 30982]]

While a loss by any single member in excess of its margin posted with 
the CCP is likely to be absorbed by the CCP's risk capital structure, 
correlated losses among many members, such as those which occurred 
among many asset classes during the 2008 financial crisis, could 
diminish the effectiveness of the risk mutualization structure of a 
CCP. Its failure could create financial instability through its members 
if the members, as residual obligors to the default related losses are 
unable to absorb the resulting financial impact. Such an outcome could 
lead to failure among CCP member counterparties, particularly when 
obligations are sizable, which may be the case if the members are 
themselves systemically important.
---------------------------------------------------------------------------

    \112\ The Financial Stability Oversight Council (``FSOC'') can 
designate a CCP as systemically important under Section 804 of the 
Dodd-Frank Act. See, e.g., Craig Pirrong, ``Mutualization of Default 
Risk, Fungibility, and Moral Hazard: The Economics of Default Risk 
Sharing in Cleared and Bilateral Markets,'' University of Houston, 
Working Paper (2010), available at: https://business.nd.edu/uploadedFiles/Academic_Centers/Study_of_Financial_Regulation/pdf_and_documents/clearing_moral_hazard_1.pdf (``[c]learing of 
OTC derivatives has been touted as an essential component of reforms 
designed to prevent a repeat of the financial crisis. A back-to-
basics analysis of the economics of clearing suggests that such 
claims are overstated, and that traditional OTC mechanisms may be 
more efficient for some instruments and some counterparties.'').
---------------------------------------------------------------------------

    Certain aspects of Title VII are intended to reduce the risk of CCP 
failure by promoting sound risk management practices among registered 
clearing agencies, while also providing open access to market 
participants.\113\ Sound risk management practices are important among 
both domestic and foreign CCPs, given the global nature of CCP 
membership.\114\ When a CCP in the United States has significant number 
of foreign members, the CCP and its U.S.-domiciled members would be 
exposed to the foreign members. Similarly, when U.S.-domiciled entities 
are members of foreign domiciled CCPs, U.S. exposure to a foreign 
institution is created that may be systemically important.
---------------------------------------------------------------------------

    \113\ See, e.g., Clearing Agency Standards Adopting Release, 77 
FR 66220.
    \114\ Based on the analysis of the member positions at ICE Clear 
Credit in the United States by the staff in the Division of Risk, 
Strategy and Financial Innovation, approximately half of the 
positions at ICE Clear Credit in the United States are held by 
foreign-domiciled dealing entities. See Section XV.B.2(e), infra.
---------------------------------------------------------------------------

(d) Security-Based Swap Data Reporting
    Certain Title VII requirements are designed to increase market 
transparency for regulators and among security-based swap market 
participants. Requirements of regulatory reporting are designed to 
provide regulators with a broad view of the market and help monitor 
pockets of risk that might not otherwise be observed by market 
participants with an incomplete view of the market. Separately, 
requirements of post-trade reporting of prices in real-time are 
intended to promote price discovery and lower the trading costs by 
lessening the information advantage afforded certain OTC market 
participants with the largest order flow. Allowing all market 
participants access to more information about transactions' prices and 
sizes should create a more level playing field and may promote the 
efficiency of exchange or SEF trading of security-based swaps. In 
particular, as in other security markets, quoted bids and offers should 
form and adjust according to the reporting of executed trades. At the 
same time, however, we recognize that increased post-trade transparency 
also could impact the liquidity of, and competition in, the security-
based swap market.\115\ For example, market participants may be less 
willing to provide liquidity for large, potentially market-moving 
trades if the implementation of the Title VII public dissemination 
requirements reveals private information about future hedging and 
inventory needs.
---------------------------------------------------------------------------

    \115\ See Section XV.C, infra (discussing the effects of our 
proposed cross-border approach on competition, efficiency, and 
capital formation).
---------------------------------------------------------------------------

    The increased transparency caused by the Title VII reporting 
requirements could be diminished if consistent reporting requirements 
are not applied to transactions across various jurisdictions and 
information regarding security-based swaps taking place in the global 
market is not shared among jurisdictions. For instance, the aggregate 
exposures created by a particular security-based swap or class of 
security-based swaps may only be partially observed if security-based 
swap transactions span multiple jurisdictions. As a result any single 
regulator may not have a complete view of the security-based swap risks 
and may underestimate such risks. Separately, if some regulatory 
regimes do not require, or provide for less informative, post-trade 
reporting rules, then certain transactions may gravitate to these 
jurisdictions so that market participants can escape reporting their 
transaction prices. In both instances the increased transparency 
contemplated by the Title VII reporting requirements may be diluted.

B. Scope of Title VII's Application to Cross-Border Security-Based Swap 
Activity

    Congress has given the Commission authority in Title VII to 
implement a security-based swap regulatory framework. In the statutory 
definitions and registration requirements for market intermediaries and 
participants (i.e., security-based swap dealers and major security-
based swap participants) and security-based swap infrastructures (i.e., 
SDRs, security-based swap clearing agencies, and SB SEFs), Congress has 
identified the types of security-based swap activity that triggers 
Title VII registration and regulatory requirements relevant to such 
persons or the application of Title VII transaction-level requirements.
    We recognize that applying Title VII to persons and transactions 
that fall within the statutory definitions or requirements may subject 
some persons based outside the United States, or some transactions 
arising from activity that occurs in part inside and in part outside 
the United States, to the various provisions of Title VII. At the same 
time, however, the global nature of the security-based swap market and 
the characteristics of the risk associated with security-based swap 
activity suggest that applying Title VII only to the conduct of persons 
located within the United States or to security-based swap activity 
occurring entirely within the United States would exclude from 
regulation a significant proportion of security-based swap activity 
that occurs in part inside and in part outside the United States.\116\ 
Our proposed approach is intended to strike a reasonable balance in 
light of the authority provided by Congress, the structure of the 
security-based swap market, and the transfer of risk within that 
market. Accordingly, among other things, our proposed approach does not 
impose Title VII requirements on persons whose relevant security-based 
swap activity occurs entirely outside the United States and thus likely 
does not raise the types of concerns in the U.S. financial system that 
would warrant application of Title VII.
---------------------------------------------------------------------------

    \116\ See Section II.A, supra. We preliminarily believe that 
many of the circumstances of concern also would create the 
opportunity for evasion of the Dodd-Frank Act's regulatory regime. 
See, e.g., note 558, infra.
---------------------------------------------------------------------------

    Commenters have raised concerns about the application of Title VII 
to security-based swap activity in the cross-border context and 
specifically about the possibility that the Commission may apply our 
security-based swap regulations to ``extraterritorial'' conduct. In 
this subsection, we discuss commenters' views regarding the 
applicability of Title VII to cross-border security-based swap 
activity, explain our proposed approach to determining whether the 
relevant security-based swap activity takes place, in whole or in part, 
within the United States, and interpret what it means for a person to 
``transact a business in security-based swaps without the jurisdiction 
of the United States'' as set forth in Section 30(c) of the Exchange 
Act (``Section 30(c)'').\117\ In subsequent sections of the release, we 
discuss in more detail our proposed

[[Page 30983]]

application of Title VII to cross-border security-based swap activity.
---------------------------------------------------------------------------

    \117\ 15 U.S.C. 78dd(c).
---------------------------------------------------------------------------

1. Commenters' Views
    Commenters generally expressed the view that Section 30(c) 
restricts the Commission's authority to apply Title VII to 
``extraterritorial'' conduct and thus, that the Commission follow a 
territorial approach in applying Title VII to cross-border security-
based swap activity. One commenter interpreted Section 30(c) as 
prescribing a strictly territorial approach to the application of Title 
VII, arguing that this section codifies the territorial approach that 
we have historically taken in our existing securities regulations.\118\ 
Several commenters argued that a narrow interpretation of the 
``extraterritorial'' reach of Title VII was consistent with both 
Commission precedent\119\ and the Supreme Court's decision in Morrison 
v. National Australia Bank.\120\
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    \118\ See Cleary Letter IV at 33-36; see also SIFMA Letter I at 
5, 22; Sullivan & Cromwell Letter at 6 (suggesting that Section 
30(c) permits ``extraterritorial'' application of Title VII only to 
prevent ``efforts to evade'' statutory requirements).
    \119\ See, e.g., Sullivan & Cromwell Letter at 11 (stating that 
the Commission has ``plainly stated that it uses a territorial 
approach in applying the broker-dealer requirements to international 
operations'').
    \120\ 130 S.Ct. 2869 (2010). See, e.g., Jones Day Letter at 7-8 
(suggesting that the jurisdictional limits of Dodd-Frank Act 
Sections 722 and 772 be interpreted narrowly in a manner consistent 
with the Morrison decision); Cleary Letter IV at 33-6 (arguing 
against an extraterritorial application of Title VII); SIFMA Letter 
I at 5-6; ISDA Letter I at 11.
---------------------------------------------------------------------------

    Based on this interpretation of Section 30(c), commenters generally 
argued that Title VII does not give the Commission authority to 
regulate entities that transact a business in security-based swaps 
outside the United States.\121\ Some commenters suggested that non-U.S. 
entities (including affiliates of U.S. persons) that conduct business 
entirely with counterparties outside the United States should not be 
required to register as swap or security-based swap dealers or comply 
with Title VII.\122\ Some of these commenters also urged the Commission 
not to subject foreign branches and affiliates of U.S. banks to Title 
VII registration requirements to the extent that they transact solely 
with foreign persons.\123\ Some commenters urged that, even within a 
single entity, only those branches, departments, or divisions that 
engage in business within the United States should be required to 
register.\124\
---------------------------------------------------------------------------

    \121\ See, e.g., Jones Day Letter at 7-8; Cleary Letter IV at 
33-6; Sullivan & Cromwell Letter at 10-11; SIFMA Letter I at 5-6; 
ISDA Letter I at 11.
    \122\ See SIFMA Letter I at 4; see also ISDA Letter I at 11 
(recommending that designation as a dealer should not be triggered 
by transactions entered into with foreign affiliates or branches of 
a U.S. bank or with foreign entities whose obligations are 
guaranteed by a U.S. person, or by legacy positions with U.S. 
counterparties); Davis Polk Letter II at 5-6 (stating that a foreign 
entity engaged in swaps exclusively with foreign counterparties is 
```without the jurisdiction of the United States'''). Similarly, one 
commenter recommended that transactions between two foreign entities 
should be excluded from calculations of substantial position for 
purposes of the major participant definition. Canadian MAVs Letter 
at 7-8.
    \123\ See, e.g., Sullivan & Cromwell Letter at 7 (stating that a 
territorial interpretation of Section 30(c) prevented the Commission 
from imposing Title VII requirements on the U.S. banks' ``Non-U.S. 
Operations,'' defined to include both foreign affiliates or 
subsidiaries and foreign branches of these banks).
    \124\ See, e.g., Cleary Letter IV at 12; see also id. at 26 
(arguing that a non-U.S. branch or affiliate of a U.S. entity should 
not be required to register as a dealer by virtue of its 
transactions with a non-U.S. person counterparty); ISDA Letter I at 
11 (stating that a ``branch, division or office of an entity should 
be able to be designated as a Dealer without subjecting the whole 
entity to regulation'').
---------------------------------------------------------------------------

    Commenters generally took the view that Section 30(c) does not 
permit the Commission to apply Title VII to transactions occurring 
outside the United States. Accordingly, commenters suggested that 
Section 30(c) restricts the Commission's ability to apply Title VII 
requirements to the foreign business of entities that are required to 
register with the Commission.\125\ For example, one commenter 
interpreted Section 30(c) to prohibit application of Title VII to any 
of a person's ``activity'' or ``business'' outside the United States, 
even if that person otherwise transacts a business in security-based 
swaps within the jurisdiction of the United States.\126\
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    \125\ See Cleary Letter IV at 11; see also SIFMA Letter I at 14 
(suggesting that Section 30(c) ``provide[s] strong support'' for not 
applying Title VII to transactions between a registered foreign swap 
dealer and non-U.S. persons); ISDA Letter I at 11 (recommending that 
no Title VII requirements should apply to transactions between a 
non-U.S. entity registered as a dealer and its non-U.S. person 
counterparties).
    \126\ See Cleary Letter IV at 12.
---------------------------------------------------------------------------

    Similarly, some commenters suggested that Section 30(c) prohibits 
the application of Title VII to transactions involving the foreign 
affiliates of U.S. persons, on the basis that such transactions occur 
``without the jurisdiction of the United States'' when no U.S. person 
is a counterparty to the trade.\127\ One commenter explained that, 
because such transactions involve parties outside the United States and 
occur outside the United States, they are ``removed from the stream of 
U.S. commerce.'' \128\
---------------------------------------------------------------------------

    \127\ See SIFMA Letter I at 5-6; see also ISDA Letter I at 11 
(suggesting that dealer-related requirements of Title VII should not 
apply to business with non-U.S. person counterparties, including 
foreign affiliates and branches of U.S. persons).
    \128\ See Sullivan & Cromwell Letter at 9.
---------------------------------------------------------------------------

    Commenters also generally recommended a narrower interpretation of 
the language in Section 30(c) permitting the application of Title VII 
regulations to persons transacting a business in security-based swaps 
without the jurisdiction of the United States to the extent that they 
are doing so in contravention of rules the Commission has prescribed as 
``necessary or appropriate to prevent the evasion of any provision of 
[the Exchange Act that was added by the Dodd-Frank Act].'' Under this 
view, Section 30(c) permits ``extraterritorial'' application of Title 
VII only to entities that have themselves engaged in willful or 
intentional evasion.\129\ These commenters argued that the longstanding 
use of foreign branches and affiliates by security-based swap market 
entities demonstrates that these types of business structures are not 
evasive and, therefore, do not fall within the exception to the limits 
on the applicability of Title VII as set forth in Section 30(c).\130\
---------------------------------------------------------------------------

    \129\ See, e.g., id. at 9-10 (suggesting that 
``extraterritorial'' application of Title VII requires an ``intent 
to evade'' Title VII).
    \130\ See Cleary Letter IV at 7.
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2. Scope of Application of Title VII in the Cross-Border Context
(a) Overview and General Approach
    Section 772(b) of the Dodd-Frank Act amends Section 30 of the 
Exchange Act to provide that ``[n]o provision of [Title VII] . . . 
shall apply to any person insofar as such person transacts a business 
in security-based swaps without the jurisdiction of the United 
States,'' unless that business is transacted in contravention of rules 
prescribed to prevent evasion of Title VII.\131\ In so amending Section 
30 of the Exchange Act, Congress directly appropriated nearly identical 
language defining the scope of the Exchange Act's application that 
appears in subsection (b) of Section 30 of the Exchange Act,\132\ 
indicating that Congress intended the territorial application of Title 
VII to entities and transactions in the security-based swap market to 
follow similar principles to those applicable to the

[[Page 30984]]

securities market under the Exchange Act.\133\
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    \131\ See Section 30(c) of the Exchange Act, 15 U.S.C. 78dd(c), 
added by Section 772(b) of the Dodd-Frank Act.
    \132\ Section 30(b) of the Exchange Act, 15 U.S.C. 78dd(b), 
provides that the Exchange Act and related rules ``shall not apply 
to any person insofar as he transacts a business in securities 
without the jurisdiction of the United States,'' unless that 
business is transacted in contravention of rules prescribed as 
necessary or appropriate to prevent evasion of the Exchange Act.
    \133\ See, e.g., Commodity Futures Trading Comm'n v. Schor, 478 
U.S. 833, 846 (1986) (holding that ``when Congress revisits a 
statute giving rise to a longstanding administrative interpretation 
without pertinent change, the `congressional failure to revise or 
repeal the agency's interpretation is persuasive evidence that the 
interpretation is the one intended by Congress''').
---------------------------------------------------------------------------

    In light of this similar language, commenters have urged us to 
follow a territorial approach in applying Title VII to cross-border 
security-based swap activity.\134\ We preliminarily agree that a 
territorial approach, if properly tailored to the characteristics of 
the security-based swap market, should help ensure that our regulatory 
framework focuses on security-based swap activity that is most likely 
to raise the concerns that Congress intended to address in Title VII, 
including the effects of security-based swap activity on the financial 
stability of the United States, on the transparency of the U.S. 
financial system, and on the protection of counterparties.
---------------------------------------------------------------------------

    \134\ See, e.g., Cleary Letter IV at 33-37.
---------------------------------------------------------------------------

    We differ from commenters, however, in our understanding of what a 
territorial approach means in the context of a global security-based 
swap market. As noted above, some commenters suggested that the 
security-based swap activity of foreign branches and affiliates of U.S. 
persons with non-U.S. persons occurs outside the United States and has 
only an indirect connection with the United States and that, therefore, 
subjecting transactions resulting from that activity to Title VII would 
involve extraterritorial application of the statute.\135\ Although we 
recognize that some of the security-based swap activity involving these 
foreign branches and affiliates occur outside the United States, we 
believe that a properly tailored territorial approach should look to 
both the full range of activities described in the statutory text as 
well as to the concerns that Congress intended Title VII to address in 
determining whether the relevant activity, considered in its entirety, 
occurs at least in part within the United States.\136\
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    \135\ See, e.g., Cleary Letter IV at 35; ISDA Letter I at 11; 
SIFMA Letter I at 5-6; Sullivan & Cromwell Letter at 11-13.
    \136\ See Morrison, 130 S. Ct. at 2884 (looking to the ``focus'' 
of the relevant statutory provision in determining whether the 
statute was being applied to domestic conduct).
---------------------------------------------------------------------------

    As noted above, security-based swap transactions differ from most 
traditional securities transactions in that they give rise to an 
ongoing obligation between the counterparties to the trade: the 
counterparties bear the risks that result from those transactions for 
the duration of the transactions.\137\ The Dodd-Frank Act was enacted, 
in part, to address the risks to the financial stability of the United 
States posed by entities bearing such risks, and a territorial approach 
to the application of Title VII should be consistent with achieving 
these statutory purposes. A territorial approach to the application of 
Title VII that excluded from the application of Title VII any activity 
conducted by the foreign operations of a U.S. person where they do 
business only with non-U.S. counterparties located outside the United 
States would likely fail to achieve the financial stability goals of 
Title VII, as such an approach would not account for the security-based 
swap risks that may be borne by entities located within the United 
States whose foreign operations solicit, negotiate, or execute 
transactions outside the United States. In addition, it is not clear 
that a different territorial approach that focused solely on the 
location of the entity bearing the risk (and disregarded whether 
certain relevant activity, including execution of the transaction, 
occurred within the United States) would adequately address the Dodd-
Frank Act's concern with promoting transparency in the U.S. financial 
system and protecting counterparties, concerns that are likely to be 
raised by the solicitation, negotiation, or execution within the United 
States, even if the risk arising from those security-based swaps 
transactions is borne by entities outside the United States. For 
example, some transactions characterized by commenters as occurring 
outside the United States, even with non-U.S. persons, are entered into 
by persons located within the United States and would appear to raise 
the same types of risk concerns as transactions occurring wholly within 
the United States.
---------------------------------------------------------------------------

    \137\ See Section II.A, infra.
---------------------------------------------------------------------------

    Similarly, the Commission preliminarily believes that a territorial 
approach should be informed by the text of the statutory provision that 
imposes the registration or other regulatory requirement.\138\ Some 
commenters suggested, for instance, that a territorial approach would 
necessarily exclude certain foreign operations of U.S. persons from 
registration as security-based swap dealers so long as they did not 
enter into security-based swap transactions with counterparties located 
within the United States.\139\ However, in this instance, these 
commenters did not show how their suggested approach relates to the 
statutory definition of security-based swap dealer or to the rules and 
interpretation adopted by the Commission and the CFTC to further define 
``security-based swap dealer'' in the Intermediary Definitions Adopting 
Release, including our discussion of conduct that is indicative of 
dealing activity.\140\ In our preliminary view, we should identify the 
activity that the statutory provision regulates before reaching a 
determination of whether relevant activity is occurring within the 
United States.\141\ Only after we identify the activity that the 
statutory provision regulates would we then be able to determine 
whether the conduct at issue involves activity that the statutory 
provision regulates and whether this conduct occurs within the United 
States. To the extent that conduct involving activity that the 
statutory provision regulates occurs within the United States, 
application of Title VII to that conduct would be consistent with a 
territorial approach.
---------------------------------------------------------------------------

    \138\ See Morrison, 130 S. Ct. at 2884 (performing a textual 
analysis of Section 10(b) of the Exchange Act to determine what 
conduct was relevant in determining whether the statute was being 
applied to domestic conduct).
    \139\ See, e.g., Sullivan & Cromwell Letter at 11.
    \140\ See note 135, supra; see also Intermediary Definitions 
Adopting Release, 77 FR 30616-19.
    \141\ See Morrison, 130 S. Ct. at 2884.
---------------------------------------------------------------------------

(b) Territorial Approach to Application of Title VII Security-Based 
Swap Dealer Registration Requirements
    We discuss our application of this approach with respect to each of 
the major Title VII registration categories and requirements in 
connection with reporting, public dissemination, clearing, and trade 
execution for security-based swaps in further detail in the sections 
below,\142\ but for sake of illustration, we provide a brief overview 
of our territorial approach as it applies to the security-based swap 
dealer definition.
---------------------------------------------------------------------------

    \142\ See Sections III-VII, infra (discussing each major 
registration category), and Sections VIII-IX.A, infra (discussing 
certain requirements in connection with reporting and dissemination, 
clearing, and trade execution for security-based swaps).
---------------------------------------------------------------------------

    Section 3(a)(71) of the Exchange Act \143\ defines security-based 
swap dealer as a person that engages in any of the following types of 
activity:
---------------------------------------------------------------------------

    \143\ 15 U.S.C. 78c(a)(71).
---------------------------------------------------------------------------

    (i) Holding oneself out as a dealer in security-based swaps,
    (ii) making a market in security-based swaps,
    (iii) regularly entering into security-based swaps with 
counterparties as an ordinary course of business for one's own account,
    (iv) engaging in any activity causing oneself to be commonly known 
in the

[[Page 30985]]

trade as a dealer in security-based swaps.\144\
---------------------------------------------------------------------------

    \144\ Section 3(a)(71)(A) of the Exchange Act, 15 U.S.C. 
78c(a)(71)(A).
---------------------------------------------------------------------------

    We have further interpreted this definition by jointly adopting 
interpretive guidance with the CFTC that identifies the types of 
activity that is relevant in determining whether a person is a 
security-based swap dealer.\145\ In this interpretive guidance, we have 
identified indicia of security-based swap dealing activity to include 
the following activities:

    \145\ See Intermediary Definitions Adopting Release, 77 FR 
30617-18.
---------------------------------------------------------------------------

     Providing liquidity to market professionals or other 
persons in connection with security-based swaps,
     seeking to profit by providing liquidity in connection 
with security-based swaps,
     providing advice in connection with security-based swaps 
or structuring security-based swaps,
     having a regular clientele and actively soliciting 
clients,
     using inter-dealer brokers, and
     acting as a market maker on an organized security-based 
swap exchange or trading system.\146\
---------------------------------------------------------------------------

    \146\ Id.
---------------------------------------------------------------------------

    As the foregoing list of relevant activities illustrates, both the 
statutory text and our interpretation of that text include within the 
security-based swap dealer definition a range of activities. The broad 
scope of activities listed above identifies various characteristics of 
dealing activity. Given the risks associated with dealing activity that 
the dealer definition and associated regulatory framework in Title VII 
are intended to address, we preliminarily believe that a territorial 
approach consistent with these statutory purposes should consider 
whether the entity performs any of these indicia of dealing activity 
within the United States (even if some of these indicia also arise in 
activity conducted outside the United States). This type of analysis 
appears to us more consistent with the statutory text and with the 
Supreme Court's approach to statutory analysis in its decision in 
Morrison than an approach that excludes from jurisdiction certain 
foreign operations of U.S. persons transacting with foreign 
counterparties. We also believe that our proposed approach would better 
help ensure that our regulatory framework achieves the various purposes 
of security-based swap dealer regulation under Title VII, while 
avoiding application of security-based swap dealer registration to 
persons whose dealing activity is unlikely to raise the types of 
dealer-specific risks that Title VII dealer registration was intended 
to address because it occurs entirely outside the United States.\147\
---------------------------------------------------------------------------

    \147\ Under our proposed approach to the application of the de 
minimis threshold in the cross-border context, non-U.S. persons that 
engage in dealing activity with U.S. persons or otherwise within the 
United States at levels below the de minimis threshold generally 
would also not be required to register as security-based swap 
dealers. Such entities are engaged in dealing activity within the 
United States, and their dealing activity within the United States 
may raise certain concerns addressed by Title VII. However, we 
preliminarily believe that, to the extent that this dealing activity 
remains at levels below the de minimis threshold, they should be 
treated similarly to a U.S. person that engages in dealing activity 
at levels below the de minimis threshold. See Section III.B.4, 
infra. Like U.S. entities engaged in dealing activity, they may be 
required to register under the aggregation requirements the 
Commission and the CFTC adopted in the Intermediary Definitions 
Adopting Release. See Intermediary Definitions Adopting Release, 77 
FR 30631; 17 CFR 240.3a71-2(a)(1). Under the aggregation 
requirements we propose below, even entities with security-based 
swap dealing activity at levels below the de minimis threshold may 
be required to register if the total security-based swap dealing 
activity of affiliates under common control (excluding the activity 
of any registered affiliates that have independent operations) 
exceeds the de minimis threshold. See Section III.B.8, infra.
---------------------------------------------------------------------------

    Under our proposed territorial approach to the security-based swap 
dealer definition, as explained further below, we would require persons 
resident or organized in the United States, or with their principal 
place of business in the United States, to count all of their dealing 
transactions toward their de minimis threshold, including transactions 
that arise from dealing activity that occurs in part outside the United 
States (for example, because it is negotiated and executed through that 
person's foreign branch or office).\148\
---------------------------------------------------------------------------

    \148\ See Section III.B.4, infra.
---------------------------------------------------------------------------

    An interpretation of Section 30(c) that advances the view that 
security-based swap activity conducted by a U.S. person through a 
foreign branch constitutes activity ``without the jurisdiction of the 
United States'' or that a transaction arising from such activity 
constitutes ``transacting a business in security-based swaps without 
the jurisdiction of the United States'' for purposes of Section 30(c) 
may not fully account for the statutory definition of ``security-based 
swap dealer,'' the purposes of Title VII, or the global nature of the 
security-based swap market. It does not account for the entire range of 
activities performed by entities active in the security-based swap 
market, including security-based swap dealers, and the relevance of 
such activities to the statutory definitions and requirements, given 
the purposes of Title VII, and it would leave unaddressed significant 
levels of activity that poses precisely the sorts of risks that Title 
VII was intended to address.
    In our preliminary view, to the extent that a U.S. person engages 
in dealing activity through a foreign operation that is part of the 
U.S. legal person (such as a foreign branch or office), relevant 
activity for purposes of the security-based swap dealer definition 
occurs, at least in part, within the United States because we believe 
it is the U.S. entity as a whole, and not just the foreign branch or 
office, that is holding itself out as a dealer and making a market in 
security-based swaps. Moreover, it is necessarily the U.S. person as a 
whole that is seeking to profit by providing liquidity and engaging in 
market-making in security-based swaps, and it is the financial 
resources of the entire entity that enable it to provide liquidity and 
engage in market-making in connection with security-based swaps. Its 
dealing counterparties will look to the entire U.S. person, and not 
just the foreign branch or office, for performance on the transaction. 
The entire U.S. person assumes, and stands behind, the obligations 
arising from the resulting agreement. For these reasons, to the extent 
that a dealer resides or is organized, or has its principal place of 
business, within the United States, we believe that it cannot hold 
itself out as a security-based swap dealer, even through a foreign 
branch, as anything other than a single person, given that it generally 
could not operate as a dealer absent the financial and other resources 
of the entire U.S. person. Its dealing activity with all of its 
counterparties, including dealing activity conducted through its 
foreign branch or office, is best characterized as occurring, at least 
in part, within the United States and should therefore be counted 
toward the entity's de minimis threshold.
    More generally, we preliminarily believe that transactions that 
create ongoing obligations that are borne by a U.S. person are properly 
described as directly occurring within the United States, particularly 
given Title VII's focus on, among other things, addressing risks to the 
financial stability of the United States.\149\ Indeed, the history of 
AIG FP confirms that such transactions of U.S. persons can pose risks 
to the U.S. financial system even if they are conducted through foreign 
operations. The nature of such risks, and their role in the financial 
crisis and in the enactment of Title VII, suggest that the statutory 
framework established

[[Page 30986]]

by Congress and the objectives of Title VII may require a broader 
analysis than excluding transactions involving U.S. persons from the 
application of Title VII solely because they are conducted through 
operations outside the United States, while others by the same U.S. 
persons occur within the United States.\150\
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    \149\ As we discuss below, such activity would include providing 
guarantees for a foreign entity's security-based swap transactions. 
See Section II.B.2(d), infra.
    \150\ However, for reasons explained below, the Commission is 
not proposing to subject the foreign operations of U.S. persons to 
certain of the requirements in Title VII. See, e.g., Sections 
III.B.7, III.B.9, VIII.C, IX.C.3(a), and X.B.3(a), infra.
---------------------------------------------------------------------------

    However, we preliminarily believe that non-U.S. persons engaged in 
dealing activity would be required to count toward their de minimis 
thresholds only transactions arising from their dealing activity with 
U.S. persons \151\ or dealing activity otherwise conducted within the 
United States. In addition, to the extent that a non-U.S. person 
engages in security-based swap dealing activity within the United 
States, we preliminarily believe that such dealing activity should be 
counted toward the non-U.S. person's de minimis threshold regardless of 
whether its counterparties are U.S. persons.\152\ This view is 
consistent with the fact that such security-based swap activity raises 
the types of concerns that the Dodd-Frank Act was intended to address.
---------------------------------------------------------------------------

    \151\ However, for reasons explained below, the Commission is 
not proposing to require non-U.S. persons to include transactions 
with the foreign branches of U.S. banks in their de minimis 
calculations. See Section III.B.7, infra.
    \152\ See Intermediary Definitions Adopting Release, 77 FR 
30617-18.
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    We preliminarily believe that a non-U.S. person not engaged in any 
security-based swap activity within the United States (or engaged only 
at levels below the de minimis threshold) is unlikely to pose the types 
of concerns within the U.S. financial system that Title VII dealer 
regulation was intended to address.\153\ Thus, under our proposed 
approach, a non-U.S. person that engages in dealing activity entirely 
outside the United States (i.e., does not enter into transactions with 
a U.S. person or otherwise conduct any part of its dealing activity 
within the United States) would not be required to register as a 
security-based swap dealer.\154\
---------------------------------------------------------------------------

    \153\ Proposed Rule 3a71-3(b) under the Exchange Act, as 
discussed in Section III.B.4, infra. Of course, the transactions of 
an entity engaged in security-based swap dealing activity within the 
United States at levels below the de minimis threshold or in 
security-based swap activity within the United States that is not 
dealing activity may be subject to other Title VII requirements, as 
discussed below, or other provisions of the federal securities laws.
    \154\ This proposed approach to the application of Title VII 
security-based swap dealer registration requirements is not intended 
to limit or address the cross-border reach or extraterritorial 
application of the antifraud or other provisions of the federal 
securities laws.
---------------------------------------------------------------------------

(c) Application of Other Title VII Requirements to Registered Entities
    We are proposing to apply the Title VII requirements associated 
with registration (including, among others, capital and margin 
requirements and external business conduct requirements \155\) to the 
activities of registered entities to the extent we have determined that 
doing so advances the purposes of Title VII.\156\ Although some 
commenters suggested that a territorial approach would prohibit the 
Commission from applying Title VII to the foreign security-based swap 
activities of even registered entities, such an interpretation of the 
application of Title VII to registered entities is difficult to 
reconcile with the statutory language describing the requirements 
applicable to registered security-based swap dealers, with the text of 
Section 30(c),\157\ or with the purposes of Title VII and the nature of 
risks in the security-based swap market as described above. We have 
long taken the view that an entity that has registered with the 
Commission subjects itself to the entire regulatory system governing 
such registered entities.\158\
---------------------------------------------------------------------------

    \155\ See Section 15F of the Exchange Act, 15 U.S.C. 78o-10.
    \156\ See, e.g., Sections III.C.3 and 4, infra (discussing 
requirements applicable to security-based swap dealers).
    \157\ Section 30(c) prohibits the application of the Exchange 
Act only with respect to those persons that ``transact[] a business 
in security-based swaps without the jurisdiction of the United 
States.'' Because only security-based swap entities that transact a 
business in security-based swaps within the United States would be 
required to register under the approach proposed in this release, 
registered entities are not persons that ``transact[] a business in 
security-based swaps without the jurisdiction of the United 
States.''
    \158\ See Registration Requirements for Foreign Broker-Dealers, 
Exchange Act Release No. 27017 (July 11, 1989), 54 FR 30013, 30016-
17 (July 18, 1989) (``Rule 15a-6 Adopting Release'') (noting that a 
foreign registrant is subject to the regulatory system applicable to 
such entities); Revision of Form BD, Exchange Act Release No. 25285 
(Jan. 22, 1988) (``It is the Commission's view that a broker-dealer 
submits to the Commission's jurisdiction when it registers with the 
Commission.''); In re International Paper and Power Co., 4 SEC 873, 
876 (1939) (registration with the Commission makes registrant 
``subject to the complete jurisdiction of the Commission''). See 
also Exemption of Certain Foreign Brokers or Dealers, Exchange Act 
Release No. 58047 (June 27, 2008), 73 FR 39182 (July 8, 2008) 
(``Proposed Amendments to Rule 15a-6''), at 39182 (describing 
registration requirements as applying to the entire foreign entity); 
In re Ira William Scott, 53 SEC 862, 866 (1998) (holding that 
investment adviser that registers with the Commission has 
``submitted himself to [the Commission's] jurisdiction pursuant to 
the Advisers Act''). Cf. In re United Corp., 232 F.2d 601, 606 
(1956) (stating that, upon registration as a holding company, an 
entity comes within ``the jurisdiction of the Commission and [is] 
subject to all requirements applicable to a registered holding 
company'').
---------------------------------------------------------------------------

(d) Application of Title VII Regulatory Requirements to Transactions of 
Foreign Entities Receiving Guarantees From U.S. Persons
    We also are proposing to apply certain Title VII transaction-level 
requirements (e.g., mandatory clearing, reporting and dissemination, 
and mandatory trade execution of security-based swaps) to certain 
transactions involving one or more non-U.S. persons whose performance 
under the security-based swaps is guaranteed by a U.S. person. We 
discuss the statutory basis for applying specific Title VII 
requirements to such transactions in the relevant substantive 
discussions below.\159\ In this subsection, we briefly explain why we 
believe that a territorial approach that is consistent with the 
purposes and text of the Dodd-Frank Act supports the application of 
Title VII to such transactions.
---------------------------------------------------------------------------

    \159\ See Sections VIII-XI, infra.
---------------------------------------------------------------------------

    In a security-based swap transaction between two non-U.S. persons 
where the performance of at least one side of the transaction is 
guaranteed by a U.S. person, the guarantee gives the guaranteed 
entity's counterparty direct recourse to the U.S. person for 
performance of obligations owed by the guaranteed entity under the 
security-based swap,\160\ and the U.S. guarantor exposes itself to the 
security-based swap risk as if it were a direct counterparty to the 
security-based swap through the security-based swap activity engaged in 
by the guaranteed entity. As a result, the guarantee creates risk to 
the U.S. financial system and counterparties (including U.S. 
guarantors) to the same degree as if the transaction were entered into 
directly by a U.S. person. In addition, in many cases, the counterparty 
would not enter into the transaction (or would not do so on the same 
terms) with the guaranteed entity, and the guaranteed entity would not 
be able to engage in any security-based swaps, absent the presence of 
the guarantee. Given that the guarantee is

[[Page 30987]]

provided by a U.S. person and poses risks to the U.S. financial system, 
and considering the reliance by both the guaranteed entity and its 
counterparty on the creditworthiness of the guarantor in the course of 
engaging in security-based swap transactions and for the duration of 
the security-based swap, we preliminarily believe that a transaction 
entered into by a non-U.S. person whose performance under the security-
based swap is guaranteed by a U.S. person is within the United States 
by virtue of the involvement of the U.S. guarantor in the security-
based swap. Therefore, we preliminarily believe that subjecting such 
transactions to Title VII is consistent with our territorial approach.
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    \160\ In discussing the application of the major participant 
tests to guaranteed positions in the Intermediary Definitions 
Adopting Release, the Commission and the CFTC noted that an entity's 
security-based swap positions are attributed to a parent, other 
affiliate, or guarantor for purposes of the major participant 
analysis to the extent that the counterparties to those positions 
have recourse to that parent, other affiliate, or guarantor in 
connection with the position. Positions are not attributed in the 
absence of recourse. See Intermediary Definitions Adopting Release, 
77 FR 30689. As a result, the term ``guarantee'' as used in this 
release refers to a contractual agreement pursuant to which one 
party to a security-based swap transaction has recourse to its 
counterparty's parent, other affiliate, or guarantor with respect to 
the counterparty's obligations owed under the transaction.
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(e) Regulations Necessary or Appropriate to Prevent Evasion of Title 
VII
    As noted above, several commenters expressed the view that Section 
30(c) of the Exchange Act restricts the Commission's authority to apply 
amendments made to the Exchange Act by Title VII to 
``extraterritorial'' conduct. Section 30(c) provides the Commission 
with the express authority to prescribe rules and regulations for 
persons that transact a business in security-based swaps without the 
jurisdiction of the United States to the extent the Commission 
determines that doing so is necessary or appropriate to prevent 
evasion. Some commenters have expressed the view that this authority 
extends to ``extraterritorial'' activity only when such activity is 
intended to evade Title VII or to conceal a domestic violation of Title 
VII, suggesting that Section 30(c) prohibits application of Title VII 
to transactions by foreign affiliates or operations established for a 
legitimate business purpose, as the existence of such a purpose is 
evidence that the conduct is not intended to be evasive.\161\
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    \161\ See, e.g., Cleary Letter IV at 5-6, 7, 18; Sullivan & 
Cromwell Letter at 6-7.
---------------------------------------------------------------------------

    While recognizing the concerns expressed by commenters, the 
Commission preliminarily believes that Section 30(c) does not require 
the Commission to find actual evasion in order to invoke our authority 
to reach activity ``without the jurisdiction of the United States.'' 
Section 30(c) also does not require that every particular application 
of Title VII to security-based swap activity ``without the jurisdiction 
of the United States'' address only business that is transacted in a 
way that evades Title VII. Section 30(c) authorizes the Commission to 
apply Title VII to persons transacting a business ``without the 
jurisdiction of the United States'' if they violate rules that the 
Commission has prescribed as ``necessary or appropriate to prevent the 
evasion of any provision'' of Title VII. The focus of this provision is 
not whether such rules impose Title VII requirements only on entities 
engaged in evasive activity but whether the rules are generally 
``necessary or appropriate'' to prevent evasion of Title VII. In other 
words, Section 30(c) permits the Commission to impose prophylactic 
rules intended to prevent possible evasion, even if they affect both 
evasive and non-evasive conduct. Thus, under our preliminary proposed 
interpretation of Section 30(c), the statute permits us to prescribe 
such rules to conduct without the jurisdiction of the United States, 
even if those rules would also apply to a market participant that has 
been transacting business through a pre-existing market structure such 
as a foreign branch or guaranteed foreign affiliate established for 
valid business purposes, provided the proposed rule or interpretation 
is designed to prevent possible evasive conduct.\162\
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    \162\ We preliminarily believe that the proposed rules or 
interpretations set forth in this release are not being applied to 
persons who are ``transact[ing] a business in security-based swaps 
without the jurisdiction of the United States,'' within the meaning 
of Section 30(c). See Section II.B.2(a), supra. However, as noted 
below, the Commission also preliminarily believes that the proposed 
rules or interpretations are necessary or appropriate to help 
prevent the evasion of the provisions of the Exchange Act that were 
added by the Dodd-Frank Act and prophylactically will help ensure 
that the particular purposes of the Dodd-Frank Act addressed by the 
rule or interpretation are not undermined. See, e.g., note 558, 
infra.
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C. Principles Guiding Proposed Approach to Applying Title VII in the 
Cross-Border Context

    In considering how to apply Title VII in the cross-border context, 
the Commission has been mindful of the global nature of the security-
based swap market and the types of risks created by security-based swap 
activity to the U.S. financial system and market participants, as well 
as the needs of a well-functioning security-based swap market.\163\ We 
also have been guided by the purpose of the Dodd-Frank Act \164\ and 
the applicable requirements of the Exchange Act, including the 
following:
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    \163\ See Sections II.A.1-II.A.3, supra.
    \164\ See note 4, supra.
---------------------------------------------------------------------------

     Risk to the U.S. Financial System--The Dodd-Frank Act was 
intended to promote, among other things, the financial stability of the 
United States by limiting/mitigating risks to the financial 
system.\165\
---------------------------------------------------------------------------

    \165\ See id.
---------------------------------------------------------------------------

     Transparency--The Dodd-Frank Act was intended to promote 
transparency in the U.S. financial system.\166\
---------------------------------------------------------------------------

    \166\ See id.
---------------------------------------------------------------------------

     Counterparty Protection--The Dodd-Frank Act adds 
provisions to the Exchange Act relating to counterparty protection, 
particularly with respect to ``special entities.'' \167\
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    \167\ See Section 15F(h) of the Exchange Act, as added by 
Section 764(a) of the Dodd-Frank Act, in particular.
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     Economic Impacts--The Exchange Act requires the Commission 
to consider the impact of our rulemakings on efficiency, competition, 
and capital formation.\168\
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    \168\ Specifically, Section 3(f) of the Exchange Act provides: 
``Whenever pursuant to this title the Commission is engaged in 
rulemaking, . . .; required to consider or determine whether an 
action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, 
and capital formation.'' Section 23(a)(2) of the Exchange Act also 
provides: ``The Commission . . ., in making rules and regulations 
pursuant to any provisions of this title, shall consider among other 
matters the impact any such rule or regulation would have on 
competition. The Commission . . . shall not adopt any such rule or 
regulation which would impose a burden on competition not necessary 
or appropriate in furtherance of the purposes of [the Exchange 
Act].''
---------------------------------------------------------------------------

     Harmonization with Other U.S. Regulators--In connection 
with implementation of Title VII, the Dodd Frank Act requires the 
Commission to consult and coordinate with the CFTC and prudential 
regulators to ensure ``regulatory consistency and comparability, to the 
extent possible.'' \169\
---------------------------------------------------------------------------

    \169\ See Section 712(a)(2) of the Dodd-Frank Act.
---------------------------------------------------------------------------

     Consistent International Standards--To promote effective 
and consistent global regulation of swaps and security-based swaps, the 
Dodd-Frank Act requires the Commission and the CFTC to consult and 
coordinate with foreign regulatory authorities on the ``establishment 
of consistent international standards'' with respect to the regulation 
of swaps and security-based swaps.\170\ In this regard, the Commission 
recognizes that regulators in other jurisdictions are currently engaged 
in implementing their own regulatory reforms of the OTC derivatives 
markets and that our proposed application of Title VII to cross-border 
activities may affect the policy decisions of these other regulators as 
they seek to address potential conflicts or duplication in the 
regulatory requirements that apply to

[[Page 30988]]

market participants under their authority.\171\
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    \170\ See Section 752(a) of the Dodd-Frank Act. In this regard, 
some commenters have encouraged the Commission to consider 
international comity when applying Title VII in the cross-border 
context. See note 225, infra.
    \171\ For example, subjecting non-U.S. persons to Title VII may 
prompt a foreign jurisdiction to respond by subjecting U.S. persons 
to the foreign jurisdiction's regulatory regime. However, 
substituted compliance of the type proposed in this release or other 
mechanisms may address potential conflicts or duplication arising 
from overlapping regulatory requirements.
---------------------------------------------------------------------------

     Anti-Evasion--The Dodd-Frank Act amends the Exchange Act 
to provide the Commission with authority to prescribe rules and 
regulations as necessary or appropriate to prevent the evasion of any 
provision of the Exchange Act that was added by the Dodd-Frank 
Act.\172\
---------------------------------------------------------------------------

    \172\ See Section 30(c) of the Exchange Act, 15 U.S.C. 78dd(c), 
as discussed in Section II.B, supra.
---------------------------------------------------------------------------

    At times these principles reinforce one another; at other times 
they compete with each other. For instance, attempts to regulate risk 
posed to the United States may, depending on what is proposed, make it 
more costly for U.S.-based firms to conduct security-based swap 
business, particularly in foreign markets, compared to foreign firms, 
or could make foreign firms less willing to deal with U.S. persons. On 
the other hand, attempts to provide U.S. persons greater access to 
foreign security-based swap markets may, depending on what is proposed, 
fail to appropriately address the risk posed to the United States from 
transactions conducted outside the United States or create 
opportunities for market participants to evade the application of Title 
VII, particularly until such time as global initiatives to regulate the 
derivatives markets are fully enacted and implemented.
    Balancing these sometimes competing principles is complicated by 
the fact that Title VII imposes a new regulatory regime on a 
marketplace that already exists as a functioning, global market. Title 
VII establishes reforms that will have implications for entities that 
compete internationally in the global security-based swap market. As we 
have formulated our proposal, we have generally sought, in accordance 
with the statutory factors described above, to avoid creating 
opportunities for regulatory arbitrage or evasion or the potential for 
duplicative or conflicting regulations. We also have considered the 
needs for a well-functioning security-based swap market and for 
avoiding disruption that may reduce liquidity, competition, efficiency, 
transparency, or stability in the security-based swap market.

D. Conclusion

    Consistent with the principles and requirements outlined above, we 
are proposing to structure our implementation of Title VII around an 
approach that focuses on identifying market participants whose presence 
or activity within the United States or activity involving market 
participants within the United States may give rise to the types of 
risk to the U.S. financial system and counterparties that Title VII 
seeks to address, as described more fully below in the subsequent 
sections of the release.
Request for Comment
    The Commission requests comment on all aspects of the discussion 
and analysis above, including the following:
     Is our understanding of the global nature of the security-
based swap market accurate? If not, why not? Please elaborate.
     Is our understanding of the dealing structures used by 
U.S. and non-U.S. persons accurate? If not, why not? Are there other 
dealing structures used by market participants? If so, please 
elaborate.
     Is our understanding of clearing, reporting, and trade 
execution practices accurate? If not, why not? Please elaborate.
     As discussed above in Section II.B.1, some commenters 
recommend a narrower approach to the cross-border application of Title 
VII than this proposal sets forth. We request further comment on these 
and any other potential alternative approaches to determining the 
extent to which Title VII should be applied to cross-border 
transactions, non-U.S. persons, and registered entities.

III. Security-Based Swap Dealers

A. Introduction

    Among the market participants subject to regulation under Title VII 
as a result of their security-based swap activities are security-based 
swap dealers.\173\ As discussed above, a ``security-based swap dealer'' 
generally is defined as any person that (i) Holds itself out as a 
dealer in security-based swaps; (ii) makes a market in security-based 
swaps; (iii) regularly enters into security-based swaps with 
counterparties as an ordinary course of business for its own account; 
or (iv) engages in any activity causing the person to be commonly known 
in the trade as a dealer or market maker in security-based swaps.\174\ 
The Commission, jointly with the CFTC, issued final rules and 
interpretive guidance to further define the term security-based swap 
dealer,\175\ including rules implementing the de minimis 
exception.\176\ As part of these final rules and interpretive guidance, 
the Commission stated that the relevant statutory provisions suggest 
that, rather than focusing solely on the risk these entities pose to 
the financial markets, we should interpret the ``security-based swap 
dealer definition in a way that identifies those persons for which 
regulation is warranted either: (i) [D]ue to the nature of their 
interactions with counterparties; or (ii) to promote market stability 
and transparency, in light of the role those persons occupy within the 
security-based swap markets.'' \177\ Security-based swap dealers are 
subject to a comprehensive regulatory regime under Title VII. The 
statutory provisions added to the Exchange Act by Title VII are 
intended to provide for financial responsibility associated with 
security-based swap dealers' activities (e.g., the ability to satisfy 
obligations and the protection of counterparties' funds and assets), 
and other counterparty protections, as well as market stability and 
transparency.\178\
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    \173\ See Section 764(a) of the Dodd-Frank Act, codified as 
Section 15F of the Exchange Act, 15 U.S.C. 78o-10. See also Section 
IV, infra (discussing major security-based swap participants).
    \174\ See Section 3(a)(71) of the Exchange Act, 15 U.S.C. 
78c(a)(71), as added by Section 761(a) of the Dodd-Frank Act; see 
also Section II.B.2(b), supra.
    \175\ See Intermediary Definitions Adopting Release, 77 FR 
30596; 17 CFR 240.3a71-1.
    \176\ Section 3(a)(71)(D) of the Exchange Act, 15 U.S.C. 
78c(a)(71)(D), provides that ``[t]he Commission shall exempt from 
designation as a security-based swap dealer an entity that engages 
in a de minimis quantity of security-based swap dealing in 
connection with transactions with or on behalf of its customers. The 
Commission shall promulgate regulations to establish factors with 
respect to the making of this determination to exempt.'' This 
provision is implemented in Rule 3a71-2 under the Exchange Act (17 
CFR 240.3a71-2), as discussed in the Intermediary Definitions 
Adopting Release, 77 FR 30626-43.
    \177\ Intermediary Definitions Adopting Release, 77 FR 30617.
    \178\ See Intermediary Definitions Adopting Release, 77 FR 
30608; see also Section III.C.1, infra (discussing substantive 
requirements applicable to security-based swap dealers).
---------------------------------------------------------------------------

    By its terms, application of the security-based swap dealer 
definition set forth in Section 3(a)(71) of the Exchange Act \179\ does 
not depend on whether a security-based swap dealer or its counterparty 
is a U.S. person.\180\ Rather, the security-based swap dealer 
definition encompasses persons engaged in security-based swap dealing 
activities without regard to the geographic location or legal residence 
of either the dealing person or such person's counterparties. The 
Commission did not provide guidance on the application of the security-
based swap dealer definition to non-U.S. persons or to U.S. persons 
that conduct dealing activities

[[Page 30989]]

in the cross-border context in either our proposed or final rules.\181\ 
As discussed above \182\ and as further discussed below, market 
participants, foreign regulators, and other interested parties have 
raised concerns regarding, among other things, the application of Title 
VII to non-U.S. persons that engage in security-based swap dealing 
activity and U.S. persons who conduct dealing activities ``outside the 
United States.'' \183\
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    \179\ 15 U.S.C. 78c(a)(71).
    \180\ See Section 3(a)(71) of the Exchange Act, 15 U.S.C. 
78c(a)(71); 17 CFR 240.3a71-1.
    \181\ See Intermediary Definitions Adopting Release, 77 FR 
30596; Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant,'' Exchange Act 
Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010) 
(``Intermediary Definitions Proposing Release'').
    \182\ See Section II.B, supra.
    \183\ See Section III.B.3, infra.
---------------------------------------------------------------------------

    The rules and interpretations described below represent the 
Commission's proposed approach to applying the security-based swap 
dealer definition to non-U.S. persons and to U.S. persons who conduct 
dealing activities in the cross-border context in light of the 
principles discussed above.\184\ Our proposal reflects a particular 
balancing of these principles, informed by, among other things, the 
particular nature of the security-based swap market,\185\ the structure 
of security-based swap dealing activity,\186\ and our experience in 
applying the federal securities laws in the cross-border context in the 
past.\187\ We recognize that other approaches are possible to achieve 
the goals of the Dodd-Frank Act, in whole or in part. Accordingly, we 
invite comment regarding all aspects of the proposal described below, 
and each proposed rule and interpretation contained therein, including 
potential alternative approaches. Data and comment from market 
participants and other interested parties regarding the likely effect 
of each proposed rule and interpretation and potential alternative 
approaches will be particularly useful to the Commission in evaluating 
possible modifications to the proposal.
---------------------------------------------------------------------------

    \184\ See Section II.C, supra.
    \185\ See Section II.A, supra.
    \186\ See Section II.A.2, supra.
    \187\ See Section III.B.2, infra.
---------------------------------------------------------------------------

B. Registration Requirement

1. Introduction
    In the Intermediary Definitions Adopting Release, which was adopted 
jointly with the CFTC, the Commission set forth a de minimis threshold 
of security-based swap dealing that takes into account the notional 
amount of security-based swap positions connected with a person's 
security-based swap dealing activity over the prior 12 months.\188\ 
When a person engages in security-based swap dealing in connection with 
transactions above that threshold, such person meets the definition of 
a security-based swap dealer under Section 3(a)(71) of the Exchange 
Act,\189\ and the rules and regulations thereunder,\190\ and is 
required to register as a security-based swap dealer with the 
Commission pursuant to Section 15F(a)(1) of the Exchange Act.\191\
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    \188\ See Intermediary Definitions Adopting Release, 77 FR 
30626-43. The de minimis threshold was adopted by the Commission in 
the Intermediary Definitions Adopting Release to implement a 
statutory exclusion from the security-based swap dealer definition 
found in Section 3(a)(71)(D) of the Exchange Act. See note 176, 
supra. The de minimis threshold is defined in terms of a notional 
amount of security-based swap positions connected with dealing 
activity in which a person engages over the course of the 
immediately preceding 12 months. An entity engaged in security-based 
swap dealing activity in connection with security-based swap 
transactions with or on behalf of its customers below the de minimis 
threshold amount is exempt from designation as a security-based swap 
dealer. See Intermediary Definitions Adopting Release, 77 FR 30626.
    \189\ 15 U.S.C. 78c(3)(a)(71).
    \190\ 17 CFR 240.3a71-1 and 240.3a71-2.
    \191\ Section 15F(a)(1) of the Exchange Act provides that ``[i]t 
shall be unlawful for any person to act as a security-based swap 
dealer unless the person is registered as a security-based swap 
dealer with the Commission.'' 15 U.S.C. 78o-10(a)(1). A person that 
engages in security-based swap dealing activity in connection with 
transactions with or on behalf of customers in excess of the de 
minimis threshold falls within the security-based swap dealer 
definition, and such person must register as a security-based swap 
dealer pursuant to Section 15F(a)(1). By contrast, persons that fall 
within the statutory definitions of a broker and dealer in Sections 
3(a)(4) and (5) of the Exchange Act, 15 U.S.C. 78c(a)(4) and (a)(5), 
are required to register with the Commission only if they make use 
of the ``mails or any means or instrumentality of interstate 
commerce to effect any transactions in, or to induce or attempt to 
induce the purchase or sale of, any security. . . . '' Section 
15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a)(1).
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    The de minimis exception in Section 3(a)(71) of the Exchange Act is 
silent on its application to the cross-border security-based swap 
dealing activity of U.S. persons and non-U.S. persons, and the 
Commission did not address this issue in the Intermediary Definitions 
Adopting Release.\192\ Without additional Commission guidance, it would 
be unclear how persons would be required to calculate the notional 
amount of their security-based swaps for purposes of the de minimis 
exception based on their global book of security-based swap dealing 
activity. In addition, as discussed below, commenters have raised 
questions regarding how the de minimis threshold should be applied in 
the cross-border context, expressing concern that, among other things, 
if a non-U.S. person were required to register as a security-based swap 
dealer with the Commission because its security-based swap dealing 
activity exceeded the de minimis threshold, it might be subject to 
duplicative and potentially conflicting requirements by the Commission 
and a foreign jurisdiction.\193\
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    \192\ See Intermediary Definitions Adopting Release, 77 FR 30628 
n.407 (indicating that the Commission and the CFTC intended to 
address the application of the Title VII dealer regime to non-U.S. 
persons in separate releases).
    \193\ See Section III.B.2, infra.
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    Under the Commission's proposal, as described more fully in the 
following subsections of this release, a non-U.S. person \194\ would be 
required to register as a security-based swap dealer with the 
Commission pursuant to Section 15F(a)(1) of the Exchange Act \195\ if 
the notional amount of security-based swap positions connected with its 
security-based swap dealing activity \196\ with U.S. persons (other 
than with foreign branches of U.S. banks) \197\ or otherwise conducted 
within the United States \198\ exceeds the de minimis threshold in the 
security-based swap dealer definition.\199\ Thus, a non-U.S. person 
with a global security-based swap dealing business, but whose positions 
connected with its security-based swap dealing activity with U.S 
persons (other than with foreign branches of U.S. banks) or otherwise 
conducted within the United States fall below the de minimis threshold, 
would not be required to register with the Commission as a security-
based swap dealer.\200\ A U.S. person, by contrast, would be required 
to count all of its security-based swap transactions (including 
transactions conducted

[[Page 30990]]

through a foreign branch),\201\ conducted in a dealing capacity, toward 
the de minimis threshold to determine whether it would be required to 
register as a security-based swap dealer with the Commission pursuant 
to Section 15F(a)(1) of the Exchange Act.\202\
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    \194\ Proposed Rule 3a71-3(a)(7) under the Exchange Act 
(defining ``U.S. person''), as discussed in Section III.B.5, infra.
    \195\ 15 U.S.C. 78o-10(a)(1).
    \196\ See note 188, supra.
    \197\ Proposed Rule 3a71-3(a)(1) under the Exchange Act 
(defining ``foreign branch''), as discussed in Section III.B.7, 
infra.
    \198\ Proposed Rule 3a71-3(a)(5) under the Exchange Act 
(defining ``transaction conducted within the United States''), as 
discussed in Section III.B.6, infra. This provision would capture 
dealing activity undertaken by non-U.S. persons that are physically 
located within the United States, such as through a U.S. branch of a 
foreign bank, or through an agent, such as non-U.S. person's U.S. 
subsidiary or an unaffiliated third party acting on the non-U.S. 
person's behalf. As discussed elsewhere in the release, foreign 
security-based swap dealers utilize these organizational models as 
part of their global security-based swap dealing businesses. See 
Section II.A.2, supra (discussing dealing structures), and Section 
III.D, infra (discussing intermediation).
    \199\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
    \200\ But see Section III.B.9, infra (discussing the aggregation 
of affiliate positions).
    \201\ Proposed Rule 3a71-3(a)(4) under the Exchange Act 
(defining ``transaction conducted through a foreign branch''), as 
discussed in Section III.C.4, infra.
    \202\ Proposed Rule 3a71-3(b)(1)(i) under the Exchange Act.
---------------------------------------------------------------------------

    As further discussed below, however, we are not proposing to 
require a non-U.S. person engaged in security-based swap dealing 
activity to count a transaction with a non-U.S. person conducted 
outside the United States toward its de minimis threshold, even if its 
performance (or the performance of its counterparty) on the security-
based swap is guaranteed by a U.S. person.\203\ In addition, in 
conformity with the position that the Commissions took in the 
Intermediary Definitions Adopting Release,\204\ we are not proposing to 
require cross-border security-based swap transactions between majority-
owned affiliates to be considered when determining whether a person is 
a security-based swap dealer.\205\
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    \203\ See Section III.B.8, infra. However, such U.S. guarantor 
may become a major security-based swap participant by virtue of the 
guarantee it extends on the performance of the obligations under the 
transaction. See Section IV.C.2, infra. In addition, a security-
based swap entered into by a non-U.S. person whose performance under 
such security-based swap is guaranteed by a U.S. person would be 
required to be reported and, in certain cases, publicly 
disseminated, under re-proposed Regulation SBSR. See Section VIII.C, 
infra. Such security-based swap also may be subject to the clearing 
and trade execution requirements in Title VII. See Sections IX and 
X, infra.
    \204\ See Intermediary Definitions Adopting Release, 77 FR 
30624-25.
    \205\ See Section III.B.8, infra.
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    In the following subsections, we first briefly discuss the 
Commission's approach to the registration of foreign brokers and 
dealers, as background, and the views of commenters on the application 
of Title VII to cross-border activities, particularly as such views 
relate to security-based swap dealing activity. Then we propose a rule 
regarding the application of the de minimis exception to cross-border 
security-based swap dealing activity.\206\ In order to give further 
definition to this proposed rule, we are proposing rules defining a 
number of relevant terms, including ``U.S. person'' \207\ and 
``transaction conducted within the United States.''\208\ We also are 
proposing a rule excluding from a non-U.S. person's de minimis 
calculation security-based swap transactions entered into, in a dealing 
capacity, with a foreign branch of a U.S. bank.\209\ In addition, we 
are proposing a rule providing an exception from the aggregation 
requirement, in the context of the security-based swap dealer 
definition, for affiliated groups with a registered security-based swap 
dealer.\210\ Finally, we are proposing interpretive guidance regarding 
and requesting comment on the treatment of inter-affiliate and 
guaranteed transactions in the cross-border context for purposes of the 
de minimis threshold.\211\
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    \206\ Proposed Rule 3a71-3(b) under the Exchange Act, as 
discussed in Section III.B.4, infra.
    \207\ Proposed Rule 3a71-3(a)(7) under the Exchange Act, as 
discussed in Section III.B.5, infra. The proposed definition of U.S. 
person is used not only in the proposed rule regarding the 
application of the de minimis threshold in the cross-border context, 
but also in proposed rules discussed in subsequent sections of the 
release.
    \208\ Proposed Rule 3a71-3(a)(5) under the Exchange Act, as 
discussed in Section III.B.6, infra. Like the proposed definition of 
U.S. person, the definition of ``transaction conducted within the 
United States'' is used not only in the proposed rule regarding the 
application of the de minimis threshold in the cross-border context, 
but also in proposed rules discussed in subsequent sections of the 
release. In general, under the Commission's proposal, transactions 
conducted within the United States, as defined in the proposed rule, 
would trigger certain transaction-level requirements in Title VII. 
See Sections VIII-X, infra.
    \209\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act; see 
also proposed Rule 3a71-3(a)(1) under the Exchange Act (defining 
``foreign branch''), as discussed in Section III.B.7, infra.
    \210\ Proposed Rule 3a71-4 under the Exchange Act, as discussed 
in Section III.B.8, infra.
    \211\ See Section III.B.8, infra.
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2. Background Discussion Regarding the Registration of Foreign Brokers 
and Dealers
    Under the Commission's traditional approach to the registration of 
brokers and dealers under the Exchange Act, registration and other 
requirements generally are triggered by a broker or dealer physically 
operating in the United States, even if such activities are directed 
only to non-U.S. persons outside the United States.\212\ The 
Commission's territorial approach also generally requires broker-dealer 
registration by foreign brokers or dealers that, from outside the 
United States, induce or attempt to induce securities transactions by 
persons within the United States.\213\ By contrast, the Commission has 
not required foreign entities to register as broker-dealers if they 
conduct their ``sales activities'' entirely outside the United 
States.\214\
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    \212\ See Rule 15a-6 Adopting Release, 54 FR 30016-17 (``As a 
policy matter, the Commission now uses a territorial approach in 
applying the broker-dealer registration requirements to the 
international operations of broker-dealers. Under this approach, all 
broker-dealers physically operating within the United States that 
effect, induce, or attempt to induce any securities transactions 
would be required to register as broker-dealers with the Commission, 
even if these activities were directed only to foreign investors 
outside the United States.''); see also Proposed Amendments to Rule 
15a-6, 73 FR 39182 (``Under this [territorial] approach, broker-
dealers located outside the United States that induce or attempt to 
induce securities transactions with persons in the United States are 
required to register with the Commission, unless an exemption 
applies'').
    \213\ See Rule 15a-6 Adopting Release, 54 FR 30016 (``[E]ven if 
section 30(b) [of the Exchange Act] were read to incorporate a 
territorial approach, the Commission does not believe that section 
30(b) would exempt from broker-dealer registration the activities 
suggested by the commenters. In particular, directed selling efforts 
to U.S. investors in the United States hardly could be considered 
activities not traversing the U.S. territorial limits. A broker-
dealer operating outside the physical boundaries of the United 
States, but using the U.S. mails, wires, or telephone lines to trade 
securities with U.S. persons located in this country, would not be, 
in the words of section 30(b), `transact[ing] a business in 
securities without the jurisdiction of the United States.' '').
    \214\ See Rule 15a-6 Adopting Release, 54 FR 30016 (citing 
Exchange Act Release No. 25801, 53 FR 23646 n.9, and accompanying 
text).
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    In addition to our territorial approach to registration of broker-
dealers under the Exchange Act, the Commission traditionally has taken 
an ``entity'' approach to the application of regulation to registered 
broker-dealers.\215\ Pursuant to this approach, we have not limited the 
application of the Exchange Act, and rules and regulations thereunder, 
solely to the transactions of such entities that result in the 
registration requirement. Instead, we have taken the position that a 
registered broker-dealer is generally subject to registration and 
consequent substantive requirements with respect to all of its 
securities activity, including the activity of its branches and 
offices, regardless of whether the activity occurs in the United States 
or with U.S. persons.\216\ For instance, under this approach, if a 
foreign broker-dealer is required to register with the Commission as a 
result of conducting securities activity through a branch in the United 
States, the registration requirements and the regulatory system 
governing U.S. broker-dealers, including capital, margin, and 
recordkeeping requirements, would apply to the entire foreign broker-
dealer entity, including its head office, not just the U.S. 
branch.\217\ By contrast, the Commission

[[Page 30991]]

traditionally has not extended our regulatory oversight of broker-
dealers to the activities of their corporate parents, subsidiaries, or 
other affiliates.\218\
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    \215\ See Rule 15a-6 Adopting Release, 54 FR 30017 (``Also, the 
Commission uses an entity approach with respect to registered 
broker-dealers''); see also Proposed Amendments to Rule 15a-6, 73 FR 
39182 (``Because this territorial approach applies on an entity 
level, not a branch level, if a foreign broker-dealer establishes a 
branch in the United States, broker-dealer registration requirements 
would extend to the entire foreign broker-dealer entity.'').
    \216\ As noted above, this is consistent with the approach we 
have taken in other contexts under the federal securities laws. See 
note 158, supra.
    \217\ See Rule 15a-6 Adopting Release, 54 FR 30017.
    \218\ See id. (``If the foreign broker-dealer establishes an 
affiliate in the United States, however, only the affiliate must be 
registered as a broker-dealer; the foreign broker-dealer parent 
would not be required to register.''); see also Proposed Amendments 
to Rule 15a-6, 73 FR 39182. As discussed in Section III.B.89, infra, 
this is consistent with the approach that the Commission is 
proposing to take in the context of security-based swap dealer 
registration.
---------------------------------------------------------------------------

    The Commission's approach to registration and regulation of foreign 
broker-dealers thus extends Commission oversight to the global 
activities of non-U.S.-based securities market intermediaries that are 
registered broker-dealers because of their securities activities with 
U.S. persons or that physically operate within the United States.\219\ 
In recognition of the internationalization of securities markets, 
however, the Commission has used available exemptive authority to 
tailor rules and regulations to the specific circumstances of foreign 
markets and market participants. For example, we used our exemptive 
authority under Section 15(a)(2) of the Exchange Act to adopt Rule 15a-
6 under the Exchange Act (``Rule 15a-6''),\220\ which provides limited 
exemptions from registration to foreign brokers or dealers engaging in 
securities transactions, or offering to engage in securities 
transactions, within the United States or with U.S. persons, subject to 
certain conditions.\221\
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    \219\ See Rule 15a-6 Adopting Release, 54 FR 30017.
    \220\ 17 CFR 240.15a-6.
    \221\ See Rule 15a-6 Adopting Release, 54 FR 30013. As discussed 
below, some commenters have suggested that the Commission use an 
approach that would be modeled after the approach the Commission has 
applied to foreign broker-dealers in Rule 15a-6 to address issues 
related to cross-border security-based swap transactions and foreign 
security-based swap dealers.
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3. Comment Summary
(a) Market Participants
    As noted above, various commenters expressed concerns about the 
``extraterritorial'' application of Title VII, and many of these 
commenters expressed particular concerns about the possible 
extraterritorial application of security-based swap dealer regulation 
and registration requirements.\222\ In addition to concerns described 
above regarding the application of Title VII to cross-border security-
based swap activity,\223\ commenters noted that the derivatives 
industry functions in a global market and that new regulations pose the 
potential to disrupt this market if they do not take into account the 
nature of the industry and the appropriate extraterritorial reach of 
the regulations.\224\ A consistent theme in many of these comment 
letters was the importance of taking into account the principles of 
international comity in limiting the extraterritorial reach of the 
proposed rules, including entering into coordination agreements with 
our foreign regulatory counterparts on the jurisdictional reach of U.S. 
and foreign derivatives rules.\225\
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    \222\ See e.g., ACP/AMF Letter, BaFin Letter, Cleary Letter IV, 
Davis Polk Letter I, Davis Polk Letter II, IIB Letter, ISDA Letter 
I, Japanese Banks Letter, JFSA Letter I, Newedge Letter, Rabobank 
Letter, Soci[eacute]t[eacute] G[eacute]n[eacute]rale Letter I, SIFMA 
Letter, Soci[eacute]t[eacute] G[eacute]n[eacute]rale Letter II, 
Sullivan & Cromwell Letter, and TCX Letter.
    \223\ See Section II.B, supra.
    \224\ See Section II.B, supra; see also ISDA Letter I at 17 
(urging that the new regulations be implemented so as to not distort 
the current global derivatives market that functions ``within a 
relatively level international playing field,'' and noting that to 
address concerns related to competition and conflicts between 
various regulators and regulations ``[i]t is imperative that U.S. 
and non-U.S. regulators must coordinate requirements to avoid 
unintended impediments to, and fragmentation of, the derivatives 
markets'').
    \225\ See, e.g., Davis Polk Letter II at 12 (recommending that 
in implementing Title VII regulations, ``the Commissions and the 
Federal Reserve should also give effect to the general 
jurisdictional limits specified in Sections 722 and 772 of the Dodd-
Frank Act in a manner that is consistent with the principle of 
international comity evident in the statute and general legal 
principles governing statutory construction pertaining to 
extraterritorial and international matters''); Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale Letter I at 8, 11 (recommending U.S. and 
foreign counterparts to work toward a memorandum of understanding on 
the jurisdictional reach of U.S. and EU derivatives rules and 
warning that without cooperation between the U.S. and foreign 
regulators the result could be ``regulatory retaliation'' whereby 
``the [s]waps market could devolve into regulatory chaos, thereby 
increasing systemic risk''); Newedge Letter at 10-12 (expressing 
concern that requiring foreign firms to register as swaps dealers or 
major swap participants in the U.S. ``could result in foreign 
regulators taking retaliatory action against U.S. firms engaging in 
swap activities with non-U.S. persons domiciled within their 
physical borders'' and that any regulation of foreign firms not 
physically present in the United States that are already subject to 
foreign regulations is unnecessary and would violate principles of 
international comity).
---------------------------------------------------------------------------

    For example, a number of commenters recommended that the Commission 
take a territorial approach in determining when a person engaging in 
security-based swap dealing activity would be required to register with 
the Commission as a security-based swap dealer, generally recommending 
registration of an entity for its security-based swaps dealing activity 
from within the United States or with regard to its dealings with U.S. 
counterparties.\226\ Several commenters further suggested that a non-
U.S. person's de minimis amount of swap activities with U.S. persons 
should not trigger security-based swap dealer registration.\227\ Some 
commenters expressed the view that the Commission's cross-border 
framework should seek to avoid imposing duplicative regulation and 
unnecessary cost on entities that are already regulated in a foreign 
jurisdiction.\228\ Some commenters have suggested that the Commission 
use an approach that would be modeled after the approach the Commission 
has applied to foreign broker-dealers in Rule 15a-6 to address issues 
related to cross-border security-

[[Page 30992]]

based swap transactions and foreign security-based swap dealers.\229\
---------------------------------------------------------------------------

    \226\ See, e.g., Sullivan & Cromwell Letter at 11 (``The SEC 
has, in the past, plainly stated that it uses a territorial approach 
in applying broker-dealer registration requirements to international 
operations. Only those broker-dealers who induce, or attempt to 
induce, securities transactions with persons in the United States 
would be required to register.''); MFA Letter II at 15-16 
(commenting that the proposed security-based swap dealer and major 
security-based swap participant rules do not appear to encompass 
trading outside of the U.S. between non-U.S. entities or non-U.S. 
affiliates of U.S. entities, and adding that the rules also should 
not capture the non-U.S. affiliates of U.S. investment managers that 
advise offshore funds, or non-U.S.-domiciled funds that have U.S. 
investment managers but trade in swaps referencing non-U.S. 
securities or on a non-U.S. market, considering that foreign 
regulators will have jurisdiction over the non-U.S. activities of 
U.S. entities); IIB Letter at 9 (urging the Commission to adopt an 
interpretation that a ``reference to a U.S. underlier or reference 
entity in a swap conducted outside the U.S. [is not] a sufficient 
connection to the U.S. to subject either counterparty to U.S. Swap 
Dealer registration requirements''); Newedge Letter at 2 (suggesting 
that foreign entities engaging in swaps transactions ``with US 
persons should not be required to register as swaps dealers or major 
swaps participants in the US to the extent they are not physically 
located in the US and are subject to a comparable regulatory 
regime'').
    \227\ See, e.g., Sullivan & Cromwell Letter at 2, 8 
(acknowledging that a foreign entity's swaps transactions with U.S. 
persons in excess of the de minimis amount, ``if otherwise covered 
by the definitions, [should] be required to register'' as a swaps 
entity, but suggesting that swaps activities with U.S. persons 
within ``any de minimis amount authorized by the final rules and in 
transactions with their U.S. affiliates for purposes of risk 
management'' should not trigger swaps entity registration); TCX 
Letter at 6 (``We are concerned that, should TCX become subject to 
swap dealer registration notwithstanding the arguments presented 
above, the de minimis exception as proposed in the [Intermediary 
Definitions Proposing Release] has been drafted too narrowly to be 
of any practical use to TCXIM or to any other similarly-situated 
offshore entity with limited US swaps business. In particular, we 
urge the Commission to clarify that an offshore entity's swaps with 
US counterparties, excluding non-US subsidiaries of US entities, 
must be counted when determining if the de minimis exemption is 
available.'').
    \228\ See, e.g., IIB Letter at 7 (suggesting that the 
``Commissions should establish a framework for cross-border swap 
activities that preserves and leverages the strengths of existing 
market practices and home country supervision and regulation'' and 
``avoid a framework that is duplicative, inefficient (for 
supervisors and market participants) and would result in unrealistic 
extraterritorial supervisory responsibilities for the Commissions 
and potential fragmentation of the derivatives markets'').
    \229\ See, e.g., Davis Polk Letter I at 11 n.17 (``This model is 
similar to the mode of operation permitted by Rule 15a-6 under the 
Securities Exchange Act of 1934, pursuant to which foreign broker-
dealers interface with U.S. customers under arrangements with 
affiliated or non-affiliated broker-dealers without themselves 
registering as broker-dealers in the U.S.''); Cleary Letter IV at 22 
(``Accordingly, as one alternative, we suggest that the Commissions 
adopt an approach that is modeled on the Commissions' existing 
regimes, permitting non-U.S. swap dealers to transact with U.S. 
persons without registering in the U.S. if those transactions are 
intermediated by a U.S.-registered swap dealer. This would be 
consistent with the approach adopted by the SEC under Rule 15a-6 and 
prior interpretative precedents with respect to non-U.S. securities 
dealers.'').
---------------------------------------------------------------------------

    For purposes of analyzing the appropriate definition of U.S. person 
in the security-based swap dealer context, several commenters suggested 
that the Commission look to rules adopted under the Securities Act and 
adopt a definition of U.S. person based on Regulation S under the 
Securities Act (``Regulation S'').\230\ Some commenters stated the view 
that under Regulation S, only affiliates or branches located within the 
United States would be considered U.S. persons.\231\ Some commenters 
argued that a foreign affiliate of a U.S. person and non-U.S. branches 
of a U.S. bank should be treated as non-U.S. persons and, depending on 
their dealing activity, not be required to register as security-based 
swap dealers because such entities may not have direct and significant 
connection with, or effect on, U.S. commerce.\232\ One commenter 
further argued that a non-U.S. affiliate of a U.S. person, in its 
insolvency, is subject to separate resolution from its parent, and thus 
should be treated as a non-U.S. entity.\233\
---------------------------------------------------------------------------

    \230\ See 17 CFR 230.901(k). See, e.g., Cleary Letter IV at 2, 
6-9; Davis Polk Letter I at note 6.
    \231\ See, e.g., Cleary Letter IV at 7 (stating that 
``Regulation S does not include as a `U.S. person' the non-U.S. 
branch or affiliate of a U.S. or non-U.S. person; only affiliates or 
branches located in the U.S. are covered''); SIFMA Letter at 5 
(stating that (``It is noteworthy that the Regulation S definition 
of U.S. person does not include non-U.S. affiliates of U.S. persons 
or non-U.S. branches of a U.S. bank. . . .'').
    \232\ See, e.g., Sullivan & Cromwell Letter at 2-3, 6-9 (arguing 
against the extraterritorial application to foreign affiliates of a 
U.S. person, stating that when a foreign entity's ``counterparty to 
a transaction is a non-U.S. affiliate of a U.S. person,'' the 
transactions are ``removed from the U.S. stream of commerce. As a 
result, there is no `direct' effect on U.S. commerce and it is 
highly unlikely that the transactions would have any significant 
effect on U.S. commerce''); ISDA Letter I at 11 (stating that ``Non-
U.S. entities (including non-U.S. affiliates and branches of U.S. 
banks) should not be required to register as Dealers where they are 
conducting business with non-U.S. counterparties.'').
    \233\ See Cleary Letter IV at 7 (``The non-U.S. affiliate of a 
U.S. person is, in its own insolvency or that of its parent, 
typically subject to separate resolution from its parent and other 
affiliates'').
---------------------------------------------------------------------------

    Several commenters stated that a foreign branch or office of a U.S. 
person also should be treated as a non-U.S. person, despite the fact 
that, as a few commenters acknowledged, foreign branches of U.S. banks 
are not separate legal entities from their U.S. head office and 
typically are not separately capitalized, although in some cases they 
may be subject to certain local capital or reserve maintenance 
requirements.\234\ Several commenters suggested that broker-dealer 
registration, not security-based swap dealer registration, may be more 
appropriate for a U.S. branch, agency, or affiliate that acts as an 
agent of a non-U.S. person for security-based swaps transactions.\235\
---------------------------------------------------------------------------

    \234\ See, e.g., Cleary Letter IV at 7 (arguing that 
``[a]lthough bank branches are not usually separately capitalized,'' 
they should not be considered U.S. persons because their operations 
are subject to separate local licensing, examination, and books and 
records requirements); SIFMA Letter I at 15 n.37 (``We acknowledge 
that Title VII capital requirements cannot be applied at the branch-
level and, therefore, must be applied at the bank level.''); 
Sullivan & Cromwell Letter at 16 (remarking that ``foreign branches 
have long been allowed to engage in a wider range of activities than 
are their U.S. head offices and have benefitted from the presumption 
against applying U.S. law extraterritorially'' despite the fact that 
``foreign branches of U.S. banks are not corporate entities separate 
and apart from their bank parents'').
    \235\ See, e.g., IIB Letter at 10 (suggesting that a U.S.-based 
person who acts as an agent for a non-U.S. person in soliciting or 
negotiating security-based swap transactions with counterparties 
located outside of the U.S. should register as a broker-dealer); 
Rabobank Letter at 3 (recommending that U.S. affiliates who help to 
arrange swaps transactions with U.S. persons should ``register as 
futures commissions merchants or introducing brokers, broker-
dealers, or swap dealers depending upon their respective roles in 
soliciting transactions, receiving customer margin, performing 
delegated compliance functions, effecting transactions as an agent 
on exchanges and swap execution facilities and in OTC markets, or 
clearing customer transactions''); cf. Newedge Letter at 1-2 
(asserting that broker-dealers and foreign entities subject to 
comparable regulations who ``engage principally in customer 
[security-based] swap facilitation activities'' should not be 
subject to security-based swap dealer and major security-based swaps 
participant registration requirements because they already are 
``subject to stringent rules relating to capital, risk, margin and 
other requirements by virtue of their registration status''; and 
alternatively, suggesting that registrants who ``execute swaps 
solely in response to customer orders and that hedge each such 
transactions individually . . . should be exempt since, among other 
things, their trading poses little or no risk to themselves, their 
customers or the markets generally.'').
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    Several commenters acknowledged concerns that persons may seek to 
book transactions through non-U.S. branches or subsidiaries in an 
effort to evade the requirements of Title VII.\236\ These commenters, 
however, urged that the Commissions not seek to address the potential 
for evasion through an overbroad definition of a security-based swap 
dealer, noting that there are legitimate business reasons for 
conducting security-based swap transactions with non-U.S. persons 
through non-U.S. operations.\237\
---------------------------------------------------------------------------

    \236\ See, e.g., Sullivan & Cromwell Letter at 10 (``We 
understand the concerns that the Commission may have that persons 
would seek to book transactions through non-U.S. branches or 
subsidiaries in order to evade the requirements of the CEA or 
Exchange Act.'').
    \237\ See, e.g., Sullivan & Cromwell Letter at 9-10 (expressing 
understanding for the Commissions' evasion concerns, but noting that 
U.S. companies have legitimate business reasons for establishing 
their non-U.S. operations, including requirements in some foreign 
jurisdictions that only local banks and local branches of foreign 
banks may engage in swap activities); Cleary Letter IV at 5-7 
(noting legitimate business reasons for establishing non-U.S. 
operations abroad, and stating that the Commissions ``should not 
adopt an extraterritorial regulatory framework premised on the 
assumption that activities conducted outside the U.S. will be 
undertaken for the purpose of evasion'').
---------------------------------------------------------------------------

(b) Foreign Regulators
    Foreign regulators have reached out to the Commission through 
correspondence and bilateral and multilateral discussions to better 
understand the approach being considered by the Commission, to express 
concern about the potential impact of potential approaches on their 
markets, and to seek regulatory coordination.\238\ One of the principal 
concerns of foreign regulators is that the Commission would require 
foreign entities to register with the Commission and subject them to 
regulatory requirements that are duplicative of, or potentially 
conflict with, the requirements imposed by their home country or host 
country.\239\ In their view, the Commission's application of Title VII 
requirements to foreign entities in jurisdictions that commit to 
developing or have developed similar OTC derivatives regulations would 
fail to acknowledge, under general principles of international comity, 
the effectiveness, suitability, and scope of foreign regulatory regimes 
and place undue regulatory burdens on foreign

[[Page 30993]]

entities that conduct security-based swap business with U.S. 
persons.\240\
---------------------------------------------------------------------------

    \238\ See, e.g., BaFIN Letter at 1-2 (``Close cooperation of our 
respective authorities, accompanied by a Memorandum of 
Understanding, might help to establish an adequate regulatory 
environment for the swap activities of US and German entities and to 
provide the confidence that the respective national legislation is 
adequately recognized and complied with.'').
    \239\ See, e.g., JFSA Letter I at 1-2 (requesting that Japanese 
financial institutions be exempted from ``Swap Dealer'' and ``Major 
Swap Participant'' registration under the Dodd-Frank Act); BaFIN 
Letter at 1 (``The obligations for foreign banks should be 
proportionate and take into account equivalent requirements in their 
home jurisdiction.''). See also ECB Letter at 2 (expressing concern 
about the ``possible inconsistency between US and EU legislation 
with respect to differing rules on exempting public international 
institutions . . . from the clearing and reporting obligation.'').
    \240\ See Asian-Pacific Regulators Letter at 4.
---------------------------------------------------------------------------

    Such concerns from foreign regulators include comments that U.S. 
regulators should not ask financial institutions domiciled in their 
jurisdictions to register as security-based swap dealers because this 
would create undesirable redundancies for those financial institutions 
that are already regulated in the foreign jurisdiction.\241\ Certain 
foreign regulators also argued that the Commission should not regulate 
foreign subsidiaries of U.S. security-based swap dealers because these 
entities would already be regulated by a foreign regulator.\242\ Some 
foreign regulators expressed the expectation that the Commission would 
limit the registration of foreign banks as security-based swap dealers 
to operations conducting activities with U.S. counterparties or clients 
and would not apply the registration and regulation requirements to 
foreign banks as a whole.\243\
---------------------------------------------------------------------------

    \241\ See, e.g., JFSA Letter I at 1 (``If these institutions 
were also to be regulated under US DFA framework, this will create 
an undesirable and redundant effect on these Japanese 
institutions.'').
    \242\ See, e.g., ACP/AMF Letter at 1-32 (``[W]e strongly support 
. . . a mutual recognition regime built around an adequate and 
balanced symmetrical system taking into account the home and the 
host country regulatory regimes. Thus . . . we expect that [the 
registration of non-resident entities] will be limited to activities 
in relation with US counterparties and/or clients and will not 
involve similar obligations to the financial organizations as a 
whole. The obligations for non-resident entities should indeed be 
proportionate and take into [account] equivalent requirements in 
their home jurisdiction.'').
    \243\ See, e.g., BaFIN Letter at 1 (``Without questioning the 
registration of foreign banks, I suppose that such registration will 
be limited to activities in relation with US counterparties and/or 
clients and will not involve similar obligations to foreign banks as 
a whole'').
---------------------------------------------------------------------------

4. Application of the De Minimis Exception to Cross-Border Security-
Based Swap Dealing Activity
    The Commission recognizes the concerns raised by commenters 
regarding the potential for imposing inconsistent or conflicting 
requirements on security-based swap dealers with global operations, as 
well as their desire that the Commission take into account the 
principles of international comity when applying Title VII to cross-
border dealing activity. After considering the goals of the Dodd-Frank 
Act and the scope of the provisions of Title VII covering security-
based swap dealers, in light of the global nature of the security-based 
swap market, the various structures of dealing operations, and the 
views of commenters, the Commission is proposing an approach to the 
application of the Title VII registration requirement to cross-border 
security-based swap dealing activity that focuses on whether dealing 
conduct occurs with U.S. persons or otherwise occurs within the United 
States.
    Specifically, as explained below, the Commission is proposing to 
require a non-U.S. person engaged in security-based swap dealing 
activity to register with the Commission as a security-based swap 
dealer pursuant to Section 15F(a)(1) of the Exchange Act \244\ if the 
notional amount of security-based swap transactions connected with its 
dealing activity with U.S. persons (other than with foreign branches of 
U.S. banks) \245\ or otherwise conducted within the United States \246\ 
exceeds the de minimis threshold in the security-based swap dealer 
definition.\247\ A U.S. person engaged in security-based swap dealing 
activity would be required to count all security-based swap 
transactions connected with its dealing activity toward the de minimis 
threshold, including transactions conducted through a foreign 
branch.\248\
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    \244\ 15 U.S.C. 78o-10(a)(1).
    \245\ Proposed Rule 3a71-3(a)(7) under the Exchange Act 
(defining ``U.S. person''), as discussed in Section III.B.5, infra; 
proposed Rule 3a71-3(a)(1) under the Exchange Act (defining 
``foreign branch''), as discussed in Section III.B.7, infra.
    \246\ Proposed Rule 3a71-3(a)(5) under the Exchange Act 
(defining ``transaction conducted within the United States''), as 
discussed in Section III.B.6, infra.
    \247\ Proposed Rule 3a71-3(b) under the Exchange Act; see also 
17 CFR 240.3a71-2.
    \248\ See id.
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(a) Meaning of the Term ``Person'' in the Security-Based Swap Dealer 
Definition
    As a preliminary matter, we note that, as the Commission discussed 
in the Intermediary Definitions Adopting Release, the term ``person'' 
as used in the security-based swap dealer definition should be 
interpreted to refer to a particular legal person.\249\ Accordingly, a 
trading desk, department, office, branch, or other discrete business 
unit that is not a separately organized legal person would not be 
viewed as a security-based swap dealer (regardless of where located); 
rather, the legal person of which it is a part would be the security-
based swap dealer.\250\ Similarly, the term ``person'' in the 
Commission's rules implementing the de minimis exception should be 
interpreted to refer to a particular legal person.\251\
---------------------------------------------------------------------------

    \249\ See Intermediary Definitions Adopting Release, 77 FR 
30624. Section 3(a)(9) of the Exchange Act defines ``person'' as ``a 
natural person, company, government, or political subdivision, 
agency, or instrumentality of a government.'' 15 U.S.C. 78c(a)(9); 
see also proposed Rule 3a71-3(a)(7) under the Exchange Act (defining 
``U.S. person''), as discussed in Section III.B.5, infra.
    \250\ This approach is consistent with the Commission's 
discussion in the Intermediary Definitions Adopting Release 
regarding the entity-level designation of security-based swap 
dealers. 77 FR 30624. It also generally is consistent with the 
Commission's traditional entity approach to the registration of 
broker-dealers, as discussed in Section III.B.2, supra.
    \251\ See 17 CFR 240.3a71-2; proposed Rule 3a71-3(b) under the 
Exchange Act.
---------------------------------------------------------------------------

    Thus, the security-based swap dealer definition would apply to the 
particular legal person performing the dealing activity, even if that 
person's dealing activity is limited to a trading desk or discrete 
business unit.\252\ The presumption is that a person who falls within 
the security-based swap dealer definition is a dealer with regard to 
all of its security-based swap activities.\253\ As a result, a legal 
person with a branch, agency, or office that is engaged in dealing 
activity in connection with transactions above the de minimis threshold 
would be required to register as a security-based swap dealer, even if 
the legal person's dealing activity were limited to such branch, 
agency, or office. By contrast, each affiliate of a security-based swap 
dealer would need to separately consider whether it falls within the de 
minimis exception if that affiliate engages in security-based swap 
dealing activity.\254\
---------------------------------------------------------------------------

    \252\ Within an affiliated group of companies, only those legal 
persons that engage in dealing activities will be designated as 
dealers; that designation will not be imputed to other non-dealer 
affiliates or to the group as a whole. A single affiliate group may 
have multiple swap or security-based swap dealers. See Intermediary 
Definitions Adopting Release, 77 FR 30624-25. But see Section 
III.B.8, infra (discussing aggregation).
    \253\ The definition of security-based swap dealer provides that 
a person may be designated as a security-based swap dealer for a 
single type or class or category of security-based swaps or 
activity, and not others. See Section 3(a)(71)(B) of the Exchange 
Act, 15 U.S.C. 78c(71)(B); 17 CFR 240.3a71-1(c) (``A person that is 
a security-based swap dealer in general shall be deemed to be a 
security-based swap dealer with respect to each security-based swap 
it enters into, regardless of the type, class, or category of the 
security-based swap or the person's activities in connection with 
the security-based swap, unless the Commission limits the person's 
designation as a security-based swap dealer to specified types, 
classes, or categories of security-based swaps or specified 
activities of the person in connection with security-based 
swaps.''). See note 588, infra.
    Although the Commission is not proposing to designate non-U.S. 
persons as security-based swap dealers in a limited capacity, the 
Commission's proposed approach would limit the application of 
certain transaction-level requirements to the ``U.S. Business'' of 
foreign security-based swap dealers. See Section III.C.4, infra.
    \254\ See Section III.B.8, infra (discussing inter-affiliate 
transactions), and Section III.B.8, infra (discussing aggregation).
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(b) Proposed Rule
    We are proposing a rule identifying the types of security-based 
swap transactions that should be included in

[[Page 30994]]

a person's calculation of the notional amount of security-based swap 
transactions connected with dealing activity for purposes of 
determining whether the de minimis exception excludes that dealer from 
the security-based swap dealer definition.\255\ The proposed rule 
confirms that all of a U.S. person's security-based swap transactions 
conducted in a dealing capacity would count toward its de minimis 
threshold, wherever those transactions are solicited, negotiated, 
executed, or booked.\256\ Although we recognize that some commenters 
have suggested that the Commission should not require U.S. persons to 
include positions connected with dealing activity conducted through 
foreign branches in calculating the amount of their dealing 
activity,\257\ we are not proposing to adopt this approach. The 
security-based swap dealing activity of a foreign branch is activity of 
the U.S. legal person regardless of the role played by the foreign 
branch or the location of the security-based swap dealing activity. We 
believe that any dealing activity undertaken by a U.S. person occurs at 
least in part within the United States and therefore warrants 
application of Title VII, regardless of where particular dealing 
activity in connection with the transactions is conducted.\258\ The 
security-based swap dealing activity of a U.S. person creates risk to 
the U.S. person and to the U.S. financial system, because the risk of 
such transactions ultimately is borne by the U.S. person, even if the 
transactions in connection with that dealing activity are conducted in 
part outside the United States, and because the U.S. person is part of 
the U.S. financial system.\259\ To achieve the purposes of Title VII, 
including the reduction of systemic risk, we preliminarily believe that 
U.S. persons that engage in security-based swap dealing activity 
through foreign branches should be subject to the regulatory framework 
for dealers established by Congress in Title VII, even if they deal 
exclusively with non-U.S. persons.
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    \255\ Proposed Rule 3a71-3(b) under the Exchange Act. Appendix B 
to this release contains a table that identifies whether a potential 
security-based swap dealer would be required to count a transaction 
with a specific type of counterparty toward its de minimis 
threshold. The table in Appendix B is only a summary of the rules 
and interpretations proposed in this release that is provided for 
ease of reference; it does not supersede, and should be read in 
conjunction with, the proposed rules and interpretations.
    \256\ Proposed Rule 3a71-3(b)(1)(i) under the Exchange Act. As 
noted above, as used in this release, ``security-based swap 
dealing,'' ``security-based swap dealing activity,'' ``dealing 
activity,'' and related concepts have the meanings described in the 
Intermediary Definitions Adopting Release, 77 FR 30596, unless 
otherwise indicated in this release. Such dealing activity is 
normally carried out through interactions with counterparties or 
potential counterparties, which includes solicitation, negotiation, 
or execution of a security-based swap.
    \257\ See, e.g., Sullivan and Cromwell Letter, at 9-11.
    \258\ See notes 231 and 234, supra. As noted in Section II.A.3 
above, the security-based swap transactions of U.S. persons, 
wherever entered into, give rise to ongoing obligations that may 
affect the financial stability of the United States and thus present 
the type of risk that Title VII was intended to address.
    \259\ These risk concerns may be greater for uncleared security-
based swap than for cleared security-based swaps where the U.S. 
person would not retain the credit risk of its counterparty; 
however, cleared security-based swaps still represent an importation 
of risk into the U.S. financial system when entered into by U.S. 
persons because in the context of cleared security-based swaps, the 
U.S. persons would be exposed to the credit, financial, and 
operational risks of the clearing agency.
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    By contrast, a non-U.S. person would be required to consider only 
the security-based swap transactions connected with its dealing 
activity with U.S. persons (other than foreign branches of U.S. banks) 
\260\ or otherwise conducted within the United States \261\ for 
purposes of the de minimis exception.\262\ Under this proposed 
approach, a non-U.S. person would be required to calculate its 
security-based swap position for purposes of the de minimis threshold 
by adding together the notional amount of transactions connected with 
dealing activity with U.S. persons (other than foreign branches of U.S. 
banks) \263\ or otherwise conducted within the United States.\264\ As a 
result, a foreign entity with a global security-based swap dealing 
business, but whose transactions connected with its dealing activity 
with U.S. persons (other than foreign branches of U.S. banks) or 
otherwise conducted within the United States fall under the de minimis 
threshold, would not fall within the security-based swap dealer 
definition and, therefore, would not be required to register as a 
security-based swap dealer.\265\
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    \260\ Proposed Rule 3a71-3(a)(7) under the Exchange Act 
(defining ``U.S. person''), as discussed in Section III.B.5; 
proposed Rule 3a71-3(a)(1) under the Exchange Act (defining 
``foreign branch''), as discussed in Section III.B.7, infra.
    \261\ Proposed Rule 3a71-3(a)(5) under the Exchange Act 
(defining ``transaction conducted within the United States''), as 
discussed in Section III.B.6, infra. Proposed Rule 3a71-3(a)(9) 
under the Exchange Act defines ``United States'' as ``the United 
States of America, its territories and possessions, any States of 
the United States, and the District of Columbia.'' The proposed 
definition of ``United States'' is consistent with the definition of 
that term in other contexts in the federal securities laws. See, 
e.g., 17 CFR 230.902(l); 17 CFR 240.15a-6(b)(6).
    \262\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
    \263\ See Section III.B.7, infra (discussing the exception from 
the de minimis threshold for transactions by foreign dealers with 
foreign branches of U.S. banks).
    \264\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act. For 
purposes of the de minimis threshold, the U.S. person-status of a 
non-U.S. person's counterparty would be relevant only at the time of 
a transaction that arises out of the non-U.S. person's dealing 
activity. Any change in a counterparty's U.S. person status after 
the transaction is executed would not affect that transaction's 
treatment for purposes of the de minimis exception, though it would 
affect the treatment of any subsequent dealing transactions with 
that counterparty. See also Product Definitions Adopting Release, 77 
FR 48286 (``If the material terms of a Title VII instrument are 
amended or modified during its life based on an exercise of 
discretion and not through predetermined criteria or a predetermined 
self-executing formula, the Commissions view the amended or modified 
Title VII instrument as a new Title VII instrument'').
    \265\ See 17 CFR 240.3a71-2(a). The Commission notes that, to 
the extent that a non-U.S. person does not conduct dealing activity 
within the United States or with U.S. persons (or to the extent that 
the volume of positions connected with such dealing activity does 
not exceed the de minimis threshold discussed below), it would not 
be required to register with the Commission as a security-based swap 
dealer under Section 15F(a)(1) of the Exchange Act regardless of the 
volume of non-dealing security-based swap transactions it has within 
the United States or with U.S. persons. See Intermediary Definitions 
Adopting Release, 77 FR 30631. Such an entity still would be subject 
to the major security-based swap participant thresholds with respect 
to its non-dealing security-based swap transactions. However, once a 
non-U.S. person's transactions with U.S. persons (other than foreign 
branches of U.S. banks) or otherwise conducted within the United 
States involve dealing activity that exceeds the de minimis 
threshold, that person would be required to register as a security-
based swap dealer and would be subject to the statutory requirements 
applicable to security-based swap dealers for all of its security-
based swap transactions. See Intermediary Definitions Adopting 
Release, 77 FR 30645.
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    This approach to the de minimis exception for non-U.S. persons 
engaged in cross-border dealing activity preliminarily appears to us to 
focus appropriately on a non-U.S. person's security-based swap dealing 
activity in the United States. In addition, this proposed approach, 
when combined with our broader approach to the registration and 
regulation of foreign security-based swap dealers, appears to us to 
appropriately focus our oversight on those non-U.S. persons engaged in 
security-based swap dealing activities that most directly impact the 
U.S. security-based swap market and U.S. financial system and that, 
therefore, warrant the application of the provisions of Title VII 
covering security-based swap dealers.\266\
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    \266\ The Commission understands that entities such as foreign 
central banks, international financial institutions, multilateral 
development banks, and sovereign wealth funds (``SWFs'') (together, 
``foreign public sector financial institutions'' or ``FPSFIs'') 
rarely enter into security-based swap transactions in a dealing 
capacity. As such, we believe that the proposed approach outlined in 
this release would sufficiently address the dealer registration 
concerns of these entities. The Commission is soliciting comment on 
whether our proposal sufficiently addresses the concerns of FPSFIs 
and whether our understanding of the security-based swap activity of 
such entities is accurate. See also Section III.B.5(b)iv, infra 
(discussing international organizations).

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[[Page 30995]]

    The Commission is not proposing, as some commenters have suggested, 
an approach modeled on Rule 15a-6(a)(3), which would permit non-U.S. 
persons to conduct security-based swap dealing activity with U.S. 
persons without registering with the Commission if such dealing 
activity were intermediated by a registered security-based swap 
dealer.\267\ The Commission preliminarily believes that such an 
approach would not address the risk to the U.S. financial system by 
dealing activity of non-U.S. persons within the United States or with 
U.S. persons. As a dealer, the non-U.S. person would be the party to 
the security-based swap transaction and, therefore, the party that 
bears the financial risk of such transaction and whose financial 
integrity is of primary concern to the Commission. This concern is 
heightened by the fact, noted above, that, unlike most other securities 
transactions, security-based swap transactions give rise to ongoing 
obligations between the transaction counterparties.\268\ Under the 
alternative suggested, the important financial responsibility 
requirements that Title VII imposes on security-based swap dealers 
would not apply to the non-U.S. person with respect to that 
transaction. Instead, the intermediating registered security-based swap 
dealer would be subject to the financial responsibility rules with 
respect to the transaction, but since it would not be a party to, and 
would not bear the financial risk of, the security-based swap 
transaction, it would not bear the ongoing financial risk of such 
transaction. As a result, the financial responsibility requirements 
imposed on the intermediating dealer would not address the dealing risk 
posed by the non-U.S. person in this context.\269\
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    \267\ See note 229, supra.
    \268\ See Section II.A.3, supra.
    \269\ The Commission also is not proposing a dealer-to-dealer 
exception modeled on Rule 15a-6(a)(4)(i) (providing that a foreign 
broker or dealer shall be exempt from the registration requirements 
of Section 15(a)(l) or 15B(a)(l) of the Exchange Act to the extent 
that the foreign broker or dealer effects transactions in securities 
with or for, or induces or attempts to induce the purchase or sale 
of any security by ``[a] registered broker or dealer, whether the 
registered broker or dealer is acting as principal for its own 
account or as agent for others, or a bank acting in a broker or 
dealer capacity as permitted by U.S. law'').
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Request for Comment
    The Commission requests comment on all aspects of the proposed rule 
regarding the application of the de minimis exception to U.S. persons 
and non-U.S. persons, including the following:
     Should the proposed rule limit the de minimis test to the 
notional amount of a U.S. person's positions connected with its dealing 
activity involving transactions with other U.S. persons or otherwise 
conducted within the United States? For example, should the proposed 
rule be altered to provide that U.S. banks would not include the 
notional amount of transactions connected with the dealing activity of 
their foreign branches in the de minimis calculation, rather than 
counting these transactions against the de minimis threshold as 
required under the proposed approach? Why or why not?
     Should the proposed rule require non-U.S. persons to count 
transactions with the foreign branches of U.S. banks towards their de 
minimis calculations? Why or why not?
     Should the proposed rule follow an approach modeled on 
Rule 15a-6(a)(3), which would permit non-U.S. persons to conduct 
security-based swap dealing activity within the United States without 
registering with the Commission if those transactions were 
intermediated by a registered U.S. security-based swap dealer? If so, 
what compliance obligations, if any, should the unregistered non-U.S. 
person be subject to? What obligations should the U.S. security-based 
swap dealer be subject to with respect to such intermediated 
transactions, particularly with respect to capital, margin, and 
segregation requirements? How would this approach deal with risk 
concerns, especially with any security-based swaps not subject to 
clearing?
     Should the proposed rule follow an approach modeled on 
Rule 15a-6(a)(4)(i), which would permit non-U.S. persons to conduct 
security-based swap dealing activity within the United States without 
registering with the Commission if those transactions were with a 
registered U.S. security-based swap dealer? If so, what conditions, if 
any, should the Commission impose on such an exception?
     Should non-U.S. persons acting in a dealing capacity be 
required to count transactions entered into with registered security-
based swap dealers toward their de minimis threshold? Why or why not? 
If non-U.S. persons are not required to count security-based swap 
transactions, conducted in a dealing capacity, with registered 
security-based swap dealers, should U.S. persons be required to count 
security-based swap transactions, conducted in a dealing capacity, with 
registered security-based swap dealers? If not, why not? If so, why?
     The CFTC has proposed an interpretation that would require 
a non-U.S. person to consider the aggregate notional value of its swap 
dealing transactions (or any swap dealing transactions of its 
affiliates under common control) where the non-U.S. person's 
obligations are guaranteed by a U.S. person.\270\ Should the proposed 
rule require a non-U.S. person whose security-based swap transactions 
are guaranteed by a U.S. person to count all of its security-based swap 
dealing transactions that are guaranteed by a U.S. person toward the de 
minimis threshold, even if they are not entered into with U.S. persons 
or otherwise conducted within the United States?
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    \270\ See CFTC Cross-Border Proposal, 77 FR 41221.
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     Should the proposed rule require counting against the de 
minimis threshold the notional amount of a non-U.S. person's 
transactions entered into in its dealing capacity within the United 
States or with a U.S. person? Should a non-U.S. person be required 
instead to aggregate the total worldwide notional amount of its 
security-based swap transactions entered into in a dealing capacity, 
regardless of the geographic location of the dealing activity or the 
counterparty's status as a U.S. person if it engages in any dealing 
transactions with U.S. persons? Why or why not?
     What circumstances, if any, would justify requiring a non-
U.S. person to register with the Commission if its dealing activity 
arising from its transactions with non-U.S. persons outside the United 
States would exceed the de minimis threshold if it had been conducted 
within the United States or with U.S. persons but the non-U.S. person 
enters into transactions within the United States or with U.S. persons 
solely in a non-dealing capacity?
     What circumstances would justify following a different 
territorial approach that would treat transactions connected with the 
dealing activity conducted by a U.S. person through its foreign 
locations with non-U.S. persons as outside the United States and not 
required to be counted against such U.S. person's de minimis threshold?
     Does the Commission's proposed approach adequately address 
the concerns of FPSFIs? Is our understanding of the security-based swap 
activity of FPSFIs accurate? If not, please explain.
     What would be the market impact of the proposed approach 
to apply the de minimis exception in the cross-border context? How 
would the proposed application of the de minimis

[[Page 30996]]

exception to U.S. persons and non-U.S. persons affect the 
competitiveness of U.S. entities in the global marketplace (both in the 
United States as well as in foreign jurisdictions)? Would the proposed 
approach place any market participants at a competitive disadvantage or 
advantage? If so, please explain. Would the proposed approach be a more 
general burden on competition? If so, please explain. What other 
measures should the Commission consider to implement the de minimis 
exception? What would be the market impacts and competitiveness effects 
of alternatives to the proposed approach discussed in this release?
5. Proposed Definition of ``U.S. Person''
Introduction
    The proposed rule defining ``U.S. person'' would identify a 
person's status as a U.S. person for purposes of applying the 
calculation for the de minimis exception in the cross-border 
context.\271\ The proposed definition of U.S. person generally follows 
an approach to defining U.S. person similar to that used by the 
Commission in other contexts.\272\ Specifically, the proposed rule 
would define U.S. person to mean any of the following:
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    \271\ Proposed Rule 3a71-3(a)(7) under the Exchange Act. The 
definition of ``U.S. person'' also is used in other proposed rules 
and interpretive guidance discussed below. See Sections IV-XI, 
infra.
    \272\ See, e.g., Regulation S Adopting Release, 55 FR 18308 
(``The Regulation adopted today is based on a territorial approach 
to Section 5 of the Securities Act.''). Although the proposed rule 
generally follows the same approach as Regulation S, the Commission 
preliminarily believes that it is necessary to depart from 
Regulation S in certain respects. See Section III.B.10, infra 
(comparing the proposed definition of ``U.S.'' person with the 
definition of ``U.S. person'' in Regulation S). Notably, neither the 
Exchange Act nor Rule 15a-6 contains a definition of U.S. person.
    The proposed definition of U.S. person is similar to the 
definition of U.S. person that the CFTC staff provided its October 
12, 2012 no-action letter. See Time-Limited No-Action Relief: Swaps 
Only With Certain Persons to be Included in Calculation of Aggregate 
Gross Notional Amount for Purposes of Swap Dealer De Minimis 
Exception and Calculation of Whether a Person is a Major Swap 
Participant (Oct. 12, 2012), available at: https://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-22.pdf; see also 
Final CFTC Cross-Border Exemptive Order, 78 FR 862 (indicating that 
for purposes of its temporary conditional relief the CFTC is taking 
a similar approach to the U.S. person definition as that set forth 
in the October 12, 2012 no-action letter).
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     Any natural person resident in the United States;
     Any partnership, corporation, trust, or other legal person 
organized or incorporated under the laws of the United States \273\ or 
having its principal place of business in the United States; or
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    \273\ Proposed Rule 3a71-3(a)(9) under the Exchange Act defines 
``United States'' as ``the United States of America, its territories 
and possessions, any States of the United States, and the District 
of Columbia.''
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     Any account (whether discretionary or non-discretionary) 
of a U.S. person.\274\
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    \274\ Proposed Rule 3a71-3(a)(7)(i) under the Exchange Act.

The proposed rule also would provide that the term ``U.S. person'' 
would not include the following international organizations: The 
International Monetary Fund (``IMF''), the International Bank for 
Reconstruction and Development, the Inter-American Development Bank, 
the Asian Development Bank, the African Development Bank, the United 
Nations, and their agencies and pension plans, and any other similar 
international organizations, their agencies and pension plans.\275\
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    \275\ Proposed Rule 3a71-3(a)(7)(ii) under the Exchange Act.
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    We preliminarily believe that the proposed definition of U.S. 
person would achieve three objectives necessary to effective 
application of Title VII in the cross-border context. First, it would 
identify those types of individuals or entities that, by virtue of 
their location within the United States or their legal or other 
relationship with the United States, are likely to impact the U.S. 
market even if they transact with security-based swap dealers that are 
not U.S. persons.\276\ Second, it would identify those types of 
individuals or entities that, by virtue of their location within the 
United States or their legal or other relationship with the United 
States, are part of the U.S. security-based swap market and should 
receive the protections of Title VII. Third, it would permit us to 
identify dealing entities that most likely would be active in the U.S. 
security-based swap market and whose dealing activity most likely would 
pose a risk to the U.S. financial system by virtue of their 
counterparties' resident or domicile status.
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    \276\ As noted in Section II.A.3 above, the security-based swap 
transactions of U.S. persons give rise to ongoing liability that is 
borne by a person located within the United States and thus are 
likely to pose the types of financial stability risks to U.S. 
financial system that Title VII was intended to address. The 
security-based swap activity of U.S. persons occurs, at least in 
part, within the United States.
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    Because of the nature of the risks posed by security-based swaps, 
which are borne by the entire corporate entity even if the transaction 
is entered into by a specific trading desk, office, or branch of such 
entity, consistent with the Commission's approach to the meaning of 
``person'' in the security-based swap dealer definition, as discussed 
above, we are proposing to define the term ``U.S. person'' to include 
the entire entity, including its branches and offices that may be 
located in a foreign jurisdiction.\277\ Thus, under this approach, the 
term ``U.S. person'' would be interpreted to include any foreign 
trading desk, office, or branch of an entity that is organized under 
U.S. law or whose principal place of business is located in the United 
States.\278\
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    \277\ See Section III.B.4(a), supra.
    \278\ Id.
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(b) Discussion
i. Natural Persons
    Under the proposed rule, any natural person resident in the United 
States would be a U.S. person, regardless of that individual's 
citizenship status.\279\ Individuals resident abroad, on the other 
hand, would not be treated as U.S. persons, even if they possess U.S. 
citizenship.\280\ We preliminarily believe that natural persons 
residing within the United States who engage in security-based swap 
transactions may raise the types of concerns intended to be addressed 
by Title VII, including those related to transparency and customer 
protection.\281\ We also note that this approach is generally 
consistent with the approach we have taken in prior rulemakings 
relating to the cross-border application of certain similar regulatory 
requirements.\282\ Moreover, any risk to such person arising from its 
security-based swap activity may manifest itself most directly within 
the United States, where a significant portion of its commercial and 
legal relationships exist because that is where its residency is 
(unlike a U.S. citizen resident abroad).
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    \279\ Proposed Rule 3a71-3(a)(7)(i)(A) under the Exchange Act.
    \280\ This proposed approach to treating natural persons as U.S. 
persons based on residency, rather than citizenship, differs from 
the proposed approach to legal entities, such as partnerships and 
corporations, discussed below.
    \281\ See note 4, supra.
    \282\ See Rule 15a-6 Adopting Release, 54 FR 30017 (providing 
that foreign broker-dealers soliciting U.S. investors abroad 
generally would not be subject to registration requirements with the 
Commission).
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ii. Corporations, Organizations, Trusts, and Other Legal Persons
    Under the proposed rule, any partnership, corporation, trust, or 
other legal person organized or incorporated under the laws of the 
United States \283\ or having as its principal place of business in the 
United States would be a U.S. person.\284\ We have previously looked to 
an entity's place of

[[Page 30997]]

organization or incorporation to determine whether it is a U.S. person 
in adopting rules under the federal securities laws,\285\ and we 
preliminarily believe that it is also appropriate to do so in the 
context of Title VII. We preliminarily believe that the decision of a 
corporation, trustee, or other entity to organize under the laws of the 
United States indicates a degree of involvement in the U.S. economy or 
legal system that warrants ensuring that its security-based swap 
activity is subject to the requirements of Title VII.\286\
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    \283\ Proposed Rule 3a71-3(a)(9) under the Exchange Act 
(defining ``United States'').
    \284\ Proposed Rule 3a71-3(a)(7)(i)(B) under the Exchange Act.
    \285\ See Regulation S Adopting Release, 55 FR 18316.
    \286\ Under this prong of the proposed rule, ``special 
entities,'' as defined in Section 15F(h)(2)(C) of the Exchange Act, 
would be U.S. persons because they are legal persons organized under 
the laws of the United States. Section 15F(h)(2)(C) of the Exchange 
Act defines the term ``special entity'' as ``(i) a Federal agency; 
(ii) a State, State agency, city, county, municipality, or other 
political subdivision of a State; (iii) any employee benefit plan, 
as defined in Section 3 of the Employee Retirement Income Security 
Act of 1974, 29 U.S.C. 1002; (iv) any governmental plan, as defined 
in Section 3 of the Employee Retirement Income Security Act of 1974, 
29 U.S.C. 1002; or (v) any endowment, including an endowment that is 
an organization described in Section 501(c)(3) of the Internal 
Revenue Code of 1986.'' 15 U.S.C. 78o-10(h)(2)(C).
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    Similarly, we believe that the proposed definition should ensure 
that Title VII applies to entities that are organized or incorporated 
in a jurisdiction outside the United States if they have their 
principal place of business in the United States.\287\ Any risk to such 
entities arising from their security-based swap activity is likely to 
manifest itself most directly within the United States, where a 
significant portion of their commercial and legal relationships would 
be likely to exist. Moreover, focusing exclusively on whether an entity 
is organized or incorporated in the United States could encourage some 
entities that are currently organized or incorporated in the United 
States to incorporate in a non-U.S. jurisdiction to avoid the costs of 
complying with Title VII while maintaining their principal place of 
business--and thus in all likelihood, the risks arising from their 
security-based swap transactions--within the United States. To prevent 
this possibility, we are proposing to define ``U.S. person'' to include 
entities that are organized or incorporated abroad but have their 
principal place of business within the United States.\288\
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    \287\ For example, a business may be incorporated under the laws 
of a foreign jurisdiction but nonetheless have its business 
operations, including its home office, in the United States.
    \288\ As discussed in Section III.B.6 below, the Commission also 
is proposing to require non-U.S. persons that conduct security-based 
swap transactions within the United States, in a dealing capacity, 
to count such transactions toward their de minimis threshold. In 
addition, the Commission is proposing to subject security-based swap 
transactions that are conducted within the United States to certain 
transaction-level requirements in Title VII in connection with 
reporting and dissemination, clearing, and trade execution. See 
Sections VIII-X, infra.
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    An entity's status as a U.S. person under the proposed rule would 
be determined at the legal entity-level and thus apply to the entire 
legal entity, including any foreign operations that are part of the 
U.S. legal entity.\289\ Consistent with this entity-level approach, a 
foreign branch, agency, or office of a U.S. person would be treated as 
a U.S. person under the proposed definition.\290\ As the Commission 
noted in proposing Regulation SBSR, ``[b]ecause a branch or office has 
no separate legal existence under corporate law, the branch or office 
would be an integral part of the U.S. person itself.'' \291\ In other 
words, because a branch or office is merely an extension of the head 
office, not a separately incorporated or organized legal entity, we 
preliminarily believe that it lacks the legal independence to be 
considered a non-U.S. person for purposes of Title VII if its head 
office is a U.S. person. We preliminarily believe a wholesale exclusion 
from the requirements of Title VII for a foreign branch, agency, or 
office of a U.S. person is not warranted with respect to its security-
based swap transactions because the legal obligations and economic 
risks associated with the transactions directly affect a U.S. person, 
of which the branch, agency, or office is merely a part.
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    \289\ In principle, Regulation S looks to the location of the 
branch rather than the jurisdiction in which the entity is organized 
or incorporated in determining whether the branch is a U.S. person. 
See 17 CFR 230.902(k)(1)(v) and (2)(v). Thus, under Regulation S, 
the foreign branch of a U.S. bank is not treated as a U.S. person 
while the U.S. branch of a foreign bank is treated as a U.S. person. 
Under subsection (a)(7)(ii) of proposed Rule 3a71-3 under the 
Exchange Act, the foreign branch of a U.S. bank would be treated as 
part of a U.S. person. See Section III.B.10, infra (discussing the 
proposed definition of ``U.S. person'' with the definition of ``U.S. 
person'' in Regulation S).
    \290\ Proposed Rule 3a71-3(a)(7) under the Exchange Act.
    \291\ See Regulation SBSR Proposing Release, 75 FR 75240 (``The 
Commission intends for this proposed definition [of U.S. person] to 
include branches and offices of U.S. persons''). The Commission is 
re-proposing Regulation SBSR in this release, including its 
definition of U.S. person. See Section VIII, infra.
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    Under the proposed definition, the status of an entity as a U.S. 
person would have no bearing on whether separately incorporated or 
organized legal entities in its affiliated corporate group are U.S. 
persons. Accordingly, a foreign subsidiary of a U.S. person would not 
be a U.S. person by virtue of its relationship with its U.S. parent. 
Similarly, a foreign entity with a U.S. subsidiary would not be a U.S. 
person simply by virtue of its relationship with its U.S. 
subsidiary.\292\ The Commission preliminarily believes that it is 
appropriate to treat each affiliate separately because of the distinct 
legal status of each of the affiliates.\293\
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    \292\ See Section III.B.8, infra.
    \293\ But see Section III.B.8, infra (discussing the aggregation 
of affiliate positions for purposes of the de minimis calculation).
---------------------------------------------------------------------------

iii. Accounts of U.S. Persons
    Consistent with the proposed definition's focus on the location of 
the person bearing the actual risk arising from the security-based swap 
transaction, the proposed definition of U.S. person would include any 
accounts (whether discretionary or not) of U.S. persons.\294\ Such 
accounts would be U.S. persons regardless of whether the entity at 
which the account is held or maintained is a U.S. person. Conversely, 
accounts of non-U.S. persons would not be U.S. persons solely because 
they are held by a U.S. financial institution or other entity that is 
itself a U.S. person.\295\ In our view, the purposes of Title VII 
require that its provisions apply to the person that actually bears the 
risks arising from the security-based swap transaction.\296\ For this 
reason, we preliminarily believe that the status of accounts, wherever 
located, should turn on whether any owner of the account is itself a 
U.S. person,\297\ and not on the status of the fiduciary or other 
person managing the account, the discretionary or non-discretionary 
nature of the

[[Page 30998]]

account, or the status of the entity at which the account is held or 
maintained.\298\ Thus any account of a U.S. person would be a U.S. 
person for purposes of Title VII.
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    \294\ Proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange Act.
    \295\ An account of a non-U.S. person and, therefore, not a 
``U.S. person'' under proposed Rule 3a71-3(a)(7) under the Exchange 
Act, may nevertheless engage in ``transactions conducted within the 
United States,'' as defined in proposed Rule 3a71-3(a)(5) under the 
Exchange Act. For example, if a non-U.S. person executes a security-
based swap from an office located in the United States that 
security-based swap would be a ``transaction conducted within the 
United States'' even though neither party would be a ``U.S. 
person.'' Similarly, if a non-U.S. person solicits a counterparty 
within the United States to enter into a security-based swap 
transaction, that transaction would be a ``transaction conducted 
within the United States,'' regardless of whether both 
counterparties were non-U.S. persons. See Section III.B.6, infra.
    \296\ The same approach would apply to an account of a 
partnership, corporation, trust, or other legal person (e.g., a fund 
or a special-purpose investment vehicle) to enter into a security-
based swap. If the partnership, corporation, trust, or other legal 
person were a U.S. person, the account would be a U.S. person.
    \297\ For purposes of this definition, the term ``account'' 
includes both discretionary accounts and non-discretionary accounts. 
See proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange Act.
    \298\ This proposed approach is consistent with the treatment of 
managed accounts in the context of the major security-based swap 
participant definition, whereby the swap or security-based swap 
positions in client accounts managed by asset managers or investment 
advisers are not attributed to such entities for purposes of the 
major participant definitions, but rather are attributed to the 
beneficial owners of such positions based on where the risk 
associated with those positions ultimately lies. See Intermediary 
Definitions Adopting Release, 77 FR 30690.
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iv. International Organizations
    In addition to identifying the persons that fall within the U.S. 
person definition, the proposed rule also provides a list of specific 
international organizations that do not fall within such 
definition.\299\ This list includes ``the International Monetary Fund, 
the International Bank for Reconstruction and Development, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the United Nations, and their agencies and pension 
plans, and any other similar international organizations, their 
agencies and pension plans.'' \300\ Although these organizations may 
have headquarters in the United States, the Commission preliminarily 
believes that most of their membership and financial activity are 
outside the United States. Thus, based on the nature of these entities 
as international organizations the Commission is proposing not to treat 
them as U.S. persons for purposes of Title VII.\301\
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    \299\ Proposed Rule 3a71-3(a)(7)(ii) under the Exchange Act.
    \300\ Id.
    \301\ Regulation S also specifies that these international 
organizations are not considered U.S. persons, but Regulation S also 
considers affiliates of such organizations to be non-U.S. persons. 
See 17 CFR 230.902(k)(2)(vi). The Commission is soliciting comment 
on whether affiliates of such organizations should be treated as 
non-U.S. persons under proposed Rule 3a71-3(a)(7) under the Exchange 
Act. Currently, under the proposed rule, an affiliate of one of 
these international organizations would have to separately consider 
its U.S. person-status.
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(c) Conclusion
    In short, by following a territorial approach, the Commission 
preliminarily believes that the proposed definition of U.S. person 
describes the types of individuals and entities residing, organized, or 
conducting business within the United States, and the types of accounts 
that should be designated as U.S. persons for purposes of the proposed 
rule regarding application of the de minimis exception to security-
based swap dealers.\302\
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    \302\ As discussed below, the proposed definition is used in 
other proposed rules and interpretive guidance in the release. See 
Sections IV-XI, infra.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
definition of ``U.S. person,'' including the following:
     Does the proposed definition of ``U.S. person'' 
appropriately address the concerns of security-based swap dealer 
regulation under Title VII?
     Does the proposed definition appropriately identify all 
individuals or entities that should be designated as U.S. persons? Is 
the proposed definition too narrow or too broad? Why? Do the proposed 
criteria for determining whether an entity is a U.S. person effectively 
describe the types of counterparties that are relevant to identifying 
the transactions a security-based swap dealer must count when 
calculating its de minimis threshold for purposes of determining 
whether it is required to register as a security-based swap dealer and 
comply with the requirements of Title VII? Does the proposed definition 
appropriately identify the types of entities that should be entitled to 
the protections afforded to counterparties of security-based swap 
dealers under Title VII?
     Does the proposed definition appropriately treat natural 
persons residing in the United States as U.S. persons? Should certain 
categories of persons residing in the United States be excluded from 
the definition of U.S. person? Should certain categories of persons 
(such as U.S. citizens or permanent residents) residing abroad be 
included in the definition of U.S. person? Please explain why excluding 
or including particular categories of natural persons would be 
consistent with and further the objectives of dealer regulation under 
Title VII.
     Is the proposed approach to the U.S. person status of 
natural persons based on residency, rather than citizenship, 
appropriate? In particular, is the proposed approach to natural 
persons, which differs from the proposed approach to legal entities, 
such as partnerships and corporations, appropriate in light of the fact 
that, as the Commission understands, natural persons rarely enter into 
security-based swaps?
     Does incorporation or organization under the laws of the 
United States appropriately define the types of entities (both for-
profit and non-profit) that should be treated as U.S. persons under 
Title VII? Is it appropriate to define an entity as a U.S. person if it 
has its principal place of business in the United States, even if it is 
incorporated or organized under the laws of a foreign jurisdiction? Why 
or why not?
     Does the proposed rule adequately address the risk of 
evasion or avoidance of Title VII requirements? Are there entities 
incorporated or organized under foreign law that should be defined as a 
U.S. person under the proposed rule that are not currently so defined? 
For example, should an entity incorporated or organized under foreign 
law but whose security-based swap transactions are guaranteed by a U.S. 
person be defined as a U.S. person? Why or why not? Should a foreign 
entity that conducts security-based swap dealing activity predominantly 
with U.S. persons or within the United States be defined as a U.S. 
person? If so, why?
     Is it appropriate to determine the U.S. person status of a 
corporation or organization on an entity-wide basis? Why or why not? 
Should foreign branches, offices, or agencies of U.S. persons be U.S. 
persons? Why or why not? What distinguishes transactions mediated or 
entered into by a foreign branch of a U.S. bank from transactions 
entered into by the head office of such U.S. bank for purposes of Title 
VII regulation?
     What, if any, competitive concerns would be raised by 
defining foreign branches, offices, or agencies of U.S. persons as non-
U.S. persons? Please explain the mechanism of any competitive effects. 
For example, would particular business structures become unworkable 
under this approach and what would be the relevant impact? If so, 
please explain possible alternatives and their relative 
competitiveness.
     Should the proposed rule include within the definition of 
U.S. person foreign affiliates of U.S. persons? Should other factors be 
taken into account in determining the status of such affiliated 
entities, such as, for example, whether performance on the security-
based swap obligations of the foreign entity is guaranteed by a U.S. 
affiliate? Should a foreign entity with performance on its security-
based swap obligations guaranteed by a U.S. affiliate, where such 
foreign entity's security-based swap dealing activity is conducted 
predominantly or exclusively with non-U.S. persons, be included within 
the definition of U.S. person? Why or why not?
     Should a foreign branch of a U.S. parent, including a 
foreign branch of a U.S. bank, be included in the definition of ``U.S. 
person'' for all purposes under Title VII? Why or why not?

[[Page 30999]]

     Should a majority-owned subsidiary of a U.S. parent, 
regardless of whether the subsidiary has financial guarantees from the 
U.S. parent, be included in the definition of ``U.S. person'' for 
purposes of Title VII? Why or why not?
     Should an account of one U.S. person and one or more non-
U.S. persons be treated as a U.S. person? Should the Commission instead 
establish a de minimis threshold amount or otherwise allows some U.S. 
person ownership without triggering U.S. person status for the account? 
If so, how?
     The CFTC has proposed a definition of U.S. person that 
would include a legal entity that is directly or indirectly majority-
owned by one or more U.S. persons and in which such person(s) bears 
unlimited responsibility for the obligations and liabilities of the 
legal entity (other than a limited liability company or limited 
liability partnership where partners have limited liability).\303\ 
Should the Commission adopt a similar approach? If so, why? How should 
majority ownership be determined? Is majority ownership the appropriate 
test? If not, should some other percentage test be used (e.g., 25% or 
some other measure of control)? Are there operational or other 
difficulties in implementing such an approach?
---------------------------------------------------------------------------

    \303\ See CFTC Further Proposed Guidance, 78 FR 912.
---------------------------------------------------------------------------

     Should entities, whatever their place of domicile, that 
guarantee the performance of U.S. person counterparties to security-
based swaps themselves be deemed U.S. persons? Why or why not? How 
would treating such indirect counterparties to security-based swaps as 
U.S. persons affect the application of Title VII rules?
     Is the proposed definition's focus on the status of the 
person bearing the actual risk in the transaction (e.g., looking at the 
status of the account owner rather than the person with authority to 
direct the investment decisions) appropriate in determining whether the 
person is a U.S. person?
     The CFTC has proposed a definition of U.S. person that 
would include any pension plan for the employees, officers or 
principals of a legal entity with its principal place of business 
inside the United States. Should the Commission adopt a similar 
approach? If so, what categories of entities would or would not be U.S. 
persons when compared to the Commission's proposed approach? How is 
including or excluding such entities, as applicable, from the 
definition of U.S. person consistent with and in furtherance of the 
objectives of Title VII?
     Does the proposed rule appropriately address the treatment 
of certain international organizations with respect to the definition 
of U.S. person? Should any or all of the organizations specifically 
identified in the proposed rule be treated as U.S. persons? If so, why? 
Are there other similarly situated international organizations that 
should also be explicitly excluded from the U.S. person definition? 
Should the affiliates of international organizations be treated as non-
U.S. persons, even if organized under U.S. law? If so, why? If not, why 
not?
     Should the proposed definition expressly exclude from the 
definition of U.S. person any other entity or category of entities? If 
so, which ones and why?
     The CFTC has proposed a definition of U.S. person that 
would include any commodity pool, pooled account, or collective 
investment vehicle (whether or not it is organized or incorporated in 
the United States) of which a majority ownership is held, directly or 
indirectly, by a U.S. person. Should the Commission adopt a similar 
definition that includes any investment fund, commodity pool, pooled 
account, or collective investment vehicle of which a majority ownership 
is held by one or more U.S. persons, even if such entity is not 
incorporated or organized under the laws of the United States, or does 
not have its principal place of business in the United States? If so, 
why and how should majority ownership be determined? Is majority 
ownership the appropriate test? If not, should some other percentage 
test be used (e.g., 25% or some other measure of control)? Are there 
operational or other difficulties in implementing such an approach?
     The CFTC has proposed a definition of U.S. person that 
would include any commodity pool, pooled account, or collective 
investment vehicle the operator of which would be required to register 
as a commodity pool operator under the CEA.\304\ Should the Commission 
adopt a similar definition that includes any investment fund, commodity 
pool, pooled account, or collective investment vehicle the operator of 
which would be required to register as a commodity pool operator under 
the CEA or an investment adviser under the Investment Advisers Act of 
1940 (``Investment Advisers Act'')? If so, why?
---------------------------------------------------------------------------

    \304\ See CFTC Cross-Border Proposal, 77 FR 41218.
---------------------------------------------------------------------------

     Should the definition of U.S. person specifically address 
the status of estates, which is specifically addressed in Regulation S? 
\305\ If so, please explain the types of security-based swap 
transaction such entities typically engage in and describe any problems 
created by the proposed definition of U.S. person relative to the goals 
of Title VII.
---------------------------------------------------------------------------

    \305\ See Section III.B.10, infra (discussing the definition of 
``U.S. person'' in Regulation S).
---------------------------------------------------------------------------

     The CFTC has proposed a definition of U.S. person that 
would include any estate or trust, the income of which is subject to 
U.S. income tax regardless of source. Should the Commission adopt a 
similar approach? If so, why?
     Should the Commission define the term ``principal place of 
business'' for purposes of the proposed definition of ``U.S. person''? 
If so, should the Commission define ``principal place of business'' as 
the location of the personnel who direct, control, or coordinate the 
security-based swap activities of the entity? \306\ If no, how should 
the Commission define it?
---------------------------------------------------------------------------

    \306\ This focus would be generally consistent with the focus of 
the definition of ``principal office and place of business'' in the 
Investment Advisers Act, where it is defined as ``the executive 
office of the investment adviser from which the officers, partners, 
or managers of the investment adviser direct, control, and 
coordinate the activities of the investment adviser.'' 17 CFR 
275.222-1(b).
---------------------------------------------------------------------------

6. Proposed Definition of ``Transaction Conducted Within the United 
States''
    We are proposing a definition of ``transaction conducted within the 
United States'' to identify security-based swap transactions that 
involve activities in the United States that the Commission 
preliminarily believes would warrant requiring a non-U.S. person to 
count such transactions toward its de minimis threshold in the 
security-based swap dealer definition.\307\ Under the proposed rule, 
``transaction conducted within the United States'' would be defined to 
mean any ``security-based swap transaction that is solicited, 
negotiated, executed, or booked within the United States, by or on 
behalf of either counterparty to the transaction, regardless of the 
location, domicile, or residence status of either counterparty

[[Page 31000]]

to the transaction.'' \308\ It would not, however, include a 
transaction conducted through a foreign branch of a U.S. bank, for 
reasons discussed below.\309\
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    \307\ Proposed Rule 3a71-3(a)(5) under the Exchange Act. The 
proposed definition of ``transaction conducted within the United 
States'' also is used in other places in the release in the context 
of our proposed application of Title VII requirements in the cross-
border context. See Sections VIII-X, infra. The proposed definition 
of ``transaction conducted within the United States,'' and related 
discussion in this release, is not intended to apply outside of the 
scope of the proposals set forth in this release, unless otherwise 
indicated. Accordingly, it thus does not affect other rights or 
obligations of parties under the Exchange Act or the federal 
securities laws generally.
    \308\ Proposed Rule 3a71-3(a)(5)(i) under the Exchange Act. The 
use of the term ``counterparty'' in the proposed rule is intended to 
refer to the direct counterparty to the security-based swap 
transaction, not a party that provides a guarantee on the 
performance of the direct counterparty to the transaction. See 
Section VIII.A, infra (distinguishing between direct and indirect 
counterparties).
    \309\ Proposed Rule 3a71-3(a)(4)(ii) under the Exchange Act. See 
proposed Rule 3a71-3(a)(4) under the Exchange Act (defining 
``transaction conducted through a foreign branch''), as discussed in 
Section III.B.7, infra.
---------------------------------------------------------------------------

    As noted above, dealing activity is normally carried out through 
interactions with counterparties or potential counterparties that 
include solicitation, negotiation, execution, or booking of a security-
based swap.\310\ Engaging in any of these activities within the United 
States, as part of dealing activity, would involve a level of 
involvement in a security-based swap transaction that the Commission 
believes should require such transaction to count toward a potential 
security-based swap dealer's de minimis threshold. The proposed rule, 
therefore, is designed to identify for market participants the key 
aspects of a security-based swap transaction that the Commission 
believes should trigger security-based swap dealer registration 
requirements.
---------------------------------------------------------------------------

    \310\ See Section II.B.2(b), supra. More generally, 
solicitation, negotiation, execution, and booking are activities 
that represent key stages in a potential or completed security-based 
swap transaction. As discussed below, transactions conducted within 
the United States, regardless of whether in a dealing or non-dealing 
capacity, would generally be subject to requirements relating to 
reporting and dissemination, clearing, and trade execution. See 
Sections VIII-X, infra.
---------------------------------------------------------------------------

    By contrast, we are not proposing to include either submitting a 
transaction for clearing in the United States or reporting a 
transaction to an SDR in the United States as activity that would cause 
a transaction to be conducted within the United States under the 
proposed rule, nor are we proposing to treat activities related to 
collateral management (e.g., exchange of margin payments) that may 
occur in the United States or involve U.S. banks or custodians as 
activity conducted within the United States for these purposes. We 
recognize that submission of a transaction for clearing to a CCP 
located in the United States poses risk to the U.S. financial system, 
and collateral management plays a vital role in an entity's financial 
responsibility program and risk management. However, we preliminarily 
believe that none of these activities, by themselves, involves 
activities conducted between a potential dealer and its counterparty 
that may be characterized as dealing activity, although clearing and 
collateral management services may be offered in conjunction with 
dealing activity.
    Under the rule adopted by the Commission, jointly with the CFTC, a 
potential security-based swap dealer is required to consider the 
security-based swap positions ``connected with'' the dealing activity 
in which the potential dealer--or any other entity controlling, 
controlled by or under common control with the potential dealer--
engages over the course of the immediately preceding 12 months (or 
following the effective date of final rules implementing Section 
3(a)(68) of the Exchange Act, 15 U.S.C. 78c(a)(68), if that period is 
less than 12 months).\311\ By incorporating the definition of a 
``transaction conducted within the United States'' into the proposed 
rule applying the de minimis exception in the cross-border 
context,\312\ the Commission is proposing that non-U.S. persons engaged 
in cross-border dealing activity include in their de minimis 
calculations any security-based swap transaction that is connected with 
\313\ an entity's dealing activity with another non-U.S. person if a 
U.S. branch or office of either counterparty, or an associated person 
\314\ of either counterparty--including any affiliate and any 
associated person of any affiliate, or a third party agent, located 
within the United States--is directly involved in the transaction. 
Thus, a non-U.S. person engaged in security-based swap dealing activity 
would be required to count toward its de minimis threshold any dealing 
transaction entered into with another non-U.S. person that was 
conducted in the United States, whether the transaction falls within 
the ``conducted within the United States'' definition through such non-
U.S. person's own activity (or that of an agent within the United 
States), or that of its non-U.S. person counterparty (or such 
counterparty's agent).\315\ Similarly, if any transaction connected 
with a non-U.S. person's dealing activity is executed within the United 
States, the non-U.S. person would be required to count that transaction 
toward its de minimis threshold.\316\
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    \311\ See 17 CFR 240.3a71-2(a)(1).
    \312\ See proposed Rule 3a71-3(b) under the Exchange Act.
    \313\ The de minimis exception threshold is computed based on 
the notional amount of an entity's security-based swap positions, 
connected with its dealing activity, not transactions that are 
merely solicited. See Intermediary Definitions Adopting Release, 77 
FR 30630.
    \314\ See Section 3(a)(70) of the Exchange Act, 15 U.S.C. 
78c(a)(70) (defining ``person associated with a security-based swap 
dealer or major security-based swap participant''); see also note 
472, infra.
    \315\ See Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
    \316\ See id.
---------------------------------------------------------------------------

    We recognize that many of a non-U.S. person's transactions 
conducted within the United States that arise out of its dealing 
activity may also be transactions with U.S. persons, and thus would 
already be counted for purposes of the de minimis threshold. However, 
requiring non-U.S. persons to include in their de minimis calculations 
only transactions with U.S. person counterparties would enable such 
persons to engage in significant amounts of security-based swap dealing 
activity within the United States without Commission oversight as a 
security-based swap dealer, so long as the dealing activity were 
limited to non-U.S. persons.\317\ This would be the case if the 
potential dealer operated out of a branch, office, or affiliate, or 
utilized a third-party agent acting on its behalf within the United 
States, or merely directed its dealing activity to non-U.S. persons 
that themselves operate out of the United States, either through 
branches, office, or affiliates, or by utilizing third party 
agents.\318\ The Commission preliminarily does not believe that this 
would be consistent with the purposes of the Dodd-Frank Act, which is 
intended, in part, to promote accountability and transparency in the 
U.S. security-based swap market.\319\
---------------------------------------------------------------------------

    \317\ Depending on the nature of the activity and the person 
located in the United States engaging in the activity, such person 
may need to register with the Commission as a broker-dealer under 
Section 15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a)(1).
    \318\ The Commission is not distinguishing, for purposes of the 
proposed rule, whether a potential dealer or its counterparty is 
operating out of a branch, an office, an affiliate, or utilizes a 
third-party agent to act on its behalf. We are, however, soliciting 
comment on whether there is a basis for drawing distinctions in this 
area and look forward to receiving commenters' views.
    \319\ See note 97, supra.
---------------------------------------------------------------------------

    First, we preliminarily believe that when a non-U.S. person engages 
in dealing activity with another non-U.S. person from within the United 
States either through an agent, branch, or office, or otherwise engages 
in security-based swap dealing activity within the United States (such 
as by soliciting persons within the United States from outside the 
United States), the solicitation, negotiation, or execution activity 
that occurs within the United States constitutes dealing activity that 
is described by the security-based swap dealer definition.\320\ This is 
the case even where such transaction is

[[Page 31001]]

ultimately booked by the two non-U.S. entities outside the United 
States. Second, most market participants, including non-U.S. persons, 
entering into a security-based swap transaction with a security-based 
swap dealer, particularly through personnel located in the United 
States, could reasonably expect to be entitled to the customer 
protections of Title VII because of Title VII's role in setting the 
standards for the U.S. security-based swap market and the market 
participant's decision to engage in a transaction within that 
market.\321\ Given the Commission's responsibility in Title VII to 
regulate the U.S. security-based swap market, as well as reasonable 
market expectations and the risk of creating confusion among market 
participants,\322\ we preliminarily do not believe that it is 
appropriate to diverge from our traditional approach to the regulation 
of broker-dealers by establishing a regulatory regime for the security-
based swap market that would allow non-U.S. persons to engage in 
unregulated dealing activity within the United States, either when it 
acts through U.S. branches, office, or agents or it solicits, 
negotiates, or executes transactions with non-U.S. persons that 
themselves are operating out of the United States.
---------------------------------------------------------------------------

    \320\ See Section II.B.2(b), supra.
    \321\ The Commission previously has noted the role that the 
location of the dealer plays in setting expectations regarding the 
legal protections available in transactions with that dealer. See 
Rule 15a-6 Adopting Release, 54 FR 30017 (noting that a U.S. citizen 
residing abroad who seeks out transactions with foreign broker-
dealers would not generally expect U.S. securities laws to apply to 
the transaction); Regulation S Adopting Release, 55 FR 18310 (noting 
the expectation that a buyer outside the United States who purchases 
securities offered outside the United States is aware that ``the 
transaction is not subject to registration under the Securities 
Act''). See also Cleary Letter IV at 17 (``As both Commissions have 
consistently recognized in the past, the non-U.S. counterparty in . 
. . transactions [with a non-U.S. branch or affiliate of a U.S. 
person] conducted abroad have no expectation of protection under 
U.S. law''); Davis Polk Letter II at 20 (``Finally, the non-U.S. 
counterparty would not reasonably expect the swap [with a foreign 
bank swap dealer] to be subject to Title VII's requirements'').
    \322\ See Rui Albequerque and Neng Wang, ``Agency Conflicts, 
Investment and Asset Pricing,'' Journal of Finance, Vol. 63, No. 1 
(2008) (discussing the effect of customer protection on prices) and 
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and 
Robert Vishny, ``Investor Protection and Corporate Valuation,'' 
Journal of Finance, Vol. 57, No. 3 (2002) (discussing the effect of 
customer protection on prices).
---------------------------------------------------------------------------

    Moreover, suppose non-U.S. persons were not required to register 
when engaging in security-based swap dealing activity within the United 
States with other non-U.S. persons. Non-U.S. persons seeking to 
negotiate security-based swap transactions using personnel in the 
United States may choose to enter into security-based swap transactions 
with such unregistered non-U.S. persons rather than with a U.S. person 
to avoid the application of Title VII. In this way, customers may 
choose to forego the protections of Title VII in order to achieve 
potential cost savings. This could limit the access of U.S. persons 
engaged in dealing activity within the United States to non-U.S. 
persons, as well as more generally limiting the ability of U.S. persons 
to access liquidity in the security-based swap market. Accordingly, the 
Commission is proposing that a non-U.S. person would be required to 
count its security-based swap transactions conducted within the United 
States (as well as its transactions with U.S. persons) that arise out 
of its dealing activity to determine whether the notional amount of its 
dealing transactions exceeds the de minimis threshold. This would have 
the effect of subjecting both non-U.S. persons engaged in dealing 
activity within the United States and U.S. persons engaged in dealing 
activity within the United States to the same set of rules, thus 
providing their counterparties the same set of protections.
    Finally, although the proposed rule reflects the importance of 
ensuring that neither non-U.S. person counterparty is engaged in the 
relevant activities within the United States for purposes of this 
definition, we also recognize the operational difficulties that could 
arise in investigating the activities of a counterparty to ensure 
compliance with the rule. As a result, we are preliminarily proposing 
to allow parties to rely on a representation received from a 
counterparty indicating that a given transaction ``is not solicited, 
negotiated, executed, or booked within the United States by or on 
behalf of such counterparty.'' \323\ A party may rely on such a 
representation by its counterparty unless the party knows that the 
representation is not accurate.\324\ The Commission preliminarily 
believes that this would address whatever operational difficulties 
parties may have in determining whether or not their counterparty is 
conducting a transaction within the United States.
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    \323\ Proposed Rule 3a71-3(a)(5)(iii) under the Exchange Act.
    \324\ Id. Cf. Exemptions for Advisers to Venture Capital Funds, 
Private Fund Advisers With Less Than $150 Million in Assets Under 
Management, and Foreign Private Advisers, Advisers Act Release No. 
3222 (June 22, 2011), 76 FR 39646, 39676 (July 6, 2011) (``if an 
adviser reasonably believes that an investor is not `in the United 
States,' the adviser may treat the investor as not being `in the 
United States'''). We are proposing to use a knowledge standard 
rather than a reasonable belief standard with respect to 
transactions conducted within the United States between non-U.S. 
person counterparties due to the fact that this definition applies 
to both counterparties to a transaction, thus each counterparty has 
an incentive to ensure the accuracy of its representation. In 
addition, the proposed ``actual knowledge'' standard and related 
discussion in this release are not intended to apply outside the 
scope of the proposals set forth in this release. Accordingly, it 
does not affect the standard for reliance on representations with 
respect to other rights or obligations of persons under the Exchange 
Act or the federal securities law generally.
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Request for Comment
    The Commission requests comment on all aspects of the proposed rule 
regarding registration by non-U.S persons who engage in dealing 
activity within the United States, including the following:
     Should non-U.S. persons be required to register by virtue 
of engaging in security-based swap dealing activity within the United 
States, even if none of this dealing activity is directed to, or 
otherwise involves, U.S. persons? Why or why not?
     Does the proposed approach appropriately impose the dealer 
registration requirement on non-U.S. persons based on their dealing 
activities conducted within the United States? Should a non-U.S. person 
be required to register as a security-based swap dealer if it enters 
into, or offers to enter into, security-based swap transactions that 
are transactions conducted within the United States if such non-U.S. 
person's dealing activity is limited to its foreign business? What 
about if the non-U.S. person engages in non-U.S. dealing activity, but 
also enters into transactions with U.S. persons in a non-dealing 
capacity?
     What, if any, market-transparency or counterparty-
protection issues would be likely to arise if non-U.S. persons were not 
required to register if they engaged in dealing activity solely with 
non-U.S. persons from within the United States?
     What, if any, competition issues would be likely to arise 
if non-U.S. persons were not required to register if they engaged in 
dealing activity solely with non-U.S. persons from within the United 
States?
     Is the proposed approach toward determining whether 
dealing activity is conducted within the United States appropriate? 
Does the proposed rule identify appropriate factors in determining 
whether a transaction has been conducted within the United States? If 
not, what factors should be modified, removed, or added?
     Is the proposed identification of activities appropriate 
in the context of determining whether a security-based swap is a 
transaction conducted within

[[Page 31002]]

the United States? If not, which activities should the Commission 
consider as key evidence of a transaction that is conducted within the 
United States?
     Is direct participation by a branch, agency, office, or 
associated person, including any affiliate and any associated person of 
any affiliate, within the United States an appropriate element for 
identifying whether a security-based swap transaction is a transaction 
conducted within the United States? Are there functions routinely 
performed by these entities that should not trigger a registration 
requirement, even if performed within the United States?
     Is the direct participation of a third-party agent an 
appropriate element for identifying whether a security-based swap 
transaction is a transaction conducted within the United States? If 
not, why not?
     From an operational perspective, what, if any, changes to 
policies and procedures would be required to identify transactions 
conducted within the United States under the proposed approach? What 
changes would be required, for example, to monitor circumstances that 
would prevent a party from relying on representations?
     Does the proposed rule appropriately identify the range of 
security-based swap activities (i.e., solicitation, negotiation, 
execution, and booking) that should be considered in determining 
whether dealing activity is conducted within the United States? If not, 
what activities should be excluded or included? Why?
     Should a transaction entered into by a non-U.S. person in 
its capacity as a dealer be treated as dealing activity conducted 
within the United States if it is executed on an SB SEF, submitted to 
an SDR, or cleared by a security-based swap clearing agency physically 
located within the United States, even if no other activity related to 
the transaction were conducted within the United States?
     Should the Commission allow parties to rely on 
representations from their counterparties regarding compliance with the 
definition of ``transaction conducted within the United States''? Are 
there alternatives to relying on representations to ensure compliance? 
Should parties be required to exercise reasonable standards of care and 
due diligence?
     Is the standard used for the proposed ability to rely on a 
representation appropriate? Should another standard of knowledge be 
used? If so, what standard would be more appropriate for this purpose?
     The CFTC has proposed an interpretation that does not 
consider whether swap dealing activity is conducted inside or outside 
the United States when determining whether the de minimis threshold is 
met.\325\ Should the Commission adopt this approach? If yes, please 
address the effect of both approaches on customer protection, market 
transparency, competition, and capital formation in the U.S. security-
based swap market.
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    \325\ See CFTC Cross-Border Proposal, 77 FR 41219-20.
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     What would be the market impact of the proposed approach 
to determining whether dealing activity occurred within the United 
States? How would the proposed approach affect the competitiveness of 
U.S. entities in the global marketplace (both in the United States as 
well as in foreign jurisdictions)? Would the proposed approach place 
any market participants at a competitive disadvantage or advantage? If 
so, please explain. Would the proposed approach be a more general 
burden on competition? If so, please explain. What other measures 
should the Commission consider to implement the proposed approach? What 
would be the market impacts and competitiveness effects of alternatives 
to the proposed approach discussed in this release?
7. Proposed Treatment of Transactions With Foreign Branches of U.S. 
Banks
    As noted above, under the proposed rule, a non-U.S. person would 
not be required to count toward the de minimis threshold in the 
security-based swap dealer definition its transactions with the foreign 
branch of a U.S. bank.\326\ For purposes of this proposed approach, and 
as described more fully below, ``foreign branch'' would be defined as 
any branch of a U.S. bank if:
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    \326\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act. 
Section 716 of the Dodd-Frank Act (commonly known as the ``Push-Out 
Rule'') prohibits the provision of certain types of ``Federal 
assistance'' to certain swap and security-based swap dealers and 
major swap and security-based swap participants referred to as 
``swaps entities,'' subject to certain exceptions. In addition, 
Section 619 of the Dodd-Frank Act (commonly referred to as the 
``Volcker Rule'') adds a new Section 13 to the Bank Holding Company 
Act of 1956 (``BHC Act'') (to be codified at 12 U.S.C. 1851) that 
generally prohibits any banking entity from engaging in proprietary 
trading or from acquiring or retaining an ownership interest in, 
sponsoring, or having certain relationships with a hedge fund or 
private equity fund (``covered fund''), subject to certain 
exemptions. See Prohibitions and Restrictions on Proprietary Trading 
and Certain Interests in, and Relationships With, Hedge Funds and 
Private Equity Funds, Exchange Act Release No. 66057 (Oct. 12, 
2011), 76 FR 68846 (Nov. 7, 2011). Both the Push-Out Rule and the 
Volcker Rule will potentially limit the ability of U.S. banks to 
conduct security-based swap activity.
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     The branch is located outside the United States;
     The branch operates for valid business reasons;
    and
     The branch is engaged in the business of banking and is 
subject to substantive banking regulation in the jurisdiction where 
located.\327\
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    \327\ Proposed Rule 3a-71-3(a)(1) under the Exchange Act. We are 
not proposing to include ``agencies'' within the definition of 
``foreign branch'' as such term is used in connection with our 
treatment of transactions with foreign branches of U.S. banks. We 
recognize that Regulation S groups agencies and branches together in 
defining the term U.S. person. See 17 CFR 230.902(k)(1)(v), (2)(v). 
However, as discussed in Section III.B.10 below, although certain 
aspects of Regulation S may be useful in the context of security-
based swaps, Title VII and Regulation S are tailored to serve 
different objectives. In particular, the common treatment of 
agencies and branches under Regulation S does not compel us to 
similarly group agencies and branches for purposes of our treatment 
of transactions with foreign branches of U.S. banks given the fact 
that the term ``agency'' does not have any operative meaning with 
respect to the foreign operations of U.S. banks.
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We preliminarily believe that these factors are appropriate for 
determining which entities fall within the definition of a foreign 
branch for purposes of this proposed approach due to their focus on the 
physical location of the branch and the nature of the branch's business 
and regulation in a foreign jurisdiction. Requiring the branch to be 
located outside the United States is consistent with the goal of the 
proposed rule, which is to identify security-based swap activity that 
is not conducted within the United States. Requiring the branch to be 
operated for valid business purposes and to be engaged in the business 
of banking and subject to substantive banking regulation in a foreign 
jurisdiction is intended to help ensure that U.S. banks are not able to 
take advantage of the proposed rule by setting up offshore operations 
to evade the application of Title VII.
    In order for a transaction to be a ``transaction conducted through 
a foreign branch,'' and therefore excluded from a non-U.S. person's de 
minimis threshold calculation,\328\ the foreign branch must be the 
named counterparty to the transaction \329\ and the transaction must 
not be solicited, negotiated, or executed by a person within the United 
States on behalf of the foreign branch or its counterparty.\330\ To the 
extent that the transaction is conducted within the

[[Page 31003]]

United States, as described in the immediately preceding section 
(whether on behalf of the U.S. bank to which the branch belongs or of 
the foreign counterparty), the non-U.S. person would be required to 
count such transaction arising out of its dealing activity toward its 
de minimis threshold for purposes of determining whether it is required 
to register as a security-based swap dealer.\331\
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    \328\ Proposed Rules 3a71-3(b)(1)(ii) and (2)(ii) under the 
Exchange Act.
    \329\ Proposed Rule 3a71-3(a)(4)(i)(A) under the Exchange Act.
    \330\ Proposed Rule 3a71-3(a)(4)(i)(B) under the Exchange Act.
    \331\ See Section III.B.6, supra.
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    We believe that counting transactions with a foreign branch toward 
the de minimis threshold would be consistent with the view that a 
foreign branch of a U.S. bank is part of a U.S. person within the 
proposed definition.\332\ We also recognize that such transactions pose 
risk to the U.S. financial system. At the same time, however, we 
believe that imposing registration requirements on non-U.S. persons 
solely by virtue of their transactions with foreign branches of U.S. 
banks could limit the access of U.S. banks to non-U.S. counterparties 
when they conduct their foreign security-based swap dealing activity 
through foreign branches because non-U.S. persons may not be willing to 
enter into transactions with them in order to avoid being required to 
register as a security-based swap dealer.\333\ We have preliminary 
concluded that not requiring such transactions to be counted toward the 
foreign counterparty's de minimis threshold for purposes of the 
security-based swap dealer registration requirement would minimize this 
disparate treatment while ensuring that transactions involving foreign 
branches of U.S. banks remain subject to certain Title VII requirements 
(as described below).\334\
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    \332\ See Section III.B.5, supra.
    \333\ See, e.g., Sullivan and Cromwell Letter at 14 (``The 
jurisdictional scope of the swaps entity definitions is critical to 
the ability of U.S. banking organizations to maintain their 
competitive position in foreign marketplaces. Imposing the 
regulatory regime of Title VII on their Non-U.S. Operations would 
place them at a disadvantage to their foreign bank competitors 
because the Non-U.S. Operations would be subject to an additional 
regulatory regime which their foreign competitors would not.''); 
Cleary IV at 7 (``Subjecting such non-U.S. branches and affiliates 
to U.S. requirements could effectively preclude them from, or 
significantly increase the cost of, managing their risk in the local 
financial markets, since local financial institutions may be 
required to comply with Dodd-Frank to provide those services'').
    \334\ See Section III.C, infra. Provided the transaction is not 
a transaction conducted within the United States under proposed Rule 
3a71-3(a)(5) under the Exchange Act, the Commission also is not 
proposing to require non-U.S. persons to count transactions with a 
non-U.S. person toward their de minimis threshold even if the non-
U.S. person's performance on the security-based swap is guaranteed 
by a U.S. person. See Section III.B.9, infra.
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    Finally, although the proposed rule reflects the importance of 
ensuring that neither counterparty is operating from within the United 
States for purposes of conducting a transaction through a foreign 
branch, we also recognize the operational difficulties that could arise 
in investigating the activities of a counterparty to ensure compliance 
with the rule. As a result, we are proposing to allow parties to rely 
on a representation received from a counterparty indicating that ``no 
person within the United States is directly involved in soliciting, 
negotiating, executing, or booking'' a given transaction on behalf of 
the counterparty.\335\ A party may rely on such a representation by its 
counterparty unless the party knows that the representation is not 
accurate. The Commission preliminarily believes that this would address 
whatever operational difficulties parties may have in determining 
whether or not their counterparty is conducting a transaction conducted 
through a foreign branch.
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    \335\ Proposed Rule 3a71-3(a)(4)(ii) under the Exchange Act; see 
also Section III.B.6, supra.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
treatment of transactions with foreign branches of U.S. persons for 
purposes of the de minimis exception, including the following:
     Would the proposed approach reduce the effectiveness of 
customer protections or any other provisions of Title VII? If so, how 
should these concerns be balanced against the competitiveness concerns 
identified as part of the rationale behind the proposed approach?
     Does the proposed approach appropriately address the 
potential for disparate competitive impacts related to the application 
of the de minimis exception to dealers operating out of foreign 
branches? If not, how might the Commission more effectively address 
these concerns?
     Does the proposed approach provide an advantage to U.S. 
banks engaging in security-based swap dealing activity through foreign 
branches? Are there competitiveness concerns raised by this approach 
for entities (either banks or nonbanks) that do not utilize the branch 
model? Are there competitiveness concerns for non-U.S. persons, 
including non-U.S. persons whose performance under security-based swaps 
is guaranteed by a U.S. person? If so, what are they?
     Should the Commission allow parties to rely on 
representations from their counterparties regarding compliance with the 
definition of ``transaction conducted through a foreign branch''? 
Should the Commission separately allow parties to rely on 
representations from their counterparties regarding status under the 
``foreign branch'' definition?
     Is the standard used for the proposed ability to rely on a 
representation appropriate? Should another standard of knowledge be 
used? If so, what standard would be more appropriate for this purpose?
     Should the definition of a ``foreign branch'' be broadened 
to include ``agencies'' of U.S. banks in addition to branches? If so, 
what rationale justifies the inclusion of agencies? In particular, what 
are the similarities (or differences) in the legal status and 
regulatory treatment of the foreign branches and foreign agencies of 
U.S. banks that would warrant similar treatment? How do foreign 
agencies of U.S. banks differ from foreign offices of U.S. persons that 
are not banks?
     How might the proposed approach to the foreign branches of 
U.S. banks be impacted by the Volcker Rule and the Push-Out Rule? How 
might security-based swap dealers alter their business practices in 
response to the Volcker Rule and the Push-Out Rule? Should the proposed 
approach to the foreign branches of U.S. banks be altered to account 
for these changes to business practice?
     What would be the market impact of the proposed treatment 
of transactions with foreign branches of U.S. banks? How would the 
proposed approach affect the competitiveness of U.S. entities in the 
global marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach? What would be 
the market impacts and competitiveness effects of alternatives to the 
proposed approach discussed in this release?
8. Proposed Rule Regarding Aggregation of Affiliate Positions
    One key issue related to our proposed approach to the de minimis 
exception, both in the cross-border context and domestically, is the 
aggregation of transactions connected with the dealing activity of an 
affiliate. In the Intermediary Definitions Adopting Release, the 
Commission and the CFTC

[[Page 31004]]

jointly stated that the notional thresholds in the de minimis exception 
encompass swap and security-based swap dealing positions entered into 
by an affiliate controlling, controlled by, or under common control 
with the person at issue.\336\ The Commission and the CFTC further 
noted that for these purposes, control would be interpreted to mean 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.\337\ This 
aggregation of affiliate positions was deemed necessary to prevent 
persons from avoiding dealer regulation by dividing up dealing activity 
in excess of the notional thresholds among multiple affiliates.\338\
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    \336\ See Intermediary Definitions Adopting Release, 77 FR 
30631; 17 CFR 240.3a71-2(a)(1).
    \337\ See Intermediary Definitions Adopting Release, 77 FR 30631 
n.437.
    \338\ See Intermediary Definitions Adopting Release, 77 FR 
30631.
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    The Commission is proposing a rule that would describe how this 
aggregation requirement would apply to U.S. persons and non-U.S. 
persons engaged in cross-border security-based swap dealing activity, 
as well as to U.S. persons engaged in purely domestic 
transactions.\339\ As set forth in the Intermediary Definitions 
Adopting Release, the affiliate aggregation principle requires that a 
person aggregate the entire security-based swap dealing activity of any 
of its affiliates, without distinguishing whether the dealing positions 
are entered into by U.S. person affiliates or non-U.S. person 
affiliates, and without distinguishing whether the dealing positions 
are entered into with U.S. persons or non-U.S. persons.\340\ The 
proposed rule takes an approach that generally is consistent with the 
affiliate aggregation interpretive guidance jointly adopted by the 
Commission and the CFTC to require a person to aggregate all of the 
security-based swap dealing positions entered into by its U.S. person 
affiliates,\341\ except that it excludes from such aggregation the 
positions of an affiliate that is a registered security-based swap 
dealer, under certain conditions.\342\ The proposed rule also provides 
that such aggregation must include any security-based swap transactions 
of such person's non-U.S. person affiliates that would be required to 
be counted by such affiliates toward their respective de minimis 
thresholds in accordance with the proposed approach described above 
(i.e., a non-U.S. person affiliate would be required to calculate its 
security-based swap transactions connected with dealing activity 
conducted with U.S. persons (other than foreign branches of U.S. banks) 
or otherwise conducted within the United States).\343\
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    \339\ Proposed Rule 3a71-4 under the Exchange Act.
    \340\ See Intermediary Definitions Adopting Release, 77 FR 30631 
n.438 (explaining that the Commission intended to address the 
application of the aggregation principle to non-U.S. persons in a 
separate release); 17 CFR 240.3a71-2(a)(1).
    \341\ Proposed Rule 3a71-3(b)(2)(i) under the Exchange Act. The 
proposed rule also clarifies that only a person directly engaged in 
dealing activity that is required to be counted toward such person's 
de minimis threshold would be required to aggregate the dealing 
activity of its affiliates.
    \342\ Proposed Rule 3a71-4 under the Exchange Act.
    \343\ See Section III.B.4(b), supra; see also proposed Rule 
3a71-3(b)(2)(ii) under the Exchange Act.
---------------------------------------------------------------------------

    The proposed rule similarly provides that the affiliate aggregation 
principle also would apply to non-U.S. persons that engage in 
transactions in a dealing capacity with U.S. persons (other than 
foreign branches of U.S. banks) or otherwise within the United States. 
In determining whether its dealing activity exceeds the de minimis 
threshold, a non-U.S. person must aggregate the amount of its own 
transactions connected with its dealing activity with U.S. persons 
(other than foreign branches) or otherwise conducted within the United 
States with the amount of any security-based swap transactions 
connected with the dealing activity conducted by its affiliates, 
whether U.S. persons or non-U.S. persons, that such affiliates would be 
required to count toward their respective de minimis thresholds in 
accordance with the proposed approach described above \344\ (other than 
the transactions of affiliates that are registered security-based swap 
dealers).\345\ Transactions of affiliates that are themselves non-U.S. 
persons with other non-U.S. persons (or foreign branches of U.S. banks) 
outside the United States would not need to be aggregated for purposes 
of the de minimis exception.\346\
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    \344\ See Section III.B.4(b), supra. A U.S. person affiliate 
would be required to calculate all of its security-based swap 
transactions connected with its dealing activity and a non-U.S.-
person affiliate would be required to calculate its security-based 
swap transactions connected with its dealing activity with U.S. 
persons (other than foreign branches of U.S. banks) or otherwise 
conducted within the United States.
    \345\ Proposed Rules 3a71-3(b)(2)(i) and (ii) and proposed Rule 
3a71-4 under the Exchange Act.
    \346\ Id.
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    Thus, the Commission's proposal would require aggregation of the 
amount of dealing transactions of all affiliates, both U.S. persons and 
non-U.S. persons, other than registered security-based swap dealers. We 
believe that the Commission's proposed approach implements the de 
minimis exception in a manner that is consistent with the Dodd-Frank 
Act's focus on the U.S. security-based swap market.\347\ The proposed 
approach reflects the fact that all of a U.S. affiliate's security-
based swap dealing transactions impact the U.S. financial system, 
regardless of whether such entity's counterparties are located in the 
United States or abroad. The same is not true of non-U.S. affiliates, 
however, because the security-based swap transactions entered into by a 
non-U.S. affiliate with other non-U.S. persons outside the United 
States would not impact the U.S. financial system to the same extent as 
transactions with U.S. persons. Thus, because the statutory focus is on 
the U.S. security-based swap market, we preliminarily believe it is 
appropriate to distinguish between U.S. and non-U.S. affiliates based 
on the disparate impact of their security-based swap dealing 
transactions on the U.S. financial system when determining which 
dealing transactions should be aggregated for purposes of the de 
minimis threshold. This further suggests that we should aggregate the 
dealing positions of both U.S. and non-U.S. person affiliates that are 
not already registered security-based swap dealers, in accordance with 
the rule and guidance described in the following paragraph regarding 
aggregation of the positions of registered dealers, with the goal of 
capturing all dealing transactions that warrant imposing dealer 
registration and regulation\348\ and minimizing the opportunity for a 
person to evasively engage in large amounts of dealing activity.\349\ 
As a result, where the aggregate security-based swap dealing activity 
of an affiliated group, calculated as described above, exceeds the de 
minimis threshold, then each affiliate within such group that engages 
in the security-based swap dealing activity included in such 
aggregation calculation would be required to register with the 
Commission as a security-based swap dealer, subject to the exception 
described below.
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    \347\ See Subtitle B of Title VII of the Dodd-Frank Act.
    \348\ See note 4, supra.
    \349\ See Intermediary Definitions Adopting Release, 77 FR 
30631.
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    The Commission also is proposing a rule to address the affiliate 
aggregation of dealing positions for purposes of the de minimis 
threshold where one or more affiliates within a corporate group are 
registered with the Commission as

[[Page 31005]]

security-based swap dealers.\350\ Under the proposed approach, a person 
calculating the amount of its security-based swap positions for 
purposes of the de minimis threshold would not need to include in such 
calculation the security-based swap transactions of an affiliate 
controlling, controlled by, or under common control with the person if 
such affiliate is registered with the Commission as a security-based 
swap dealer.\351\ The application of this proposed rule would be 
limited to circumstances where a person's security-based swap 
activities are operationally independent from those of its registered 
security-based swap dealer affiliate. For purposes of this proposed 
rule, the security-based swap activities of two affiliates would be 
considered operationally independent if the two affiliated persons 
maintained separate sales and trading functions, operations (including 
separate back offices), and risk management with respect to any 
security-based swap dealing activity conducted by either affiliate that 
is required to be counted against their respective de minimis 
thresholds. If any of these functions were jointly administered by the 
two affiliates, or were managed at a central location within the 
affiliates' corporate group (e.g., at the entity serving as the central 
booking entity) with respect to any security-based swap dealing 
activity conducted by either affiliate that is required to be counted 
against their respective de minimis thresholds, then an unregistered 
person would not be able to exclude the security-based swap dealing 
activities of its registered security-based swap dealer affiliate under 
the proposed rule.
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    \350\ Proposed Rule 3a71-4 under the Exchange Act.
    \351\ Id.
---------------------------------------------------------------------------

    Absent the proposed exclusion of the dealing positions of a 
registered security-based swap dealer affiliate in the proposed rule, 
any affiliate of a registered security-based swap dealer that engaged 
in security-based swap dealing activity with U.S. persons or within the 
United States would be required to aggregate the dealing positions of 
the registered security-based swap dealer with its own dealing 
positions for purposes of the de minimis threshold. Given that a 
registered security-based swap dealer would presumably conduct relevant 
security-based swap dealing positions in excess of the de minimis 
threshold over the course of the immediately preceding 12 months, all 
persons affiliated with a registered security-based swap dealer that 
engaged in any level of security-based swap dealing activity that is 
required to be counted against the de minimis threshold would 
necessarily be required to register with the Commission as security-
based swap dealers because of the affiliate aggregation principle. We 
preliminarily do not believe that this outcome would be consistent with 
the statutory purpose of the de minimis exception, because it would 
prevent all affiliates of a registered dealer from taking advantage of 
the exception, even those engaged in a minimal amount of dealing 
activity relevant to Title VII dealer registration and regulation. We 
also do not believe that this scenario raises the concerns about 
evasion that underlie the de minimis affiliate aggregation rule jointly 
adopted by the Commission and the CFTC in the Intermediary Definitions 
Adopting Release, given that this proposed rule would apply only where 
a corporate group already included a registered dealer subject to 
Commission oversight, and the dealing positions of all commonly 
controlled unregistered affiliates in the corporate group would still 
be aggregated for purposes of the de minimis threshold.\352\ For these 
reasons, we believe that it is appropriate not to include the security-
based swap dealing positions of registered security-based swap dealers 
in the de minimis calculations of their commonly controlled affiliates 
provided that their security-based swap dealing activities that are 
relevant to the de minimis calculation are operationally independent of 
the registered security-based swap dealer affiliates.
---------------------------------------------------------------------------

    \352\ See Intermediary Definitions Adopting Release, 77 FR 
30631.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed rule 
regarding the aggregation of affiliate positions, including the 
following:
     Should the Commission permit affiliated persons to exclude 
the security-based swap dealing positions of affiliated registered 
security-based swap dealers from their de minimis calculations, as 
proposed? Why or why not?
     Would permitting affiliated entities to exclude the 
security-based swap dealing positions of registered security-based swap 
dealers from their de minimis calculations undermine any of the Title 
VII protections associated with security-based swap dealer registration 
and regulation? If so, please explain. Should the Commission further 
explain what ``operationally independent'' means? If so, what should 
the Commission consider?
     Should the Commission permit affiliated entities to 
exclude the security-based swap dealing positions of operationally 
independent affiliates from their de minimis calculations, even if such 
affiliates are not registered security-based swap dealers?
     The CFTC has adopted temporary conditional relief that 
would permit a non-U.S. person to exclude from its de minimis 
calculation the security-based swap dealing positions of an affiliated 
non-U.S. person that is registered as a swap dealer and not guaranteed 
by a U.S. person with respect to its swap obligations.\353\ Should the 
Commission adopt a similar interpretation to permit a non-U.S. person 
(but not a U.S. person) to exclude the dealing positions of its 
affiliated registered non-U.S. security-based swap dealer (but not the 
dealing positions of its affiliated registered U.S. security-based swap 
dealer)? Should the Commission condition such exclusion on the 
affiliated registered security-based swap dealer not being guaranteed 
by a U.S. person? If so, please describe the likely economic effects of 
providing different exclusions from the affiliate aggregation principle 
for U.S. and non-U.S. security-based swap dealers and how the 
Commission should best address them.
---------------------------------------------------------------------------

    \353\ See Final CFTC Cross-Border Exemptive Order, 78 FR 868.
---------------------------------------------------------------------------

     The CFTC has also proposed an interpretation that would 
permit non-U.S. persons engaged in dealing activity with U.S. persons 
to aggregate the notional amounts of security-based swap dealing 
transactions by their non-U.S. affiliates separately from any dealing 
activity performed by their U.S. affiliates.\354\ Should the Commission 
adopt a similar approach? If so, please explain how this approach is 
consistent with the de minimis threshold and the rationale provided for 
the affiliate aggregation principle in the Intermediaries Definitions 
Adopting Release. In addition, please describe the likely economic 
effects of providing an effectively higher de minimis threshold for 
corporate groups that engage in dealing activity with U.S. persons or 
within the United States through affiliates located in the United 
States and in foreign jurisdictions.
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    \354\ See CFTC Cross-Border Proposal, 77 FR 41219-20; see also 
Final CFTC Cross-Border Exemptive Order, 78 FR 867-68 (providing 
temporary conditional relief from the CFTC's de minimis aggregation 
requirements).
---------------------------------------------------------------------------

     What would be the market impact of the proposed approach 
to aggregation of affiliate positions? How would the proposed approach 
affect the competitiveness of U.S. entities in the global marketplace 
(both in the United

[[Page 31006]]

States as well as in foreign jurisdictions)? Would the proposed 
approach place any market participants at a competitive disadvantage or 
advantage? If so, please explain. Would the proposed approach be a more 
general burden on competition? If so, please explain. What other 
measures should the Commission consider to implement the proposed 
approach? What would be the market impacts and competitiveness effects 
of alternatives to the proposed approach discussed in this release?
9. Treatment of Inter-Affiliate and Guaranteed Transactions
    Consistent with the approach taken in the Intermediary Definitions 
Adopting Release, the Commission is proposing that cross-border 
security-based swap transactions between majority-owned affiliates 
would not need to be considered when determining whether a person is a 
security-based swap dealer.\355\ Thus, a non-U.S. person engaged in 
dealing activity outside the United States would not be required to 
register as a security-based swap dealer simply by virtue of entering 
into security-based swap transactions with its majority-owned U.S. 
affiliate, even if such inter-affiliate security-based swaps were back-
to-back transactions (i.e., the foreign subsidiary was acting as a 
``conduit'' for the U.S. person). Similarly, a U.S. person would not be 
required to register as a security-based swap dealer as a result of 
back-to-back transactions with a non-U.S. person subsidiary that acts 
as a conduit for such U.S. person.\356\ Instead, as proposed, there 
must be an independent basis for requiring a person to register as a 
security-based swap dealer that is unrelated to its inter-affiliate 
transactions.\357\
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    \355\ See 17 CFR 240.3a71-1(d), as discussed in the Intermediary 
Definitions Adopting Release, 77 FR 30624-25. For the purposes of 
this rule, which was adopted in the Intermediary Definitions 
Adopting Release, counterparties are considered majority-owned 
affiliates if one party directly or indirectly owns a majority 
interest in the other, or if a third party directly or indirectly 
owns a majority interest in both, based on the right to vote or 
direct the vote of a majority of a class of voting securities of an 
entity, the power to sell or direct the sale of a majority of a 
class of voting securities of an entity, or the right to receive 
upon dissolution or the contribution of a majority of the capital of 
a partnership. See 17 CFR 240.3a71-1(d)(2).
    \356\ This approach differs from the treatment of conduit 
entities in the CFTC Cross-Border Proposal. Under the CFTC Cross-
Border Proposal, a U.S. entity may be required to register as a swap 
dealer as a result of its inter-affiliate swap transactions with an 
affiliated foreign dealer if the foreign dealer is acting as a 
conduit by transferring swaps to the U.S. entity through back-to-
back transactions. See CFTC Cross-Border Proposal, 77 FR 41222.
    \357\ Proposed Rule 3a71-4 under the Exchange Act.
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    Furthermore, the Commission is proposing not to require a non-U.S. 
person that receives a guarantee from a U.S. person of its performance 
on security-based swaps with non-U.S. persons outside the United States 
to count its dealing transactions with those non-U.S. persons toward 
the de minimis threshold as a U.S. person would be required to do.\358\ 
We believe that the primary risk related to these transactions is the 
risk posed to the United States via the guarantee from a U.S. person, 
not the dealing activity occurring between two non-U.S. persons outside 
the United States. As a result, we do not believe that the risk posed 
by the existence of the U.S. guarantee would be better addressed 
through requiring non-U.S. persons receiving such guarantees to 
register with the Commission as security-based swap dealers. One way 
that the accumulation of risk resulting from security-based swap 
positions is addressed in Title VII is through the major security-based 
swap participant registration category. We preliminarily believe that 
the risk associated with guarantees by U.S. persons of the performance 
on security-based swap obligations of non-U.S. persons may be best 
addressed through the application of principles of attribution in the 
major security-based swap participant definition described in the 
Intermediary Definitions Adopting Release.\359\ We preliminarily 
believe that use of the major security-based swap participant 
definition to address the risks posed to the United States as a result 
of guarantees by U.S. persons effectively deals with the specific 
regulatory concerns posed by the risks these guarantees present to the 
U.S. financial system and is consistent with the regulatory framework 
set forth in the Dodd-Frank Act.\360\
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    \358\ This approach differs from the treatment of guaranteed 
entities in the CFTC Cross-Border Proposal. Under the CFTC Cross-
Border Proposal, a non-U.S. person that receives a guarantee from a 
U.S. person would be required to count all of its swap dealing 
transactions against the de minimis threshold. See CFTC Cross-Border 
Proposal, 77 FR 41221.
    \359\ See Intermediary Definitions Adopting Release, 77 FR 
30688-89; Section V.C.2(a), infra.
    \360\ See, e.g., Section IV, infra; see also Bank Holding 
Company Act of 1956 (12 U.S.C. 1841, et seq.); Title I of the Dodd-
Frank Act (concerning regulation of certain nonbank financial 
companies and bank holding companies that pose a threat to the 
financial stability of the United States).
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    The Commission also is proposing not to require a foreign dealer to 
count security-based swap transactions with non-U.S. persons that 
receive guarantees from U.S. persons toward the de minimis threshold. 
The Commission notes that, in many respects, the risk created for U.S. 
persons and the U.S. financial system in these transactions is the same 
as the risk posed if the U.S. person who provides the guarantee had 
entered into transactions directly with non-U.S. persons. The U.S. 
guarantor would be held responsible to settle those obligations, thus 
maintaining similar liability as though the U.S. person had entered 
into security-based swap transactions directly with a non-U.S person. 
The Commission preliminarily believes that the risk posed to the U.S. 
markets by non-U.S. persons engaged in dealing activity with non-U.S. 
persons outside the United States whose performance under security-
based swaps is guaranteed by a U.S. person can be best addressed 
through the major security-based swap participant definition and 
requirements applicable to major security-based swap participants, as 
the risks to the United States appear to arise only from the resulting 
positions and not the dealing activity as such.
    Finally, as discussed below, the Commission is proposing to subject 
a security-based swap transaction between two non-U.S. persons where at 
least one of the persons receives a guarantee on the performance of its 
obligations from a U.S. person to the regulatory reporting requirement 
(but not, in some cases, to real-time public reporting).\361\ If the 
proposed approach is adopted, the Commission would gain an 
understanding of market developments in this area as a result of the 
proposed de minimis exception.
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    \361\ See Section VIII, infra. Under proposed Regulation SBSR, 
inter-affiliate transactions would be subject to reporting and 
dissemination requirements. See id.
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Request for Comment
    The Commission requests comment on all aspects of the proposed 
treatment of inter-affiliate and guaranteed transactions, including the 
following:
     Should the Commission revise our proposed approach to 
inter-affiliate transactions to require those transactions to be 
considered when determining whether a person is a security-based swap 
dealer? If so, why?
     If the Commission determines not to exclude inter-
affiliate transactions from security-based swap dealing activity in the 
cross-border context, how could such a decision be reconciled with the 
exclusion for inter-affiliate transactions provided in the Intermediary 
Definitions Adopting Release? Should the Commission and the CFTC 
jointly reconsider the approach to inter-affiliate transactions 
provided in the Intermediary Definitions Adopting Release?

[[Page 31007]]

     Should the Commission require the registration of non-U.S. 
dealers that receive guarantees on the performance of their security-
based swap obligations from U.S. persons based on their transactions 
with non-U.S. persons as well as U.S. persons? Why or why not? Should 
the U.S. guarantor be viewed as engaging indirectly in dealing activity 
through its affiliate and, therefore, required to register as a 
security-based swap dealer if the security-based swap transactions in 
connection with its dealing activity exceed the de minimis threshold? 
Should there be a concern that the U.S. guarantor is using the non-US 
affiliate to evade the requirements of Title VII?
     Does the proposed approach to guarantees effectively 
address concerns related to the risk posed to the U.S. financial system 
resulting from guarantees by U.S. persons of security-based swap 
dealing activity by non-U.S. persons?
     Are there competitiveness concerns related to the proposed 
approach to guarantees with regard to U.S. entities that engage in non-
U.S. security-based swap dealing activity through business models that 
do not rely on guarantees of non-U.S. persons, such as those that 
operate through foreign branches?
     The CFTC has proposed an interpretation that would subject 
an entity that operates a ``central booking system'' where swaps are 
booked into a single legal entity, to any applicable swap dealer 
registration requirement as if it had entered into such swaps directly, 
irrespective of whether such entity is a U.S. person or whether the 
booking entity is a counterparty to the swap or enters into the swap 
indirectly through a back-to-back swap or other arrangement with its 
affiliate or subsidiary.\362\ Should the Commission adopt a similar 
approach? If so, please describe how such a decision could be 
reconciled with the exclusion for inter-affiliate transactions provided 
in the Intermediary Definitions Adopting Release.
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    \362\ See CFTC Cross-Border Proposal, 77 FR 41221-22.
---------------------------------------------------------------------------

     What would be the market impact of the proposed approach 
to inter-affiliate and guaranteed transactions? How would the 
application of the proposed approach affect the competitiveness of U.S. 
entities in the global marketplace (both in the United States as well 
as in foreign jurisdictions)? Would the proposed approach place any 
market participants at a competitive disadvantage or advantage? If so, 
please explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach? What would be 
the market impacts and competitiveness effects of alternatives to the 
proposed approach discussed in this release?
10. Comparison With Definition of ``U.S. Person'' in Regulation S
    In proposing an entity-based approach to the definition of a U.S. 
person, we have declined to follow the suggestions by some commenters 
that we adopt the definition of ``U.S. person'' used in Regulation S, 
which among other things expressly excludes from the definition of 
``U.S. person'' agencies or branches of U.S. persons located outside 
the United States.\363\ Although we recognize that the Regulation S 
definition of U.S. person has the advantage of familiarity for many 
market participants, Regulation S addresses specific policy concerns 
that are different from those addressed by Title VII.\364\ 
Specifically, the definition of U.S. person in Regulation S was adopted 
in the context of providing an ``issuer safe harbor'' from the 
registration requirements of Section 5 of the Securities Act, which was 
intended ``to ensure that the [unregistered] securities offered 
[abroad] come to rest offshore.'' \365\ In that context, providing a 
safe harbor based in part on the location of the person, branch, or 
office making the investment decision is consistent with the goals of 
that regulatory framework, which include protecting the integrity of 
the registration requirements applicable to securities publicly offered 
in the United States under the Securities Act. The Regulation S 
definition of ``U.S. person'' reflects this policy judgment.
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    \363\ See, e.g., Cleary Letter IV at 2 (``The Agencies should 
adopt a consistent definition of `U.S. person' based on SEC 
Regulation S for purposes of analyzing whether a transaction 
involving one or more such persons may be subject to the provisions 
of Dodd-Frank.''); Davis Polk I at 6 n.6 (``We propose that the term 
`U.S. counterparty' be defined in the same way as the term `U.S. 
person' in Rule 902(k) of the SEC's Regulation S under the 
Securities Act, 17 CFR 230.902(k). This established definition is 
familiar to countless financial market professionals. Following the 
`U.S. person' definition in Regulation S, rather than creating an 
entirely new definition, would avoid confusion and also provide 
consistency of application and legal certainty for a financial 
institution that offers a security and a swap to the same customer, 
which is common.''); SIFMA Letter I at 5 (``To determine whether a 
party to a swap is a `U.S. person,' the Commissions should rely on 
the existing definition of that term contained in Rule 902(k) of the 
SEC's Regulation S. This established, workable definition is 
familiar to regulators and market participants alike, and would 
provide legal certainty. It is noteworthy that the Regulation S 
definition of U.S. person does not include non-U.S. affiliates of 
U.S. persons or non-U.S. branches of a U.S. bank and generally 
excludes collective investment vehicles established outside the 
United States with U.S. investors.'') (footnotes omitted); see also 
Section III.B.5(c), supra.
    \364\ See 17 CFR 230.901(k); see also Regulation S Adopting 
Release, 55 FR 18306.
    \365\ Regulation S Adopting Release, 55 FR 18307.
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    We preliminarily believe that the definition of U.S. person in 
Title VII should encompass, for example, not only a person that has its 
place of residence or legal organization within the United States, but 
also its principal place of business within the United States, as the 
security-based swap activities of such entities are likely to manifest 
themselves most directly within the United States, where the majority 
of their commercial, legal, and financial relationships would be likely 
to exist because that is where their business principally occurs.\366\
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    \366\ See proposed Rule 3a71-3(a)(7)(i)(B) under the Exchange 
Act; Section III.B.5(b)ii, supra.
---------------------------------------------------------------------------

    Similarly, we preliminarily believe that the definition of U.S. 
person in Title VII should include accounts of a U.S. person, 
regardless of whether the account is a discretionary account or is held 
by a dealer or other person that is not resident in the United States, 
because the U.S. person bears the direct risk of transactions in the 
account, regardless of where the investment decision is made.\367\ 
Moreover, we are proposing that an entity's U.S.-person status would 
apply to the entity as a whole, since the risks related to the concerns 
of Title VII are borne by the entire entity and not just by the 
specific business unit (or branch or office) engaged in security-based 
swap activity.\368\ With its exclusions for certain foreign branches 
and agencies of U.S. persons from the definition of ``U.S. person,'' 
Regulation S would not address the entity-wide nature of the risks that 
Title VII seeks to address.\369\
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    \367\ See proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange 
Act; Section III.B.5(b)iii, supra.
    \368\ See Section III.B.5(a), supra.
    \369\ Under Regulation S, the foreign branch of a U.S. bank is 
not treated as a U.S. person while the U.S. branch of a foreign bank 
is treated as a U.S. person. By contrast, under proposed Rule 3a71-
3(a)(7)(i)(B) under the Exchange Act, the foreign branch of a U.S. 
bank would be treated as part of a U.S. person while the U.S. branch 
of a foreign bank would be treated as a non-U.S. person.
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    The Commission preliminarily believes that adopting the definition 
of ``U.S. person'' in Regulation S without significant modifications 
would not achieve the goals of Title VII. As discussed above, we are 
instead proposing a definition of U.S. person that focuses primarily on 
the location of the person bearing the direct risk of the transaction. 
Regulation S, with its focus on the person making the investment 
decision (rather than the person actually

[[Page 31008]]

bearing the risk), would not necessarily capture the entity that 
actually bears the risks arising from security-based swap transactions 
that Title VII seeks to address.\370\
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    \370\ Rather than creating a U.S. person definition specifically 
tailored to Title VII, the Commission could have proposed a modified 
version of Regulation S. However, significantly modifying the 
definition of ``U.S. person'' in Regulation S to accommodate the 
objectives of Title VII would largely eliminate the benefits 
associated with adopting a consistent and well-established 
regulatory standard.
---------------------------------------------------------------------------

    In light of the specific objectives of Title VII, the Commission 
preliminarily believes that a definition of U.S. person specifically 
tailored to the regulatory objectives it is meant to serve, as 
described above, is appropriate.\371\
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    \371\ See Section III.B.3(b)(4), infra. The Commission notes 
that it took a different approach to the definition of U.S. person 
and activity in the United States in connection with the 
Commission's exemption from registration for foreign private 
advisers. See Exemptions for Advisers to Venture Capital Funds, 
Private Fund Advisers With Less Than $150 Million in Assets Under 
Management, and Foreign Private Advisers, Advisers Act Release No 
3222, 76 FR 39646 (July 6, 2011) (the ``Foreign Private Adviser 
Exemption''). The Foreign Private Adviser Exemption defines certain 
terms in the statutory definition of ``foreign private adviser'' 
(added by Section 402 of the Dodd-Frank Act and codified at section 
202(a)(30) of the Investment Advisers Act) by incorporating the 
definition of a ``U.S. person'' and ``United States'' under 
Regulation S. As discussed in this subsection, the Commission 
preliminarily believes that it would be inappropriate to follow the 
approach in Regulation S in its entirety with respect to the cross-
border regulation of security-based swaps, although it may be 
appropriate in the context of the Foreign Private Adviser Exemption 
given the similar policy objectives with Regulation S.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
definition of U.S. person, including the following:
     Should the Commission adopt the definition of U.S. person 
in Regulation S? If so, how should the Commission reconcile the 
objectives of Title VII with the objectives that Regulation S is meant 
to serve?
     Should the Commission include all U.S. citizens in the 
definition of U.S. person, regardless of a person's residence or 
domicile?
     Should the Commission include within the definition of 
U.S. person entities and accounts where the discretion to enter into 
security-based swaps resides with a U.S. person? To what extent would 
this approach produce a result that differs from the current approach 
reflected in the proposed rule and the definitions of ``security-based 
swap dealer'' and ``major security-based swap participant''?

C. Regulation of Security-Based Swap Dealers in Title VII

I. Introduction
    To help address the potential effects of registration, and 
attendant regulatory requirements, on foreign security-based swap 
dealers \372\ with global security-based swap businesses and U.S. 
security-based swap dealers \373\ that engage in security-based swap 
dealing activity through foreign branches that also may be subject to 
registration or regulation in foreign jurisdictions, the Commission is 
proposing not to apply the external business conduct standards and 
segregation requirements in Title VII to the Foreign Business \374\ of 
such registered foreign security-based swap dealers and registered U.S. 
security-based swap dealers that engage in dealing activity through 
foreign branches with non-U.S. persons and foreign branches of U.S. 
banks.\375\ In addition, while we are not proposing a rule to limit the 
application of entity-level requirements in Title VII to foreign 
security-based swap dealers, we are proposing to establish a policy and 
procedural framework under which the Commission would permit 
substituted compliance in some circumstances by registered foreign 
security-based swap dealers with certain Title VII requirements 
specifically applicable to security-based swap dealers.\376\
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    \372\ Proposed Rule 3a71-3(a)(8) under the Exchange Act defines 
``U.S. security-based swap dealer'' as a security-based swap dealer, 
as defined in Section 3(a)(71) of the Exchange Act, 15 U.S.C. 
78c(a)(71), and the rules and regulations thereunder, that is a U.S. 
person, as defined in proposed Rule 3a71-3(a)(7) under the Exchange 
Act. Proposed Rule 3a71-3(a)(3) under the Exchange Act defines 
``foreign security-based swap dealer'' as a security-based swap 
dealer, as defined in Section 3(a)(71) of the Exchange Act, and the 
rules and regulations thereunder, that is not a U.S. security-based 
swap dealer.
    \373\ See note 372, supra.
    \374\ As discussed below, proposed Rule 3a71-3(a)(2) under the 
Exchange Act defines ``Foreign Business'' as meaning the security-
based swap transactions of foreign security-based swap dealers and 
U.S. security-based swap dealers ``other than the U.S. Business of 
such entities.'' ``U.S. Business'' is defined in proposed Rule 3a71-
3(a)(6) under the Exchange Act, with respect to a foreign security-
based swap dealer, as (i) any transaction entered into, or offered 
to be entered into, by or on behalf of such foreign security-based 
swap dealer, with a U.S. person (other than with a foreign branch); 
or (ii) any transaction conducted within the United States; and, 
with respect to a U.S. security-based swap dealer, as any 
transaction by or on behalf of such U.S. security-based swap dealer, 
wherever entered into or offered to be entered into, other than a 
transaction conducted through a foreign branch, as defined in 
proposed Rule 3a71-3(a)(4), with a non-U.S. person or another 
foreign branch. See Section III.C.4, infra.
    \375\ Proposed Rule 3a71-3(b) under the Exchange Act.
    \376\ Proposed Rule 3a71-5 under the Exchange Act, as discussed 
in Section XI, infra.
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    In the following sections, we discuss the views of commenters, 
describe the transaction-level and entity-level requirements 
specifically applicable to security-based swap dealers in Title VII, 
and discuss the proposed application of transaction-level and entity-
level requirements to registered security-based swap dealers in the 
cross-border context.
2. Comment Summary
    Various foreign dealers expressed their views about the application 
of the Dodd-Frank Act requirements to their derivatives businesses. A 
number of them expressed concern that if the Commission applies 
security-based swap dealer regulations, not only to entities conducting 
business from within the United States, but also to foreign-domiciled 
entities, it could effectively prevent foreign dealers from, among 
other things, managing their global security-based swap business out of 
a centralized booking entity (i.e., the entity that acts as principal--
the named counterparty--to a security-based swap transaction), which 
they maintain has many advantages for foreign dealers and their 
clients, including more efficient counterparty netting, greater 
transparency, greater financial counterparty financial strength, and 
operational efficiencies.\377\ One commenter cautioned that if the 
regulations lead foreign dealers to create ``fragmented booking 
structures'' to avoid duplicative and conflicting regulatory regimes, 
it could harm U.S. consumers through increased transaction costs with 
foreign dealers.\378\
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    \377\ See, e.g., Soci[eacute]t[eacute] G[eacute]n[eacute]rale 
Letter I at 3 (``Overall, the advantages of carrying out Swap 
transactions in and with a foreign bank with a consolidated booking 
structure help control risk significantly . . . . We believe it 
would be sensible for the Commissions to craft regulations that do 
not discourage foreign banks such as SG from registering as Swap 
Dealers.''); Davis Polk Letter I at 2, 5 (``We believe operating and 
managing a global swaps business out of a single booking entity 
presents many advantages from the perspective of foreign banks, 
customers and supervisors.'').
    \378\ See ISDA Letter I at 10 (warning that ``U.S. 
counterparties will . . . face increased costs and decreased 
liquidity if U.S. regulation forces non-U.S. SDs to create 
fragmented booking structures to avoid duplicative and conflicting 
regulatory regimes'').
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    Many commenters suggested that to preserve a registration framework 
that would allow foreign dealers to continue to book their global 
security-based swap business out of a central non-U.S. entity, the 
Commission should use our limited designation authority under the Dodd-
Frank Act's swap dealer definition to designate and regulate only 
specific activities and particular branches or agencies of foreign 
banks that transact

[[Page 31009]]

with U.S. customers, without subjecting the whole entity or its other 
branches to regulation.\379\
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    \379\ See, e.g., IIB Letter at 11 (pointing out that Section 
3(a)(71) of the Exchange Act, as amended by the Dodd-Frank Act, 
provides for limited designation as a security-based swap dealer 
``for a single type or single class . . . of activities, and not for 
other types, classes, of . . . activities,'' and recommending that 
the Commissions designate as a Swap Dealer only the particular U.S. 
or non-U.S. branch or agency of the foreign bank involved in the 
execution of swaps with U.S. customers''); Rabobank Letter at 2 
(recommending that to preserve ``the benefits of the centralized 
booking model, a non-U.S. branch of a foreign bank should register 
as a swap dealer solely with respect to its swap dealing activities 
with U.S. persons. Under this scenario, Title VII's transaction-
level rules would apply only to the non-U.S. branch's swap dealing 
activities with U.S. persons and would not apply to its other 
activities or to the swap activities of other parts of the foreign 
bank'').
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    In addition, various commenters suggested a variety of operational 
models through which foreign dealers could operate in the U.S. 
security-based swap market, generally premising the proposed 
registration and regulatory regime on the notion that home country 
supervision should apply to entity-level regulations (e.g., capital, 
risk management, and conflicts of interest), while Title VII 
transaction-level regulations should apply only to security-based swaps 
involving a U.S. counterparty.\380\ A number of commenters emphasized 
that transaction-level requirements should not apply to security-based 
swaps entered into between foreign counterparties.\381\ Other 
commenters remarked that if the Commission regulates both the U.S.-
facing business (i.e., transactions with U.S. persons) and the foreign-
facing business (i.e., transactions with non-U.S. persons) of U.S. 
security-based swap dealers, but only the U.S.-facing business of 
foreign security-based swap dealers, then U.S. firms would be at a 
competitive disadvantage vis-[agrave]-vis their foreign counterparts 
with respect to transactions with foreign counterparties.\382\
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    \380\ See, e.g., Davis Polk Letter II at 4-20 (recommending 
reliance on comprehensive home country requirements such as capital, 
margin, conflicts of interest, risk management, and limited 
recordkeeping requirements for entity-level regulations if certain 
standards are met, and recommending the application of Title VII 
transaction-level rules to a swap dealer's swap dealing activities 
with U.S. persons).
    \381\ See, e.g., Sullivan & Cromwell Letter at 14-15 (asserting 
that subjecting foreign entities to transaction-level requirements 
on foreign transactions would likely lead to a competitive 
disadvantage, because other foreign ``banking organizations that are 
not so burdened by such dual and potentially conflicting 
requirements would be able to provide a wider range of services . . 
., which may cause customers to migrate away from'' those foreign 
operations, which would limit their ability to manage, transfer, and 
reduce systemic risk).
    \382\ See, e.g., SIFMA Letter I at 11 (remarking that ``U.S. 
swap dealers also may be at a competitive disadvantage relative to 
non-U.S. entities if U.S. swap dealers must comply with U.S. rules 
when dealing with a non-U.S. counterparty in a jurisdiction that 
does not have similar rules, for example, if the foreign rules do 
not mandate margin requirements for non-cleared swaps'').
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    Several commenters further expressed concern that a requirement for 
foreign persons to register with the Commission as security-based swap 
dealers could be particularly problematic in the case of capital 
requirements, where foreign security-based swap dealers already would 
be subject to their home country's prudential requirements. These 
commenters favored deferring to foreign regulators the regulation and 
supervision of entity-level requirements when a foreign security-based 
swap dealer is subject to comprehensive and comparable home country 
regulation.\383\ One commenter recommended a comparability standard 
whereby the Federal Reserve and the Commission determine comparability 
even when a home country regulator does not require margin for non-
cleared security-based swaps, if the home country's capital regime 
takes into account functionally equivalent capital charges.\384\ 
Several commenters recommended that, for monitoring purposes, U.S. 
regulators could rely on information-sharing arrangements with home 
regulators regarding foreign swap transactions and activities.\385\ A 
few commenters argued that U.S. regulators should not have examination 
authority over foreign swap transactions and activities located outside 
the United States, and suggested that the Commissions obtain any 
necessary information about U.S. swap transactions and activities from 
U.S. affiliates of the foreign security-based swap dealer.\386\
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    \383\ See, e.g., Financial Services Roundtable Letter at 25 
(suggesting that the Commissions should defer to foreign prudential 
regulators with regard to entity-level requirements such as capital 
and margin, when they are deemed consistent with U.S. standards); 
Davis Polk Letter I at 3-4 (emphasizing the importance of relying on 
home country regulation for entity-level rules such as capital, 
margin, conflicts of interest, risk management, and limited 
recordkeeping requirements).
    \384\ See Davis Polk Letter II at 13-15 (recommending a 
comparability standard that ``focuses on the similarities in 
regulatory objectives as opposed to identity of technical rules,'' 
whereby the Federal Reserve, as the prudential regulator, could 
determine comparability even when a home country regulator does not 
require margin for non-cleared swaps, if ``the capital regime in 
such home country is determined to take account appropriately of 
unmargined or undermargined swaps by imposing additional capital 
charges'').
    \385\ See, e.g., Davis Polk Letter I at 9 (stating that 
``[w]here information is required from the foreign bank swap dealer, 
U.S. regulators should seek to rely upon regulatory examinations by 
home country regulators, and information sharing arrangements'').
    \386\ See, e.g., Soci[eacute]t[eacute] G[eacute]n[eacute]rale 
Letter I at 12 (recommending that a foreign dealer based outside the 
U.S. with no U.S. nexus ``should be `ring-fenced' and outside the 
scope of the Commissions' examination and regulatory authority,'' 
but allowing for a limited examination of a foreign bank's U.S. 
facing business concerning its clearing, trade execution, and 
capital rules, through its U.S. domiciled agent who ``would 
facilitate this examination by making all necessary information 
available directly to the Commissions'').
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3. Title VII Requirements Applicable to Security-Based Swap Dealers
    Certain Title VII requirements specifically applicable to security-
based swap dealers apply at a transaction level, that is, to security-
based swap transactions with specific counterparties. Examples of 
transaction-level requirements in Title VII principally include 
requirements relating to external business conduct standards such as 
the requirement that a security-based swap dealer or major security-
based swap participant verify that any counterparty meets the 
eligibility standards for an eligible contract participant \387\ and 
requirements relating to segregation of assets held as collateral in 
security-based swap transactions.\388\ Other requirements apply to 
security-based swap dealers at an entity level, that is, to the dealing 
entity as a whole. Examples of entity-level requirements include, among 
others, requirements relating to capital,\389\ risk management 
procedures,\390\ recordkeeping and reporting,\391\ supervision,\392\ 
and designation of a chief compliance officer.\393\ Some requirements 
can be considered both entity-level and transaction-level requirements. 
For instance, the margin requirement in Section 15F(e) of the Exchange 
Act can be considered both an entity-level requirement because margin 
affects the financial soundness of an entity and a transaction-level 
requirement because margin calculation is based on particular 
transactions (i.e., an entity

[[Page 31010]]

calculates margin based on the market value of specific transactions or 
on a portfolio basis).\394\
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    \387\ See, e.g., Section 15F(h)(3)(A) of the Exchange Act, 15 
U.S.C. 78o-10(h)(3)(A). See generally Section 15F(h) (discussing 
external business conduct standards). However, requirements under 
Section 15F(h)(1), which address fraud, supervision and adherence to 
position limits, apply at the entity level.
    \388\ See Section 3E of the Exchange Act, 15 U.S.C. 78c-5.
    \389\ See Section 15F(e) of the Exchange Act, 15 U.S.C. 78o-
10(e).
    \390\ See Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o-
10(j)(2).
    \391\ See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o-
10(k).
    \392\ See Section 15F(h)(1)(B) of the Exchange Act, 15 U.S.C. 
78o-10(h)(1)(B).
    \393\ See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o-
10(k).
    \394\ See Section 15F(e) of the Exchange Act, 15 U.S.C. 78o-
10(e). To take another example, the requirement that security-based 
swap dealers implement conflict-of-interest systems and procedures 
relating to security-based swaps in Section 15F(j)(5) of the 
Exchange Act, 15 U.S.C. 78o-10(j)(5), is transactional in the sense 
that potential conflicts of interest relate to particular security-
based swap transactions. At the same time, however, it also is an 
entity-level requirement because implementing such systems and 
procedures would require, among other things, a security-based swap 
dealer to establish structural and institutional safeguards to wall 
off the activities of persons within the firm relating to research 
or analysis of the price or market for any security-based swap. See 
External Business Conduct Standards Proposing Release, 76 FR 42420.
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    Below, we describe in more detail various transaction-level and 
entity-level requirements in Title VII applicable to security-based 
swap dealers.\395\
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    \395\ For purposes of this discussion, we are addressing only 
requirements applicable to security-based swap dealers in Sections 
3E and 15F of the Exchange Act, 15 U.S.C. 78c-5 and 78o-10, and the 
rules and regulations thereunder. Title VII requirements relating to 
regulatory reporting and public dissemination, clearing, and trade 
execution are discussed in Sections VIII-X below.
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(a) Transaction-Level Requirements
    In general, transaction-level requirements primarily focus on 
protecting counterparties by requiring security-based swap dealers to, 
among other things, provide certain disclosures to counterparties, 
adhere to certain standards of business conduct, and segregate customer 
funds, securities, and other assets. The following briefly describes 
the most significant transaction-level requirements applicable to 
security-based swap dealers in Title VII.
i. External Business Conduct Standards
    Section 15F(h) of the Exchange Act requires the Commission to adopt 
rules specifying external business conduct standards for security-based 
swap dealers in their dealings with counterparties,\396\ including 
counterparties that are ``special entities.'' \397\ Congress granted 
the Commission broad authority to promulgate business conduct 
requirements, as the Commission determines to be appropriate in the 
public interest, for the protection of investors or otherwise in 
furtherance of the purposes of the Exchange Act.\398\
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    \396\ Section 15F(h)(6) of the Exchange Act, 15 U.S.C. 78o-
10(h)(6), directs the Commission to prescribe rules governing 
external business conduct standards for security-based swap dealers. 
Section 15F(h) of the Exchange Act, 15 U.S.C. 78o-10(h), also 
generally authorizes and requires the Commission to adopt rules for 
major security-based swap participants. See Section IV, infra.
    \397\ Section 15F(h)(2)(C) of the Exchange Act, 15 U.S.C. 78o-
10(h)(2)(C). See note 286, supra.
    \398\ See Section 15F(h)(3)(D) of the Exchange Act, 15 U.S.C. 
78o-10(h)(3)(D) (``[b]usiness conduct requirements adopted by the 
Commission shall establish such other standards and requirements as 
the Commission may determine are appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of this Act''). See also Section 15F(h)(1)(D) of the 
Exchange Act (requiring that security-based swap dealers to comply 
as well with ``such business conduct standards . . . as may be 
prescribed by the Commission by rule or regulation that relate to . 
. . such other matters as the Commission determines to be 
appropriate'').
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    These standards, as described in Section 15F(h)(3) of the Exchange 
Act, must require security-based swap dealers to: (i) Verify that a 
counterparty meets the eligibility standards for an ECP; (ii) disclose 
to the counterparty material information about the security-based swap, 
including material risks and characteristics of the security-based 
swap, and material incentives and conflicts of interest of the 
security-based swap dealer in connection with the security-based swap; 
and (iii) provide the counterparty with information concerning the 
daily mark for the security-based swap. Section 15F(h)(3) also directs 
the Commission to establish a duty for security-based swap dealers to 
communicate information in a fair and balanced manner based on 
principles of fair dealing and good faith.
    In addition, Section 15F(h)(4) of the Exchange Act requires that a 
security-based swap dealer that ``acts as an advisor to a special 
entity'' must act in the ``best interests'' of the special entity and 
undertake ``reasonable efforts to obtain such information as is 
necessary to make a reasonable determination'' that a recommended 
security-based swap is in the best interests of the special 
entity.\399\ Section 15F(h)(5) requires that security-based swap 
dealers that enter into, or offer to enter into, security-based swaps 
with a special entity comply with any duty established by the 
Commission that requires a security-based swap dealer to have a 
``reasonable basis'' for believing that a special entity has an 
``independent representative'' that meets certain criteria and 
undertakes a duty to act in the ``best interests'' of the special 
entity.
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    \399\ See External Business Conduct Standards Proposing Release, 
76 FR 42423-25.
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    The Commission has proposed Rules 15Fh-1 through 15Fh-6 under the 
Exchange Act to implement the business conduct requirements described 
above.\400\ In addition to external business conduct standards 
expressly addressed by Title VII, the Commission has proposed certain 
other business conduct requirements for security-based swap dealers 
that the Commission preliminarily believed would further the principles 
that underlie the Dodd-Frank Act. These rules would, among other 
things, impose certain ``know your counterparty'' and suitability 
obligations on security-based swap dealers, as well as restrict 
security-based swap dealers from engaging in certain ``pay to play'' 
activities.\401\
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    \400\ See External Business Conduct Standards Proposing Release, 
76 FR 42396.
    \401\ See External Business Conduct Standards Proposing Release, 
76 FR 42399-400; proposed Rules 15Fh-3(e) (``know your 
counterparty''), 15Fh-3(f) (``suitability''), and 15Fh-6 (``pay to 
play'') under the Exchange Act.
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ii. Segregation of Assets
    Segregation requirements are designed to identify and protect 
customer property held by a security-based swap dealer as collateral in 
order to facilitate the prompt return of the property to customers or 
counterparties in a liquidation proceeding of such security-based swap 
dealer.\402\ Segregation not only protects counterparties who are 
customers of a security-based swap dealer but also facilitates orderly 
liquidation of a security-based swap dealer and minimizes the 
disruption to and impact on the U.S. security-based swap market and the 
U.S. financial system overall caused by insolvency and liquidation of a 
security-based swap dealer.
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    \402\ Proposed Rule 18a-4 under the Exchange Act, as discussed 
in Section II.C. of the Capital, Margin, and Segregation Proposing 
Release, 77 FR 70274.
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    Section 3E of the Exchange Act provides the Commission with 
rulemaking authority to prescribe segregation requirements for 
securities-based swap dealers that receive assets from, for, or on 
behalf of a counterparty to margin, guarantee, or secure a security-
based swap transaction.\403\ Section 3E(c) provides the Commission with 
rulemaking authority to prescribe how any margin received by a 
security-based swap dealer with respect to cleared security-based swap 
transactions may be maintained, accounted for, treated and dealt with 
by the security-based swap dealer.\404\ In addition, Section 3E(g) 
extended the customer protections of the U.S. Bankruptcy Code to 
counterparties of a security-based swap dealer with respect to cleared 
security-based swaps, and with respect to non-cleared security-based 
swaps, if there is a customer protection requirement under Section 
15(c)(3) or a segregation requirement

[[Page 31011]]

prescribed by the Commission.\405\ The Commission has proposed Rule 
18a-4 under the Exchange Act to establish segregation requirements for 
security-based swap dealers with respect to both cleared and non-
cleared security-based swap transactions.\406\ The provisions of 
proposed Rule 18a-4 were modeled on the broker-dealer customer 
protection rule and take into account the characteristics of security-
based swaps.\407\
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    \403\ See Section 3E of the Exchange Act, 15 U.S.C. 78c-5.
    \404\ See Section 3E(c)(2) of the Exchange Act, 15 U.S.C. 78c-
5(c)(2).
    \405\ See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c-5(g); 
Capital, Margin, and Segregation Proposing Release, 77 FR 70275.
    \406\ Proposed Rule 18a-4 under the Exchange Act, as discussed 
in the Capital, Margin, and Segregation Proposing Release, 77 FR 
70274-88.
    \407\ 17 CFR 240.15c3-3. See Capital, Margin, and Segregation 
Proposing Release, 77 FR 70276.
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(b) Entity-Level Requirements
    Entity-level requirements in Title VII primarily address concerns 
relating to the security-based swap dealer as a whole, with a 
particular focus on safety and soundness of the entity to reduce 
systemic risk in the U.S. financial system.\408\ The most significant 
entity-level requirements, as discussed below, are capital and margin 
requirements. Certain other entity-level requirements relate to the 
capital and margin requirements because, at their core, they relate to 
how the firm identifies and manages its risk exposure arising from its 
activities (e.g., risk management requirements). Given their functions, 
these entity-level requirements would be applied under our proposal on 
a firm-wide basis to address risks to the security-based swap dealer as 
a whole.
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    \408\ For example, Section 15F(e)(3) of the Exchange Act 
provides that the requirements relating to capital and margin 
imposed by the Commission pursuant to Section 15F(e)(2) shall help 
ensure the safety and soundness of the security-based swap dealer 
and be appropriate for the risk associated with the non-cleared 
security-based swaps held as a security-based swap dealer in order 
``[t]o offset the greater risk to the security-based swap dealer . . 
. and the financial system arising from the use of security-based 
swaps that are not cleared.''
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i. Capital
    The Commission is required to establish minimum requirements 
relating to capital for security-based swap dealers for which there is 
not a prudential regulator (``nonbank security-based swap 
dealers'').\409\ The prudential regulators are required to establish 
requirements relating to capital for bank security-based swap 
dealers.\410\ Some security-based swap dealers may also be registered 
as swap dealers with the CFTC. The CFTC is required to establish 
capital requirements for nonbank swap dealers.\411\ The prudential 
regulators are required to establish capital requirements for bank swap 
dealers.\412\
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    \409\ See Section 15F(e)(1)(B) of the Exchange Act, 15 U.S.C. 
78o-10(e)(1)(B); note 34, supra (discussing the term ``prudential 
regulator'').
    \410\ See Section 15F(e)(1)(A) of the Exchange Act, 15 U.S.C. 
78o-10(e)(1)(A); see also Prudential Regulators Proposed Rule, 
Margin and Capital Requirements for Covered Swap Entities, 76 FR 
27564 (May 11, 2011) (``Prudential Regulator Margin and Capital 
Proposal'').
    \411\ See Section 4s(e)(1)(B) of the CEA, 7 U.S.C. 6s(e)(1)(B), 
as added by Section 731 of the Dodd-Frank Act; see also CFTC 
Proposed Rule, Capital Requirements of Swap Dealers and Major Swap 
Participants, 76 FR 27802 (May 12, 2011) (``CFTC Capital 
Proposal'').
    \412\ See Section 4s(e)(1)(A) of the CEA, 7 U.S.C. 6s(e)(1)(A); 
see also Prudential Regulator Margin and Capital Proposal, 76 FR 
27564.
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    The objective of the Commission's proposed capital rule for 
security-based swap dealers is the same as the Commission's capital 
rule for broker-dealers; specifically, to ensure that the entity 
maintains at all times sufficient liquid assets to (i) promptly satisfy 
its liabilities--the claims of customers, creditors, and other 
security-based swap dealers, and (ii) provide a cushion of liquid 
assets in excess of liabilities to cover potential market, credit, and 
other risks.\413\
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    \413\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70218 (``[T]he capital and other financial responsibility 
requirements for broker-dealers generally provide a reasonable 
template for crafting the corresponding requirements for nonbank 
[security-based swap dealers]. For example, among other 
considerations, the objectives of capital standards for both types 
of entities are similar.'').
---------------------------------------------------------------------------

    As noted above, the Commission's proposed capital rules focus on 
the liquid assets of a nonbank security-based swap dealer available to 
satisfy its liabilities or cover its risks in a liquidation scenario. 
This focus on liquid assets would distinguish the Commission's capital 
rules applicable to security-based swap dealers from those applicable 
to banks, which generally include a more permissive list of assets that 
may be taken into account for purposes of capital calculations.\414\ 
The difference in approach between the capital rules applicable to 
nonbank dealers and bank dealers is supported by certain operational, 
policy, and legal differences between nonbank security-based swap 
dealers and bank security-based swap dealers.\415\ Notably, existing 
capital standards for banks and broker-dealers reflect, in part, 
differences in their funding models and access to certain types of 
financial support, and we expect that those same differences also will 
exist between bank security-based swap dealers and nonbank security-
based swap dealers. For example, banks obtain funding through customer 
deposits and can generally obtain liquidity through the Federal 
Reserve's discount window to meet their obligations,\416\ whereas 
broker-dealers and nonbank security-based swap dealers cannot.\417\ 
Thus all of a nonbank entity's counterparty obligations must be met 
through the nonbank entity's own liquid assets. For these reasons, the 
Commission's proposed capital standard for nonbank security-based swap 
dealers is a net liquid assets test modeled on the broker-dealer 
capital standard in Rule 15c3-1 under the Exchange Act.\418\
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    \414\ See, e.g., Basel Committee on Banking Supervision 
(``BCBS''), Basel III: International framework for liquidity risk 
measurement, standards and monitoring for banks (Dec. 2010) (``Basel 
III''), available at: https://www.bis.org/publ/bcbs188.pdf.
    \415\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70218. In this release, the Commission discussed the operational, 
policy, and legal differences between banks and nonbank entities for 
distinguishing the Commission's capital rules from those applicable 
to bank security-based swap dealers.
    \416\ Depository institutions that maintain transaction accounts 
or non-personal time deposits subject to reserve requirements are 
eligible to borrow funds from the Federal Reserve's discount window, 
such as commercial banks, thrift institutions, and U.S. branches and 
agencies of foreign banks. See Regulation D, 12 CFR part 204.
    \417\ Under the segregation requirements in Rule 15c3-3 under 
the Exchange Act and proposed Rule 18a-4 under the Exchange Act, 
broker-dealers and security-based swap dealers are not permitted to 
rehypothecate customer assets to finance their business activity. 
Thus, they cannot use customer assets as a source of funding, 
whereas banks are in the business of investing customer deposits 
(subject to banking regulations).
    \418\ Id.
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ii. Margin
    Margin may be viewed as an entity-level requirement given its 
effect on the financial soundness of an entity, as well as a 
transaction-level requirement due to the fact that margin is calculated 
based on particular transactions and positions. Although margin is 
calculated based on individual transactions, the cumulative effect of 
collecting margin from counterparties is to protect an entity from the 
default of its counterparties. Given the emphasis placed on the 
financial soundness of security-based swap dealers in Title VII,\419\ 
we believe that margin should be treated as an entity-level requirement 
for purposes of implementing Title VII in the cross-border context.
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    \419\ See, e.g., Section 15F(e)(3)(A)(i) of the Exchange Act, 15 
U.S.C. 78o-10(e)(3)(A)(i) (stating that Title VII's capital and 
margin requirements are intended to ``help ensure the safety and 
soundness of the security-based swap dealer or major security-based 
swap participant''). In setting capital and margin requirements for 
security-based swap dealers and major security-based swap 
participants, the Commission's goal is to help ensure the safety and 
soundness of these entities because of their connection to the U.S. 
financial system.
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    We recognize that this approach differs from the approach to margin

[[Page 31012]]

proposed by the CFTC in its cross-border guidance, which focused on the 
transaction-by-transaction nature of margin and thus treated it as a 
transaction-level requirement.\420\ However, we preliminarily believe 
that treating margin as an entity-level requirement is consistent with 
the role margin plays as part of an integrated program of financial 
responsibility requirements, along with the capital standards and 
segregation requirements, that are intended to enhance the financial 
integrity of security-based swap dealers.\421\ The margin requirements 
proposed by the Commission are intended to work in tandem with the 
capital requirements to strengthen the financial system by reducing the 
potential for default to an acceptable level and limiting the amount of 
leverage that can be employed by security-based swap dealers and other 
market participants.\422\ For example, the capital requirements 
proposed by the Commission take into account whether a security-based 
swap is cleared or non-cleared, the amount of margin collateral imposed 
by registered clearing agencies with respect to cleared security-based 
swaps, and the circumstances where non-cleared security-based swaps are 
excepted from the margin collection requirements imposed by the 
Commission, and would impose a capital charge in certain cases for 
uncollateralized or insufficiently collateralized exposures arising 
from cleared or non-cleared security-based swaps in order to account 
for the counterparty default risk that is not adequately addressed by 
margin collateral.\423\ We preliminarily do not believe that margin 
would effectively fulfill its purpose as part of a comprehensive 
financial responsibility program for non-bank security-based swap 
dealers if the Commission were to treat margin solely as a transaction-
level requirement.
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    \420\ See CFTC Cross-Border Proposal, 77 FR 41226.
    \421\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70303 and 70259.
    \422\ See id. at 70304.
    \423\ See id. at 70245-46.
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    The division of regulatory responsibilities related to margin 
requirements in Title VII mirrors that of the capital requirements 
discussed above. As with capital, the Commission is required to 
establish minimum requirements relating to initial and variation margin 
on all security-based swaps that are not cleared by a registered 
clearing agency for nonbank security-based swap dealers.\424\ The 
prudential regulators are required to establish requirements relating 
to margin for bank security-based swap dealers.\425\ Security-based 
swap dealers that are also registered as swap dealers with the CFTC 
also would be subject to CFTC requirements for nonbank swap dealers 
with respect to initial and variation margin requirements on all swaps 
that are not cleared by a registered derivatives clearing 
organization.\426\
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    \424\ See Sections 15F(e)(1)(B) and (2)(B) of the Exchange Act, 
15 U.S.C. 78o-10(e)(1)(B) and (2)(B).
    \425\ See Section 15F(e)(1)(A) of the Exchange Act, 15 U.S.C. 
78o-10(e)(1)(A); see also Prudential Regulator Margin and Capital 
Proposal, 76 FR 27564.
    \426\ See Section 4s(e)(1)(B) of the CEA, 7 U.S.C. 6s(e)(1)(B), 
as added by Section 731 of the Dodd-Frank Act; see also CFTC 
Proposed Rule, Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 76 FR 23732 (Apr. 28, 2011) 
(``CFTC Margin Proposal''). The CFTC also has adopted segregation 
requirements for cleared swaps and proposed segregation requirements 
for non-cleared swaps. See Protection of Cleared Swaps Customer 
Contracts and Collateral; Conforming Amendments to the Commodity 
Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012) (``CFTC 
Segregation for Cleared Swaps Final Release''); Protection of 
Collateral of Counterparties to Uncleared Swaps; Treatment of 
Securities in a Portfolio Margining Account in a Commodity Broker 
Bankruptcy, 75 FR 75432 (Dec. 3, 2010) (``CFTC Segregation for 
Uncleared Swaps Proposing Release'').
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    The objective of the margin requirements for security-based swap 
dealers is to offset the greater risk to the security-based swap dealer 
and the financial system arising from the use of security-based swaps 
that are not cleared.\427\ Margin serves as a buffer in the event a 
counterparty fails to meet an obligation to the security-based swap 
dealer and the security-based swap dealer must liquidate the assets 
posted by the counterparty to satisfy the obligation.\428\ More 
generally, under Title VII, the Commission is specifically required to 
set both capital and margin requirements for nonbank security-based 
swap dealers that (i) help ensure the safety and soundness of the 
nonbank security-based swap dealer and (ii) are appropriate for the 
risk associated with the non-cleared swaps held as a security-based 
swap dealer.\429\
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    \427\ See Section 15F(e)(3)(A) of the Exchange Act, 15 U.S.C. 
78o-10(e)(3)(A).
    \428\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70259.
    \429\ See Sections 15F(e)(3)(A)(i) and (ii) of the Exchange Act, 
15 U.S.C. 78o-10(e)(3)(A)(i) and (ii).
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    Pursuant to Section 15F(e) of the Exchange Act, the Commission has 
proposed Rule 18a-3 to establish margin requirements for nonbank 
security-based swap dealers with respect to non-cleared security-based 
swaps.\430\ Proposed Rule 18a-3 is based on the margin rules applicable 
to broker-dealers.\431\ The goal of modeling proposed Rule 18a-3 on the 
broker-dealer margin rules is to promote consistency with existing 
rules and to facilitate the portfolio margining of security-based swaps 
with other types of securities.\432\ Proposed Rule 18a-3 is intended to 
form part of an integrated program of financial responsibility 
requirements, along with the proposed capital and segregation 
standards.\433\
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    \430\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70257-74.
    \431\ See id. at 70259. Broker-dealers are subject to margin 
requirements in Regulation T promulgated by the Federal Reserve (12 
CFR 220.1-220.132), in rules promulgated by the self-regulatory 
organizations (``SROs'') (see, e.g., Rules 4210-4240 of the 
Financial Industry Regulatory Authority (``FINRA'')), and with 
respect to security futures, in rules jointly promulgated by the 
Commission and the CFTC (17 CFR 242.400-242.406).
    \432\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70259.
    \433\ Id.
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    The Commission preliminarily believes that it is necessary to treat 
margin as an entity-level requirement applicable to all of a dealer's 
security-based swap transactions in order to effectively address the 
Dodd-Frank Act requirements for setting margin. We preliminarily 
believe that treating margin solely as a transaction-level requirement, 
and applying margin requirements differently to a security-based swap 
dealer's U.S. Business and Foreign Business,\434\ would not adequately 
further the goals of using margin to ensure the safety and soundness of 
security-based swap dealers because it could result in security-based 
swap dealers with global businesses collecting significantly less 
collateral than would otherwise be required to the extent that they are 
not required by local law to collect margin from their counterparties. 
Further, separately applying margin in this way would force those 
counterparties entering into transactions that constitute the U.S. 
Business of a dealer to bear a greater burden in ensuring the safety 
and soundness of such dealer than counterparties that are part of the 
dealer's Foreign Business.\435\ We thus preliminarily believe that it 
is

[[Page 31013]]

appropriate to treat margin as an entity-level requirement applicable 
to the security-based swap transactions of registered security-based 
swap dealers regardless of the location of their counterparties. As 
noted below, the Commission is soliciting comment on this approach.
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    \434\ See proposed Rule 3a71-3(a)(2) under the Exchange Act 
(defining ``Foreign Business'').
    \435\ Although we do not believe that it is appropriate to 
distinguish between the geographic locations of counterparties when 
applying the margin requirement, we recognize that it may be 
appropriate, in certain circumstances, to distinguish between types 
of counterparties in applying margin based on such factors as the 
risk they pose to dealers and the policy goal of promoting liquidity 
in dealers. See Capital, Margin, and Segregation Proposing Release, 
77 FR 70265-68 (proposing to exclude both transactions with 
commercial end users and those with other dealers from certain 
margin requirements applicable to security-based swap dealers).
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iii. Risk Management
    Registered security-based swap dealers are required to establish 
robust and professional risk management systems adequate for managing 
their day-to-day business.\436\ The Commission has proposed that 
nonbank security-based swap dealers would be required to comply with 
existing Rule 15c3-4 under the Exchange Act.\437\ This rule, originally 
adopted for OTC derivative dealers, requires firms subject to its 
provisions to establish, document, and maintain a comprehensive system 
of internal risk management controls to assist in managing the risks 
associated with its business activities, including market, credit, 
leverage, liquidity, legal, and operational risks.\438\ These various 
risks arise from both the U.S. Business and Foreign Business of a 
global security-based swap dealer. A risk management system limited in 
scope to cover only one type of business, or limited to certain 
security-based swap transactions, would not effectively control the 
risks undertaken by a security-based swap dealer because the risks 
stemming from business outside the scope of such risk management system 
could still negatively impact the dealer. As a result, we preliminarily 
believe that it is necessary to treat risk management requirements as 
entity-level requirements in order to place risk controls over the 
entire security-based swap business, thus effectively addressing the 
Dodd-Frank Act requirements for managing risk within security-based 
swap dealers.
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    \436\ See Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o-
10(j)(2).
    \437\ See proposed new paragraph (a)(10)(ii) of Rule 15c3-1 
under the Exchange Act (17 CFR 240.15c3-1); paragraph (g) of 
proposed new Rule 18a-1 under the Exchange Act. See also 17 CFR 
240.15c3-4; Capital, Margin, and Segregation Proposing Release, 77 
FR 70250-51. The Commission has not proposed rules relating to risk 
management for bank security-based swap dealers.
    \438\ See OTC Derivatives Dealers, Exchange Act Release No. 
40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998).
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    Rule 15c3-4 identifies a number of qualitative factors that would 
need to be a part of the risk management controls of a nonbank 
security-based swap dealer. For example, a nonbank security-based swap 
dealer would need to have a risk control unit that reports directly to 
senior management and is independent from business trading units, and 
it would be required to separate duties between personnel responsible 
for entering into a transaction and those responsible for recording the 
transaction in the books and records of the firm.\439\ In addition, the 
Commission is authorized to adopt rules governing documentation 
standards of security-based swap dealers for timely and accurate 
confirmation, processing, netting, documentation, and valuation of 
security-based swaps.\440\ Pursuant to this authority, the Commission 
has proposed rules regarding trade acknowledgement and verification 
related to security-based swap transactions.\441\
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    \439\ See 17 CFR 240.15c3-4(c), as discussed in the Capital, 
Margin, and Segregation Proposing Release, 77 FR 70250.
    \440\ See Section 15F(i) of the Exchange Act, 15 U.S.C. 78o-
10(i).
    \441\ See Trade Acknowledgement Proposing Release, 76 FR 3859.
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iv. Recordkeeping and Reporting
    Registered nonbank security-based swap dealers are required to keep 
books and records in such form and manner and for such period as may be 
prescribed by the Commission by rule or regulation; registered bank 
security-based swap dealers are required to keep books and records of 
all activities related to their ``business as a security-based swap 
dealer'' in such form and manner and for such period as may be 
prescribed by the Commission.\442\ Registered security-based swap 
dealers also are required to make such reports as are required by the 
Commission regarding the transactions and positions, and financial 
condition of the registrant.\443\
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    \442\ See Sections 15F(f)(1)(B)(i) and (ii) of the Exchange Act, 
15 U.S.C. 78o-10(f)(1)(B)(i) and (ii).
    \443\ See Section 15F(f)(1)(A) of the Exchange Act, 15 U.S.C. 
78o-10(f)(1)(A).
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    In addition, security-based swap dealers are required to maintain 
daily trading records of the security-based swaps they enter into.\444\ 
Security-based swap dealers also are required to disclose to the 
Commission and the prudential regulators information concerning: (i) 
Terms and conditions of their security-based swaps; (ii) security-based 
swap trading operations, mechanisms, and practices; (iii) financial 
integrity protections relating to security-based swaps; and (iv) other 
information relevant to their trading in security-based swaps.\445\
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    \444\ See Section 15F(g) of the Exchange Act, 15 U.S.C. 78o-
10(g).
    \445\ See Section 15F(j)(3) of the Exchange Act, 15 U.S.C. 78o-
10(j)(3).
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    Each of these types of records is an important part of the 
Commission's oversight of our registrants because it provides the 
Commission with vital information regarding such entities. If the 
Commission's information were limited in scope to cover only one type 
of business, or limited to only certain security-based swap activities, 
the Commission would not be able to effectively regulate our registered 
security-based swap dealers because it would not have a full picture of 
the business of such registrants. As a result, we preliminarily believe 
that it is necessary to treat recordkeeping and reporting as entity-
level requirements in order to provide the Commission with the 
information necessary to regulate registered security-based swap 
dealers and thus effectively address the Dodd-Frank Act requirements 
for maintaining books and records.
    The Commission has not yet proposed rules regarding the 
recordkeeping and reporting requirements under Section 15F of the 
Exchange Act and solicits comment regarding the application of 
recordkeeping and reporting requirements in the cross-border context.
v. Internal System and Controls
    Security-based swap dealers are required to establish and enforce 
systems and procedures to obtain any information that is necessary to 
perform any of the functions that are required under Section 15F(j) of 
the Exchange Act \446\ and to provide this information to the 
Commission, or the responsible prudential regulator, upon request.\447\ 
The Commission has proposed a rule that would require a registered 
security-based swap dealer to establish policies and procedures that 
are reasonably designed to comply with its responsibilities under 
Section 15F(j) of the Exchange Act.\448\
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    \446\ 15 U.S.C. 78o-10(j). These functions include monitoring of 
applicable position limits under Section 15F(j)(1) of the Exchange 
Act, 15 U.S.C. 78o-10(j)(1); establishment of risk management 
procedures under Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 
78o-10(j)(2); disclosure of general information to the Commission 
and prudential regulators under Section 15F(j)(3) of the Exchange 
Act, 15 U.S.C. 78o-10(j)(3); establishment of policies and 
procedures to avoid conflicts of interest under Section 15F(j)(5) of 
the Exchange Act, 15 U.S.C. 78o-10(j)(5); and avoidance of any 
actions that result in an unreasonable restraint of trade or place 
any material anticompetitive burden on trading or clearing under 
Section 15F(j)(6) of the Exchange Act, 15 U.S.C. 78o-10(j)(6).
    \447\ See Section 15F(j)(4) of the Exchange Act, 15 U.S.C. 78o-
10(j)(4).
    \448\ See proposed Rule 15Fh-3(h)(2)(iv) under the Exchange Act, 
as discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42420.
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    Many of the functions required under Section 15F(j) of the Exchange 
Act are

[[Page 31014]]

entity-level in nature (e.g., risk management procedures \449\ and 
conflicts of interest \450\). As a result, we preliminarily believe 
that the requirement to establish and enforce systems and procedures to 
obtain any information that is necessary to perform these functions 
cannot be effectively implemented unless it also is treated as an 
entity-level requirement, or else it would not cover the full scope of 
the requirements under Section 15F(j) of the Exchange Act to which it 
applies.
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    \449\ See Section III.C.3(b)iii, supra.
    \450\ See Section III.C.3(b)vii, infra.
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vi. Diligent Supervision
    The Commission is authorized under the Dodd-Frank Act to adopt 
rules requiring diligent supervision of the business of security-based 
swap dealers.\451\ The Commission has proposed a rule that would 
establish supervisory obligations and that would incorporate principles 
from Section 15(b) of the Exchange Act and existing SRO rules.\452\ 
Among other things, under proposed Rule 15Fh-3(h), a security-based 
swap dealer would be required to establish, maintain, and enforce a 
system to supervise, and would be required to supervise diligently, its 
business and its associated persons, with a view to preventing 
violations of applicable federal securities laws, and the rules and 
regulations thereunder, relating to its business as a security-based 
swap dealer.\453\ The rule proposed by the Commission also would 
establish certain minimum requirements relating to the supervisory 
systems that are prescriptive in nature, that is, they would impose 
specific obligations on security-based swap dealers.\454\
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    \451\ See Section 15F(h)(1)(B) of the Exchange Act, 15 U.S.C. 
78o-10(h)(1)(B).
    \452\ Proposed Rule 15Fh-3(h) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42419-21.
    \453\ Proposed Rule 15Fh-3(h)(1) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42419-21.
    \454\ Proposed Rule 15Fh-3(h)(2) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42419-21.
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    As previously noted, the purpose of diligent supervision 
requirements is to prevent violations of applicable federal securities 
laws, and the rules and regulations thereunder, relating to an entity's 
business as a security-based swap dealer. An entity's business as a 
security-based swap dealer is not limited to either its Foreign 
Business or its U.S. Business, but rather is comprised of its entire 
global security-based swap dealing activity. As a result, we 
preliminarily believe that it is necessary to treat diligent 
supervision as an entity-level requirement applicable to all of a 
dealer's security-based swap transactions in order to effectively 
address the Dodd-Frank Act requirements for diligent supervision. We 
believe that treating diligent supervision solely as a transaction-
level requirement, and applying supervisory requirements differently to 
a security-based swap dealer's U.S. Business and Foreign Business, 
would not further the Dodd-Frank Act goal of establishing effective 
supervisory systems for security-based swap dealers.
vii. Conflicts of Interest
    Section 15F(j)(5) of the Exchange Act requires security-based swap 
dealers to implement conflict-of-interest systems and procedures. Such 
policies and procedures must establish structural and institutional 
safeguards to ensure that the activities of any person within the firm 
relating to research or analysis of the price or market for any 
security-based swap, or acting in the role of providing clearing 
activities, or making determinations as to accepting clearing customers 
are separated by appropriate informational partitions within the firm 
from the review, pressure, or oversight of persons whose involvement in 
pricing, trading, or clearing activities might potentially bias their 
judgment or supervision, and contravene the core principles of open 
access and the business conduct standards addressed in Title VII.\455\ 
The Commission has proposed a rule that would require a security-based 
swap dealer to establish policies and procedures that are reasonably 
designed to comply with its responsibilities under Section 
15F(j)(5).\456\
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    \455\ See Section 15F(j)(5) of the Exchange Act, 15 U.S.C. 78o-
10(j)(5), as discussed in the External Business Conduct Standards 
Proposing Release, 76 FR 42420.
    \456\ Proposed Rule 15Fh-3(h)(2)(iv) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42420.
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    The Commission preliminarily believes that it is necessary to treat 
conflicts of interest as an entity-level requirement applicable to all 
of a dealer's security-based swap transactions in order to effectively 
address the Dodd-Frank Act requirements for setting systems and 
procedures to prevent conflicts of interest from biasing the judgment 
or supervision of security-based swap dealers. We believe that treating 
conflicts of interest solely as a transaction-level requirement, and 
applying the required structural and institutional safeguards 
differently to a security-based swap dealer's U.S. Business and Foreign 
Business, would not further the goals of preventing conflicts of 
interest from influencing the security-based swap dealing activities of 
registered security-based swap dealers because such safeguards would 
only be in place for a portion of a security-based swap dealer's 
activities.
viii. Chief Compliance Officer
    Registered security-based swap dealers are required to designate a 
chief compliance officer who reports directly to the board of directors 
or to the senior officer of the security-based swap dealer.\457\ The 
chief compliance officer's responsibilities include reviewing and 
ensuring compliance of the security-based swap dealer with applicable 
requirements in the Exchange Act and the rules and regulations 
thereunder, resolution of conflicts of interest, administration of 
business conduct policies and procedures, and establishment of 
procedures for the remediation of noncompliance issues.\458\ The chief 
compliance officer also is required to prepare and sign a report that 
contains a description of the security-based swap dealer's compliance 
with applicable requirements in the Exchange Act, and the rules and 
regulations thereunder, and each of the security-based swap dealer's 
policies and procedures.\459\ The Commission has proposed a rule to 
implement these statutory requirements relating to the designation and 
functions of a chief compliance officer.\460\
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    \457\ See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o-
10(k).
    \458\ See Section 15F(k)(2) of the Exchange Act, 15 U.S.C. 78o-
10(k)(2).
    \459\ See Section 15F(k)(3) of the Exchange Act, 15 U.S.C. 78o-
10(k)(3).
    \460\ Proposed Rule 15Fk-1 under the Exchange Act, as discussed 
in the External Business Conduct Standards Proposing Release, 76 FR 
42435-38.
---------------------------------------------------------------------------

    As noted above, part of the chief compliance officer's 
responsibilities, under the proposed rule, include establishing, 
maintaining, and reviewing policies and procedures reasonably designed 
to ensure compliance with applicable requirements in the Exchange Act 
and the rules and regulations thereunder.\461\ Many of Title VII 
requirements, such as those applicable to security-based swap dealers 
that are described in this section, apply at the entity level. As a 
result, we preliminarily believe that it is necessary to treat the 
chief compliance officer as an entity-level requirement applicable to 
all of a dealer's security-

[[Page 31015]]

based swap business in order to effectively address the Dodd-Frank Act 
requirements for the chief compliance officer. We believe that treating 
the chief compliance officer solely as a transaction-level requirement, 
and applying the chief compliance officer requirements differently to a 
security-based swap dealer's U.S. Business and Foreign Business, would 
be unworkable given the chief compliance officer's oversight 
responsibilities over entity-level requirements and thus would not 
further the goals of establishing the chief compliance officer role for 
security-based swap dealers.
---------------------------------------------------------------------------

    \461\ See Proposed Rule 15Fk-1(b)(2) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42435-36.
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ix. Inspection and Examination
    Registered bank and nonbank security-based swap dealers are 
obligated to keep their books and records required pursuant to 
Commission rules and regulations open to inspection and examination by 
any representative of the Commission.\462\ The Commission has proposed 
a rule that would require, among other things, ``nonresident security-
based swap dealers'' that are required to register with the Commission 
to appoint and identify to the Commission an agent in the United States 
(other than the Commission or a Commission member, official, or 
employee) for service of process.\463\ In addition, the proposed rule 
would require that a nonresident security-based swap dealer certify 
that the firm can, as a matter of law, provide the Commission with 
prompt access to its books and records and can, as a matter of law, 
submit to onsite inspection and examination by the Commission.\464\ The 
proposed rule also would require that the nonresident security-based 
swap dealer provide the Commission with an opinion of counsel 
concurring that the firm can, as a matter of law, provide the 
Commission with prompt access to its books and records and can, as a 
matter of law, submit to onsite inspection and examination by the 
Commission.\465\
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    \462\ See Section 15F(f)(1)(C) of the Exchange Act, 15 U.S.C. 
78o-10(f)(1)(C). Registered bank security-based swap dealers are 
only required to keep the books and records associated with the 
activities related to their security-based swap dealing business, as 
prescribed by the Commission, and to make these books and records 
available for inspection by any representative of the Commission. 
See id.
    \463\ Proposed Rule 15Fb2-4 under the Exchange Act, as discussed 
in the Registration Proposing Release, 76 FR 65799. For a 
description of the term ``nonresident security-based swap dealer'' 
as defined in proposed Rule 15Fb2-4(a) under the Exchange Act, 
including how that definition differs from the definition of the 
term ``foreign security-based swap dealer'' as proposed in this 
release, see note 579 above.
    \464\ Proposed Rule 15Fb2-4 under the Exchange Act, as discussed 
in the Registration Proposing Release, 76 FR 65800.
    \465\ Proposed Rule 15Fb2-4 under the Exchange Act, as discussed 
in the Registration Proposing Release, 76 FR 65799-801.
---------------------------------------------------------------------------

    In proposing this rule, the Commission stated that it preliminarily 
believed that the nonresident security-based swap certification and 
supporting opinion of counsel were important to confirm that each 
registered nonresident security-based swap dealer 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.\466\ To effectively fulfill our 
regulatory oversight responsibilities with respect to nonresident 
security-based swap dealers registered with it, the Commission stated 
that it must have access to those entities' records and the ability to 
examine them. The Commission recognized, however, that certain foreign 
jurisdictions may have laws that complicate the ability of financial 
institutions, such as nonresident security-based swap dealers located 
in their jurisdictions, to share and/or transfer certain information 
including personal financial data of individuals that the financial 
institutions come to possess from third persons (e.g., personal data 
relating to the identity of market participants or their 
customers).\467\ The Commission further stated that the required 
certification and opinion of counsel regarding the nonresident 
security-based swap dealer's ability to provide prompt access to books 
and records and to be subject to inspection and examination would allow 
the Commission to better evaluate a nonresident security-based swap 
dealer's ability to meet the requirements of registration and ongoing 
supervision.\468\
---------------------------------------------------------------------------

    \466\ See Registration Proposing Release, 76 FR 65800.
    \467\ Id.
    \468\ Id.
---------------------------------------------------------------------------

    The Commission's inspection and examination authority is vital to 
our oversight of registered security-based swap dealers. If the 
Commission's inspection and examination were limited in scope to cover 
only one type of business, or limited to only certain security-based 
swap activities, the Commission would not be able to effectively 
regulate our registered security-based swap dealers because it would 
not have a full picture of the business of such registrants. As a 
result, we preliminarily believe that it is necessary to treat 
inspection and examination requirements as entity-level in order to 
provide the Commission with the information and access necessary to 
regulate registered security-based swap dealers.
x. Licensing Requirements and Statutory Disqualification
    The Commission has not proposed any licensing requirements for 
associated persons of registered security-based swap dealers, that are 
specifically related to their security-based swap dealing activities. 
However, the Commission has proposed a rule that would require 
security-based swap dealers (and major security-based swap 
participants) to certify that no person associated with such entities 
who effects or is involved in effecting security-based swaps on their 
behalf is subject to statutory disqualification, as defined in Section 
3(a)(39) of the Exchange Act.\469\ This proposed rule relates to 
paragraph (b)(6) of Section 15F of the Exchange Act,\470\ which 
generally prohibits security-based swap dealers (and major security-
based swap participants) from permitting any of their associated 
persons \471\\\ who are subject to a ``statutory disqualification'' to 
effect or be involved in effecting \472\\\ security-based swaps on 
behalf of such entities if the security-based swap dealer (or major 
security-based swap participant) knew, or in the exercise of

[[Page 31016]]

reasonable care should have known, of the statutory 
disqualification.\473\
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    \469\ 15 U.S.C. 78c(a)(39). See proposed Rule 15Fb6-1 under the 
Exchange Act, as discussed in the Registration Proposing Release, 76 
FR 65795.
    \470\ 15 U.S.C. 78o-10(b)(6).
    \471\ Section 3(a)(70) of the Exchange Act, 15 U.S.C. 
78c(a)(70), generally defines the term ``person associated with'' a 
security-based swap dealer or major security-based swap participant 
(``SBS Entity'') to include: (i) any partner, officer, director, or 
branch manager of an SBS Entity (or any person occupying a similar 
status or performing similar functions); (ii) any person directly or 
indirectly controlling, controlled by, or under common control with 
an SBS Entity; or (iii) any employee of an SBS Entity. However, it 
generally excludes persons whose functions are solely clerical or 
ministerial.
    \472\ As stated in the Registration Proposing Release, ``[t]he 
Commission believes that associated persons `involved in effecting' 
security-based swaps would include, but not be limited to, persons 
involved in drafting and negotiating master agreements and 
confirmations, persons recommending security-based swap transactions 
to counterparties, persons on a trading desk actively involved in 
effecting security-based swap transactions, persons pricing 
security-based swap positions and managing collateral for the 
[security-based swap dealer or major security-based swap 
participant], and persons assuring that the [security-based swap 
dealer's or major security-based swap participant's] security-based 
swap business operates in compliance with applicable regulations. In 
short, the term would encompass persons engaged in functions 
necessary to facilitate the [security-based swap dealer's or major 
security-based swap participant's] security-based swap business.'' 
Registration Proposing Release, 76 FR 65795 n. 56.
    \473\ See Registration Proposing Release, 76 FR 65795.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is necessary to treat 
requirements related to licensing and statutory disqualification as 
entity-level requirements applicable to all of a dealer's security-
based swap business in order to effectively address the Exchange Act's 
statutory disqualification provision. We believe that treating 
licensing requirements and statutory disqualification solely as 
transaction-level requirements, and applying the statutory 
disqualification differently to a security-based swap dealer's U.S. 
Business and Foreign Business, would not further the goals of 
preventing statutorily disqualified persons from effecting security-
based swaps on behalf of registered security-based swap dealers because 
such disqualifications would only be in place for a portion of a 
security-based swap dealer's activities.
4. Application of Certain Transaction-Level Requirements \474\
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    \474\ For purposes of this discussion, we are addressing only 
requirements applicable to security-based swap dealers in Sections 
3E and 15F of the Exchange Act, 15 U.S.C. 78c-5 and 78o-10, and the 
rules and regulations thereunder. Title VII requirements relating to 
reporting and dissemination, clearing, and trade execution are 
discussed in Sections VIII-X, infra.
---------------------------------------------------------------------------

(a) Proposed Rule
    The Commission is proposing a rule that would provide that a 
registered foreign security-based swap dealer and a foreign branch of a 
registered U.S. security-based swap dealer, with respect to their 
Foreign Business, shall not be subject to the requirements relating to 
external business conduct standards described in Section 15F(h) of the 
Exchange Act,\475\ and the rules and regulations thereunder, other than 
the rules and regulations prescribed by the Commission pursuant to 
Section 15F(h)(1)(B).\476\
---------------------------------------------------------------------------

    \475\ 15 U.S.C. 78o-10(h).
    \476\ Proposed Rule 3a71-3(c) under the Exchange Act. The 
approach under the proposed rule does not affect applicability of 
the general antifraud provisions of the federal securities laws to 
the activity of a foreign security-based swap dealer. See Section 
XII, infra.
---------------------------------------------------------------------------

    The proposed rule would define ``Foreign Business'' as security-
based swap transactions entered into, or offered to be entered into, by 
or on behalf of a foreign security-based swap dealer or a U.S. 
security-based swap dealer that do not include its U.S. Business.\477\ 
The proposed rule would define ``U.S. Business'' as:
---------------------------------------------------------------------------

    \477\ Proposed Rule 3a71-3(a)(2) under the Exchange Act.
---------------------------------------------------------------------------

     With respect to a foreign security-based swap dealer, (i) 
any transaction entered into, or offered to be entered into, by or on 
behalf of such foreign security-based swap dealer, with a U.S. person 
(other than with a foreign branch), or (ii) any transaction conducted 
within the United States; \478\ and
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    \478\ Proposed Rule 3a71-3(a)(6) under the Exchange Act. A 
person that meets the security-based swap dealer definition is a 
dealer with regard to all of its security-based swap activities, not 
just its dealing activities. See Intermediary Definitions Adopting 
Release, 77 FR 30645. Accordingly, a foreign security-based swap 
dealer's U.S. Business would not be limited only to transactions 
arising from its dealing activity, but rather would include all 
types of security-based swap activity.
---------------------------------------------------------------------------

     With respect to a U.S. security-based swap dealer, any 
transaction by or on behalf of such U.S. security-based swap dealer, 
wherever entered into or offered to be entered into, other than a 
transaction conducted through a foreign branch with a non-U.S. person 
or another foreign branch.\479\
---------------------------------------------------------------------------

    \479\ Proposed Rule 3a71-3(a)(6) under the Exchange Act.
---------------------------------------------------------------------------

    Whether the activity occurred within the United States or with a 
U.S. person for purposes of identifying whether security-based swap 
transactions are part of a U.S. Business or Foreign Business would turn 
on the same factors used to determine whether a foreign security-based 
swap dealer is engaging in dealing activity within the United States or 
with U.S. persons, as discussed above.\480\ The proposed rule provides 
that a U.S. security-based swap dealer would be considered to have 
conducted a security-based swap transaction through a foreign branch 
if:
---------------------------------------------------------------------------

    \480\ See Section III.B.6, supra (discussing the proposed 
definition of ``transaction conducted within the United States'').
---------------------------------------------------------------------------

     The foreign branch is the counterparty to such security-
based swap transaction; and
     No person within the United States is directly involved in 
soliciting, negotiating, or executing the security-based swap 
transaction on behalf of the foreign branch or its counterparty.\481\
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    \481\ Proposed Rule 3a71-3(a)(4) under the Exchange Act. See 
also proposed Rule 3a71-3(a)(5)(ii) under the Exchange Act 
(providing that the definition of ``transaction conducted within the 
United States'' shall not include a transaction conducted through a 
foreign branch).
---------------------------------------------------------------------------

As discussed above,\482\ the proposed rule would define ``foreign 
branch'' as any branch of a U.S. bank if:
---------------------------------------------------------------------------

    \482\ See Section III.B.7, supra.
---------------------------------------------------------------------------

     The branch is located outside the United States;
     The branch operates for valid business reasons; and
     The branch is engaged in the business of banking and is 
subject to substantive banking regulation in the jurisdiction where 
located.\483\
---------------------------------------------------------------------------

    \483\ Proposed Rule 3a71-3(a)(1) under the Exchange Act.
---------------------------------------------------------------------------

    All other requirements in Section 15F of the Exchange Act, and the 
rules and regulations thereunder, would apply to both U.S. and foreign 
security-based swap dealers registered with the Commission, although 
the Commission is proposing to establish a policy and procedural 
framework under which it would consider permitting substituted 
compliance for foreign security-based swap dealers (but not for U.S. 
security-based swap dealers that conduct dealing activity through 
foreign branches) under certain circumstances, as discussed below.\484\
---------------------------------------------------------------------------

    \484\ See Section XI.C, infra.
---------------------------------------------------------------------------

    The Commission also is proposing a rule that would provide that a 
foreign security-based swap dealer would not be required to comply with 
the segregation requirements set forth in Section 3E of the Exchange 
Act, and the rules and regulations thereunder, with respect to 
security-based transactions with non-U.S. person counterparties in 
certain circumstances.\485\ Specifically, the Commission is proposing a 
rule that would provide the following:
---------------------------------------------------------------------------

    \485\ Proposed Rule 18a-4(e) under the Exchange Act.
---------------------------------------------------------------------------

     With respect to non-cleared security-based swap 
transactions:
    [cir] A registered foreign security-based swap dealer that is a 
registered broker-dealer would be subject to the requirements relating 
to segregation of assets held as collateral set forth in Section 3E of 
the Exchange Act, and rules and regulations thereunder, with respect to 
assets collected from, for, or on behalf of any counterparty to margin 
a non-cleared security-based swap transaction.
    [cir] a registered foreign security-based swap dealer that is not a 
registered broker-dealer would be subject to the requirements relating 
to segregation of assets held as collateral set forth in Section 3E of 
the Exchange Act, and Rules 18a-4(a)-(d), solely with respect to assets 
collected from, for, or on behalf of a counterparty that is a U.S. 
person to margin a non-cleared security-based swap transaction. The 
special account maintained by a registered foreign security-based swap 
dealer that is not a registered broker-dealer in accordance with 
proposed Rule 18a-4(c) would be required to be designated for the 
exclusive benefit of U.S. person security-based swap customers.\486\
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    \486\ Proposed Rule 18a-4(e)(1) under the Exchange Act.
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     With respect to cleared security-based swap transactions:

[[Page 31017]]

    [cir] A registered foreign security-based swap dealer that is not a 
foreign bank with a branch or agency in the United States and is a 
registered broker-dealer shall be subject to the requirements relating 
to segregation of assets held as collateral set forth in Section 3E of 
the Exchange Act, and rules and regulations thereunder, with respect to 
assets collected from, for, or on behalf of any counterparty to margin 
a cleared security-based swap transaction.
    [cir] a registered foreign security-based swap dealer that is not a 
foreign bank with a branch or agency in the United States and that is 
not a registered broker-dealer shall be subject to the requirements 
relating to segregation of assets held as collateral set forth in 
Section 3E of the Exchange Act, and Rules 18a-4(a)-(d), only if such 
registered foreign security-based swap dealer accepts any assets from, 
for, or on behalf of a counterparty that is a U.S. person to margin, 
guarantee, or secure a cleared security-based swap transaction.\487\
---------------------------------------------------------------------------

    \487\ Proposed Rule 18a-4(e)(2)(ii) under the Exchange Act.
---------------------------------------------------------------------------

    [cir] a registered foreign security-based swap dealer that is a 
foreign bank with a branch or agency in the United States would be 
subject to the requirements relating to segregation of assets held as 
collateral set forth in Section 3E of the Exchange Act, and Rules 18a-
4(a)-(d),\488\ solely with respect to assets collected from a 
counterparty that is a U.S. person to margin a cleared security-based 
swap transaction. The special account maintained by a registered 
foreign security-based swap dealer that is a foreign bank with a branch 
or agency in the United States in accordance with proposed Rule 18a-
4(c) would be required to be designated for the exclusive benefit of 
U.S. person security-based swap customers.\489\
---------------------------------------------------------------------------

    \488\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70274-88 (proposing Rules 18a-4(a)-(d) under the Exchange Act).
    \489\ Proposed Rule 18a-4(e)(2)(i) under the Exchange Act.
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    In addition, a registered foreign security-based swap dealer would 
be required to disclose to its counterparty the potential treatment of 
the assets segregated by such registered foreign security-based swap 
dealer pursuant to Section 3E of the Exchange Act, and rules and 
regulations thereunder, in insolvency proceedings under the U.S. 
bankruptcy law and applicable foreign insolvency laws.\490\
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    \490\ Proposed Rule 18a-4(e)(3) under the Exchange Act.
---------------------------------------------------------------------------

(b) Discussion
i. External Business Conduct Standards
a. Foreign Security-Based Swap Dealers
    The Commission preliminarily believes it is appropriate not to 
impose on foreign security-based swap dealers the external business 
conduct standards in Section 15F(h) (other than rules and requirements 
prescribed by the Commission pursuant to Section 15F(h)(1)(B)) of the 
Exchange Act, and the rules and regulations thereunder, described in 
the proposed rule,\491\ with respect to their Foreign Business, because 
these requirements relate primarily to customer protection. The Dodd-
Frank Act's counterparty protection mandate focuses on the United 
States and the U.S. markets.\492\ In addition, we preliminarily believe 
that foreign counterparties typically would not expect to receive the 
customer protections of Title VII when dealing with a foreign security-
based swap dealer outside the United States. At the same time, our 
proposed approach would preserve customer protections for U.S. 
counterparties that would expect to benefit from the protection 
afforded to them by Title VII of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \491\ Proposed Rule 3a71-3(c) under the Exchange Act.
    \492\ See note 4, supra.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily believes that requiring 
foreign security-based swap dealers to comply with the external 
business conduct standards requirement with respect to their security-
based swap transactions conducted outside the United States with non-
U.S. persons (or with foreign branches of U.S. banks) would not advance 
this statutory purpose. Although this approach represents a departure 
from the entity approach the Commission has traditionally taken in the 
regulation of foreign broker-dealers, as discussed above, whereby the 
Commission applies our regulations to the entire global business of a 
registered broker-dealer, we preliminarily believe this departure is 
appropriate in the context of a global security-based swap market in 
order to create a regulatory framework that provides effective 
protections for counterparties that are U.S. persons while recognizing 
the role of foreign regulators in non-U.S. markets.
    The Commission also preliminarily believes that this approach 
addresses many of the concerns raised by commenters, including foreign 
regulators, concerning the potential application of Title VII to 
transactions between registered foreign security-based swap dealers and 
non-U.S. counterparties. In addition, this approach is consistent with 
the reasonable expectations of U.S. person counterparties, who would 
expect to receive the protection of external business conduct standards 
and conflicts of interest requirements when dealing with a foreign 
security-based swap dealer within the United States.\493\
---------------------------------------------------------------------------

    \493\ See note 321, supra.
---------------------------------------------------------------------------

    The Commission's proposed approach to external business conduct 
standards would not except foreign security-based swap dealers from the 
rules and requirements prescribed by the Commission pursuant to Section 
15F(h)(1)(B) of the Exchange Act with respect to their Foreign 
Business.\494\ Section 15F(h)(1)(B) requires security-based swap 
dealers to conform with such business conduct standards relating to 
diligent supervision as the Commission shall prescribe.\495\ The 
Commission preliminarily believes that it is not appropriate to except 
foreign security-based swap dealers from compliance with such 
requirements. Because registered foreign security-based swap dealers 
would be subject to a number of obligations under the federal 
securities laws with respect to their security-based swap business, the 
Commission preliminarily believes that having systems in place 
reasonably designed to ensure diligent supervision would be an 
important aspect of their compliance with the federal securities laws. 
However, as discussed below, the Commission is proposing to permit 
substituted compliance with the diligent supervision requirement in 
Section 15F(h)(1)(B), and the rules and regulations thereunder, by 
foreign security-based swap dealers.\496\ The Commission preliminarily 
believes that foreign security-based swap dealers subject to regulation 
in a foreign jurisdiction are very likely to be subject to diligent 
supervision requirements and to the extent that such requirements are 
comparable to Commission requirements, we would consider permitting 
substituted compliance, as discussed below.\497\
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    \494\ Proposed Rule 3a71-3(c) under the Exchange Act.
    \495\ 15 U.S.C. 78o-10(h)(1)(B). See Section III.C.3(b)vi, supra 
(discussing the diligent supervision requirements).
    \496\ See Section XI.C, infra.
    \497\ See id.
---------------------------------------------------------------------------

    The Commission is proposing to except foreign security-based swap 
dealers from complying with the rules and regulations that the 
Commission may prescribe pursuant to Section 15F(h)(1)(A) or (C) of the 
Exchange

[[Page 31018]]

Act.\498\ Section 15F(h)(1)(A) requires security-based swap dealers to 
conform with such business conduct standards relating to fraud, 
manipulation, and other abusive practices involving security-based 
swaps (including security-based swaps that are offered but not entered 
into) as prescribed by the Commission. Section 15F(h)(1)(C) requires 
security-based swap dealers to adhere to rules and regulations 
prescribed by the Commission with respect to applicable position 
limits. The Commission has not engaged in rulemaking pursuant to these 
provisions.\499\ If the Commission does propose rules pursuant to these 
provisions in the future, the Commission would consider, at that time, 
whether it would be appropriate to subject foreign security-based swap 
dealers to such requirements with respect to their Foreign Business.
---------------------------------------------------------------------------

    \498\ 15 U.S.C. 78o-10(h)(1)(A) and (C).
    \499\ Although the Commission has not proposed rules under 
Section 15F(h)(1)(A) of the Exchange Act, the Commission has 
proposed new Rule 9j-1 under the Exchange Act, which is intended to 
prevent fraud, manipulation, and deception in connection with the 
offer, purchase, or sale of any security-based swap, the exercise of 
any right or performance of any obligation under a security-based 
swap, or the avoidance of such exercise or performance. See 
Prohibition Against Fraud, Manipulation, and Deception in Connection 
with Security-Based Swaps, Exchange Act Release No. 63236 (Nov. 3, 
2010), 75 FR 68560 (Nov. 8, 2010). The Commission's view of its 
antifraud enforcement authority in the cross-border context is 
described in further detail in Section XI below.
---------------------------------------------------------------------------

b. U.S. Security-Based Swap Dealers
    The Commission preliminarily believes it is appropriate not to 
subject U.S. security-based swap dealers to the external business 
conduct standards in Section 15F(h) (other than Section 15F(h)(1)(B)) 
of the Exchange Act, and the rules and regulations thereunder, as 
specified in the proposed rule, with respect to security-based swap 
transactions conducted through their foreign branches outside the 
United States with non-U.S. counterparties, because such requirements 
relate primarily to customer protection requirements. The Dodd-Frank 
Act generally is concerned with the protection of U.S. markets and 
participants in those markets.\500\ Therefore, we preliminarily believe 
that subjecting U.S. security-based swap dealers to the Title VII 
customer protection requirements with respect to their security-based 
swap transactions conducted through their foreign branches outside the 
United States (even though the transactions may pose risk to the U.S. 
financial system) with non-U.S. persons would produce little or no 
benefit to U.S. market participants. Although this approach would 
represent a departure from the entity approach the Commission has 
traditionally taken in the regulation of broker-dealers, whereby the 
Commission applies our regulations to the entire global business of a 
registered broker-dealer, we preliminarily believe it is appropriate in 
the context of a global security-based swap market in order to develop 
a national regulatory framework that provides effective protections for 
counterparties who are U.S. persons while recognizing the role of 
foreign regulators in non-U.S. markets.
---------------------------------------------------------------------------

    \500\ See note 4, supra.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that this approach would 
help address the potential application of duplicative and conflicting 
regulatory requirements to security-based swap transactions between the 
foreign branches of registered U.S. bank security-based swap dealers 
and non-U.S. counterparties. In addition, the Commission preliminarily 
believes this approach is consistent with the reasonable expectations 
of foreign counterparties, who would not necessarily expect to receive 
the protections of Title VII when dealing with a foreign branch of a 
U.S. bank outside the United States, even if it is registered as a 
security-based swap dealer with the Commission.\501\
---------------------------------------------------------------------------

    \501\ See note 321, supra. The proposed definition of foreign 
branch is the same as discussed above. See proposed Rule 3a71-
3(a)(1) under the Exchange Act, as discussed in Section III.B.7, 
supra.
---------------------------------------------------------------------------

    The purpose of the proposed provision defining when a security-
based swap transaction would be considered to have been conducted 
through a foreign branch is intended to prevent U.S. security-based 
swap dealers from using the proposed rule to evade the application of 
Title VII.\502\ Requiring that the foreign branch be the named 
counterparty to the security-based swap transaction and that no person 
within the United States be directly involved in soliciting, 
negotiating, or executing the security-based swap transaction on behalf 
of the foreign branch or its counterparty is intended to help ensure 
that the security-based swap transaction occurs outside the United 
States, even though the Commission recognizes that the risk of the 
transaction would ultimately be borne by the U.S. security-based swap 
dealer, of which the foreign branch is merely a part.\503\ The U.S. 
security-based swap dealer would still be subject to the entity-level 
requirements described above intended to address the risk the 
transactions pose to the U.S. financial system.
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    \502\ Proposed Rule 3a71-3(a)(4) under the Exchange Act.
    \503\ Proposed Rule 3a71-3(a)(4)(i) under the Exchange Act.
---------------------------------------------------------------------------

ii. Segregation Requirements
    The segregation requirements set forth in Section 3E of the 
Exchange Act, and rules and regulations thereunder, are closely tied to 
U.S. bankruptcy laws.\504\ Subchapter III of Chapter 7, Title 11 of the 
United States Code (the ``stockbroker liquidation provisions'') \505\ 
provides special protections for ``customers'' of stockbrokers. Among 
other protections, ``customers'' share ratably with other customers 
ahead of virtually all other creditors in the ``customer property'' 
held by the failed stockbroker.\506\ The Dodd-Frank Act contains 
provisions designed to ensure that cash and securities held by a 
security-based swap dealer relating to security-based swaps will be 
deemed customer property under the stockbroker liquidation 
provisions.\507\ In particular, Section 3E(g) of the Exchange Act \508\ 
provides, among other things, that a security-based swap shall be 
considered to be a ``security'' as such term is used in section 
101(53A)(B) \509\ and the stockbroker liquidation provisions. Section 
3E(g) also provides that an account that holds a security-based swap 
shall be considered to be a ``securities account'' as that term is 
defined in the stockbroker liquidation provisions.\510\ In addition, 
Section 3E(g) provides that the terms ``purchase'' and ``sale'' as 
defined in Sections 3(a)(13) and (14) of the Exchange Act, 
respectively, shall be applied to the terms ``purchase'' and ``sale'' 
as used in the stockbroker liquidation

[[Page 31019]]

provisions.\511\ Finally, Section 3E(g) provides that the term 
``customer'' as defined in the stockbroker liquidation provisions 
excludes any person to the extent the person has a claim based on a 
non-cleared security-based swap transaction except to the extent of any 
margin delivered to or by the customer with respect to which there is a 
customer protection requirement under Section 15(c)(3) of the Exchange 
Act or a segregation requirement.\512\
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    \504\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70274-78 (discussing the customer protection treatment provided 
by proposed Rules 18a-4(a)-(d) in the stockbroker liquidation 
provisions in the U.S. Bankruptcy Code).
    \505\ See 11 U.S.C. 741-53.
    \506\ See 11 U.S.C. 752.
    \507\ See Public Law 111-203 section 763(d), adding Section 
3E(g) to the Exchange Act, 15 U.S.C. 78c-5(g).
    \508\ See 15 U.S.C. 78c-5(g).
    \509\ See 11 U.S.C. 101(53A)(B). Section 101(53A) of the U.S. 
Bankruptcy Code defines a ``stockbroker'' to mean a person--(A) with 
respect to which there is a customer, as defined in section 741, 
subchapter III of chapter 7, title 11, United States Code (the 
definition section of the stockbroker liquidation provisions); and 
(B) that is engaged in the business of effecting transactions in 
securities--(i) for the account of others; or (ii) with members of 
the general public, from or for such person's own account. See 11 
U.S.C. 101(53A).
    \510\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741. There is not a 
definition of ``securities account'' in 11 U.S.C. 741. The term 
``securities account'' is used in 11 U.S.C. 741(2) and (4) in 
defining the terms ``customer'' and ``customer property.''
    \511\ See also 15 U.S.C. 78c-5(g) and 11 U.S.C. 741-753. Section 
3(a)(13) of the Exchange Act, as amended by Section 761(a) of the 
Dodd-Frank Act, defines the term ``purchase'' to mean, in the case 
of security-based swaps, the execution, termination (prior to its 
scheduled maturity date), assignment, exchange, or similar transfer 
or conveyance of, or extinguishing of rights or obligations under, a 
security-based swap, as the context may require. See 15 U.S.C. 
3(a)(13). Section 3(a)(14) of the Exchange Act, as amended by 
Section 761(a) of the Dodd-Frank Act, defines the term ``sale'' to 
mean, in the case of security-based swaps, the execution, 
termination (prior to its scheduled maturity date), assignment, 
exchange, or similar transfer or conveyance of, or extinguishing of 
rights or obligations under, a security-based swap, as the context 
may require. See 15 U.S.C. 3(a)(14).
    \512\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741(2).
---------------------------------------------------------------------------

    The provisions of Section 3E(g) of the Exchange Act apply the 
customer protection elements of the stockbroker liquidation provisions 
to cleared security-based swaps, including related collateral, and, if 
subject to customer protection requirements under Section 15(c)(3) of 
the Exchange Act or a segregation requirement prescribed by the 
Commission, to collateral delivered as margin for non-cleared security-
based swaps.\513\ The Commission has proposed Rule 18a-4(a)-(d) to 
establish segregation requirements for security-based swap dealers with 
respect to cleared and non-cleared security-based swaps pursuant to 
Section 3E of the Exchange Act and pursuant to Section 15(c)(3) of the 
Exchange Act \514\ with respect to security-based swap dealers that are 
broker-dealers.\515\
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    \513\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741-53.
    \514\ 15 U.S.C. 78o(c)(3).
    \515\ See proposed Rules 18a-4(a)-(d) under the Exchange Act and 
Section 3E of the Exchange Act, 15 U.S.C. 78c-5. See also the 
Capital, Margin, and Segregation Proposing Release, 77 FR 70278-88, 
for detailed descriptions and discussions of the proposed 
segregation requirements for security-based swaps in proposed Rules 
18a-4(a), (b), and (c) under the Exchange Act and special provisions 
for non-cleared security-based swaps in proposed Rule 18a-4(d) under 
the Exchange Act.
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    Specifically, proposed Rule 18a-4(b) requires a security-based swap 
dealer to promptly obtain and thereafter maintain physical possession 
or control of all excess securities collateral carried for the accounts 
of security-based swap customers. Such possession or control 
requirement is designed to ensure the securities held for the accounts 
of security-based swap customers are under the control of the security-
based swap dealer and, therefore, readily available to be returned to 
security-based swap customers. Proposed Rule 18a-4(c) requires a 
security-based swap dealer to maintain a special account for the 
exclusive benefit of security-based swap customers and have on deposit 
in that account at all times an amount of cash or qualified securities 
determined by computing the net amount of credits owed to 
customers.\516\ The objective of the possession or control and special 
account requirements in proposed Rule 18a-4 is to facilitate the prompt 
return of ``customer property'' to security-based swap customers either 
before or during a liquidation proceeding if the firm fails. In the 
event of a failure of the security-based swap dealer, customers would 
share the ``customer property'' ratably with other customers and ahead 
of virtually all other creditors.\517\ In addition, with respect to 
non-cleared security-based swaps, proposed Rule 18a-4(d) requires a 
security-based swap dealer to provide the notice required under Section 
3E(f)(1)(A) of the Exchange Act \518\ to a counterparty in writing 
prior to the execution of the first non-cleared security-based swap 
transaction with such counterparty. If a counterparty to a non-cleared 
security-based swap elects to segregate funds or other property with a 
third-party custodian pursuant to Section 3E(f) of the Exchange Act or 
elects not to require the omnibus segregation of funds or other 
property pursuant to proposed Rule 18a-4(c), the security-based swap 
dealer must obtain an agreement from such counterparty to subordinate 
all claims against the security-based swap dealer to the claims of 
security-based swap customers of such security-based swap dealer.\519\
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    \516\ See proposed Rule 18a-4(c) and the related discussion in 
the Capital, Margin, and Segregation Proposing Release, 77 FR 70277.
    \517\ See the stockbroker liquidation provisions in the U.S. 
Bankruptcy Code, 11 U.S.C. 741-53.
    \518\ 15 U.S.C. 78c-5(f)(1)(A).
    \519\ See proposed Rules 18a-4(d)(1) and (d)(2)(i) and (ii) 
under the Exchange Act, as discussed in the Capital, Margin, and 
Segregation Proposing Release, 77 FR 70287-88. If a non-cleared 
security-based swap counterparty elects to segregate funds or other 
property with a third-party custodian, the subordination agreement 
would be conditioned on the counterparty's funds and other property 
segregated at a third-party custodian not being included in the 
bankruptcy estate of the security-based swap dealer. If the election 
is not effective in keeping the counterparty's assets bankruptcy 
remote, then the counterparty should be treated as a security-based 
swap customer with a pro rata priority claim to customer property. 
See proposed Rule 18a-4(d)(2)(i) under the Exchange Act. If a non-
cleared security-based swap counterparty elects not to segregate any 
assets at all, the security-based swap dealer would need to obtain 
an unconditional subordination agreement from the counterparty that 
waives segregation altogether. See proposed Rule 18a-4(d)(2)(ii) 
under the Exchange Act.
---------------------------------------------------------------------------

    As proposed in the Capital, Margin and Segregation Proposing 
Release, the segregation requirements in proposed Rule 18a-4(a)-(d) do 
not distinguish between U.S. security-based swap dealers and foreign 
security-based swap dealers or between U.S. person and non-U.S. person 
security-based swap counterparties, and do not address application of 
the segregation requirements in the cross-border context. The 
Commission preliminarily believes that the Dodd-Frank Act's mandate to 
promote financial stability, improve accountability, and protect 
counterparties focuses territorially on the United States and the U.S. 
security-based swap market \520\ and, therefore, is not proposing any 
changes with respect to U.S. security-based swap dealers to the 
segregation requirements already proposed.\521\ The Commission's 
proposed approach to application of segregation requirements to foreign 
security-based swap dealers intends to protect U.S. person 
counterparties and minimize the impact of a failed security-based swap 
dealer on the U.S. financial system generally and the U.S. security-
based swap market in particular.
---------------------------------------------------------------------------

    \520\ See note 4, supra.
    \521\ See proposed Rules 18a-4(a)-(d) under the Exchange Act and 
Section 3E of the Exchange Act, 15 U.S.C. 78c-5. See also the 
Capital, Margin, and Segregation Proposing Release, 77 FR 70278-88.
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a. Foreign Security-Based Swap Dealers
    As stated above, Section 3E(g) extends the customer protection 
provided by the stockbroker liquidation provisions of the U.S. 
Bankruptcy Code to cleared security-based swaps and non-cleared 
security-based swaps in different ways. In addition, a foreign 
security-based swap dealer may not be subject to the stockbroker 
liquidation provisions if it is a foreign bank with a branch or agency 
in the United States.\522\ Such foreign security-based swap dealer's 
insolvency and liquidation would be subject to banking 
regulations.\523\ On the

[[Page 31020]]

other hand, if a foreign security-based swap dealer is not a foreign 
bank with a branch or agency in the United States, it may be subject to 
the stockbroker liquidation provisions \524\ in a stockbroker 
liquidation proceeding in a U.S. bankruptcy court. Moreover, if a 
foreign security-based swap dealer is a registered broker-dealer, it is 
a member of the Securities Investor Protection Corporation (``SIPC'') 
\525\ and is subject to segregation requirements under Section 15(c)(3) 
of the Exchange Act,\526\ and rules and regulations thereunder.\527\ 
Such a foreign security-based swap dealer would be subject to the 
liquidation proceeding under the Securities Investor Protection Act of 
1970 (the ``SIPA'').\528\ Therefore, we propose an approach that would 
apply the segregation requirements to a foreign security-based swap 
dealer depending on whether it holds assets to secure cleared security-
based swap transactions or non-cleared security-based swap transactions 
and whether such foreign security-based swap dealer is a registered 
broker-dealer, a foreign bank with a branch or agency in the United 
States, or neither of the above.\529\
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    \522\ See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C. 
109(b) (providing that a person may be a debtor under chapter 7 of 
the U.S. Bankruptcy Code only if such person is not, among other 
things, a bank or similar institution which is an insured bank as 
defined in Section 3(h) of the Federal Deposit Insurance Act, or a 
foreign bank that has a branch or agency (as defined in Section 1(b) 
of the International Banking Act of 1978) in the United States).
    \523\ See 12 U.S.C. 1821-25. Whereas insured deposit 
institutions would be resolved under the Federal Deposit Insurance 
Act, uninsured U.S. branches of foreign banks would be resolved 
under either relevant state statutes, in the case of uninsured state 
branches, or the International Banking Act, in the case of uninsured 
federal branches.
    \524\ See note 522, supra.
    \525\ We recognize that a very limited number of registered 
foreign broker-dealers who do not conduct securities business in the 
United States and do not hold U.S. person customers' funds are not 
members of SIPC.
    \526\ 15 U.S.C. 78o(c)(3).
    \527\ See Rule 15c3-3 under the Exchange Act, 17 CFR 240.15c3-3.
    \528\ See 15 U.S.C. 78aaa et seq.
    \529\ We preliminarily believe that the proposed approach with 
respect to the segregation requirements set forth in Section 3E of 
the Exchange Act, and rules and regulations thereunder, is not being 
applied to persons who are ``transact[ing] a business in security-
based swaps without the jurisdiction of the United States,'' within 
the meaning of Section 30(c). See Section II.B.2(a), supra. However, 
the Commission also preliminary believes that the proposed approach 
with respect to the segregation requirements is necessary or 
appropriate to help prevent the evasion of the particular provisions 
of the Exchange Act that were added by the Dodd-Frank Act that are 
being implemented by the proposed approach and prophylactically will 
help ensure that the purposes of those provisions of the Dodd-Frank 
Act are not undermined. See Section II.B.2(e), supra; see also 
Section II.B.2(c), supra.
    For example, if the segregation requirements do not apply to the 
entire business of a registered foreign security-based swap dealer 
that is a registered broker-dealer, or do not apply to assets 
received from non-U.S. person customers to secure cleared security-
based swaps by a registered foreign security-based swap dealer that 
is not a registered broker-dealer (and is not a foreign bank with a 
branch or agency in the United States) if such foreign security-
based swap dealer also receives assets from a U.S. person customer 
to secure clear security-based swaps, then U.S. security-based swap 
dealers would have an incentive to evade the full application of the 
segregation requirements by moving their operations outside the 
United States. In this event, these security-based swap dealers 
could use the assets collected from the non-U.S. person 
counterparties for their own business purposes, and the assets 
segregated (i.e., assets posted by U.S. person customers) could be 
insufficient to satisfy the combined priority claims of both U.S. 
person and non-U.S. person customers, potentially resulting in 
losses to U.S. person customers in contravention of the purposes of 
the customer protection framework established by the Dodd-Frank Act. 
See discussions of application of the segregation requirements to a 
foreign security-based swap dealer that is a registered broker-
dealer with respect to non-cleared security-based swaps in Section 
III.C.4(b)ii.b.i, application of the segregation requirements to a 
foreign security-based swap dealer that is a registered broker-
dealer with respect to cleared security-based swaps in Section 
III.C.4(b)ii.c.i, and application of the segregation requirements to 
a foreign security-based swap dealer that is not a registered 
broker-dealer and is not a foreign bank with a branch or agency in 
the United States in Section III.C.4(b)ii.c.ii above.
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    We recognize that a foreign security-based swap dealer may not be 
subject to the stockbroker liquidation provisions and its insolvency or 
liquidation proceeding in the United States may be administered under 
SIPA or banking regulations concurrently with other potential 
insolvency proceedings outside the United States under applicable 
foreign insolvency laws. Therefore, the effectiveness of the 
segregation requirements with respect to a foreign security-based swap 
dealer in practice may depend on many factors, including the type and 
objectives of the insolvency or liquidation proceeding and how the U.S. 
Bankruptcy Code, SIPA, banking regulations and applicable foreign 
insolvency laws are interpreted by the U.S. bankruptcy court, SIPC, 
Federal Deposit Insurance Corporation and relevant foreign authorities.
b. Non-Cleared Security-Based Swaps
i. Foreign Security-Based Swap Dealer That Is a Registered Broker-
Dealer
    With respect to non-cleared security-based swaps, the Commission 
proposes to apply segregation requirements differently to foreign 
security-based swap dealers depending on whether they also are 
registered broker-dealers. Specifically, the Commission proposes to 
require a foreign security-based swap dealer that is a registered 
broker-dealer to segregate margin received from all counterparties to 
secure non-cleared security-based swap transactions, in accordance with 
Section 3E of the Exchange Act, and rules and regulations 
thereunder.\530\
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    \530\ See proposed Rule 18a-4(e)(1)(i) under the Exchange Act.
---------------------------------------------------------------------------

    If a foreign security-based swap dealer is a registered broker-
dealer, it already would: (i) be subject to the customer protection 
requirements under Section 15(c)(3) of the Exchange Act,\531\ and rules 
and regulations thereunder, including Rule 15c3-3 if it carries 
customer securities and cash; (ii) be required to maintain possession 
or control of customer securities and maintain cash or qualified 
securities in a special reserve account if it carries customer 
securities and cash; and (iii) if it is a member of SIPC, be liquidated 
in a formal proceeding under the SIPA.\532\ Rule 15c3-3 under Section 
15(c)(3) of the Exchange Act provides customer protection and defines 
``customer'' broadly to include any person from whom or on whose behalf 
a broker or dealer has received or acquired or holds funds or 
securities for the account of that person.\533\ Therefore, if a foreign 
security-based swap dealer that is a registered broker-dealer receives 
collateral from a non-cleared security-based swap counterparty, such 
counterparty would be a ``customer'' and is afforded customer 
protection with respect to such collateral under Rule 15c3-3. As stated 
above, Section 3E(g) extends ``customer'' status to non-cleared 
security-based swap counterparties to the extent of any margin 
delivered to or by the counterparties with respect to which there is a 
customer protection requirement under Section 15(c)(3).\534\ Therefore, 
non-cleared security-based swap counterparties of a foreign security-
based swap dealer that is a registered broker-dealer are ``customers'' 
within the meaning of the stockbroker liquidation provisions.\535\
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    \531\ 15 U.S.C. 78o(c)(3).
    \532\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70276-77 (discussing the broker-dealer segregation rule--Rule 
15c3-3 under the Exchange Act, 17 CFR 240.15c3-3).
    \533\ See Rule 15c3-3(a)(1) under the Exchange Act, 17 CFR 
240.15c3-3(a)(1).
    \534\ See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c-5(g) 
(``The term `customer', as defined in section 741 of title 11, 
United States Code, excludes any person, to the extent that such 
person has a claim based on any . . . non-cleared security-based 
swap except to the extent of any margin delivered to or by the 
customer with respect to which there is a customer protection 
requirement under section 15(c)(3) or a segregation requirement.'').
    \535\ A non-cleared security-based swap counterparty may waive 
its pro rata priority claim on customer property with other 
customers by executing a conditional subordination agreement 
pursuant to proposed Rule 18a-4(d)(i) under the Exchange Act to 
affirmatively elect individual segregation, or by executing an 
unconditional subordination agreement pursuant to proposed Rule 18a-
4(d)(ii) under the Exchange Act to affirmatively waive segregation 
altogether.
---------------------------------------------------------------------------

    As such, if the Commission does not require a foreign security-
based swap dealer that is a registered broker-dealer to segregate all 
counterparties' assets posted to secure non-cleared security-based 
swaps, in a SIPA liquidation

[[Page 31021]]

proceeding of such foreign security-based swap dealer and broker-
dealer,\536\ the pool of assets segregated pursuant to Rule 15c3-3 and 
proposed Rule 18a-4 may be insufficient to satisfy the combined claims 
of all customers, resulting in losses to all customers. Therefore, the 
Commission proposes to subject a foreign security-based swap dealer 
that is a registered broker-dealer to the segregation requirements set 
forth in Section 3E of the Exchange Act, and rules and regulations 
thereunder, relating to assets received from all counterparties held as 
collateral to secure non-cleared security-based swap transactions.
---------------------------------------------------------------------------

    \536\ In very limited circumstances where a foreign security-
based swap dealer that is a registered broker-dealer is not a SIPC 
member, it would potentially be liquidated pursuant to the 
stockbroker liquidation provisions in a U.S. bankruptcy court.
---------------------------------------------------------------------------

ii. Non-Cleared Security-Based Swaps--Foreign Security-Based Swap 
Dealer That is Not a Registered Broker-Dealer
    If a foreign security-based swap dealer is not a registered broker-
dealer, its non-cleared security-based swap counterparties would be 
``customers'' under the stockbroker liquidation provisions only to the 
extent that there is a segregation requirement prescribed by the 
Commission.\537\ The Commission proposes to subject such foreign 
security-based swap dealer to the segregation requirements set forth in 
Section 3E of the Exchange Act, and rules and regulations thereunder, 
solely with respect to non-cleared security-based swaps with U.S. 
person counterparties.\538\ This approach would provide U.S. person 
counterparties ``customer'' status under the stockbroker liquidation 
provisions and their assets would be segregated for their exclusive 
benefit. Non-U.S. person counterparties would not be ``customers'' and 
would not have ``customer'' status with respect to the segregated 
assets. As stated above, the Commission preliminarily believes that the 
objective of the Dodd-Frank Act is to protect U.S. counterparties and 
to minimize disruption to the U.S. financial system caused by a 
security-based swap dealer's failure. Therefore, the Commission 
preliminarily believes that the proposed approach would achieve the 
benefit intended by the segregation requirements set forth in Section 
3E of the Exchange Act, and rules and regulations thereunder.
---------------------------------------------------------------------------

    \537\ See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c-5(g).
    \538\ See proposed Rule 18a-4(e)(1)(ii) under the Exchange Act.
---------------------------------------------------------------------------

    The Commission recognizes that a foreign security-based swap dealer 
that is not a broker-dealer but is a foreign bank with a branch or 
agency (as defined in Section 1(b) of the International Banking Act of 
1978) \539\ in the United States may not be eligible to be liquidated 
pursuant to the stockbroker liquidation provisions.\540\ Such foreign 
security-based swap dealer's insolvency proceeding in the United States 
would be administered under banking regulations.\541\ Nevertheless, the 
Commission preliminarily believes that imposing segregation 
requirements on such foreign security-based swap dealer when it 
receives collateral from U.S. person counterparties would reduce the 
likelihood of U.S. person counterparties incurring losses by helping 
identify U.S. customers' assets in an insolvency proceeding of such 
foreign security-based swap dealer in the United States and would 
potentially minimize disruption to the U.S. security-based swap market, 
thereby producing potential benefits to the U.S. financial system and 
U.S. counterparties that are consistent with the objectives of the 
Dodd-Frank Act.
---------------------------------------------------------------------------

    \539\ See Sections 1(b)(1), (3), and (7) of the International 
Banking Act of 1978, 12 U.S.C. 3101(b)(1), (3) and (7), for 
definitions of ``agency,'' ``branch,'' and ``foreign bank.''
    \540\ See Section 109(b)(3)(B) of the U.S. Bankruptcy Code, 11 
U.S.C. 109(b)(3)(B).
    \541\ See 12 U.S.C. 1821-25. Whereas insured deposit 
institutions would be resolved under the Federal Deposit Insurance 
Act, uninsured U.S. branches of foreign banks would be resolved 
under either relevant state statutes, in the case of uninsured state 
branches, or the International Banking Act, in the case of uninsured 
federal branches.
---------------------------------------------------------------------------

c. Cleared Security-Based Swaps
    In applying the segregation requirements to a foreign security-
based swap dealer with respect to cleared security-based swap 
transactions, the Commission also proposes to distinguish among: (1) a 
foreign security-based swap dealer that is a registered broker-dealer; 
(2) a foreign security-based swap dealer that is not a registered 
broker-dealer and is not a foreign bank with a branch or agency in the 
United States; and (3) a foreign security-based swap dealer that is a 
foreign bank with a branch or agency in the United States. In the 
following paragraphs, we will discuss how we propose to apply the 
segregation requirements to foreign security-based swap dealers in each 
of these categories with respect to assets held by them as collateral 
to secure cleared security-based swaps.
i. Foreign Security-Based Swap Dealer That Is a Registered Broker-
Dealer
    The proposed rule would apply segregation requirements to a foreign 
security-based swap dealer that is a registered broker-dealer with 
respect to assets received from all counterparties to secure cleared 
security-based swaps.\542\ As stated above, Section 3E(g) of the 
Exchange Act extends customer protection under the stockbroker 
liquidation provisions to all cleared security-based swap 
counterparties and to all non-cleared security-based swap 
counterparties, with respect to which there is a customer protection 
requirement under Section 15(c)(3) of the Exchange Act.\543\ Therefore, 
all security-based swap counterparties of a foreign security-based swap 
dealer that is a registered broker-dealer are customers under the 
stockbroker liquidation provisions.\544\ In the absence of a Commission 
requirement that a foreign security-based swap dealer that is a 
registered broker-dealer segregate all cleared security-based swap 
counterparties' collateral, if such an entity were liquidated pursuant 
to SIPA, the amount of assets segregated could be less than the 
combined priority claims of all security-based swap customers, 
potentially resulting in losses to customers. Therefore, the Commission 
proposes to subject a foreign security-based swap dealer who is a 
registered broker-dealer to segregation requirements set forth in 
Section 3E of the Exchange Act, and rules and regulations thereunder, 
with respect to assets received from all counterparties to secure 
cleared security-based swaps.
---------------------------------------------------------------------------

    \542\ Proposed Rule 18a-4(e)(2)(i) under the Exchange Act.
    \543\ See Section III.C.4(b)ii.b, supra.
    \544\ A non-cleared security-based swap counterparty would be a 
customer of a foreign security-based swap dealer that is a 
registered broker-dealer and have a pro rata priority claim to 
customer property under the stockbroker liquidation provisions 
unless it affirmatively waives segregation altogether by executing 
an unconditional subordination agreement pursuant to proposed Rule 
18a-4(d)(ii) under the Exchange Act, or elects individual 
segregation pursuant to Section 3E(f) of the Exchange Act by 
executing a conditional subordination agreement pursuant to proposed 
Rule 18a-4(d)(i) under the Exchange Act.
---------------------------------------------------------------------------

ii. Foreign Security-Based Swap Dealer That Is Not a Registered Broker-
Dealer and Is Not a Foreign Bank With Branch or Agency in the United 
States
    If a foreign security-based swap dealer is not a registered broker-
dealer and is not a foreign bank that has a branch or agency (as 
defined in Section 1(b) of the International Banking Act of 1978) in 
the United States, such foreign security-based swap dealer may be 
eligible to be

[[Page 31022]]

a debtor under Chapter 7 of the U.S. Bankruptcy Code and may therefore 
be subject to the stockbroker liquidation provisions in the U.S. 
Bankruptcy Code.\545\ As stated above, Section 3E(g) of the Exchange 
Act provides ``customer'' status to all counterparties to cleared 
security-based swaps, making no distinction between U.S. customers or 
counterparties and non-U.S. person customers or counterparties.\546\ 
Therefore, in the case where such foreign security-based swap dealer 
receives any assets from, for, or on behalf of a U.S. person customer 
to margin, guarantee, or secure security-based swaps, if the Commission 
were to apply the segregation requirements only to assets posted by 
U.S. person customers but not to assets posted by non-U.S. person 
customers, in a stockbroker liquidation proceeding of such foreign 
security-based swap dealer, the assets segregated (i.e., assets posted 
by U.S. person customers) could be insufficient to satisfy the combined 
priority claims of both U.S person and non-U.S. person customers, 
potentially resulting in losses to U.S. person customers. As stated 
above, the Commission preliminarily believes that Section 3E intends to 
provide customer protection to U.S. person counterparties and apply 
segregation requirements in a way that would protect the U.S. financial 
system and counterparties in the United States. Therefore, the 
Commission proposes to apply segregation requirements described in 
Section 3E of the Exchange Act, and the rules and regulations 
thereunder, to a foreign security-based swap dealer that is not a 
registered broker-dealer and is not a foreign bank with a branch or 
agency in the United States with respect to assets received from both 
U.S. person counterparties and non-U.S. person counterparties if such 
foreign security-based swap dealer receives collateral from U.S. person 
counterparties to secure security-based swaps.\547\
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    \545\ See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C. 
109(b).
    \546\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741(2).
    \547\ Proposed Rule 18a-4(e)(2)(ii) under the Exchange Act.
---------------------------------------------------------------------------

iii. Foreign Security-Based Swap Dealer That is Not a Registered 
Broker-Dealer and is a Foreign Bank With Branch or Agency in the United 
States
    Finally, if a foreign security-based swap dealer is not a 
registered broker-dealer and is a foreign bank that has a branch or 
agency in the United States, it is not eligible to be a debtor under 
Chapter 7 and will therefore not be subject to the stockbroker 
liquidation provisions of the U.S. Bankruptcy Code \548\ and its 
insolvency proceeding in the United States would be administered under 
banking regulations.\549\ Consistent with the objective of protecting 
U.S. person counterparties, the Commission is proposing that such 
foreign security-based swap dealer shall be subject to the segregation 
requirements set forth in Section 3E of the Exchange Act, and the rules 
and regulations thereunder, with respect to any assets received from, 
for or on behalf of a counterparty who is a U.S. person to margin, 
guarantee, or secure a cleared security-based swap, but shall not be 
required to segregate assets received from, for or on behalf of all 
other counterparties to margin, guarantee, or secure a cleared 
security-based swap.\550\ The special account maintained by the foreign 
security-based swap dealer shall be designated for the exclusive 
benefit of U.S. person security-based swap customers. The Commission 
preliminarily believes that imposing segregation requirements on such 
foreign security-based swap dealer when it receives collateral from 
U.S. person counterparties would reduce the likelihood of U.S. person 
counterparties incurring losses by helping identify U.S. customers' 
assets in an insolvency proceeding of such foreign security-based swap 
dealer in the United States and would potentially minimize disruption 
to the U.S. security-based swap market, thereby producing potential 
benefits to the U.S. financial system and U.S. counterparties that are 
consistent with the objectives of the Dodd-Frank Act. For the same 
reason, the Commission preliminarily does not believe that extending 
segregation requirements and customer protection to such foreign 
security-based swap dealer's transactions with non-U.S. persons would 
advance the purposes of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \548\ See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C. 
109(b).
    \549\ See 12 U.S.C. 1821-25. Whereas insured deposit 
institutions would be resolved under the Federal Deposit Insurance 
Act, uninsured U.S. branches of foreign banks would be resolved 
under either relevant state statutes, in the case of uninsured state 
branches, or the International Banking Act, in the case of uninsured 
federal branches.
    \550\ Proposed Rule 18a-4(e)(2)(iii) under the Exchange Act.
---------------------------------------------------------------------------

d. Disclosure
    In addition to the proposed rules described above relating to 
application of the segregation requirements to foreign security-based 
swap dealers, the Commission also is proposing to require foreign 
security-based swap dealers to make certain disclosures.\551\ Since the 
treatment of the special account under Sections 3E(b) and (g) or 
individually segregated assets pursuant to Section 3E(f) of the 
Exchange Act in insolvency proceedings of a foreign security-based swap 
dealer may vary depending on the status of the foreign security-based 
swap dealer and the insolvency proceedings such foreign security-based 
swap dealer is subject to, the Commission proposes to require a foreign 
security-based swap dealer to disclose to each counterparty that is a 
U.S. person, prior to accepting any assets from, for, or on behalf of 
such counterparty to margin, guarantee, or secure a security-based 
swap, the potential treatment of the assets segregated by such foreign 
security-based swap dealer pursuant to Section 3E of the Exchange Act, 
and the rules and regulations thereunder, in insolvency proceedings 
relating to such foreign security-based swap dealer under U.S. 
bankruptcy law and applicable foreign insolvency laws. Pursuant to this 
proposed rule, the Commission intends to require that a foreign 
security-based swap dealer disclose whether it is subject to the 
segregation requirement set forth in Section 3E of the Exchange Act, 
and the rules and regulations thereunder, with respect to the assets 
collected from the U.S. person counterparty who will receive the 
disclosure, whether the foreign security-based swap dealer could be 
subject to the stockbroker liquidation provisions in the U.S. 
Bankruptcy Code, whether the segregated assets could be afforded 
customer property treatment under the U.S. bankruptcy law, and any 
other relevant considerations that may affect the treatment of the 
assets segregated under Section 3E of the Exchange Act in insolvency 
proceedings of a foreign security-based swap dealer.\552\ Since the 
proposed rule regarding application of the segregation requirements in 
the cross-border context is designed to advance the goals of protecting 
U.S. person counterparties, the Commission believes that such 
disclosure would enhance U.S. person counterparty protection and the 
objectives that segregation requirements intend to achieve in the 
context of cross-border security-based swap dealing.
---------------------------------------------------------------------------

    \551\ Proposed Rule 18a-4(e)(3) under the Exchange Act.
    \552\ Proposed Rule 18a-4(e)(3) under the Exchange Act.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed rule 
regarding the application of transaction-

[[Page 31023]]

level requirements relating to customer protection and segregation, 
including the following:
     What, if any, are the likely competitive effects, within 
the U.S. security-based swap market and among U.S. security-based swap 
dealers, of the proposed approach for foreign security-based swap 
dealers? Please describe the specific nature of any such effects.
     Should a foreign security-based swap dealer automatically 
be eligible for the proposed approach by virtue of being a nonresident 
entity? Alternatively, should the Commission consider other factors, 
such as the share of the foreign security-based swap dealer's business 
that constitutes U.S. Business, in determining how to apply 
transaction-level requirements?
     From an operational perspective, what types of internal 
controls would be necessary to identify Foreign Business and U.S. 
Business and ensure that the foreign security-based swap dealer 
complies with the external business conduct standards with respect to 
its U.S. Business? Should U.S. Business be generally defined with 
reference to the type of activity that, if performed in a dealing 
capacity, triggers the registration requirement?
     Does the proposed approach appropriately classify entity-
level and transaction-level requirements? Does it appropriately 
identify those transaction-level requirements that relate to the 
operation of the security-based swap dealer on an entity level? If not, 
please identify those requirements that should be classified 
differently and how doing so is consistent with the goals of Title VII.
     To what extent would foreign security-based swap dealers 
in various jurisdictions be prohibited from complying, under local law, 
with the Commission's requirements to provide the Commission with 
prompt access to their books and records and to submit to onsite 
inspection and examination by the Commission? If there are limitations, 
what are they, and under what circumstances would they arise? Are there 
other entity-level requirements that foreign security-based swap 
dealers would not be permitted to comply with under local law? If so, 
what are they?
     Should the external business conduct rules apply in 
transactions between a registered non-U.S. security-based swap dealer 
and foreign branches of a U.S. bank?
     Should the external business conduct rules apply in 
transactions between a registered non-U.S. security-based swap dealer 
and non-U.S. persons with U.S. guarantees in transactions outside the 
United States?
     Does the proposed application of the business conduct 
standards in the cross-border context appropriately implement the 
business conduct standards as described in Section 15F(h) of the 
Exchange Act?
     As described above, the Commission does not, at this time, 
propose to apply the business conduct standards in Section 15F(h) of 
the Exchange Act, and the rules and regulations thereunder (other than 
the rules and regulations relating to diligent supervision prescribed 
by the Commission pursuant to Section 15F(h)(1)(B)), to the Foreign 
Business of registered security-based swap dealers. Should such 
standards apply to the Foreign Business of registered security-based 
swap dealers? Would such application of business conduct standards 
further the goals of Title VII of the Dodd-Frank Act?
     Should the Commission apply rules and regulations pursuant 
to Section 15F(h)(1)(A) of the Exchange Act relating to fraud, 
manipulation, and other abusive practices involving security-based 
swaps (including security-based swaps that are offered but not entered 
into) to the Foreign Business of registered foreign security-based swap 
dealers?
     Should the Commission apply rules and regulations pursuant 
to Section 15F(h)(1)(C) of the Exchange Act relating to position limits 
to the Foreign Business of foreign security-based swap dealers?
     Should the proposed rule relating to conflicts of interest 
set forth in Section 15F(j)(5) of the Exchange Act apply to both the 
U.S. Business and Foreign Business of security-based swap dealers?
     Does the proposed approach appropriately treat the rules 
and regulations prescribed by the Commission relating to diligent 
supervision pursuant to Section 15F(h)(1)(B) as entity-level 
requirements applicable to both the U.S. Business and the Foreign 
Business of foreign security-based swap dealers? Why or why not?
     Is it appropriate that the proposed rule does not apply 
future rules and regulations that the Commission may prescribe pursuant 
to Section 15F(h)(1)(A) of the Exchange Act relating to fraud, 
manipulation, and other abusive practices involving security-based 
swaps (including security-based swaps that are offered but not entered 
into) to the Foreign Business of foreign security-based swap dealers? 
Why or why not?
     Is it appropriate that the proposed rule does not apply 
future rules and regulations that the Commission may prescribe pursuant 
to Section 15F(h)(1)(C) of the Exchange Act relating to position limits 
to the Foreign Business of foreign security-based swap dealers? Why or 
why not?
     Does the proposed approach appropriately treat the 
requirements relating to conflicts of interest set forth in Section 
15F(j)(5) of the Exchange Act as entity-level requirements applicable 
to both the U.S. Business and Foreign Business of foreign security-
based swap dealers? If not, please identify any requirements that 
should not be applied to a foreign security-based swap dealer and 
explain how such an approach would be consistent with the goals of 
Title VII. Please identify what the costs or operational challenges 
would be, if any, for a registered security-based swap dealer to 
establish conflict-of-interest systems and procedures that would apply 
to its U.S. Business but not its Foreign Business.
     Does the proposed approach appropriately implement the 
requirements relating to segregation of assets held as collateral in 
Section 3E of the Exchange Act, and rules and regulations thereunder, 
in light of various statuses of foreign security-based swap dealers?
     Should the Commission apply segregation requirements to a 
foreign security-based swap dealer that is not subject to the 
stockbroker liquidation provisions in the U.S. Bankruptcy Code? If not, 
what are the reasons for not applying segregation requirements? If the 
segregation requirements do not apply, how would the objective of 
customer protection be achieved?
     Should the Commission adopt the disclosure requirement 
with respect to foreign security-based swap dealers? Why or why not? Is 
the proposed disclosure requirement feasible? What would the 
difficulties be in complying with the proposed disclosure requirement?
     The CFTC has proposed an interpretation that would 
effectively treat a non-U.S. person whose obligations are guaranteed by 
a U.S. person as a U.S. person for purposes of determining whether a 
swap between it and a non-U.S. swap dealer or major swap participant 
would be subject to transaction-level requirements as interpreted by 
the CFTC to include, without limitation, margin and segregation 
requirements, reporting, clearing, and trade execution.\553\ Should the 
Commission adopt a similar approach? What would be the effects on 
efficiency, competition and capital

[[Page 31024]]

formation in the event that there are overlapping or duplicative 
requirements across multiple jurisdictions?
---------------------------------------------------------------------------

    \553\ See CFTC Cross-Border Proposal, 77 FR 41228-29.
---------------------------------------------------------------------------

     In addition, the CFTC has proposed an interpretation that 
includes a description of a ``conduit affiliate'' that includes: (1) a 
non-U.S. person that is majority-owned, directly or indirectly, by a 
U.S. person where (2) the non-U.S. person regularly enters into swaps 
with one or more U.S. affiliates or subsidiaries of the U.S. person, 
and (3) the financial statements of the non-U.S. person are included in 
the consolidated financial statements of the U.S. person.\554\ Conduit 
affiliates would be subject to transaction-level requirements as if 
they were U.S. persons. Should the Commission consider a similar 
approach?
---------------------------------------------------------------------------

    \554\ See id. at 41229.
---------------------------------------------------------------------------

     The CFTC's proposed interpretation would subject foreign 
branches of U.S.-based bank swap dealers and major swap participants to 
the CFTC's entity-level requirements and transaction-level requirements 
(other than external business conduct standards for swaps with non-U.S. 
persons), provided that foreign branches would be eligible for a 
limited exception in emerging markets where foreign regulations are not 
comparable.\555\ Should the Commission consider a similar approach? If 
so, please explain how such an approach would be consistent with the 
goals of Title VII.
---------------------------------------------------------------------------

    \555\ See id. at 41230-31.
---------------------------------------------------------------------------

     What would be the market impact of the proposed approach 
to application of the transaction-level requirements relating to 
customer protection and segregation? How would the proposed application 
of transaction-level requirements affect the competitiveness of U.S. 
entities in the global marketplace (both in the United States as well 
as in foreign jurisdictions)? Would the proposed approach place any 
market participants at a competitive disadvantage or advantage? If so, 
please explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the transaction-level requirements? 
What would be the market impacts and competitiveness effects of 
alternatives to the proposed approach discussed in this release?
5. Application of Entity-Level Rules
(a) Introduction
    As noted above, by their very nature, entity-level requirements 
apply to the operation of a security-based swap dealer as a whole. The 
Commission recognizes that the capital, margin, and other entity-level 
requirements that it adopts could have a substantial impact on 
international commerce and the relative competitive position of 
intermediaries operating in various, or multiple, jurisdictions. In 
particular, if these requirements are substantially more or less 
stringent than corresponding requirements, if any, that apply to 
intermediaries operating in security-based swap markets outside the 
United States, depending on how the rules are written, these 
differences could impact the ability of firms based in the United 
States to participate in non-U.S. markets, access to U.S. markets by 
foreign-based firms, and how and whether international firms make use 
of global ``booking entities'' to centralize risks related to security-
based swaps, among other possible impacts. These issues have been the 
focus of numerous comments to the Commission and other regulators, as 
discussed above, as well as Congressional inquiries and other public 
dialogue.
(b) Proposed Approach
    The Commission is not proposing to provide specific relief for 
foreign security-based swap dealers from Title VII entity-level 
requirements, although, as discussed in Section XI below, under a 
Commission substituted compliance determination, a foreign security-
based swap dealer would be able to satisfy relevant Title VII entity-
level requirements by substituting compliance with corresponding 
requirements under a foreign regulatory system.\556\ The Commission 
preliminarily believes that entity-level requirements are core 
requirements of the Commission's responsibility to ensure the safety 
and soundness of registered security-based swap dealers.\557\ The 
Commission preliminarily believes that it would not be consistent with 
this mandate to provide a blanket exclusion to foreign security-based 
swap dealers from entity-level requirements applicable to such 
entities.\558\
---------------------------------------------------------------------------

    \556\ See Section XI, infra.
    \557\ See note 419, supra.
    \558\ We preliminarily believe that the proposed approach with 
respect to entity-level requirements is not being applied to persons 
who are ``transact[ing] a business in security-based swaps without 
the jurisdiction of the United States,'' within the meaning of 
Section 30(c) of the Exchange Act. See Section II.B.2(a), supra. 
However, the Commission also preliminarily believes that the 
proposed approach with respect to entity-level requirements is 
necessary or appropriate to help prevent the evasion of the 
particular provisions of the Exchange Act that were added by the 
Dodd-Frank Act that are being implemented by the proposed approach 
and prophylactically will help ensure that the purposes of those 
provisions of the Dodd-Frank Act are not undermined. See Section 
II.B.2(e), supra; see also Section II.B.2(c), supra.
    For example, if entity-level requirements do not apply to the 
entire business of a registered foreign security-based swap dealer, 
then U.S. security-based swap dealers would have an incentive to 
evade the full application of the entity-level requirements by 
moving their operations outside the United States. In this event, 
assuming the scope of the security-based swap dealers dealing 
activity remained unchanged, the risk presented by the entity to its 
U.S. counterparties and the U.S. financial system would remain 
unchanged. If, for instance, Title VII margin requirements did not 
apply to the entire entity, these entities could accumulate risk 
through their non-U.S. dealing activity and transmit that risk to 
U.S. counterparties in contravention of the purposes of the 
financial responsibility framework established by the Dodd-Frank 
Act. See Section III.C.3(b)ii, supra.
---------------------------------------------------------------------------

    For example, capital requirements play an essential role in 
ensuring the safety and soundness of security-based swap dealers. As 
discussed above, the Commission's proposed capital rules for nonbank 
security-based swap dealers are modeled on the net liquid assets test 
found in the capital requirements applicable to broker-dealers.\559\ We 
believe that this capital standard is necessary to ensure the safety 
and soundness of nonbank security-based swap dealers, and thus we are 
not proposing to exclude foreign nonbank security-based swap dealers 
from our capital rules. In addition, we believe that the capital, 
margin, and other entity-level requirements proposed and adopted by the 
Commission work together to provide a comprehensive regulatory scheme 
that is vital for ensuring the safety and soundness of registered 
security-based swap dealers, and that the benefits of Title VII's 
entity-level requirements are equally important to both foreign and 
U.S. dealers registered with the Commission. As a result, we are not 
proposing to provide specific relief from individual entity-level 
requirements for foreign dealers.
---------------------------------------------------------------------------

    \559\ See Section III.C.3(b)i, supra.
---------------------------------------------------------------------------

    We do, however, recognize the concerns raised by commenters 
regarding the application of entity-level requirements to foreign 
security-based swap dealers.\560\ We preliminarily believe that these 
concerns are largely addressed through the Commission's overall 
proposed approach to substituted compliance in the context of Title 
VII, which is discussed in detail in Section XI below. In general, the 
Commission is proposing a framework under which it may permit a 
registered foreign security-based swap dealer (or class thereof) to 
satisfy the capital, margin, and other requirements in Section 15F of 
the Exchange Act, and the rules and regulations thereunder, by

[[Page 31025]]

complying with the corresponding requirements established by its 
foreign financial regulatory authority,\561\ subject to certain 
conditions.\562\ We preliminarily believe that providing foreign 
security-based swap dealers with the possibility of substituted 
compliance in this way will help address concerns related to 
competitiveness and overlapping regulations related to entity-level 
requirements, while still ensuring that registered foreign security-
based swap dealers are subject to appropriate regulatory oversight.
---------------------------------------------------------------------------

    \560\ See, e.g., Davis Polk Letter II at 4-20; Sullivan & 
Cromwell Letter at 14-15.
    \561\ Section 3(a)(52) of the Exchange Act, 15 U.S.C. 
78c(a)(52), defines ``foreign financial regulatory authority'' as 
``any (A) foreign securities authority, (B) other governmental body 
or foreign equivalent of a self-regulatory organization empowered by 
a foreign government to administer or enforce its laws relating to 
the regulation of fiduciaries, trusts, commercial lending, 
insurance, trading in contracts of sale of a commodity for future 
delivery, or other instruments traded on or subject to the rules of 
a contract market, board of trade, or foreign equivalent, or other 
financial activities, or (C) membership organization a function of 
which is to regulate participation of its members in activities 
listed above.'' The term ``foreign securities authority'' is defined 
in Section 3(a)(50) of the Exchange Act as ``any foreign government, 
or any governmental body or regulatory organization empowered by a 
foreign government to administer or enforce its laws as they relate 
to securities matters.''
    \562\ Proposed Rule 3a71-5 under the Exchange Act. As discussed 
in Section II.C.3(b) above, the Commission has authority to 
establish capital and margin requirements only for registered 
nonbank security-based swap dealers. For treatment of the capital 
and margin requirements for foreign bank security-based swap 
dealers, see Prudential Regulator Margin and Capital Proposal, 76 FR 
27564.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
interpretive guidance regarding the proposed provision of substituted 
compliance for certain requirements in Section 15F of the Exchange Act 
for foreign security-based swap dealers, including the following:
     What types of conflicts might a foreign security-based 
swap dealer face if subjected to capital requirements in more than one 
jurisdiction? In what situations would compliance with more than one 
capital requirement be difficult or impossible?
     Should the Commission provide specific relief to foreign 
security-based swap dealers with respect to entity-level requirements? 
If so, please indicate the specific relief that should be provided and 
the rationale for providing such relief.
     Would the provision of relief from entity-level 
requirements undermine the Commission's efforts to set capital 
requirements to ensure the safety and soundness of security-based swap 
dealers, as required by Section 15F(e)(2)(C) of the Exchange Act? Why 
or why not?
     Should the Commission treat margin as an entity-level 
requirement or a transaction-level requirement? If only a transaction-
level requirement, why?
     Should the Commission consider providing relief for 
foreign security-based swap dealers from the statutory disqualification 
requirement in Section 15F(b)(6) of the Exchange Act with respect to 
their transactions with non-U.S. persons? For example, should the 
Commission permit associated persons of a foreign security-based swap 
dealer that are subject to a statutory disqualification to conduct 
security-based swap activity with non-U.S. persons outside the United 
States? If so, why?
     The CFTC has proposed an interpretation that categorizes 
certain entity-level requirements and transaction-level requirements 
differently when compared to the Commission's proposed approach.\563\ 
For example, the CFTC has proposed classifying margin requirements 
applicable to uncleared swaps as a transaction-level requirement, where 
the Commission has proposed categorizing margin as an entity-level 
requirement. Should the Commission adopt portions of the CFTC's 
approach to categorization? If so, which requirements should be re-
categorized and why?
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    \563\ See CFTC Cross-Border Proposal, 77 FR 41223-27.
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     What would be the market impact of the proposed approach 
to applying entity-level requirements to registered foreign security-
based swap dealers? How would the proposed application of the entity-
level requirements affect the competitiveness of U.S. entities in the 
global marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the entity-level requirements? What 
would be the market impacts and competitiveness effects of alternatives 
to the proposed approach discussed in this release?

D. Intermediation

1. Introduction
    Security-based swap dealers currently use a variety of business 
models and legal structures to do business with customers in 
jurisdictions around the world. For instance, many security-based swap 
dealers with global businesses use local personnel to provide security-
based swap services to customers in a particular jurisdiction while 
booking transactions originated from multiple jurisdictions in a single 
entity (i.e., a centralized booking model). Some security-based swap 
dealers also use unique organizational structures to provide local 
customers with access to market or product specialists in other 
jurisdictions. As discussed below, commenters have indicated that, in 
the U.S. market, these scenarios are particularly prevalent in the case 
of foreign security-based swap dealers seeking access to U.S. customers 
or providing non-U.S. customers with expertise from employees located 
in the United States.\564\
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    \564\ See, e.g., IIB Letter at 15 (``Perhaps more commonly, a 
foreign bank may transact in swaps as a dealer with U.S. customers 
through a separate U.S. branch, agency, or affiliate that 
intermediates the transactions as agent for the foreign bank. This 
is often because, to facilitate strong relationships with U.S. 
customers, the personnel who solicit and negotiate with U.S. 
customers and commit a foreign bank to swaps are located in the 
U.S.'').
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    In the following discussion, we briefly describe comments received 
regarding various intermediation models. Throughout this release we use 
the term ``intermediation'' generally to refer to origination activity 
(e.g., solicitation and negotiation of transactions) in connection with 
a security-based swap transaction.
2. Comment Summary
    Commenters stated that foreign security-based swap dealers use 
different types of business models to service U.S. customers and 
provide their global customer base with specialized information, while 
at the same time reducing both customer costs and entity risks through 
centralized netting and risk management of their global security-based 
swap businesses.\565\ In

[[Page 31026]]

support of these perceived benefits, commenters have urged the 
Commission not to apply Title VII to cross-border transactions in a way 
that would either prohibit or disincentivize the existing security-
based swap dealing business models of foreign security-based swap 
dealers.\566\
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    \565\ See, e.g., IIB Letter at 6 (``Globally, there are a number 
of paradigms under which swap activity is conducted. To achieve the 
benefits of reduced risk and increased liquidity and efficiency 
associated with netting and margining on a portfolio basis, foreign 
banks (like their U.S. domestic counterparts) typically seek to 
transact with swap counterparties globally, to the extent feasible, 
through a single, highly creditworthy entity. In many cases, 
however, the personnel who have relationships with U.S. customers or 
who manage the market risk of the foreign bank's swap portfolio are 
located regionally, outside the jurisdiction in which the foreign 
bank is domiciled. In some cases, entities other than the foreign 
bank (such as a U.S. branch, agency, or affiliate) transact with 
local customers in order to satisfy unique customer documentation, 
insolvency, tax, regulatory, or other considerations.); Davis Polk 
Letter I at 2-3 (suggesting that ``operating and managing a global 
swaps business out of a single booking entity presents many 
advantages from the perspective of foreign banks, customers and 
supervisors,'' including reduction in system risk, maximization of 
benefits of counterparty netting for customers, and consolidated 
supervision); Cleary IV at 3-4 (stating that the represented firms 
``conduct their swap dealing businesses through a variety of 
structures, based on multiple and in many cases interdependent 
legal, strategic and business considerations that pre-date Dodd-
Frank,'' and urging the Commissions to address a number of ``common 
cross-border transaction structures'').
    \566\ See, e.g., IIB Letter at 6-7 (``[T]he Commissions should 
establish a framework for cross-border swap activities that 
preserves and leverages the strengths of existing market practices 
and home country supervision and regulation.''); Cleary IV at 3-4 
(urging the Commissions to give consideration to a number of common 
cross-border transaction structures in deciding how to implement 
Title VII).
---------------------------------------------------------------------------

    A number of commenters recommended that a foreign dealer that 
engages in security-based swap transactions with U.S. counterparties, 
but only through U.S. registered swap or security-based swap dealers, 
should not be subject to security-based swap dealer registration.\567\ 
One commenter stated that in such situations, the Commission should 
either not require security-based swap dealer registration of the non-
U.S. security-based swap dealer at all, or require a limited 
registration, whereby the non-U.S. security-based swap dealer would be 
subject to only capital and related prudential requirements and be 
permitted to rely on comparable home country regulation.\568\ In 
situations where a foreign security-based swap dealer uses a U.S. 
domiciled subsidiary or affiliate as its agent to solicit and negotiate 
the terms of security-based swap transactions, several commenters 
suggested that the Commission allow for a bifurcated registration and 
regulation framework allowing the foreign security-based swap dealer to 
comply with Title VII's requirements by registering both the foreign 
dealer and its agent in limited capacities and allocating the 
compliance responsibilities between the two entities.\569\ Other 
commenters remarked that the foreign security-based swap dealer should 
remain ultimately responsible for ensuring compliance with all the 
applicable Title VII requirements whether or not the regulated 
activities were carried out by the foreign security-based swap dealer 
or its agent.\570\
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    \567\ See, e.g., Financial Services Roundtable Letter at 25 
(suggesting that ``entities that would meet the definition of `swap 
dealer' based on their non-U.S. activity, but that act in the U.S. 
only on an intermediated basis through a regulated U.S. swap dealer, 
should not be subject to U.S. regulation''); Davis Polk Letter II at 
4, 7 (discussing reasons to exclude dealing activities with U.S.-
registered swap dealers, including because ``a swap between a 
foreign dealer and a U.S. registered swap dealer would be already 
subject to Title VII by the virtue of the latter's involvement'').
    \568\ See Cleary Letter IV at 3-4 (recommending that the 
Commission either adopt an approach similar to the broker-dealer 
registration regime, ``under which a non-U.S. swap dealer 
transacting with U.S. persons . . . intermediated by an affiliated 
U.S.-registered swap dealer'' would not have to register as a swap 
dealer or a major swap participant, or adopt a limited registration 
approach whereby ``the non-U.S. swap dealer would be subject to U.S. 
swap dealer registration and regulation solely with respect to the 
capital and related prudential requirements relevant to its status 
as a swap counterparty, which requirements could be satisfied 
through compliance with comparable home country requirements'').
    \569\ See, e.g., Soci[eacute]t[eacute] G[eacute]n[eacute]rale 
Letter I at 4-6 (suggesting a bifurcated registration model allowing 
foreign banks to centrally book their U.S. swap and security-based 
swap business with a registered ``Foreign Swap Dealer'' who is 
responsible for obligations associated with a booking entity (e.g., 
complying with capital requirements), while complying with most of 
Title VII's regulations through a U.S. domiciled, registered ``Non-
Booking Swap Dealer''); and Davis Polk Letter II at 4-22 (proposing 
two registration scenarios, including one that would require a 
foreign bank to register with the Commission solely as a booking 
center for security-based swap transactions, while a U.S. affiliate 
of a foreign bank would also register with the Commission, and the 
foreign bank's obligations under Title VII would be divided between 
the two registered entities).
    \570\ See, e.g., Cleary Letter IV at 12 (recommending a limited 
designation registration whereby ``the branch, department or 
division of a registrant involved in the regulated swap activity 
should be responsible for compliance with Dodd-Frank's 
requirements,'' but allowing for the outsourcing of ``performance 
(but not responsibility for due performance) of those requirements 
to a U.S. affiliate that is registered as an introducing broker, 
futures commission merchant (``FCM'') and/or securities broker-
dealer''); Rabobank Letter at 3 (suggesting that ``the non-U.S. 
branch registrant would use one or more U.S. affiliates as agents in 
arranging swaps with U.S. persons and would be permitted to delegate 
certain compliance functions to its U.S. affiliates, although such 
delegation would not relieve the non-U.S. branch registrant of its 
ultimate compliance responsibilities'').
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3. Discussion
    The Commission is not at this time proposing any specific rules 
regarding security-based swap dealing activities undertaken through 
intermediation. At the same time, we recognize the importance of 
intermediation, particularly with respect to foreign security-based 
swap dealers accessing U.S. customers or product specialists located in 
the United States. Based on the Commission's experience in the 
securities markets, we expect that many foreign security-based swap 
dealers will operate within the U.S. market by utilizing their U.S. 
affiliates or other U.S. entities as agents \571\ in the United States, 
while booking transactions facilitated by such U.S. personnel in a 
central booking entity located abroad. We preliminarily believe that 
the approach proposed in this release for the cross-border regulation 
of security-based swap dealing activity will not impede the use of 
these types of intermediation business models by foreign security-based 
swap dealers. More specifically, we believe that the Commission's 
proposed approach to the application of transaction-level requirements 
related to Foreign Business \572\ and proposed framework for 
substituted compliance on entity-level requirements \573\ should help 
to address commenter concerns that a foreign security-based swap dealer 
engaging in Foreign Business would be subject to potentially 
duplicative and conflicting transaction-level requirements in a foreign 
jurisdiction with respect to its Foreign Business.
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    \571\ The Commission previously proposed new Rule 15Fh-2(d), 
which would provide that the term ``security-based swap dealer'' 
would include, where relevant, an ``associated person'' of the 
security-based swap dealer. See External Business Conduct Standards 
Proposing Release, 76 FR 42402. Section 3(a)(70) of the Exchange 
Act, as added by Section 761(a)(6), defines the term ``person 
associated with a security-based swap dealer or major security-based 
swap participant'' as ``(i) any partner, officer, director, or 
branch manager of such security-based swap dealer or major security-
based swap participant (or any person occupying a similar status or 
performing similar functions); (ii) any person directly or 
indirectly controlling, controlled by, or under common control with 
such security-based swap dealer or major security-based swap 
participant; or (iii) any employee of such security-based swap 
dealer or major security-based swap participant.'' The term does not 
include, however, any person associated with a security-based swap 
dealer or major security-based swap participant ``whose functions 
are solely clerical or ministerial.'' See id.
    As the Commission noted, to the extent that a security-based 
swap dealer acts through, or by means of, an associated person of 
that security-based swap dealer, the associated person must comply 
as well with the applicable business conduct standards. See External 
Business Conduct Standards Proposing Release, 76 FR 42402-3. In 
support of this position, the Commission cited Section 20(b) of the 
Exchange Act, which provides that ``[i]t shall be unlawful for any 
person, directly or indirectly, to do any act or thing which it 
would be unlawful for such person to do under the provisions of this 
title or any rule or regulation thereunder through or by means of 
any other person.''
    \572\ See Section III.C.4, supra.
    \573\ See Section III.C.5, supra, and Section XI, infra.
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    While the foreign security-based swap dealer would remain 
responsible for ensuring that all relevant Title VII requirements 
applicable to a given security-based swap transaction are fulfilled, 
the dealer and its agent(s) may choose to allocate the specific 
responsibilities such as taking responsibility that all U.S. external

[[Page 31027]]

business conduct requirements are complied with, margin is collected 
and segregated, and required trading records are maintained and 
available, to be undertaken by each entity depending on the 
intermediation model it adopts.\574\
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    \574\ The agent, in these circumstances, would need to consider 
whether it separately would need to register as a security-based 
swap dealer (if, for example, the agent acted as principal in a 
security-based swap with the counterparty, and then entered into a 
back-to-back transaction with the booking entity), a broker (e.g., 
by soliciting or negotiating the terms of security-based swap 
transactions), or other regulated entity. Further, the allocation of 
functions between a foreign security-based swap dealer and a U.S. 
agent would not affect the aggregation calculation for determining 
whether the foreign security-based swap dealer exceeded the de 
minimis threshold. See Section III.B.3(c), supra.
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    Further, although a foreign security-based swap dealer could use an 
entity that is not a security-based swap dealer to act as its agent, 
the foreign security-based swap dealer would nonetheless be responsible 
for ensuring compliance with all the requirements applicable to 
security-based swap dealers under Title VII (and the federal securities 
laws) whether or not the regulated activities were carried out by the 
foreign security-based swap dealer or its non-security-based swap 
dealer agent.\575\
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    \575\ See note 574, supra.
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Request for Comment
    The Commission requests comment on all aspects of the proposed 
approach to intermediation. In addition, the Commission requests 
comment in response to the following questions:
     Should the Commission revise our proposed approach to 
address directly the concerns of entities using the intermediation 
model to access the U.S. market? If so, what type of approach should 
the Commission use to address these concerns consistent with the 
protection of counterparties' interests and the purposes of Title VII?
     Should the Commission adopt a model on intermediation 
similar to the approach laid out in Rule 15a-6(a)(3) (17 CFR 240.15a-
6(a)(3)) governing foreign broker-dealers, which would permit non-U.S. 
persons to conduct security-based swap dealing activity within the 
United States without registering with the Commission if those 
transactions were intermediated by a registered U.S. security-based 
swap dealer? If so, how would it work in the security-based swap 
context, and how would it address Title VII policy concerns?
     What would be the market impact of the proposed approach 
to intermediation? How would the application of the proposed approach 
to intermediation affect the competitiveness of U.S. entities in the 
global marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach to 
intermediation? What would be the market impacts and competitiveness 
effects of alternatives to the proposed approach discussed in this 
release?

E. Registration Application Re-Proposal

1. Introduction
    As discussed in Section XI.C below, the Commission is proposing a 
rule that would create a framework under which the Commission would 
consider permitting a foreign security-based swap dealer, where 
appropriate, to rely on a substituted compliance determination by the 
Commission with respect to certain of the requirements in Section 15F 
of the Exchange Act and the rules and regulations thereunder.\576\ In 
discussing the application of this proposed framework below, the 
Commission indicated that certain entity-level requirements under 
Section 15F of the Exchange Act may be candidates for substituted 
compliance determinations.\577\
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    \576\ Proposed Rule 3a71-3(c) under the Exchange Act.
    \577\ See Section III.C.5, supra.
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    The Commission preliminarily believes that the most appropriate 
time for a foreign security-based swap dealer to notify the Commission 
of its intention to avail itself of an existing substituted compliance 
determination \578\ would be at the time the foreign security-based 
swap dealer files an application to register with the Commission as a 
security-based swap dealer.\579\ As part of its application, the 
foreign security-based swap dealer would already be providing the 
Commission with detailed information in support of its application. The 
intent of a foreign security-based swap dealer to avail itself of a 
previously granted substituted compliance determination would be 
relevant to the Commission's review of such application because it 
would impact how the Commission will conduct oversight of the security-
based swap dealer. In addition, if a security-based swap dealer 
determines, after it registered with the Commission, that it intends to 
rely on a substituted compliance determination, proposed Rule 15Fb2-3 
would require that it promptly update its application.\580\
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    \578\ The Commission is proposing to establish a separate 
process whereby foreign security-based swap dealers may request that 
the Commission make a substituted compliance determination with 
respect to a particular foreign jurisdiction. See Section XI, infra.
    \579\ The Commission's Registration Proposing Release does not 
use the term ``foreign security-based swap dealer,'' but rather 
references a ``nonresident security-based swap dealer.'' Proposed 
Rule 15Fb2-4(a) under the Exchange Act defines the term 
``nonresident security-based swap dealer'' as a security-based swap 
dealer that is incorporated or organized any place that is not in 
the United States or that has its principal place of business in any 
place not in the United States. See Registration Proposing Release, 
76 FR 65799-801.
    The definition of ``nonresident security-based swap dealer'' in 
proposed Rule 15Fb2-4(a) is similar to, but potentially broader 
than, the definition of ``foreign security-based swap dealer'' in 
proposed Rule 3a71-3(a)(3) under the Exchange Act because it uses 
``or'' instead of ``and'' in the definition. As a result, proposed 
Rule 15Fb2-4(a) would treat a U.S. corporation as a nonresident 
person if its principal place of business were outside the United 
States, whereas proposed Rule 3a71-3(a)(3) would not treat such an 
entity as a U.S. security-based swap dealer and, therefore, it would 
not be able to avail itself of substituted compliance determinations 
applicable to foreign security-based swap dealers.
    The Commission preliminarily believes that defining the term 
``foreign security-based swap dealer'' more narrowly for purposes of 
the proposals in this release is appropriate because proposed Rule 
15Fb2-4(a) uses the term ``nonresident security-based swap dealer'' 
only for determining whether a nonresident security-based dealer 
would be required to appoint an agent for service of process in the 
United States and provide assurance that the Commission would have 
prompt access to books and records in the foreign jurisdiction. In 
proposed Rule 3a71-3(a)(3), by contrast, the definition of ``foreign 
security-based swap dealer'' would be used to determine who would be 
eligible to take advantage of the proposed substituted compliance 
framework, as well as how customer protection and segregation 
requirements would be applied. The Commission does not believe that 
it is appropriate to treat an entity as a foreign security-based 
swap dealer for these purposes if its principal place of business 
were outside the United States but it were incorporated in the 
United States, because of its connection to the U.S. security-based 
swap market. Nonetheless, the Commission would still want the 
assurances required of a ``nonresident security-based swap dealer'' 
described above, even if the dealer is incorporated in the United 
States but has a principal place of business outside the United 
States.
    \580\ See Registration Proposing Release, 76 FR 65822.
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    Accordingly, the Commission preliminarily believes it is 
appropriate to require foreign security-based swap dealers to provide 
additional information in their applications for registration as 
security-based swap dealers, as described below.
    The Commission previously proposed Form SBSE, Form SBSE-A, and Form 
SBSE-BD for the purpose of registering security-based swap dealers and 
major security-based swap participants.\581\ All of these forms are 
generally based on Form BD, which is the consolidated form used by 
broker-dealers to register

[[Page 31028]]

with the Commission, states, and SROs.\582\ Forms SBSE-A and SBSE-BD 
are shorter forms that have been modified to provide a more streamlined 
application process for entities that are registered or registering 
with the CFTC or registered or registering with the Commission as a 
broker-dealer.\583\ Each of these forms is designed to be used to 
gather information concerning a registrant's business operations to 
facilitate the Commission's initial registration decisions, as well as 
ongoing examination and monitoring of registration.'' \584\ While the 
Commission received four comments on the Registration Proposing 
Release, only one specifically expressed views on the Forms SBSE, SBSE-
A, and SBSE-BD.\585\
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    \581\ See id. at 65784.
    \582\ See id. at 65802.
    \583\ See id. at 65804-5.
    \584\ See id. at 65802.
    \585\ See SIFMA Letter II. SIFMA indicated that it appreciated 
``the Commission's attempts to minimize registration burdens by 
aligning its proposed registration requirements for SBSDs and MSBSPs 
with those the CFTC is proposing for swap dealers and major swap 
participants as well as by creating a streamlined registration 
process for entities already registered with the Commission or the 
CFTC,'' and was ``generally pleased that the Commission elected to 
make its existing broker-dealer registration forms the basis for its 
proposed registration requirements for SBSDs and MSBSPs'' because 
``[m]arket participants are familiar with these requirements and 
may, in some cases, be registering broker-dealers as SBSDs.'' 
However, SIFMA did object to ``several of the required disclosures 
on proposed Form SBSE,'' which are substantially similar to 
disclosures required on Form BD, which it claimed would ``impose 
significant burdens on registrants.''
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2. Discussion
    To address the Commission's proposed rule regarding substituted 
compliance, the Commission is re-proposing Forms SBSE, SBSE-A, and 
SBSE-BD to add two questions to Form SBSE and Form SBSE-A, add one 
question to all three Forms, and to modify Schedule F to all the Forms. 
In addition, we are proposing one new instruction to the Forms, which 
is unrelated to substituted compliance, to clarify that if an 
application is not filed properly or completely, it may be delayed or 
rejected.\586\ Key differences from the originally proposed forms are 
discussed more fully below. The Commission is not proposing to modify 
or eliminate any of the other Forms, or any of the rules, proposed in 
the Registration Proposing Release.
---------------------------------------------------------------------------

    \586\ See Instruction B.1.b. on Forms SBSE, SBSE-A, and SBSE-BD.
---------------------------------------------------------------------------

    Re-proposed Forms SBSE and SBSE-A would include two new questions, 
question 3 (which has three parts) and question 6.\587\ The new 
question 3.A. would ask whether an applicant is a foreign security-
based swap dealer that intends to work with the Commission and its 
primary regulator to have the Commission determine whether the 
requirements of its primary regulator's regulatory system are 
comparable to the Commission's, or avail itself of a substituted 
compliance determination previously granted by the Commission with 
respect to the requirements of Section 15F of the Exchange Act and the 
rules and regulations thereunder. If the applicant responds in the 
affirmative to either part of the question, new question 3.B. would 
require that the applicant identify the foreign financial regulatory 
authority that serves as the applicant's primary regulator and for 
which the Commission has made, or may make, a substituted compliance 
determination. If the applicant indicates that it is relying on a 
previously granted substituted compliance determination, new question 
3.C. would require the applicant to describe how it satisfies any 
conditions the Commission may have placed on the use of such 
substituted compliance determination. New question 3 would elicit basic 
information from an applicant to inform the Commission with respect to 
its intent to rely upon a substituted compliance determination.
---------------------------------------------------------------------------

    \587\ The Commission is not proposing to add these questions to 
the Form SBSE-BD, because that form is only applicable to entities 
that are already registered as broker-dealers. These firms would not 
be eligible to rely on a substituted compliance determination 
because the substituted compliance determination only is with 
respect to the requirements in Section 15F of the Exchange Act, not 
the requirements in the Exchange Act to which registered broker-
dealers are subject.
---------------------------------------------------------------------------

    New question 6 would ask whether the applicant is a U.S. branch of 
a non-resident entity. If the applicant responds in the affirmative, 
the applicant would need to identify the non-resident entity and its 
location. This question would provide the Commission with information 
regarding whether the firm would be subject to the rules of the foreign 
regulator or the rules of one of the U.S. banking regulators, which 
would, in turn, elicit which rules may be applicable to the entity's 
U.S. security-based swap business.
    Re-proposed Forms SBSE and SBSE-A would also include new question 
17, which would be identified as new question 15 in re-proposed Form 
SBSE-BD. This new question would ask if the applicant is registered 
with or subject to the jurisdiction of a foreign financial regulatory 
authority. If the applicant answered this question in the affirmative, 
it would be directed to provide additional information on Schedule F as 
discussed below. This question would apply to all applicants, not just 
foreign security-based swap applicants, and would provide the 
Commission with information regarding other regulatory schemes that may 
be applicable to an applicant.
    The proposed revisions to Schedule F would divide Schedule F into 
two sections. Section I would include the full text of the originally 
proposed Schedule F. Section II would elicit additional information 
regarding foreign regulators with which the applicant may be registered 
or that otherwise have jurisdiction over the applicant.
    The Commission preliminarily believes that modifying Forms SBSE, 
SBSE-A, and SBSE-BD (including the changes to Schedule F), as described 
above, would be appropriate because it would provide foreign security-
based swap dealers with a convenient and cost-effective way of 
informing the Commission of their intention to rely on or seek a 
substituted compliance determination, as discussed above. In addition, 
we believe these modifications to our original proposal would provide 
the Commission with additional information necessary to make a 
determination as to whether it is appropriate to grant or institute 
proceedings to deny registration to a person applying to become a non-
resident security-based swap dealer.
Request for Comment
    The Commission requests comment on all aspects of the proposed 
modifications and additions to proposed Forms SBSE, SBSE-A and SBSE-BD 
(including the proposed changes to Schedule F). The Commission also 
specifically requests comment on the following:
     Please explain whether Form SBSE and Form SBSE-A are the 
appropriate places to identify whether an entity is intending to rely 
on a substituted compliance determination. If not, please explain why 
and what other method of notifying the Commission might be appropriate 
as well as when such notification to the Commission should be required 
to be made.
     Please explain whether Forms SBSE, SBSE-A, and SBSE-BD 
(and Schedule F) are the appropriate places to identify whether an 
entity is subject to oversight by a foreign regulator, and if so, which 
regulators. If so, why? If not, why not?
     Should any additional questions be added to Form SBSE to 
elicit information related to a registrant's reliance on a substituted 
compliance determination?
     Should any additional questions be added to Form SBSE-A to 
elicit information related to a registrant's

[[Page 31029]]

reliance on a substituted compliance determination?
     Should Form SBSE-BD also be modified to include any of the 
additional questions the Commission is proposing to include in re-
proposed Form SBSE or Form SBSE-A? If so, which questions and why?
     The Commission previously indicated in the Intermediary 
Definitions Adopting Release that it would consider applications for 
limited purpose designations from the major security-based swap 
participant and security-based swap dealer definitions under Rules 
3a67-1(b) and 3a71-1(c) under the Exchange Act, respectively,\588\ and 
requested comment on this topic in the Registration Proposing 
Release.\589\ Since that time, we have adopted and proposed, both 
jointly with the CFTC and individually, various rules that further 
clarify the regulations that will be applicable to security-based swap 
dealers,\590\ and today we propose a substituted compliance framework 
to potentially address the concerns of foreign security-based swap 
dealers. Given these developments, are there any situations addressed 
by previous comments where limited registration designation would no 
longer be appropriate? Are there any situations, addressed by previous 
comments or otherwise, where a limited registration designation may be 
appropriate for security-based swap dealers? If so, in what situations 
would a limited registration designation be warranted, and how should 
the registration forms be amended to facilitate such limited 
registration? If not, why not?
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    \588\ As we noted in the Intermediary Definitions Adopting 
Release, 77 FR 30643-46 and 30696-97, the Commission will consider 
limited designation applications on an individual basis through 
analysis of the unique circumstances of each applicant, given that 
the types of entities that engage in security-based swap 
transactions are diverse and their organization and activities are 
varied. Any particular limited designation application will be 
analyzed in light of the unique circumstances presented by the 
applicant, and must demonstrate full compliance with the 
requirements that apply to the type, class, or category of security-
based swap, or the activities involving security-based swaps, that 
fall within the security-based swap dealer or major security-based 
swap participant designation. A key challenge that any applicant for 
a limited purpose designation will face is the need to demonstrate 
that the applicant can comply with the statutory and regulatory 
requirements applicable to security-based swap dealers or major 
security-based swap participants while subject to a limited 
designation. Regardless of the type of limited designation being 
requested, the Commission will not designate a person as a security-
based swap dealer or major security-based swap participant in a 
limited capacity unless it can demonstrate that it can fully comply 
with the applicable requirements.
    \589\ See Registration Proposing Release, 76 FR 65795. The 
Commission received one comment on this topic, from SIFMA (see note 
585, supra). SIFMA indicated that it ``SIFMA strongly believes that 
the Commission should allow for limited SBSD or MSBSP registration 
along a number of dimensions.'' For instance, SIFMA suggested that 
the Commission allow entities to separately register individual 
trading desks, allow an entity to register as an SBSD in one class 
or type of security-based swap but not another (e.g., ``an entity 
that acts as a dealer in single-name credit default swaps but not 
total return swaps on single securities should be able to register 
as an SBSD in the former but not the latter''), and ``allow entities 
to register as an SBSD or MSBSP for their activities with U.S. 
persons, keeping activities with non-U.S. persons outside the scope 
of registration and related regulation.''
    \590\ See, e.g., the Product Definitions Adopting Release, 77 FR 
48208, and the Capital, Margin, and Segregation Proposing Release, 
77 FR 70214.
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IV. Major Security-Based Swap Participants

A. Introduction

    Title VII defines a new type of entity regulated by the Commission, 
the ``major security-based swap participant.'' \591\ The statutory 
definition of major security-based swap participant encompasses persons 
whose security-based swap activities do not cause them to be dealers, 
but nonetheless could pose a high degree of risk to the U.S. financial 
system generally.\592\ This term was further defined in the 
Intermediary Definitions Adopting Release, focusing on the potential 
market impact and risks associated with a person's security-based swap 
positions.\593\ In this respect, the major security-based swap 
participant definition differs from the security-based swap dealer 
definition, which generally focuses on a person's activities and how it 
holds itself out to the market. The amount or significance of those 
activities is relevant only in the context of the de minimis 
exception.\594\ As a result, we believe that the cross-border issues 
that are raised by the definition of major security-based swap 
participant differ from those raised by the definition of security-
based swap dealer. The application of the major security-based swap 
participant definition to cross-border activities was not addressed in 
the Intermediary Definitions Adopting Release.\595\
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    \591\ See Section 3(a)(67) of Exchange Act, 15 U.S.C. 
78c(a)(67), as added by Section 761(a) of the Dodd-Frank Act.
    \592\ As discussed in the Intermediary Definitions Adopting 
Release, the tests of the major security-based swap participant 
definition use terms--particularly ``systemically important,'' 
``significantly impact the financial system'' or ``create 
substantial counterparty exposure''--that denote a focus on entities 
that pose a high degree of risk through their security-based swap 
activities. See Intermediary Definitions Adopting Release, 77 FR 
30661 n.761. In addition, the link between the major participant 
definitions and risk was highlighted during the congressional debate 
on the statute. See 156 Cong. Rec. S5907 (daily ed. July 15, 2010).
    \593\ See Intermediary Definitions Adopting Release, 77 FR 
30661. Under Rule 3a67-1 under the Exchange Act, 17 CFR 240.3a67-1, 
a major security-based swap participant is any entity that maintains 
security-based swap positions exceeding one of the following three 
thresholds: (1) $1 billion current uncollateralized exposure or $2 
billion combined current uncollateralized exposure and potential 
future exposure in a major category of security-based swaps 
(excluding certain hedging positions); (2) $2 billion current 
uncollateralized exposure or $4 billion combined current 
uncollateralized exposure and potential future exposure in all 
security-based swaps; or (3) highly leveraged financial entities 
with $1 billion current uncollateralized exposure or $2 billion 
combined current uncollateralized exposure and potential future 
exposure in a major category of security-based swaps. See 
Intermediary Definitions Adopting Release, 77 FR 30751-54.
    \594\ See Intermediary Definitions Adopting Release, 77 FR 
30661.
    \595\ The Commission indicated that the cross-border application 
of the major security-based swap participant definition would be 
addressed in a separate release. See Intermediary Definitions 
Adopting Release, 77 FR 30692 n.1181.
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B. Comment Summary

    A variety of commenters provided their views on the application of 
the major security-based swap participant definition and its related 
thresholds in the cross-border context, generally suggesting that the 
major participant tests focus on the systemic risk that an entity's 
swap transactions poses to the U.S. market.\596\ Commenters further 
suggested that major security-based swap participant threshold 
calculations should exclude security-based swap transactions that do 
not involve a U.S. counterparty.\597\ Several FPSFIs further

[[Page 31030]]

requested specific exclusions from the major security-based swap 
participant definition, suggesting that as a matter of comity, swap 
transactions involving foreign central banks as a counterparty,\598\ 
international financial institutions, and/or foreign SWFs should be 
excluded from the major participant definitions.\599\
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    \596\ See, e.g., Financial Services Roundtable Letter at 25 
(stating that ``non-US entities should not be subject to regulation 
as major participants unless their activities in US markets exceed 
the relevant thresholds, even if their aggregate global activity 
would exceed those thresholds'' and warning that ``the regulatory 
burden is sufficiently high that such entities may choose to exit 
the US markets, or deny US market participants access to non-US 
markets, rather than submit to regulation''); APG Asset Management 
Letter at 4 (recommending that the thresholds be amended to exclude 
from the computations the outward credit exposures of the computing 
party to non-U.S. persons, and supporting the CFTC's statement in 
its proposed registration release that the major participant 
analysis should be focused on an entity's activities with U.S. 
counterparties or using U.S. mails or instrumentalities); and AIMA 
Letter at 4-5 (suggesting that in the case of managed funds, only 
U.S. funds or funds otherwise regulated in the U.S. should be 
subject to potential major participant designation).
    \597\ See, e.g., Jones Day Letter at 7-8 (recommending that 
``[f]oreign swap transactions not involving a U.S. counterparty, 
i.e., between two foreign counterparties[,] are more appropriately 
the province of the supervisory authorities in the relevant non-U.S. 
jurisdiction and should, therefore, be excluded from calculations of 
substantial swap positions''); Milbank Tweed Letter at 3 (``Clearly, 
the thresholds should not be applied to a non-U.S. participant's 
transactions with all of its counterparties. Equally, all 
transactions with U.S. counterparties can reasonably be included. To 
take account of transactions with non-U.S. counterparties that might 
meet the `direct and significant connection' standard, we suggest 
the Commissions consider including only those transactions by a 
potential non-U.S. major swap participant that are with non-U.S. 
registered swap dealers or non-U.S. registered major swap 
participants.'').
    \598\ For this purpose, we consider the Bank for International 
Settlements, in which the Federal Reserve and foreign central banks 
are members, to be a foreign central bank. See https://www.bis.org/about/orggov.htm.
    \599\ See, e.g., Norges Bank Letter at 4-5 (recommending 
exemptions for foreign governments and their agencies); KfW letter 
at 8 (FPSFIs); World Bank Group Letter II at 1-2 (multilateral 
development institutions); China Investment Letter at 2 (SWFs); and 
GIC Letter at 2, 5-6 (SWFs).
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    Certain entities managed or controlled by foreign governments also 
have asked for exemptions or exclusions from Commission registration or 
the Dodd-Frank Act's substantive requirements. For example, SWFs 
commented that they believe SWFs should be excluded from the definition 
of major security-based swap participant and thus the related 
regulatory obligations.\600\ These entities argued that the Commission 
should not subject SWFs to registration requirements based on 
principles of international comity and cooperation and noted that SWFs 
are typically subject to comparable home country supervision that would 
render SEC regulation largely duplicative. They also argued that 
excluding SWFs from the major security-based swap participant 
definition would not increase systemic risks given that SWFs make long-
term investments across diverse asset classes, use swaps or security-
based swaps to hedge portfolio risks rather than generate returns, and 
are more likely to ensure that risk management measures are in place 
because of SWFs' heightened concerns regarding reputational risk.\601\
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    \600\ See China Investment Letter at 2-4 (further explaining 
that exempting SWFs from the definition of MSBSP would not result in 
reduced transparency, given that the SWF would still have to comply 
with a number of other Dodd-Frank Act requirements) and GIC Letter 
at 2, 5-6.
    \601\ See China Investment Letter at 3-4 and GIC Letter at 3.
---------------------------------------------------------------------------

    Another entity, which operates with an explicit government 
guarantee of its swap and security-based swap obligations, argued that 
it should be excluded from the major participant definition due to its 
lack of risk to the market resulting from this government support.\602\
---------------------------------------------------------------------------

    \602\ See KfW Letter at 8.
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C. Proposed Approach

    In light of the comments received on the application of the major 
security-based swap participant definition in the cross-border context 
and the principles discussed above,\603\ the Commission is proposing a 
rule and interpretive guidance regarding the application of the major 
security-based swap participant definition to cross-border activities.
---------------------------------------------------------------------------

    \603\ See Section II.C, supra.
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1. In General
    The Commission is proposing a rule under which a U.S. person would 
consider all security-based swap transactions entered into by it, while 
a non-U.S. person would consider only transactions entered into with 
U.S. persons,\604\ when determining whether the person falls within the 
major security-based swap participant definition.\605\ Under this 
proposed approach, a non-U.S. person would calculate its security-based 
swap positions under the three prongs of the major security-based swap 
participant definition \606\ based solely on its transactions with U.S. 
persons (including foreign branches of U.S. banks). All security-based 
swap transactions by a non-U.S. person with other non-U.S. person 
counterparties, regardless of whether they are conducted within the 
United States or whether the non-U.S. person counterparties are 
guaranteed by a U.S. person, would be excluded from the major security-
based swap participant analysis.
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    \604\ Proposed Rule 3a67-10(a)(2) under the Exchange Act 
(defining the term ``U.S. person'' by cross-reference to the 
definition of U.S. person in proposed Rule 3a71-3(a)(7) under the 
Exchange Act, as discussed in Section III.B.5, supra).
    \605\ Proposed Rule 3a67-10(c) under the Exchange Act.
    \606\ See Rule 3a67-1 under the Exchange Act, 17 CFR 240.3a67-1; 
see also note 593, supra.
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    The proposed rule would use the same definition of ``U.S. person'' 
as proposed in the context of foreign security-based swap dealer 
registration.\607\ As previously discussed, this definition generally 
follows a territorial approach to defining U.S. person.\608\ The 
proposed approach to the U.S. person definition is intended to identify 
individuals or legal persons that, by virtue of their location within 
the United States or their legal or other relationship with the United 
States, are likely to impact the U.S. financial market and the U.S. 
financial system.\609\ Therefore, we preliminarily believe that 
requiring a non-U.S. person to take into account its security-based 
swap positions with U.S. persons, as proposed to be defined, for 
purposes of the major security-based swap participant definition would 
provide an appropriate indication of the degree of default risk posed 
by such non-U.S. person's security-based swap positions to the U.S. 
financial system, which we view as the focus of the major security-
based swap participant definition.\610\ Consistent with the rules 
further defining the definition of major security-based swap 
participant adopted in the Intermediary Definitions Adopting Release, 
such risk to the U.S. financial system would be measured by calculating 
such non-U.S. person's aggregate outward exposures \611\ to U.S. 
persons (that is, what such non-U.S. person owes, or potentially could 
owe, on its security-based swaps with U.S. persons).\612\ If such non-
U.S. person's aggregate outward exposures to U.S. persons exceed one of 
the thresholds set forth in the rules further defining ``major 
security-based swap

[[Page 31031]]

participant,'' \613\ the non-U.S. person would be required to register 
as a major security-based swap participant.
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    \607\ Proposed Rule 3a67-10(a)(2) under the Exchange Act; see 
also proposed Rule 3a71-3(a)(7) under the Exchange Act, as discussed 
in Section III.B.5, supra.
    \608\ See Section III.B.5, supra, (discussing the definition of 
``U.S. person'').
    \609\ Id.
    \610\ See Section 3(a)(67) of Exchange Act, 15 U.S.C. 
78c(a)(67). In particular, one of the thresholds of the statutory 
definition of major security-based swap participant focuses on the 
serious adverse effects on the financial stability of the U.S. 
banking system or financial markets as a result of substantial 
counterparty exposure created by a person's security-based swap 
positions. See Section 3(a)(67)(A)(ii)(II) of the Exchange Act, 15 
U.S.C. 78c(a)(67)(A)(ii)(II). In addition, Section 3(a)(67)(B) of 
the Exchange Act requires the Commission to define the term 
``substantial position'' in Sections 3(a)(67)(A)(ii)(I) and (III) of 
the Exchange Act at the threshold that the Commission determines to 
be prudent for the effective monitoring, management, and oversight 
of entities that are systemically important or can significantly 
impact the financial system of the United States. See Section 
3(a)(67)(B) of the Exchange Act, 15 U.S.C. 78c(a)(67)(B).
    \611\ See Intermediary Definitions Adopting Release, 77 FR 
30666-71; Rules 3a67-3(b) and (c) under the Exchange Act, 17 CFR 
240.3a67-3(b) and (c).
    \612\ The determination of whether a security-based swap 
transaction must be included in a non-U.S. person's major security-
based swap participant calculation is based on the U.S. person 
status of the non-U.S. person's counterparty to such transaction, 
regardless of whether the counterparty is a security-based swap 
dealer, end user, CCP, or other market participant. For example, 
where a non-U.S. person enters into a security-based swap 
transaction with a security-based swap dealer, and that transaction 
is submitted for clearing and novated from the dealer to a CCP, the 
non-U.S. person would look to the U.S. person status of the CCP that 
became its counterparty as a result of such novation when 
determining whether the transaction must be included in such non-
U.S. person's major security-based swap participant calculation.
    \613\ See Rule 3a67-3 and Rule 3a67-5 under the Exchange Act, 17 
CFR 240.3a67-3 and 17 CFR 240.3a67-5 (defining ``substantial 
position'' and ``substantial counterparty exposure'').
---------------------------------------------------------------------------

    Given the focus of the major security-based swap participant 
definition on the degree of risk to the U.S. financial system,\614\ the 
Commission preliminarily believes that the location in which security-
based swap transactions are conducted is not relevant to the 
calculation of a person's security-based swap positions for purposes of 
determining such person's status as a major security-based swap 
participant. Such an approach would differ from the approach we are 
proposing with respect to the security-based swap dealer definition, 
where we would count transactions connected with security-based swap 
dealing activity conducted within the United States toward a potential 
security-based swap dealer's de minimis threshold even if the 
transactions were with non-U.S. persons.\615\ This difference in 
approach is driven by the different focuses of the statutory 
definitions of the terms security-based swap dealer and major security-
based swap participant. While the statutory major security-based swap 
participant definition is focused specifically on risk,\616\ the 
statutory security-based swap dealer definition is focused on, in 
addition to risk, the nature of the activities undertaken by an entity, 
its interactions with counterparties, and its role within the security-
based swap market.\617\ These different statutory emphases lead us to 
treat major security-based swap participants differently from security-
based swap dealers with respect to whether activities conducted within 
the United States should be counted toward their respective thresholds.
---------------------------------------------------------------------------

    \614\ See note 610, supra.
    \615\ See Section III.B.6, supra.
    \616\ See note 610, supra.
    \617\ See note 177 and accompanying text, supra.
---------------------------------------------------------------------------

    In addition, as stated above, the U.S. person definition applies to 
the entire entity, including its branches and offices that may be 
located in a foreign jurisdiction.\618\ Therefore, under the proposed 
approach, a non-U.S. person would need to include its security-based 
swap transactions with foreign branches of U.S. banks when calculating 
its security-based swap positions for purposes of the major security-
based swap participant definition.
---------------------------------------------------------------------------

    \618\ See Section III.B.5, supra.
---------------------------------------------------------------------------

    Some commenters on the CFTC Cross-Border Proposal have suggested 
that a non-U.S. person should be allowed to exclude swap transactions 
with foreign branches of U.S. banks for purposes of determining whether 
it is a major swap participant because otherwise non-U.S. persons would 
have a strong incentive to limit or even stop trading with U.S. banks 
that operate outside the United States via foreign branches.\619\ We 
are mindful of these concerns. However, because foreign branches are 
not separate legal persons,\620\ the Commission believes that the 
potential losses that a U.S. bank would suffer due to a non-U.S. person 
counterparty's default, and the potential impact on the U.S. banking 
system and the U.S. financial system generally, would not differ 
depending on whether the non-U.S. person counterparty entered into the 
security-based swap with the home office of the U.S. bank or with a 
foreign branch of the U.S. bank. Therefore, the Commission 
preliminarily believes that it is appropriate to require a non-U.S. 
person to include its security-based swap transactions with foreign 
branches of U.S. banks for purposes of determining its major security-
based swap participant status.
---------------------------------------------------------------------------

    \619\ See, e.g., Citigroup Letter at 3.
    \620\ See Section III.B.5, supra.
---------------------------------------------------------------------------

    By contrast, the Commission preliminarily believes that a non-U.S. 
person (the ``potential non-U.S. person major security-based swap 
participant'') does not need to include its security-based swap 
transactions with non-U.S. person counterparties in determining whether 
it is a major security-based swap participant. As stated above, the 
focus of the major security-based swap participant definition is on the 
degree of risk posed by a person's security-based swap positions to the 
U.S. financial system.\621\ In the case of transactions with non-U.S. 
person counterparties, the risk that a potential non-U.S. person major 
security-based swap participant will not pay what it owes (or 
potentially could owe) under its security-based swaps to its non-U.S. 
counterparties is not transmitted directly and fully to the U.S. 
financial system in the way that such risk would be transmitted if the 
potential non-U.S. person major security-based swap participant engaged 
in security-based swap transactions with U.S. person counterparties. 
Instead, the non-U.S. person counterparties bear the direct and full 
risk of loss.\622\ We recognize that there may be indirect spillover 
effects related to the security-based swap positions arising from the 
activity conducted by a potential non-U.S. person major security-based 
swap participant and a non-U.S. person counterparty (e.g., a U.S. 
person that has an ownership interest in such a non-U.S. person 
counterparty would potentially face losses on the value of its 
investment in such a non-U.S. person counterparty due to failure of the 
potential non-U.S. person major security-based swap participant), but 
the Commission preliminarily believes that the major security-based 
swap participant tests do not need to address the potential indirect 
spillover risk to the U.S. financial system from foreign investments by 
U.S. persons in non-U.S. persons, or other non-security-based swap 
activities by U.S. persons with non-U.S. persons.\623\
---------------------------------------------------------------------------

    \621\ See note 610, supra.
    \622\ This is the case even if the non-U.S. person 
counterparties' obligations under the security-based swaps with the 
potential non-U.S. person major security-based swap participant are 
guaranteed by a U.S. person. As discussed in more detail below, the 
Commission proposes to address the risk posed by a non-U.S. person's 
security-based swap positions guaranteed by a U.S. person to the 
U.S. financial system through its treatment of guarantees for 
purposes of the major security-based swap participant definition. 
See Section IV.C.2(a), infra.
    \623\ The Commission preliminarily believes that such risk is 
more appropriately addressed under Titles I and II of the Dodd-Frank 
Act.
---------------------------------------------------------------------------

    The Commission recognizes that this proposed approach results in 
different treatment of U.S. and non-U.S. persons under the major 
security-based swap participant definition (i.e., a non-U.S. person 
would consider its security-based swap transactions with only U.S. 
persons, while a U.S. person would consider all of its security-based 
swap transactions). However, the Commission preliminarily believes that 
this approach is appropriate in light of the focus in the major 
security-based swap participant definition on the U.S. financial 
system. More specifically, the need for separate analysis of U.S. and 
non-U.S. entities results from the fact that all of a U.S. person's 
security-based swap transactions are part of and create risk to the 
U.S. financial system, regardless of whether such entity's 
counterparties are U.S. persons or non-U.S. persons. The same is not 
true of non-U.S. persons, however, because the security-based swap 
transactions entered into by a non-U.S. person with other non-U.S. 
persons are not fundamentally part of the U.S. financial system, while 
such non-U.S. person's security-based swap transactions with U.S. 
persons would directly impact the U.S. financial system. Thus, we 
preliminarily believe that the statutory major security-based swap 
participant definition's focus on the U.S. financial system, justifies 
treating U.S. and non-U.S. persons differently for purposes of the 
major participant analysis based on

[[Page 31032]]

the disparate impacts of their security-based swap transactions on the 
U.S. financial system.
    We recognize that a non-U.S. person's transactions with other non-
U.S. person counterparties could still have an impact on the U.S. 
financial system, including where those transactions threatened the 
financial integrity of a non-U.S. person counterparty and such person 
had significant security-based swap positions with U.S. persons. 
However, the amount of risk the non-U.S. person poses to the U.S. 
financial system would most directly stem from the size of its direct 
positions with U.S. persons. As a result, the Commission preliminarily 
believes it is appropriate to limit the international application of 
the major security-based swap participant definition to a non-U.S. 
person's security-based swaps entered into with U.S. persons.
2. Guarantees
    The application of the major security-based swap participant 
definition to security-based swap positions guaranteed by a parent, 
other affiliate, or guarantor raises unique issues in the cross-border 
context. These issues were not addressed in the Intermediary 
Definitions Adopting Release.\624\
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    \624\ In the Intermediary Definitions Adopting Release, the 
Commissions stated they intended to address guarantees provided to 
non-U.S. entities, and guarantees by non-U.S. holding companies, in 
separate releases. See Intermediary Definitions Adopting Release, 77 
FR 30689 n.1134. In this release, we are not altering the 
interpretive approach with respect to the attribution of guarantees 
that was adopted by the Commissions in the Intermediary Definitions 
Adopting Release, but rather we are proposing an interpretive 
approach that would apply the principles adopted in the Intermediary 
Definitions Adopting Release in the cross-border context.
---------------------------------------------------------------------------

    As a general principle, the Commission and the CFTC did note in the 
Intermediary Definitions Adopting Release that an entity's security-
based swap positions are attributed to a parent, other affiliate, or 
guarantor for purposes of the major participant analysis to the extent 
that the counterparties to those positions have recourse to that 
parent, other affiliate, or guarantor in connection with the 
position.\625\ Positions are not attributed in the absence of 
recourse.\626\ The Commission and the CFTC further stated that 
attribution of these positions for purposes of the major participant 
definitions is intended to reflect the risk focus of the major 
participant definitions by providing that entities will be regulated as 
major participants when they pose a high level of risk in connection 
with the swap and security-based swap positions they guarantee.
---------------------------------------------------------------------------

    \625\ See Intermediary Definitions Adopting Release, 77 FR 
30689, and the accompanying note 1132 on that page.
    \626\ See id. As indicated in note 160 above, the term 
``guarantee'' as used in this release refers to a contractual 
agreement pursuant to which one party to a security-based swap 
transaction has recourse to its counterparty's parent, other 
affiliate, or guarantor with respect to the counterparty's 
obligations owed under the transaction.
---------------------------------------------------------------------------

    The application of these general principles in the cross-border 
context is discussed below, including the attribution of guaranteed 
security-based swap positions to U.S. persons and non-U.S. persons, 
respectively, when they provide guarantees on performance of the 
security-based swap obligations of other persons, the limited 
circumstances where attribution of guaranteed security-based swap 
positions is not required, and operational compliance.
(a) Guarantees Provided by U.S. Persons to Non-U.S. Persons
    One cross-border issue that arises from the general approach to 
guarantees set forth in the Intermediary Definitions Adopting Release 
is how the attribution of guarantees for purposes of the major 
security-based swap participant definition would apply to a guarantee 
provided by a U.S. person for performance on the obligations of a non-
U.S. person, such as a U.S. holding company providing a guarantee on 
the obligations of a foreign subsidiary. As noted in the Intermediary 
Definitions Adopting Release, the attribution of guaranteed positions 
for purposes of the major participant definitions is intended to 
reflect the risk that a guarantor might pose to, and the systemic 
impact of such risk may impose on, the U.S. financial system as a 
result of the guarantees that it provides.\627\ The Commission 
preliminarily believes that these risk concerns are the same when U.S. 
persons act as guarantors for foreign persons regardless of whether the 
underlying security-based swap transactions that they guarantee are 
entered into with U.S. persons or non-U.S. persons, given that the risk 
borne by the U.S. person guarantor would not be impacted by the status 
of the guaranteed non-U.S. person's counterparty as either a U.S. 
person or non-U.S. person. As a result, the Commission is proposing 
that, other than in the limited circumstances described below,\628\ all 
security-based swaps entered into by a non-U.S. person and guaranteed 
by a U.S. person be attributed to such U.S. person guarantor for 
purposes of determining such U.S. person guarantor's major security-
based swap participant status, regardless of whether the underlying 
transaction was entered into with a U.S. person counterparty or non-
U.S. person counterparty.\629\
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    \627\ See id.
    \628\ See Section IV.C.2(c), infra (discussing the limited 
circumstances where attribution of guaranteed security-based swap 
positions to the guarantor would not apply).
    \629\ In all circumstances where a U.S. person guarantor is 
required to attribute to itself all security-based swap transactions 
entered into by the guaranteed non-U.S. person, the guaranteed non-
U.S. person would still be required to consider those security-based 
swap transactions that it enters into with U.S. person 
counterparties for purposes of determining whether it is a major 
security-based swap participant pursuant to the proposed Rule 3a67-
10(c)(2) under the Exchange Act. See Section IV.C.1, supra 
(discussing proposed Rule 3a67-10(c) under the Exchange Act). Once 
the guaranteed non-U.S. person becomes a major security-based swap 
participant and registers with the Commission, the U.S. guarantor 
would no longer be required to attribute to itself the security-
based swap positions entered into by the guaranteed non-U.S. person. 
See Intermediary Definitions Adopting Release, 77 FR 30689. This 
same result would also occur where a guaranteed non-U.S. person 
becomes subject to capital regulation by the Commission or the CFTC 
(e.g., a registered major swap participant, swap dealer, security-
based swap dealer, futures commission merchant, or broker-dealer). 
See id.
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(b) Guarantees Provided by Non-U.S. Persons to U.S. Persons and 
Guarantees Provided by Non-U.S. Persons to Non-U.S. Persons
    Another cross-border issue related to the Commission's approach to 
the attribution of guarantees is how guarantees provided by non-U.S. 
persons are treated for purposes of the major security-based swap 
participant definition. As previously noted, the statutory major 
security-based swap participant definition's focus on the accumulation 
of security-based swap risk by non-U.S. persons is primarily centered 
on the impact such risk could have on the U.S. financial system.\630\ 
Where a non-U.S. person provides a guarantee on performance of the 
security-based swap obligations of a U.S. person (e.g., a non-U.S. 
holding company providing a guarantee on performance of the obligations 
owed by its U.S. subsidiary under security-based swaps entered into by 
the U.S. subsidiary), the counterparties of such U.S. person would be 
taking the credit risk of the non-U.S. person guarantor as well as the 
U.S. person. If the non-U.S. person guarantor defaults, the full amount 
of risk accumulated under the guaranteed U.S. person's security-based 
swap positions would impact the U.S. financial system. As a result, 
subject to the limited circumstances described in the Intermediary 
Definitions Adopting Release,\631\ a non-U.S. person providing

[[Page 31033]]

a guarantee on performance of the security-based swap obligations of a 
U.S. person would attribute to itself all of the U.S. person's 
security-based swap positions that are guaranteed by the non-U.S. 
person guarantor for purposes of determining the non-U.S. person 
guarantor's major security-based swap participant status.\632\
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    \630\ See note 610, supra.
    \631\ See Intermediary Definitions Adopting Release, 77 FR 30730 
(discussing the limited circumstances where attribution of 
guaranteed security-based swap positions of a U.S. person to the 
guarantor would not apply).
    \632\ See note 629, supra.
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    By contrast, where a non-U.S. person provides a guarantee on 
performance of the security-based swap obligations of another non-U.S. 
person (e.g., a non-U.S. holding company providing a guarantee on 
performance of the obligations owed by its non-U.S. subsidiary under 
security-based swaps entered into by the non-U.S. subsidiary), the 
ultimate counterparty credit risk associated with the transaction would 
generally reside outside of the United States with the non-U.S. 
guarantor. In this scenario, the potential impact on the U.S. financial 
system would be limited to transactions entered into by the guaranteed 
non-U.S. person with U.S. person counterparties. Therefore, the 
Commission preliminarily believes that, other than in the limited 
circumstances described below,\633\ where a non-U.S. person guarantees 
performance on the security-based swap transactions of another non-U.S. 
person, the non-U.S. guarantor need only attribute to itself such 
guaranteed security-based swap transactions entered into with U.S. 
person counterparties for purposes of determining its major security-
based swap participant status.\634\
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    \633\ See Section IV.C.2(c), infra (discussing the limited 
circumstances where attribution of guaranteed security-based swap 
positions of a non-U.S. person to the guarantor would not apply).
    \634\ Where a non-U.S. person guarantor is required to attribute 
to itself the security-based swap positions entered into by a non-
U.S. person that are guaranteed by the first non-U.S. person, the 
guaranteed non-U.S. person also would be required to consider all 
security-based swap transactions entered into by itself with U.S. 
person counterparties for purposes of determining its major 
security-based swap participant status in accordance with proposed 
Rule 3a67-10(c)(2) under the Exchange Act. See Section IV.C.1, supra 
(discussing proposed Rule 3a67-10(c) under the Exchange Act). Once 
the guaranteed non-U.S. person becomes a major security-based swap 
participant and registers with the Commission, the non-U.S. 
guarantor would no longer be required to attribute to itself the 
security-based swap positions entered into by the guaranteed non-
U.S. person. See Intermediary Definitions Adopting Release, 77 FR 
30689.
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(c) Limited Circumstances Where Attribution of Guaranteed Security-
Based Swap Positions Does Not Apply
    In addition to setting forth general principles regarding the 
attribution of guaranteed swap or security-based swap positions to the 
guarantor for the major participant definitions, the Intermediary 
Definitions Adopting Release also provided interpretive guidance 
related to the limited circumstances under which attribution of 
guaranteed swap or security-based swap positions is not required.\635\ 
Specifically, it stated that even in the presence of a guarantee, it is 
not necessary to attribute a person's swap or security-based swap 
positions to a parent or other guarantor if the person already is 
subject to capital regulation by the Commission or the CFTC (i.e., swap 
dealers, security-based swap dealers, major swap participants, major 
security-based swap participants, FCMs, and broker-dealers) or if the 
person is a U.S. entity regulated as a bank in the United States.\636\ 
In providing this interpretive guidance, the Commission and the CFTC 
explained that the positions of those regulated entities already will 
be subject to capital and other requirements, making it unnecessary to 
separately address, via major participant regulations, the risks 
associated with guarantees of those positions of a regulated 
entity.\637\
---------------------------------------------------------------------------

    \635\ See Intermediary Definitions Adopting Release, 77 FR 
30689.
    \636\ Id. This interpretive guidance applies to both U.S. 
persons and non-U.S. persons that are subject to registration and 
regulation in the enumerated categories.
    \637\ See Intermediary Definitions Adopting Release, 77 FR 
30689.
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    The Intermediary Definitions Adopting Release did not address the 
application of the interpretive guidance regarding attribution of 
guaranteed positions where a guarantee is provided to support a non-
U.S. person's performance on the obligations under security-based swaps 
in the cross-border context. The Commission preliminarily believes that 
the interpretation jointly adopted by the Commission and the CFTC in 
the Intermediary Definitions Adopting Release regarding security-based 
swap positions of a person subject to capital regulation by the CFTC or 
the Commission should equally apply to a non-U.S. person whose 
security-based swap positions are guaranteed by another person. 
Therefore, the Commission is proposing to interpret that it is not 
necessary to attribute a non-U.S. person's security-based swap 
positions to a parent or other guarantor if such non-U.S. person 
already is subject to capital regulation by the Commission or the CFTC 
(i.e., swap dealers, security-based swap dealers, major swap 
participants, major security-based swap participants, FCMs and broker-
dealers).
    In addition, in the cross-border context and with respect to a non-
U.S. person, if such non-U.S. person is not subject to capital 
regulation by the Commission or the CFTC, consistent with the rationale 
for the approach to attribution of security-based swap positions of a 
person that is a U.S. entity regulated as a bank in the United States, 
it would not be necessary to attribute such non-U.S. person's security-
based swap positions to its guarantor if such non-U.S. person is 
subject to capital standards that are consistent with the capital 
standards such non-U.S. person would have been subject to if such non-
U.S. person were a bank subject to the prudential regulators' capital 
regulation. Therefore, the Commission preliminarily believes that it is 
not necessary to attribute such non-U.S. person's security-based swap 
positions to its guarantor for purposes of determining the guarantor's 
major security-based swap participant status, if such non-U.S. person 
is subject to capital standards adopted by its home country supervisor 
that are consistent in all respects with the Capital Accord of the 
Basel Committee on Banking Supervision (the ``Basel Accord'').\638\ 
This proposed approach also is consistent with the capital standards 
proposed by the prudential regulators for a foreign bank that is a swap 
dealer, major swap participant, security-based swap dealer or major 
security-based swap participant, which require such foreign bank to 
comply with regulatory capital rules already made applicable to such 
foreign bank as part of the existing prudential regulatory regime.\639\ 
The Commission preliminarily believes that security-based swap 
positions of a non-U.S. person subject to foreign regulatory capital 
requirements consistent with the Basel Accord would be subject to risk-
based capital requirements that take into account the unique risks 
(including the

[[Page 31034]]

credit risk, market risk, and other risks) arising from security-based 
swap transactions, in such a way as to make it unnecessary to 
separately address, via major security-based swap participant 
regulation, the risks associated with guarantees of those security-
based swap positions.
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    \638\ This is consistent with the capital standards of the 
prudential regulators with respect to foreign banks that are bank 
holding companies subject to the Federal Reserve Board of Governors' 
supervision. See Sec.  225.2(r)(3) of the Regulation Y (``For 
purposes of determining whether a foreign banking organization 
qualifies under paragraph (r)(1) of this section: (A) A foreign 
banking organization whose home country supervisor . . . has adopted 
capital standards consistent in all respects with the Capital Accord 
of the Basle Committee on Banking Supervision (Basle Accord) may 
calculate its capital ratios under the home country standard . . 
.''), 12 CFR 225.2(r)(3).
    \639\ See Prudential Regulator Margin and Capital Proposal, 76 
FR 27582 (``The proposed rule generally requires a covered swap 
entity to comply with regulatory capital rules already made 
applicable to that covered swap entity as part of its prudential 
regulatory regime. . . . In the case of a foreign bank or the U.S. 
branch or agency of a foreign bank, the capital rules that are made 
applicable to such covered entity pursuant to Sec.  225.2(r)(3) of 
the Board's Regulation Y, 12 CFR 225.2(r)(3) . . .'').
---------------------------------------------------------------------------

(d) Operational Compliance
    Finally, the Commission believes that it is necessary to provide 
interpretive guidance regarding operational compliance and the special 
issues that may result from the attribution of security-based swap 
positions to a parent or guarantor. As the Commission and the CFTC 
noted in the Intermediary Definitions Adopting Release, these include 
issues regarding the application of the transaction-focused 
requirements applicable to registered major participants (e.g., certain 
requirements related to trading records and transaction confirmations), 
given that the entity that is the direct counterparty to the swap or 
security-based swap may be better positioned to comply with those 
requirements.\640\ In the Intermediary Definitions Adopting Release, 
the Commission and the CFTC stated that ``an entity that becomes a 
major participant by virtue of swaps or security-based swaps directly 
entered into by others must be responsible for compliance with all 
applicable major participant requirements with respect to those swaps 
or security-based swaps (and must be liable for failures to comply), 
but may delegate operational compliance with transaction-focused 
requirements to entities that directly are party to the transactions. 
The entity that is the major participant, however, cannot delegate 
compliance duties with the entity-level requirements applicable to 
major participants (e.g., requirements related to registration and 
capital).'' \641\
---------------------------------------------------------------------------

    \640\ Intermediary Definitions Adopting Release, 77 FR 30689.
    \641\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the same approach should 
apply in the cross-border context when the guarantor and the guaranteed 
person are located in different jurisdictions (e.g., U.S. holding 
companies that act as guarantors of the security-based swap obligations 
of their non-U.S. dealing subsidiaries). In each case, the major 
security-based swap participant may delegate compliance duties for 
transaction-focused requirements to the entities that are 
counterparties to the transactions, but the major security-based swap 
participant would remain responsible for ensuring that the Title VII 
requirements applicable to such transactions are fulfilled. However, 
major security-based swap participants must comply with all relevant 
entity-level requirements themselves that are not transaction-focused, 
such as registration and capital. Entity-level requirements that have a 
transaction focus, such as margin, may be delegated to the guaranteed 
entities that directly are party to the transactions. However, the 
major security-based swap participants would remain responsible for 
ensuring compliance with these requirements.
3. Foreign Public Sector Financial Institutions (FPSFIs)
    The proposed approach to the cross-border application of the major 
security-based swap participant definition described above provides a 
general framework for applying the definition to non-U.S. persons. That 
framework does not separately address questions raised by commenters 
regarding how the major security-based swap participant definition 
applies to FPSFIs. Specifically, some commenters requested explicit 
exclusions from the major security-based swap participant definition 
for these types of entities.\642\
---------------------------------------------------------------------------

    \642\ See note 599, supra.
---------------------------------------------------------------------------

    We note that FPSFIs encompass a wide range of institutions and 
organizations, ranging from divisions of foreign central banks, to 
international financial institutions established under treaties, to 
multilateral development banks formed, owned, and controlled by 
sovereign members, to sovereign wealth funds and other investment 
corporations owned by foreign governments. Some FPSFIs' obligations are 
guaranteed or backed by foreign governments; others may not be. The 
purposes and activities of these institutions and organizations vary. 
For example, some FPSFIs (such as the Bank for International 
Settlements) provide banking services to foreign central banks who are 
their members. Some FPSFIs provide credits and grants to promote 
economic development in developing countries (e.g., multilateral 
development banks) or distribute funds of regional recovery programs to 
promote regional economies (e.g., KfW for the European Recovery 
Program). Other FPSFIs conduct investment activities around the world 
and their exclusive customers are the foreign governments to which they 
are linked. Depending on their purposes and activities, FPSFIs may 
engage in different types of swaps or security-based swaps to various 
degrees, although the Commission is not aware of data reflecting the 
nature and amount of such transactions across the FPSFI population. One 
commenter stated that it enters into swaps to manage interest rates and 
foreign exchange risks but does not use swaps to generate returns.\643\
---------------------------------------------------------------------------

    \643\ See China Investment Letter at 3-4. Cf. World Bank Letter 
II states that ``not all multilateral development banks use 
derivatives in their development operations, or do so only on a 
limited basis.'' See World Bank Letter II at 1 n.1.
---------------------------------------------------------------------------

    Several commenters requested that FPSFIs be excluded from the major 
security-based swap participant definition. They provided various 
reasons and basis to support their requests. Some FPSFIs commented that 
they are subject to exceptionally high risk controls and have extremely 
strong capital bases and therefore pose no risk to systemic 
stability.\644\ Others argued that they already are subject to 
comparable or comprehensive substantive regulation of their respective 
governments in their home countries and therefore, subjecting them to 
the major security-based swap participant regulation would create 
regulatory duplication or conflicts.\645\ One FPSFI argued that it only 
conducts swap activities with dealers, which would be regulated under 
Title VII, and therefore it is not necessary to subject it to 
duplicative regulation and supervision.\646\ Another FPSFI, which 
operates with an explicit government guarantee of its swap and 
security-based swap obligations, argued that it should be excluded from 
the major participant definition due to its lack of risk to the market 
resulting from this government support.\647\ Intergovernmental 
organizations, such as multilateral development banks, argued that 
multilateral development institutions are never subject to national 
regulations and their privileges and immunities should be fully 
respected.\648\
---------------------------------------------------------------------------

    \644\ See BIS Letter II at 3 and World Bank Letter I at 7.
    \645\ See GIC Letter at 3-4 and KfW Letter at 3 and 8.
    \646\ See China Investment Letter at 3-4.
    \647\ See KfW Letter at 8.
    \648\ See World Bank Letter II at 2-3.
---------------------------------------------------------------------------

    After considering the concerns of these commenters, we recognize 
that FPSFIs raise unique and complex issues because of the diversity of 
the special purposes they are serving, their differing governance 
structures and sources of financial strength, and their supranational, 
intergovernmental, or sovereign nature. The Commission also recognizes 
that we have received relatively little information from commenters 
regarding the types, levels, and natures of security-based swap 
activity that FPSFIs regularly engage in (although some information has 
been

[[Page 31035]]

received regarding their swap transactions) and that, consequently, the 
Commission has comparatively little basis on which to understand their 
roles in the security-based swap markets and, as appropriate, exclude 
them from the major security-based swap participant definition. 
Therefore, we are not proposing to specifically address the treatment 
of FPSFIs at this time. Instead, we are soliciting comment to help 
determine the basis on which it may be appropriate to exclude FPSFIs 
from the proposed rule regarding application of the major security-
based swap participant definition to non-U.S. persons. In particular, 
we invite public comment regarding the types, levels, and nature of the 
security-based swap activity that various types of FPSFIs may engage in 
on a regular basis, the roles of FPSFIs in the security-based swap 
market, the mitigating factors and reasons that FPSFIs may not pose 
systemic risk as a result of their security-based swap activity, and 
whether it would be more appropriate for the Commission to address 
FPSFI concerns on an individual basis. We also request considerations, 
information, and data regarding potential definitions of a FPSFI for 
purposes of the major security-based swap definition. Responses that 
are supported by empirical data and analysis are encouraged in 
assisting the Commission in considering whether excluding FPSFIs from 
the definition of the major security-based swap participant is 
warranted.

D. Title VII Requirements Applicable to Major Security-Based Swap 
Participants

1. Transaction-Level Requirements Related to Customer Protection
(a) Overview
    As previously noted, the Dodd-Frank Act is generally concerned with 
the protection of the U.S. financial system and counterparties in the 
U.S. security-based swap market.\649\ This general principle is 
particularly relevant to the customer protection, including 
segregation, requirements in Title VII, which are focused on the 
protection of the counterparties or customers of security-based swap 
dealers. As a result, the Commission preliminarily believes that it is 
not necessary to the objective of Title VII to subject foreign major 
security-based swap participants to certain of the customer protection 
requirements in Title VII with respect to their transactions with non-
U.S. persons. Accordingly, the Commission is proposing rules that would 
identify specific transaction-level requirements that would not apply 
to foreign major security-based swap participants with respect to their 
transactions with non-U.S. persons.
---------------------------------------------------------------------------

    \649\ See note 4, supra.
---------------------------------------------------------------------------

(b) Proposed Rules
    The proposed rules would provide that foreign major security-based 
swap participants would not be subject, solely with respect to their 
transactions with non-U.S. persons, to certain of the transaction-level 
requirements that apply to major security-based swap participants.\650\ 
Specifically, under the proposed rules registered foreign major 
security-based swap participants would not have to comply with business 
conduct standards as described in Section 15F(h) of the Exchange Act, 
and the rules and regulations thereunder, other than the rules and 
regulations prescribed by the Commission relating to diligent 
supervision pursuant to Section 15F(h)(1)(B) \651\ and the rules and 
regulations thereunder, with respect to their transactions with non-
U.S. persons.\652\ In addition, under the proposed rules, registered 
foreign major security-based swap participants that are not registered 
broker-dealers would not have to comply with requirements related to 
the segregation of assets held as collateral in Section 3E of the 
Exchange Act and the rules and regulations thereunder with respect to 
their transactions with non-U.S. persons.\653\
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    \650\ Proposed Rule 3a67-10(b) and proposed Rule 18a-4(f) under 
the Exchange Act.
    \651\ 15 U.S.C. 78o-10(h)(1)(B).
    \652\ See Section III.C.3(a)(i), supra. As discussed previously, 
Section 15F(h)(1)(B) requires security-based swap dealers to conform 
with such business conduct standards relating to diligent 
supervision as the Commission shall prescribe.
    \653\ See proposed Rule 18a-4(f) under the Exchange Act.
---------------------------------------------------------------------------

    Our rationale for this proposed approach to the application of 
transaction-level requirements for foreign major security-based swap 
participants is substantially the same as that discussed previously in 
the context of foreign security-based swap dealers.\654\ This rationale 
includes our belief that applying these customer protections and 
segregation requirements to security-based swap transactions with non-
U.S. persons outside the United States would not advance the objectives 
of Title VII to protect the U.S. financial system or U.S. 
counterparties. At the same time, this approach would preserve customer 
protections for U.S. person counterparties who would expect to benefit 
from the protections afforded by Title VII.
---------------------------------------------------------------------------

    \654\ See generally Section III.C.4(b), supra. In addition, all 
``nonresident major security-based swap participants,'' as defined 
in proposed Rule 15Fb2-4(a) under the Exchange Act, would be 
required: (1) To appoint and identify to the Commission an agent in 
the United States (other than the Commission or a Commission member, 
official or employee) for service of process; (2) to certify that 
the firm can, as a matter of law, provide the Commission with prompt 
access to its books and records and can, as a matter of law, submit 
to onsite inspection and examination by the Commission; and (3) to 
provide the Commission with an opinion of counsel concurring that 
the firm can, as a matter of law, provide the Commission with prompt 
access to its books and records and can, as a matter of law, submit 
to onsite inspection and examination by the Commission. See proposed 
Rule 15Fb2-4(b) under the Exchange Act, as discussed in the 
Registration Proposing Release, 76 FR 65799-801.
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(2) Entity-Level Requirements
    Entity-level requirements in Title VII primarily address concerns 
relating to the major security-based swap participant as a whole, with 
a particular focus on safety and soundness of the entity to reduce 
systemic risk in the U.S. financial system. The most significant 
entity-level requirements are capital and margin requirements. Because 
these requirements address the financial, operational, and business 
integrity of the entity engaged in security-based swap activity, the 
Commission preliminarily believes that a registered foreign major 
security-based swap participant should be required to adhere to these 
standards. As noted above, other requirements that the Commission 
believes should apply at the entity, rather than the transactional, 
level include, but are not limited to, risk management procedures, 
books and records requirements, conflicts of interest systems and 
procedures, and designation of a chief compliance officer.\655\ These 
entity-level requirements ensure the safety and soundness of the entire 
registrant and are thus distinguishable from the transaction-level 
requirements discussed above, which apply to transactions with 
individual counterparties and thus may be applied differently based on 
the U.S. person status of a counterparty.
---------------------------------------------------------------------------

    \655\ See Section III.C.3(b), supra.
---------------------------------------------------------------------------

3. Substituted Compliance
    The Commission is not proposing, at this time, to establish a 
policy and procedural framework under which we would consider 
permitting compliance by a foreign major security-based swap 
participant with comparable regulatory requirements in a foreign 
jurisdiction to substitute for compliance with requirements of the 
Exchange Act, and the rules and regulations thereunder, applicable to 
major security-based swap

[[Page 31036]]

participants, as it is proposing to do for foreign security-based swap 
dealers.\656\
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    \656\ See Section XI.C, infra.
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    Unlike foreign security-based swap dealers whose primary businesses 
are in securities, security-based swaps, swaps, banking and other 
financial and investment banking activities, the non-U.S. persons that 
may need to register as nonbank major security-based swap participants 
may engage in a diverse range of business activities different from, 
and broader than, the activities conducted by broker-dealers or 
security-based swap dealers (otherwise they may be required to register 
as a security-based swap dealer and/or broker-dealer) or the activities 
conducted by banks. For example, as stated in the Capital, Margin and 
Segregation Proposing Release, persons that may need to register as 
nonbank major security-based swap participants may engage in commercial 
activities that require them to have substantial fixed assets to 
support manufacturing and/or result in them having significant assets 
comprised of unsecured receivables.\657\ Therefore, it is not clear 
what types of entity-level regulatory oversight, if any, especially 
with respect to capital and margin, a foreign major security-based swap 
participant would be subject to in the foreign regulatory system.
---------------------------------------------------------------------------

    \657\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70315.
---------------------------------------------------------------------------

    Accordingly, in light of the limited information currently 
available to us regarding what types of foreign entities may become 
major security-base swap participants, if any, and the foreign 
regulation of such entities, we are not, at this time, proposing to 
extend the proposed policy and procedural framework for substituted 
compliance to foreign major-security-based swap participants. 
Nevertheless, we will continue to consider the appropriateness of 
permitting substituted compliance for major security-based swap 
participants in light of comments received on this proposal and market 
developments more generally and will consider what further steps to 
take, if any, at adoption. In this regard, we request considerations, 
information, and data regarding potential foreign major security-based 
swap participants. Responses that are supported by empirical data and 
analysis are encouraged in assisting the Commission in considering 
whether permitting substituted compliance by foreign major security-
based swap participants would be warranted.
Request for Comment
    The proposed rules and interpretations regarding the application of 
the major security-based swap participant definition and transaction-
level and entity-level requirements to registered major security-based 
swap participants discussed above represent the Commission's 
preliminary views. The Commission seeks comment on the proposed rules 
and interpretations in all aspects. Interested persons are encouraged 
to provide supporting data and analysis and, when appropriate, suggest 
modifications to proposed rule text and interpretations. Responses that 
are supported by data and analysis provide great assistance to the 
Commission in considering the practicality and effectiveness of the 
proposed application as well as considering the benefits and costs of 
proposed requirements. In addition, the Commission seeks comment on the 
following specific questions:
     Should the major security-based swap participant 
definition focus only on a non-U.S. person's security-based swap 
transactions entered into with U.S. persons, or should the major 
security-based swap participant definition incorporate some or all of a 
non-U.S. person's other security-based swap transactions? Which 
transactions? For example, should a non-U.S. person include security-
based swap transactions with non-U.S. person counterparties guaranteed 
by U.S. persons in such non-U.S. person's major security-based swap 
participant calculation? Why or why not?
     Should the proposed approach toward determining whether a 
non-U.S. person should count its security-based swap transactions that 
are cleared through CCPs be adopted? Why or why not? Should the 
Commission adopt a different approach to the treatment of security-
based swap transactions cleared through CCPs for purposes of the cross-
border application of the major security-based swap participant test? 
If so, how should cleared transactions be treated for purposes of the 
cross-border application of the major security-based swap participant 
test?
     Should a non-U.S. person be permitted to exclude its 
security-based swap transactions entered into with foreign branches of 
U.S. banks from the calculation for purposes of determining whether it 
is a major security-based swap participant? Why? If a non-U.S. person's 
security-based swaps with foreign branches of U.S. banks are not 
required to be considered in determining such non-U.S. person's major 
security-based swap participant status, how should the risk (in terms 
of outward exposures) that such non-U.S. person poses to U.S. banks be 
addressed?
     Should the Commission permit a non-U.S. person to exclude 
from its major security-based swap participant calculations its 
security-based swap positions arising from transactions with the 
foreign branches of U.S. banks if such non-U.S. person is subject to 
capital standards adopted by its home country supervisor that are 
consistent in all respect with the Basel Accord? Are there other 
conditions or standards the Commission should consider that a non-U.S. 
person may satisfy or comply with that should allow a non-U.S. person 
to exclude its security-based swap positions arising from transactions 
with foreign branches of U.S. banks from its major security-based swap 
participant calculation?
     Are there competitiveness concerns related to the proposed 
different treatment of U.S. persons and non-U.S. persons for purposes 
of calculating their status under the major security-based swap 
participant definition? If so, what are these concerns, and how should 
they be addressed?
     Should the proposed approach towards the attribution of 
security-based swap positions guaranteed by U.S. persons and non-U.S. 
persons be altered? What justifications would support an alternate 
approach?
     Should the Commission adopt the proposed approach to the 
attribution of guaranteed security-based swap positions whereby the 
positions of guaranteed entities subject to capital standards adopted 
by its home country supervisor that are consistent in all respects with 
the Basel Accord would not need to be attributed? Is Basel Accord 
capital standard an appropriate standard for determining whether it is 
not necessary to attribute guaranteed security-based swap positions to 
a guarantor, or should another standard be used? Is this proposed 
standard clear, or is additional guidance necessary? In addition to the 
proposed capital standard, should the Commission's approach to the 
attribution of guaranteed security-based swap positions also include a 
requirement that the guaranteed entities be subject to effective 
capital oversight by its home country supervisor as determined by the 
Commission in order not to attribute the guaranteed security-based swap 
positions to the guarantor?
     Are there FPSFIs that would fall within the definition of 
major security-based swap participant based on the proposed rules and 
interpretive guidance? If so, should the Commission

[[Page 31037]]

provide relief to such FPSFIs? If so, what type of relief, what types 
of entities should be eligible for such relief, and what factors would 
justify such relief? Would it be more appropriate for the Commission to 
address these concerns on an individual basis?
     Should the Commission adopt the proposed approach to the 
application of certain customer protection requirements and segregation 
requirements to foreign major security-based swap participants with 
respect to their transactions with non-U.S. persons? If so, are there 
other transaction-level requirements that should be included within 
this proposed approach?
     Should substituted compliance be provided to foreign major 
security-based swap participants with respect to entity-level 
requirements? Transaction-level requirements? If so, how should the 
Commission make such a determination? In particular, what standard 
should be used for determining whether existing regulation merits a 
substituted compliance determination?
     What would be the market impact of the proposed approach 
to major security-based swap participants? How would the application of 
the proposed approach affect the competitiveness of U.S. entities in 
the global marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach to major 
security-based swap participants? What would be the market impacts and 
competitiveness effects of alternatives to the proposed approach 
discussed in this release?

V. Security-Based Swap Clearing Agencies

A. Introduction

    Title VII of the Dodd-Frank Act adds a number of provisions to the 
Exchange Act relating to the registration and regulation of clearing 
agencies that provide clearance and settlement services for security-
based swaps.\658\ Such provisions augment the Commission's existing 
authority to register and regulate clearing agencies in Section 17A of 
the Exchange Act.\659\ In particular, Section 17A(g) of the Exchange 
Act, as added by Section 763(b) of the Dodd-Frank Act, requires 
clearing agencies that use interstate commerce to perform the functions 
of a clearing agency with respect to security-based swaps to register 
with the Commission.\660\ Section 17A(k) of the Exchange Act, as added 
by Section 763(b) of the Dodd-Frank Act, provides the Commission with 
authority to exempt a security-based swap clearing agency from 
registration if the Commission determines that the clearing agency is 
subject to comparable, comprehensive supervision and regulation by the 
CFTC or the appropriate government authorities in the home country of 
the clearing agency.\661\ The Dodd-Frank Act also added provisions to 
Section 17A of the Exchange Act relating to voluntary clearing agency 
registration and the establishment of clearing agency standards.\662\ 
Finally, Section 17A(j) requires the Commission to adopt rules 
governing persons that are registered as clearing agencies for 
security-based swaps.\663\
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    \658\ See Section 763(b) of the Dodd-Frank Act.
    \659\ See 15 U.S.C 78q-1 and 17 CFR 240.17Ab2-1.
    \660\ 15 U.S.C. 78q-1(g). Note that Section 929W of the Dodd-
Frank Act added another subsection (g) to Section 17A of the 
Exchange Act. The subsection (g) added by Section 763(b) of the 
Dodd-Frank Act is the focus of the discussion in this section.
    \661\ 15 U.S.C. 78q-1(k). The exemptive authority contained in 
Section 17A(k) of the Exchange Act only pertains to clearing 
agencies that would be required to register under Section 17A of the 
Exchange Act for the clearing of security-based swaps. It does not 
alter the Commission's existing exemptive authority found in Section 
17A(b)(1) and Section 36 of the Exchange Act.
    \662\ Section 17A(h) of the Exchange Act, as added by Section 
763(b) of the Dodd-Frank Act, permits a person, in certain cases, to 
voluntarily register as a clearing agency with the Commission. 15 
U.S.C. 78q-1(h). Section 17A(i) of the Exchange Act, as added by 
Section 763(b) of the Dodd-Frank Act, requires security-based swap 
clearing agencies to comply with standards established by the 
Commission. 15 U.S.C. 78q-1(i).
    \663\ 15 U.S.C. 78q-1(j).
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    Because of the global nature of the security-based swap market, the 
Commission recognizes that there may be some uncertainty regarding when 
a foreign security-based swap clearing agency \664\ that provides 
central counterparty (``CCP'') services \665\ for security-based swaps 
would be required to register with the Commission as a clearing agency. 
Accordingly, we are proposing interpretive guidance regarding the 
application of the registration requirement in Section 17A(g) of the 
Exchange Act for security-based swap clearing agencies that act as 
CCPs.\666\ We also address our exemptive authority under Section 17A(k) 
to exempt a foreign security-based swap clearing agency from the 
registration requirement in Section 17A(g).\667\ In addition, we 
discuss the potential application of alternative standards to certain 
foreign clearing agency registrants.
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    \664\ In using the terms ``foreign'' and ``non-resident'' in 
connection with a security-based swap clearing agency, the 
Commission means a security-based swap clearing agency that is not a 
U.S. person, as that term is defined in proposed Rule 3a71-3(a)(7) 
under the Exchange Act, as discussed in Section III.B.5, supra. In 
this regard, the Commission notes that legal persons that have their 
principal place of business in the United States would be considered 
``U.S. persons'' under the proposed definition regardless of their 
place of incorporation or organization. See proposed Rule 3a71-
3(a)(7)(i)(B) under the Exchange Act.
    \665\ As discussed more fully below, generally speaking, a CCP 
is an entity that interposes itself between the counterparties to a 
securities transaction. See 17 CFR 240.17Ad-22(a)(1).
    \666\ In this section, the Commission is proposing interpretive 
guidance only regarding the registration requirement in Section 
17A(g) of the Exchange Act as it applies to clearing agencies that 
provide CCP services. The Commission is not addressing the 
registration requirement in Section 17A(b) of the Exchange Act, 
which was unchanged by the Dodd-Frank Act. The Commission also is 
not addressing the registration of clearing agencies that provide 
other types of services for security-based swaps and other 
securities. Elsewhere, the Commission has provided a temporary 
exemption from the clearing agency registration requirements to 
clearing agencies that provide non-CCP types of clearance and 
settlement services for security-based swaps. See Order Pursuant to 
Section 36 of the Securities Exchange Act of 1934 Granting Temporary 
Exemptions from Clearing Agency Registration Requirements under 
Section 17A(b) of the Exchange Act for Entities Providing Certain 
Clearing Services for Security-Based Swaps, Exchange Act Release No. 
64796 (July 1, 2011). Accordingly, the Commission expects to address 
clearing agencies that provide non-CCP services in a future release.
    \667\ The Commission also has adopted final rules to exempt 
transactions by CCPs in security-based swaps from all provisions of 
the Securities Act, other than the anti-fraud provisions in Section 
17(a), as well as from Exchange Act registration requirements and 
provisions of the Trust Indenture Act. See Exemptions for Security-
Based Swaps issued by Certain Clearing Agencies, Securities Act 
Release No. 9308 (Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012). The 
exemption is conditioned on the CCP being registered or exempt from 
registration with the Commission, on the determination that the 
security-based swap is required to be cleared or that the CCP is 
permitted to clear it pursuant to its rules, that the security-based 
swap is sold only to an ECP, and that certain information be made 
available to a counterparty or to the public.
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    The proposed interpretation discussed below represents the 
Commission's preliminary views regarding the application of the 
registration requirement in Section 17A(g) for security-based swap 
clearing agencies acting as CCPs in the cross-border context. Our 
proposal reflects a balancing of the principles described above, 
including, in particular, the goal of the Dodd-Frank Act to address the 
risk to the U.S. financial system.\668\ We

[[Page 31038]]

recognize, however, that the proposed interpretation represents one of 
a number of possible alternative approaches in applying Title VII in 
the cross-border context. Accordingly, the Commission invites comment 
regarding all aspects of the proposal discussed below, including 
potential alternative approaches. Responses that are supported by data 
and analysis provide great assistance to the Commission in considering 
the practicality and effectiveness of the proposed application as well 
as considering the benefits and costs of proposed requirements.
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    \668\ See Section II.C, supra. In addition, as noted above, to 
promote effective and consistent global regulation of swaps and 
security-based swaps, the Dodd-Frank Act requires the Commission and 
the CFTC to consult and coordinate with foreign regulatory 
authorities on the ``establishment of consistent international 
standards'' with respect to the regulation of swaps and security-
based swaps. Public Law 111-203 section 752(a).
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B. Proposed Title VII Approach

1. Clearing Agency Registration
    Section 17A(g) of the Exchange Act, entitled ``Registration 
Requirement,'' provides that ``[i]t shall be unlawful for a clearing 
agency, unless registered with the Commission, directly or indirectly 
to make use of the mails or any means or instrumentality of interstate 
commerce to perform the functions of a clearing agency with respect to 
a security-based swap.'' \669\ The Commission preliminarily believes 
that Title VII was intended to apply to clearing agencies that perform 
clearing agency functions within the United States, regardless of their 
principal place of business or their place of incorporation or 
organization.\670\ For reasons discussed below, the proposed 
interpretive guidance would provide that a security-based swap clearing 
agency performs the functions of a CCP within the United States if it 
has a U.S. person as a member.
---------------------------------------------------------------------------

    \669\ 15 U.S.C. 78q-1(g).
    \670\ See Section II.B, supra.
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(a) Clearing Agencies Acting as CCPs
    Clearing agencies are broadly defined under the Exchange Act and 
undertake a variety of functions.\671\ One such function is to act as a 
CCP,\672\ which is an entity that interposes itself between the 
counterparties to a securities transaction. For example, when a 
security-based swap contract between two counterparties that are 
members of a CCP is executed and submitted for clearing, it is 
typically replaced by two new contracts--separate contracts between the 
CCP and each of the two original counterparties. At that point, the 
original counterparties are no longer counterparties to each other. 
Instead, each acquires the CCP as its counterparty, and the CCP assumes 
the counterparty credit risk of each of the original counterparties 
that are members of the CCP. Structured and operated appropriately, 
CCPs may improve the management of counterparty risk and may provide 
additional benefits such as multilateral netting of trades.\673\
---------------------------------------------------------------------------

    \671\ Section 3(a)(23)(A) of the Exchange defines the term 
``clearing agency'' to mean any person who: (i) acts as an 
intermediary in making payments or deliveries or both in connection 
with transactions in securities; (ii) provides facilities for 
comparison of data respecting the terms of settlement of securities 
transactions, to reduce the number of settlements of securities 
transactions, or for the allocation of securities settlement 
responsibilities; (iii) acts as a custodian of securities in 
connection with a system for the central handling of securities 
whereby all securities of a particular class or series of any issuer 
deposited within the system are treated as fungible and may be 
transferred, loaned, or pledged by bookkeeping entry, without 
physical delivery of securities certificates (such as a securities 
depository); or (iv) otherwise permits or facilitates the settlement 
of securities transactions or the hypothecation or lending of 
securities without physical delivery of securities certificates 
(such as a securities depository). 15 U.S.C. 78c(a)(23)(A).
    \672\ See Clearing Agency Standards Adopting Release, 77 FR 
66221 n.17 (``[a]n entity that acts as a CCP for securities 
transactions is a clearing agency as defined in the Exchange Act and 
is required to register with the Commission'').
    \673\ See id.
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    Although technology and risk management practices frequently change 
and vary from CCP to CCP, the following are some of the functions 
performed by the subset of clearing agencies that are CCPs: \674\
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    \674\ The Commission does not believe that the opening and 
maintenance of bank accounts or investment accounts in the United 
States by a CCP that are not directly accessible by members of a 
security-based swap clearing agency constitutes the performance of 
functions of a CCP for these purposes. See, e.g., Exchange Act 
Release No. 39643 (Feb. 11, 1998), 63 FR 8232, 8234 (Feb. 18, 1998) 
(discussing a foreign unregistered clearing agency's use of a U.S. 
depository, which did not in and of itself trigger the registration 
requirement). In addition, the Commission does not believe that the 
use of U.S.-based persons to perform services on behalf of a CCP in 
the ordinary course of business that do not involve clearing agency 
functions (e.g., financial guaranties, banking services, or payroll 
operations) constitutes the performance of functions of a clearing 
agency.
---------------------------------------------------------------------------

     The extinguishing of a security-based swap contract 
between two counterparties and the associated novation of it with two 
new contracts between the CCP and each of the two original 
counterparties;
     The assumption of counterparty credit risk of members of 
the CCP through the novated security-based swap contracts;
     The calculation and collection of initial and variation 
margin during the life of the security-based swap contract;
     The determination of settlement obligations under a 
security-based swap contract;
     The determination of a default under a security-based swap 
contract;
     The collection of funds from members for contributions to 
a clearing fund;
     The implementation of a loss-sharing arrangement among 
members to respond to a member insolvency or default; and
     The multilateral netting of trades.\675\
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    \675\ See, e.g., CDS Clearing Exemption Orders, note 74, supra.
---------------------------------------------------------------------------

    In performing these functions, CCPs help facilitate over-the-
counter trading, and trading on exchanges and other platforms, through 
the assumption of counterparty risk by the CCP from the original 
counterparties. During times of market stress, a CCP would mitigate the 
potential for a market participant's failure to be transmitted to other 
market participants, and would increase transparency of the risks borne 
by its members, as well as confidence of the market participants in the 
performance of their transactions.\676\
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    \676\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs regarding The Restoring American Financial 
Stability Act of 2010, S. Rep. No. 111-176 at 31 (stating that by 
``mandating the use of central clearinghouses, institutions would 
become much less interconnected, mitigating risk and increasing 
transparency.''). At the same time, concentrating risk from several 
counterparties into a CCP could actually introduce risks through the 
prospect of moral hazard, such as if the costs of imprudent 
decisions by one clearing member were shifted to other clearing 
members or to the general public through bail-out of a CCP. See, 
e.g., Craig Pirrong, ``Mutualization of Default Risk, Fungibility, 
and Moral Hazard: The Economics of Default Risk Sharing in Cleared 
and Bilateral Markets,'' University of Houston, Working Paper 
(2010), available at: https://business.nd.edu/uploadedFiles/Academic_Centers/Study_of_Financial_Regulation/pdf_and_documents/clearing_moral_hazard_1.pdf. Such cost-shifting 
mechanisms might induce members to take on more risk than they 
otherwise would in a bilateral setting.
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    Furthermore, the agreements among members and between members and a 
CCP play a key role in the CCP's performance of the functions of a 
clearing agency. The Exchange Act permits clearing agencies to deny 
membership if a person does not meet a clearing agency's financial 
responsibility, operational capacity, experience and competence 
standards.\677\ In a scenario where risk is mutualized under loss-
sharing arrangements, the strength of the CCP hinges upon the strength 
of its members. The legal arrangements between a CCP and its members 
are of significant importance to the operational resilience of the CCP 
itself.
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    \677\ See, e.g., 15 U.S.C. 78q-1(b)(4); see also 17 CFR 
240.17Ad-22(d)(2) (requiring registered clearing agencies to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to require participants to meet 
certain operational capacity standards).

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[[Page 31039]]

(b) Proposed Interpretive Guidance
    The Commission is proposing interpretive guidance that a security-
based swap clearing agency performing the functions of a CCP within the 
United States would be required to register pursuant to Section 17A(g) 
of the Exchange Act.\678\ In our preliminary view, a foreign security-
based swap clearing agency that provides CCP services, as described 
above, to a member that is a U.S. person for security-based swaps would 
be performing the functions of a CCP within the United States and, 
therefore, would be required to register pursuant to Section 17A(g) of 
the Exchange Act. The Commission preliminarily believes that such an 
approach is consistent with the Dodd-Frank Act's goal of reducing 
systemic risk in the U.S. financial system.\679\ Foreign security-based 
swap clearing agencies that provide CCP services to U.S. members could 
pose a risk to the United States due to the risk mutualization among 
members of these clearing agencies.\680\ Further, the more complete 
information about relationships between security-based swap market 
participants that registration would provide to regulators and the 
marketplace may help reduce the risk of crises.\681\ Accordingly, to 
address the risk to the U.S. financial system posed by foreign 
security-based swap clearing agencies with U.S. members, the Commission 
preliminarily is proposing to require foreign security-based swap 
clearing agencies that provide CCP services to U.S. members to register 
pursuant to Section 17A(g) of the Exchange Act.
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    \678\ 15 U.S.C. 78q-1.
    \679\ See note 4, supra.
    \680\ See, e.g., Clearing Agency Standards Adopting Release, 77 
FR 66267 (stating that ``[a]ll clearing agencies that act as CCPs in 
the United States collect contributions from their members to 
guaranty funds or clearing funds for the mutualization of losses 
under extreme but plausible market scenarios'').
    \681\ See note 676, supra.
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    The Commission anticipates, however, that some U.S. persons may 
choose to clear transactions at a foreign security-based swap clearing 
agency on an indirect basis through a correspondent clearing 
arrangement with a non-U.S. member of the clearing agency.\682\ We 
preliminarily do not believe that such a correspondent clearing 
arrangement of a U.S. person with a non-U.S. person member alone would 
cause the foreign security-based swap clearing agency to be required to 
register with the Commission because the clearing agency's business is 
conducted directly with its member firms, which in this example would 
be located outside of the United States. Correspondent clearing 
arrangements do not pose the same type of direct risk to the U.S. 
financial system that foreign security-based swap clearing agencies 
with U.S. members pose because customers, unlike clearing agency 
members, do not take mutual responsibility for the obligations of the 
clearing agency.\683\
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    \682\ Traditionally, the Commission has required registration 
(or an exemption from registration) as a clearing agency if a 
foreign clearing agency provides services for U.S. securities 
directly to U.S. persons. The Commission has not viewed 
intermediated access by U.S. persons to a foreign clearing agency's 
services (for example, through a foreign broker) as sufficiently 
direct to trigger registration requirements. See Proposed Amendments 
to Rule 15a-6, 73 FR 39198 (summarizing the Commission's position 
taken in past exemptive orders).
    \683\ As noted above, the interpretation proposed here applies 
solely to the registration requirement in Section 17A(g) of the 
Exchange Act with respect to clearing agencies that provide CCP 
services for security-based swaps; it does not change the 
Commission's interpretation of Section 17A(b) of the Exchange Act. 
See note 666, supra.
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2. Exemption from Registration under Section 17A(k)
    Section 17A(k) of the Exchange Act, as added by Section 763(b) of 
the Dodd-Frank Act, provides that the Commission may grant a 
conditional or unconditional exemption from clearing agency 
registration for the clearing of security-based swaps if the Commission 
determines that the clearing agency is subject to comparable, 
comprehensive supervision and regulation by the CFTC or the appropriate 
government authorities in the home country of the clearing agency.\684\
---------------------------------------------------------------------------

    \684\ 15 U.S.C. 78q-1(k).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it may be appropriate to 
consider an exemption as an alternative to registration in 
circumstances where the clearing agency is subject to comparable, 
comprehensive supervision and regulation by appropriate government 
authorities in the home country of the clearing agency, and the nature 
of the clearing agency's activities and performance of functions within 
the United States suggest that registration is not necessary to achieve 
the Commission's regulatory objectives. Exemptions that are carefully 
targeted could help to improve clearing agency supervision overall by 
allowing the Commission to devote resources most efficiently where U.S. 
interests are more directly implicated, while reducing duplication of 
efforts in areas where its interests are aligned with those of other 
regulators. Section 17A(k) further provides that any such exemption may 
be subject to appropriate conditions that may include, but are not 
limited to, requiring the clearing agency to be available for 
inspection by the Commission and to make available all information 
requested by the Commission.\685\
---------------------------------------------------------------------------

    \685\ Id.
---------------------------------------------------------------------------

    The Commission is not at this point specifying how such 
determinations might be made. The Commission notes that market 
structure and clearing agency supervision and regulation vary in other 
jurisdictions, and these variances in combination would affect the 
Commission's ability to make a determination under Section 17A(k) of 
the Exchange Act in a particular case, as well as the conditions that 
would be applied to any exemption. In addition to these factors, 
differences among individual clearing agencies on matters such as 
organizational governance, rules for members, and risk management 
procedures would inform individual exemption determinations.
3. Application of Alternative Standards to Certain Registrants
    In addition, the Commission may consider, as an alternative to an 
exemption from registration, proposing rules that are specific to 
foreign-based CCPs that are registered with the Commission under 
Section 17A(g). We believe that this approach is contemplated by 
Section 17A(i) of the Exchange Act, which permits the Commission to 
adopt rules for registered CCPs that clear security-based swaps and 
conform our regulatory standards and supervisory practices to reflect 
evolving United States and international standards.\686\ This approach 
may be particularly appropriate where the Commission determines not to 
grant a general exemption from registration under Section 17A(k) of the 
Exchange Act, based on consideration of the factors described above, 
but where consistency with some regulatory standards suggests that a 
targeted regulatory approach may be warranted.
---------------------------------------------------------------------------

    \686\ Specifically, Section 17A(i) of the Exchange Act, entitled 
``Standards for Clearing Agencies Clearing Security-Based Swap 
Transactions'': (i) Requires registered clearing agencies that clear 
security-based swaps to comply with such standards that the 
Commission may establish by rule; (ii) contemplates that the 
Commission may conform such standards or its oversight practices to 
reflect evolving United States and international standards; and 
(iii) except where the Commission determines otherwise by rule or 
regulation, confirms that a clearing agency shall have reasonable 
discretion in establishing the manner in which it complies with any 
such standards. 15 U.S.C. 78q-1(i).

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[[Page 31040]]

Request for comment
    The Commission requests comment on all aspects of the proposed 
interpretation, including the following:
     Should performing the functions of a CCP for only one U.S. 
person member of the CCP warrant requiring a foreign security-based 
swap clearing agency to register with the Commission? If not, why not? 
Further, are there other kinds of activities in the United States or 
outside the United States that would warrant requiring a CCP to be 
registered? If so, what are they?
     To what extent might the proposed approach create 
incentives for foreign CCPs to restrict access to U.S. person members? 
Please explain.
     Are there any other circumstances where a foreign 
security-based swap CCP should be required to register with the 
Commission? For example, is there a circumstance where a CCP that has 
no U.S. members but clears security-based swaps with a U.S. security as 
an underlying security should be required to register with the 
Commission as a clearing agency? Similarly, is there a circumstance 
where a CCP that has no U.S. members and does not conduct activities 
within the United States but that clears security-based swaps for the 
U.S. customers of its members should be required to register with the 
Commission as a clearing agency? Would the provision of omnibus or 
individual segregation of U.S. customer funds affect this analysis? Why 
or why not? Should a security-based swap CCP that relies on a financial 
guaranty of a U.S. person in allowing a non-U.S. person to become a 
member be required to register with the Commission? If not, why not?
     How will Commission registration of, exemption from 
registration for, or promulgation of alternative standards applicable 
to registered foreign security-based swap CCPs affect the central 
clearing of security-based swaps? How would it affect the management of 
counterparty credit risk? How would it affect systemic risk? What 
impact would it have on the continued development of the global 
security-based swap market?
     What factors should the Commission consider in determining 
whether a foreign security-based swap CCP is subject to comparable, 
comprehensive supervision and regulation by appropriate government 
authorities in the home country of the CCP? What level of similarity 
should be required in order for a home country supervision and 
regulatory framework to be considered comparable and comprehensive when 
compared to that of the United States?
     How should the Commission determine the home country of a 
CCP for purposes of Section 17A(k) of the Exchange Act? Should it be 
the country in which the CCP is incorporated or organized or the 
country in which it conducts the principal amount of its clearance and 
settlement activities?
     What other facts and circumstances should the Commission 
review in determining whether an exemption may be granted under 
Exchange Act Section 17A(k)? What terms and conditions should be 
required in connection with an exemption from registration? For 
example, should the Commission consider whether a jurisdiction has 
implemented any international standards, such as the CPSS-IOSCO 
Principles for Financial Market Infrastructures in its regulatory 
framework? \687\ In addition, should the existence of a cooperative 
agreement with the home country be a factor?
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    \687\ See CPSS-IOSCO, Principles for Financial Market 
Infrastructures (Apr. 2012) (``FMI Principles''), available at: 
https://www.bis.org/publ/cpss101a.pdf.
---------------------------------------------------------------------------

     What would be the market impact of the proposed approach 
to the registration of foreign CCPs? How would the application of the 
proposed approach affect the competitiveness of U.S. entities in the 
global marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach? What would be 
the market impacts and competitiveness effects of alternatives to the 
proposed approach discussed in this release?

VI. Security-Based Swap Data Repositories

A. Introduction

    Under the Dodd-Frank Act, SDRs are intended to play a key role in 
enhancing transparency in the security-based swap market by retaining 
complete records of security-based swap transactions, maintaining the 
integrity of those records, and providing effective access to those 
records to relevant authorities and the public consistent with their 
respective information needs.\688\ Title VII provides the Commission 
with authority to adopt rules governing SDRs.\689\ Using this 
authority, the Commission has proposed rules governing the SDR 
registration process, duties, and core principles, including duties 
related to data maintenance and access by relevant authorities and 
those seeking to use the SDR's repository services.\690\
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    \688\ See SDR Proposing Release, 75 FR 77307.
    \689\ See Section 13(n)(9) of the Exchange Act, 15 U.S.C. 
78m(n)(9), as added by Section 763(i) of the Dodd-Frank Act.
    \690\ See SDR Proposing Release, 75 FR 77306.
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    As noted above, the security-based swap market is global in scope 
and transactions often involve counterparties in different 
jurisdictions.\691\ The Commission recognizes that, as a result, there 
may be uncertainty regarding the application of Section 13(n) of the 
Exchange Act \692\ and the rules and regulations thereunder 
(collectively, ``SDR Requirements'').\693\ In addition, the Commission 
is concerned that an overly broad application of the SDR Requirements 
may unnecessarily restrict global regulators' access to, and sharing 
of, security-based swap data in various jurisdictions and present 
difficulties in enhancing transparency in the global security-based 
swap market.\694\ To address these concerns, and as explained more 
fully below, the Commission is proposing to limit the application of 
the SDR Requirements to certain persons that perform the functions of 
an SDR, including proposing a new rule to provide non-U.S. persons 
performing the functions of an SDR within the United States with 
exemptive relief from the SDR Requirements. In addition, to facilitate 
relevant authorities' access to security-based swap data collected and 
maintained by Commission-registered SDRs, the Commission is proposing 
interpretive guidance to specify how SDRs may comply with the 
notification requirement set forth in Section 13(n)(5)(G) of the 
Exchange Act \695\ and previously proposed Rule 13n-4(b)(9) thereunder. 
The Commission also is specifying how the Commission proposes to 
determine whether a relevant authority is appropriate for purposes of 
receiving security-based swap data from an SDR. In addition, the 
Commission is proposing a new rule to provide SDRs with exemptive 
relief from the indemnification requirement

[[Page 31041]]

set forth in Section 13(n)(5)(H)(ii) of the Exchange Act \696\ and 
previously proposed Rule 13n-4(b)(10) thereunder.
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    \691\ See Section II.A, supra.
    \692\ 15 U.S.C. 78m(n)(9), as added by Section 763(i) of the 
Dodd-Frank Act.
    \693\ See Section 13(n) of the Exchange Act, 15 U.S.C. 78m(n), 
as added by Section 763(i) of the Dodd-Frank Act, and proposed Rules 
13n-1 to 13n-11 under the Exchange Act.
    \694\ Cf. Soci[eacute]t[eacute] G[eacute]n[eacute]rale Letter I 
at 2 (suggesting that U.S. and EU regulators limit their 
jurisdiction to the part of the security-based swap business that 
they can most practically regulate, even if they have jurisdiction 
over a broader range of that business).
    \695\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \696\ 15 U.S.C. 78m(n)(5)(H)(ii), as added by Section 763(i) of 
the Dodd-Frank Act.
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    In formulating this proposal, the Commission has sought to balance 
the policy considerations discussed above \697\ and the particular 
concerns related to security-based swap reporting discussed below. The 
Commission recognizes that other approaches may exist in achieving the 
mandate of the Dodd-Frank Act, in whole or in part. Accordingly, the 
Commission invites comment regarding all aspects of the proposal 
described below, including potential alternative approaches. Data and 
comment from market participants and other interested parties regarding 
the likely effect of the Commission's proposed rules and interpretative 
guidance as well as potential alternative approaches will be 
particularly useful to the Commission in evaluating possible 
modifications to the proposal.
---------------------------------------------------------------------------

    \697\ See Section II.C, supra (discussing principles guiding the 
Commission's proposed approach to applying Title VII in the cross-
border context).
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B. Application of the SDR Requirements in the Cross-Border Context

1. Introduction
    Section 3(a)(75) of the Exchange Act defines a ``security-based 
swap data repository'' to mean ``any person that collects and maintains 
information or records with respect to transactions or positions in, or 
the terms and conditions of, security-based swaps entered into by third 
parties for the purpose of providing a centralized recordkeeping 
facility for security-based swaps.'' \698\ Section 13(n)(1) of the 
Exchange Act provides that ``[i]t shall be unlawful for any person, 
unless registered with the Commission, directly or indirectly, to make 
use of the mails or any means or instrumentality of interstate commerce 
to perform the functions of a security-based swap data repository.'' 
\699\
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    \698\ 15 U.S.C. 78c(a)(75), as added by Section 761(a) of the 
Dodd-Frank Act.
    \699\ 15 U.S.C. 78m(n)(1), as added by Section 763(i) of the 
Dodd-Frank Act.
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    Although the Commission has previously proposed a rule governing 
the registration process for SDRs,\700\ which includes requirements for 
``non-resident security-based swap data repositor[ies],'' \701\ the 
Commission has not explicitly explained under what circumstances in the 
cross-border context would a person performing the functions of an SDR 
be required to register with the Commission pursuant to Section 
13(n)(1) of the Exchange Act \702\ and previously proposed Rule 13n-1 
thereunder, and to comply with the other SDR Requirements.\703\ As 
discussed further below, the Commission is proposing interpretative 
guidance to discuss such circumstances and a new rule to provide 
exemptive relief from the SDR Requirements.
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    \700\ See proposed Rule 13n-1 under the Exchange Act.
    \701\ See proposed Rule 13n-1(a)(2) under the Exchange Act, 
which defines ``non-resident security-based swap data repository'' 
(hereinafter ``non-resident SDR'') as ``(i) [i]n the case of an 
individual, one who resides in or has his principal place of 
business in any place not in the United States; (ii) [i]n the case 
of a corporation, one incorporated in or having its principal place 
of business in any place not in the United States; or (iii) [i]n 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.'' Proposed Rule 13n-1(g) under the 
Exchange Act would require any non-resident SDR applying for 
registration with the Commission to certify 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 the Commission.
    \702\ 15 U.S.C. 78m(n)(1), as added by Section 763(i) of the 
Dodd-Frank Act.
    \703\ In addition to the SDR Requirements, the Commission has 
proposed, and is re-proposing in this release, Regulation SBSR, 
which, if adopted as re-proposed, would impose certain obligations 
on SDRs registered with the Commission. See Section VIII, infra. In 
a separate proposal relating to implementation of Section 763(i) of 
the Dodd-Frank Act (adding Exchange Act Section 13(n)(5)(E), 15 
U.S.C. 78m(n)(5)(E)), the Commission has proposed rules that would 
require SDRs registered with the Commission to collect data related 
to monitoring the compliance and frequency of end-user clearing 
exemption claims. See End-User Exception Proposing Release, 75 FR 
79992. Because these proposed rules and regulations, on their face, 
apply only to Commission-registered SDRs, the Commission 
preliminarily believes that these requirements, if adopted as 
proposed, would not apply to unregistered SDRs, including those that 
avail themselves of the SDR Exemption, discussed below.
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2. Comment Summary
    The Commission received several comment letters concerning the 
registration and regulation of SDRs in the cross-border context. As a 
general matter, commenters suggested that the Commission should apply 
principles of international comity.\704\
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    \704\ See DTCC Letter III at 3 (urging the Commission, in its 
regulation of SDRs, to aim for regulatory comity); Davis Polk Letter 
I at 7 (recommending that the Commission work with foreign 
authorities to permit SDRs in all major jurisdictions to register 
with the appropriate regulators in each jurisdiction); see also 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale Letter I at 2 
(suggesting that the Commission consider international comity and 
public policy goals of derivatives regulation to limit its 
regulation of swap business); ISDA/SIFMA Letter I at 18 (``The 
Commission should consult with foreign regulators before 
establishing the extra-territorial scope of the rules promulgated 
under Title VII.'').
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    In addition, two commenters expressed concerns about the potential 
impact of duplicative registration requirements imposed on SDRs.\705\ 
Specifically, one of these commenters remarked that the Commission's 
previously proposed rules governing SDRs ``would seem to force a non-
resident SDR to be subject to multiple regimes and to the jurisdiction 
of several authorities'' and that the SDR Proposing Release made no 
``reference to equivalency of regulatory regimes or cooperation with 
the authorities of the country of establishment of the non-resident 
SDRs.'' \706\ To address this concern, the commenter suggested that the 
Commission adopt a regime under which foreign SDRs would be deemed to 
comply with the SDR Requirements if the laws and regulations of the 
relevant foreign jurisdiction were equivalent to those of the 
Commission and an MOU has been entered into between the Commission and 
the relevant foreign authority.\707\ The commenter noted that the 
recommended ``regime would have the following advantages: (i) 
facilitating cooperation among authorities from different 
jurisdictions; (ii) ensuring the mutual recognition of [SDRs]; and 
(iii) establishing convergent regulatory and supervisory regimes which 
is necessary in a global market such as the OTC derivatives one.'' 
\708\
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    \705\ See Cleary Letter IV at 31; ESMA Letter.
    \706\ ESMA Letter at 1.
    \707\ See id. at 2.
    \708\ Id.
---------------------------------------------------------------------------

    Recognizing that some SDRs would function solely outside of the 
United States and, therefore, would be regulated by an authority in 
another jurisdiction, commenters suggested possible approaches to the 
SDR registration regime. One commenter, for example, believed that ``a 
non-U.S. SDR should not be subject to U.S. registration so long as it 
collects and maintains information from outside the U.S., even if such 
information is collected from non-U.S. swap dealer or [major security-
based swap participant] registrants.'' \709\ Another commenter 
supported ``cross-registration'' of SDRs, whereby SDRs in all major 
jurisdictions may register with the appropriate regulators in each 
jurisdiction.\710\
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    \709\ See Cleary Letter IV at 31.
    \710\ Davis Polk Letter I at 7 (``Cross-registration of SDRs is 
not only necessary given the global nature of the swaps market, it 
also reduces duplicative data reporting. Cross-registration would 
also facilitate the creation of uniform reporting rules and 
procedures that would enable easy comparison of transaction data 
from different jurisdictions.'').
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3. Proposed Approach
    In light of the concerns raised by commenters and the policy

[[Page 31042]]

considerations discussed above,\711\ the Commission is proposing (i) 
interpretive guidance regarding the application of the SDR Requirements 
to U.S. persons that perform the functions of an SDR; and (ii) 
interpretive guidance regarding the application of the SDR Requirements 
to non-U.S. persons that perform the functions of an SDR within the 
United States and a new rule providing exemptive relief from the SDR 
Requirements for such non-U.S. persons, subject to a condition.
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    \711\ See Section II.C, supra (discussing principles guiding the 
Commission's proposed approach to applying Title VII in the cross-
border context).
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(a) U.S. Persons Performing SDR Functions Are Required to Register With 
the Commission
    Consistent with the approach taken elsewhere in this release,\712\ 
the Commission preliminarily believes that any U.S. person \713\ that 
performs the functions of an SDR \714\ would be required to register 
with the Commission pursuant to Section 13(n)(1) of the Exchange Act 
\715\ and previously proposed Rule 13n-1 thereunder. The Commission 
preliminarily believes that requiring U.S. persons that perform the 
functions of an SDR to register with the Commission and comply with the 
SDR Requirements, as well as other requirements applicable to SDRs 
registered with the Commission,\716\ is necessary to achieve the policy 
objectives of Title VII.\717\ Requiring U.S. persons that perform the 
functions of an SDR to be operated in a manner consistent with the 
Title VII regulatory framework and subject to the Commission's 
oversight, would, among other things, help ensure that relevant 
authorities are able to monitor the build-up and concentration of risk 
exposure in the security-based swap market, reduce operational risk in 
that market, and increase operational efficiency.\718\ As the 
Commission noted in the SDR Proposing Release, SDRs themselves are 
subject to certain operational risks that may impede the ability of 
SDRs to meet these goals,\719\ and the Title VII regulatory framework 
is intended to address these risks.
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    \712\ See Section V.B, supra, and Section VII.B, infra.
    \713\ Under this proposed interpretation, the term ``U.S. 
person'' would have the same meaning as set forth in proposed Rule 
3a71-3(a)(7) under the Exchange Act, as discussed in Section 
III.B.5, supra. As a practical matter, the Commission preliminarily 
believes that all non-resident SDRs would likely be non-U.S. persons 
given the similar distinguishing factors in the definitions of 
``non-resident security-based swap data repository'' and ``non-U.S. 
person.''
    \714\ Generally speaking, the Commission preliminarily believes 
that the ``functions of a security-based swap data repository'' 
include, at a minimum, the core services or functions that are 
embedded in the statutory definition of a ``security-based swap data 
repository.'' See Section 3(a)(75) of the Exchange Act, 15 U.S.C. 
78c(a)(75), as added by Section 761(a) of the Dodd-Frank Act 
(defining ``security-based swap data repository'' to mean ``any 
person that collects and maintains information or records with 
respect to transactions or positions in, or the terms and conditions 
of, security-based swaps entered into by third parties for the 
purpose of providing a centralized recordkeeping facility for 
security-based swaps'').
    \715\ 15 U.S.C. 78m(n)(1), as added by Section 763(i) of the 
Dodd-Frank Act.
    \716\ See note 703, supra.
    \717\ See Section II.C, supra (discussing principles guiding the 
Commission's proposed approach to applying Title VII in the cross-
border context).
    \718\ See SDR Proposing Release, 75 FR 77307 (``The enhanced 
transparency provided by an SDR is important to help regulators and 
others monitor the build-up and concentration of risk exposures in 
the [security-based swap] market . . . . In addition, SDRs have the 
potential to reduce operational risk and enhance operational 
efficiency in the [security-based swap] market.'').
    \719\ See id. (``The inability of an SDR to protect the accuracy 
and integrity of the data that it maintains or the inability of an 
SDR to make such data available to regulators, market participants, 
and others in a timely manner could have a significant negative 
impact on the [security-based swap] market. Failure to maintain 
privacy of such data could lead to market abuse and subsequent loss 
of liquidity.'').
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(b) Interpretive Guidance and Exemption for Non-U.S. Persons That 
Perform the Functions of an SDR Within the United States
    In the context of the cross-border reporting of security-based swap 
data, the Commission recognizes that some uncertainty may arise 
regarding when the SDR Requirements, and other requirements applicable 
to SDRs registered with the Commission,\720\ apply to non-U.S. persons 
that perform the functions of an SDR. The Commission preliminarily 
believes that a non-U.S. person that performs the functions of an SDR 
within the United States would be required to register with the 
Commission, absent an exemption.\721\
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    \720\ See note 703, supra.
    \721\ See Section 13(n)(1) of the Exchange Act, 15 U.S.C. 
78m(n)(1), as added by Section 763(i) of the Dodd-Frank Act 
(requiring persons that, directly or indirectly, make use of the 
mails or any means or instrumentality of interstate commerce to 
perform the functions of an SDR, to register with the Commission). 
The Commission recognizes that some non-U.S. persons that perform 
the functions of an SDR may do so entirely outside the United States 
and thus are not required to register with the Commission.
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    In order to provide legal certainty to market participants and 
address concerns raised by commenters, and consistent with the proposed 
interpretive guidance discussed above, the Commission is proposing, 
pursuant to our authority under Section 36 of the Exchange Act,\722\ an 
exemption from the SDR Requirements for non-U.S. persons that perform 
the functions of an SDR within the United States, subject to a 
condition. Specifically, the Commission is proposing Rule 13n-12 (``SDR 
Exemption''), which states as follows: ``A non-U.S. person \723\ that 
performs the functions of a security-based swap data repository within 
the United States shall be exempt from the registration and other 
requirements set forth in Section 13(n) of the [Exchange] Act . . . and 
the rules and regulations thereunder, provided that each regulator with 
supervisory authority over such non-U.S. person has entered into a 
supervisory and enforcement memorandum of understanding (`MOU') or 
other arrangement with the Commission that addresses the 
confidentiality of data collected and maintained by such non-U.S. 
person, access by the Commission to such data, and any other matters 
determined by the Commission.'' \724\
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    \722\ Section 36 of the Exchange Act authorizes the Commission 
to conditionally or unconditionally exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions, from certain provisions of the Exchange Act or certain 
rules or regulations thereunder, by rule, regulation, or order, to 
the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of investors. 
15 U.S.C. 78mm.
    \723\ Proposed Rule 13n-12(a)(1) under the Exchange Act defines 
``non-U.S. person'' to mean any person that is not a U.S. person. 
Proposed Rule 13n-12(a)(2) under the Exchange Act defines ``U.S. 
person'' by cross-reference to the definition of ``U.S. person'' in 
re-proposed Rule 3a71-3(a)(7) under the Exchange Act, as discussed 
in Section III.B.5 above.
    \724\ Proposed Rule 13n-12(b) under the Exchange Act.
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    The Commission preliminarily believes that a non-U.S. person would 
be performing ``the functions of a security-based swap data repository 
within the United States'' if, for example, it enters into contracts, 
such as user or technical agreements, with a U.S. person to enable the 
U.S. person to report security-based swap data to such non-U.S. person. 
As another example, a non-U.S. person would be performing ``the 
functions of a security-based swap data repository within the United 
States'' if it has operations in the United States, such as maintaining 
security-based swap data on servers physically located in the United 
States, even if its principal place of business is not in the United 
States.\725\ Given the constant

[[Page 31043]]

innovation in the market and the fact-specific nature of the 
determination, it is not possible to provide here a comprehensive 
discussion of every activity that would constitute a non-U.S. person 
performing ``the functions of a security-based swap data repository 
within the United States.''
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    \725\ The Commission notes that if a person performing the 
functions of an SDR has operations in the United States to the 
extent that such operations constitute a principal place of 
business, then the person would fall within the proposed definition 
of ``U.S. person.'' As proposed, the term ``U.S. person'' includes a 
partnership, corporation, trust, or other legal person having its 
principal place of business in the United States. See Section 
III.B.5(b)ii, supra. As a result, under the interpretation proposed 
in Section VI.B.3(a) above, such person would be required to 
register as an SDR with the Commission.
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    The Commission preliminarily believes that the SDR Exemption is 
necessary or appropriate in the public interest, and consistent with 
the protection of investors. Because the reporting requirements of 
Title VII and re-proposed Regulation SBSR can be satisfied only if a 
security-based swap transaction is reported to an SDR that is 
registered with the Commission,\726\ the Commission preliminarily 
believes that the primary reason for a person subject to the reporting 
requirements of Title VII and re-proposed Regulation SBSR to report a 
security-based swap transaction to an SDR that is not registered with 
the Commission would likely be to satisfy reporting obligations that it 
or its counterparty has under foreign law. Such person would still be 
required to fulfill its reporting obligations under Title VII and re-
proposed Regulation SBSR by reporting its security-based swap 
transaction to an SDR registered with the Commission, absent other 
relief from the Commission,\727\ even if the transaction were also 
reported to a non-U.S. person that relies on the SDR Exemption. The 
Commission preliminarily believes that this proposed approach to the 
SDR Requirements appropriately would balance the Commission's interest 
in having access to security-based swap data involving U.S. persons, 
while addressing commenters' concerns regarding the potential for 
duplicative regulatory requirements \728\ as well as furthering the 
goals of the Dodd-Frank Act.
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    \726\ The Commission notes that a non-U.S. person that performs 
the functions of an SDR may choose to register with the Commission 
as an SDR to enable that person to accept data from persons that are 
reporting a security-based swap pursuant to the reporting 
requirements of Title VII and re-proposed Regulation SBSR. See 15 
U.S.C. 78m(m)(1)(G) and 78m-1(a)(1), as added by Sections 763(i) and 
766(a) of the Dodd-Frank Act and Section VIII, infra (discussing re-
proposed Regulation SBSR). The Commission may consider also 
granting, pursuant to its authority under Section 36 of the Exchange 
Act, 15 U.S.C. 78mm, exemptions to such non-U.S. person that 
registers with the Commission from certain of the SDR Requirements 
on a case-by-case basis. In determining whether to grant such an 
exemption, the Commission may consider, among other things, whether 
there are overlapping requirements in the Exchange Act and 
applicable foreign law.
    \727\ See discussion of Regulation SBSR in Section VIII, infra, 
and discussion of substituted compliance in Section XI.D, infra.
    \728\ See Section VI.B.2, supra (summarizing comment letters 
concerning the registration of SDRs in the cross-border context).
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    The SDR Exemption would be subject to the condition that each 
regulator with supervisory authority over the non-U.S. person that 
performs the functions of an SDR within the United States enters into a 
supervisory and enforcement MOU or other arrangement with the 
Commission, as specified in proposed Rule 13n-12(b) under the Exchange 
Act. The Commission anticipates that in determining whether to enter 
into such an MOU or other arrangement with a relevant authority, the 
Commission would consider whether the relevant authority would keep 
data collected and maintained by the non-U.S. person that performs the 
functions of an SDR within the United States confidential \729\ and 
whether the Commission would have access to data collected and 
maintained by such non-U.S. person.\730\ The Commission anticipates 
that it would consider other matters, including, for example, whether 
the relevant authority agrees to provide the Commission with reciprocal 
assistance in securities matters within the Commission's jurisdiction 
and whether a supervisory and enforcement MOU or other arrangement 
would be in the public interest.\731\ The Commission preliminarily 
believes that, in lieu of requiring non-U.S. persons that perform the 
functions of an SDR within the United States to register with the 
Commission, the condition in the SDR Exemption is appropriate to 
address the Commission's interest in having access to security-based 
swap data involving U.S. persons and U.S. market participants that is 
maintained by non-U.S. persons that perform the functions of an SDR 
within the United States and protecting the confidentiality of such 
security-based swap data involving U.S. persons and U.S. market 
participants.
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    \729\ The Commission contemplates that the relevant authority 
would keep data collected and maintained by such non-U.S. person 
confidential in a manner that is consistent with Section 24 of the 
Exchange Act and Rule 24c-1 thereunder. See 15 U.S.C. 78x and 17 CFR 
240.24c-1.
    \730\ The Commission contemplates that the Commission's access 
to data collected and maintained by such non-U.S. person would be in 
a manner that is consistent with Section 13(n)(5)(D) of the Exchange 
Act and previously proposed Rule 13n-4(b)(5) thereunder. See 15 
U.S.C. 78m(n)(5)(D), as added by Section 763(i) of the Dodd-Frank 
Act.
    \731\ The Commission has previously entered numerous cooperative 
agreements with foreign authorities. See Cooperative Arrangements 
with Foreign Regulators, available at: https://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml. Based on the Commission's 
experience with negotiating MOUs and other agreements with foreign 
authorities, the Commission believes that the MOU or agreement 
described in proposed Rule 13n-12(b) could, in many cases, be 
negotiated in a timely manner based on existing confidentiality and 
information sharing agreements so that the exemptive relief provided 
under proposed Rule 13n-12(b) would be available before the 
registration of an SDR seeking to claim the exemption would be 
required.
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Request for comment
    The Commission requests comment on all aspects of the Commission's 
proposed interpretive guidance and the SDR Exemption, including the 
following:
     Is the Commission's proposed interpretive guidance and the 
SDR Exemption appropriate and sufficiently clear? Why or why not? Do 
you agree with the Commission's proposed interpretive guidance and SDR 
Exemption? Is it overly broad or narrow? If so, why? Is there a better 
alternative?
     Under the Commission's proposed interpretive guidance and 
SDR Exemption, will SDRs be subject to duplicative regulatory 
requirements? If so, will the Commission's proposed interpretive 
guidance and SDR Exemption reduce the costs of compliance with 
duplicative regulatory requirements? Why or why not?
     How may the Commission's proposed interpretive guidance 
and SDR Exemption affect the duplicative reporting of security-based 
swap data? Would the Commission's ability to exercise oversight of our 
registrants be compromised if it did not have the ability to learn and/
or obtain all security-based swap data from non-U.S. persons that 
perform the functions of an SDR within the United States that have 
chosen not to register with the Commission and that are not subject to 
a substituted compliance order? Why or why not?
     Are there any circumstances where a U.S. person performing 
the functions of an SDR should not be required to register with the 
Commission? If so, what are those circumstances?
     Should the Commission require all non-U.S. persons that 
perform the functions of an SDR within the United States to register 
with the Commission? Why or why not?
     Non-U.S. persons that perform the functions of an SDR 
within the United States may rely on the SDR Exemption. Are there any 
circumstances where non-U.S. persons that perform the functions of an 
SDR within the United States should be required to register with the 
Commission? If so, what are those circumstances? Do any of the 
following facts and circumstances, either individually or in 
combination, warrant requiring non-U.S. persons that perform

[[Page 31044]]

the functions of an SDR within the United States to register with the 
Commission: maintaining security-based swap data pertaining to a U.S. 
person or U.S. financial product; facilitating or supporting in the 
United States the submission of security-based swap data by U.S. 
persons; having any operations within the United States; entering into 
contracts, such as user or technical agreements, in order to accept 
security-based swap data from U.S. persons? If so, which one(s) and 
why? If not, why not? What types of activities and SDR functions 
performed within the United States do not warrant requiring a non-U.S. 
person that performs the functions of an SDR within the United States 
to be registered with the Commission? What if, for example, a non-U.S 
person that performs the functions of an SDR within the United States 
accepts only data from persons that are ``U.S. persons'' solely because 
they are foreign branches of U.S. persons?
     Does the proposed definition of ``U.S. person'' or ``non-
U.S. person'' in the SDR Exemption need to be clarified or modified? If 
so, which terms and how should they be defined?
     Do you agree with the proposed condition in the SDR 
Exemption? Why or why not? Should the condition include additional 
requirements? If so, what requirements would be appropriate? Are the 
Commission's estimates of the time required to establish an MOU 
reasonable? Why or why not? Should the condition apply only to certain 
non-U.S. persons that perform the functions of an SDR within the United 
States? Please explain. Should the condition apply if, for example, the 
only connection to the United States by a non-U.S. person that performs 
the functions of an SDR within the United States is that it maintains a 
back-up server physically located in the United States? Should the 
condition apply only to non-U.S. persons that perform the functions of 
an SDR within the United States that collect security-based swap data 
from a reporting side that includes at least one counterparty that is a 
U.S. person?
     Do you believe that most, if not all, non-U.S. persons 
that perform the functions of an SDR within the United States will 
maintain at least some security-based swap data involving U.S. persons 
or U.S. market participants? Why or why not?
     Is the Commission's reference in the SDR Exemption to a 
``non-U.S. person that performs the functions of a security-based swap 
data repository'' sufficiently clear? If not, what is a better 
alternative? Should the Commission replace, for example, ``non-U.S. 
person'' with ``non-resident security-based swap data repository,'' as 
defined in previously proposed Rule 13n-1(a)(2) under the Exchange Act, 
instead? Why or why not? Are there circumstances that would be covered 
by using ``non-U.S. person that performs the functions of a security-
based swap data repository'' in the SDR Exemption rather than using 
``non-resident security-based swap data repository that performs the 
functions of a security-based swap data repository'' in the SDR 
Exemption, and vice versa? If so, what circumstances and does it matter 
for practical purposes?
     Is the SDR Exemption's reference to ``within the United 
States'' sufficiently clear? What are the implications of this 
reference in the SDR Exemption?
     Are there any other factors that the Commission should 
consider in our interpretive guidance or the SDR Exemption, but that 
are not addressed above? If so, please explain.
     What would be the market impact of proposed approach to 
the registration of SDRs? How would the application of proposed 
approach affect the competitiveness of U.S. entities in the global 
marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach? What would be 
the market impacts and competitiveness effects of alternatives to the 
proposed approach discussed in this release?

C. Relevant Authorities' Access to Security-Based Swap Information and 
the Indemnification Requirement

    Section 13(n)(5)(G) of the Exchange Act \732\ and previously 
proposed Rule 13n-4(b)(9) thereunder provide that an SDR shall on a 
confidential basis, pursuant to Section 24 of the Exchange Act, and the 
rules and regulations thereunder, upon request, and after notifying the 
Commission of the request (``Notification Requirement''), make 
available all data obtained by the SDR, including individual 
counterparty trade and position data, to each appropriate prudential 
regulator, the Financial Stability Oversight Council, the CFTC, the 
Department of Justice, the Federal Deposit Insurance Corporation and 
any other person that the Commission determines to be appropriate, 
including, but not limited to, foreign financial supervisors (including 
foreign futures authorities), foreign central banks, and foreign 
ministries. Further, Section 13(n)(5)(H) of the Exchange Act \733\ and 
previously proposed Rule 13n-4(b)(10) provide that before sharing 
information with any entity described in Section 13(n)(5)(G) \734\ or 
previously proposed Rule 13n-4(b)(9),\735\ respectively, an SDR must 
obtain a written agreement from the entity stating that the entity 
shall abide by the confidentiality requirements described in Section 24 
of the Exchange Act,\736\ and the rules and regulations thereunder, 
relating to the information on security-based swap transactions that is 
provided; in addition, the entity shall agree to indemnify the SDR and 
the Commission for any expenses arising from litigation relating to the 
information provided under Section 24 of the Exchange Act \737\ and the 
rules and regulations thereunder (``Indemnification Requirement'').
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    \732\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \733\ 15 U.S.C. 78m(n)(5)(H), as added by Section 763(i) of the 
Dodd-Frank Act.
    \734\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \735\ Proposed Rules 13n-4(b)(9) and (10) essentially repeat the 
requirements of Sections 13(n)(5)(G) and (H) of the Exchange Act, 
respectively, with the exception of the addition in proposed Rule 
13n-4(b)(9) of the Federal Deposit Insurance Corporation to the 
relevant authorities specified in Section 13(n)(5)(G) of the 
Exchange Act.
    \736\ 15 U.S.C. 78x.
    \737\ Id.
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    The Commission believes that the goals of Sections 13(n)(5)(G) and 
13(n)(5)(H) of the Exchange Act \738\ are, among other things, to 
obligate SDRs to make available security-based swap information to 
relevant authorities and maintain the confidentiality of such 
information. More broadly, the goal of the Dodd-Frank Act is, among 
other things, to promote the financial stability of the U.S. by 
improving accountability and transparency in the financial system.\739\
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    \738\ 15 U.S.C. 78m(n)(5)(G) and (H), as added by Section 763(i) 
of the Dodd-Frank Act.
    \739\ See note 4, supra.
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    As discussed further below, the Commission recognizes that the 
Indemnification Requirement raises a number of concerns, including, 
among other things, the inability of certain relevant authorities to 
provide, as a matter of law or practice, an open-ended indemnification 
agreement and the possibility of security-based swap data being 
fragmented among trade repositories globally if foreign authorities 
establish trade repositories

[[Page 31045]]

in their jurisdictions to ensure access to data that they need to 
perform their regulatory mandates and legal responsibilities.\740\
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    \740\ See Section VI.C.3(c), infra.
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    In this section, the Commission will first describe the 
alternatives to the Notification Requirement and Indemnification 
Requirement that were discussed in the SDR Proposing Release. The 
Commission will then summarize the comments received, primarily in 
response to the SDR Proposing Release. Finally, the Commission will 
discuss our proposed interpretive guidance regarding relevant 
authorities' access to security-based swap information and our proposed 
exemptive relief from the Indemnification Requirement.
1. Information Sharing Under Sections 21 and 24 of the Exchange Act
    In the SDR Proposing Release, the Commission highlighted two 
alternative ways for relevant authorities to obtain data maintained by 
SDRs directly from the Commission (rather than directly from SDRs) 
without providing an indemnification agreement.\741\ Specifically, the 
Commission noted that there is existing independent authority in the 
Exchange Act for certain domestic and foreign authorities to obtain 
data maintained by SDRs directly from the Commission (rather than 
directly from SDRs) pursuant to Sections 21(a) and 24(c) of the 
Exchange Act \742\ in certain circumstances and without application of 
the Indemnification Requirement.\743\
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    \741\ See SDR Proposing Release, 75 FR 77319.
    \742\ 15 U.S.C. 78u(a) and 15 U.S.C. 78x(c).
    \743\ Section 13(n)(5)(H) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(H), as added by Section 763(i) of the Dodd-Frank Act. See 
SDR Proposing Release, 75 FR 77319. The Indemnification Requirement 
does not apply to requests for information made pursuant to Sections 
21(a) and 24(c) of the Exchange Act. Further, since relevant 
authorities requesting information under these provisions would go 
directly to the Commission, the Notification Requirement would also 
be inapplicable. Thus, these requirements would not apply to 
requests by relevant authorities for security-based swap data when 
the Commission is exercising its independent statutory authority to 
assist relevant authorities pursuant to Section 21(a) or 24(c) of 
the Exchange Act.
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    Section 21(a)(2) of the Exchange Act \744\ provides that the 
Commission may provide assistance to a foreign securities authority. 
The term ``foreign securities authority'' is broadly defined in Section 
3(a)(50) of the Exchange Act \745\ to include ``any foreign government, 
or any governmental body or regulatory organization empowered by a 
foreign government to administer or enforce its laws as they relate to 
securities matters.'' The Commission may provide assistance under 
Section 21(a)(2) of the Exchange Act \746\ to the foreign securities 
authority in connection with an investigation being conducted by the 
foreign securities authority to determine whether any person has 
violated, is violating, or is about to violate any laws or rules 
relating to securities matters that the authority administers or 
enforces. Section 21(a)(2) further provides that, as part of this 
assistance, the Commission may conduct an investigation to collect 
information and evidence pertinent to the foreign securities 
authority's request for assistance.\747\ The Commission believes that 
Section 21(a)(2) provides the Commission with independent authority to 
assist foreign securities authorities in certain circumstances by, for 
example, collecting security-based swap data from an SDR and providing 
such authorities with the data.
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    \744\ 15 U.S.C. 78u(a)(2).
    \745\ 15 U.S.C. 78c(a)(50).
    \746\ 15 U.S.C. 78u(a)(2).
    \747\ Section 21(a)(2) of the Exchange Act requires that, in 
considering whether to provide assistance to a foreign securities 
authority, the Commission determine whether the requesting authority 
has agreed to provide reciprocal assistance in securities matters to 
the United States, and whether compliance with the request would 
prejudice the public interest of the United States.
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    Pursuant to Section 24(c) of the Exchange Act \748\ and Rule 24c-1 
thereunder,\749\ the Commission may share nonpublic information \750\ 
in our possession with, among others, any ``federal, state, local, or 
foreign government, or any political subdivision, authority, agency or 
instrumentality of such government . . . [or] a foreign financial 
regulatory authority.'' \751\ Because the Exchange Act provides the 
Commission with the statutory authority to share information in our 
possession with other authorities, the Commission is of the view that 
if security-based swap transaction data is in our possession, then it 
may share this information with other authorities. In this regard, the 
Commission notes that the indemnification requirement set forth in 
Section 13(n)(5)(H)(ii) of the Exchange Act \752\ does not apply to the 
Commission, and would be inapplicable to the Commission's provision of 
security-based swap data to relevant authorities pursuant to our 
independent authority in Section 24(c) of the Exchange Act.\753\
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    \748\ 15 U.S.C. 78x(c).
    \749\ 17 CFR 240.24c-1.
    \750\ Under Rule 24c-1 under the Exchange Act, the term 
``nonpublic information'' means ``records, as defined in Section 
24(a) of the [Exchange] Act, and other information in the 
Commission's possession, which are not available for public 
inspection and copying.'' 17 CFR 240.24c-1.
    \751\ Section 3(a)(52) of the Exchange Act defines ``foreign 
financial regulatory authority'' to mean ``any (A) foreign 
securities authority, (B) other governmental body or foreign 
equivalent of a self-regulatory organization empowered by a foreign 
government to administer or enforce its laws relating to the 
regulation of fiduciaries, trusts, commercial lending, insurance, 
trading in contracts of sale of a commodity for future delivery, or 
other instruments traded on or subject to the rules of a contract 
market, board of trade, or foreign equivalent, or other financial 
activities, or (C) membership organization a function of which is to 
regulate participation of its members in activities listed above.'' 
15 U.S.C. 78c(a)(52).
    \752\ 15 U.S.C. 78m(n)(5)(H)(ii).
    \753\ 15 U.S.C. 78x(c).
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2. Comment Summary
    Four commenters submitted comments relating to relevant 
authorities' access to security-based swap information, three of which 
were in response to the SDR Proposing Release and one of which was in 
response to a joint public roundtable regarding the cross-border 
application of Title VII held by the Commission and the CFTC on August 
1, 2011.\754\ Commenters were generally supportive of relevant 
authorities having access to security-based swap data maintained by 
SDRs when such access is within the scope of the authorities' mandate, 
but these commenters expressed particular concerns relating to the 
Indemnification Requirement and relevant authorities' unfettered access 
to security-based swap data.
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    \754\ See Cleary Letter IV at 30-31; DTCC Letter I at 2 and III 
at 22-23; ESMA Letter at 2; MFA Letter I at 3.
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    As a general matter, one commenter stated that an SDR should be 
able to provide: (i) Enforcement authorities with necessary trading 
information; (ii) regulatory agencies with counterparty-specific 
information about systemic risk based on trading activity; (iii) 
aggregate trade information on market-wide activity and aggregate gross 
and net open interest for publication; and (iv) real-time reporting 
from SB SEFs and bilateral counterparties and related 
dissemination.\755\ The same commenter supported relevant authorities' 
access to reports from SDRs that are scheduled on a regular basis or 
triggered by certain events, and believed that the Commission's 
regulatory model regarding regulatory access should be ``location 
agnostic, without preferential access for [a] prudential regulator, 
except to perform its prudential duties.'' \756\ The commenter also 
believed that ``it is important to preserve [the] spirit of cooperation 
and coordination between regulators around the world'' in the context 
of ensuring

[[Page 31046]]

global regulators' access to security-based swap data.\757\
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    \755\ DTCC Letter IV at 5.
    \756\ DTCC Letter III at 12.
    \757\ Id. at 12 (discussing the spirit of cooperation and 
coordination between regulators in the context of implementation of 
guidance provided by the ODRF regarding global regulators' access to 
security-based swap data maintained by a trade repository in the 
United States).
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    Two commenters concurred with the Commission's statements in the 
SDR Proposing Release that relevant authorities will likely be unable 
to agree to provide SDRs and the Commission with indemnification, as 
required by Section 13(n)(5)(H)(ii) of the Exchange Act prior to 
receiving security-based swap data maintained by SDRs.\758\ One of 
these commenters described the Indemnification Requirement as 
contravening the purpose of SDRs by diminishing transparency if 
regulators are not allowed to have ready access to information and 
thereby jeopardizing market stability.\759\ Specifically, the commenter 
believed that the Indemnification Requirement should not apply where 
relevant authorities are carrying out their regulatory 
responsibilities, in accordance with international agreements and while 
maintaining the confidentiality of data provided to them.\760\ 
Recognizing that the Indemnification Requirement is mandated by the 
Dodd-Frank Act, however, the commenter suggested that in order to 
ensure consistent application of the requirement and to ``minimize any 
disruption to the global repository framework,'' the Commission should 
provide model indemnification language for all SDRs to use.\761\ 
Further, the commenter believed that ``any indemnity should be limited 
in scope to minimize the potential reduction in value of registered 
SDRs to the regulatory community.'' \762\
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    \758\ See DTCC Letter I at 3; Cleary Letter IV at 31; see also 
SDR Proposing Release, 75 at 77318-19 (``With respect to the 
indemnification provision, the Commission understands that 
regulators may be legally prohibited or otherwise restricted from 
agreeing to indemnify third parties, including SDRs as well as the 
Commission. The indemnification provision could chill requests for 
access to data obtained by SDRs, thereby hindering the ability of 
others to fulfill their regulatory mandates and 
responsibilities.'').
    \759\ See DTCC Letter I at 3 (discussing how the Indemnification 
Requirement would result in the reduction of information accessible 
to regulators on a timely basis and would greatly diminish 
regulators' ability to carry out oversight functions).
    \760\ DTCC Letter III at 12.
    \761\ Id.
    \762\ Id.
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    In discussing the Indemnification Requirement, another commenter 
reiterated the notion that relevant authorities must ensure the 
confidentiality of security-based swap data provided to them.\763\ The 
commenter believed that the Indemnification Requirement ``undermines 
the key principle of trust according to which exchange of information 
[among relevant authorities] should occur.'' \764\ Thus, the commenter 
recommended that the Commission's rules help streamline the 
Indemnification Requirement for an ``efficient exchange of 
information.'' \765\
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    \763\ ESMA Letter at 2.
    \764\ Id.
    \765\ Id.
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    One commenter voiced concerns about unfettered access to security-
based swap information by regulators, including foreign financial 
supervisors, foreign central banks, and foreign ministries, beyond 
their regulatory authority and mandate.\766\ This commenter was 
concerned that the statutory language incorporated in previously 
proposed Rule 13n-4(b)(9), which provides that in addition to the 
entities specifically listed in the rule, an SDR could make available 
data to ``any other person that the Commission determines to be 
appropriate,'' is vague and could result in an SDR providing access to 
persons without proper authority.\767\ The commenter suggested that the 
Commission adopt an approach similar to the CFTC's proposed Rule 
49.17(d),\768\ and that the Commission and the CFTC ``endeavor to adopt 
similar procedures to control regulator requests for security-based 
swap information.'' \769\
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    \766\ MFA Letter I at 3.
    \767\ Id. at 4.
    \768\ As adopted, CFTC Rule 49.17(d) requires any ``Appropriate 
Domestic Regulator'' or ``Appropriate Foreign Regulator'' requesting 
access to swap data obtained and maintained by a swap data 
repository to first file a request for access with the swap data 
repository and certify the statutory authority for such request. The 
swap data repository then must promptly notify the CFTC of such 
request and the swap data repository subsequently would provide 
access to the requested swap data. CFTC Rule 49.17(b)(1) defines 
``Appropriate Domestic Regulator'' and CFTC Rule 49.17(b)(2) 
provides that ``Appropriate Foreign Regulators'' are those that have 
an existing memorandum of understanding with the CFTC or otherwise 
as determined through an application process. See CFTC Final Rule, 
Swap Data Repositories: Registration Standards, Duties and Core 
Principles, 76 FR 54538 (Sept. 1, 2011) (``CFTC SDR Adopting 
Release'').
    \769\ MFA Letter I at 4.
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3. Proposed Guidance and Exemptive Relief
    Consistent with the goals of the Dodd-Frank Act \770\ and the 
purposes of SDRs,\771\ and after considering the comments received to 
date, the Commission is proposing additional guidance regarding 
relevant authorities' access to security-based swap information and 
proposing exemptive relief from the Indemnification Requirement. For 
the reasons discussed further below, the Commission preliminarily 
believes that our proposed guidance and exemption from the 
Indemnification Requirement is necessary or appropriate to, among other 
things, further the goals of the Dodd-Frank Act and the purposes of 
SDRs while preserving the confidentiality of the security-based swap 
information maintained by SDRs, as necessary. The Commission also 
preliminarily believes that our proposed guidance and exemption will, 
as one commenter suggested, help provide for an ``efficient exchange of 
information.'' \772\
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    \770\ Dodd-Frank Act, Public Law 111-203 at Preamble (goals 
include promoting ``the financial stability of the United States by 
improving accountability and transparency in the financial 
system'').
    \771\ See SDR Proposing Release, 75 FR 77307 (stating that 
``SDRs are intended to play a key role in enhancing transparency in 
the [security-based swap] market by . . . providing effective access 
to [security-based swap transaction] records to relevant 
authorities. . . .'').
    \772\ See ESMA Letter at 2.
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(a) Notification Requirement
    Section 13(n)(5)(G) of the Exchange Act requires an SDR, upon 
request, to ``make available all data obtained by the SDR, including 
individual counterparty trade and position data,'' to certain specified 
relevant authorities, as well as ``other persons that the Commission 
determines to be appropriate.'' \773\ However, the SDR may make such 
data available only ``after notifying the Commission of the request.'' 
\774\ The Commission preliminarily believes that an SDR can fulfill its 
obligation to notify ``the Commission of the request'' under Section 
13(n)(5)(G) of the Exchange Act \775\ and previously proposed Rule 13n-
4(b)(9) by notifying the Commission, upon the initial request for 
security-based swap data by a relevant authority, of the request for 
security-based swap data from the SDR, and maintaining records of the 
initial request and all subsequent requests.\776\

[[Page 31047]]

The Commission would consider the notice provided and records 
maintained as satisfying the Notification Requirement.\777\ The 
Commission preliminarily believes that this approach is an efficient 
way for an SDR to satisfy its statutory notification obligation.\778\
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    \773\ Section 13(n)(5)(G) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(G), as added by Section 763(i) of the Dodd-Frank Act 
(specifying each appropriate prudential regulator, the Financial 
Stability Oversight Council, the CFTC, and the Department of 
Justice); see also proposed Rule 13n-4(b)(9) under the Exchange Act 
(adding the Federal Deposit Insurance Corporation).
    \774\ Section 13(n)(5)(G) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(G), as added by Section 763(i) of the Dodd-Frank Act; see 
also proposed Rule 13n-4(b)(9) under the Exchange Act.
    \775\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \776\ Pursuant to previously proposed Rule 13n-7(b) under the 
Exchange Act, the SDR would be required to maintain records of the 
initial request and all subsequent requests, including details of 
any on-line access by relevant authorities to security-based swap 
data maintained by the SDR, by such relevant authority. See proposed 
Rule 13n-7(b) under the Exchange Act (requiring, among other things, 
keeping at least one copy of all documents required under the 
Exchange Act and records made or received by the SDR in the course 
of its business as such for not less than five years, and promptly 
furnishing such documents to any representative of the Commission 
upon request).
    \777\ One commenter stated that ``regulators want direct 
electronic access to data in SDRs where that data is needed to 
fulfill regulatory responsibilities'' rather than access ``by 
request, with notice to another regulatory authority.'' See DTCC 
Letter III at 11-12. The Commission preliminarily believes that SDRs 
can provide direct electronic access to relevant authorities under 
its interpretation. In such a case, the SDR would have to provide 
the Commission with actual notification upon the initial time that 
the relevant authority accesses the SDR's security-based swap data, 
and retain records of any electronic access by the relevant 
authority.
    \778\ As discussed in the SDR Proposing Release, an SDR must 
keep its notifications to the Commission and requests by relevant 
authorities confidential. See SDR Proposing Release, 75 FR 77318. 
Failure by an SDR to treat such notifications and requests 
confidential could render ineffective or could have adverse effects 
on the underlying basis for the requests. See id. If, for example, a 
regulatory use of the data is improperly disclosed, such disclosure 
could possibly signal a pending investigation or enforcement action, 
which could have detrimental effects. See id.
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(b) Determination of Appropriate Regulators
    Section 13(n)(5)(G) of the Exchange Act requires an SDR, upon 
request, to ``make available all data obtained by the [SDR], including 
individual counterparty trade and position data,'' to certain specified 
relevant authorities, as well as ``each appropriate prudential 
regulator'' and ``other persons that the Commission determines to be 
appropriate,'' including, but not limited to, foreign financial 
supervisors (including foreign futures authorities), foreign central 
banks, and foreign ministries.\779\ The Commission contemplates that a 
relevant authority will be able to request that the Commission make a 
determination that the relevant authority is appropriate for requesting 
security-based swap data from an SDR. The Commission preliminarily 
believes that it will make such a determination through the issuance of 
a Commission order.
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    \779\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act. See also proposed Rule 13n-4(b)(9) under the 
Exchange Act.
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    In making such a determination, the Commission expects that we 
would consider a variety of factors, and our order may include, among 
other things, conditions on determining that a relevant authority is 
appropriate for purposes of receiving security-based swap data directly 
from SDRs. The Commission preliminarily believes that such 
determination will likely be conditioned on a supervisory and 
enforcement MOU or other arrangement between the Commission and the 
relevant authority.\780\ Given the necessity of maintaining the 
confidentiality of the proprietary and highly sensitive data maintained 
by an SDR, such an MOU or arrangement \781\ would be designed to 
protect the confidentiality of the security-based swap data provided to 
the relevant authority by an SDR.\782\ The Commission anticipates that 
in determining whether to enter into such an MOU or other arrangement 
with a relevant authority, the Commission may consider whether, among 
other things, the relevant authority needs security-based swap 
information from an SDR to fulfill its regulatory mandate or legal 
responsibilities and the relevant authority agrees to protect the 
confidentiality of the security-based swap information provided to it. 
The Commission preliminarily believes that this MOU or arrangement 
could also satisfy the condition in proposed Rule 13n-4(d)(3) for an 
SDR to avail itself of the Indemnification Exemption, which is 
discussed below.\783\
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    \780\ Similarly, the CFTC requires ``appropriate foreign 
regulator[s]'' to have an MOU or similar type of arrangement with 
the CFTC or, as determined by the CFTC on a case-by-case basis. CFTC 
Rule 49.17(b)(2), 17 CFR 49.17(b)(2).
    \781\ This MOU or other arrangement is separate from the written 
agreement under Section 13(n)(5)(H)(i) of the Exchange Act and 
previously proposed Rule 13n-4(b)(10) thereunder, both of which 
require the SDR to receive a written agreement from each relevant 
authority pertaining to the confidentiality of the security-based 
swap transaction information that is provided by the SDR. The MOU or 
other arrangement is between the Commission and the relevant 
authority, whereas the written agreement is between the SDR and the 
relevant authority.
    \782\ The CFTC requires certain foreign regulators ``to provide 
sufficient facts and procedures to permit the [CFTC] to analyze 
whether the [foreign regulator] employs appropriate confidentiality 
procedures and to satisfy itself that the information will be 
disclosed only as permitted by Section 8(e) of the [Commodity 
Exchange Act].'' CFTC Rule 49.17(b)(2), 17 CFR 49.17(b)(2). The 
Commission expects that the relevant authority will need to provide 
to the Commission similar information before the Commission will 
enter into the MOU or other arrangement.
    \783\ See Section VI.C.3(c), infra.
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    In addition, the Commission preliminarily believes that in making 
the determination, it would be reasonable for the Commission to 
consider whether the relevant authority has a legitimate need for 
access to the security-based swaps maintained by an SDR in order to 
help safeguard such information.\784\ Confirming that the relevant 
authority has a legitimate need could reduce the risk of unauthorized 
disclosure, misappropriation, or misuse of security-based swap data. In 
this regard, the Commission would be furthering the objectives of the 
Dodd-Frank Act, which created a number of protections for proprietary 
and highly sensitive data, including ``individual counterparty trade 
and position data,'' maintained by an SDR.\785\ The Commission, 
therefore, preliminarily believes that a reasonable approach for our 
determination of an appropriate authority is for the Commission to 
consider the scope of the relevant authority's regulatory mandate and 
legal responsibilities. The Commission preliminarily believes that our 
consideration of these factors will further the Dodd-Frank Act's 
objective to safeguard security-based swap data and should address a 
commenter's concerns over unfettered access to such proprietary 
data.\786\ The Commission also anticipates considering, among other 
things, whether the relevant authority agrees to provide the Commission 
with reciprocal assistance in securities matters within the 
Commission's jurisdiction, and whether such a determination would be in 
the public interest. The Commission may take into account any other 
factors as the Commission determines are appropriate in making our 
determination.
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    \784\ See MFA Letter I at 3 (voicing concerns about unfettered 
access to security-based swap information by regulators, including 
foreign financial supervisors, foreign central banks, and foreign 
ministries, beyond their regulatory authority and mandate).
    \785\ See Section 13(n)(5)(G) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(G), as added by Section 763(i) of the Dodd-Frank Act 
(directing SDRs to provide data, including individual counterparty 
trade and position data, on a confidential basis only to 
circumscribed list of authorities or other persons that the 
Commission determines to be appropriate); Section 13(n)(5)(H)(i) of 
the Exchange Act, 15 U.S.C. 78m(n)(5)(H)(i), as added by Section 
763(i) of the Dodd-Frank Act (requiring that, prior to an SDR 
sharing such information, the SDR must receive a written agreement 
from each entity stating that the entity shall abide by certain 
confidentiality requirements); and Section 13(n)(5)(F) of the 
Exchange Act, 15 U.S.C. 78m(n)(5)(F), as added by Section 763(i) of 
the Dodd-Frank Act (requiring SDRs to maintain the privacy of any 
and all security-based swap transaction information that they 
receive from a security-based swap dealer, counterparty, or any 
other registered entity).
    \786\ See MFA Letter I at 3.
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    In addition, the Commission preliminarily believes that it is not 
necessary to prescribe by rule--as one commenter suggested \787\--a 
specific process such as the one proposed by the

[[Page 31048]]

CFTC \788\ that sets forth criteria for relevant authorities and the 
SDR to use in order to facilitate relevant authorities' access to 
security-based swap data maintained by the SDR. The Commission 
preliminarily believes that our determination of an appropriate 
authority, pursuant to the process described above, represents a 
reasonable approach to provide appropriate access by relevant 
authorities, while at the same time providing safeguards against access 
by persons without proper authority.\789\ The Commission also 
preliminarily believes that SDRs should have the flexibility to 
consider whether to provide relevant authorities with access to 
requested security-based swap data.\790\ The Commission preliminarily 
believes that a specific rule that delineates a process governing 
relevant authorities' access requests, as suggested by the commenter, 
would limit the flexibility of SDRs in considering whether to provide 
relevant authorities with access to requested security-based swap data.
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    \787\ See MFA Letter I at 4 (suggesting that the Commission 
adopt an approach similar to the CFTC's proposed Rule 49.17(d)).
    \788\ See CFTC Notice of Proposed Rulemaking: Swap Data 
Repositories, 75 FR 80898 (Dec. 23, 2010). The CFTC has since 
adopted CFTC Rule 49.17(d), 17 CFR 49.17(d), which does not include 
several of its proposed requirements, such as requiring relevant 
authorities to detail the basis for their requests. See CFTC SDR 
Adopting Release, 76 FR 54538.
    \789\ See MFA Letter I at 4 (voicing concern that vague standard 
could result in an SDR providing access to persons without proper 
authority).
    \790\ The Commission preliminarily believes that an SDR's 
consideration of whether to provide relevant authorities with access 
to requested security-based swap data is implicitly subsumed in an 
SDR's statutory duty to maintain the privacy of security-based swap 
information that it receives. See Section 13(n)(5)(F) of the 
Exchange Act, 15 U.S.C. 78m(n)(5)(F), as added by Section 763(i) of 
the Dodd-Frank Act; see also proposed Rule 13n-4(b)(8) under the 
Exchange Act (requiring SDRs to maintain the privacy of any and all 
security-based swap transaction information that the SDR receives 
from a security-based swap dealer, counterparty, or certain 
registered entity) and proposed Rule 13n-9 under the Exchange Act 
(requiring an SDR to protect the privacy of security-based swap 
transaction information that the SDR receives by, among other 
things, establishing safeguards, policies, and procedures that are 
reasonably designed to protect such information and that address, 
without limitation, the SDR limiting access to confidential 
information, material, nonpublic information, and intellectual 
property).
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    The Commission contemplates that, in our sole discretion, we would 
determine whether to grant or deny a request for a determination that 
the relevant authority is appropriate for purposes of requesting 
security-based swap data from an SDR.\791\ In addition, the Commission 
could revoke our determination at any time.\792\ For example, the 
Commission may revoke a determination or request additional information 
from a relevant authority to support continuation of the determination 
if a relevant authority fails to keep confidential security-based swap 
data provided to it by an SDR.
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    \791\ The Commission may issue a determination order that is for 
a limited time.
    \792\ As a general matter, the Commission provides a list of 
MOUs and other arrangements on its Web site, which is one way for an 
SDR to monitor and determine whether a relevant authority has 
entered into an applicable MOU or other arrangement. The MOUs and 
other arrangements can be found at the following link: https://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml.
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(c) Option for Exemptive Relief from the Indemnification Requirement
i. Impact of the Indemnification Requirement
    As noted above, Section 13(n)(5)(G) of the Exchange Act \793\ and 
previously proposed Rule 13n-4(b)(9) thereunder provide that an SDR 
shall on a confidential basis, pursuant to Section 24 of the Exchange 
Act, and the rules and regulations thereunder, upon request, and after 
notifying the Commission of the request, make available all data 
obtained by the SDR to each appropriate prudential regulator, the 
Financial Stability Oversight Council, the CFTC, the Department of 
Justice, the Federal Deposit Insurance Corporation and any other person 
that the Commission determines to be appropriate. Section 
13(n)(5)(H)(ii) of the Exchange Act requires that before an SDR shares 
security-based swap information with a relevant authority requesting 
such information from the SDR, the relevant authority must ``agree to 
indemnify the security-based swap data repository and the Commission 
for any expenses arising from litigation relating to the information 
provided under section 24 [of the Exchange Act].'' \794\ Based on the 
Commission's understanding that certain relevant authorities may be 
unable to agree to indemnify any SDR and the Commission, the Commission 
preliminarily believes that the Indemnification Requirement could 
significantly frustrate the purpose of Section 13(n)(5)(G) of the 
Exchange Act \795\ by preventing SDRs from making available security-
based swap information to relevant authorities.
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    \793\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \794\ 15 U.S.C. 78m(n)(5)(H)(ii), as added by Section 763(i) of 
the Dodd-Frank Act.
    \795\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
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    As stated in the SDR Proposing Release, ``under the Dodd-Frank Act, 
SDRs are intended to play a key role in enhancing transparency in the 
[security-based swap] market by retaining complete records of 
[security-based swap] transactions, maintaining the integrity of those 
records, and providing effective access to those records to relevant 
authorities and the public in line with their respective information 
needs.'' \796\ Commenters \797\ as well as relevant authorities, 
however, have expressed concerns about how the Indemnification 
Requirement would contravene the purposes of the Dodd-Frank Act, and 
more specifically, the statutory purposes of SDRs.\798\ The Commission 
preliminarily believes that the Indemnification Requirement should not 
be applied rigidly so as to frustrate such purposes.
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    \796\ SDR Proposing Release, 75 FR 77307.
    \797\ See, e.g., Cleary Letter IV at 31 (``[T]he indemnification 
requirement could be a significant impediment to effective 
regulatory coordination, since non-US regulators may establish 
parallel requirements for U.S. regulators to access swap data 
reported in their jurisdictions.''); DTCC Letter I at 3 (discussing 
how the Indemnification Requirement would result in the reduction of 
information accessible to regulators on a timely basis and would 
greatly diminish regulators' ability to carry out oversight 
functions); ESMA Letter at 2 (noting that the Indemnification 
Requirement ``undermines the key principle of trust according to 
which exchange of information [among relevant authorities] should 
occur'').
    \798\ See, e.g., DTCC Letter IV at 5 (noting that SDRs should be 
able to provide, among other things, enforcement authorities with 
necessary trading information and regulatory agencies with certain 
counterparty-specific information). As stated above, the Commission 
believes that the goal of Sections 13(n)(5)(G) and 13(n)(5)(H) of 
the Exchange Act is, among other things, to obligate SDRs to make 
available security-based swap information to relevant authorities, 
provided that the confidentiality of the information is preserved.
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    Specifically, the Commission recognizes that certain domestic 
authorities, including some of those expressly identified in Section 
13(n)(5)(G) of the Exchange Act \799\ and the Commission, cannot, as a 
matter of law, provide an open-ended indemnification agreement. For 
example, the Antideficiency Act prohibits certain U.S. federal agencies 
from obligating or expending federal funds in advance or in excess of 
an appropriation, apportionment, or certain administrative subdivisions 
of those funds (e.g., through an unlimited or unfunded 
indemnification).\800\ Similarly, the Commission understands that 
foreign authorities may also be prohibited under applicable foreign 
laws from satisfying the Indemnification Requirement.\801\ As such, the 
Commission agrees with three commenters' views that the Indemnification 
Requirement could hinder the ability of relevant authorities

[[Page 31049]]

to fulfill their regulatory mandates and legal responsibilities.\802\
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    \799\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \800\ 31 U.S.C. 1341, 1517(a).
    \801\ See Cleary Letter IV at 31; DTCC Letter I at 3; ESMA 
Letter at 2.
    \802\ See Cleary Letter IV at 31; DTCC Letter I at 3; ESMA 
Letter at 2.
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    Moreover, the Commission understands from foreign authorities that 
their regulatory regimes will require them to have direct access to 
data maintained by trade repositories, including SDRs registered with 
the Commission, in order to fulfill their regulatory mandates and legal 
responsibilities.\803\ Many foreign regulators \804\ and market 
participants have indicated, however, that because foreign authorities 
cannot, as a matter of law or practice, comply with the Indemnification 
Requirement, the practical effect of having an open-ended 
indemnification requirement may be the fragmentation of security-based 
swap data across multiple SDRs, as foreign authorities establish trade 
repositories in their jurisdictions to ensure access to data that they 
need to perform their regulatory mandates and legal 
responsibilities.\805\ Such fragmentation may lead to duplicative 
reporting requirements in multiple jurisdictions, higher reporting 
costs for market participants, and less transparency in the security-
based swap market.\806\ In light of these concerns, the Commission 
preliminarily believes that an exemption from the Indemnification 
Requirement may be necessary or appropriate, as a practical matter, to 
minimize fragmentation of security-based swap data that could otherwise 
be consolidated and reduce duplicative reporting requirements.\807\
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    \803\ For example, in the case of Europe, under European Market 
Infrastructure Regulation (``EMIR''), trade repositories established 
in third countries that provide services to entities established in 
the European Union must apply for recognition by ESMA, which 
conditions its approval on, among other things, ``[European] Union 
authorities, including ESMA, hav[ing] immediate and continuous 
access'' to information in such trade repositories. Regulation No. 
648/2012 of the European Parliament and of the Council of 4 July 
2012 on OTC derivatives, central counterparties and trade 
repositories, 2012 O.J. (L 201) 1, 49.
    \804\ See CFTC and SEC, Joint Report on International Swap 
Regulation (Jan. 31, 2012) (noting that the indemnification 
provisions have ``caused concern among foreign regulators, some of 
which have expressed unwillingness to register or recognize [a swap 
data repository] unless [they are] able to have direct access to 
necessary information'' and that foreign regulators ``are 
considering the imposition of a similar requirement that would 
restrict the CFTC's and SEC's access to information at [trade 
repositories] abroad'').
    \805\ See Section XV.H.2(b)iii, infra (discussing the potential 
effects of fragmentation of security-based swap data among trade 
repositories across multiple jurisdictions).
    \806\ See, e.g., Cleary Letter IV at 31 (The Indemnification 
Requirement ``could be a significant impediment to effective 
regulatory coordination, since non-U.S. regulators may establish 
parallel requirements for U.S. regulators to access swap data 
reported in their jurisdictions'').
    \807\ The Commission preliminarily believes that the 
Indemnification Requirement does not apply when an SDR is registered 
with the Commission and is also registered or licensed with a 
foreign authority and that authority is obtaining security-based 
swap information directly from the SDR pursuant to that foreign 
authority's regulatory regime.
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ii. Proposed Rule 13n-4(d): Indemnification Exemption
    The Commission is proposing, pursuant to our authority under 
Section 36 of the Exchange Act,\808\ a tailored exemption from the 
Indemnification Requirement. To avoid a result that could significantly 
frustrate the purpose of Section 13(n)(5)(G) and the purpose of SDRs, 
the Commission preliminarily believes that the Indemnification 
Exemption is necessary or appropriate in the public interest, and is 
consistent with the protection of investors,\809\ particularly given 
that the exemption is narrowly tailored and could be applied in only 
limited circumstances.
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    \808\ 15 U.S.C. 78mm (providing the Commission with general 
exemptive authority * * * ``to the extent that such exemption is 
necessary or appropriate in the public interest, and is consistent 
with the protection of investors'').
    \809\ 15 U.S.C. 78mm.
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    Specifically, the Commission is proposing Rule 13n-4(d) 
(``Indemnification Exemption''), which states as follows: ``A 
registered security-based swap data repository is not required to 
comply with the indemnification requirement set forth in Section 
13(n)(5)(H)(ii) of the [Exchange] Act and [Rule 13n-4(b)(9) thereunder] 
with respect to disclosure of security-based swap information by the 
security-based swap data repository if: (1) [a]n entity described in 
[Rule 13n-4(b)(9)] requests security-based swap information from the 
security-based swap data repository to fulfill a regulatory mandate 
and/or legal responsibility of the entity; (2) [t]he request of such 
entity pertains to a person or financial product subject to the 
jurisdiction, supervision, or oversight of the entity; and (3) [s]uch 
entity has entered into a supervisory and enforcement memorandum of 
understanding or other arrangement with the Commission that addresses 
the confidentiality of the security-based swap information provided and 
any other matters as determined by the Commission.''
    In proposing the Indemnification Exemption, the Commission is 
mindful of the comments received. The Commission intends for the 
Indemnification Exemption to--as one commenter suggested--``preserve 
[the] spirit of cooperation and coordination between regulators around 
the world'' in the context of ensuring global regulators' access to 
security-based swap data.\810\ By identifying specific conditions that 
are applicable to requests by any relevant authority, the Commission 
also intends for the Indemnification Exemption to be--as one commenter 
suggested--``location agnostic,'' \811\ whereby relevant authorities 
are treated similarly regardless of whether they are domestic 
authorities or foreign authorities.\812\ In addition, the 
Indemnification Exemption is consistent with one commenter's suggestion 
that the Commission should not apply the Indemnification Requirement 
where relevant authorities are carrying out their regulatory 
responsibilities, in accordance with international agreements and while 
maintaining the confidentiality of data provided to them.\813\ In order 
for an SDR to share security-based swap information with a relevant 
authority without an indemnification agreement, the three proposed 
conditions specified in the Indemnification Exemption, as discussed 
further below, must be met.
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    \810\ See DTCC Letter III at 12 (discussing implementation of 
guidance provided by the ODRF regarding global regulators' access to 
security-based swap data maintained by a trade repository in the 
United States).
    \811\ See DTCC Letter III at 12 (suggesting that the 
Commission's regulatory model regarding regulatory access should be 
``location agnostic'').
    \812\ The Commission intends for the Indemnification Exemption 
to provide relief for both foreign authorities and domestic 
authorities that require access to security-based swap data 
maintained by SDRs in order to fulfill a regulatory mandate or legal 
responsibility. The Commission preliminarily believes that an SDR 
may rely on the Indemnification Exemption in connection with 
requests from relevant authorities, including SROs, registered 
futures associations, and international financial institutions.
    \813\ See DTCC Letter III at 12.
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    First, the relevant authority's request for security-based swap 
information from an SDR must be for the purpose of fulfilling the 
relevant authority's regulatory mandate and/or legal responsibility. 
The Commission preliminarily believes that this condition is aligned 
with the Dodd-Frank Act's requirements to protect security-based swap 
information, including proprietary and highly sensitive data, 
maintained by an SDR from unauthorized disclosure, misappropriation, or 
misuse of security-based swap information.\814\ In

[[Page 31050]]

particular, the Commission preliminarily believes that this condition 
is consistent with an SDR's statutory duty to maintain the privacy of 
security-based swap information that it receives.\815\ In complying 
with its duty to maintain the privacy of security-based swap 
information, an SDR would need to determine when it can or cannot 
provide security-based swap information to others. The Commission 
preliminarily believes that, for the limited purposes of satisfying the 
Indemnification Exemption, it is appropriate for the SDR to include in 
its consideration of whether to provide security-based swap information 
to relevant authorities whether a relevant authority's specific request 
for security-based swap information is indeed within its regulatory 
mandate or legal responsibilities before the SDR provides the 
information to the relevant authority.\816\ Finally, the Commission 
notes that establishing such a condition in the Indemnification 
Exemption is consistent with guidelines that one commenter indicated 
that it followed on a voluntary basis in providing relevant authorities 
with access to security-based swap information.\817\
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    \814\ See Section 13(n)(5)(F) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(F), as added by Section 763(i) of the Dodd-Frank Act 
(requiring SDRs to maintain the privacy of any and all security-
based swap transaction information that they receive from a 
security-based swap dealer, counterparty, or any other registered 
entity); Section 13(n)(5)(G) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(G), as added by Section 763(i) of the Dodd-Frank Act 
(directing SDRs to provide data, including individual counterparty 
trade and position data, on a confidential basis only to 
circumscribed list of authorities or other persons that the 
Commission determines to be appropriate); and Section 13(n)(5)(H)(i) 
of the Exchange Act, 15 U.S.C. 78m(n)(5)(H)(i), as added by Section 
763(i) of the Dodd-Frank Act (requiring that, prior to an SDR 
sharing such information, the SDR must receive a written agreement 
from each entity stating that the entity shall abide by certain 
confidentiality requirements).
    \815\ See Section 13(n)(5)(F) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(F), as added by Section 763(i) of the Dodd-Frank Act; see 
also proposed Rule 13n-4(b)(8) under the Exchange Act (requiring 
SDRs to maintain the privacy of any and all security-based swap 
transaction information that the SDR receives from a security-based 
swap dealer, counterparty, or certain registered entity) and 
proposed Rule 13n-9 under the Exchange Act (requiring an SDR to 
protect the privacy of security-based swap transaction information 
that the SDR receives by, among other things, establishing 
safeguards, policies, and procedures that are reasonably designed to 
protect such information and that address, without limitation, the 
SDR limiting access to confidential information, material, nonpublic 
information, and intellectual property).
    \816\ The Commission preliminarily believes that in complying 
with an SDR's statutory privacy duty, the SDR has the flexibility to 
consider whether to provide relevant authorities with access to 
requested security-based swap data and will most likely decide that 
it is reasonable to consider whether a relevant authority's request 
for security-based swap information is within its regulatory mandate 
or legal responsibilities before the SDR provides the information.
    \817\ See DTCC Letter III at 12 (stating that it ``routinely 
provides [swap] transaction data to U.S. regulators (and . . . 
routinely provides data related to [swap] transactions in the U.S. 
by U.S. persons on European underlyings to European regulators), as 
contemplated by the ODRF'' guidelines that provide guidance on 
relevant authorities' information needs and level of access to 
data); see also DTCC Letter IV at 7-8.
---------------------------------------------------------------------------

    Second, the relevant authority's request must pertain to a person 
or financial product subject to that authority's jurisdiction, 
supervision, or oversight. If, for instance, the relevant authority 
requests information on a security-based swap that pertains to a 
counterparty or underlier that is subject to the authority's 
jurisdiction, supervision, or oversight, then this condition to the 
Indemnification Exemption would be satisfied. The Commission 
preliminarily believes that the person or financial product need not be 
registered or licensed with the authority in order for this condition 
to be satisfied. Similar to the first condition of the Indemnification 
Exemption, the Commission preliminarily believes that this condition is 
aligned with the Dodd-Frank Act's requirements to protect security-
based swap information, including proprietary and highly sensitive 
data, maintained by an SDR from unauthorized disclosure, 
misappropriation, or misuse of security-based swap information.\818\ In 
particular, the Commission preliminarily believes that the second 
condition is consistent with an SDR's statutory duty to maintain the 
privacy of security-based swap information that it receives.\819\ In 
complying with its duty to maintain the privacy of security-based swap 
information, an SDR would need to determine when it can or cannot 
provide security-based swap information to others. The Commission 
preliminarily believes that, for the limited purposes of satisfying the 
Indemnification Exemption, it is appropriate for the SDR to include in 
its consideration of whether to provide security-based swap information 
to relevant authorities whether a relevant authority's specific request 
pertains to a person or financial product that is subject to the 
authority's jurisdiction, supervision, or oversight. \820\ Finally, the 
Commission notes that establishing such a condition in the 
Indemnification Exemption is consistent with guidelines that one 
commenter indicated that it followed on a voluntary basis in providing 
relevant authorities with access to security-based swap 
information.\821\
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    \818\ See Sections 13(n)(5)(F), (G), and (H)(i) of the Exchange 
Act, 15 U.S.C. 78m(n)(5)(F), (G), and (H)(i), as added by Section 
763(i) of the Dodd-Frank Act.
    \819\ See Section 13(n)(5)(F) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(F), as added by Section 763(i) of the Dodd-Frank Act; see 
also proposed Rule 13n-4(b)(8) under the Exchange Act (requiring 
SDRs to maintain the privacy of any and all security-based swap 
transaction information that the SDR receives from a security-based 
swap dealer, counterparty, or certain registered entity) and 
proposed Rule 13n-9 under the Exchange Act (requiring an SDR to 
protect the privacy of security-based swap transaction information 
that the SDR receives by, among other things, establishing 
safeguards, policies, and procedures that are reasonably designed to 
protect such information and that address, without limitation, the 
SDR limiting access to confidential information, material, nonpublic 
information, and intellectual property).
    \820\ The Commission preliminarily believes that in complying 
with an SDR's statutory privacy duty, the SDR has the flexibility to 
consider whether to provide relevant authorities with access to 
requested security-based swap data and will most likely decide that 
it is reasonable to consider whether a relevant authority's request 
for security-based swap information pertains to a person or 
financial product that is subject to the authority's jurisdiction, 
supervision, or oversight before the SDR provides the information.
    \821\ See DTCC Letter III at 12 (stating that it ``routinely 
provides [swap] transaction data to U.S. regulators (and . . . 
routinely provides data related to [swap] transactions in the U.S. 
by U.S. persons on European underlyings to European regulators), as 
contemplated by the ODRF'' guidelines that provide guidance on 
relevant authorities' information needs and level of access to 
data); see also DTCC Letter IV at 7-8.
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    Third, the requesting relevant authority must enter into a 
supervisory and enforcement MOU or other arrangement with the 
Commission that addresses the confidentiality of the security-based 
swap information provided and any other matters as determined by the 
Commission.\822\ For those entities not expressly identified in Section 
13(n)(5)(G) of the Exchange Act \823\ or the rules thereunder, such an 
MOU or other arrangement can be entered into during the Commission's 
determination process, as discussed in Section VI.C.3(b) above. On the 
other hand, entities expressly identified in Section 13(n)(5)(G) of the 
Exchange Act and the rules thereunder, which are not subject to the 
Commission's process to determine appropriate regulators, would need to 
enter into such an MOU or other arrangement to satisfy this condition 
of the Indemnification Exemption. The Commission anticipates that in 
determining whether to enter into such a supervisory and enforcement 
MOU or other arrangement with a relevant authority, the Commission will 
consider whether, among other things, the

[[Page 31051]]

relevant authority needs security-based swap information from an SDR to 
fulfill its regulatory mandate or legal responsibilities; the relevant 
authority agrees to protect the confidentiality of the security-based 
swap information provided to it; the relevant authority agrees to 
provide the Commission with reciprocal assistance in securities matters 
within the Commission's jurisdiction; and a supervisory and enforcement 
MOU or other arrangement would be in the public interest.
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    \822\ As a general matter, the Commission provides a list of 
MOUs and other arrangements on its Web site, which is one way for an 
SDR to monitor and determine whether a relevant authority has 
entered into an applicable MOU or other arrangement for purposes of 
satisfying the third condition of the Indemnification Exemption. The 
MOUs and other arrangements can be found at the following link: 
https://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml.
    \823\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
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    The Commission preliminarily believes that the third condition in 
the Indemnification Exemption is--as one commenter suggested--an 
effective way to streamline the Indemnification Requirement for an 
``efficient exchange of information.'' \824\ The Commission also 
preliminarily believes that the third condition in the Indemnification 
Exemption is appropriate to help protect the confidentiality of the 
security-based swap data provided to relevant authorities, and also to 
further the purposes of the Dodd-Frank Act. In this regard, the 
Commission preliminarily believes that where a relevant authority 
cannot agree to indemnification, a supervisory and enforcement MOU or 
other arrangement, which a relevant authority can legally enter into, 
may be a reasonable alternative because, similar to an indemnification 
agreement, a supervisory and enforcement MOU or other arrangement would 
serve as another mechanism to protect the confidentiality of security-
based swap data provided to a relevant authority by committing the 
authority to maintain such confidentiality.\825\ In light of the 
confidentiality agreement required under Section 13(n)(5)(H)(i) of the 
Exchange Act and previously proposed Rule 13n-4(b)(10) \826\ as well as 
the importance of maintaining good relations and trust among relevant 
authorities, the Commission also preliminarily believes that a relevant 
authority will have strong incentives to take reasonable measures and 
precautions to comply with its obligation to protect the 
confidentiality of the security-based swap information received from an 
SDR. In lieu of providing an indemnification agreement, a supervisory 
and enforcement MOU or other arrangement would provide an SDR and the 
Commission with an additional layer of protection in maintaining the 
confidentiality of security-based swap information shared by the 
SDR.\827\
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    \824\ See ESMA Letter at 2 (recommending an MOU between the 
Commission and relevant authorities to address duplicative 
regulatory regimes and facilitate cooperation among authorities from 
different jurisdictions).
    \825\ See 15 U.S.C. 8325(a), as added by Section 752 of the 
Dodd-Frank Act (providing that the Commission and foreign regulators 
``may agree to such information-sharing arrangements as may be 
deemed to be necessary or appropriate in the public interest . . . 
.'').
    \826\ As stated above, the MOU or other arrangement is separate 
from the written agreement under Section 13(n)(5)(H)(i) of the 
Exchange Act and previously proposed Rule 13n-4(b)(9) thereunder 
stating that the relevant authority shall abide by the 
confidentiality requirements described in Section 24 of the Exchange 
Act relating to the information on security-based swap transactions 
that is provided by the SDR. The MOU or other arrangement is between 
the Commission and the relevant authority, whereas the written 
agreement is between the SDR and the relevant authority.
    \827\ The Commission notes that the MOU or other arrangement 
would not constitute a waiver on the part of the Commission or SDR 
to pursue legal action against a relevant authority and liability, 
if any, will be determined in accordance with applicable law. The 
Commission also does not interpret the indemnification as extending 
to an SDR's own wrongful acts.
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    For the reasons stated above, the Commission preliminarily believes 
that the Indemnification Exemption is a reasonable alternative to the 
Indemnification Requirement. The Commission recognizes, however, that a 
supervisory and enforcement MOU or other arrangement would not 
necessarily provide SDRs that invoke the exemption with the same level 
of protection that an indemnification agreement would provide (i.e., 
coverage for any expenses arising from litigation relating to 
information provided to a relevant authority) and thus, an SDR may 
prefer the benefits of the Indemnification Requirement rather than rely 
on the Indemnification Exemption. Therefore, under the Commission's 
proposed exemption, an SDR would have the option to require an 
indemnification agreement from a relevant authority should the SDR 
choose to do so rather than rely on the Indemnification Exemption.
    The Commission expects that where an SDR seeks to obtain an 
indemnification agreement from a relevant authority, the SDR should 
negotiate in good faith an indemnification agreement. In this regard, 
the Commission agrees with one commenter's view that ``any indemnity 
should be limited in scope'' \828\ and expects that an SDR will not 
unreasonably hinder the ability of relevant authorities to obtain 
security-based swap information from the SDR.\829\ Regarding the same 
commenter's suggestion that the Commission provide model 
indemnification language,\830\ the Commission does not believe that it 
is appropriate to prescribe by rule specific language that an SDR would 
be required to use when requesting indemnification from relevant 
authorities. Because such language could vary on a case-by-case basis 
depending on various factors, such as the laws applicable to the 
relevant authority, the Commission preliminarily believes that it is 
appropriate to allow for flexibility in negotiation of an 
indemnification agreement.
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    \828\ See DTCC Letter III at 12.
    \829\ For example, the Commission does not expect that an 
indemnification agreement would include a provision requiring a 
relevant authority to indemnify the SDR from the SDR's own wrongful 
or negligent acts.
    \830\ See DTCC Letter III at 12.
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Request for comment
    The Commission requests comment on all aspects of the proposed 
guidance, interpretation, and the Indemnification Exemption, including 
the following:
     Is the Commission's proposed interpretation of the 
Notification Requirement appropriate and sufficiently clear? Why or why 
not? Is it overly broad or narrow? If so, why? Does the Commission's 
proposed interpretation provide the Commission with sufficient 
information to fulfill our responsibilities?
     Should the Commission require SDRs to provide the 
Commission with actual notice of all of requests for security-based 
swap data by relevant authorities? Why or why not? If so, what should 
such notice include? Why?
     What would be the advantage of requiring SDRs to provide 
actual notice to the Commission of requests for security-based swap 
data by relevant authorities before making the data available to the 
relevant authorities?
     With regard to the Notification Requirement, should the 
Commission adopt a rule that is consistent with the approach taken by 
the CFTC in its Rule 49.17(d)(4), 17 CFR 49.17(d)(4), which requires a 
swap data repository to promptly notify the CFTC regarding any request 
received by an appropriate foreign or domestic regulator to gain access 
to the swap data maintained by such swap data repository? Why or why 
not?
     Should the Commission provide an exemption from the 
Notification Requirement similar to the Indemnification Exemption? Why 
or why not? For example, should proposed Rule 13n-4(d) be revised to 
begin with ``[a] registered security-based swap data repository is not 
required to comply with the notification requirements set forth in 
Section 13(n)(5)(G) of the Act and paragraph (b)(9) of this section and 
the indemnification requirement set forth in Section 13(n)(5)(H)(ii) of 
the Act and paragraph (b)(10) of this section . . .''? Why or why not?

[[Page 31052]]

     Should the Commission propose a rule with regard to the 
application of the Notification Requirement? Why or why not? If so, 
what should the rule stipulate?
     In determining whether a person is appropriate to obtain 
security-based swap data from SDRs, should the Commission establish the 
process set forth in this release for persons to request a Commission 
determination? Why or why not? Should the Commission make such a 
determination by order? Why or why not? Should the Commission delegate 
this determination to the staff? Why or why not?
     In determining whether a person is appropriate to obtain 
security-based swap data from SDRs, should the Commission require a 
supervisory and enforcement MOU or other arrangement? Why or why not? 
If so, what matters should be addressed in the MOU or other 
arrangement? What factors should the Commission take into consideration 
when determining whether to enter into an MOU or other arrangement with 
the person?
     In determining whether a person is appropriate to obtain 
security-based swap data from SDRs, does the Commission need to 
understand the scope of a relevant authority's regulatory mandate or 
legal responsibilities? Why or why not? What other factors should the 
Commission take into account in making such a determination?
     Should the Commission's process for determining whether a 
person is appropriate to obtain security-based swap data from SDRs be 
memorialized in a rule? If so, what should the rule stipulate?
     Should the Commission require by rule or in our 
determination orders that SDRs not provide relevant authorities with 
access to security-based swap data beyond their regulatory mandates or 
legal responsibilities? Why or why not? Should the Commission adopt a 
process such as the one adopted by the CFTC in its Rule 49.17(d), 17 
CFR 49.17(d), which requires certain regulators seeking to gain access 
to the swap data maintained by a swap data repository to certify that 
they are acting within the scope of their jurisdiction?
     Are there any reasons why the Commission should determine 
a person appropriate to obtain security-based swap data from one or 
more SDRs, but not all SDRs? If so, what are they?
     Should the Commission, when it determines that a person is 
appropriate to obtain security-based swap data from SDRs, include 
limitations on such determination? Why or why not? For example, should 
the Commission limit the determination to a certain period of time or 
to certain individual persons at a relevant authority?
     Under what circumstances should the Commission be able to 
revoke our determination order? Under what circumstances would it be 
appropriate for the Commission to request a relevant authority to 
provide additional information in order to maintain such a 
determination?
     Should the Commission provide additional clarification 
with respect to how parties comply with the confidentiality 
requirements in Section 24 of the Exchange Act? In what aspect would 
clarification be helpful?
     Is the Commission's proposed interpretation of the 
Indemnification Requirement appropriate and sufficiently clear? Should 
the Commission interpret the Indemnification Requirement more broadly 
or narrowly? If so, explain.
     Should the Commission interpret the Indemnification 
Requirement to be limited to the liability that a relevant authority 
otherwise would have to an SDR pursuant to the laws applicable to that 
relevant authority, such as the Federal Tort Claims Act, which is 
applicable to domestic authorities?
     Is the Commission's Indemnification Exemption appropriate 
and sufficiently clear? If not, what would be a better alternative? 
Please also explain the costs and benefits of any alternative, 
including how the alternative would be consistent with and further the 
goals of Title VII.
     Is the Indemnification Exemption overly broad or narrow? 
If so, what would be a better alternative? Please also explain the 
costs and benefits of any alternative, including how the alternative 
would be consistent with and further the goals of Title VII.
     Are there ways to narrowly tailor the Indemnification 
Exemption further without hindering a relevant authority's ability to 
obtain security-based swap data information from SDRs?
     Should the SDRs have the option to require a relevant 
authority to provide an indemnification agreement even if the three 
conditions in the Indemnification Exemption can be satisfied? Why or 
why not? Does providing SDRs with such an option raise any 
competiveness concerns?
     If the Commission were to modify the Indemnification 
Exemption so that SDRs do not have the option to require an 
indemnification agreement pursuant to Section 13(n)(5)(H)(ii) of the 
Exchange Act even if the three conditions in the exemption are 
satisfied, would this be appropriate and consistent with the 
Indemnification Requirement?
     What is the likelihood of an SDR not availing itself of 
the Indemnification Exemption even if the three conditions are met? Are 
there any measures that the Commission should take to address or 
mitigate this scenario? Are there any restrictions that the Commission 
should impose on an SDR that requires an indemnification agreement even 
if it can avail itself of the Indemnification Exemption?
     Should an SDR be required to make and keep records of its 
decision to rely on the Indemnification Exemption?
     Are the Indemnification Exemption and the Commission's 
proposed interpretive guidance sufficient to address the possibility 
that SDRs may be registered with ESMA and national regulators at the 
European Union (``EU'') member state level will obtain security-based 
swap information from ESMA? Are there any regulatory regime or 
circumstances that the Commission should take into consideration that 
is not addressed by the Indemnification Exemption or the Commission's 
interpretive guidance? Please explain.
     Will organizations such as FINRA and other self-regulatory 
organizations, the National Futures Association, the IMF, and the 
International Bank for Reconstruction and Development be able to meet 
the three conditions of the Indemnification Exemption? Why or why not? 
If not, should the Indemnification Exemption be modified to explicitly 
exempt such organizations from the Indemnification Requirement? Why or 
why not? If so, which organizations and why?
     Does the Indemnification Exemption adequately address the 
concerns of relevant authorities with respect to the Indemnification 
Requirement? Are there any circumstances that would warrant an 
exemption from the Indemnification Requirement, but that would not 
satisfy all the conditions in the Indemnification Exemption? If so, how 
could the Indemnification Exemption be modified and narrowly tailored 
to capture such circumstances so as not to have the effect of 
nullifying the Indemnification Requirement?
     Is it appropriate to provide SDRs with the flexibility to 
determine, on a case-by-case basis, whether a relevant authority that 
is requesting security-based swap information is acting within the 
scope of its regulatory mandate or legal responsibilities? Why or why 
not?
     Should the Commission impose any additional requirements 
on SDRs to confirm that a relevant authority is requesting security-
based swap

[[Page 31053]]

information for the purpose of fulfilling its regulatory mandate or 
legal responsibilities? For example, should the Commission prescribe, 
as a condition in the Indemnification Exemption, that the SDR obtain a 
written confirmation from the requesting relevant authority that it is 
acting within its regulatory mandate or legal responsibilities?
     Should the Commission impose any additional requirements 
on SDRs to confirm that a relevant authority is requesting security-
based swap information that pertains to a person or financial product 
subject to the jurisdiction, supervision, or oversight of the 
authority? For example, should the Commission prescribe, as a condition 
in the Indemnification Exemption, that the SDR obtain a written 
confirmation from the requesting relevant authority that its request 
pertains to a person or financial product subject to the jurisdiction, 
supervision, or oversight of the authority?
     Would an MOU between the Commission and a relevant 
authority in lieu of an indemnification agreement provide protection of 
security-based swap information shared with the relevant authority 
comparable to that of an indemnification agreement? If not, why not?
     Should the Commission specify in the Indemnification 
Exemption any other matters that may be in a supervisory and 
enforcement MOU or other arrangement? If so, what?
     On January 25, 2012, the European Commission proposed 
reforms to strengthen online privacy rights and to modernize the 
principles set forth in the EU's 1995 Data Protection Directive (``EU 
Directive'') to protect personal data. Will the EU Directive affect the 
ability of SDRs to provide security-based swap data to other relevant 
authorities, including the Commission? If so, please explain. Will the 
EU Directive affect the ability of the EU and its member countries to 
provide reciprocal assistance in securities matters, as contemplated by 
the supervisory and enforcement MOU or other arrangement discussed 
above? If so, please explain.
     Should the Commission impose any additional conditions in 
the Indemnification Exemption? If so, what? Are there any conditions in 
the Indemnification Exemption that the Commission should not require? 
If so, what conditions and why?
     For the purpose of satisfying the Indemnification 
Exemption, should an SDR be required to maintain policies and 
procedures setting forth how to determine (i) whether security-based 
swap information being requested is needed to fulfill a regulatory 
mandate and/or legal responsibility of the requesting entity, (ii) 
whether a relevant authority's requests pertain to a person or 
financial product subject to the authority's jurisdiction, supervision, 
or oversight, or (iii) whether the requesting relevant authority has 
entered into a supervisory and enforcement MOU or other arrangement 
with the Commission? To the extent such policies and procedures require 
each requesting relevant authority to provide a written representation 
with respect to one or more of the conditions in the Indemnification 
Exemption, should such written representations be considered sufficient 
to satisfy the relevant conditions in the Indemnification Exemption?
     Are there better ways that the Commission could address 
the Indemnification Requirement besides the Indemnification Exemption 
that would be consistent with and further the goals of Title VII? 
Please explain the costs and benefits of any alternative.
     What is the likely impact of the Indemnification Exemption 
on the security-based swap market? Would the Indemnification Exemption 
potentially promote or impede the establishment of SDRs?
     Is the Commission's proposed interpretation of how the 
Indemnification Requirement applies to SDRs dually registered with the 
Commission and a foreign regulator appropriate and sufficiently clear? 
If not, why not? Should the Commission apply the Indemnification 
Requirement when an SDR is registered with the Commission and is also 
registered or licensed with a foreign authority and that foreign 
authority is obtaining information from the SDR pursuant to its 
regulatory regime? Why or why not? Should there be any additional 
conditions in such instances? If so, what conditions and why?
     Should the Commission provide guidance on what it means 
for a ``person or financial product'' to be ``subject to [an] 
authority's jurisdiction, supervision, or oversight''? Why or why not?
     What would be the market impact of the proposed approach 
to providing an exemption from the Indemnification Requirement? How 
would the proposed application of the Indemnification Requirement, 
including the proposed exemption, affect the competitiveness of U.S. 
entities in the global marketplace (both in the United States as well 
as in foreign jurisdictions)? Would the proposed approach place any 
market participants at a competitive disadvantage or advantage? If so, 
please explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the Indemnification Requirement? What 
would be the market impacts and competitiveness effects of alternatives 
to the proposed approach discussed in this release?

VII. Security-Based Swap Execution Facilities

A. Introduction

    As discussed throughout this release, the market for security-based 
swaps is global in scope, with transactions in security-based swaps 
often involving counterparties in different jurisdictions. The 
Commission recognizes that, as a result, there may be uncertainty 
regarding the application of our proposed SB SEF registration 
requirements for a security-based swap market whose principal place of 
business is outside of the United States. The Commission believes, 
therefore, that guidance and clarification on the application of our 
proposed registration requirements would be useful with respect to 
security-based swap markets operating in the cross-border context.
    Under the Dodd-Frank Act, new Section 3D(a)(1) of the Exchange Act 
provides 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.'' \831\ In our release proposing rules 
governing SB SEFs,\832\ the Commission expressed the view that the 
registration requirement of Section 3D(a)(1) would apply only to a 
facility that meets the definition of ``security-based swap execution 
facility'' in Section 3(a)(77) of the Exchange Act.\833\ The SB SEF 
Proposing Release, however, did not explicitly address the 
circumstances under which a foreign \834\

[[Page 31054]]

security-based swap market would be required to register with the 
Commission under Section 3D of the Exchange Act.\835\ As discussed 
below, the Commission herein proposes to interpret when the 
registration requirements of Section 3D of the Exchange Act would apply 
to a foreign security-based swap market.\836\ The Commission also 
discusses below the circumstances under which it may consider granting 
an exemption from registration for a foreign security-based swap 
market.
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    \831\ 15 U.S.C. 78c-4(a)(1).
    \832\ See SB SEF Proposing Release, 76 FR 10948. The proposed 
rules governing SB SEFs are contained in proposed Regulation SB SEF.
    \833\ See SB SEF Proposing Release, 76 FR 10949 n.10. 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 security-based 
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 security-based swaps between persons and (B) is not a national 
securities exchange.'' 15 U.S.C. 78c(a)(77).
    \834\ In using the terms ``foreign'' and ``non-resident'' in 
connection with a security-based swap market, the Commission intends 
that these terms refer to a security-based swap market that is not a 
U.S. person.
    \835\ In the SB SEF Proposing Release, the Commission 
contemplated that non-resident persons may apply for registration as 
a SB SEF. In this regard, the Commission proposed Rule 801(f) of 
Regulation SB SEF, which would require any non-resident person 
applying for registration as a SB SEF to certify 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. See SB SEF Proposing Release, 76 FR 11001.
    \836\ Entities that do not meet the definition of SB SEF may 
nonetheless be required to register in another capacity under the 
Exchange Act.
---------------------------------------------------------------------------

    The proposed interpretations described below represent the 
Commission's proposed approach to applying the SB SEF registration 
requirements to foreign security-based swap markets. We recognize that 
other approaches may achieve the goals of the Dodd-Frank Act, in whole 
or in part. Accordingly, we invite comment regarding all aspects of the 
proposal described below, and each proposed interpretation contained 
therein, including potential alternative approaches. Data and comment 
from market participants and other interested parties regarding the 
likely effect of each proposed interpretation and potential alternative 
approaches would be particularly useful to the Commission in evaluating 
modifications to the proposals.

B. Registration of Foreign Security-Based Swap Markets

    As noted above, in our SB SEF Proposing Release, the Commission 
expressed the view that the registration requirement of Section 
3D(a)(1) would apply only to a facility that meets the definition of 
``security-based swap execution facility'' in Section 3(a)(77) of the 
Exchange Act.\837\ A ``security-based swap execution facility'' is 
defined as ``a trading system or platform in which 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, through any means of interstate commerce, including 
any trading facility, that (A) facilitates the execution of security-
based swaps between persons and (B) is not a national securities 
exchange.'' \838\
---------------------------------------------------------------------------

    \837\ See note 833 and accompanying text, supra.
    \838\ 15 U.S.C. 78c(a)(77).
---------------------------------------------------------------------------

    As outlined further below, the Commission preliminarily believes 
that, when evaluating whether a foreign security-based swap market 
would have to register under Section 3D(a)(1), activities by the 
foreign security-based swap market that provide U.S. persons, or non-
U.S. persons located in the United States, the ability to directly 
execute or trade security-based swaps on the foreign security-based 
swap market or facilitate the execution or trading of security-based 
swaps by U.S. persons, or non-U.S. persons located in the United 
States, on the foreign security-based swap market should be 
considered.\839\ The Commission also preliminarily believes that, if a 
foreign security-based swap market takes affirmative actions to induce 
the execution or trading of security-based swaps on its market by U.S. 
persons, or non-U.S. persons located in the United States, including by 
inducing such execution or trading through marketing its services 
relating to the ability to execute or trade security-based swaps on its 
market to U.S. persons, or non-U.S. persons located in the United 
States, or otherwise initiating contact with such persons for the 
purpose of inducing such execution or trading, then those activities 
could be viewed as facilitating the execution or trading of security-
based swaps on its market and could cause the foreign security-based 
swap market to fall within the scope of the registration requirements 
of Section 3D of the Exchange Act.
---------------------------------------------------------------------------

    \839\ See id. Non-U.S. persons located in the United States 
could include, for example, U.S. branches of foreign entities.
---------------------------------------------------------------------------

    The Commission believes that it would be useful to provide some 
discussion of the types of activities that it preliminarily believes 
would place a foreign security-based swap market within the scope of 
Section 3D of the Exchange Act under the Commission's proposed 
interpretation. Given the constant innovation of trading mechanisms and 
methods, as well as technological and communication developments, 
however, it would not be possible to provide a comprehensive, final 
discussion of every activity for which a foreign security-based swap 
market would be considered to be providing U.S. persons or non-U.S. 
persons located in the United States the ability to execute or trade 
security-based swaps, or to be facilitating the execution or trading of 
security-based swaps, on its market, thereby triggering the requirement 
to register as a SB SEF under Section 3D(a)(1).
    The Commission preliminarily believes that when a foreign security-
based swap market provides U.S. persons, or non-U.S. persons located in 
the United States, with the direct ability to trade or execute 
security-based swaps on the foreign security-based swap market by 
accepting bids and offers made by one or more participants on the 
foreign security-based swap market, then such market would be required 
to register as a SB SEF. The Commission notes that a foreign security-
based swap market could grant such direct access to U.S. persons, and 
non-U.S. persons located in the United States, through a variety of 
means, such as (i) providing proprietary electronic screens, market 
terminals, monitors or other devices for trading security-based swaps 
on its market; (ii) granting direct electronic access to the foreign 
security-based swap market's trading system or network, including by 
providing data feeds or codes for use with software operated through 
the computer of a U.S. person, or non-U.S. person located in the United 
States, or by allowing such persons to access the foreign security-
based swap market through third-party service vendors or public 
networks (such as the Internet); or (iii) allowing its members or 
participants to provide U.S. persons or non-U.S. persons located in the 
United States with direct electronic access to trading in security-
based swaps on the foreign security-based swap market.
    The Commission also preliminarily believes that, if a foreign 
security-based swap market were to grant membership or participation in 
the foreign security-based swap market to U.S. persons, or non-U.S. 
persons located in the United States, which would provide such persons 
with the ability to directly execute or trade security-based swaps by 
accepting bids and offers made by one or more participants on the 
foreign security-based swap market, then such market would be required 
to register as a SB SEF.
    Although the Commission preliminarily believes that the foregoing 
activities are the types of activities that would warrant application 
of the registration requirement of Section 3D, the Commission 
emphasizes that these activities are not intended to be an exclusive or 
exhaustive discussion of all the activities that could trigger the 
registration requirements of Section 3D by a foreign security-based 
swap market. In addition, as trading and

[[Page 31055]]

communication mechanisms and methods evolve, other activities that aim 
at providing U.S. persons, or non-U.S. persons located in the United 
States, the ability to directly execute or trade security-based swaps 
by accepting bids and offers made by multiple participants on a foreign 
security-based swap market, or that aim to facilitate the execution or 
trading of security-based swaps by U.S. persons or non-U.S. persons 
located in the United States on a trading platform or system operated 
by a foreign security-based swap market, could cause a foreign 
security-based swap market to fall within the ambit of the registration 
requirements of Section 3D.\840\
---------------------------------------------------------------------------

    \840\ In the alternative, the foreign security-based swap market 
could elect to apply for registration as a national securities 
exchange. See 15 U.S.C. 78f.
---------------------------------------------------------------------------

    The Commission anticipates that some U.S. persons or non-U.S. 
persons located in the United States may choose to transact on a 
foreign security-based swap market on an indirect basis through a non-
U.S. person that is not located in the United States and that is a 
member or participant of a foreign security-based swap market. The 
Commission preliminarily believes that, to the extent that the U.S. 
person, or non-U.S. person located in the United States, initiates the 
contact and the foreign security-based swap market does not attempt to 
solicit such business, such a transaction would not on its own warrant 
requiring the foreign security-based swap market to register under 
Section 3D of the Exchange Act.\841\ However, as discussed above, to 
the extent that a foreign security-based swap market initiates contacts 
with U.S. persons or non-U.S. persons located in the United States to 
induce or facilitate the execution or trading of security-based swaps 
by such persons on its market, such activity would trigger the 
requirement to register under Section 3D.\842\
---------------------------------------------------------------------------

    \841\ The U.S. person or non-U.S. person located in the United 
States may, however, be required to register as a broker under 
Section 15(a)(1) of the Exchange Act. See 15 U.S.C. 78o(a)(1).
    \842\ For example, if a foreign security-based swap market were 
to allow its members or participants to provide U.S. persons, or 
non-U.S. persons located in the United States with direct electronic 
access to trading in security-based swaps on the foreign security-
based swap market, this access would be considered direct access by 
a U.S. person, or a non-U.S. person located in the United States 
and, as noted above, would require the foreign security-based swap 
market to register.
---------------------------------------------------------------------------

    The Commission also anticipates that, given the global nature of 
the security-based swap business, a foreign security-based swap market 
could, at some point, seek to enter into a business combination with a 
registered SB SEF. Under the Commission's proposed interpretation, such 
business combination also could trigger the registration requirements 
of Section 3D of the Exchange Act for the foreign security-based swap 
market, depending on the nature and extent of integration of the 
entities' operations and activities. In this regard, the Commission's 
experience in recent years with national securities exchanges that have 
engaged in cross-border combinations may be illustrative for these 
purposes. Several national securities exchanges in recent years have 
entered into transactions to combine under common ownership with 
certain non-U.S. markets, such as NYSE Group, Inc.'s transaction with 
Euronext N.V. to form NYSE Euronext in 2007; \843\ Eurex Frankfurt AG's 
acquisition of the International Securities Exchange, LLC in 2007; 
\844\ and The Nasdaq Stock Market, Inc.'s transaction with Borse Dubai 
Limited to form NASDAQ OMX Group, Inc. in 2008.\845\ In each case, the 
U.S. and the foreign markets, under their respective parent companies, 
generally have continued to operate as separate legal entities, 
maintained separate liquidity pools in their respective jurisdictions 
without integrating trading interest among markets under common 
ownership, and continued to be regulated subject to their own home 
country's requirements. Similarly, a registered SB SEF and a foreign 
security-based swap market could come under common ownership but 
continue to be separate legal entities, maintain separate liquidity 
pools for their security-based swap businesses without integrating 
trading interest among affiliated markets, and be separately regulated 
in their own home jurisdictions. However, if a registered SB SEF and 
foreign security-based swap market were to integrate their security-
based swap trading facilities, for example, by the foreign security-
based swap market providing direct access to the SB SEF's participants, 
or by the foreign security-based swap market and the registered SB SEF 
integrating their liquidity pools,\846\ under the Commission's proposed 
interpretation, such actions would trigger the registration 
requirements of Section 3D of the Exchange Act for the foreign 
security-based swap market because the market would then be operating a 
facility for trading security-based swaps within the United States.
---------------------------------------------------------------------------

    \843\ See Exchange Act Release No. 55293 (Feb. 14, 2007), 72 FR 
8033 (Feb. 22, 2007).
    \844\ See Exchange Act Release No. 56955 (Dec. 13, 2007), 72 FR 
71979 (Dec. 19, 2007).
    \845\ See Exchange Act Release No. 57099 (Jan. 4, 2008), 73 FR 
1901 (Jan. 10, 2008).
    \846\ An integrated trading pool for security-based swaps would 
indicate that there is a unitary market for the security-based 
swaps. In such a scenario, persons with direct access to or 
membership in the registered SB SEF effectively would have the same 
direct access or membership privileges in the foreign security-based 
swap market by virtue of their access to the integrated trading 
pool, and thus would have the ability to directly execute or trade 
security-based swaps on the foreign security-based swap market.
---------------------------------------------------------------------------

C. Registration Exemption for Foreign Security-Based Swap Markets

    The prior section discusses when a foreign security-based swap 
market would be required to register as a SB SEF under Section 3D of 
the Exchange Act. The Commission recognizes, however, that the 
security-based swap market is global in nature and therefore one or 
more foreign security-based swap markets may seek relief from the 
Commission to allow some of the activities discussed above that would 
trigger the SB SEF registration requirement to continue without the 
foreign security-based swap market having to register as a SB SEF under 
Section 3D of the Exchange Act.
    Following the publication of the SB SEF Proposing Release, the 
Commission received comments from the public expressing concerns about 
the implications of the proposed rules and the requirements of Section 
3D of the Exchange Act for foreign security-based swap markets and the 
global markets for security-based swaps generally.\847\ Several 
commenters urged the Commission to work with foreign regulators to 
develop harmonized rules for the trading of security-based swaps.\848\ 
Some commenters believed that harmonization or flexibility with regard 
to foreign security-based swap markets would help reduce the risk of 
regulatory arbitrage.\849\ One commenter stated that such harmonization 
would reduce the burdens of duplicative or conflicting requirements 
that could be faced by security-based swap markets operating in 
multiple jurisdictions.\850\
---------------------------------------------------------------------------

    \847\ See, e.g., Thomson Letter at 3-4, Blackrock Letter at 12-
13, Bloomberg Letter at 6-7, ISDA/SIFMA II Letter at 2, WMBAA Letter 
at 10-11, Cleary Letter III at 4, and Cleary Letter IV at 5, 13.
    \848\ See Thomson Letter, BlackRock Letter, ISDA/SIFMA Letter 
II, and WMBAA Letter.
    \849\ See Thomson Letter, Bloomberg Letter, and WMBAA Letter.
    \850\ See Bloomberg Letter.
---------------------------------------------------------------------------

    Although a number of foreign jurisdictions are in the process of 
developing standards for the regulation of security-based swaps and 
security-based swap markets, at this time few foreign jurisdictions 
have enacted legislation or adopted standards for the regulation of 
security-based swap

[[Page 31056]]

markets.\851\ The Commission, however, is in discussions with its 
foreign counterparts to explore steps toward harmonizing standards for 
such regulation in the future.\852\ In the meantime, the Commission is 
considering how best to address commenters' concerns about the risks of 
regulatory arbitrage and duplicative regulatory burdens on security-
based swap markets that operate on a cross-border basis, in a manner 
consistent with the requirements of the Dodd-Frank Act and the federal 
securities laws generally.
---------------------------------------------------------------------------

    \851\ See FSB Progress Report April 2013 at 1 (``While progress 
has been made in moving [OTC derivatives] markets towards 
centralized infrastructure, less than half of the FSB member 
jurisdictions currently have legislative and regulatory frameworks 
in place to implement the G20 commitments and there remains 
significant scope for increases in trade reporting, central clearing 
and exchange and electronic platform trading in global OTC 
derivatives markets.'').
    \852\ See Section I.C, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it may be appropriate to 
consider an exemption as an alternative approach to SB SEF registration 
depending on the nature or scope of the foreign security-based swap 
market's activities in, or the nature or scope of the contacts the 
foreign security-based swap market has with, the United States. 
Exemptions that are carefully tailored to achieve the objectives of 
Section 3D could help to improve security-based swap market supervision 
overall by allowing the Commission to focus our resources on areas 
where it has a substantial interest, while reducing duplication of 
efforts in areas where our interests are aligned with those of other 
regulators.
    The Commission could exempt from the registration requirements of 
Section 3D a foreign security-based swap market that is subject to 
comparable, comprehensive supervision and regulation under appropriate 
governmental authorities in its home country.\853\ The availability of 
such an exemption could serve to reduce any potential duplicative 
regulatory burdens faced by security-based swap markets that operate on 
a cross-border basis and that otherwise would be required to register 
both in the United States and in a non-U.S. jurisdiction.
---------------------------------------------------------------------------

    \853\ Any such exemption would be issued by order pursuant to 
the Commission's authority under Section 36 of the Exchange Act. 15 
U.S.C. 78mm.
---------------------------------------------------------------------------

    Before the Commission would consider issuing an exemption from the 
registration requirements of Section 3D for a particular foreign 
security-based swap market, the Commission could consider whether the 
foreign security-based swap market is subject to comparable, 
comprehensive supervision and regulation by the appropriate 
governmental authorities in its home country, as compared to the 
supervision and regulation of SB SEFs under the Dodd-Frank Act and the 
Commission's implementing regulations. This process could include a 
review of the foreign jurisdiction's laws, rules, regulatory standards 
and practices governing the foreign security-based swap market and 
would entail consultation and cooperation with the foreign security-
based swap market's home country governmental authorities.
    The Commission expects that any such registration exemption could 
be subject to appropriate conditions that could include, but not be 
limited to, requiring a foreign security-based swap market to certify 
that it would provide the Commission with prompt access to its books 
and records, including, for example, data relating to orders, quotes, 
and transactions, as well as provide an opinion of counsel that, as a 
matter of law, it is able to provide such access. The Commission also 
could require, as a condition to receiving an exemption from 
registration, that a foreign security-based swap market would appoint 
an agent for service of process in the United States who is not an 
employee or official of the Commission. These potential conditions 
would be consistent with the proposed requirements for non-resident 
registered SB SEFs \854\ and would allow the Commission to exercise, as 
necessary or appropriate, supervisory oversight of a foreign security-
based swap market that receives an exemption from Section 3D's 
registration requirements. The Commission also could require that, 
before issuing an exemption from registration, the Commission and the 
appropriate financial regulatory authority or authorities in the 
foreign security-based swap market's home jurisdiction enter into a MOU 
that addresses the oversight and supervision of that market.
---------------------------------------------------------------------------

    \854\ See SB SEF Proposing Release, 76 FR 11001, proposed Rule 
801(f), and proposed Form SB SEF.
---------------------------------------------------------------------------

    In certain cases, the Commission also could require, as a condition 
to granting such an exemption, that a foreign security-based swap 
market meet some of the requirements applicable to registered SB SEFs. 
Such a condition may be useful where the Commission is unable to make a 
determination regarding the broader comparability of the home 
jurisdiction's regulation and supervision, but where there is 
comparability with respect to some of the requirements applicable to 
registered SB SEFs and to a foreign security-based swap market (or 
class of security-based swap markets) in its home country. Therefore, 
the terms and conditions of any exemption that the Commission may grant 
to a foreign security-based swap market (or class of security-based 
swap markets) could depend on the degree to which the foreign 
jurisdiction's laws, rules, regulatory standards, and practices 
governing security-based swaps ``compare'' to those of the United 
States.
    In considering the above, the Commission may consider any 
requirements of the home country that would conflict with the 
requirements applicable to SB SEFs under the Dodd-Frank Act. For 
example, Section 3D of the Exchange Act seeks to ensure fair and open 
access to SB SEFs by requiring that a SB SEF establish and enforce 
rules that include means to provide market participants with impartial 
access to the market.\855\ The Commission also could consider whether a 
home country regulator imposes a regulation or policy limiting fair and 
open access to its security-based swap markets.
---------------------------------------------------------------------------

    \855\ 15 U.S.C. 78c-4(d)(2)(B).
---------------------------------------------------------------------------

    The Commission notes that security-based swap market structure and 
security-based swap market supervision and regulation could vary in 
other jurisdictions and could affect the Commission's ability to make a 
comparability determination. In addition, such differences in 
supervision and regulation would necessitate that each exemption 
request be reviewed on a jurisdiction-by-jurisdiction basis by the 
Commission. The conditions to any such exemption also would be based on 
the differences in the market structure and supervisory regime in the 
jurisdiction under consideration in comparison to U.S. oversight of SB 
SEFs.
    As noted above, few foreign jurisdictions have adopted a 
comprehensive framework for the regulation of security-based swap 
markets and the Commission has not yet adopted rules governing SB SEFs. 
Thus, the Commission believes that it is premature to specify the 
precise criteria that the Commission may use for our evaluation and 
comparison of the regulatory and supervision programs for foreign 
security-based swap markets, should the Commission choose to consider 
exempting from registration as a SB SEF a foreign security-based swap 
market that becomes subject to regulation in its home country at a 
future date. Nonetheless, the Commission believes that it is useful now 
to elicit comment from interested

[[Page 31057]]

persons regarding our proposed approach, should it choose to consider 
providing such an exemption.
    The Commission preliminarily believes that the proposed approach, 
which may condition any exemption for a foreign security-based swap 
market on the existence of comparable, comprehensive supervision and 
regulation under the appropriate financial regulatory authority or 
authorities in the foreign security-based swap market's home country, 
should provide comparable regulatory oversight and supervision as that 
afforded by the Commission's regulation and supervision of SB SEFs. The 
standard of ``comparability'' discussed above should allow the 
Commission sufficient flexibility to make exemption determinations 
based on the similarity of the requirements and practices of the 
foreign jurisdiction's regulatory program governing security-based 
swaps. In this regard, the Commission preliminarily believes that the 
comparability standard could extend not only to the written laws and 
rules of the foreign jurisdiction, but also to the jurisdiction's 
comprehensive supervision and regulation of its security-based swap 
markets, including the jurisdiction's oversight of its markets and 
enforcement of its laws and rules. The breadth of the proposed 
comparability standard (i.e., to consider actual practices as well as 
written laws and rules) could help ensure that the regulatory 
protections provided in the foreign jurisdiction's security-based swap 
markets are substantially realized by sufficiently vigorous supervision 
and enforcement.
    Finally, as discussed below,\856\ the Commission proposes to permit 
substituted compliance, under certain circumstances, with respect to 
the mandatory trade execution requirement in Section 3C(h)(1) of the 
Exchange Act, if the Commission finds that a foreign-based security-
based swap market (or class of security-based swap markets) is subject 
to comparable, comprehensive supervision and regulation by a foreign 
financial regulatory authority in such foreign jurisdiction.\857\ While 
the proposed comparability standard for our granting an exemption from 
SB SEF registration could be similar to the proposed comparability 
standard for a substituted compliance determination with respect to the 
mandatory trade execution requirement, which is discussed below, the 
factors that the Commission could find relevant to a comparability 
determination with respect to SB SEF registration would not necessarily 
be the same factors that it would consider when making a comparability 
determination with respect to mandatory trade execution. This is 
because Section 3D of the Exchange Act is focused on the registration 
of SB SEFs and compliance by registered SB SEFs with the 14 enumerated 
core principles governing SB SEFs,\858\ whereas Section 3C(h)(1) of the 
Exchange Act is focused on the circumstances where execution of a 
security-based swap on a SB SEF (or an exchange) is required.\859\ 
However, the Commission solicits comment on the appropriateness or 
feasibility of our proposed approach.
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    \856\ See Section XI.F, infra.
    \857\ See proposed Rule 3Ch-2 under the Exchange Act.
    \858\ See 15 U.S.C. 78c-4.
    \859\ See 15 U.S.C. 78c-3(h)(1).
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Request for Comment
    The Commission generally requests comment on the discussion 
regarding SB SEFs, including the following:
     The Commission requests comment on all aspects of our 
discussion regarding when a foreign security-based swap market would be 
required to register as a SB SEF under Section 3D and on the non-
exhaustive discussion of the types of activities, noted above, that 
would trigger registration of the foreign security-based swap market as 
a SB SEF. The Commission also requests comment on all aspects of our 
proposal to consider requests for an exemption from SB SEF registration 
for a foreign security-based swap market under certain circumstances.
     The Commission seeks commenters' views on the potential 
impact of applying the proposed SB SEF registration requirements to 
foreign security-based swap markets that engage in activities that 
would require such markets to register as a SB SEF. Are there aspects 
of the proposed SB SEF rules and registration requirements that present 
issues for foreign security-based swap markets that would be required 
to register as a SB SEF? If so, please explain in detail.
     The Commission requests commenters' views on whether the 
non-exhaustive discussion of the types of activities, noted above, 
which would trigger the application of Section 3D registration 
requirements to a foreign security-based swap market, is appropriate to 
aid foreign security-based swap markets in assessing whether they would 
be required to register as a SB SEF. Are there other activities that 
foreign security-based swap markets currently engage in that should be 
evaluated for consideration as to whether those activities would 
trigger Section 3D registration requirements? If so, please describe 
those activities in detail. Are there specific items set forth in the 
non-exhaustive discussion of the types of activities noted above or any 
other specific activities engaged in by foreign security-based swap 
markets that should not trigger Section 3D registration requirements? 
If so, commenters should describe those activities in detail and 
explain their rationale. Does the proposed interpretation regarding the 
application of Section 3D and the proposed non-exhaustive discussion of 
the types of activities provide sufficient guidance for a foreign 
security-based swap market to assess whether it would have to register, 
or seek an exemption from registration, as a SB SEF? If not, what kind 
of further guidance would be helpful for making that determination? 
Does the proposed approach provide sufficient guidance to a foreign 
security-based swap market that may seek an exemption? If not, what 
kind of further guidance would be helpful?
     The Commission seeks comment on the appropriateness of the 
proposed interpretation that the registration requirements of Section 
3D should be triggered by certain activities directed at ``U.S. 
persons, or non-U.S. persons located in the United States.'' Are the 
categories of persons captured by this proposed approach too broad? Too 
narrow? Please specify and explain. For example, foreign branches would 
be included by the proposed approach, such that a foreign security-
based swap market's provision of direct access or participation in its 
market to a foreign branch, or activities facilitating execution or 
trading of security-based swaps on its market by such a foreign branch, 
would trigger the Section 3D registration requirement. Do commenters 
agree with this approach? If not, why not? What would be a better 
approach? If so, how so?
     The Commission requests comment on what would be the 
appropriate circumstances under which the Commission should consider 
granting an exemption from the registration requirements of Section 3D. 
Should the Commission consider granting an exemption from registration 
for a foreign security-based swap market when the nature or scope of 
its activities in the United States are limited? If so, why? Or should 
the Commission also consider granting an exemption for a foreign 
security-based swap market when the nature or scope of its activities 
in the United States are more extensive? Why or why not? What would be 
the advantages and disadvantages of either

[[Page 31058]]

approach? What would be the appropriate criteria for the Commission to 
apply when it considers whether to grant an exemption from the 
registration requirements of Section 3D? Please specify and explain.
     The Commission seeks comment on whether the proposed 
standard of comparability is an appropriate standard for the Commission 
to determine whether to grant an exemption from Section 3D's 
registration requirements for a foreign security-based swap market. 
Should a different standard be used? If so, what should be the standard 
and why? Should it be stricter or more lenient than the proposed 
standard? If it should be stricter or more lenient, in what respects 
and in what manner? Why or why not? As proposed, when making a 
comparability determination, the Commission would look not just at the 
rules of a foreign jurisdiction, but also at the comprehensiveness of 
the supervision and regulation by the appropriate governmental 
authorities of that jurisdiction. Is the Commission's holistic approach 
to making a comparability determination appropriate? Why or why not? 
Comment also is requested regarding whether the Commission should put 
in place a more detailed standard for granting an exemption, for 
example, by providing specific criteria that the Commission would look 
to in determining whether there is comparable, comprehensive regulation 
and supervision of a foreign security-based swap market by the 
appropriate financial regulatory authority or authorities in the home 
country. If so, what criteria should the Commission include and why? 
Commenters also are requested to explain how the Commission should 
develop such criteria in the absence of existing regulations in other 
jurisdictions at the present time. Are there specific procedures or 
comparability considerations that commenters believe that the 
Commission would find useful to incorporate in our proposed exemption 
approach at this time? If so, please describe. What would be the 
advantages of adopting such measures now? What would be the 
disadvantages of adopting such measures now?
     The Commission solicits comment on the appropriateness or 
feasibility of distinguishing between the comparability determination 
for purposes of an exemption from registration as a SB SEF and for 
purposes of substituted compliance for the mandatory trade execution 
requirement. Should the Commission consider the same factors in making 
a comparability determination for mandatory trade execution and a 
comparability determination for SB SEF registration? If so, what 
factors would be relevant and appropriate to both determinations? 
Please describe. What factors, if any, would only be relevant or 
appropriate to a comparability determination for SB SEF registration or 
a comparability determination for mandatory trade execution, 
respectively? Please describe.
     The Commission seeks comment on the proposed process for 
granting an exemption from Section 3D's registration requirements for a 
foreign security-based swap market. Is the process explained in a 
sufficiently clear manner? Does the process provide foreign security-
based swap markets with an efficient method for obtaining exemptions? 
If not, what aspects of the process would be burdensome for foreign 
security-based swap markets? Are there other ways to streamline the 
exemption process? Please describe.
     What would be the market impact of the proposed approach 
to the registration of foreign security-based swap markets? How would 
the proposed application of the SB SEF registration requirement affect 
the competitiveness of U.S. entities in the global marketplace (both in 
the United States as well as in foreign jurisdictions)? Would the 
proposed approach place any market participants at a competitive 
disadvantage or advantage? If so, please explain. Would the proposed 
approach be a more general burden on competition? If so, please 
explain. What other measures should the Commission consider to 
implement the proposed approach to the registration of foreign 
security-based swap markets? What would be the market impacts and 
competitiveness effects of alternatives to the proposed approach 
discussed in this release?

VIII. Regulation SBSR--Regulatory Reporting and Public Dissemination of 
Security-Based Swap Information

A. Background

    Section 13A(a)(1) of the Exchange Act \860\ provides that all 
security-based swaps that are not accepted for clearing shall be 
subject to regulatory reporting. Section 13(m)(1)(G) of the Exchange 
Act \861\ provides that each security-based swap (whether cleared or 
uncleared) shall be reported to a registered SDR, and Section 
13(m)(1)(C) of the Exchange Act \862\ generally provides that 
transaction, volume, and pricing data of all security-based swaps shall 
be publicly disseminated in real time, except in the case of block 
trades.\863\ On November 19, 2010, the Commission proposed Regulation 
SBSR to implement these requirements.\864\
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    \860\ 15 U.S.C. 78m-1(a)(1).
    \861\ 15 U.S.C. 78m(m)(1)(G).
    \862\ 15 U.S.C. 78m(m)(1)(C).
    \863\ Section 13(m)(1)(E) of the Exchange Act, 15 U.S.C. 
78(m)(1)(E), provides that, with respect to cleared security-based 
swaps, the rule promulgated by the Commission related to public 
dissemination shall contain provisions that ``specify the criteria 
for determining what constitutes a large notional security-based 
swap transaction (block trade) for particular market and contracts'' 
and ``specify the appropriate time delay for reporting large 
notional security-based swap transactions (block trades) to the 
public.''
    \864\ See Regulation SBSR Proposing Release, 75 FR 75208.
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    Rule 908 of Regulation SBSR as initially proposed was designed to 
clarify the application of Regulation SBSR to cross-border security-
based swaps. Proposed Rule 908(a) would require a security-based swap 
to be reported and publicly disseminated if the security-based swap: 
(i) Has at least one counterparty that is a U.S. person; (ii) was 
executed in the United States or through any means of interstate 
commerce; or (iii) was cleared through a registered clearing agency 
having its principal place of business in the United States. Proposed 
Rule 908(b) provided that, notwithstanding any other provision of 
Regulation SBSR, no counterparty to a security-based swap would incur 
any obligation under Regulation SBSR unless it is: (i) A U.S. person; 
(ii) a counterparty to a security-based swap executed in the United 
States or through any means of interstate commerce; or (iii) a 
counterparty to a security-based swap cleared through a clearing agency 
having its principal place of business in the United States. Thus, 
under the Commission's initial proposal, a security-based swap--
wherever it is executed or cleared--would be required to be reported 
pursuant to Regulation SBSR if at least one counterparty were a U.S. 
person. Furthermore, a security-based swap--even if both counterparties 
were non-U.S. persons--would be required to be reported if the 
security-based swap were executed in the United States or through any 
means of interstate commerce, or cleared through a clearing agency 
having its principal place of business in the United States.
    Rule 901(a)(1), as initially proposed, also provided that, where 
only one counterparty to a security-based swap is a U.S. person, the 
U.S. person would be the ``reporting party'' (i.e., the party that 
incurs the duty to report the security-based swap pursuant to 
Regulation SBSR). Rule 901(a)(3), as initially proposed, provided that, 
where neither

[[Page 31059]]

counterparty to a security-based swap that must be reported is a U.S. 
person, the counterparties must select which of them would be the 
reporting party.
    To date, the Commission has received 48 comment letters 
specifically in response to proposed Regulation SBSR, many of which 
raised issues relating to the cross-border aspects of the proposal. The 
Commission has received other letters that, while not specifically 
referencing proposed Regulation SBSR, raised cross-border issues that 
are germane to proposed Regulation SBSR.\865\ In response to these 
comments--which are described further herein--and upon further 
consideration of issues related to cross-border security-based swap 
transactions across all of the various areas of Title VII, the 
Commission is proposing various modifications to proposed Regulation 
SBSR, particularly Rule 908 thereof, which address cross-border 
transactions.
---------------------------------------------------------------------------

    \865\ All such letters are cited in Appendix D.
---------------------------------------------------------------------------

    One significant modification being proposed here would take into 
account situations in which a U.S. person, although not a ``direct 
counterparty,'' as defined below, to a security-based swap, guarantees 
the performance of one of the direct counterparties. As discussed 
above,\866\ the Commission is proposing to apply various Title VII 
provisions to the security-based swap transactions of non-U.S. persons 
that are guaranteed by U.S. persons--including the regulatory reporting 
and public dissemination requirements of Regulation SBSR, as discussed 
below.\867\ A second significant modification is to propose a 
``substituted compliance'' regime. As explained in more detail below, 
the Commission is now proposing a framework that would allow certain 
Title VII requirements to be satisfied by compliance with the rules of 
a foreign jurisdiction rather than the specific requirements under U.S. 
rules. Below, the Commission describes the circumstances under which 
compliance with the rules of such a foreign jurisdiction could, under 
re-proposed Regulation SBSR, be ``substituted'' for compliance with the 
specific regulatory reporting and public dissemination requirements of 
Regulation SBSR.\868\
---------------------------------------------------------------------------

    \866\ See Section II.B.2(d), supra.
    \867\ See Sections VIII.C and VIII.D, infra.
    \868\ See Section XI.D, infra.
---------------------------------------------------------------------------

    A number of new definitions are being added to re-proposed Rule 900 
in light of the changes being proposed.\869\ For example, new paragraph 
(g) of Rule 900 would define the term ``counterparty'' to mean ``a 
person that is a direct counterparty or indirect counterparty of a 
security-based swap.'' A direct counterparty would be ``a person that 
enters directly with another person into a contract that constitutes a 
security-based swap.'' An indirect counterparty would be ``a person 
that guarantees the performance of a direct counterparty to a security-
based swap or that otherwise provides recourse to the other side for 
the failure of the direct counterparty to perform any obligation under 
the security-based swap.'' Although a guarantor is not a direct 
counterparty to the security-based swap, the duties to be performed 
under the security-based swap, and thus the risks associated with the 
security-based swap, ultimately fall to the guarantor.\870\ Therefore, 
the Commission preliminarily believes that it is appropriate to deem a 
guarantor to be a counterparty to the security-based swap for purposes 
of the regulatory reporting requirements of Title VII and the rules 
proposed thereunder. As discussed in detail below, the concept of 
``reporting party'' used in Regulation SBSR as initially proposed would 
be replaced by the newly proposed term ``reporting side,'' to reflect 
the fact that reporting obligations could attach to both direct and 
indirect counterparties.\871\
---------------------------------------------------------------------------

    \869\ In some cases, a definition used in Rule 900 would cross-
reference a term defined elsewhere in the Commission's Title VII 
rules. In other cases, a definition might be specific to Regulation 
SBSR and not be used elsewhere in the Commission's Title VII rules.
    \870\ See Section II.B.2(d), supra.
    \871\ Re-proposed Rule 900(ee) would define ``side'' as ``a 
direct counterparty and any indirect counterparty that guarantees 
the direct counterparty's performance of any obligation under a 
security-based swap.'' Re-proposed Rule 900(cc) would define 
``reporting side'' as ``the side of a security-based swap having the 
duty to report information in accordance with [Regulation SBSR] to a 
security-based swap data repository, or if there is no security-
based swap data repository that would receive the information, to 
the Commission.''
---------------------------------------------------------------------------

    The Commission has received and continues to consider comments on 
the Regulation SBSR Proposing Release that address areas other than 
those relating to cross-border security-based swap activity. In this 
release, the Commission is re-proposing only changes relating to cross-
border security-based swap activity, technical and conforming changes 
necessitated by these larger revisions, and certain other minor changes 
that would help to clarify these re-proposed revisions (such as 
numbering each definition in re-proposed Rule 900, so that each defined 
term can more readily be identified). Changes to Regulation SBSR in 
other areas could, if appropriate, be addressed in a future 
release.\872\
---------------------------------------------------------------------------

    \872\ For example, the Commission in the Regulation SBSR 
Proposing Release did not propose how to define a ``block trade.'' 
As noted in Regulation SBSR Proposing Release, the Commission 
intends to do so in a separate proposal. See Regulation SBSR 
Proposing Release, 75 FR 75228.
---------------------------------------------------------------------------

    Regulation SBSR, as re-proposed today, represents the Commission's 
preliminary views regarding the application of Title VII's provisions 
relating to regulatory reporting and public dissemination of cross-
border security-based swap transactions, and how those provisions would 
apply to non-U.S. persons who act in capacities regulated under the 
Dodd-Frank Act. The Commission invites comment regarding all aspects of 
the approaches taken by the Commission and each provision of re-
proposed Regulation SBSR, including potential alternative approaches. 
In particular, data and comment from market participants and other 
interested parties regarding the likely effect of each re-proposed rule 
regarding application of a specific Title VII requirement, the effect 
of such proposed application in the aggregate, and potential 
alternative approaches will be particularly useful to the Commission in 
evaluating possible modifications to re-proposed Regulation SBSR.

B. Modifications to the Definition of ``U.S. Person''

    Rule 900 of re-proposed Regulation SBSR contains a revised 
definition of ``U.S. person.'' As initially proposed, ``U.S. person'' 
was defined as ``a natural person that is a U.S. citizen or U.S. 
resident or a legal person that is organized under the corporate laws 
of any part of the United States or has its principal place of business 
in the United States.'' Two persons who commented specifically on the 
Regulation SBSR proposal \873\ argued that ``U.S. person'' as used in 
the Commission's Title VII rules should have the same definition as in 
Regulation S.\874\
---------------------------------------------------------------------------

    \873\ See Cleary Letter III at 2, 6-9; Davis Polk Letter I at 
note 6 (arguing that using the existing Regulation S definition, 
rather than creating a new definition, ``would avoid confusion and 
also provide consistency of application'').
    \874\ 17 CFR 230.901 to 230.905.
---------------------------------------------------------------------------

    Proposed Regulation SBSR was the only one of the Commission's 
proposals for implementing Title VII to propose to use and define the 
term ``U.S. person.'' Because the Commission is now addressing cross-
border issues across multiple Title VII rules, the Commission has given 
further thought to the definition of ``U.S. person'' as initially

[[Page 31060]]

proposed in Regulation SBSR. The Commission now believes that using a 
single definition of ``U.S. person'' in all Title VII rulemaking would 
promote consistency and transparency in understanding and complying 
with these various rules. However, as described above,\875\ the 
Commission preliminarily believes that the Regulation S definition of 
``U.S. person'' is not appropriate for Title VII rules. Proposed Rule 
900(pp) would define ``U.S. person'' to have the same meaning as in 
proposed Rule 3a71-3(a)(7) under the Exchange Act.\876\
---------------------------------------------------------------------------

    \875\ See Section III.B.10, supra.
    \876\ See Section III.B.5, supra.
---------------------------------------------------------------------------

    Under both the proposed and re-proposed definitions of ``U.S. 
person,'' a natural person resident in the United States would be a 
U.S. person, as would a legal person that is organized or incorporated 
under the laws of the United States or having its principal place of 
business in the United States. Furthermore, under both definitions, a 
foreign branch of a U.S. person would not be recognized as having an 
existence separate from the U.S. person.\877\ The proposed rule also 
would cover partnerships, trusts, and other legal persons, as set forth 
in proposed Rule 3a71-3(a)(7) under the Exchange Act. The re-proposed 
definition of ``U.S. person'' also would clarify certain situations 
that were not specifically addressed in the initial proposal. For 
example, the initially proposed definition of ``U.S. person'' did not 
address whether--and, if so, when--an account would be considered a 
U.S. person. The re-proposed definition would provide that an account, 
whether discretionary or non-discretionary, of a U.S. person would be a 
U.S. person.
---------------------------------------------------------------------------

    \877\ See Regulation SBSR Proposing Release, 75 FR 75240 (``The 
Commission intends for this proposed definition [of U.S. person] to 
include branches and offices of U.S. persons''). See also Section 
III.B.5(b)ii, supra (proposing that an entity's status as a U.S. 
person would be determined at the legal-entity level and thus apply 
to the entire legal entity, including any foreign operations such as 
branches that are part of the U.S. legal entity).
---------------------------------------------------------------------------

    New paragraph (q) of re-proposed Rule 900 would define the term 
``non-U.S. person'' as a person that is not a U.S. person.
Request for Comment
    The Commission requests comment on all aspects of the re-proposed 
definition of ``U.S. person'' in Regulation SBSR. In particular:
     Should the definition of ``U.S. person'' in Regulation 
SBSR be consistent with that proposed for the Commission's other Title 
VII rules? Why or why not? If so, what should that definition be and 
why? Would having a different definition of ``U.S. person'' in 
Regulation SBSR create ambiguity or conflict with other Title VII rules 
being issued by the Commission? If not, why not?

C. Additional Modifications to Scope of Regulation SBSR

1. Revisions to Proposed Rule 908(a)
    Rule 908(a), as initially proposed, provided that a security-based 
swap would be subject to regulatory reporting and public dissemination 
under Regulation SBSR if the security-based swap: (i) Has at least one 
counterparty that is a U.S. person; (ii) is executed in the United 
States or through any means of interstate commerce; or (iii) is cleared 
through a registered clearing agency having its principal place of 
business in the United States. Thus, Rule 908(a), as originally 
proposed, would not impose reporting or public dissemination 
requirements in connection with a security-based swap solely because 
the obligations of one of the direct counterparties is guaranteed by a 
U.S. person. As noted above, the re-proposed definition of ``U.S. 
person''--like the initially proposed definition--would not treat a 
direct counterparty that is guaranteed by a U.S. person as itself, 
solely due to the existence of the guarantee, a U.S. person. However, 
as noted below, the Commission is concerned about instances where--
because of a guarantee extended by a U.S. person--the risk of a 
transaction resides in the United States, even if the direct 
counterparties of the transaction are domiciled outside the United 
States. Thus, upon further consideration, the Commission is now 
proposing to apply Title VII's regulatory reporting requirements to 
security-based swaps having at least one counterparty, whether direct 
or indirect, that is a U.S. person.
    Guarantees provided by U.S. persons to their foreign affiliates or 
other non-U.S. persons could have the effect of concentrating 
significant risks within the United States that may rise to the 
systemic level. If a U.S. person guarantees the performance of a non-
U.S. person, the financial resources of that U.S. person could be 
called upon to satisfy the contract. This activity is capable of posing 
risks to the stability of the U.S. financial system. The Commission 
preliminarily believes that, if it does not require regulatory 
reporting of security-based swaps that are guaranteed by U.S. persons, 
in addition to security-based swaps having a U.S. person direct 
counterparty, the Commission and other federal financial regulators 
would be less likely to detect the build-up of potentially significant 
risks within individual institutions or more widespread systemic risks 
to the U.S. financial system. The Dodd-Frank Act is intended to promote 
the financial stability of the United States by, among other things, 
reducing risks to the U.S. financial system by allowing regulators 
better access to necessary market data.\878\
---------------------------------------------------------------------------

    \878\ See, e.g., S. Comm. on Banking, Hous., & Urban Affairs, 
The Restoring American Financial Stability Act of 2010, S. Rep. No. 
111-176, at 32 (``As a key element of reducing systemic risk and 
protecting taxpayers in the future, protections must include 
comprehensive regulation and rules for how the OTC derivatives 
market operates. Increasing the use of central clearinghouses, 
exchanges, appropriate margining, capital requirements, and 
reporting will provide safeguards for American taxpayers and the 
financial system as a whole'') (emphasis added); note 4, supra.
---------------------------------------------------------------------------

    In addition, the Commission is now proposing to require regulatory 
reporting of all security-based swaps entered into by non-U.S. person 
security-based swap dealers and major security-based swaps 
participants, wherever they may be executed.\879\ This is a change from 
how the initial proposal applied to a security-based swap executed by a 
non-U.S. person security-based swap dealer or major security-based swap 
participant. Under the initial proposal, such a security-based swap 
would not be required to be reported solely based on an entity's status 
as a security-based swap dealer or major security-based swap 
participant, unless the security-based swap was executed in the United 
States or through any means of interstate commerce, or was cleared by a 
clearing agency having its principal place of business in the United 
States.
---------------------------------------------------------------------------

    \879\ See re-proposed Rule 908(a)(1)(iii) of Regulation SBSR.
---------------------------------------------------------------------------

    A non-U.S. person security-based swap dealer or major security-
based swap participant generally would be subject to all rules 
applicable to security-based swap dealers or major security-based swaps 
participants, regardless of its principal place of business or where it 
is organized.\880\ Having access to all of the security-based swap 
transactions entered into by a security-based swap dealer or major 
security-based swap participant is an important aspect of understanding 
its compliance with the applicable Title VII requirements, including 
without limitation, compliance with the capital, margin, and other 
applicable entity-level and transaction-level requirements. The 
Commission notes that Section 15F(f)(1)(a) of the Exchange Act provides 
that each registered security-based swap dealer and major

[[Page 31061]]

security-based swap participant shall make such reports as are required 
by the Commission, by rule or regulation, regarding the transactions 
and financial condition of the registered security-based swap dealer or 
major security-based swap participant.\881\ Therefore, the Commission 
is now proposing to require that all security-based swaps of all 
security-based swap dealers and major security-based swap participants, 
regardless of where such security-based swaps are executed or where 
these entities have their principal place of business or are organized, 
be subject to regulatory reporting to a registered SDR.\882\
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    \880\ See Sections III.C and IV.D, supra.
    \881\ 15 U.S.C. 78o-8(f)(1)(A). The Commission further notes 
that Section 15F(f)(2) of the Exchange Act, 15 U.S.C. 78o-8(f)(2), 
requires the Commission to ``adopt rules governing reporting and 
recordkeeping for security-based swap dealers and major security-
based swap participants.''
    \882\ As discussed below, however, the Commission is proposing 
that certain security-based swaps of non-U.S. person security-based 
swap dealers and major security-based swap participants would not be 
subject to public dissemination. In addition, certain security-based 
swaps that would otherwise be subject to regulatory reporting and 
public dissemination under Regulation SBSR could qualify for 
substituted compliance. See Section XI.D, infra.
---------------------------------------------------------------------------

    To reflect these changes and to reincorporate other provisions that 
are not being substantially revised, the Commission is re-proposing 
Rule 908(a) as follows. The rule would be divided into two 
subparagraphs, (1) and (2), which would address regulatory reporting 
and public dissemination, respectively. Specifically, re-proposed Rule 
908(a)(1) would provide that a security-based swap transaction would be 
subject to regulatory reporting if:
    (i) The security-based swap is a transaction conducted within the 
United States;
    (ii) There is a direct or indirect counterparty that is a U.S. 
person on either side of the transaction;
    (iii) There is a direct or indirect counterparty that is a 
security-based swap dealer or major security-based swap participant on 
either side of the transaction; or
    (iv) The security-based swap is cleared through a clearing agency 
having its principal place of business in the United States.
    Re-proposed Rule 908(a)(1)(i) would preserve the principle from the 
original proposal that a security-based swap would be subject to 
regulatory reporting if it is executed in the United States.\883\ As 
noted above,\884\ the concept of a security-based swap transaction 
being solicited, negotiated, executed, or booked in the United States 
has been integrated into the new term ``transaction conducted within 
the United States,'' which also is being used in other Title VII 
proposals of the Commission. Proposed Rule 3a71-3(a)(5) under the 
Exchange Act would define ``transaction conducted within the United 
States'' as ``a security-based swap transaction that is solicited, 
negotiated, executed, or booked within the United States, by or on 
behalf of either counterparty to the transaction, regardless of the 
location, domicile, or residence status of either counterparty to the 
transaction.'' \885\
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    \883\ See Rule 908(a)(2) of Regulation SBSR, as originally 
proposed.
    \884\ See Section III.B.6, supra.
    \885\ See note 308, supra (explaining that the word 
``counterparty'' as used within this term has the same meaning as 
``direct counterparty'' in re-proposed Rule 900(j) of Regulation 
SBSR).
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    The Commission received no comments that specifically addressed our 
use of the phrase ``through any means of interstate commerce'' in three 
places in Regulation SBSR, as initially proposed.\886\ However, upon 
further consideration, the Commission is concerned that this language 
could unduly require a security-based swap to be reported if it had 
only the slightest connection with the United States. Therefore, the 
Commission has decided to delete the phrase ``through any means of 
interstate commerce'' from re-proposed Regulation SBSR. Instead, the 
Commission is proposing to require reporting of a security-based swap 
that falls within the definition of ``transaction conducted within the 
United States,'' which would describe more precisely the nature of the 
activities in the United States that could result in a security-based 
swap becoming subject to Regulation SBSR. The Commission generally 
believes that security-based swaps that are solicited, negotiated, 
executed, or booked within the United States--by or on behalf of either 
counterparty to the transaction, and regardless of the location, 
domicile, or residence status of either counterparty to the 
transaction--generally should be subject to Regulation SBSR.
---------------------------------------------------------------------------

    \886\ See Rules 900 (definition of ``participant''), 908(a), and 
908(b) of Regulation SBSR, as initially proposed.
---------------------------------------------------------------------------

    Re-proposed Rule 908(a)(1)(ii)--which would require regulatory 
reporting of any security-based swap if there is a direct or indirect 
counterparty that is a U.S. person on either side of the transaction--
embodies the principle in the initial proposal that a security-based 
swap, wherever executed, must be reported if it has at least one 
counterparty that is a U.S. person. This revised prong, however, also 
would apply the reporting requirement to any security-based swap, 
wherever executed, that has at least one indirect counterparty \887\ 
that is a U.S. person, even when no direct counterparty is a U.S. 
person. The original proposal, because it did not include guarantors as 
counterparties, would not have required regulatory reporting in such 
case. As discussed above, the Commission now preliminarily believes 
that--to satisfy Congressional intent that security-based swaps be 
subject to regulatory reporting, thereby informing the Commission and 
other financial regulators of potential systemic risks--any security-
based swap having at least one direct counterparty that is a U.S. 
person should be reported. The Commission also preliminarily believes 
that, because guarantees extended by U.S. persons create risk to the 
U.S. financial system, regulatory reporting of security-based swaps 
should extend to any security-based swap transaction in which one or 
both direct counterparties is guaranteed by a U.S. person. In the 
absence of regulatory reporting of such security-based swaps, the 
Commission's ability to detect and analyze potentially significant 
sources of risk to the U.S. financial system could be limited.
---------------------------------------------------------------------------

    \887\ ``Indirect counterparty'' would be defined as ``a 
guarantor of a direct counterparty's performance of any obligation 
under a security-based swap.'' See re-proposed Rule 900(o) of 
Regulation SBSR.
---------------------------------------------------------------------------

    Re-proposed Rule 908(a)(1)(iii) would, for reasons described above, 
require regulatory reporting of any security-based swap executed by a 
security-based swap dealer or major security-based swap participant, 
regardless of the entity's place of domicile and regardless of the 
place of execution.
    Re-proposed Rule 908(a)(1)(iv) would preserve the principle from 
the original proposal that a security-based swap would be subject to 
regulatory reporting if it is cleared through a clearing agency having 
its principal place of business in the United States.\888\ As noted in 
the Regulation SBSR Proposing Release, the Commission preliminarily 
believes that, if a security-based swap is cleared by a clearing agency 
having its principal place of business in the United States, U.S. 
regulators should have access to information regarding the security-
based swap through a registered SDR.\889\ This approach is premised on 
the view that, when a security-based swap is cleared through a clearing 
agency, the initial transaction is novated and two new transactions 
take its place, with the clearing agency becoming the seller to the 
buyer and the buyer to the seller. If the clearing agency is located 
within the

[[Page 31062]]

United States, the new transactions necessarily would be executed 
within the United States.\890\
---------------------------------------------------------------------------

    \888\ See Rule 908(a)(3) of Regulation SBSR, as originally 
proposed.
    \889\ See Regulation SBSR Proposing Release, 75 FR 75240.
    \890\ See id. (noting that the concept of being ``executed in 
the United States or through any means of interstate commerce'' 
includes being cleared through a clearing agency having its 
principal place of business in the United States).
---------------------------------------------------------------------------

    While subparagraph (1) of re-proposed Rule 908(a) would address 
when a security-based swap would be subject to regulatory reporting, 
subparagraph (2) would address when a security-based swap would be 
subject to public dissemination. Re-proposed Rule 908(a)(2) would 
provide that a security-based swap shall be subject to public 
dissemination if:
    (i) The security-based swap is a transaction conducted within the 
United States;
    (ii) There is a direct or indirect counterparty that is a U.S. 
person on each side of the transaction;
    (iii) At least one direct counterparty is a U.S. person (except in 
the case of a transaction conducted through a foreign branch \891\);
---------------------------------------------------------------------------

    \891\ The term ``foreign branch'' would be defined in re-
proposed Rule 900(n) of Regulation SBSR to cross-reference the 
definition in proposed Rule 3a71-3(a)(1) under the Exchange Act. See 
Section III.B.7, supra, for a definition of that term.
---------------------------------------------------------------------------

    (iv) One side includes a U.S. person and the other side includes a 
non-U.S. person that is a security-based swap dealer; or
    (v) The security-based swap is cleared through a clearing agency 
having its principal place of business in the United States.
    The Commission notes that Section 13(m)(1)(B) of the Exchange Act 
\892\ ``authorize[s] the Commission to make security-based swap 
transaction and pricing data available to the public in such form and 
at such times as the Commission determines appropriate to enhance price 
discovery.'' Re-proposed Rule 908(a)(2) reflects the Commission's 
revised preliminary determination regarding an appropriate way to 
enhance price discovery in the U.S. market for security-based swaps. As 
noted below, since issuing the Regulation SBSR Proposing Release, the 
Commission has obtained and analyzed more extensive data regarding the 
overlap between the U.S. market and the global market for security-
based swaps.\893\ These data suggest that a vast majority of security-
based swap transactions directly involved at least one non-U.S. 
domiciled counterparty.\894\ Furthermore, these transactions frequently 
may be conducted with one direct counterparty located in one 
jurisdiction with the other direct counterparty located in another 
jurisdiction, further suggesting that no easy distinction can be made 
between the U.S. market and foreign or global markets. The Commission 
is concerned that limiting the application of Title VII's public 
dissemination requirement only to transactions that are wholly 
conducted within the United States or to transactions where both direct 
counterparties are U.S. persons would significantly reduce the 
potential benefits of post-trade transparency in the security-based 
swap market. The Commission stated in the Regulation SBSR Proposing 
Release that, ``[b]y reducing information asymmetries, post-trade 
transparency has the potential to lower transaction costs, improve 
confidence in the market, encourage participation by a larger number of 
market participants, and increase liquidity in the [security-based 
swap] market.'' \895\ The Commission also noted that, ``[i]n other 
markets, greater post-trade transparency has increased competition 
among market participants and reduced transaction costs.'' \896\
---------------------------------------------------------------------------

    \892\ 15 U.S.C. 78m(m)(1)(B).
    \893\ See Section XIV.F.2(d)ii, infra.
    \894\ See Section II.A.1, supra.
    \895\ Regulation SBSR Proposing Release, 75 FR 75224.
    \896\ Id. at 75225 (citing studies of the impact of TRACE (Trade 
Reporting and Compliance Engine) on the corporate bond market).
---------------------------------------------------------------------------

    Re-proposed Rule 908(a)(2) eliminates use of the term `interstate 
commerce'' and instead incorporates the new concept of ``transaction 
conducted within the United States,'' which is being used throughout 
the Commission's proposed Title VII cross-border rules, to help 
delineate precisely the types of security-based swap transactions that 
would be subject to public dissemination under Regulation SBSR. 
Furthermore, re-proposed Rule 908(a)(2) is designed to achieve the goal 
of improving the transparency, fairness, and efficiency of the U.S. 
security-based swap market, as reflected in Section 13(m)(1)(B) of the 
Exchange Act. Re-proposed Rule 908(a)(2) also is designed, as far as 
practicable, to minimize competitive disparities that might result 
under the proposed public dissemination regime, as well as to minimize 
incentives for market participants to structure their operations for 
the purpose of evading Regulation SBSR.\897\ Each individual 
subparagraph of re-proposed Rule 908(a)(2) is discussed below.
---------------------------------------------------------------------------

    \897\ We preliminarily believe that the proposed approach with 
respect to regulatory reporting and public dissemination is not 
being applied to persons who are ``transact[ing] a business in 
security-based swaps without the jurisdiction of the United 
States,'' within the meaning of Section 30(c). See Sections 
II.B.2(a)-II.B.2(d), supra. However, the Commission also 
preliminarily believes that the proposed approach with respect to 
regulatory reporting and public dissemination is necessary or 
appropriate to help prevent the evasion of the particular provisions 
of the Exchange Act that were added by the Dodd-Frank Act that are 
being implemented by the approach and prophylactically will help 
ensure that the purposes those provisions of the Dodd-Frank Act are 
not undermined. See Section II.B.2(e), supra; see also Section 
II.B.2(d), supra.
    For example, if the reporting requirements do not apply to 
transactions among non-U.S. persons that receive guarantees from 
U.S. persons and foreign branches of U.S. banks, then U.S. persons 
would have an incentive to evade the reporting requirements by 
conducting transactions with other U.S. persons through guaranteed 
foreign affiliates or foreign branches. Altering the form of the 
transaction in this manner would allow U.S. persons to continue to 
avail themselves of transparency in the U.S. security-based swap 
market while themselves evading the requirements intended to enhance 
that transparency, even though the substance of the transaction 
remains unchanged.
---------------------------------------------------------------------------

    Re-proposed Rule 908(a)(2)(i), similar to re-proposed Rule 
908(a)(1)(i), generally would preserve the principle from the original 
proposal that a security-based swap would be subject to public 
dissemination if it were executed in the United States.\898\ That 
concept has been integrated into the new term ``transaction conducted 
within the United States,'' which also is being used in the 
Commission's other Title VII proposals.
---------------------------------------------------------------------------

    \898\ See Rule 908(a)(2) of Regulation SBSR, as originally 
proposed. See also Regulation SBSR Proposing Release, 75 FR 75239-
40.
---------------------------------------------------------------------------

    Re-proposed Rule 908(a)(2)(ii) would provide that a security-based 
swap would be subject to public dissemination if there is a direct or 
indirect counterparty that is a U.S. person on each side of the 
transaction. Under the initial proposal, a security-based swap 
involving two non-U.S. person direct counterparties, but where each 
direct counterparty is guaranteed by a U.S. person, would not be 
required to be publicly disseminated. The Commission now preliminarily 
believes that, where U.S. persons have an interest on both sides of the 
transaction, even if indirectly, the transaction generally should be 
viewed as part of the U.S. security-based swap market and, as such, 
should be subject to Title VII's public dissemination requirement. 
Moreover, to the extent that U.S. persons might be incented to 
structure their trading operations through guaranteed foreign 
subsidiaries to avoid public dissemination that otherwise would apply 
to trades executed between U.S. person direct counterparties, the 
Commission seeks to minimize that incentive by re-proposing Rule 
908(a)(2)(ii) to require public dissemination of a security-based swap 
transaction if a U.S. person is present on

[[Page 31063]]

each side, whether directly or indirectly.
    Re-proposed Rule 908(a)(2)(iii) would provide that a security-based 
swap would be subject to public dissemination if at least one direct 
counterparty is a U.S. person (except in the case of a transaction 
conducted through a foreign branch \899\). This prong generally 
reincorporates the original proposal's approach that a security-based 
swap executed anywhere in the world and having just one U.S. person 
counterparty would be subject to public dissemination. The Commission 
generally believes that a security-based swap transaction having even 
just one U.S. person direct counterparty generally should be viewed as 
part of the U.S. security-based swap market and, as such, should be 
subject to Title VII's public dissemination requirement. The Commission 
preliminarily believes that the benefits of requiring public 
dissemination of all security-based swaps involving at least one U.S. 
person direct counterparty would inure to other U.S. persons that 
transact in the same or similar instruments.
---------------------------------------------------------------------------

    \899\ The term ``transaction conducted through a foreign 
branch'' would be defined in re-proposed Rule 900(hh) of Regulation 
SBSR to cross-reference the definition of that term in proposed Rule 
3a71-3(a)(4) under the Exchange Act, as discussed in Section III.B.7 
above.
---------------------------------------------------------------------------

    However, re-proposed Rule 908(a)(2)(iii) would provide a limited 
exception to the general rule that any transaction involving a U.S. 
person direct counterparty would be subject to public dissemination; 
re-proposed Rule 908(a)(2)(iii) would not apply if the transaction is 
conducted through a foreign branch.\900\ The Commission is concerned 
that, if it did not take this approach, non-U.S. market participants 
might avoid entering into security-based swaps with the foreign 
branches of U.S. banks so as to avoid their security-based swaps being 
publicly disseminated. The Commission notes that registration with the 
local regulatory authority to engage in banking business is inherent in 
the proposed definition of ``foreign branch.'' This approach would 
restrict the proposed exception to public dissemination for 
transactions conducted through a foreign branch.\901\ The Commission 
further notes that the proposed exclusion for transactions conducted 
through a foreign branch is equivalent to the proposed approach for 
transactions conducted by foreign affiliates that are guaranteed by a 
U.S. person. In the case of a security-based swap transaction executed 
outside the United States between a non-U.S. person and either the 
guaranteed foreign affiliate or the foreign branch of the U.S. bank, 
re-proposed Rule 908(a)(2) would not require public dissemination of 
the transaction. Re-proposed Rule 908(a)(2)(iii) would not require 
public dissemination if the transaction were conducted through a 
foreign branch. Re-proposed Rule 908(a)(2)(ii) would not require public 
dissemination if the only U.S. person involved in the transaction were 
the U.S. person providing the guarantee.
---------------------------------------------------------------------------

    \900\ However, a security-based swap having a direct 
counterparty that is a foreign branch could be subject to public 
dissemination for other reasons--e.g., if the transaction included a 
U.S. person on the other side. See re-proposed Rule 908(a)(2)(ii) of 
Regulation SBSR.
    \901\ Thus, for example, a security-based swap involving a U.S. 
person that sends staff to a foreign country to negotiate and 
execute the transaction but does not have a recognized foreign 
branch in that country would be required to be publicly 
disseminated, and would not qualify for the proposed exclusion in 
re-proposed Rule 908(a)(2)(iii) for transactions conducted through a 
foreign branch.
---------------------------------------------------------------------------

    Re-proposed Rule 908(a)(2)(iv) would provide that a security-based 
swap would be subject to public dissemination if one side includes a 
U.S. person and the other side includes a non-U.S. person that is a 
security-based swap dealer, as defined in Section 3(a)(71) of the 
Exchange Act and the rules and regulations thereunder. The Commission 
notes that re-proposed Rule 908(a)(2)(ii) would require public 
dissemination of a transaction if both sides include a U.S. person. 
Under re-proposed Rule 908(a)(2)(iv), however, public dissemination 
would be required when only one side includes a U.S. person, provided 
the other side includes a non-U.S. person security-based swap dealer. 
The Commission preliminarily believes that both types of transaction 
generally should be considered part of the U.S. security-based swap 
market and, as such, should be subject to Title VII's public 
dissemination requirement. As the Commission has previously stated, 
post-trade transparency of security-based swap transactions would 
reduce information asymmetries and could have the potential to lower 
transaction costs, improve confidence in the market, encourage 
participation by a larger number of market participants, and increase 
liquidity in the security-based swap market.\902\ Post-trade 
transparency of security-based swap transactions also has the potential 
to improve valuation models and thereby contribute to more efficient 
capital allocation.\903\ The Commission preliminarily believes that not 
subjecting transactions between U.S. persons (whether directly or 
indirectly) or between a U.S. person and a non-U.S. person security-
based swap dealer to post-trade transparency would undermine these 
goals. The fact that both sides of the transaction include a U.S. 
person, or that one side includes a U.S. person and the other side 
includes a person that conducts enough U.S. business to warrant 
requiring it to register with the Commission, suggests that they are 
engaging in the types of transactions that might be engaged in by other 
U.S. persons or others who are required to register with the 
Commission. Furthermore, in the absence of re-proposed Rule 
908(a)(2)(iv), a non-U.S. person security-based swap dealer could 
encourage foreign affiliates that are guaranteed by a U.S. parent to 
transact business with it outside the United States in order to evade 
the public dissemination requirement.\904\ If re-proposed Rule 
908(a)(2)(iv) applied, all transactions between a security-based swap 
dealer (regardless of whether it is a U.S. person) and a U.S. person 
(whether as a direct or indirect counterparty), would be required to be 
publicly disseminated, regardless of where such transactions are 
conducted. Finally, the Commission notes that Section 13(m)(1)(D) of 
the Exchange Act gives the Commission authority to require registered 
entities--such as security-based swap dealers--regardless of whether or 
not they are U.S. persons, to publicly disseminate security-based swap 
transaction and pricing data.
---------------------------------------------------------------------------

    \902\ See Regulation SBSR Proposing Release, 75 FR 75267.
    \903\ See id. at 75267-68.
    \904\ The Commission notes that re-proposed Rule 908(a)(2)(iii) 
of Regulation SBSR would require public dissemination if only one 
direct counterparty is a U.S. person, regardless of the status, 
nationality, or place of domicile of the other direct counterparty. 
Thus, re-proposed Rule 908(a)(2)(iii) already would require public 
dissemination in the case of a security-based swap between a non-
U.S. person security-based swap dealer and a U.S. person direct 
counterparty. Re-proposed Rule 908(a)(2)(iv) of Regulation SBSR 
would, in addition, require public dissemination in the case of a 
security-based swap between a non-U.S. person security-based swap 
dealer and a U.S. person indirect counterparty.
---------------------------------------------------------------------------

    However, the Commission notes that re-proposed Rule 908(a)(2) would 
not require public dissemination of a security-based swap transacted 
outside the United States between two non-U.S. persons that are 
security-based swap dealers (assuming that neither side is guaranteed 
by a U.S. person). Non-U.S. person security-based swap dealers are 
likely to have significant operations in foreign security-based swap 
markets. A transaction between two such non-U.S. person security-based 
swap dealers conducted outside the United States is less likely than a 
transaction conducted within the United States or a transaction

[[Page 31064]]

involving a U.S. person on the other side to affect the U.S. security-
based swap market. Therefore, the Commission is not proposing to 
require public dissemination of transactions conducted outside the 
United States between two non-U.S. person security-based swap dealers.
    Re-proposed Rule 908(a)(2)(v) would preserve the principle from the 
original proposal that a security-based swap would be subject to public 
dissemination if it is cleared through a clearing agency having its 
principal place of business in the United States.\905\ As noted in the 
Regulation SBSR Proposing Release, the Commission preliminarily 
believes that, if non-U.S. persons determined to clear a security-based 
swap transaction through a clearing agency having its principal place 
of business in the United States, this suggests that the clearing 
agency has made the security-based swap eligible for clearing because 
at least some U.S. counterparties might wish to trade the security-
based swap as well.\906\ The Commission preliminarily believes, 
therefore, that requiring public dissemination of the security-based 
swap transaction would promote price discovery for market participants 
in the United States and elsewhere.\907\
---------------------------------------------------------------------------

    \905\ See Rule 908(a)(3) of Regulation SBSR, as originally 
proposed.
    \906\ See Regulation SBSR Proposing Release, 75 FR 75240.
    \907\ See id.
---------------------------------------------------------------------------

    A security-based swap transaction would need to meet only one prong 
of re-proposed Rule 908(a)(2) to trigger the public dissemination 
requirement. For example, assume a security-based swap is solicited, 
negotiated, executed, and cleared in London between (A) the London 
branch of a U.S. financial institution and (B) a London-based firm 
(i.e., a non-U.S. person) that has registered with the Commission as a 
security-based swap dealer. Re-proposed Rule 908(a)(2)(i) would not 
apply, because the transaction is not conducted within the United 
States. Re-proposed Rule 908(a)(2)(v) would not apply, because the 
security-based swap is not cleared in the United States. Re-proposed 
Rule 908(a)(2)(ii) would not apply, because there is not a direct or 
indirect counterparty that is a U.S. person on both sides of the 
transaction. Re-proposed Rule 908(a)(2)(iii) would not apply because 
neither side includes a direct counterparty that is a U.S. person that 
would trigger public dissemination; here, the U.S. person direct 
counterparty is acting through a foreign branch, which is carved out of 
re-proposed Rule 908(a)(2)(iii). However, this transaction would be 
subject to public dissemination under re-proposed Rule 908(a)(2)(iv): 
one side includes a U.S. person (in this case, the London branch of the 
U.S. bank) and the other side includes a non-U.S. person security-based 
swap dealer. The result would be the same if, instead of a London 
branch of a U.S. financial institution, one of the direct 
counterparties were the London-based affiliate of a U.S. person that 
guarantees the performance of the London subsidiary (i.e., the 
transaction is between, on one side, a security-based swap dealer and, 
on the other side, an indirect counterparty that is a U.S. person).
Request for Comment
    The Commission requests comment on all aspects of the re-proposed 
Rule 908(a), including the following:
     Do you agree with the approach taken in re-proposed Rule 
908(a) that a security-based swap should be subject to regulatory 
reporting and public dissemination regardless of the nationality or 
place of domicile of the counterparties if it is a transaction 
conducted in the United States? Why or why not? Do you agree with the 
Commission's use of the term ``transaction conducted within the United 
States'' in re-proposed Rule 908? Why or why not?
     Do you agree with the approach taken in re-proposed Rule 
908(a) that a security-based swap cleared through a clearing agency 
having its principal place of business in the United States should be 
subject to the regulatory reporting and public dissemination 
requirements? Why or why not?
     Do you agree with the Commission's general approach of 
treating guarantors as counterparties for purposes of security-based 
swap trade reporting requirements? Why or why not? Do you believe that 
a security-based swap should be subject to regulatory reporting solely 
because one side includes a guarantor that is a U.S. person? Why or why 
not? Would the Commission's ability to exercise prudential and 
regulatory oversight of the securities markets be compromised if it did 
not have the ability to learn about all security-based swap positions 
held by U.S. persons, including guarantors? Why or why not?
     Do you believe that a security-based swap should be 
subject to regulatory reporting solely because one side includes a 
security-based swap dealer or major security-based swap participant, 
regardless of the nationality or place of domicile of that entity? Why 
or why not? Would the Commission's ability to exercise prudential and 
regulatory oversight of entities registered with it be compromised if 
it did not have the ability to learn about all security-based swap 
positions held by such entities? Why or why not?
     In general, do you agree with how re-proposed Rule 908(a) 
would apply to security-based swaps entered into by non-U.S. person 
security-based swap dealers and major security-based swap participants? 
Why or why not?
     Do you agree with the requirement, in re-proposed Rule 
908(a)(2)(ii), that a security-based swap should be subject to public 
dissemination if there is a direct or indirect counterparty that is a 
U.S. person on each side of the transaction? Why or why not? What would 
be the benefits of requiring public dissemination in this scenario? 
What would be the costs? Please be specific.
     Do you agree with the requirement, in re-proposed Rule 
908(a)(2)(iii), that a security-based swap should be subject to public 
dissemination if at least one direct counterparty is a U.S. person, 
even if the transaction is not conducted within the United States? Why 
or why not? What would be the benefits of requiring public 
dissemination in this scenario? What would be the costs? Please be 
specific. Do you agree with the exception to this general rule for 
transactions conducted through a foreign branch of a U.S. person? Why 
or why not? Should the exception be limited to foreign branches? Why or 
why not? Are there any alternatives that the Commission should 
consider? If so, what are they?
     Do you agree with the requirement, in re-proposed Rule 
908(a)(2)(iv), that would provide that a security-based swap, even if 
not a transaction conducted within the United States, would be subject 
to public dissemination if one side includes a U.S. person and the 
other side includes a non-U.S. person security-based swap dealer? Why 
or why not? What would be the benefits of requiring public 
dissemination in this scenario? What would be the costs? Please be 
specific.
     Should the Commission require public dissemination of 
security-based swaps cleared by any clearing agency registered with the 
Commission, even if its principal place of business is outside the 
United States? Why or why not?
     In general, do you agree the distinctions drawn in the 
scenarios set forth in re-proposed Rule 908(a) regarding which 
security-based swaps would be subject to the regulatory reporting and 
public dissemination? Why or why not?

[[Page 31065]]

2. Revisions to Proposed Rule 908(b)
    In the initial proposal, the Commission explained when duties would 
be imposed on non-U.S. person counterparties of security-based swaps 
when some connection to the United States might be present. Rule 
908(b), as initially proposed, provided that no duties would be imposed 
on a counterparty unless one of the following conditions were true:
     The counterparty is a U.S. person;
     The security-based swap is executed in the United States 
or through any means of interstate commerce; or
     The security-based swap is cleared through a clearing 
agency having its principal place of business in the United States.
Under the initial proposal, if none of these conditions were true, a 
foreign counterparty ``would not become a `participant' of an SDR and 
would not become subject to proposed Regulation SBSR'' \908\--even if 
the security-based swap itself and its counterparty were subject to 
Regulation SBSR.
---------------------------------------------------------------------------

    \908\ Regulation SBSR Proposing Release, 75 FR 75240.
---------------------------------------------------------------------------

    In light of other revisions being made to Regulation SBSR discussed 
above, the Commission is now proposing several conforming revisions to 
proposed Rule 908(b). First, consistent with the other revisions 
described above, Rule 908(b) is being re-proposed to account for the 
possibility that a non-U.S. person security-based swap dealer or major 
security-based swap participant could incur a duty to report. Second, 
consistent with the broader conceptual framework set forth in this 
release, the ``interstate commerce clause,'' used in the initial 
proposal to describe a security-based swap that may generate reporting 
duties for counterparties under Regulation SBSR,\909\ is being replaced 
with the new concept of a ``transaction conducted within the United 
States'' that is being used throughout the Commission's proposed cross-
border rules.\910\ Therefore, re-proposed Rule 908(b) would provide 
that a direct or indirect counterparty to a security-based swap would 
not incur any obligation under Regulation SBSR unless the counterparty 
were:
---------------------------------------------------------------------------

    \909\ See Rule 908(b)(2) of Regulation SBSR, as originally 
proposed.
    \910\ See Section III.B.6, supra (discussing the proposed 
definition of ``transaction conducted within the Unites States'').
---------------------------------------------------------------------------

     A U.S. person;
     A security-based swap dealer or major security-based swap 
participant; or
     A counterparty to a transaction conducted within the 
United States.\911\
---------------------------------------------------------------------------

    \911\ In addition, the Commission is re-proposing the definition 
of the term ``participant'' in Rule 900 to make changes conforming 
to re-proposed Rule 908(b) of Regulation SBSR. The term 
``participant'' was designed to include any counterparty to a 
security-based swap that might incur duties under Regulation SBSR. 
Rule 906(a) of Regulation SBSR, as proposed and re-proposed, would 
impose certain duties on participants other than those required to 
initially report the transaction. The originally proposed definition 
of ``participant'' would track proposed Rule 908(b) and include a 
U.S. person that is a counterparty to a security-based swap that is 
required to be reported to a registered SDR, or a non-U.S. person 
that is a counterparty to a security-based swap that is: (i) 
Required to be reported to a registered SDR; or (ii) executed in the 
United States or through any means of interstate commerce, or 
cleared through a clearing agency having its principal place of 
business in the United States. As re-proposed, ``participant'' would 
be defined simply as ``a person that is a counterparty to a 
security-based swap that meets the criteria of [Rule 908(b)].'' This 
would include both direct and indirect counterparties.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the re-proposed 
Rule 908(b), including the following:
     Do you agree with the removal of the ``interstate commerce 
clause'' contained in Rules 908(a)(2) and 908(b)(2), as originally 
proposed, and its replacement with the new concept of ``transaction 
conducted within the United States''? Does this new concept provide 
additional clarity? If not, what alternative formulations of the 
concept should the Commission consider, and why? Please be specific.

D. Modifications to ``Reporting Party'' Rules and Assigning Duty To 
Report

    The Commission also is re-proposing aspects of Regulation SBSR that 
would specify who must report the security-based swap. Rule 900, as 
initially proposed, would define ``reporting party'' as ``the 
counterparty to a security-based swap with the duty to report 
information in accordance with [Regulation SBSR] to a registered 
security-based swap data repository, or if there is no registered 
security-based swap data repository that would receive the information, 
to the Commission.'' Because the Commission is now proposing to extend 
the reporting requirement to security-based swaps executed outside the 
United States if the performance of one or both direct counterparties 
under the security-based swap is guaranteed by a U.S. person,\912\ the 
Commission also is re-proposing the rules that would assign the duty to 
report in a number of ways. Overall, these revisions are designed to 
assign the responsibility to report a security-based swap transaction 
to persons that the Commission preliminarily believes have greater 
capacity to fulfill that responsibility, and in a manner consistent 
with the reporting hierarchy set forth in Section 13A(a)(3) of the 
Exchange Act.\913\
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    \912\ The Commission notes that, under both the initial and 
current proposals, security-based swaps would be subject to 
Regulation SBSR if they are executed within the United States, 
regardless of who the counterparties are or whether they are 
guaranteed by U.S. persons.
    \913\ 15 U.S.C. 78m-1(a)(3). Section 13A(a)(3) of the Exchange 
Act assigns to specific kinds of counterparties the duty to report 
uncleared security-based swaps to an SDR or to the Commission.
---------------------------------------------------------------------------

    First, the Commission is revising the proposed term ``reporting 
party'' to ``reporting side.'' A ``side'' would be defined in new 
paragraph (ee) of re-proposed Rule 900 to mean ``a direct counterparty 
and any indirect counterparty.'' ``Reporting side'' would be defined as 
``the side of a security-based swap having the duty to report 
information in accordance with Sec. Sec.  242.900-911 to a registered 
security-based swap data repository, or if there is no registered 
security-based swap data repository that would receive the information, 
to the Commission.'' Under this formulation, if a side has the duty to 
report a security-based swap transaction, any counterparty on that 
side--direct or indirect--would have responsibility for carrying out 
the reporting obligation. The Commission preliminarily believes that it 
would be impractical and unnecessarily complicated to attempt to assign 
the reporting duty to either the direct or indirect counterparty 
specifically, and is instead proposing to assign the duty to the side 
jointly.\914\
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    \914\ The Commission anticipates that the direct counterparty 
and any indirect counterparty on the reporting side would decide 
which of them would carry out the duty to report the transaction. 
Alternately, the direct and indirect counterparties on the reporting 
side could elect to have a third party carry out the duty to report 
on their behalf, although the direct and indirect counterparties on 
the reporting side--not the agent--would incur legal liability for 
the agent's failure to report the transaction in a timely and 
complete manner.
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    Furthermore, the Commission is revising our proposed approach to 
assigning the reporting duty to minimize consideration of the domicile 
of the counterparties, and to focus more on their status (i.e., whether 
or not a counterparty is a security-based swap dealer or major 
security-based swap participant). The initial proposal laid out three 
scenarios for assigning the reporting duty: Both direct counterparties 
are U.S. persons, only one direct counterparty is a U.S. person, and 
neither direct counterparty is a U.S.

[[Page 31066]]

person.\915\ The definition of ``U.S. person''--as proposed and re-
proposed--does not include a security-based swap dealer or major 
security-based swap participant that is organized under the laws of a 
foreign jurisdiction and has its principal place of business outside 
the United States, even though it is a security-based swap dealer or 
major security-based swap participant under Title VII. Thus, under the 
initial proposal, for a security-based swap between (A) an end user or 
other counterparty that is a U.S. person and is not a security-based 
swap dealer or major security-based swap participant (a ``non-
registered U.S. counterparty'') and (B) a security-based swap dealer or 
major security-based swap participant that is a non-U.S. person, the 
non-registered U.S. counterparty would have been the reporting party.
---------------------------------------------------------------------------

    \915\ See Rules 901(a)(1), (2), and (3) of Regulation SBSR, as 
originally proposed. See also Regulation SBSR Proposing Release, 75 
FR 75211.
---------------------------------------------------------------------------

    Several commenters argued that this requirement would unfairly 
place the reporting burden on the non-registered U.S. counterparty. 
These commenters generally argued that, due to their status as 
security-based swap dealers and major security-based swap participants, 
even security-based swap dealers and major security-based swap 
participants that are not U.S. persons have greater technological 
capability than non-registered U.S. counterparties to carry out the 
reporting function.\916\ These commenters generally maintained that 
non-registered U.S. counterparties would incur significant costs to 
build the systems necessary to report security-based swaps.\917\ 
Certain commenters noted the unequal treatment and potential 
consequences that could result if non-registered U.S. counterparties 
incurred the reporting obligation for security-based swaps that they 
entered into with non-U.S. security-based swap dealers and non-U.S. 
major security-based swap participants.\918\ One commenter specifically 
recommended that security-based swap dealers and major security-based 
swap participants that are not U.S. persons be subject to the same 
regulatory reporting responsibilities as security-based swap dealers 
and major security-based swap participants that are U.S. persons, when 
transacting with non-registered U.S. counterparties.\919\
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    \916\ See DTCC I at 8; ICI Letter at 5 (stating that security-
based swap dealers are the only market participants that currently 
have the standardization necessary to report the required security-
based swap data); ISDA/SIFMA Letter I at 19; SIFMA Letter I at 3 
(arguing that an end user should not incur higher transaction costs 
or potential legal liabilities depending on the domicile of its 
counterparty); Vanguard Letter at 6 (stating that non-U.S. security-
based swap dealers and major security-based swap participants would 
be more likely to have appropriate systems in place to facilitate 
reporting).
    \917\ See DTCC I at 27; ICI Letter at 5 (stating that investment 
funds would incur significant costs to build the necessary systems); 
Vanguard Letter at 6 (stating that end users would be required to 
commit significant capital and resources to build out their 
reporting systems). See also MarkitSERV Letter I at 9 (suggesting 
that, in light of capacity and resource constraints, a non-
registered U.S. counterparty would seek to delegate any reporting 
obligations).
    \918\ See ISDA/SIFMA Letter I at 19 (requiring end users to 
report could result in end users declining to trade with non-U.S. 
security-based swap dealers, which could increase systemic risk by 
decreasing liquidity and further concentrating the U.S. security-
based swap market); Cleary Letter II at 18 (requiring end users to 
report could result in their declining to trade with non-U.S. 
security-based swap dealers, thereby potentially reducing price 
competition).
    \919\ See SIFMA Letter I at 2.
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    The Commission generally agrees with these arguments. The 
Commission preliminarily believes that non-U.S. person security-based 
swap dealers and major security-based swap participants, like U.S. 
person security-based swap dealers and major security-based swap 
participants, have greater technological capability than non-registered 
U.S. persons to carry out the reporting function. Furthermore, the 
Commission preliminarily sees no reason not to assign the duty to 
report to non-U.S. person security-based swap dealers and major 
security-based swap participants in appropriate circumstances. Although 
such entities are not U.S. persons, the fact that they are security-
based swap dealers and major security-based swap participants 
necessarily implies that they have substantial contacts with the U.S. 
security-based swap market and thus could incur significant regulatory 
duties arising from their U.S. business. Accordingly, the Commission is 
re-proposing Rule 901(a) to provide that a security-based swap dealer 
or major security-based swap participant that is not a U.S. person 
could incur the duty to report a security-based swap in various cases. 
Re-proposed Rule 901(a) now provides as follows:
     If both sides of the security-based swap include a 
security-based swap dealer, the sides would be required to select the 
reporting side.
     If only one side of the security-based swap includes a 
security-based swap dealer, that side would be the reporting side.
     If both sides of the security-based swap include a major 
security-based swap participant, the sides would be required to select 
the reporting side.
     If one side of the security-based swap includes a major 
security-based swap participant and the other side includes neither a 
security-based swap dealer nor a major security-based swap participant, 
the side including the major security-based swap participant would be 
reporting side.
     If neither side of the security-based swap includes a 
security-based swap dealer or major security-based swap participant: 
(i) if both sides include a U.S. person or neither side includes a U.S. 
person, the sides would be required to select the reporting side; and 
(ii) if only one side includes a U.S. person, that side would be the 
reporting side.
    Re-proposed Rule 901(a)(2) would preserve the reporting hierarchy 
of proposed Rule 901(a), while additionally taking into account the 
possibility that a direct counterparty to a security-based swap might 
have a guarantor that is better suited for carrying out the reporting 
duty. Thus, the newly proposed approach set forth in re-proposed Rule 
901(a) looks to the status of each person on a side (i.e., whether it 
is a security-based swap dealer or major security-based swap 
participant), not the status of only the direct counterparties. Under 
the initial proposal, if a non-U.S. person were a direct counterparty 
to a security-based swap executed outside the United States, that non-
U.S. person would under no circumstances have had a duty to report the 
security-based swap, even if it were guaranteed by a U.S. person or if 
it were a security-based swap dealer or major security-based swap 
participant. The Commission is now proposing to refocus the reporting 
duty primarily on the status of the counterparties, rather than on 
their nationality or place of domicile.
    Under re-proposed Rule 901(a), the only time that the domicile of 
the counterparties could determine who must report is if neither side 
includes a security-based swap dealer or major security-based swap 
participant. In such case, if one side includes a U.S. person while the 
other side does not, the side with the U.S. person would be the 
reporting side. Similar to the initial proposal, however, if both sides 
include a U.S. person or neither side includes a U.S. person, the sides 
would be required to select the reporting side.
    These proposed revisions to Regulation SBSR are designed to more 
efficiently align the duty to report with the entities that the 
Commission preliminarily believes are best suited to carrying out that 
duty. The Commission has previously noted that it ``understands that 
many reporting parties already have established linkages to entities 
that may register as SDRs, which could significantly reduce the out-of-
pocket costs associated with

[[Page 31067]]

establishing the reporting function.'' \920\ These proposed revisions 
also are designed to minimize the burdens faced by non-registered U.S. 
counterparties that might enter into security-based swaps with non-U.S. 
person security-based swap dealers or major security-based swap 
participants, as well as to clarify and simplify the reporting rules 
more generally.
---------------------------------------------------------------------------

    \920\ Regulation SBSR Proposing Release, 75 FR 75265.
---------------------------------------------------------------------------

    The following examples explain the operation of re-proposed Rule 
901(a).
     Example 1. A non-registered U.S. counterparty executes a 
security-based swap with a security-based swap dealer that is a non-
U.S. person. Neither side has a guarantor. The security-based swap 
dealer would be the reporting side.
     Example 2. Same facts as Example 1, except that the non-
registered U.S. counterparty is guaranteed by a security-based swap 
dealer. Because both sides include a person that is a security-based 
swap dealer, the sides would be required to select which is the 
reporting side.
     Example 3. A security-based swap is executed in London 
between a foreign subsidiary of a U.S. person and a French hedge fund. 
The performance of the foreign subsidiary is guaranteed by its U.S. 
parent, a major security-based swap participant. The side consisting of 
the major security-based swap participant and its foreign subsidiary 
would be the reporting side.
     Example 4. The New York branch of a German bank executes, 
in New York, a security-based swap with the New York branch of a 
Brazilian bank. Neither foreign bank is a security-based swap dealer or 
a major security-based swap participant and neither direct counterparty 
is guaranteed by a U.S. person. The sides must select which would be 
the reporting side.
     Example 5. A U.S. hedge fund executes a security-based 
swap in London with a foreign bank that is registered as a dealer in 
its home jurisdiction, but is not a security-based swap dealer or major 
security-based swap participant under Title VII. Neither direct 
counterparty is guaranteed by a U.S. person. The U.S. hedge fund would 
be the reporting side, because its side includes the only U.S. person.
Request for Comment
    The Commission generally requests comment on all aspects of issues 
regarding cross-border inter-affiliate transactions, including the 
following:
     Do you agree with the proposed definitions for 
``counterparty,'' ``direct counterparty,'' and ``indirect 
counterparty''? Why or why not?
     Do you agree with the new proposed definitions of ``side'' 
and ``reporting side''? Why or why not? If you disagree with these 
proposed definitions, what alternative formulations should the 
Commission consider, and why?
     Do you believe that the re-proposed provisions would 
appropriately reduce the potential reporting burdens of non-registered 
U.S. counterparties? Why or why not?
     Do you agree with the shifting of reporting burdens as 
detailed in re-proposed Rule 901(a)? Why or why not? Do you believe it 
is appropriate to require a security-based swap dealer or major 
security-based swap participant that is not a U.S. person to incur the 
duty to report a security-based swap? Why or why not?
     Should re-proposed Rule 901(a) focus only on the status of 
the direct counterparties (i.e., whether or not they are security-based 
swap dealers or major security-based swap participants) rather than 
also taking into account the status of any indirect counterparties? Why 
or why not?
     Do you agree, as provided in re-proposed Rule 901(a), that 
the domicile of the counterparties should determine who must report 
only if neither side includes a security-based swap dealer or major 
security-based swap participant? Why or why not?
     Do you believe that Rule 901(a), as re-proposed, would 
more efficiently align the burdens of reporting with the entities 
having the greatest technological capability to carry out the reporting 
function? If not, how could the Commission more efficiently align the 
burdens of reporting with the operational capabilities of security-
based swap counterparties? Please be specific.
     Are the examples provided sufficiently clear to inform 
entities of their reporting obligations? Would additional examples be 
helpful? If so, please provide specific examples that should be 
addressed by the Commission.

E. Other Technical and Conforming Changes

    In connection with the new provisions of re-proposed Regulation 
SBSR discussed above, the Commission is proposing to make various minor 
technical and conforming changes to other parts of the regulation. 
These changes are described below.
    Rule 902(a), as initially proposed, would require a registered SDRs 
to publicly disseminate a transaction report of any security-based swap 
immediately upon receipt of information about the security-based swap, 
except in the case of a block trade. Re-proposed Rule 908, however, 
contemplates situations where a security-based swap would be required 
to be reported to a registered SDR but not publicly disseminated.\921\ 
Therefore, the Commission is re-proposing Rule 902(a) to provide that a 
registered SDR would not have an obligation to publicly disseminate a 
transaction report for any such security-based swap.
---------------------------------------------------------------------------

    \921\ This could occur in the case of a security-based swap 
between (i) a foreign branch of a U.S. bank, a non-U.S. person 
security-based swap dealer, or a non-U.S. person that has a 
guarantee from a U.S. person, and (ii) a non-U.S. person that is not 
guaranteed by a U.S. person; and further provided that neither side 
solicits, negotiates, executes, books, or submits to clear the 
transaction within the United States. See Section VIII.C, supra.
---------------------------------------------------------------------------

    Similarly, Rule 910(b)(4), as initially proposed, would provide 
that, in Phase 4 of the Regulation SBSR compliance schedule, ``[a]ll 
security-based swaps reported to the registered security-based swap 
data repository shall be subject to real-time public dissemination as 
specified in Sec.  242.902.'' As noted above, under the re-proposal of 
Rule 908, certain security-based swaps would be subject to regulatory 
reporting but not public dissemination requirements. Therefore, the 
Commission is re-proposing Rule 910(b)(4) to provide that, ``All 
security-based swaps received by the registered security-based swap 
data repository shall be treated in a manner consistent with Sec. Sec.  
242.902, 242.905, and 242.908.'' \922\
---------------------------------------------------------------------------

    \922\ Re-proposed Rules 902 and 908 of Regulation SBSR, when 
read together, would provide that certain security-based swaps 
reported to a registered SDR would not be publicly disseminated. The 
Commission also is adding the reference to Rule 905 here to provide 
that, after Phase 4, a registered SDR must publicly disseminate not 
only initial transaction reports (consistent with re-proposed Rules 
902 and 908), but also corrected transaction reports (consistent 
with re-proposed Rule 905).
---------------------------------------------------------------------------

    In addition, the Commission is proposing certain changes to 
proposed Rules 901(c) and 901(d), which address the data elements to be 
reported to a registered SDR, to reflect that, under the re-proposal, 
certain security-based swaps may be subject to regulatory reporting but 
not public dissemination. Rule 901(c), as initially proposed, was 
titled ``Information to be reported in real time.'' Under Rule 902(a), 
as originally proposed, the registered SDR to which such information 
was reported would be required to promptly disseminate to the public 
such information (except in the

[[Page 31068]]

case of a block trade). However, the Commission preliminarily believes 
that, if a security-based swap were subject to regulatory reporting but 
not public dissemination, there is no need to require that information 
about the security-based swap be reported in real time. Therefore, the 
introductory language to Rule 901(c) is being re-proposed as follows: 
``For any security-based swap that must be publicly disseminated 
pursuant to Sec. Sec.  242.902 and 242.908 and for which it is the 
reporting side, the reporting side shall report the following 
information in real time. If a security-based swap is required by 
Sec. Sec.  242.901 and 242.908 to be reported but not publicly 
disseminated, the reporting side shall report the following information 
no later than the time that the reporting side is required to comply 
with paragraph (d) of this section.'' In addition, re-proposed Rule 
901(c) would be retitled ``Primary trade information,'' thus 
eliminating the reference to real-time reporting--since the information 
required to be reported under Rule 901(c) would no longer in all cases 
be required to be reported in real time. Furthermore, re-proposed Rule 
901(d) would be retitled ``Secondary trade information.'' \923\
---------------------------------------------------------------------------

    \923\ In the original proposal, Rule 901(d) of Regulation SBSR 
was titled ``Additional information that must be reported.'' This 
additional information would be for regulatory purposes only and 
would not be publicly disseminated.
---------------------------------------------------------------------------

    The Commission also is re-proposing Rule 905(b)(2) to clarify that, 
if a registered SDR receives corrected information relating to a 
previously submitted transaction report, it would be required to 
publicly disseminate a corrected transaction report only if the initial 
security-based swap were subject to public dissemination.\924\
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    \924\ Re-proposed Rule 905(b)(2) of Regulation SBSR also 
substitutes the word ``counterparties''--which is a defined term in 
Regulation SBSR--for the word ``parties,'' which was used in the 
initial proposal but was not a defined term.
---------------------------------------------------------------------------

    Rule 901(c)(10), as initially proposed, provided that the following 
data element would be required to be reported: ``If both counterparties 
to a security-based swap are security-based swap dealers, an indication 
to that effect.'' As the Commission stated in the Regulation SBSR 
Proposing Release: ``Prices of transactions involving a dealer and a 
non-dealer are typically `all-in' prices that include a mark-up or 
mark-down, while interdealer transaction prices typically do not. Thus, 
the Commission believes that requiring an indication of whether a 
[security-based swap] was an interdealer transaction or a transaction 
between a dealer and a non-dealer counterparty would enhance 
transparency by allowing market participants to more accurately assess 
the reported price for a [security-based swap].'' \925\ The Commission 
is now re-proposing Rule 901(c)(10) as follows: ``If both sides of the 
security-based swap include a security-based swap dealer, an indication 
to that effect.'' The re-proposed rule would clarify that a security-
based swap dealer might be a direct or indirect counterparty to a 
security-based swap. The Commission continues to believe that, in 
either case, a security-based swap having a security-based swap dealer 
on each side could, all other things being equal, be priced differently 
than a security-based swap having a security-based swap dealer on only 
one side. Therefore, the Commission continues to believe that the 
existence of a security-based swap dealer on each side should be 
reported to the registered SDR and made known to the public.
---------------------------------------------------------------------------

    \925\ Regulation SBSR Proposing Release, 75 FR 75214.
---------------------------------------------------------------------------

    The Commission is re-proposing Rule 901(d)(1)(ii) to require 
reporting of the broker ID, desk ID, and trader ID, as applicable, only 
of the direct counterparty on the reporting side. The Commission 
preliminarily believes that it would be impractical and unnecessary to 
report such data elements with respect to an indirect counterparty, as 
such elements might not be applicable to an indirect counterparty.\926\ 
Similarly, Rule 901(d)(1)(iii) is being re-proposed to require 
reporting of a description of the terms and contingencies of the 
payment streams only of each direct counterparty to the other. The 
Commission is including the word ``direct'' to avoid extending Rule 
901(d)(1)(iii) to indirect counterparty relationships, where payments 
generally would not flow to or from an indirect counterparty.
---------------------------------------------------------------------------

    \926\ An indirect counterparty typically would not have a desk 
or trader involved in the transaction, or engage the services of a 
broker, in the same manner as a direct counterparty.
---------------------------------------------------------------------------

    Proposed Rule 901(e) set forth provisions for reporting life cycle 
events of a security-based swap. The basic approach set forth in 
proposed Rule 901(e) was that, generally, the original reporting party 
of the initial transaction would have the responsibility to report any 
subsequent life cycle event; this approach remains unchanged in the re-
proposal. However, if the life cycle event were an assignment or 
novation that removed the original reporting party, either the new 
counterparty or the original counterparty would have to be the 
reporting party. Further, Rule 901(e), as initially proposed, would 
provide that the new counterparty would be the reporting party if it 
were a U.S. person, whereas the other counterparty would be the new 
reporting party if the new counterparty were not a U.S. person.
    However, as discussed above, the Commission is now proposing the 
concept of a ``reporting side,'' which would include the direct and any 
indirect counterparty. Further, as discussed above, the Commission is 
proposing that non-U.S. person security-based swap dealers or major 
security-based swap participants would, in certain instances, incur a 
duty to report. Thus, the Commission is re-proposing Rule 901(e) to 
provide that the duty to report would switch to the other side only if 
the new side did not include a U.S. person (as in the originally 
proposed rule) or a security-based swap dealer or major security-based 
swap participant (references to which are being added to Rule 901(e)). 
The Commission preliminarily believes that, if the new side includes a 
security-based swap dealer or major security-based swap participant, 
the new side should retain the duty to report. This approach is 
designed to align reporting duties with the market participants that 
the Commission preliminarily believes are better suited to carrying 
them out because non-U.S. person security-based swap dealers and major 
security-based swap participants likely have already taken significant 
steps to establish and maintain the systems, processes and procedures, 
and staff resources necessary to report security-based swaps 
currently.\927\
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    \927\ See Section VIII.D, supra (explaining rationale for 
proposing to align reporting duties with greater capability to carry 
out such duties).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of all the 
technical and conforming changes in re-proposed Regulation SBSR, 
including the following:
     Do you disagree with any of the technical and conforming 
changes in the re-proposed rules? If so, why?
     Do you agree with the proposed change to Rule 902(a) which 
provides that a registered SDR would not have an obligation to publicly 
disseminate a transaction report for any security-based swap that is 
required to be reported but not publically disseminated? Why or why 
not?
     Do you agree with the proposed change to Rule 910(b)(4) 
that would remove the requirement that ``[a]ll security-based swaps 
reported to the registered security-based swap data

[[Page 31069]]

repository [] be subject to real-time public dissemination as specified 
in Sec.  242.902'' and replace it with the requirement that ``[a]ll 
security-based swaps received by the registered security-based swap 
data repository [] be treated in a manner consistent with Sec. Sec.  
242.902, 242.905, and 242.908''? Are there any alternative formulations 
of the re-proposed rule text that the Commission should consider? If 
so, what are they? Please be specific.
     Do you agree with the proposed changes to the data 
elements initially contained in proposed Rules 901(c) and 901(d)? 
Specifically, do you agree with the reformulation of the introductory 
language contained in re-proposed Rule 901(c) to reflect situations in 
which a security-based swap could be subject to regulatory reporting 
but not public dissemination? Why or why not? Do you agree with the 
retitling of re-proposed Rule 901(c) to ``Primary trade information'' 
to eliminate the reference to real-time reporting? Why or why not?
     Do you agree with the proposed change to re-proposed Rule 
905(b)(2) to clarify that, if a registered SDR receives corrected 
information relating to a previously submitted transaction report, it 
would be required to publicly disseminate a corrected transaction 
report only if the initial security-based swap were subject to public 
dissemination? Why or why not?
     Do you agree with the proposed change to re-proposed Rule 
901(c)(10) to clarify that a security-based swap dealer might be a 
direct or indirect counterparty to a security-based swap? Why or why 
not?
     Do you agree with the proposed change to re-proposed Rule 
901(d)(1)(ii) to require the reporting of the broker ID, desk ID, and 
trader ID only of the direct counterparty on the reporting side? Why or 
why not? Similarly, do you agree with the requirement in re-proposed 
Rule 901(d)(1)(iii) for reporting of a description of the terms and 
contingencies of the payment streams only of each direct counterparty 
to the other in order to avoid extending the rule to indirect 
counterparty relationships? Why or why not?
     Do you agree with the proposed change to re-proposed Rule 
901(e) to provide that the duty to report would switch to the other 
side only if the new side did not include a U.S. person or a security-
based swap dealer or major security-based swap participant? Why or why 
not?
     Are there any other technical and conforming changes that 
the Commission should make to re-proposed Regulation SBSR?

F. Cross-Border Inter-Affiliate Transactions

    Commenters raised concerns about applying Title VII reporting or 
dissemination requirements to cross-border inter-affiliate security-
based swaps.\928\ One commenter argued that, for a foreign entity 
registered as a bank holding company and subject to the consolidated 
supervision of the Federal Reserve, the reporting of inter-affiliate 
transactions would be superfluous because the Federal Reserve has 
``ample authority to monitor transactions among affiliates.'' \929\ The 
second commenter expressed concern about duplicative or conflicting 
regulation of inter-affiliate transactions. It stated that, for 
example, inter-affiliate security-based swaps ``could be required to be 
publicly reported in multiple jurisdictions, even though they are not 
suitable for reporting in any jurisdiction.'' \930\ A third commenter 
argued that inter-affiliate security-based swaps generally--not 
referencing cross-border inter-affiliate transactions in particular--
should not be subject to public dissemination requirements, stating 
that ``public reporting could confuse market participants with 
irrelevant information and raise the costs to corporate groups of 
managing risk internally.'' \931\
---------------------------------------------------------------------------

    \928\ See Japanese Banks Letter at 5; Multiple Associations 
Letter IV at 11-12.
    \929\ Japanese Banks Letter at 5.
    \930\ Multiple Associations Letter IV at 16.
    \931\ Cleary Letter II at 17-18.
---------------------------------------------------------------------------

    The Commission preliminarily believes that regulatory reporting and 
public dissemination serve different purposes and, while these two 
requirements are related, their application to cross-border inter-
affiliate transactions should be considered separately. The Commission 
notes that the statutory provisions that require regulatory reporting 
and public dissemination of security-based swap transactions state that 
``each'' security-based swap shall be reported; these statutory 
provisions do not by their terms distinguish such reporting based on 
particular characteristics (such as being negotiated at arm's length). 
Section 13A(a)(1) of the Exchange Act \932\ provides that each 
security-based swap that is not accepted for clearing shall be subject 
to regulatory reporting. Section 13(m)(1)(G) of the Exchange Act \933\ 
provides that each security-based swap (whether cleared or uncleared) 
shall be reported to a registered SDR, and Section 13(m)(1)(C) of the 
Exchange Act \934\ generally provides that transaction, volume, and 
pricing data of security-based swaps shall be publicly disseminated. 
With respect to regulatory reporting of cross-border inter-affiliate 
security-based swaps, the Commission preliminarily believes that 
regulators should have ready access to information about the precise 
legal entities that hold risk positions in all security-based swaps. 
While it is true that the Federal Reserve or perhaps other regulators 
might exercise consolidated supervision over a group, this might not 
provide regulators with current and specific information about 
security-based swap positions taken by the group's subsidiaries. As a 
result, it would likely be more difficult for the Commission to conduct 
general market analysis or surveillance of market behavior, and could 
create particular problems during a crisis situation when having 
accurate and timely information about specific risk exposures could be 
crucial. Therefore, the Commission continues to believe that each 
cross-border inter-affiliate security-based swap that otherwise 
satisfies any of the criteria in re-proposed Rule 908(a)(1) should be 
subject to regulatory reporting.
---------------------------------------------------------------------------

    \932\ 15 U.S.C. 78m-1(a)(1).
    \933\ 15 U.S.C. 78m(m)(1)(G).
    \934\ 15 U.S.C. 78m(m)(1)(C).
---------------------------------------------------------------------------

    With respect to public dissemination of cross-border inter-
affiliate transaction data, the Commission preliminarily believes that 
the analysis of this issue in the cross-border context is in many ways 
similar to the analysis of dissemination of inter-affiliate transaction 
data in the domestic context. In particular, many of the issues raised 
by commenters with respect to the public dissemination of inter-
affiliate transactions generally appear to be relevant whether a 
transaction is conducted within the United States or conducted on a 
cross-border basis. These general issues include a concern about 
information distortion, market confusion, and interference with 
internal risk management of a corporate group.
    First, commenters stated that inter-affiliate transactions--whether 
cross-border or not--are typically risk transfers with no market 
impact. They believe that the market-facing transactions already would 
have been publicly reported, so requiring that inter-affiliate 
transactions also be publically reported would duplicate information 
already known to the public. The commenters express the concern that 
such ``double counting'' would distort information that is critical for 
price discovery and measuring liquidity, the depth of trading, and

[[Page 31070]]

exposure to swaps in the market.\935\ They also believe that it would 
distort the establishment of regulatory thresholds and analysis, as 
well as enforcement activities that require an accurate assessment of 
the swaps market.\936\
---------------------------------------------------------------------------

    \935\ See Multiple Associations Letter IV at 11-12.
    \936\ See id.
---------------------------------------------------------------------------

    Second, commenters stated that affiliates often enter into an 
inter-affiliate transaction on terms linked to an external trade being 
hedged, which they are concerned could create confusion in the market 
if publicly reported. If markets move because of the external trade 
before the inter-affiliate transaction is entered into on a SEF or 
reported as an off-exchange trade, market participants could 
misconstrue the market's true direction and depth simply because of the 
disconnect in timing between the two offsetting trades.\937\
---------------------------------------------------------------------------

    \937\ See id. at 12.
---------------------------------------------------------------------------

    Third, commenters stated that public dissemination of inter-
affiliate transactions could interfere with the internal risk 
management practices of a corporate group. For example, one entity in a 
group may be better positioned to take on a certain type of risk, even 
though another entity must, for unrelated reasons, actually enter into 
the transaction with an external counterparty. Public disclosure of a 
transaction between affiliates could prompt other market participants 
to act in a way that would prevent the corporate group from following 
through with its risk management strategy by, for instance, causing 
adverse price movements in the market that the risk-carrying affiliate 
would use to hedge.\938\
---------------------------------------------------------------------------

    \938\ Cleary Letter II at 17.
---------------------------------------------------------------------------

    Beyond these concerns regarding the public dissemination of inter-
affiliate transactions, commenters addressing the public reporting of 
cross-border inter-affiliate transactions focused more generally on 
duplicative and conflicting regulations. Using public dissemination as 
an example, one commenter stated that inter-affiliate security-based 
swaps ``could be required to be publicly reported in multiple 
jurisdictions, even though they are not suitable for reporting in any 
jurisdiction.'' \939\ However, the Commission is not aware of any 
commenter proposing a treatment of cross-border inter-affiliate 
transactions under public dissemination requirements that differs 
substantively from proposals for the treatment of other inter-affiliate 
transactions.
---------------------------------------------------------------------------

    \939\ See note 930, supra.
---------------------------------------------------------------------------

    The Commission has considered the issues raised by these commenters 
both with respect to inter-affiliate transactions generally and in the 
cross-border context. The common thread of the issues identified by 
commenters to date is that public dissemination should not be required 
for a security-based swap that is undertaken to transfer the risk of an 
initial security-based swap (between X and Y) to an affiliate (i.e., 
from X to XA) because it would have no price discovery value or could 
even give market observers a false understanding of the nature of the 
transaction.\940\ The Commission acknowledges that the initial 
security-based swap between X and Y likely would have more price 
discovery value than the subsequent inter-affiliate transaction between 
X to XA, all else being equal. In this hypothetical, the initial 
transaction presumably represents the mutual agreement of parties 
operating on an arm's-length basis to execute a trade at a particular 
price, while the latter transaction generally would not involve 
negotiation of the terms, particularly as regards to price. It may not 
follow, however, that the subsequent inter-affiliate transaction would 
have no price discovery value whatsoever, particularly in a cross-
border context where multiple public dissemination requirements may be 
involved. Arguing that an inter-affiliate security-based swap has no 
price discovery value appears to presuppose that the initial, arm's-
length security-based swap had been publicly disseminated. This could 
be the case if the initial security-based swap were subject to the 
rules of a jurisdiction having public dissemination requirements.\941\ 
However, if the initial security-based swap had not been publicly 
disseminated, public dissemination of the cross-border inter-affiliate 
transaction, assuming it were subject to Rule 908(a)(2) of re-proposed 
Regulation SBSR,\942\ might be the only way for the market to obtain 
any pricing information about the series of transactions. These 
circumstances could be present if the initial security-based swap were 
not subject to the rules of a jurisdiction having public dissemination 
requirements. In this case, public dissemination of the cross-border 
inter-affiliate transaction, assuming it were subject to Rule 908(a)(2) 
of re-proposed Regulation SBSR,\943\ might be the only way for the 
market to obtain any pricing information about the series of 
transactions.
---------------------------------------------------------------------------

    \940\ See Cleary Letter II at 17-18; Multiple Associations 
Letter IV at 16.
    \941\ See Multiple Associations Letter IV at 12 (``The market-
facing swaps already will have been reported and therefore, to 
require that inter-affiliate swaps also be reported will duplicate 
information'').
    \942\ Re-proposed Rule 908(a)(2) of Regulation SBSR would 
describe when a cross-border security-based swap would be subject to 
public dissemination.
    \943\ See id.
---------------------------------------------------------------------------

    As described above, commenters also raised a general concern about 
the potential for duplicative and conflicting regulation of cross-
border inter-affiliate transactions. The Commission is sensitive to 
these concerns both generally and in the context of public 
dissemination.\944\ The treatment of these issues in connection with 
public dissemination is not dissimilar to their treatment in other 
contexts under Title VII, including the context of regulatory 
reporting. Accordingly, the Commission preliminarily believes that the 
concern expressed by the commenters should be addressed by the proposed 
substituted compliance policy and framework discussed in detail below, 
as well as when the Commission considers the adopting release for 
public dissemination, which the Commission anticipates will address the 
issue of dissemination of inter-affiliate transactions.\945\
---------------------------------------------------------------------------

    \944\ Duplicative and conflicting regulation is one of the 
considerations the Commission takes into account in proposing the 
approach to application of Title VII requirements to security-based 
swap transactions in the cross-border context. See Section II.C, 
supra.
    \945\ See Section XI, infra.
---------------------------------------------------------------------------

    In light of these considerations, the Commission preliminarily 
believes that cross-border inter-affiliate security-based swaps should 
not be excluded from the public dissemination requirements to the 
extent that inter-affiliate security-based swaps are not excluded as a 
general matter. The Commission preliminarily believes that the 
considerations regarding whether or not to exclude inter-affiliate 
cross-border security-based swaps from public dissemination on the 
grounds that they could be misleading or have no price discovery value 
are similar to the considerations regarding whether or not to exclude 
inter-affiliate security-based swaps generally. Similarly, the 
Commission preliminarily believes that any steps short of exclusion 
that could be taken to maximize the price discovery value that inter-
affiliate cross-border security-based swaps may have (while minimizing 
any concern that they might mislead the market) are similar to the 
steps that could be taken with respect to inter-affiliate security-
based swaps generally. Although the Commission is not in this release 
re-proposing any provisions of Regulation SBSR regarding the public 
dissemination of inter-affiliate security-

[[Page 31071]]

based swaps generally (whether or not cross-border),\946\ as previously 
stated, the Commission invites public comment on whether there are 
specific concerns or reasons to support different treatment or analysis 
of public dissemination of cross-border inter-affiliate transactions 
from the treatment or analysis of the same issue in the domestic 
context, and, in particular, why cross-border inter-affiliate 
transactions may not be suitable for public dissemination.
---------------------------------------------------------------------------

    \946\ See Regulation SBSR Proposing Release, 75 FR 75215 
(proposing that inter-affiliate security-based swaps should not be 
suppressed from the public data feed, but rather should be 
disseminated and appropriately tagged).
---------------------------------------------------------------------------

    For example, the concerns about the potentially limited price 
discovery value of inter-affiliate security-based swaps may be able to 
be addressed through the public dissemination of relevant data that may 
be indicative of such limitations, rather than suppressing these 
transactions entirely. In the Regulation SBSR Proposing Release, the 
Commission proposed to require a registered SDR to ``publicly 
disseminate a transaction report of a security-based swap immediately 
upon receipt of information about the security-based swap from a 
reporting party.'' \947\ As the Commission noted in the Regulation SBSR 
Proposing Release, ``[t]he transaction report that is disseminated 
would be required to consist of all the information reported by the 
reporting party pursuant to proposed Rule 901(c).'' \948\ One of the 
data elements enumerated in proposed Rule 901(c) would be ``[i]f 
applicable, an indication that the transaction does not accurately 
reflect the market.'' \949\ Such data element should send a message to 
the market that the transaction was not conducted at arm's length on 
the open market.\950\ Market participants could take such information 
into account when interpreting or analyzing the publicly-disseminated 
inter-affiliate transaction pricing information.
---------------------------------------------------------------------------

    \947\ See Rule 902(a) of Regulation SBSR, as originally 
proposed. If the SDR were closed when the reporting party submitted 
its transaction report, the SDR would be required to publicly 
disseminate the transaction report immediately upon re-opening. See 
id.
    \948\ Regulation SBSR Proposing Release, 75 FR 75228.
    \949\ Rule 901(c)(11) of Regulation SBSR, as originally 
proposed.
    \950\ The Commission preliminarily disagrees with the commenter 
that argued that ``inclusion of these swaps in swaps market data 
will distort the establishment of position limits, analysis of open 
interest, determinations of block trade thresholds and performance 
of other important regulatory analysis, functions and enforcement 
activities that require an accurate assessment of the swaps 
market.'' Multiple Associations Letter IV at 11-12. Security-based 
swaps that have been appropriately marked as inter-affiliate 
transactions also could be excluded from certain aggregated market 
data, depending on the purpose for which those data are being used.
---------------------------------------------------------------------------

    As noted above, one commenter expressed concern that public 
dissemination of an inter-affiliate transaction could interfere with 
the internal risk management of a corporate group by causing adverse 
price movements in the market that the risk-carrying affiliate might 
use to hedge. The commenter did not explain why the corporate group 
might be unable or might choose not to hedge the risk when the initial 
transaction is executed, or why the impact of the public dissemination 
of the subsequent inter-affiliate transaction might be different from 
the impact of the public dissemination of the initial transaction. The 
Commission preliminarily believes that, assuming that the corporate 
group does not hedge at the time the initial transaction was executed, 
a concern about the potential impact of public dissemination of the 
inter-affiliate transaction on the ability to hedge the position would 
be similar to the concern that commenters have expressed generally 
about public dissemination of block trades.\951\ This concern about a 
potential impact of the public dissemination--either of the original 
transaction or the subsequent inter-affiliate transaction--may be 
addressed by delayed dissemination instead of suppressing dissemination 
of these transactions entirely. The broader issue of how to treat block 
trades, including how to define what is a block trade, is one that the 
Commission continues to evaluate. In addition, public dissemination of 
relevant data indicating the inter-affiliate nature of the transaction 
separately may help address concerns about potential impact on markets 
on which a hedge might if occur if such markets are made aware that 
there may be special considerations that should be taken into account 
when assessing the extent to which the transaction may reflect the 
current market.
---------------------------------------------------------------------------

    \951\ Specifically, if the corporate group hedges the initial 
transaction at the time of execution, there would appear to be no 
need to hedge at the time of the inter-affiliate transaction, and 
thus no concern about the impact of the dissemination of the inter-
affiliate transaction on the market in which the hedge is put on. 
Furthermore, if the corporate group chooses not hedge the position 
until the time of the inter-affiliate transaction, the Commission 
questions why the concern about the impact of the disclosure of that 
transaction would be different than a concern about the 
dissemination of the original transaction.
---------------------------------------------------------------------------

    Regulation SBSR would require registered SDRs, in their policies 
and procedures, to enumerate the specific data elements of a security-
based swap or life cycle event that would be required to be reported, 
and to specify one or more acceptable data formats, connectivity 
requirements, and other protocols for submitting information.\952\ The 
Commission itself did not propose to specify each data element that 
would have to be reported, but instead identified broad categories of 
information that must be reported.\953\ Furthermore, the Commission 
initially proposed to require, in Rule 907(a)(4), that a registered SDR 
have policies and procedures ``[d]escribing how reporting parties shall 
report and, consistent with the enhancement of price discovery, how the 
registered security-based swap data repository shall publicly 
disseminate . . . security-based swap transactions that do not involve 
an opportunity to negotiate any material terms, other than the 
counterparty; and any other security-based swap transactions that, in 
the estimation of the registered security-based swap data repository, 
do not accurately reflect the market.'' \954\ However, the Commission 
invites public comment on whether concerns about the inter-affiliate 
security-based swaps not accurately reflecting the market can be 
addressed in the policies and procedures of registered SDRs that would 
be required under re-proposed Rule 907(a)(4).
---------------------------------------------------------------------------

    \952\ See Rules 907(a)(1) and 907(a)(2) of Regulation SBSR, as 
originally proposed.
    \953\ For example, the Commission proposed to require the 
reporting of ``[i]nformation that identifies the security-based swap 
instrument''--see Rule 901(c)(2) of Regulation SBSR, as originally 
proposed--but did not specify the exact manner in which such 
information must be reported, instead proposing to allow SDRs 
discretion to set such specifications in their policies and 
procedures. However, the Commission did propose to require reporting 
of certain discrete data elements. See, e.g., Rule 901(d)(vi) of 
Regulation SBSR (requiring reporting of the name of the clearing 
agency, if the security-based swap will be cleared).
    \954\ Rule 907(a)(4) of Regulation SBSR, as originally proposed.
---------------------------------------------------------------------------

    For example, such policies and procedures could be designed to 
maximize the price discovery value of cross-border (or other) inter-
affiliate security-based swaps and to minimize their ability to 
mislead. These policies and procedures could require not only that 
reporting sides mark whether a security-based swap is an inter-
affiliate transaction, but also whether the initial security-based swap 
was executed in a jurisdiction with public dissemination 
requirements.\955\ Further, these policies and procedures also could 
require the reporting side to indicate the approximate time when the 
initial

[[Page 31072]]

security-based swap was executed.\956\ This would permit market 
observers to gauge how much price discovery value to assign to the 
price provided in the inter-affiliate security-based swap transaction 
report that would be publicly disseminated under Rule 902 of re-
proposed Regulation SBSR. Information about an initial trade done less 
than 24 hours before (obtained indirectly from the later-appearing 
trade report of the inter-affiliate cross-border security-based swap) 
could have significant price discovery value, while information from an 
initial trade executed over a week before could, all things being 
equal, have less.\957\ The Commission invites public comment on these 
approaches to the treatment of inter-affiliate security-based swaps 
generally, as well as their relative advantages and disadvantages. In 
particular, the Commission invites public comment on how these 
approaches would affect the internal risk management practices of a 
corporate group. In addition, as previously stated, the Commission 
invites public comment on whether there are specific concerns or 
reasons to support different treatment or analysis of public 
dissemination of cross-border inter-affiliate transactions from the 
treatment or analysis of the same issue in the domestic context.
---------------------------------------------------------------------------

    \955\ This could be either the United States or another 
jurisdiction that imposes post-trade transparency requirements 
similar to those in re-proposed Regulation SBSR.
    \956\ For example, there could be indicators for the initial 
security-based swap having been executed within the past 24 hours, 
between one and seven days before, or longer than seven days before.
    \957\ However, even information about a trade done over a week 
ago (or more) could have price discovery value for security-based 
swap instruments that trade infrequently.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of issues 
regarding cross-border inter-affiliate security-based swaps, including 
the following:
     Do you believe that cross-border inter-affiliate security-
based swaps should be excluded from the regulatory reporting 
requirements of Regulation SBSR? If so, under what circumstances should 
such security-based swaps be excluded, and why? What would be the harm 
of having such inter-affiliate security-based swaps reported to a 
registered SDR? What are the risks of not requiring regulatory 
reporting of inter-affiliate security-based swaps?
     Do you believe that cross-border inter-affiliate security-
based swaps should be analyzed differently from domestic inter-
affiliate security-based swaps? Why or why not?
     Do you believe that cross-border inter-affiliate security-
based swaps should be excluded from the public dissemination 
requirements of Regulation SBSR? Why or why not? What are the risks or 
benefits of not requiring public dissemination of inter-affiliate 
security-based swaps? How should the Commission balance these risks and 
benefits?
     Does your view about public dissemination for cross-border 
inter-affiliate security-based swaps change depending on whether an 
initial, arm's-length security-based swap was executed and publicly 
disseminated in a jurisdiction having public dissemination 
requirements? Why or why not? On what basis could or should the 
Commission exclude the cross-border inter-affiliate security-based swap 
from the public dissemination requirements if the initial, arm's-length 
security-based swap was executed and publicly disseminated in a 
jurisdiction having no public dissemination requirements, or public 
dissemination requirements that are not comparable to those in the 
United States?
     Does your view on the application of regulatory reporting 
and public dissemination requirements to inter-affiliate security-based 
swaps change if the affiliates are subject to consolidated supervision? 
If so, please explain.
     Can you suggest any additions to the policies and 
procedures of registered SDRs that could maximize the price discovery 
value, and minimize any potentially misleading aspects, of public trade 
reports of cross-border inter-affiliate security-based swaps? If so, 
what are they? Should the Commission more clearly specify in Rule 
907(a)(4) how inter-affiliate security-based swaps should be publicly 
disseminated so as to maximize their price discovery value and minimize 
their potential for misleading market observers? If so, how?
     Do you have any other concerns about public dissemination 
of cross-border inter-affiliate security-based swaps so long as they 
are appropriately marked?

G. Foreign Privacy Laws Versus Duty To Report Counterparty ID

    Rule 901(d), as initially proposed, set forth the data elements 
that would constitute the required regulatory report of a security-
based swap (i.e., information for use only by regulators that would not 
be included in the publicly disseminated report). One such element is 
the ``participant ID'' of the counterparty.\958\ The Title VII 
provisions relating to security-based swap trade reporting and proposed 
Regulation SBSR that would implement those provisions contemplate only 
one counterparty to a security-based swap having a duty to report. 
However, the Commission preliminarily believes that being able to 
assess the positions and behavior of both counterparties to the 
security-based swap would facilitate our ability to carry out our 
regulatory duties for market oversight.\959\ Because only one party 
would be required to report, the only way to obtain the identity of the 
non-reporting party counterparty would be to require the reporting 
party to disclose its counterparty's identity.\960\
---------------------------------------------------------------------------

    \958\ See Rule 901(d)(1)(i) of Regulation SBSR, as initially 
proposed. See also Regulation SBSR Proposing Release, 75 FR 75217.
    \959\ U.S. regulators have a strong interest in being able to 
monitor the risk exposures of U.S. persons, particularly those 
involved in the security-based swap market, as the failure or 
financial distress of a U.S. person could impact other U.S. persons 
and the U.S. economy as a whole. U.S. regulators also have an 
interest in obtaining information about non-U.S. counterparties that 
enter into security-based swaps with U.S. persons, as the ability of 
such non-U.S. counterparties to perform their obligations under 
those security-based swaps could impact the financial soundness of 
U.S. persons. See, e.g., S. Comm. on Banking, Hous., & Urban 
Affairs, The Restoring American Financial Stability Act of 2010, S. 
Rep. No. 111-176, at 32 (``As a key element of reducing systemic 
risk and protecting taxpayers in the future, protections must 
include comprehensive regulation and rules for how the OTC 
derivatives market operates. Increasing the use of central 
clearinghouses, exchanges, appropriate margining, capital 
requirements, and reporting will provide safeguards for American 
taxpayers and the financial system as a whole.'') (emphasis added).
    \960\ Once the identity of the opposite counterparty to a 
security-based swap is known by a registered SDR, the SDR would be 
required to obtain certain additional information from that 
counterparty. See proposed Rule 906(a), which is not being revised 
by this re-proposal.
---------------------------------------------------------------------------

    Three comments on proposed Regulation SBSR cautioned that U.S. 
persons may be restricted from complying with such a requirement in 
cases where a security-based swap is executed outside the United 
States.\961\ One commenter stated that the London branch of a U.S. 
person would need its counterparty's consent to identify that

[[Page 31073]]

party under U.K. law.\962\ The commenter added that, under French law, 
consent is required each time a report is made identifying the 
counterparty, and this restriction cannot be resolved by changes to the 
firm's terms of business.\963\ Another commenter urged the Commission 
to ``consider carefully and provide for consistency with, foreign 
privacy laws, some of which carry criminal penalties for wrongful 
disclosure of information,''\964\ but did not provide further detail. A 
third commenter argued that allowing substituted compliance when both 
parties are not domiciled in the United States could avoid problems 
with foreign privacy laws conflicting with U.S. reporting 
requirements.\965\
---------------------------------------------------------------------------

    \961\ In addition, two comments on the Commission's interim 
final temporary rule on the reporting of security-based swaps 
entered into before July 21, 2010, Securities Exchange Act Release 
No. 63094 (Oct. 13, 2010), 75 FR 64643 (Oct. 20, 2010), made similar 
points. See Deutsche Bank Letter at 5 (``In some cases, 
dissemination or disclosure of [counterparty] information could lead 
to severe civil or criminal penalties for those required to submit 
information to an SDR pursuant to the Interim Final Rules. These 
concerns are particularly pronounced because of the expectation that 
Reportable Swap data will be reported, on a counterparty identifying 
basis, to SDRs, which will be non-governmental entities, and not 
directly to the Commissions.''); ISDA Letter II at 6 (``In many 
cases, counterparties to cross-border security-based swap 
transactions will face significant legal and reputational obstacles 
to the reporting of such information. Indeed, disclosure of such 
information may lead to civil penalties in some jurisdictions and 
even criminal sanctions in other jurisdictions.'').
    \962\ See DTCC Letter II at 21.
    \963\ See id.
    \964\ ISDA/SIFMA Letter I at 20.
    \965\ See Cleary Letter II at 17-18.
---------------------------------------------------------------------------

    The Commission seeks to understand more precisely if--and, if so, 
how--requiring a counterparty to report the transaction pursuant to 
Regulation SBSR (including disclosure of the counterparty's identity to 
a registered SDR) might cause it to violate local law in a foreign 
jurisdiction where it operates. Before determining whether any 
exception to reporting the counterparty's identity might be necessary 
or appropriate, the Commission seeks to obtain additional information 
about any such foreign privacy laws.
Request for Comment
    The Commission generally requests comment on all aspects of issues 
relating to foreign privacy laws with respect to proposed Regulation 
SBSR, including the following:
     What jurisdictions have laws that might affect a reporting 
side's ability to report the participant ID of its counterparty? Please 
cite and describe specifically for each such law: To whom such 
restrictions would apply and under what circumstances; how the law 
might restrict reporting (e.g., what data elements that otherwise would 
be required to be reported under Regulation SBSR would be restricted); 
whether any exceptions under the law, particularly but not limited to 
consent provisions and provisions relating to compliance with 
applicable law, might be available to a reporting side that otherwise 
would be required to comply with re-proposed Rule 901(d)(1)(i), or 
explain why none of the exceptions would be available.
     If no such exceptions are available under the local law 
and you believe that an exception by rule from re-proposed Rule 
901(d)(1)(i) would be appropriate, how should that exception be 
crafted? Please suggest appropriate rule text.
     How, if at all, would a substituted compliance regime for 
regulatory reporting avoid problems with foreign privacy laws? Would 
the Commission and other U.S. financial regulators be able to obtain 
information about security-based swap counterparties from foreign trade 
repositories or foreign regulatory authorities to which such 
transactions had been reported?

H. Foreign Public Sector Financial Institutions

    Six commenters expressed concern about applying the requirements of 
Title VII to the activities of FPSFIs, such as foreign central banks 
and multilateral development banks.\966\ One commenter, the European 
Central Bank (``ECB''), noted that security-based swaps entered into by 
the Federal Reserve Banks are excluded from the CEA's definition of 
``swap'' \967\ and that the functions of foreign central banks and the 
Federal Reserve are broadly comparable. The ECB argued, therefore, that 
security-based swaps entered into by foreign central banks should 
likewise be excluded from the definition of ``swap.'' \968\ A second 
commenter, the World Bank (representing the International Bank for 
Reconstruction and Development, the International Finance Corporation, 
and other multilateral development institutions of which the United 
States is a member) also argued generally that the term ``swap'' should 
be defined to exclude any transaction involving a multilateral 
development bank.\969\ The World Bank further noted that the EMIR--
which is intended to serve as the E.U. counterpart to Title VII of the 
Dodd-Frank Act--would expressly exclude multilateral development banks 
from its coverage.\970\
---------------------------------------------------------------------------

    \966\ See BIS Letter passim; CEB at 2, 4; ECB Letter passim; ECB 
Letter II passim; EIB Letter passim; Nordic Investment Bank Letter 
at 1; World Bank Letter II passim.
    \967\ Section 1a(47)(B)(ix) of the CEA excludes from the 
definition of swap any agreement, contract, or transaction a 
counterparty of which is a Federal Reserve Bank, the Federal 
Government, or a Federal agency that is expressly backed by the full 
faith and credit of the United States. A security-based swap 
includes any swap, as defined in the CEA, that is based on, among 
other things, a narrow-based index or a single security or loan. See 
Section 3(a)(68) of the Exchange Act, 15 U.S.C. 78c3(a)(68). See 
also Product Definitions Adopting Release, 77 FR 48208.
    \968\ See ECB Letter I at 2; ECB Letter II at 2. See also EIB 
Letter at 1; Nordic Development Bank at 1.
    \969\ See World Bank Letter II at 6-7.
    \970\ See id. at 4. See also EIB Letter at 7 (``As a matter of 
comity, actions by U.S. financial regulators should be consistent 
with the laws of other jurisdictions that provide exemption from 
national regulation for government-owned multinational developments 
such as the [EIB]'').
---------------------------------------------------------------------------

    The ECB and BIS stated that foreign central banks enter into 
security-based swaps solely in connection with their public mandates, 
which require them to act confidentially in certain circumstances.\971\ 
The ECB argued in particular that public disclosure of its market 
activities could compromise its ability to take necessary actions and 
``could cause signaling effects to other market players and finally 
hinder the policy objectives of such actions.'' \972\ Another 
commenter, the Council of Europe Development Banks (``CEB''), while 
opposing application of Title VII requirements to multilateral 
development banks generally, did not object to the CFTC and SEC 
preserving their authority over certain aspects of swaps activity, 
including reporting requirements.\973\ Similarly, the World Bank 
believed that the definition of ``swap'' could be qualified by a 
requirement that counterparties would treat such transactions as swaps 
solely for reporting purposes.\974\
---------------------------------------------------------------------------

    \971\ See BIS Letter at 4-5; ECB Letter I at 3.
    \972\ ECB Letter I at 3. See also ECB Letter II at 2.
    \973\ See CEB Letter at 4. However, the CEB did not state a view 
as to whether FPSFI trades should be subject to post-trade 
transparency.
    \974\ See World Bank Letter II at 7.
---------------------------------------------------------------------------

    The Commission preliminarily believes that security-based swaps to 
which an FPSFI is a counterparty (``FPSFI trades'') should not, for 
that fact alone, be exempt from regulatory reporting.\975\ Under 
Regulation SBSR, as initially proposed, an FPSFI trade would be 
required to be reported to a registered SDR if the counterparty were a 
U.S. person. The Commission continues to believe that, if an FPSFI 
executes a security-based swap with a counterparty that is a U.S. 
person, the security-based swap should be subject

[[Page 31074]]

to regulatory reporting. Under re-proposed Regulation SBSR, an FPSFI 
trade also would be required to be reported if the counterparty were a 
non-U.S. person security-based swap dealer or major security-based swap 
participant. In either case, without a regulatory report of such 
security-based swaps, the Commission would have an incomplete view of 
the risk positions held by security-based swap market participants that 
are U.S. persons or registered with the Commission. Regulatory 
reporting of such security-based swaps, despite the fact that an FPSFI 
is a counterparty, would facilitate the Commission's ability to carry 
out our regulatory oversight responsibilities with respect to 
registered entities and the security-based swap market. The Commission 
notes that this approach was endorsed by two commenters.\976\
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    \975\ The Commission notes that all FPSFIs, even FPSFIs that are 
based in the United States, would be deemed non-U.S. persons under 
the Commission's Title VII rules. See proposed Rule 3a71-3(a)(7)(ii) 
(``The term `U.S. person' does not include the International 
Monetary Fund, the International Bank for Reconstruction and 
Development, the Inter-American Development Bank, the Asian 
Development Bank, the African Development Bank, the United Nations, 
and their agencies, affiliates, and pension plans, and any other 
similar international organizations, their agencies, affiliates, and 
pension plans''). See also Section III.B.5, supra (discussing 
proposed definition of ``U.S. person''). As with any other security-
based swap transaction having a direct counterparty that is a non-
U.S. person, a transaction involving an FPSFI as a direct 
counterparty would be subject to Regulation SBSR's regulatory 
reporting requirements only if it met one of the conditions in re-
proposed Rule 908(a)(1), and would be subject to Regulation SBSR's 
public dissemination requirements only if it met one of the 
conditions in re-proposed Rule 908(a)(2).
    \976\ See CEB Letter at 4; World Bank Letter II at 7 (stating 
that, although swaps involving FPSFIs as counterparties generally 
should be exempt from the definition of ``swap,'' they should be 
treated as swaps solely for reporting purposes).
---------------------------------------------------------------------------

    Furthermore, the Commission believes that, at this time, a 
sufficient basis does not exist to support an exemption from public 
dissemination for FPSFI trades. The Commission preliminarily 
understands that FPSFI participation in the security-based swap 
market--rather than the swap market generally--may be limited. Comments 
submitted by FPSFIs generally were addressed to both the Commission and 
the CFTC and addressed participation in the swap market generally; it 
is unclear the extent to which these comments should be read to apply 
to the security-based swap market.\977\ Furthermore, to the extent that 
FPSFI trades are subject to public dissemination under Regulation SBSR 
(e.g., because the direct counterparty is a U.S. person other than a 
foreign branch of a U.S. bank), such trades could provide useful price 
discovery information to other market participants.
---------------------------------------------------------------------------

    \977\ But see BIS Letter at 3 (stating that the BIS generally 
does not transact security-based swaps such as credit default swaps 
or equity derivatives).
---------------------------------------------------------------------------

    The Commission is seeking more information with respect to the 
basis for the claim that public dissemination of FPSFI trades, as 
contemplated by re-proposed Regulation SBSR, would ``hinder the policy 
objectives'' \978\ of FPSFIs. The Commission notes that proposed 
Regulation SBSR contains provisions relating to public dissemination 
that are designed to protect the identity of security-based swap 
counterparties \979\ and prohibit a registered SDR (with respect to 
uncleared security-based swaps) from disclosing the business 
transactions and market positions of any person.\980\ Furthermore, to 
the extent that an FPSFI trade is small enough not to constitute a 
block trade, the Commission questions the extent to which market 
observers would be able to distinguish the trade as having been 
conducted by an FPSFI. Given these provisions of Regulation SBSR, which 
are designed to prevent adverse market impacts due to disclosure of a 
counterparty's identity or the public dissemination of a block trade, 
the Commission preliminarily does not see a basis to exempt FPSFI 
trades from public dissemination. However, the Commission is open to 
receiving further information that might support an exemption.
---------------------------------------------------------------------------

    \978\ ECB Letter I at 3.
    \979\ See Rule 902(c)(1), as initially proposed.
    \980\ See Rule 902(c)(2), as initially proposed.
---------------------------------------------------------------------------

Request for Comment
    As noted above, certain FPSFI commenters stated that carrying out 
their policy mandates would require confidentiality in certain 
circumstances.\981\ The Commission seeks additional information to 
assist our analysis of this issue, and requests answers to the 
following questions. In responding, please focus on the security-based 
swap market, not the market for other swaps. In addition, commenters 
are requested to answer only with respect to security-based swap 
activity that would be subject to Regulation SBSR, and not with respect 
to activity that, because of the place where the transaction is 
conducted or the nationality of the counterparties, would not be 
subject to Regulation SBSR in any case:
---------------------------------------------------------------------------

    \981\ See BIS Letter at 5; ECB Letter at 3.
---------------------------------------------------------------------------

     How many FPSFIs engage in security-based swap activity 
with U.S. persons? How active are they in the security-based swap 
market generally?
     What policy goals might an FPSFI be attempting to carry 
out by participating in the security-based swap market?
     What trading strategies might an FPSFI conduct in the 
security-based swap market?
     Are there any characteristics of FPSFI activity in the 
security-based swap market that could make it easier for market 
observers to detect an FPSFI as a counterparty, or that could make it 
easier to detect an FPSFI's business transactions or market positions? 
If so, are there steps the Commission could take to minimize such 
information leakage short of suppressing all FPSFI trades from public 
dissemination? If so, what are they?
     Do FPSFIs typically trade standardized or more bespoke 
security-based swap instruments? If the former, would market observers 
be less likely to detect the participation of an FPSFI in the security-
based swap market?
     What sizes do FPSFIs typically transact in? Does the size 
impact any concerns with publicly disseminating FPSFI trades? If so, 
how? Could the concerns of FPSFIs be addressed by crafting appropriate 
block thresholds and dissemination delays rather than by suppressing 
all FPSFI trades from public dissemination? Why or why not?
     Do you believe that FPSFI trades should be included in 
public dissemination? Why or why not? To what extent, and how, would 
price transparency and market efficiency be affected if FPSFI trades 
were suppressed from public dissemination?

I. Summary and Additional Request for Comment

    The provisions of re-proposed Regulation SBSR discussed above 
represent the Commission's preliminary views regarding the application 
of Title VII's provisions relating to regulatory reporting and public 
dissemination of security-based swap transactions in the cross-border 
context. This re-proposal reflects a particular balancing of the 
principles and applicable requirements described above,\982\ informed 
by, among other things, the particular nature of the security-based 
swap market, the structure of security-based swap dealing activity, and 
the Commission's experience in applying the federal securities laws in 
the cross-border context. The Commission recognizes that other 
approaches are possible and might more effectively achieve the goals of 
the Dodd-Frank Act, in whole or in part. Accordingly, the Commission 
invites comment regarding all aspects of re-proposed Regulation SBSR, 
and each re-proposed rule contained therein, including potential 
alternative approaches. Data and comment from market participants and 
other interested parties regarding the likely effect of each re-
proposed rule and potential alternative approaches will be particularly 
useful to the Commission in evaluating possible modifications to the 
proposals.
---------------------------------------------------------------------------

    \982\ See Section II, supra.
---------------------------------------------------------------------------

    The Commission requests comment on any other cross-border issues 
relating to regulatory reporting and public dissemination of security-
based swaps that may not have been addressed above. In particular, the 
Commission requests comment on how the Commission's re-proposal 
addressing

[[Page 31075]]

cross-border issues related to regulatory reporting and public 
dissemination might differ from the CFTC's cross-border guidance on 
these matters.\983\ For example, the CFTC Cross-Border Proposal 
provides that a swap between two unregistered non-U.S. persons, each of 
which is guaranteed by a U.S. person, would not be subject to 
regulatory reporting or public dissemination requirements.\984\ The 
Commission, on the other hand, is proposing that a security-based swap 
between two such direct counterparties would be subject to both 
regulatory reporting and public dissemination requirements.\985\ 
Furthermore, the CFTC Cross-Border Proposal provides that a swap 
between, on one side, an unregistered non-U.S. person that is 
guaranteed by a U.S. person and, on the other side, an unregistered 
non-U.S. person that is not guaranteed by a U.S. person also would not 
be subject to regulatory reporting or public dissemination 
requirements.\986\ The Commission is proposing that a security-based 
swap between two such direct counterparties would be subject to 
regulatory reporting \987\ (but, in accord with the CFTC's proposal, 
not subject to public dissemination). Please describe any other 
differences that you believe might exist and what would be the impact 
of any such differences.
---------------------------------------------------------------------------

    \983\ See note 21, supra.
    \984\ See CFTC Cross-Border Proposal, 77 FR 41237-38.
    \985\ See re-proposed Rules 908(a)(1)(ii) and 908(a)(2)(ii) of 
Regulation SBSR.
    \986\ See CFTC Cross-Border Proposal, 77 FR 41237-38.
    \987\ See re-proposed Rule 908(a)(1)(ii) of Regulation SBSR.
---------------------------------------------------------------------------

    In addition, the Commission requests comment on the market impact 
of the approach to re-proposed Regulation SBSR. For example, how would 
the application of re-proposed Regulation SBSR affect the 
competitiveness of U.S. entities in the global marketplace (both in the 
United States as well as in foreign jurisdictions)? Would re-proposed 
Regulation SBSR place any market participants at a competitive 
disadvantage or advantage? If so, please explain. Would re-proposed 
Regulation SBSR be a more general burden on competition? If so, please 
explain. What other measures should the Commission consider to 
implement re-proposed Regulation SBSR?

IX. Mandatory Security-Based Swap Clearing Requirement

A. Introduction

    Section 3C(a)(1) of the Exchange Act provides that it ``shall be 
unlawful for any person to engage in a security-based swap unless that 
person submits such security-based swap for clearing to a clearing 
agency that is registered under [the Exchange] Act or a clearing agency 
that is exempt from registration under [the Exchange] Act if the 
security-based swap is required to be cleared.'' \988\ In this section, 
we are proposing a rule to specify when persons engaging in cross-
border security-based swap transactions would be required to comply 
with a mandatory clearing determination.\989\ Consistent with the 
approach we have taken elsewhere in this release,\990\ the proposed 
rule is designed in general to help ensure that the mandatory clearing 
requirement applies to persons that engage in security-based swap 
transactions within the United States and who may pose financial or 
operational risk to the U.S. financial system that may be mitigated by 
requiring transactions to be centrally cleared.\991\ The proposed rule 
also is designed to help avoid limiting the access of U.S. persons that 
conduct security-based swap activity through foreign branches or 
guaranteed non-U.S. persons to foreign security-based swap markets. To 
address concerns regarding the clearance and settlement of security-
based swaps subject to the mandatory clearing requirement, as well as 
the potential for conflicting mandatory clearing requirements in 
different jurisdictions, we discuss under what circumstances the 
Commission would permit substituted compliance with the mandatory 
clearing requirement in Section XI.E below.\992\
---------------------------------------------------------------------------

    \988\ 15 U.S.C. 78c-3(a)(1). Section 3C of the Exchange Act 
further requires the Commission to review each security-based swap 
(or any group, category, type, or class of security-based swaps) to 
make a determination that such security-based swap (or group, 
category, type, or class of security-based swap) should be required 
to be cleared. 15 U.S.C. 78c-3(b). The Commission has adopted final 
rules regarding process for submissions for review of security-based 
swaps for mandatory clearing and notice filing requirements for 
clearing agencies. See Clearing Procedures Adopting Release, 77 FR 
41602. The proposed application of the mandatory clearing 
requirement in the cross-border context does not address, in any 
respect, our obligation to review security-based swaps and make 
mandatory clearing determinations under Section 3C(b) of the 
Exchange Act.
    \989\ The mandatory clearing requirement in Section 3C(a)(1) of 
the Exchange Act will not apply unless and until the Commission 
makes a determination that a security-based swap is required to be 
cleared, and the Commission has not yet made any such 
determinations. In addition, the registration requirement for 
security-based swap clearing agencies in Section 17A(g) of the 
Exchange Act is not yet effective because further rulemaking is 
required regarding registration of and standards for security-based 
swap clearing agencies. See 15 U.S.C. 78q-1(i) and (j). The 
Commission recently adopted rules to establish minimum requirements 
for registered clearing agency risk management practices and 
operations. The rules identify certain minimum standards for all 
clearing agencies, including clearing agencies that clear security-
based swaps. See Clearing Agency Standards Adopting Release, 77 FR 
66220. The Commission continues to consider additional standards for 
adoption, including standards for confidentiality of trading 
information, conflicts of interest, and members of clearing agency 
boards of directors or committees, as outlined in the proposing 
release for clearing agency standards. See Exchange Act Release No. 
64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011). Any new rules 
governing security-based swap clearing agencies could also affect 
counterparties that are required to clear security-based swaps.
    \990\ See, e.g., Section V, supra (discussing the registration 
requirement in Section 17A(g) of the Exchange Act for security-based 
swap clearing agencies); see also the general discussion of the 
Commission's approach to applying Title VII to cross-border 
activities in Section II.B, supra.
    \991\ See Testimony Regarding Reducing Risks and Improving 
Oversight in the OTC Credit Derivatives Market Before the Subcomm. 
on Secs., Ins., & Inv., of the S. Comm. on Banking, Hous., & Urban 
Affairs, 110th Cong. (2008) (statement of James A. Overdahl, Chief 
Economist, Commission), available at: https://www.sec.gov/news/testimony/2008/ts070908jao.htm (``The 1975 Amendments [to the 
Exchange Act] were in direct response to the Paperwork Crisis of the 
late 1960's that nearly brought the securities industry to a 
standstill and directly or indirectly resulted in the failure of 
large numbers of broker-dealers. The causes of the Paperwork Crisis 
are similar to the issues that we have been trying to resolve in the 
OTC derivatives market. The crisis resulted from a combination of 
sharply increased volume and inattention to securities processing. 
As a result, the industry's clearance and settlement procedures were 
inefficient and lacked automation, thus implicating the finances of 
the securities firms. Today, almost forty years later, increasing 
automation in the processing of OTC derivatives transactions is one 
of the key goals of the OTC confirmations initiative, in which the 
Commission is a very active participant . . .''); see also CPSS, New 
Developments in Clearing and Settlement Arrangements for OTC 
Derivatives, at 9, 39 (Mar. 2007), available at: https://www.bis.org/publ/cpss77.pdf (noting ``increasing concern about the size and 
rapid growth of confirmation backlogs for credit derivatives'' and 
the growing importance of ``operational reliability'' to ``safe and 
efficient clearing and settlement'' as the ``market infrastructure 
moves further in the direction of centralised processing of trades 
and post-trade events'').
    \992\ Under the Commission's proposal, substituted compliance 
may be permitted for cross-border security-based swap transactions 
subject to the mandatory clearing requirement in Section 3C(a)(1) of 
the Exchange Act to enable counterparties to clear and settle such 
transactions at a clearing agency that is neither registered with 
the Commission nor exempt from registration, under certain 
conditions. See Section XI.E, infra.
---------------------------------------------------------------------------

    Our proposed approach reflects a particular balancing of the 
principles discussed above.\993\ We recognize that other approaches may 
achieve the goals of the Dodd-Frank Act and Section 17A of the Exchange 
Act, in whole or in part. Accordingly, we invite comment regarding all 
aspects of the proposed rule described here, including potential 
alternative approaches. Data and comment from market participants and 
other interested parties regarding the likely effect of the proposed 
rule and of potential alternative approaches will be particularly 
useful to the Commission in

[[Page 31076]]

evaluating potential modifications to the proposal.
---------------------------------------------------------------------------

    \993\ See Section II.C, supra.
---------------------------------------------------------------------------

B. Summary of Comments

    The Commission has published several rulemaking proposals under 
Title VII of the Dodd-Frank Act that relate to clearing security-based 
swaps.\994\ The Commission solicited public comment on each of these 
proposals. The Commission also solicited public comment on regulatory 
initiatives under the Dodd-Frank Act related to clearing security-based 
swaps.\995\ Generally, these commenters requested that the Commission 
take actions to limit duplicative or conflicting regulations with 
respect to clearing security-based swaps.\996\
---------------------------------------------------------------------------

    \994\ See Exchange Act Release Nos. 63556 (Dec. 15, 2010), 75 FR 
79992 (Dec. 21, 2010) (proposing a rule governing the end-user 
exception to the mandatory clearing requirement); 63107 (Oct. 14, 
2010), 75 FR 65881 (Oct. 26, 2010) (proposing Regulation MC which 
would in part set ownership limitations and governance requirements 
for clearing agencies); see also notes 988 and 989, supra 
(discussing final rules adopted in the Clearing Procedures Adopting 
Release and rules proposed and adopted relating to clearing agency 
standards).
    \995\ See Exchange Act Release Nos. 63435 (Dec. 6, 2010), 75 FR 
76705 (Dec. 9, 2010) (joint roundtable with CFTC regarding capital 
and margin requirements); 63112 (Oct. 15, 2010), 75 FR 64710 (Oct. 
20, 2010) (joint roundtable with CFTC regarding issues related to 
clearing); 62864 (Sept. 8, 2010), 75 FR 55574 (Sept. 13, 2010) 
(joint roundtable with CFTC regarding swap execution facilities); 
62725 (Aug. 16, 2010), 75 FR 51305 (Aug. 19, 2010) (joint roundtable 
with CFTC regarding governance and conflicts of interest).
    \996\ See, e.g., Davis Polk Letter I at 8 (``First, requiring 
foreign swap transactions to be cleared through a U.S.-regulated 
clearinghouse may conflict with any applicable foreign law that 
requires such transactions to be cleared at a home country (non-
U.S.) clearinghouse. Second, such an approach would also legally 
compel a disproportionate amount of global swaps clearing to be 
conducted through U.S.-regulated clearinghouses. Third, such a 
requirement would also concentrate risk that is non-U.S. (because 
the transactions are with non-U.S. persons) in the U.S.-regulated 
clearinghouses, which would cause them and the U.S. financial system 
to bear additional non-U.S. risks.''); Davis Polk Letter II at 21-22 
(proposing rule modifications that ``would avoid imposing 
unnecessarily duplicative and inconsistent clearing and trade 
reporting obligations on swap dealers and their counterparties''); 
Cleary Letter IV at 27 (noting swaps between non-U.S. persons ``are, 
in many cases, likely to be subject to local clearing requirements 
(which may (practically or legally) require use of a local clearing 
organization and so, in some cases, could conflict with Dodd-Frank's 
clearing requirement)''); Japanese Banks Letter at 4 (``We believe 
that future Japanese regulation of swap activities of Japanese banks 
will render regulation of such banks subject to Title VII 
superfluous at best and potentially subject such banks to 
inconsistent regulations under U.S. and Japanese law.''); Multiple 
Associations Letter I at 9-10 (``We believe that [the Commission] 
and other U.S. regulatory agencies should anticipate where the 
rulemaking may overlap, and possibly conflict, and make every effort 
to actively coordinate with each other and with foreign regulators 
both as to harmonizing the substance of related regulations and the 
timing of their implementation. Otherwise, the development of the 
Swap markets will be vulnerable to false starts, significant 
revisions and inefficiencies, and possible regulatory arbitrage 
across, or the flight to, other jurisdictions.''); Multiple 
Associations Letter II at 2 (stating that it is ``essential that 
rules be appropriately tailored, work in tandem, and avoid unduly 
impairing market liquidity or adversely impacting investors'' and 
that [i]t is not enough to phase-in implementation if the final 
rules themselves are unworkable or in conflict'').
---------------------------------------------------------------------------

    Two commenters highlighted the global nature of the security-based 
swap market and raised concerns about the possible effect of foreign 
regulations on U.S. participants in the security-based swap 
market.\997\ These commenters requested that U.S. and foreign 
regulators identify possible areas where rulemaking may overlap or 
conflict and actively coordinate to harmonize both the substance of 
related regulations and the timing of their implementation.\998\ The 
commenters argued that, without such coordination, ``the development of 
the swap markets will be vulnerable to false starts, significant 
revisions and inefficiencies, and possible regulatory arbitrage across, 
or the flight to, other jurisdictions.'' \999\
---------------------------------------------------------------------------

    \997\ See Multiple Associations Letter I at 9 (``[I]t is unclear 
to what extent foreign regulation, in addition to regulation by the 
Commissions, may affect U.S. Swap market participants.''); Multiple 
Associations Letter II at 1 (noting that ``an iterative approach to 
rulemaking has been taken when rules have an unusually large impact 
on market structure and participants'').
    \998\ Multiple Associations Letter I at 9.
    \999\ Id. at 9-10.
---------------------------------------------------------------------------

    Commenters representing several foreign banks requested that the 
Commission adopt implementing regulations under the Dodd-Frank Act 
``that enable and encourage foreign banks engaged in swap dealing 
activities to book their swaps businesses in a single well-capitalized, 
highly rated foreign-based banking institution.'' \1000\ These 
commenters did not comment specifically on the proposed rules, but 
rather argued in favor of a regulatory framework that relies on home 
country supervision where regulations operate at the entity level, and 
that relies on Title VII of the Dodd-Frank Act with respect to ``U.S. 
swap transactions,'' where regulations operate at the transaction 
level.\1001\ In particular, these entities believe that the mandatory 
clearing requirement should not apply to ``foreign swap transactions'' 
(i.e., transactions they defined as not involving a U.S. counterparty) 
or, more broadly, to transactions that a counterparty thereto is 
required to submit for clearing pursuant to foreign law.\1002\
---------------------------------------------------------------------------

    \1000\ See Davis Polk Letter I at 2.
    \1001\ Id.
    \1002\ Id.; Cleary Letter IV at 27.
---------------------------------------------------------------------------

    Commenters representing foreign financial institutions submitted a 
second, supplemental comment letter to elaborate on the above 
comments.\1003\ In this letter, these commenters requested that the 
Commission modify the proposed definition of ``security-based swap 
dealer'' to make clear that ``a security-based swap which is required 
to be cleared under foreign law (including by virtue of the fact that 
any counterparty thereto is required under foreign law to submit the 
same for clearing) is not required to be cleared under the [Dodd-Frank] 
Act.'' \1004\
---------------------------------------------------------------------------

    \1003\ See Davis Polk Letter II.
    \1004\ Id. at 4-5.
---------------------------------------------------------------------------

    Moreover, commenters representing Japan's three largest bank groups 
requested that the Commission ``adopt implementing regulations under 
the Dodd-Frank Act with the effect that Japanese banks, including their 
U.S. branches, are not made subject to the application of Title VII 
requirements.'' \1005\ Should the Commission not take such action, 
these commenters requested that the regulations issued pursuant to 
Title VII: (i) Not apply to transactions between affiliates of a bank 
group regulated as a bank holding company \1006\ and (ii) not apply to 
``a foreign dealer''--particularly one that is ``subject to 
comprehensive home country regulation''--with respect to transactions 
entered into by the foreign dealer with a U.S.-based dealer regulated 
as a swap dealer or security-based swap dealer pursuant to Title 
VII.\1007\
---------------------------------------------------------------------------

    \1005\ See Japanese Banks Letter at 4.
    \1006\ Id.
    \1007\ Id. at 5.
---------------------------------------------------------------------------

    In addition, multiple commenters endorsed the use of mandatory 
clearing generally to further the goals of the Dodd-Frank Act. One 
commenter described mandatory clearing as ``the centerpiece of reform 
embodied in Title VII of the Dodd-Frank Act'' that, accordingly, should 
be subject to ``only a very few, narrow, and limited exceptions.'' 
\1008\ Another commenter similarly urged the Commission to ``prioritize 
the finalization and implementation of clearing-related rules.'' \1009\ 
Another stated that the Commission's ``top priority should be to

[[Page 31077]]

implement requirements that reduce systemic risk, such as the use of 
centralized Swap clearinghouses.'' \1010\
---------------------------------------------------------------------------

    \1008\ Better Markets Letter at 10.
    \1009\ Citadel Letter at 2 (further noting that ``anything less 
needlessly inhibits transparency and competition in the SB swaps 
markets and will leave US financial markets vulnerable, damage 
American competitiveness, and weaken our long-term prospects for 
sound economic growth''); see also MFA Letter IV at 4 (urging the 
Commission to prioritize clearing rules to ``lay the regulatory 
groundwork for more informed implementation'' of other final rules 
planned under the Dodd-Frank Act).
    \1010\ Multiple Associations Letter I at 2.
---------------------------------------------------------------------------

C. Application of Title VII Mandatory Clearing Requirements to Cross-
Border Transactions

1. Statutory Framework
    By its terms, the mandatory clearing requirement in Section 
3C(a)(1) of the Exchange Act applies to any person that ``engage[s] in 
a security-based swap . . . if the security-based swap is required to 
be cleared.'' \1011\ We are proposing to apply the statutory language 
``engage in a security-based swap'' to mean any transaction in which a 
U.S. person is a counterparty \1012\ to a security-based swap or 
guarantees the performance of a non-U.S. person under a security-based 
swap because of the involvement of a U.S. person in the 
transaction.\1013\ We also are proposing to apply the statutory 
language ``engage in a security-based swap'' to include any transaction 
in which a person performs any of the activities that are key stages in 
a security-based swap transaction (i.e., solicitation, negotiation, 
execution, or booking of the transaction) \1014\ within the United 
States. As we noted above, a ``transaction conducted within the United 
States,'' as defined in proposed Rule 3a71-3(a)(5), includes 
soliciting, negotiating, executing, or booking a security-based swap 
transaction.\1015\ Accordingly, subject to certain statutory exceptions 
\1016\ and certain other exceptions described below,\1017\ we are 
proposing to apply the mandatory clearing requirement to any person 
that engages in a security-based swap transaction in which at least one 
of the counterparties to the transaction is a U.S. person or a non-U.S. 
person whose performance under the security-based swap is guaranteed by 
a U.S. person, or if the transaction is a ``transaction conducted 
within the United States,'' as defined in proposed Rule 3a71-3(a)(5) 
under the Exchange Act.\1018\
---------------------------------------------------------------------------

    \1011\ Section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-
3(a)(1).
    \1012\ The use of the term ``counterparty'' in the proposed rule 
is intended to refer to the direct counterparty to the security-
based swap transaction, not a party that provides a guarantee on the 
performance of the direct counterparty under the security-based 
swap. As discussed in Section VIII.C, supra, re-proposed Rules 
900(j) and (o) under the Exchange Act would define the term ``direct 
counterparty'' as ``a person that enters directly with another 
person into a contract that constitutes a security-based swap,'' and 
an ``indirect counterparty'' as ``a person that guarantees the 
performance of a direct counterparty to a security-based swap or 
that otherwise provides recourse to the other side for the failure 
of the direct counterparty to perform any obligation under the 
security-based swap.''
    \1013\ See Section II.B.2(d), supra (discussing the Commission's 
treatment of guarantees).
    \1014\ As noted above, solicitation, negotiation, execution, and 
booking are activities that represent key stages in a potential or 
completed security-based swap transaction. See note 310 and 
accompanying text, supra. Persons that conduct any of these 
activities would be considered to be ``engaged in a security-based 
swap'' under the Commission's proposed interpretation.
    \1015\ See Section III.B.6, supra.
    \1016\ The Exchange Act provides an exception from the mandatory 
clearing requirement in connection with security-based swaps that 
involve persons that are not financial entities and that use the 
security-based swaps to hedge or mitigate commercial risk. See 
Section 3C(g) of the Exchange Act, 15 U.S.C. 78c-3(g). The Exchange 
Act also provides exemptions from the clearing requirement for 
security-based swaps entered into prior to the enactment of the 
Dodd-Frank Act, and for security-based swaps entered into prior to 
the application of the clearing requirement, so long as those 
instruments are reported to a registered SDR. See Sections 3C(e)(1) 
and (f)(1) of the Exchange Act, 15 U.S.C. 78c-3(e)(1) and (f)(1) 
(pre-enactment security-based swaps); Sections 3C(e)(2) and (f)(2) 
of the Exchange Act, 15 U.S.C. 78c-3(e)(2) and (f)(2) (post-
enactment security-based swaps entered into prior to the application 
of the clearing requirement).
    \1017\ See Sections IX.C.3(a)ii and IX.C.3(b)ii, infra.
    \1018\ Proposed Rule 3Ca-3(a) under the Exchange Act.
---------------------------------------------------------------------------

    We preliminarily believe our proposed approach to the mandatory 
clearing requirement, including the interpretation of the statutory 
language discussed above and further discussed below, is consistent 
with the purposes of the mandatory clearing requirement in Section 
3C(a)(1) of the Exchange Act. The Dodd-Frank Act is intended to promote 
the financial stability of the United States by, among other things, 
reducing risks to the U.S. financial system by ensuring that, whenever 
possible and appropriate, derivatives contracts are centrally cleared 
rather than traded exclusively in the OTC market.\1019\ In making our 
mandatory clearing determination, the Commission is required to take 
into account certain factors, including, among other things, ``the 
availability of rule framework, capacity, operational expertise and 
resources, and credit support infrastructure'' in clearing agencies to 
support clearing of the product in question, and ``the effect on the 
mitigation of systemic risk.'' \1020\ The Commission preliminarily 
believes that the proposed approach generally would help to ensure that 
the goals of the Dodd-Frank Act to increase the use of available 
centralized market infrastructures to reduce operational risks and 
mitigate systemic risk are achieved,\1021\ while not unnecessarily 
limiting the access of U.S. persons that conduct security-based swap 
activity through foreign branches or guaranteed non-U.S. persons to 
foreign security-based swap markets.
---------------------------------------------------------------------------

    \1019\ See, e.g., S. Comm. on Banking, Hous., & Urban Affairs, 
The Restoring American Financial Stability Act of 2010, S. Rep. No. 
111-176, at 32 (``As a key element of reducing systemic risk and 
protecting taxpayers in the future, protections must include 
comprehensive regulation and rules for how the OTC derivatives 
market operates. Increasing the use of central clearinghouses, 
exchanges, appropriate margining, capital requirements, and 
reporting will provide safeguards for American taxpayers and the 
financial system as a whole.''); id. at 34 (``Some parts of the OTC 
market may not be suitable for clearing and exchange trading due to 
individual business needs of certain users. Those users should 
retain the ability to engage in customized, uncleared contracts 
while bringing in as much of the OTC market under the centrally 
cleared and exchange-traded framework as possible.'').
    \1020\ Section 3C(b)(4)(B) of the Exchange Act, 15 U.S.C. 78c-
3(b)(4)(B).
    \1021\ The purpose of central clearing is to mitigate 
counterparty credit risk by shifting that risk from individual 
counterparties to CCPs, thereby helping protect counterparties from 
each other's potential failures. Central clearing also requires that 
mark-to-market pricing and margin requirements be applied in a 
consistent manner. CCPs generally use liquid margin collateral to 
manage the risk of a CCP member's failure, and rely on their margin 
calculations and their access to that liquid collateral to protect 
against sudden movements in market prices, including movements in 
market value after a counterparty's default. A CCP that stands 
between counterparties for OTC derivatives is generally perceived to 
decrease systemic risk. Further, the use of CCPs may lead to 
standardization of contracts and processes, which improve market 
efficiency and reduce the operational risks attributable to human 
and processing errors. See, e.g., Wellink, supra note 110, at 132-
33; Culp, supra note 111, at 15-16; Manmohan Singh, ``Collateral, 
Netting and Systemic Risk in the OTC Derivatives Market,'' IMF 
Working Paper (2010), at 9-13, available at: https://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf.
---------------------------------------------------------------------------

2. Proposed Rule
    In light of the interpretation of the statutory language ``engage 
in a security-based swap'' and the policy concerns discussed above, we 
are proposing a rule that would apply the mandatory clearing 
requirement to a person that engages in a security-based swap 
transaction if a counterparty to the transaction is (i) a U.S. person 
or (ii) a non-U.S. person whose performance under the security-based 
swap is guaranteed by a U.S. person.\1022\ We also are proposing a rule 
that would apply the mandatory clearing requirement to a person that 
engages in a security-based swap transaction if such transaction is a 
``transaction conducted within the United States,'' as defined in 
proposed Rule 3a71-3(a)(5) under the Exchange Act.\1023\ To limit

[[Page 31078]]

the scope of the proposal, we are proposing exceptions to the mandatory 
clearing requirement in the following two scenarios:
---------------------------------------------------------------------------

    \1022\ Proposed Rule 3Ca-3(a)(1) under the Exchange Act. Under 
proposed Rule 3Ca-3(c) under the Exchange Act, the term ``U.S. 
person'' would have the same meaning as set forth in proposed Rule 
3a71-3(a)(7) under the Exchange Act, as discussed in Section 
III.B.5, supra.
    \1023\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act. Under 
proposed Rule 3Ca-3(c) under the Exchange Act, the term 
``transaction conducted within the United States'' would have the 
same meaning as set forth in proposed Rule 3a71-3(a)(5) under the 
Exchange Act, as discussed in Section III.B.5, supra.
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     If the security-based swap transaction is not a 
``transaction conducted within the United States,'' the proposed rule 
would not apply the mandatory clearing requirement if one counterparty 
to the transaction is (i) a foreign branch of a U.S. bank \1024\ or 
(ii) a non-U.S. person whose performance under the security-based swap 
is guaranteed by a U.S. person,\1025\ and if the other counterparty to 
the transaction is a non-U.S. person (i) whose performance under the 
security-based swap is not guaranteed by a U.S. person and (ii) who is 
not a foreign security-based swap dealer.\1026\
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    \1024\ Under proposed Rule 3Ca-3(c) under the Exchange Act, the 
term ``foreign branch'' would have the same meaning as set forth in 
proposed Rule 3a71-3(a)(1) under the Exchange Act. See discussion in 
Section III.B.7, supra. A security-based swap transaction conducted 
through a foreign branch, as defined in proposed Rule 3a71-3(a)(4) 
under the Exchange Act, would be specifically excluded from the 
proposed definition of ``transaction conducted within the United 
States.'' See proposed Rule 3a71-3(a)(5)(ii) under the Exchange Act.
    \1025\ A security-based swap transaction involving a non-U.S. 
person whose performance under the security-based swap is guaranteed 
by a U.S. person would not be a ``transaction conducted within the 
United States'' by virtue of the guarantee alone under proposed Rule 
3a71-3(a)(5) under the Exchange Act, unless the transaction is 
solicited, negotiated, executed, or booked within the United States. 
We would consider such transaction to be engaged in within the 
United States, however, by virtue of the guarantee from the U.S. 
person, who acts as an ``indirect counterparty'' to the transaction. 
See note 1012, supra.
    \1026\ Proposed Rule 3Ca-3(b)(1) under the Exchange Act. 
Proposed Rule 3Ca-3(c) defines the term ``foreign security-based 
swap dealer'' by cross-reference to the definition of that term in 
proposed Rule 3a71-3(a)(3) of the Exchange Act (defining ``foreign 
security-based swap dealer'' to mean ``a security-based swap dealer, 
as defined in section 3(a)(71) of the [Exchange] Act (15 U.S.C. 
78c(a)(71)), and the rules and regulations thereunder, that is not a 
U.S. person'').
---------------------------------------------------------------------------

     If the security-based swap transaction is a ``transaction 
conducted within the United States,'' the proposed rule would not apply 
the mandatory clearing requirement if (i) neither counterparty to the 
transaction is a U.S. person; (ii) neither counterparty's performance 
under the security-based swap is guaranteed by a U.S. person; and (iii) 
neither counterparty to the transaction is a foreign security-based 
swap dealer.\1027\
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    \1027\ Proposed Rule 3Ca-3(b)(2) under the Exchange Act.
---------------------------------------------------------------------------

We discuss below the proposed rule regarding the application of the 
mandatory clearing requirement in more detail.
3. Discussion
(a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S. 
Persons Receiving Guarantees From U.S. Persons
i. Proposed Rule
    The proposed rule would apply the mandatory clearing requirement in 
Section 3C(a)(1) of the Exchange Act, and the rules and regulations 
thereunder, to a person that engages in a security-based swap 
transaction if a counterparty to the transaction is (i) a U.S. person 
or (ii) a non-U.S. person whose performance under the security-based 
swap is guaranteed by a U.S. person,\1028\ subject to certain 
exceptions.\1029\
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    \1028\ Proposed Rules 3Ca-3(a)(1)(i) and (ii) under the Exchange 
Act.
    \1029\ Proposed Rule 3Ca-3(b) under the Exchange Act.
---------------------------------------------------------------------------

    As discussed above,\1030\ a U.S. person that is a counterparty to a 
security-based swap transaction bears the ongoing risk of the 
transaction. It is the financial resources of that U.S. person that 
will be called upon in performing any obligations pursuant to that 
transaction, and this activity is capable of posing risks to the 
stability of the U.S. financial system. Because these obligations and 
risks reside in the United States, the Commission preliminarily 
believes that when a U.S. person is a counterparty to a security-based 
swap transaction, such person necessarily engages in a security-based 
swap within the United States and, therefore, would be subject to the 
mandatory clearing requirement in Section 3C(a)(1) of the Exchange Act 
and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \1030\ See Section II.A.6, supra.
---------------------------------------------------------------------------

    In the case of a non-U.S. person guaranteed by a U.S. person 
(``U.S. guarantor''), the guarantee provides the counterparty of the 
guaranteed entity direct recourse to the U.S. guarantor with respect to 
any obligations owed by the guaranteed entity under the security-based 
swap, and the U.S. guarantor exposes itself to the security-based swap 
risk as if it were a direct counterparty \1031\ to the security-based 
swap through the security-based swap activity engaged in by the 
guaranteed entity. In many cases, the counterparty would not enter into 
the transaction (or would not do so on the same terms) with the 
guaranteed entity, and the guaranteed entity would not be able to 
engage in any security-based swaps, without the guarantee. Given the 
reliance by both the guaranteed entity and its counterparty on the 
creditworthiness of the guarantor in the course of engaging in 
security-based swap transactions and for the duration of the 
transaction, we preliminarily believe that a security-based swap 
transaction in which one of the counterparties is a non-U.S. person 
whose performance under a security-based swap is guaranteed by a U.S. 
person is a transaction that is engaged in within the United States by 
virtue of the involvement of the U.S. guarantor in the security-based 
swap.\1032\ Our proposed rule, therefore, would subject transactions 
involving at least one counterparty whose performance under the 
security-based swap is guaranteed by a U.S. person to the mandatory 
clearing requirement,\1033\ subject to certain exceptions discussed 
below.\1034\
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    \1031\ See note 1012, supra.
    \1032\ See note 1025, supra.
    \1033\ Proposed Rule 3Ca-3(a)(1)(ii) under the Exchange Act.
    \1034\ Proposed Rule 3Ca-3(b) under the Exchange Act.
---------------------------------------------------------------------------

    We recognize that this proposed approach would subject certain 
security-based swap transactions with non-U.S. persons to the mandatory 
clearing requirement if a U.S. person is a counterparty to the 
transaction (e.g., U.S. dealer to foreign dealer transactions). We 
preliminarily believe that such an approach is appropriate, as a 
significant proportion of the risk borne by U.S. persons, and, 
therefore, the risk to the U.S. financial system as a result of the 
U.S. persons' security-based swap activity, arises from transactions 
entered into with non-U.S. persons.\1035\ Even where a U.S person's 
security-based swap activity occurs in part outside the United States 
(e.g., the transaction is negotiated or executed outside the United 
States), this activity may pose risk to the U.S. financial system 
because security-based swap transactions give rise to ongoing 
obligations on the part of the U.S. person and credit risk exposures to 
its non-U.S. counterparties. Therefore, subjecting a transaction in 
which a U.S. person is a counterparty to the transaction to the 
mandatory clearing requirement would further the purposes of Title VII 
by ensuring that security-based swaps involving persons whose security-
based swap activities create risk that Title VII is intended to address 
would be centrally cleared through a CCP.\1036\
---------------------------------------------------------------------------

    \1035\ See Section II.A.6, supra.
    \1036\ We preliminarily believe that the proposed approach to 
the mandatory clearing requirement is not being applied to persons 
who are ``transact[ing] a business in security-based swaps without 
the jurisdiction of the United States,'' within the meaning of 
Section 30(c). See Section II.B.2(b), supra. However, the Commission 
also preliminarily believes that the proposed approach to the 
mandatory clearing requirement is necessary or appropriate to help 
prevent the evasion of the particular provisions of the Exchange Act 
that were added by the Dodd-Frank Act that are being implemented by 
the approach and prophylactically will help ensure that the purposes 
of those provisions of the Dodd-Frank Act are not undermined. See 
Section II.B.2(e), supra; see also Section II.B.2(d), supra.
    For example, if the mandatory clearing requirement does not 
apply to transactions among non-U.S. persons that receive guarantees 
from U.S. persons and foreign branches of U.S. banks, then U.S. 
persons would have an incentive to conduct transactions with other 
U.S. persons through guaranteed foreign affiliates or foreign 
branches to avoid the mandatory clearing requirement, even though 
altering the form of the transactions would not alter the substance 
of the risk to U.S. markets that the Dodd-Frank Act was enacted to 
address and thus could undermine the purposes of the Dodd-Frank Act. 
See Section II.A.6, supra.

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[[Page 31079]]

ii. Proposed Exception for Certain Transactions Involving Foreign 
Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    The Commission is proposing an exception from the mandatory 
clearing requirement described above for certain transactions that 
involve foreign branches of a U.S. bank or guaranteed non-U.S. persons, 
provided the transactions are not conducted within the United States. 
Specifically, under the proposed rule, the mandatory clearing 
requirement would not apply to a security-based swap transaction if one 
counterparty to the transaction is a foreign branch of a U.S. bank 
\1037\ or a non-U.S. person whose performance under the security-based 
swap is guaranteed by a U.S. person and if the other counterparty to 
the transaction is a non-U.S. person (i) whose performance under the 
security-based swap is not guaranteed by a U.S. person and (ii) who is 
not a foreign security-based swap dealer.\1038\ Such exception would 
not apply if the security-based swap transaction were a transaction 
conducted within the United States, as defined in proposed Rule 3a71-
3(a)(5) under the Exchange Act.\1039\
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    \1037\ See note 1024, supra.
    \1038\ Proposed Rule 3Ca-3(b)(1) under the Exchange Act. See 
note 1026, supra.
    \1039\ Proposed Rule 3Ca-3(b)(1) under the Exchange Act.
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    Without such an exception, U.S. persons conducting security-based 
swap activity out of foreign branches or guaranteed non-U.S. persons 
may have less access to foreign security-based swap markets because 
non-U.S. person counterparties may be less willing to enter into 
security-based swap transactions with them if such transactions are 
subject to a mandatory clearing requirement. We recognize that imposing 
the mandatory clearing requirement on a foreign branch of a U.S. bank 
or on a non-U.S. person whose performance under a security-based swap 
is guaranteed by a U.S. person would be consistent with the view that a 
foreign branch of a U.S. bank is part of a U.S. person \1040\ and that 
a U.S. guarantor is an indirect counterparty \1041\ to the transaction 
entered into by the guaranteed non-U.S. person. We also recognize that 
such transactions pose risk to the U.S. financial system. At the same 
time, however, imposing the mandatory clearing requirement on U.S. 
persons that conduct their foreign security-based swap dealing activity 
through foreign branches or guaranteed non-U.S. persons, without any 
exceptions, could put such U.S. persons at a significant competitive 
disadvantage to non-U.S. persons who conduct security-based swap 
business in the same foreign local market and thereby limit the access 
of such U.S. persons to foreign security-based swap markets.\1042\ 
After balancing the various policy considerations, including the Dodd-
Frank Act's goal of mitigating risk to the U.S. financial system, we 
have preliminarily concluded that the proposed exception from the 
mandatory clearing requirement for transactions by U.S. persons 
conducting security-based swap activity out of foreign branches or 
guaranteed non-U.S. persons with non-U.S. persons whose performance 
under the security-based swap is not guaranteed by a U.S. person is 
appropriate, provided that it is not a transaction conducted within the 
United States.\1043\
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    \1040\ See Section III.B.5, supra.
    \1041\ See note 1012, supra.
    \1042\ See, e.g., Sullivan & Cromwell Letter at 14 (``The 
jurisdictional scope of the swaps entity definitions is critical to 
the ability of U.S. banking organizations to maintain their 
competitive position in foreign marketplaces. Imposing the 
regulatory regime of Title VII on their Non-U.S. Operations would 
place them at a disadvantage to their foreign bank competitors 
because the Non-U.S. Operations would be subject to an additional 
regulatory regime which their foreign competitors would not.''); 
Cleary Letter IV at 7 (``Subjecting such non-U.S. branches and 
affiliates to U.S. requirements could effectively preclude them 
from, or significantly increase the cost of, managing their risk in 
the local financial markets, since local financial institutions may 
be required to comply with Dodd-Frank to provide those services.'').
    \1043\ In this regard, we note that such transaction may be 
subject to a mandatory clearing requirement in a foreign 
jurisdiction. See Section XI.E, infra (discussing substituted 
compliance).
---------------------------------------------------------------------------

    This exception from the mandatory clearing requirement would not 
apply under the proposed rule, however, when the non-U.S. person 
counterparty of the foreign branch of the U.S. bank or the guaranteed 
non-U.S. person is a foreign security-based swap dealer.\1044\ As 
discussed above, a non-U.S. person would be required to register as a 
foreign security-based swap dealer if its transactions with U.S. 
persons or otherwise conducted within the United States, connected with 
its dealing capacity, exceed the de minimis threshold in the security-
based swap dealer definition.\1045\ Thus, a foreign security-based swap 
dealer would necessarily have a significant connection with the U.S. 
security-based swap market. As a result, the Commission preliminarily 
believes that it is not appropriate to provide an exception for U.S. 
persons conducting security-based swap activity out of foreign branches 
or guaranteed non-U.S. persons when they enter into security-based 
swaps with foreign security-based swap dealers.
---------------------------------------------------------------------------

    \1044\ Proposed Rule 3Ca-3(b)(1)(ii)(B) under the Exchange Act. 
Like U.S. persons conducting security-based swap activity out of 
foreign branches or guaranteed non-U.S. persons, a foreign security-
based swap dealer would not be subject to the mandatory clearing 
requirement when it engages in a security-based swap transaction 
with a non-U.S. person, provided neither party's performance under 
the security-based swap is guaranteed by a U.S. person and the 
transaction is not conducted within the United States. Such a 
transaction would not be captured by proposed Rule 3Ca-3(a) under 
the Exchange Act (and, therefore, it is not necessary for such 
transaction to be included as an exception in paragraph (b) of Rule 
3Ca-3).
    \1045\ See Section III.B.4, supra.
---------------------------------------------------------------------------

    We are not proposing to provide an exception from mandatory 
clearing for U.S. persons generally, however, although we recognize 
that such exception could increase access to foreign security-based 
swap markets for all U.S. persons. The Commission preliminarily 
believes that such a broad exception to the mandatory clearing 
requirement, in a market as global as the security-based swap 
market,\1046\ would undermine the goal of the mandatory clearing 
requirement to reduce financial risk to the U.S. financial system. In 
light of the statutory goal, we preliminarily do not believe that the 
benefit of providing U.S. persons greater access to foreign security-
based swap markets warrants expanding the exception beyond the scope we 
are proposing here. In this regard, we also note that a uniform 
mandatory clearing requirement for all U.S. persons other than foreign 
branches and guaranteed non-U.S. persons should facilitate the 
development of central clearing infrastructures and encourage the 
standardization of contract terms.\1047\
---------------------------------------------------------------------------

    \1046\ See Section II.A.1, supra (discussing the global nature 
of the security-based swap market).
    \1047\ See, e.g., note 991, supra. A robust infrastructure for 
clearing of security-based swaps should reduce operational risks 
resulting from backlogs and processing errors. See FMI Principles at 
20, 94 (describing operational risk as the ``risk that deficiencies 
in information systems or internal processes, human errors, 
management failures, or disruptions from external events will result 
in the reduction, deterioration, or breakdown of services'' and 
noting that operational risks ``can be a source of systemic 
risk.'').

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[[Page 31080]]

(b) Transactions Conducted Within the United States
i. Proposed Rule
    Under the proposed rule, a security-based swap transaction that is 
a ``transaction conducted within the United States,'' as defined in 
proposed Rule 3a71-3(a)(5) under the Exchange Act, would be subject to 
the mandatory clearing requirement.\1048\ The Commission preliminarily 
believes that engaging in a security-based swap includes the 
performance by a person of any of the activities that represent key 
stages in a security-based swap transaction, including solicitation, 
negotiation, execution, or booking of a security-based swap 
transaction. As we have noted above, a ``transaction conducted within 
the United States,'' as defined in proposed Rule 3a71-3(a)(5), includes 
soliciting, negotiating, executing, or booking a security-based swap 
transaction.\1049\ Accordingly, we preliminarily would interpret 
engaging in a security-based swap within the United States to encompass 
the same types of activities that characterize a transaction conducted 
within the United States, as that term is defined in proposed Rule 
3a71-3(a)(5).\1050\
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    \1048\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act.
    \1049\ See Section III.B.6, supra.
    \1050\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act.
---------------------------------------------------------------------------

ii. Proposed Exception for Transactions Conducted Within the United 
States by Certain Non-U.S. Persons
    The Commission recognizes that transactions between two non-U.S. 
persons whose performances under a security-based swap are not 
guaranteed by a U.S. person do not pose the same risk to the U.S. 
financial system that is posed by transactions with U.S. person 
counterparties or transactions in which a U.S. person provides a 
guarantee. In particular, while the operational risks associated with 
the transaction may reside in the United States and would potentially 
be reduced by required use of the central market infrastructure 
available to clear the products in question, we preliminarily believe 
that because the financial risks of the transaction would reside with 
non-U.S. persons outside the United States, it is not necessary to 
apply the mandatory clearing requirement to a transaction between two 
non-U.S. persons solely because the transaction is a ``transaction 
conducted within the United States'' as defined in proposed Rule 3a71-
3(a)(5) under the Exchange Act. Accordingly, the Commission is 
proposing an exception from the mandatory clearing requirement for 
security-based swap transactions that are ``transactions conducted 
within the United States'' when no counterparty to the transaction is 
(i) a U.S. person; (ii) a non-U.S. person whose performance under the 
security-based swap is guaranteed by a U.S. person; or (iii) a foreign 
security-based swap dealer.\1051\
---------------------------------------------------------------------------

    \1051\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes it is appropriate to limit 
the exception from the mandatory clearing requirement when one or both 
of the non-U.S. person counterparties is a foreign security-based swap 
dealer. Non-U.S. persons whose transactions arising from dealing 
activity with U.S. persons or otherwise conducted within the United 
States exceed the de minimis threshold in the security-based swap 
dealer definition have a sufficient connection to the U.S. security-
based swap market to lead the Commission to preliminarily conclude that 
it would not be appropriate to except transactions involving them from 
the mandatory clearing requirement when they conduct security-based 
swap transactions within the United States. Permitting non-U.S. persons 
to engage in security-based swap transactions within the United States 
with foreign security-based swap dealers without being subject to the 
mandatory clearing requirement would potentially limit the access of 
U.S. persons to foreign security-based swap markets because non-U.S. 
persons seeking to engage in security-based swaps within the United 
States may prefer to engage in security-based swaps with foreign 
security-based swap dealers rather than U.S. persons to avoid the 
mandatory clearing requirement.
Request for Comment
    The Commission seeks comment on the proposed rule in all aspects. 
In addition, the Commission seeks comment on the following specific 
questions:
     Should the mandatory clearing requirement apply to all 
transactions conducted by a U.S. person, including transactions 
conducted out of a foreign branch, or by a guaranteed non-U.S. person? 
Why or why not? Should the mandatory clearing requirement apply to such 
transactions unless, for example, they are conducted in a foreign 
regime that has a mandatory clearing regime that is comparable to the 
mandatory clearing regime under the Dodd-Frank Act? In assessing 
comparability under this approach, to what extent should results of 
mandatory clearing determinations under the foreign regime be taken 
into account? Should the determinations with respect to ``local'' 
products be viewed differently than products that are subject to 
mandatory clearing determinations in one or more other jurisdictions, 
i.e., ``global'' products? Would some other standard for assessing a 
foreign regime in these circumstances be appropriate?
     Is the proposed approach over-broad or over-narrow? If so, 
why? Should a security-based swap that is required to be cleared under 
foreign law not be required to be cleared pursuant to Section 3C, as 
some commenters stated? If so, why?
     When the conduct occurring in the United States is limited 
only to negotiating or soliciting a transaction, does the transaction 
carry risk into the U.S. financial system? If not, is application of 
the mandatory clearing requirement to such transactions appropriate?
     How should the Commission weigh the operational risks that 
arise from requiring mandatory clearing? To what extent do the 
exceptions to the mandatory clearing requirement undermine the 
development of a central clearing infrastructure that will facilitate 
the prompt and accurate clearance and settlement of security-based 
swaps? Are persons excepted from the mandatory clearing requirement 
likely to develop the same operational capacity and safeguards to 
facilitate clearing as persons not excepted? If not, to what extent 
does this increase operational risk to the national system for 
clearance and settlement? To what extent, if any, should the exceptions 
to the mandatory clearing requirement be limited to minimize 
operational risks and market risks that may be experienced in the 
United States?
     Are there other rationales besides risk mitigation that 
justify imposing the mandatory clearing requirement? If so, what are 
they and why? Do these alternative rationales support a different 
application of the requirement to U.S. persons and non-U.S. persons? As 
regards foreign branches of U.S. banks? As regards non-U.S. persons who 
receive guarantees from U.S. persons and non-U.S. persons who do not 
receive guarantees from U.S. persons? As regards security-based swap 
dealers?
     How should the mandatory clearing requirement treat 
members of clearing agencies registered with the Commission? For 
instance, to what extent should the mandatory clearing requirement 
apply to members of clearing agencies registered with the

[[Page 31081]]

Commission if the member is not a U.S. person, does not have its 
performance guaranteed by a U.S. person, is not a security-based swap 
dealer, or is not conducting the transaction within the United States? 
Please be specific.
     How should the mandatory clearing requirement treat 
counterparties who are swap dealers? For instance, should non-U.S. 
persons who are swap dealers and whose performance under the swap is 
not guaranteed by a U.S. person be excepted from the mandatory clearing 
requirement in any circumstances? If so, under what circumstances? How 
should other financial entities be treated? How should major swap 
participants and major security-based swap participants be treated 
under the proposed rule? Should they be excepted from the mandatory 
clearing requirement, in certain circumstances, as we have proposed?
     Are the proposed exceptions from the mandatory clearing 
requirement appropriate? Should other transactions also be excepted? If 
so, which? Should other categories of persons also be excepted? If so, 
whom?
     Should any transactions conducted within the United States 
be subject to any exception from the mandatory clearing requirement? If 
so, why? For instance, should a transaction between two non-U.S. 
persons neither of whom is guaranteed by a U.S. person and neither of 
whom are security-based swap dealers, as excepted from the mandatory 
clearing requirement under proposed Rule 3Ca-3(b)(2), be subject to 
mandatory clearing? If so, why?
     Should any transactions where one counterparty is a U.S. 
person be subject to an exception from the mandatory clearing 
requirement? If so, which transactions and why? For instance, should 
transactions not conducted in the United States in which one 
counterparty is a foreign branch of a U.S. bank be subject to any 
exceptions, such as the exception in proposed Rule 3Ca-3(b)(1)?
     To what extent might the exceptions described in proposed 
Rule 3Ca-3(b) create competitive disparity between similarly situated 
persons competing in the same market? For instance, for transactions 
conducted within the United States, to what extent, if any, might 
proposed Rule 3Ca-3(b)(2) create competitive disparity between U.S. 
persons and non-U.S. persons? For transactions not conducted within the 
United States, to what extent, if any, might proposed Rule 3Ca-3(b)(1) 
create competitive disparity between counterparties who are security-
based swap dealers and foreign branches of U.S. banks?
     Should the Commission impose any conditions to the 
exceptions from the mandatory clearing requirement? What conditions 
would be appropriate?
     If the proposed rule overlaps with a foreign mandatory 
clearing requirement, in what ways are the requirements likely to 
conflict? What would be the effects on efficiency, competition and 
capital formation in the event that there are overlapping or 
duplicative mandatory clearing requirements or varying exceptions to 
such requirements across multiple jurisdictions?
     What provisions of Section 3C, or the Exchange Act and 
rules thereunder generally, would a counterparty be unable to comply 
with if the security-based swap transaction was subject to more than 
one mandatory clearing requirement? What categories of transactions are 
likely to be subject to such multiple mandatory clearing requirements? 
To what extent, if any, would a counterparty's membership in a clearing 
agency that clears security-based swaps affect the likelihood that 
multiple mandatory clearing requirements would apply to a security-
based swap transaction? To what extent, if any, would a guaranteed non-
U.S. person be subject to multiple mandatory clearing requirements? To 
what extent, if any, does the home country of the reference entity 
under a security-based swap affect the likelihood that multiple 
mandatory clearing requirements would apply to the transaction? Does 
proposed Rule 3Ca-3 provide sufficient regulatory guidance regarding 
such transactions? Why or why not?
     What would be the market impact of proposed Rule 3Ca-3? 
How would the proposed application of the mandatory clearing 
requirement affect the competitiveness of U.S. entities in the global 
marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed rule place any market participants 
at a competitive disadvantage or advantage? If so, please explain. 
Would the proposed rule be a more general burden on competition? If so, 
please explain. What other measures should the Commission consider to 
implement the mandatory clearing requirement? What would be the market 
impacts and competitiveness effects of alternatives to the proposed 
approach discussed in this release?

X. Mandatory Security-Based Swap Trade Execution Requirement

A. Introduction

    Section 3C(h)(1) of the Exchange Act requires, with respect to 
transactions involving security-based swaps subject to the clearing 
requirement in Section 3C(a)(1) of the Exchange Act, that 
counterparties execute such transactions on an exchange or a security-
based swap execution facility that is registered under Section 3D of 
the Exchange Act or exempt from registration under Section 3D(e) of the 
Exchange Act (the ``mandatory trade execution requirement'').\1052\ 
Section 3C(h) thus provides that security-based swap transactions 
subject to the mandatory trade execution requirement cannot be executed 
on an OTC basis, but must instead be executed on an exchange or 
security-based swap execution facility that is registered or exempt 
from registration under the Exchange Act, unless an exception 
applies.\1053\ As such, the mandatory trade execution requirement is 
important in helping to bring the trading of security-based swaps onto 
transparent, regulated markets, from more opaque OTC markets.\1054\
---------------------------------------------------------------------------

    \1052\ 15 U.S.C. 78c-3(h)(1).
    \1053\ 15 U.S.C. 78c-3(h). Section 3C(h)(2) of the Exchange Act 
provides two exceptions to compliance with the mandatory trade 
execution requirement: (i) If no exchange or security-based swap 
execution facility makes the security-based swap available to trade; 
or (ii) if the security-based swap transaction is subject to the 
clearing exception under Section 3C(g) of the Exchange Act. 15 
U.S.C. 78c-3(h)(2). In this release, we are not addressing either of 
these exceptions, as they pertain to whether a particular security-
based swap is subject to the mandatory trade execution requirement. 
Our focus here is on the obligations of the counterparties to a 
transaction involving a security-based swap that is subject to the 
mandatory execution requirement where neither of these exceptions 
applies.
    \1054\ See SB SEF Proposing Release, 76 FR 10949 (``The current 
market for [security-based] 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 [security-based] swaps onto regulated 
markets . . . .'').
---------------------------------------------------------------------------

    Because transactions in security-based swaps are often conducted 
globally with counterparties and intermediaries from multiple 
jurisdictions,\1055\ we recognize uncertainty may exist regarding how 
to apply the mandatory trade execution requirement to cross-border 
security-based swap transactions.\1056\ The

[[Page 31082]]

Commission is proposing Rule 3Ch-1 under the Exchange Act to specify 
the applicability of the mandatory trade execution requirement with 
respect to cross-border security-based swap transactions. Our proposed 
approach follows the territorial approach described above \1057\ and 
imposes the mandatory trade execution requirement on transactions that 
would be subject to the mandatory clearing requirement \1058\ unless 
they qualify for an exception.\1059\ We discuss substituted compliance 
with the mandatory trade execution requirement in Section XI.F 
below.\1060\
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    \1055\ See Section II.A.1, supra.
    \1056\ One commenter, writing on behalf of a group of various 
market participants, asked for clear guidance regarding the 
application of the mandatory trade execution requirement for cross-
border transactions in security-based swaps. See Cleary Letter III 
and Cleary Letter IV. The commenter recommended that the mandatory 
trade execution requirement should only apply to transactions where 
at least one counterparty is a U.S. person. See Cleary Letter IV at 
27. This commenter also argued that the mandatory trade execution 
requirement should not apply to transactions involving two non-U.S. 
persons that utilize U.S. persons to carry out the transaction. We 
discuss this comment below.
    \1057\ See, e.g., Section VII, supra (discussing the 
registration of foreign security-based swap markets); see also the 
general discussion of the Commission's territorial approach in 
Section II.B, supra.
    \1058\ See Section IX, supra (discussing the scope of the 
mandatory clearing requirement).
    \1059\ See note 1053, supra.
    \1060\ Under the Commission's proposal, substituted compliance 
would be permitted for certain cross-border security-based swap 
transactions that would be subject to the mandatory trade execution 
requirement in Section 3C(h) of the Exchange Act and the rules and 
regulations thereunder. See discussion in Section XI.F, infra.
---------------------------------------------------------------------------

    We recognize that other approaches are possible to achieve the 
goals of the Dodd-Frank Act, in whole or in part. Accordingly, we 
invite comment regarding all aspects of the proposal described below, 
including potential alternative approaches. Data and comment from 
market participants and other interested parties regarding the likely 
effect of the proposed rule and potential alternative approaches will 
be particularly useful to the Commission in evaluating possible 
modifications to the proposal.

B. Application of the Mandatory Trade Execution Requirement to Cross-
Border Transactions

1. Statutory Framework
    Section 3C(h) of the Exchange Act provides that if a transaction is 
subject to the mandatory clearing requirement, counterparties shall 
execute the transaction on an exchange or on a registered or exempt SB 
SEF, unless an exception applies.\1061\ Section 3C(a)(1) of the 
Exchange Act provides that it shall be unlawful for any person ``to 
engage in a security-based swap unless that person submits such 
security-based swap for clearing . . . if the security-based swap is 
required to be cleared.'' \1062\ As discussed above, we are proposing 
to apply the statutory mandatory clearing requirement to any person who 
engages in a security-based swap transaction within the United 
States.\1063\ We preliminarily believe that, to the extent that a 
cross-border transaction is subject to the mandatory clearing 
requirement under the proposed approach described above, it also would 
be subject to the mandatory trade execution requirement unless it 
qualifies for an exception.\1064\ This approach is consistent with the 
statutory framework of Title VII of the Dodd-Frank Act, because a 
security-based swap transaction first must be subject to the mandatory 
clearing requirement before the counterparties to the transaction must 
comply with the mandatory trade execution requirement, unless an 
exception to the mandatory trade execution requirement applies. Thus, 
to the extent that we are proposing not to apply the mandatory clearing 
requirement to a particular transaction, the mandatory trade execution 
requirement would not apply to such transaction.
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    \1061\ See 15 U.S.C. 78c-3(h).
    \1062\ See 15 U.S.C. 78c-3(a)(1).
    \1063\ In Section IX above, the Commission proposes Rule 3Ca-3 
under the Exchange Act. Subject to certain exceptions, proposed Rule 
3Ca-3 would apply the mandatory clearing requirement to any person 
that engages in a security-based swap transaction in which at least 
one of the counterparties to the transaction is a U.S. person or a 
non-U.S. person whose performance under the security-based swap is 
guaranteed by a U.S. person, or if the transaction is a 
``transaction conducted within the United States,'' as defined in 
proposed Rule 3a71-3(a)(5) under the Exchange Act. See Section IX.C, 
supra, and Section III.B.6, supra (discussing proposed Rule 3a71-
3(a)(5)).
    \1064\ See note 1053, supra.
---------------------------------------------------------------------------

2. Proposed Rule
    Consistent with our proposed rule applying the mandatory clearing 
requirement \1065\ and our general approach in applying Title VII in 
the cross-border context,\1066\ the Commission is proposing Rule 3Ch-1 
under the Exchange Act. Under the proposed rule, the mandatory trade 
execution requirement would apply to any person that engages in a 
security-based swap transaction in which at least one of the 
counterparties to the transaction is (i) a U.S. person \1067\ or (ii) a 
non-U.S. person whose performance under the security-based swap is 
guaranteed by a U.S. person.\1068\ We also are proposing to apply the 
mandatory trade execution requirement to any person that engages in a 
security-based swap if such transaction is a ``transaction conducted 
within the United States,'' as defined in proposed Rule 3a71-3(a)(5) 
under the Exchange Act.\1069\
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    \1065\ See proposed Rule 3Ca-3 under the Exchange Act.
    \1066\ See Section II.B, supra.
    \1067\ Under proposed Rule 3Ch-1(c) under the Exchange Act, the 
term ``U.S. person'' would have the same meaning as set forth in 
proposed Rule 3a71-3(a)(7) under the Exchange Act, as discussed in 
Section III.B.5 below.
    \1068\ Proposed Rule 3Ch-1(a)(1) under the Exchange Act.
    \1069\ Proposed Rule 3Ch-1(a)(2) under the Exchange Act.
---------------------------------------------------------------------------

    To limit the scope of the proposal, we are proposing exceptions to 
the mandatory trade execution requirement in the following two 
scenarios: \1070\
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    \1070\ Consistent with our intent to apply the mandatory trade 
execution requirement in the same way as the mandatory clearing 
requirement, these exceptions are identical to the exceptions from 
the mandatory clearing requirement. See proposed Rule 3Ca-3(b) under 
the Exchange Act, as discussed in Section IX, supra.
---------------------------------------------------------------------------

     If the security-based swap transaction is not a 
``transaction conducted within the United States,'' the proposed rule 
would not apply the mandatory trade execution requirement if one 
counterparty to the transaction is (i) a foreign branch of a U.S. bank 
\1071\ or (ii) a non-U.S. person whose performance under the security-
based swap is guaranteed by a U.S. person,\1072\ and if the other 
counterparty to the transaction is a non-U.S. person (i) whose 
performance under the security-based swap is not guaranteed by a U.S. 
person and (ii) who is not a foreign security-based swap dealer.\1073\
---------------------------------------------------------------------------

    \1071\ Under proposed Rule 3Ch-1(c) under the Exchange Act, the 
term ``foreign branch'' would have the same meaning as set forth in 
proposed Rule 3a71-3(a)(1) under the Exchange Act. See discussion in 
Section III.B.7, supra. A security-based swap transaction conducted 
through a foreign branch, as defined in proposed Rule 3a71-3(a)(4) 
under the Exchange Act, would be specifically excluded from the 
proposed definition of ``transaction conducted within the United 
States.'' See proposed Rule 3a71-3(5)(ii) under the Exchange Act, as 
discussed in Section III.B.6, supra.
    \1072\ A security-based swap transaction involving a non-U.S. 
person whose performance under the security-based swap is guaranteed 
by a U.S. person would not be a ``transaction conducted within the 
United States'' by virtue of the guarantee alone because providing a 
guarantee on a transaction is not one of the factors that would 
cause a transaction to be a transaction conducted within the United 
States under proposed Rule 3a71-3(a)(5) under the Exchange Act. We 
would consider such transaction to be engaged in within the United 
States, however, by virtue of the guarantee from the U.S. person, 
who acts as an ``indirect counterparty'' to the transaction.
    \1073\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act. 
Proposed Rule 3Ch-1(c) under the Exchange Act defines the term 
``foreign security-based swap dealer'' by cross-reference to the 
definition of that term in proposed Rule 3a71-3(a)(3) of the 
Exchange Act (defining ``foreign security-based swap dealer'' to 
mean ``a security-based swap dealer, as defined in section 3(a)(71) 
of the [Exchange] Act (15 U.S.C. 78c(a)(71)), and the rules and 
regulations thereunder, that is not a U.S. person'').
---------------------------------------------------------------------------

     If the security-based swap transaction is a ``transaction 
conducted within the United States,'' the proposed rule would not apply 
the mandatory trade execution requirement if (i) neither counterparty 
to the transaction

[[Page 31083]]

is a U.S. person; (ii) neither counterparty's performance under the 
security-based swap is guaranteed by a U.S. person; and (iii) neither 
counterparty to the transaction is a foreign security-based swap 
dealer.\1074\
---------------------------------------------------------------------------

    \1074\ Proposed Rule 3Ch-1(b)(2) under the Exchange Act.
---------------------------------------------------------------------------

We discuss below the proposed rule regarding the application of the 
mandatory trade execution requirement in more detail.
3. Discussion
    In considering how to apply the mandatory trade execution 
requirement, we have relied primarily on the express statutory 
relationship between the mandatory clearing requirement and the 
mandatory trade execution requirement. The statutory text, in our view, 
indicates that Congress viewed the clearing and trade execution 
requirements as complementary, since a security-based swap transaction 
that is subject to the mandatory clearing requirement is subject to the 
mandatory trade execution requirement, absent circumstances that 
trigger one of the exceptions to the mandatory trade execution 
requirement. In the following, we discuss the proposed rule regarding 
the application of the mandatory trade execution requirement in more 
detail.
(a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S. 
Persons Receiving Guarantees From U.S. Persons
i. Proposed Rule
    The proposed rule would apply the mandatory trade execution 
requirement to transactions in which one of the counterparties is (i) a 
U.S. person or (ii) a non-U.S. person whose performance under the 
security-based swap is guaranteed by a U.S. person,\1075\ subject to 
certain exceptions.\1076\ We preliminarily believe that applying the 
mandatory trade execution requirement to transactions in which U.S. 
persons are counterparties or provide guarantees of the performance of 
non-U.S. persons under a security-based swap would be consistent with 
the purposes of the Dodd-Frank Act to improve transparency in the U.S. 
financial system.\1077\ As noted above, the mandatory trade execution 
requirement in Title VII is critical to this goal because this 
requirement is designed promote the trading of security-based swap 
transactions on transparent, regulated markets.\1078\ Therefore, by 
applying the mandatory trade execution requirement to transactions in 
which U.S. persons are counterparties or provide guarantees of the 
performance of non-U.S. persons under a security-based swap, the 
proposed rule would further the goals of the Dodd-Frank Act to improve 
the transparency of the U.S. financial system.\1079\
---------------------------------------------------------------------------

    \1075\ Proposed Rules 3Ch-1(a)(1)(i) and (ii) under the Exchange 
Act.
    \1076\ Proposed Rule 3Ch-1(b) under the Exchange Act. See also 
note 1053, supra.
    \1077\ See Section II.B.2(d), supra (discussing guarantees in 
the cross-border context).
    \1078\ See note 1054, supra.
    \1079\ We preliminarily believe that the proposed approach with 
respect to the mandatory trade execution requirements is not being 
applied to persons who are ``transact[ing] a business in security-
based swaps without the jurisdiction of the United States,'' within 
the meaning of Section 30(c). See Section II.B.2(b), supra. However, 
the Commission also preliminarily believes that the proposed 
approach with respect to the mandatory trade execution requirements 
is necessary or appropriate to help prevent the evasion of the 
particular provisions of the Exchange Act that were added by the 
Dodd-Frank Act that are being implemented by the approach and 
prophylactically will help ensure that the purposes of those 
provisions of the Dodd-Frank Act are not undermined. See Section 
II.B.2(e), supra; see also Section II.B.2(d), supra.
    For example, if the mandatory trade execution requirement does 
not apply to a transaction among non-U.S. persons that receive 
guarantees from U.S. persons and foreign branches of U.S. banks, 
then U.S. persons would have an incentive to evade the mandatory 
trade execution requirement by conducting transactions with other 
U.S. persons through guaranteed foreign affiliates or foreign 
branches. Altering the form of the transaction in this manner would 
allow U.S. persons to continue to avail themselves of transparency 
in the U.S. security-based swap market while evading the 
requirements intended to enhance that transparency, even though the 
substance of the transaction remains unchanged. See note 1054 and 
accompanying text, supra.
---------------------------------------------------------------------------

ii. Proposed Exception for Certain Transactions Involving Foreign 
Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    Consistent with the Commission's proposed approach to the mandatory 
clearing requirement discussed above,\1080\ the Commission is proposing 
an exception from the mandatory trade execution requirement described 
above for certain transactions that involve foreign branches of U.S. 
banks or guaranteed non-U.S. persons, provided the transactions are not 
conducted within the United States. Specifically, under proposed Rule 
3Ch-1(b)(1), the mandatory trade execution requirement would not apply 
to a security-based swap transaction if one counterparty to the 
transaction is (i) a foreign branch of a U.S. bank \1081\ or (ii) a 
non-U.S. person whose performance under the security-based swap is 
guaranteed by a U.S. person and if the other counterparty to the 
transaction is a non-U.S. person (i) whose performance under the 
security-based swap is not guaranteed by a U.S. person and (ii) who is 
not a foreign security-based swap dealer.\1082\ Such exception would 
not apply if the security-based swap transaction were a transaction 
conducted within the United States, as defined in proposed Rule 3a71-
3(a)(5) under the Exchange Act.\1083\
---------------------------------------------------------------------------

    \1080\ See Section IX, supra.
    \1081\ See note 1071, supra.
    \1082\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act. See 
also note 1073, supra.
    \1083\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act.
---------------------------------------------------------------------------

    The Commission preliminarily believes that imposing the mandatory 
trade execution requirement on all security-based swap transactions in 
which a U.S. person is a counterparty or in which a U.S. person 
provides a guarantee to a non-U.S. person counterparty may adversely 
affect the ability of U.S. persons to access foreign security-based 
swap markets because non-U.S. persons may be less willing to enter into 
transactions with them if such transactions are subject to the 
mandatory trade execution requirement. Accordingly, we are proposing an 
exception from the mandatory trade execution requirement for 
transactions in which a counterparty to the transaction is a foreign 
branch of a U.S. bank or a non-U.S. person who receives a guarantee 
from a U.S. person on its performance under the security-based swap and 
the other counterparty is a non-U.S. person whose performance under the 
security-based swap is not guaranteed by a U.S. person and who is not a 
foreign security-based swap dealer.\1084\
---------------------------------------------------------------------------

    \1084\ Id.
---------------------------------------------------------------------------

    We recognize that imposing the mandatory trade execution 
requirement on a foreign branch of a U.S. bank or on a non-U.S. person 
whose performance under a security-based swap is guaranteed by a U.S. 
person would be consistent with the view that a foreign branch of a 
U.S. bank is part of a U.S. person \1085\ and that a U.S. guarantor is 
an indirect counterparty \1086\ to the transaction entered into by the 
guaranteed non-U.S. person. We also recognize that subjecting such 
transactions to the mandatory trade execution requirement could help to 
bring the trading of security-based swaps onto transparent, regulated 
markets, from more opaque OTC market. At the same time, however, 
imposing the mandatory trade execution requirement on U.S. persons that 
conduct their foreign security-based swap dealing activity through 
foreign branches or guaranteed non-U.S. persons, without any 
exceptions, could put such U.S. persons at a significant

[[Page 31084]]

competitive disadvantage to non-U.S. persons who conduct security-based 
swap business in the same foreign local market and thereby limit the 
access of such U.S. persons to foreign security-based swap markets. 
After balancing the various policy considerations, including the Dodd-
Frank Act's goal of promoting trading on transparent, regulated 
markets, we have preliminarily concluded that the proposed exception 
from the mandatory trade execution requirement for transactions by U.S. 
persons conducting security-based swap activity out of foreign 
branches, or transactions by guaranteed non-U.S. persons, with non-U.S. 
persons whose performance under the security-based swap is not 
guaranteed by a U.S. person (and who is not a foreign security-based 
swap dealer) is appropriate, provided that it is not a transaction 
conducted within the United States.
---------------------------------------------------------------------------

    \1085\ See Section III.B.5, supra.
    \1086\ See note 1012, supra.
---------------------------------------------------------------------------

    This exception from the mandatory trade execution requirement would 
not apply under the proposed rule, however, when the non-U.S. person 
counterparty of the foreign branch of the U.S. bank or the guaranteed 
non-U.S. person is a foreign security-based swap dealer.\1087\ The 
reason for this proposed carve-out from the exception from the 
mandatory trade execution requirement is similar to the reason 
discussed above in the context of the mandatory clearing requirement. 
Because a foreign security-based swap dealer would necessarily have a 
significant connection with the U.S. security-based swap market because 
its dealing activity with U.S. persons or within the United States 
would trigger registration requirements, we preliminarily believe it is 
not appropriate to provide an exception for U.S. persons conducting 
security-based swap activity out of foreign branches or for guaranteed 
non-U.S. persons when they enter into security-based swaps with foreign 
security-based swap dealers.
---------------------------------------------------------------------------

    \1087\ Proposed Rule 3Ch-1(b)(1)(ii)(B) under the Exchange Act.
---------------------------------------------------------------------------

(b) Transactions Conducted Within the United States
i. Proposed Rule
    Under the proposed rule, a security-based swap transaction that is 
a transaction conducted within the United States, as defined in 
proposed Rule 3a71-3(a)(5) under the Exchange Act, would be subject to 
the mandatory trade execution requirement.\1088\ As we have noted 
above, a ``transaction conducted within the United States,'' as defined 
in proposed Rule 3a71-3(a)(5), includes soliciting, negotiating, 
executing, or booking a security-based swap transaction.\1089\ The 
Commission believes that applying the mandatory trade execution 
requirement to a security-based swap transaction when the activities 
that are key stages in that transaction are conducted within the United 
States furthers a goal of the mandatory trade execution requirement, 
namely, to bring the trading of security-based swaps within the United 
States onto regulated markets, unless an exception applies. 
Furthermore, such an approach is consistent with our proposed approach 
to the mandatory clearing requirement discussed above.\1090\
---------------------------------------------------------------------------

    \1088\ Proposed Rule 3Ch-1(a)(2) under the Exchange Act.
    \1089\ See Section III.B.6, supra.
    \1090\ As discussed above, the statutory language for the 
mandatory clearing requirements apply to any person that ``engages 
in a security-based swap,'' which the Commission proposes to 
interpret to include any transaction in which a person performs any 
of the activities that are key stages in a security-based swap 
transaction (i.e., solicitation, negotiation, execution, or booking 
of the transaction). See Section IX.C, supra; see also Section 
3C(a)(1) of the Exchange Act.
---------------------------------------------------------------------------

ii. Proposed Exception for Transactions Conducted Within the United 
States by Certain Non-U.S. Persons
    We recognize that one commenter has recommended that transactions 
between two non-U.S. persons that utilize U.S. agents should not be 
subject to the mandatory trade execution requirement.\1091\ The 
commenter noted that it is common for non-U.S. persons to utilize U.S. 
agents because of their expertise in the relevant market (such as in 
the case of a swap with an underlying U.S. security) or because of 
logistical matters (such as the time zones in which the parties conduct 
business).\1092\ The commenter argued that applying the mandatory trade 
execution requirement to these transactions could curtail the use of 
U.S. agents to negotiate trades and encourage personnel in the United 
States to relocate elsewhere.\1093\
---------------------------------------------------------------------------

    \1091\ See Cleary Letter IV at 27-28.
    \1092\ See id.
    \1093\ See id.
---------------------------------------------------------------------------

    Consistent with our proposed approach to applying the mandatory 
clearing requirement to transactions conducted within the United States 
by non-U.S. persons, the Commission is proposing an exception from the 
mandatory trade execution requirement for security-based swap 
transactions that are transactions conducted within the United States 
when no counterparty to the transaction is (i) a U.S. person; (ii) a 
non-U.S. person whose performance under the security-based swap is 
guaranteed by a U.S. person; or (iii) a foreign security-based swap 
dealer.\1094\
---------------------------------------------------------------------------

    \1094\ Proposed Rule 3Ch-1(b)(2).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to 
limit the exception from the mandatory trade execution requirement when 
one or both of the non-U.S. person counterparties is a foreign 
security-based swap dealer. Non-U.S. persons whose transactions arising 
from dealing activity with U.S. persons or otherwise conducted within 
the United States exceed the de minimis threshold in the security-based 
swap dealer definition have a sufficient connection to the U.S. 
security-based swap market to lead the Commission to preliminarily 
conclude that it would not be appropriate to except transactions 
involving them from the mandatory trade execution requirement when they 
conduct security-based swap transactions within the United States. 
Permitting non-U.S. persons to engage in security-based swap 
transactions within the United States with foreign security-based swap 
dealers without being subject to the mandatory trade execution 
requirement would potentially limit the access of U.S. persons to 
foreign security-based swap markets because non-U.S. persons seeking to 
engage in security-based swaps within the United States may prefer to 
engage in security-based swaps with foreign security-based swap dealers 
rather than U.S. persons to avoid the mandatory trade execution 
requirement.
Request for Comment
    The Commission seeks comment on all aspects of proposed Rule 3Ch-1, 
including the following:
     Should the mandatory trade execution requirement apply to 
all transactions conducted by a U.S. person, including transactions 
conducted out of a foreign branch of a U.S. bank or a non-U.S. person 
whose performance under a security-based swap is guaranteed by a U.S. 
person? Why or why not?
     Is it appropriate for the application of the mandatory 
trade execution requirement in the cross-border context to follow our 
approach to the mandatory clearing requirement? If not, why not? What 
alternative approach would better suit the relationship between these 
two requirements under the statute? Please explain.
     Is the proposed rule appropriate and sufficiently clear? 
Should additional details be included as to any aspect of the proposed 
rule? If so, what additional details should be provided and why?

[[Page 31085]]

     As discussed above, under proposed Rule 3Ch-1(a), the 
mandatory trade execution requirement would apply to a person that 
engages in a security-based swap transaction if such person is a U.S. 
person, such person is a non-U.S. person whose performance under such 
security-based swap transaction is guaranteed by a U.S. person, or such 
security-based swap transaction is a transaction conducted within the 
United States. Are the circumstances in which the Commission proposes 
to apply the mandatory trade execution requirement sufficiently clear? 
If not, why not? Are these the appropriate circumstances in which to 
apply the mandatory trade execution requirement? If not, why not? Are 
there additional types of counterparties or security-based swap 
transactions to which the mandatory trade execution requirement should 
be applied? If so, who or what are they, and why? Are there types of 
counterparties or security-based swap transactions that should not be 
covered by the proposed rule? If so, why not?
     Would the proposed rule apply the mandatory trade 
execution requirement in ways that appropriately promote the goals of 
Title VII? Would any objectives of Title VII be hindered by applying 
the mandatory trade execution requirement as proposed? Would there be 
any regulatory gaps created by the proposed rule? Please provide 
detail.
     By requiring transactions conducted within the United 
States to be subject to the mandatory trade execution requirement, 
would the proposed rule appropriately create competitive parity between 
U.S. and non-U.S. persons that act as intermediaries within the United 
States to conduct transactions in security-based swaps? Why or why not? 
Please explain. Please provide specific recommendations and explain how 
any recommended approach would better promote competition than the 
proposed rule. More generally, should security-based swap transactions 
be subject to the mandatory trade execution requirement solely because 
a transaction was solicited or negotiated within the United States?
     Under proposed Rule 3Ch-1(b), certain security-based swap 
transactions by foreign branches and guaranteed non-U.S. persons that 
are not conducted within the United States would be excluded from the 
mandatory trade execution requirement. The Commission generally 
solicits comments on the appropriateness of excluding the security-
based swap transactions described in proposed Rule 3Ch-1(b) from the 
application of the mandatory trade execution requirement. Should 
additional types of transactions be excluded from the application of 
the mandatory trade execution requirement? Should some or all of the 
transactions covered by proposed Rule 3Ch-1(b) not be excluded? If so, 
in either case, please explain why. Does proposed Rule 3Ch-1(b) 
appropriately balance the competitiveness of U.S. persons in the global 
security-based swaps market and the goals of Title VII? If not, how 
could this balance be better achieved? Should proposed Rule 3Ch-1(b) 
also apply to non-U.S. persons that are security-based swap dealers? 
Why or why not?
     What would be the market impact of proposed Rule 3Ch-1? 
How would the proposed application of the mandatory trade execution 
requirement affect the competitiveness of U.S. entities in the global 
marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed rule place any market participants 
at a competitive disadvantage or advantage? If so, please explain. 
Would the proposed rule be a more general burden on competition? If so, 
please explain. Would any burdens on competition be effectively 
mitigated by the proposed exception to mandatory trade execution in 
proposed Rule 3Ch-1(b)? Please explain. What other measures should the 
Commission consider to implement the mandatory trade execution 
requirement? What would be the market impacts and competitiveness 
effects of alternatives to the proposed approach discussed in this 
release?

XI. Substituted Compliance

A. Introduction

    As noted above, we are proposing to establish a policy and 
procedural framework pursuant to rules under the Exchange Act in which 
the Commission would consider permitting compliance with comparable 
regulatory requirements in a foreign jurisdiction to substitute for 
compliance with requirements in the Exchange Act, and rules and 
regulations thereunder, relating to security-based swaps (i.e., 
substituted compliance). As proposed, under a Commission substituted 
compliance determination, a person would be able to satisfy relevant 
requirements in the Exchange Act, and the rules and regulations 
thereunder, by substituting compliance with corresponding requirements 
under a foreign regulatory system. A person relying on a substituted 
compliance determination still would be subject to the particular 
Exchange Act requirement that is the subject of the substituted 
compliance determination, but would be permitted to comply with such 
requirement in an alternative fashion. Failure of a person to comply 
with the applicable foreign regulatory requirements would mean that 
such person would be in violation of the requirements in the Exchange 
Act.
    The Commission is proposing to consider making substituted 
compliance determinations with respect to four distinct categories of 
requirements, each of which raises separate issues and will be 
discussed separately below. These categories are as follows: (i) 
Requirements applicable to registered security-based swap dealers in 
Section 15F of the Exchange Act and the rules and regulations 
thereunder; (ii) requirements relating to regulatory reporting and 
public dissemination of information on security-based swaps; (iii) 
requirements relating to clearing for security-based swaps; and (iv) 
requirements relating to trade execution for security-based swaps.
    With respect to each of these categories of requirements, the 
Commission is proposing a ``comparability'' standard as the basis for 
making a substituted compliance determination. Generally, the 
Commission would endeavor to take a holistic approach in making 
substituted compliance determinations--that is, we would ultimately 
focus on regulatory outcomes as a whole with respect to the 
requirements within the same category rather than a rule-by-rule 
comparison. As noted above,\1095\ efforts to regulate the derivatives 
market are underway, not only in the United States, but also in other 
jurisdictions. Since their 2009 statement, the G20 leaders have 
reiterated their commitment to OTC derivatives regulatory reform. And, 
as described above,\1096\ the Commission has participated in numerous 
bilateral and multilateral discussions with foreign regulatory 
authorities addressing the regulation of OTC derivatives and foreign 
regulatory reform efforts. We recognize that foreign regulatory systems 
differ in their approaches to achieving particular regulatory outcomes, 
and that foreign regulatory requirements may differ from those 
ultimately adopted by the Commission, but may nonetheless achieve 
regulatory outcomes comparable with the regulatory outcomes of the 
relevant provisions of the Exchange Act added by Title VII of the Dodd-
Frank Act. In addition, we recognize that different regulatory systems 
may be able to achieve some or all of those regulatory outcomes by 
using more--or fewer--specific requirements than the

[[Page 31086]]

Commission. For example, under certain circumstances, a foreign 
regulatory system may be able to achieve one of those regulatory 
outcomes in the absence of one or more specific requirements that the 
Commission has implemented under a particular set of provisions of the 
Dodd-Frank Act.
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    \1095\ See Section I.C., supra.
    \1096\ Id.
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    Accordingly, we do not envision that the Commission, in making a 
comparability determination, would look to whether a foreign 
jurisdiction has implemented specific rules and regulations that are 
comparable to rules and regulations adopted by the Commission. Rather, 
the Commission would determine whether the foreign regulatory system in 
a particular area, taking into consideration any relevant principles, 
regulations, or rules in other areas of the foreign regulatory system 
to the extent they are relevant to the analysis, achieves regulatory 
outcomes that are comparable to the regulatory outcomes of the relevant 
provisions of the Exchange Act. If it does, the Commission 
preliminarily believes that a comparability determination would be 
appropriate, notwithstanding differences in or the absence of specific 
requirements of particular regulatory provisions.
    In addition, the Commission recognizes that other regulatory 
systems are informed by the business and market practices present in 
the foreign jurisdictions where those systems apply, and that such 
practices may differ in certain respects from practices described in 
this release. More broadly, other regulatory systems are informed by 
the characteristics of the markets for which they were designed, 
including the number and nature of their market participants to which 
they apply. In making a comparability determination, the Commission 
recognizes that it may need to take into account such practices and 
characteristics in understanding the design and application of another 
regulatory system and whether and how it may achieve regulatory 
outcomes comparable to the regulatory outcomes of the relevant 
provisions of the Exchange Act.
    As explained below, how the Commission would find a foreign 
regulatory system ``comparable'' would vary depending on the category 
of requirements. Because the Commission is proposing to make 
substituted compliance determinations with respect to each of the 
aforementioned categories of requirements, it is possible that a 
foreign regulatory system would be comparable with respect to some, but 
not all, categories of requirements. For instance, a foreign regulatory 
system may impose requirements on non-U.S. dealers that achieve 
regulatory outcomes comparable to the requirements applicable to 
registered security-based swap dealers in Section 15F of the Exchange 
Act, but the same foreign regulatory system may not achieve comparable 
regulatory outcomes regarding public reporting of trade information for 
security-based swaps. Similarly, a foreign regulatory system may impose 
requirements on clearing agencies that achieve regulatory outcomes 
comparable to the requirements applicable to registered security-based 
swap clearing agencies under Section 17A of the Exchange Act, but may 
not provide for comparable regulation of SB SEFs. By assessing each of 
these categories separately, the Commission would have the flexibility 
to make a substituted compliance determination with respect to one 
category of requirements but not another. However, the Commission would 
also retain the flexibility to consider the extent to which principles, 
regulations, or rules in one category may bear on a determination with 
respect to another category. Such an approach also would allow 
substituted compliance in certain categories to address competition and 
market efficiency concerns when a foreign regime is not comparable 
across the full range of Title VII policy objectives.
    In addition, as described below, in making substituted compliance 
determinations, the Commission would consider a variety of factors that 
the Commission deems appropriate, including the nature of the global 
security-based swap market and the scope and objectives of the relevant 
foreign regulatory requirements. As part of this holistic review, the 
Commission would consider the various ways in which a foreign 
regulatory system achieves its overall goals and purposes, including 
those undertaken in response to the G20 commitments. As noted above, 
the Commission would also consider the extent to which applicable 
principles, regulations, or rules in one category may bear on a 
determination with respect to another category. In addition, the 
Commission recognizes that our proposed application of Title VII to 
cross-border activities may affect the policy decisions of these other 
regulators as they seek to address potential conflicts or duplication 
in the regulatory requirements that apply to market participants under 
their authority.
    More specifically, the proposed policy and procedural framework for 
substituted compliance recognizes the potential, in a market as global 
as the security-based swap market, for market participants who engage 
in cross-border security-based swap activity to be subject to 
conflicting or duplicative compliance obligations. As a result of the 
efforts to implement the G20 commitments in various jurisdictions 
described above, in some cases of cross-border activity, market 
participants may be subject to compliance obligations in a foreign 
jurisdiction that are similar to those imposed by the Exchange Act. The 
proposed framework would allow the Commission to provide for 
substituted compliance to address the effect of conflicting or 
duplicative regulations on competition and market efficiency and to 
facilitate a well-functioning global security-based swap market. In 
other cases, however, market participants may not be subject to 
conflicting or duplicative regulation because the foreign jurisdiction 
has not enacted comprehensive regulation of the security-based swap 
markets or is still in the process of implementing regulatory reforms 
that have been enacted. It also may be that the foreign jurisdiction's 
regulation does not apply to the market participant or entity or the 
foreign jurisdiction has established regulations that differ, in 
material respects, from requirements in the Exchange Act (e.g., 
requirements relating to real-time public reporting) and do not achieve 
comparable regulatory outcomes. In such cases, there would be less 
justification for allowing substituted compliance.
    One alternative to making substituted compliance determinations by 
looking at separate categories of requirements would be to provide 
substituted compliance across the entire set of security-based swap 
requirements with respect to regimes that have implemented regulations 
consistent with the overall objectives of the G20 commitments. 
Preliminarily, however, we believe that making substituted compliance 
determinations on a regime-wide basis would be unworkable in light of 
the Commission's responsibility to implement the specific statutory 
provisions of the Exchange Act added by Title VII of the Dodd-Frank 
Act. While these provisions of the Exchange Act are consistent with the 
G20 commitments, they also contain provisions designed to achieve 
particular regulatory outcomes that may not be part of another 
jurisdiction's regulatory system. Thus, while the Commission would 
certainly consider the broader regulatory landscape in a foreign 
jurisdiction--including its approach to the G20 commitments--before 
making a substituted compliance

[[Page 31087]]

determination, the Commission would also need to consider the 
particular regulatory outcomes achieved under the Exchange Act 
provisions added by Title VII of the Dodd-Frank Act.
    In the following, we propose rules and interpretive guidance 
addressing the policy and procedural framework under which we would 
consider permitting compliance with comparable regulatory requirements 
in a foreign jurisdiction to substitute for compliance with 
requirements of the Exchange Act, and the rules and regulations 
thereunder, relating to security-based swaps, with respect to each of 
the aforementioned categories of requirements.
Request for Comment
    The Commission requests comment on all aspects of our general 
approach to substituted compliance, including the following questions:
     Should the Commission make substituted compliance 
determinations on a regime-wide basis for a jurisdiction rather than 
with respect to categories of requirements? If so, should the finding 
that the regulatory outcomes of a foreign regulatory system are not 
comparable with respect to the regulatory outcomes of one category of 
the Exchange Act requirements cause the Commission to find the entire 
foreign regulatory regime to be not comparable as a whole? More 
specifically, under a regime-wide approach, how should the Commission 
make substituted compliance determinations with respect to foreign 
regulatory systems that do not achieve regulatory outcomes comparable 
to the regulatory outcomes with respect to certain categories of the 
Exchange Act requirements, taking into account the Commission's 
responsibility and statutory authority to implement the requirements of 
the Exchange Act added by Title VII of the Dodd-Frank Act?
     Should the Commission take into consideration the various 
ways in which a foreign regulatory system achieves its overall goals 
and purposes that are consistent with the G20 commitments in making a 
substituted compliance determination with respect a category of the 
Exchange Act requirements added by Title VII of the Dodd-Frank Act? Why 
or why not?
     Should the Commission take a more granular approach to 
substituted compliance determinations, for example, conducting a rule-
by-rule or requirement-by-requirement comparison? Why or why not?
     Should the Commission identify more or less categories in 
our framework for substituted compliance? If so, how should those 
categories be demarcated?

B. Process for Making Substituted Compliance Requests

    The Commission is proposing to amend our Rules of General 
Application to establish procedures pursuant to which it would consider 
applications for substituted compliance determinations with respect to 
each of the aforementioned categories of requirements.\1097\ These 
procedures are similar to those now used by the Commission in 
considering exemptive order applications under Section 36 of the 
Exchange Act.\1098\ All supporting documentation submitted pursuant to 
the proposed amendment would be made public.
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    \1097\ Proposed Rule 0-13 under the Exchange Act.
    \1098\ See 17 CFR 240.0-12. Cf. 17 CFR 30.10 (Petitions for 
Exemptions), including Appendices A and C (CFTC's procedures for 
application by foreign persons with respect to foreign futures and 
foreign options transactions).
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    Specifically, the proposed amendment would add new Rule 0-13 under 
the Exchange Act setting forth the general procedures for submission of 
requests for substituted compliance determinations. These procedures 
include the requirement that all applications for substituted 
compliance determinations must be in writing in the form of a letter, 
must include any supporting documents necessary to make the application 
complete, and otherwise must comply with 17 CFR 240.0-3 (Filing of 
Material with the Commission).\1099\ All applications must be submitted 
to the Office of the Secretary of the Commission, and may be submitted 
either electronically \1100\ or in paper format.\1101\ In addition, all 
filings and supporting documentation filed pursuant to this proposed 
rule must be in the English language.\1102\ If an application is 
incomplete, the Commission may request that the application be 
withdrawn unless the applicant can justify, based on all the facts and 
circumstances, why supporting materials have not been submitted and 
undertakes to submit promptly the omitted materials.\1103\
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    \1099\ Proposed Rule 0-13(a) under the Exchange Act. In 17 CFR 
240.0-3, the Commission sets forth general procedures for filing 
materials with the Commission.
    \1100\ Proposed Rule 0-13(b) under the Exchange Act.
    \1101\ Proposed Rule 0-13(d) under the Exchange Act.
    \1102\ Proposed Rule 0-13(c) under the Exchange Act. If a filing 
or submission filed pursuant to this rule requires the inclusion of 
a document that is in a foreign language, a party must submit 
instead a fair and accurate English translation of the entire 
foreign language document. A party may submit a copy of the 
unabridged foreign language document when including an English 
translation of a foreign language document in a filing or submission 
filed pursuant to this rule. A party must provide a copy of any 
foreign language document upon the request of Commission staff. Id.
    \1103\ Proposed Rule 0-13(a) under the Exchange Act.
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    The Commission would not consider hypothetical or anonymous 
requests for a substituted compliance order.\1104\ Consistent with this 
position, every application (electronic or paper) must contain the 
name, address, telephone number, and email address of each applicant 
and the name, address, telephone number, and email address of a person 
to whom any questions regarding the application should be 
directed.\1105\ In addition, each applicant must provide the Commission 
with any supporting documentation it believes necessary for the 
Commission to make the requested substituted compliance determination, 
including information regarding applicable requirements established by 
the foreign financial regulatory authority or authorities, as well as 
the methods used by the foreign financial regulatory authority or 
authorities to monitor compliance with, and enforce, such 
requirements.\1106\ Applicants also should cite to and discuss 
applicable precedent related to a substituted compliance 
determination.\1107\ Any amendments to an application would be required 
to be prepared and submitted as set forth in the proposed procedures 
and marked to show what changes were made.\1108\
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    \1104\ Proposed Rule 0-13(e) under the Exchange Act.
    \1105\ Id.
    \1106\ Id.
    \1107\ Id.
    \1108\ Proposed Rule 0-13(f) under the Exchange Act.
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    Under the proposed rule, after the filing of an application for a 
substituted compliance determination is complete, Division of Trading 
and Markets staff would review the application and make a 
recommendation to the Commission.\1109\ After consideration of the 
recommendation by the Commission, the Commission's Office of the 
Secretary would issue an appropriate response and would notify the 
applicant.\1110\ As part of our review, the Commission may, in our sole 
discretion, schedule a hearing on the

[[Page 31088]]

matter addressed by the application.\1111\ The Commission also may, in 
our sole discretion, choose to publish in the Federal Register a notice 
that the application has been submitted which invites public comment on 
the application.\1112\ Requestors may, however, seek confidential 
treatment of their applications for substituted compliance 
determinations.\1113\
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    \1109\ As with other matters, the Division of Trading and 
Markets would work with the Office of General Counsel, the Division 
of Risk, Strategy, and Financial Innovation, the Office of 
International Affairs, the Office of Compliance Inspections and 
Examinations, and the Division of Enforcement, as well as other 
divisions and offices within the Commission, in reviewing and making 
a recommendation regarding substituted compliance determinations.
    \1110\ Proposed Rule 0-13(g) under the Exchange Act.
    \1111\ Proposed Rule 0-13(i) under the Exchange Act.
    \1112\ Proposed Rule 0-13(h) under the Exchange Act. The notice 
would provide that any person may, within the period specified 
therein, submit to the Commission any information that relates to 
the Commission action requested in the application. The notice also 
would indicate the earliest date on which the Commission would take 
final action on the application, but in no event would such action 
be taken earlier than 25 days following publication of the notice in 
the Federal Register. Id.
    \1113\ Proposed Rule 0-13(a) under the Exchange Act. Requests 
for confidential treatment would be permitted to the extent provided 
under 17 CFR 200.81. Id.
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    The Commission preliminarily believes that these proposed 
procedures would provide sufficient guidance regarding the process 
whereby persons may seek to make a request for a substituted compliance 
determination with respect to each of the categories of requirements, 
as described more fully below.
Request for Comment
    The Commission seeks comment on all aspects of the proposed rule, 
including the following:
     Do the proposed procedures give sufficient guidance to 
persons regarding the procedures for making a substituted compliance 
determination? If not, why not? What other procedures should the 
Commission adopt?
     Should the substituted compliance framework contemplate 
foreign regulatory authorities, rather than or in addition to market 
participants, submitting substituted compliance determination requests? 
Why or why not?

C. Security-Based Swap Dealer Requirements

1. Proposed Rule--Commission Substituted Compliance Determinations
    The Commission is proposing a rule that would establish a framework 
in which the Commission may make a substituted compliance determination 
permitting a foreign security-based swap dealer that is registered with 
the Commission to satisfy requirements in Section 15F of the Exchange 
Act, and the rules and regulations thereunder, by complying with the 
corresponding rules and regulations established in a foreign 
jurisdiction.\1114\ Specifically, the proposed rule would provide that 
the Commission may, conditionally or unconditionally, by order, make a 
substituted compliance determination with respect to a foreign 
financial regulatory system that compliance with specified requirements 
under such foreign financial regulatory system by a registered foreign 
security-based swap dealer (or class thereof) \1115\ may satisfy the 
corresponding requirements in Section 15F of the Exchange Act, and the 
rules and regulations thereunder, that would otherwise apply to such 
foreign security-based swap dealer (or class thereof).\1116\ The 
proposed framework would permit the Commission to make a substituted 
compliance determination only if we find that the requirements of such 
foreign financial regulatory system are comparable to otherwise 
applicable requirements, taking into account factors that the 
Commission determines appropriate, such as, for example, the scope and 
objectives of the relevant foreign regulatory requirements, as well as 
the effectiveness of the supervisory compliance program administered, 
and the enforcement authority exercised, by a foreign financial 
regulatory authority or authorities in such system to support its 
oversight of such foreign security-based swap dealer (or any class 
thereof).\1117\
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    \1114\ Proposed Rule 3a71-5 under the Exchange Act.
    \1115\ The Commission is proposing a framework under which it 
may consider making substituted compliance determinations applicable 
to bona fide foreign security-based swap dealers. This proposed 
approach would not extend to entities organized outside of the 
United States for the purpose of evading U.S. regulation. The 
Commission would consider a variety of factors to confirm the bona 
fide nature of a foreign security-based swap dealer for these 
purposes, including the location of management and risk controls 
related to such entity's security-based swap dealing activities and 
the nature of the counterparties.
    \1116\ Proposed Rule 3a71-5(a)(1) under the Exchange Act.
    \1117\ Proposed Rule 3a71-5(a)(2)(i) under the Exchange Act. In 
assessing oversight, the Commission would consider not only overall 
oversight activities, but also oversight specifically directed at 
conduct and activity that would be relevant to the substituted 
compliance determination. For example, it would be difficult for the 
Commission to make a comparability determination if oversight is 
directed solely at the local activities of foreign security-based 
swap dealers, as opposed to the cross-border activities of such 
dealers.
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    In making a substituted compliance determination, as noted above, 
the Commission's determination would focus on the similarities in 
regulatory objectives, rather than requiring that the foreign 
jurisdiction's rules be identical. Depending on our assessment of the 
comparability of the foreign regulatory regime, the Commission could 
condition the substituted compliance determination by limiting it to a 
particular class or classes of registrants in the foreign 
jurisdiction.\1118\ For instance, if the foreign jurisdiction imposes 
different levels of supervisory oversight with respect to classes of 
entities conducting security-based swap dealing activity, the 
Commission could limit a substituted compliance determination to permit 
only certain classes of supervised foreign security-based swap dealers 
to rely on a substituted compliance determination. The Commission would 
determine what conditions are appropriate on a case-by-case basis.
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    \1118\ Proposed Rule 3a71-5(a)(1) under the Exchange Act 
(permitting the Commission to make the substituted compliance 
determination ``conditionally or unconditionally'').
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    The proposed rule would require that, before making a substituted 
compliance determination, the Commission must have entered into a 
supervisory and enforcement MOU or other arrangement with the 
appropriate financial regulatory authority or authorities in that 
jurisdiction addressing oversight and supervision of applicable 
security-based swap dealers subject to the substituted compliance 
determination.\1119\ Through such MOU or other arrangement, the 
Commission and the foreign financial regulatory authority or 
authorities would express their commitment to cooperate with each other 
to fulfill their respective regulatory mandates.
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    \1119\ Proposed Rule 3a71-5(a)(2)(ii) under the Exchange Act. 
The Commission expects that any existing supervisory or enforcement 
MOU or other arrangement would need to be re-negotiated during the 
substituted compliance determination process to reflect the 
particulars of a determination.
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    Although we intend generally to take a category-by-category 
approach to substituted compliance, under the proposed rule, the 
Commission could make a substituted compliance determination with 
respect to one Title VII requirement applicable to registered security-
based swap dealers but not another.\1120\ However, consistent with our 
category-by-category approach, we believe that certain requirements are 
interrelated such that the Commission would expect to make a 
substituted compliance determination for the entire group of related 
requirements. For example, the core entity-level requirements relate to 
the regulation of an entity's capital and margin. But certain other 
entity-level requirements (such as risk management, general 
recordkeeping and reporting, and diligent supervision) are so

[[Page 31089]]

interconnected with capital and margin oversight that we would expect 
to make substituted compliance determinations, where warranted with 
regard to capital and margin rules, on the entire package of entity-
level regulations.
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    \1120\ Proposed Rule 3a71-5(a) under the Exchange Act.
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    The proposed rule also would permit the Commission, on our own 
initiative, to modify the terms of, or withdraw, a substituted 
compliance determination for a particular foreign jurisdiction, after 
appropriate notice and opportunity for comment.\1121\ For instance, due 
to changes in the foreign regulatory regime, or a failure of a foreign 
regulator to exercise its supervisory or enforcement authority in an 
effective manner, the Commission may determine to modify the terms of, 
or withdraw, a previous substituted compliance determination. The 
Commission also would have the ability to periodically review the 
substituted compliance determinations it has granted and decide whether 
the substituted compliance determination should continue to apply.
---------------------------------------------------------------------------

    \1121\ Proposed Rule 3a71-5(a)(4) under the Exchange Act.
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    In addition, the proposed rule would permit a foreign security-
based swap dealer to rely on an applicable substituted compliance 
determination by the Commission with regard to a particular 
jurisdiction to satisfy the specified requirements in Section 15F of 
the Exchange Act, and the rules and regulations thereunder, as 
applicable, by complying with the corresponding requirements 
established in the foreign jurisdiction.\1122\ The proposed rule would 
require a foreign security-based swap dealer relying on a substituted 
compliance determination to satisfy the conditions of the Commission's 
substituted compliance determination.\1123\
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    \1122\ Proposed Rule 3a71-5(b) under the Exchange Act.
    \1123\ Proposed Rule 3a71-5(b)(2) under the Exchange Act.
---------------------------------------------------------------------------

    Finally, the proposed rule would address the situation in which a 
foreign security-based swap dealer seeks to rely on the rules and 
regulations of a foreign jurisdiction to satisfy Commission 
requirements but the Commission has not previously made a substituted 
compliance determination with respect to that jurisdiction. In such a 
case, the proposed rule would permit the foreign security-based swap 
dealer, or a group of foreign security-based swap dealers, to request 
pursuant to the procedures set forth in proposed Rule 0-13 under the 
Exchange Act, that the Commission make a substituted compliance 
determination for the foreign jurisdiction with respect to specified 
requirements in Section 15F of the Exchange Act.\1124\ The proposed 
rule would require that the foreign security-based swap dealer (or 
foreign security-based swap dealers) be directly supervised by one or 
more financial regulatory authorities in that jurisdiction with respect 
to requirements similar to those in Section 15F of the Exchange Act, 
and the rules and regulations thereunder,\1125\ and provide the 
certification and opinion of counsel as described in proposed Rule 
15Fb2-4(c) under the Exchange Act.\1126\
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    \1124\ Proposed Rule 3a71-5(c)(1) under the Exchange Act.
    \1125\ Proposed Rule 3a71-5(c)(2)(i) under the Exchange Act.
    \1126\ Proposed Rule 3a71-5(c)(2)(ii) under the Exchange Act. 
Proposed Rule 15Fb2-4 under the Exchange Act, as discussed in the 
Registration Proposing Release, 76 FR 65799-801, would require that 
a nonresident security-based swap dealer provide the Commission with 
an opinion of counsel concurring that the firm can, as a matter of 
law, provide the Commission with prompt access to its books and 
records and can, as a matter of law, submit to onsite inspection and 
examination by the Commission. See Section III.C.3(b)ix, supra. The 
Commission preliminarily believes that, before a foreign security-
based swap dealer should be permitted to make a substituted 
compliance request, it should assure the Commission that it can 
provide the Commission with prompt access to books and records and 
submit to onsite inspection and examination because we expect that 
access to books and records and the ability to inspect and examine a 
foreign security-based swap dealer will be essential conditions of 
any substituted compliance determination.
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    Although the request for a substituted compliance determination 
could come from a particular foreign security-based swap dealer or 
group of dealers, the Commission would make such a determination, under 
the proposed rule, on a class or jurisdiction basis, depending on the 
regulator(s) and the foreign regulatory regime (rather than on a firm-
by-firm basis).\1127\ As a result, once the Commission has made a 
substituted compliance determination with respect to a particular 
foreign jurisdiction, it would apply to every foreign security-based 
swap dealer in the specified class or classes registered and regulated 
in that jurisdiction, subject to the conditions specified in the 
Commission's substituted compliance order.
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    \1127\ Proposed Rule 3a71-5(a) under the Exchange Act. Because, 
under the proposed approach, all requests for substituted compliance 
determinations must come directly from a foreign security-based swap 
dealer, foreign financial regulatory authorities may not themselves 
request such a determination.
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    The proposed rule would not provide for substituted compliance with 
respect to registration requirements described in Sections 15F(a)-(d) 
of the Exchange Act and the rules and regulations thereunder.\1128\ As 
an initial matter, the registration process serves two important notice 
functions for the Commission. First, it is through the submission of a 
registration application that security-based swap dealers notify the 
Commission that they are engaged in dealing activity in excess of the 
de minimis threshold. Second, the registration application process is 
how foreign security-based swap dealers notify the Commission that they 
intend to seek or to rely on an existing substituted compliance 
determination.\1129\ In addition to these key notice functions, the 
registration process provides the Commission with information that is 
essential to the Commission's ability to provide effective oversight of 
foreign security-based swap dealers, particularly for those relying on 
substituted compliance determinations to satisfy their obligations 
under Section 15F requirements.\1130\ As a result, we are not proposing 
to allow substituted compliance for the registration requirements in 
Section 15F of the Exchange Act.
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    \1128\ Proposed Rule 3a71-5(a)(3) under the Exchange Act.
    \1129\ See Section III.E, supra (discussing the process by which 
foreign security-based swap dealers would be required to notify the 
Commission of their reliance on substituted compliance 
determinations).
    \1130\ As part of the registration process, nonresident 
security-based swap dealers must (i) appoint an agent for service of 
process in the United States, (ii) furnish the Commission with the 
identity and address of its agent for services of process, (iii) 
certify that the firm can, as a matter of law, provide the 
Commission with prompt access to its books and records and can, as a 
matter of law, submit to onsite inspection and examination by the 
Commission, and (iv) provide the Commission with an opinion of 
counsel concurring that the firm can, as a matter of law, provide 
the Commission with prompt access to its books and records and can, 
as a matter of law, submit to onsite inspection and examination by 
the Commission. See proposed Rule 15Fb2-4 under the Exchange Act, as 
discussed in the Registration Proposing Release, 77 FR 65799-801
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2. Discussion
    The goal of the proposed rule is to increase the efficiency of the 
security-based swap market and promote competition by helping to avoid 
subjecting foreign security-based swap dealers to potentially 
conflicting or duplicative compliance obligations, while still 
achieving the policy objectives of Title VII of the Dodd-Frank Act. The 
Commission preliminarily believes that the proposed rule, by requiring 
that a substituted compliance determination be made on a class or 
jurisdictional basis and that a foreign jurisdiction's requirements be 
comparable to otherwise applicable U.S. requirements, is consistent 
with this goal.

[[Page 31090]]

    In addition, the Commission preliminarily believes that such an 
approach is consistent with the global nature of the security-based 
swap market and may be less disruptive of entity business arrangements 
than not permitting substituted compliance. At the same time, the 
Commission recognizes that U.S. security-based swap dealers may be put 
at a competitive disadvantage with their foreign counterparts if they 
are subject to, for example, more stringent capital or margin 
requirements than foreign security-based swap dealers. For instance, 
all other things being equal, a foreign security-based swap dealer that 
is subject to lower capital requirements would be able to enter into a 
security-based swap with a customer at a more competitive price than a 
U.S. security-based swap dealer that is subject to a higher capital 
requirement. Of course, more stringent capital or margin requirements 
could equally be viewed as a source of competitive advantage, with 
counterparties having greater confidence in the financial stability of 
U.S. counterparties.
    One alternative to the proposed approach would be to impose uniform 
compliance on all registered security-based swap dealers rather than 
permitting substituted compliance for registered foreign security-based 
swap dealers. If the Commission were to adopt a uniform approach to the 
application of Section 15F requirements to registered U.S. and foreign 
security-based swap dealers without allowing for substituted 
compliance, foreign security-based swap dealers may find that complying 
with the Commission's capital, margin, and other entity-level rules 
would subject them to duplicative or conflicting requirements and may 
put them at a competitive disadvantage as a result.
    As discussed above, the Dodd-Frank Act divides the entity-level 
regulatory oversight of security-based swap dealers between the 
Commission and prudential regulators.\1131\ This statutory division of 
authority means that the Commission is not responsible for the capital 
and margin regulation of bank security-based swap dealers and, 
therefore, does not have the authority to make substituted compliance 
determinations in those areas for dealers that are banks. As a result, 
the Commission's provision of substituted compliance for capital and 
margin requirements only would extend to nonbank security-based swap 
dealers, whereas the Commission's substituted compliance determinations 
for all other entity-level requirements would apply to both bank and 
nonbank security-based swap dealers.
---------------------------------------------------------------------------

    \1131\ See Section III.C.3(b), supra.
---------------------------------------------------------------------------

    In addition to this statutory limitation on the Commission's 
ability to provide for substituted compliance in certain areas, the 
Commission also may consider the rationale for different capital 
treatment of banks and nonbanks in the United States. As discussed 
above, the Commission's proposed capital rules for nonbank security-
based swap dealers differ from those that would be applicable to bank 
dealers as proposed by the prudential regulators in that the 
Commission's proposed capital standards are principally focused on the 
retention of highly liquid assets that can be distributed to 
customers.\1132\ Assuming that the Commission adopts capital standards 
for nonbank security-based swap dealers as proposed, the Commission's 
comparability determinations regarding entity-level requirements would 
likely analyze separately the capital treatment of nonbank entities in 
jurisdictions that do not impose a comparable net liquid assets test. 
In performing such an analysis, the Commission would take into account 
the other principles, rules, and regulations of the foreign 
jurisdiction that may be relevant to the analysis. It also would 
consider whether nonbank dealers in that jurisdiction are permitted to 
hold more illiquid assets as regulatory capital compared to the assets 
permitted to be held under the capital rules adopted by the Commission 
and, if so, whether nonbank dealers in that jurisdiction have access to 
sufficient liquidity at the entity level to support the liabilities 
they incur out of their business activity.\1133\ Similarly, the 
Commission would need to consider the impact of any reduced liquidity 
associated with the application of foreign capital standards on the 
ability of nonbank dealers in such jurisdiction to wind down operations 
quickly and distribute assets to customers.\1134\ As this example 
illustrates, however, even when separately analyzing capital 
requirements, the Commission's focus would remain on ensuring not that 
the foreign jurisdiction has identical rules but on ensuring that a 
foreign jurisdiction that applies capital rules that do not impose a 
comparable net liquid assets test to nonbank security-based swap 
dealers can achieve the regulatory outcomes comparable to those 
intended under the Dodd-Frank Act.
---------------------------------------------------------------------------

    \1132\ See Section III.C.3(b)(1), supra.
    \1133\ See Capital, Margin, and Segregation Proposing Release, 
77 FR 70304.
    \1134\ See id.
---------------------------------------------------------------------------

    Similarly, consistent with our category-based approach, the 
Commission's comparability determination with respect to the 
requirements set forth in Section 15F of the Exchange Act generally 
would not depend on the comparability of the goals achieved by foreign 
jurisdiction's capital and margin requirements taken alone but also 
would, in light of the interconnectedness of capital and margin with 
related entity-level requirements, take into account regulatory 
outcomes of other aspects of the jurisdiction's requirements. Although 
we believe that capital and margin requirements are at the core of a 
robust internal risk controls system at a firm, equally foundational to 
the financial integrity of a firm are effective internal risk 
management procedures and the effectiveness of other relevant foreign 
regulatory requirements that are connected to an entity's financial 
integrity. As noted above, the Commission is proposing to permit 
substituted compliance, not only with capital and margin requirements, 
but also with such other related entity-level requirements as the 
Commission finds appropriate.\1135\ The Commission preliminarily 
believes that this approach to substituted compliance in the context of 
entity-level requirements will benefit foreign security-based swap 
dealers by allowing them to comply, where possible, with a single set 
of entity-level requirements where a substituted compliance 
determination is deemed appropriate, while ensuring that all registered 
security-based swap dealers are subject to robust entity-level 
oversight.
---------------------------------------------------------------------------

    \1135\ See Section XII.B.1, supra.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed rule 
establishing a policy and procedural framework for making substituted 
compliance determinations for registered foreign security-based swap 
dealers, including the following:
     What, if any, are the likely competitive effects, within 
the U.S. security-based swap market and among U.S. security-based swap 
dealers, of the proposed approach for application of substituted 
compliance for foreign security-based swap dealers? Please describe the 
specific nature of any such effects.
     The Commission generally solicits comments on the 
appropriateness and clarity of the proposed rule. Should

[[Page 31091]]

additional details be included regarding any aspects of the proposed 
rule?
     As discussed above, in making a substituted compliance 
determination, the Commission would ultimately focus on the 
comparability of regulatory outcomes rather than a rule-by-rule 
comparison. Is this holistic approach to making a substituted 
compliance determination appropriate? If not, why not?
     Is the comparability standard appropriate and sufficiently 
clear? Should additional detail be provided as to what would and would 
not satisfy this standard? If so, what additional detail should be 
provided? Should a different standard be used? If so, what should be 
the standard and why?
     As discussed above, in making a substituted compliance 
determination, the Commission would consider factors such as the scope 
and objectives of the relevant foreign regulatory requirements, as well 
as the effectiveness of the supervisory compliance program 
administered, and the enforcement authority exercised. Are these 
factors appropriate? Are the enumerated factors too broad or too 
narrow? What other factors should the Commission consider?
     When assessing the effectiveness of a foreign 
jurisdiction's supervisory compliance program should the Commission 
consider factors such as the existence of a dedicated examination 
program, the expertise of examiners, the existence of a risk monitoring 
framework and an examination plan, and the existence of a disciplinary 
program to enforce compliance with laws? Similarly, when assessing the 
effectiveness of a foreign jurisdiction's enforcement program, should 
the Commission consider factors such as whether the program is actively 
administered, resourced, and transparent?
     As discussed above, the Commission could condition a 
substituted compliance determination by limiting it to a particular 
class or classes of registrants in the foreign jurisdiction, in which 
case the Commission would determine what conditions are appropriate on 
a case-by-case basis. What, if any, are the competitive effects of the 
proposed approach with respect to conditional substituted compliance 
determinations?
     As discussed above, the proposed rule permits the 
Commission, on our own initiative, to modify or withdraw a substituted 
compliance determination for a particular foreign jurisdiction, after 
appropriate notice and opportunity for comment. In the event that the 
Commission determines that a previous substituted compliance 
determination needs to be further conditioned or even withdrawn, how 
much advance notice would be sufficient to permit market participants 
to adjust their activities to reflect the modification or withdrawal? 
For example, would 60 days be appropriate? Should the opportunity for 
comment be made public? Why or why not?
     Should a review period or ``sunset provision'' to revisit 
a previous substituted compliance determination be required? If so, 
what should the appropriate time period be for such review period or 
sunset provision?
     Should the ability of a foreign security-based swap dealer 
to take advantage of substituted compliance be conditioned on it not 
transacting with certain classes of U.S. counterparties, such as 
persons that do not meet the definition of qualified institutional 
buyer, as defined in Securities Act Rule 144A (17 CFR 230.144A(a)(1)) 
(``QIB''), or some other threshold, such as qualified investor, as 
defined in Section 3(a)(54) of the Exchange Act? Would such 
counterparties be less able to appreciate the differences between 
engaging in security-based swap transactions with a security-based 
dealer subject to relevant provisions of Title VII versus a security-
based swap dealer complying with comparable foreign regulations than a 
QIB or qualified investor? Would such an approach result in meaningful 
safeguards that would justify adopting such an approach? Is the use of 
such a substituted compliance regime likely to have a disparate impact 
on any particular class of counterparties? What are the potential 
advantages or disadvantages (including in terms of risk, competition, 
and counterparty protection) to counterparties, foreign security-based 
swap dealers, and U.S. security-based swap dealers in restricting the 
use of substituted compliance to transactions involving certain classes 
of U.S. counterparties?
     As discussed above, the proposed rule permits a foreign 
security-based swap dealer or group of foreign security-based swap 
dealers to submit a request that the Commission make a substituted 
compliance determination for the foreign jurisdiction with respect to 
specified requirements in Section 15F of the Exchange Act. Is the 
proposed procedure for submitting such requests sufficiently clear? 
Should additional details be included regarding any aspects of the 
proposed procedure?
     Do the proposed substituted compliance rules appropriately 
reflect the goal to increase the efficiency of the security-based swap 
market and promote competition by avoiding (as appropriate) subjecting 
foreign security-based swap dealers to potentially conflicting or 
duplicative compliance obligations? Would it be more appropriate to 
make substituted compliance determinations on a firm-by-firm basis 
rather than a class or jurisdictional basis? If so, why?
     Should entity-level requirements be treated separately for 
purposes of substituted compliance determinations, or should they be 
considered as a package of regulations?
     Should the Commission permit substituted compliance with 
respect to external business conduct standards in Section 15F(h) of the 
Exchange Act and the rules and regulations thereunder? Would allowing 
substituted compliance impair the Commission's ability to enforce the 
business conduct standards that the Dodd-Frank Act added to the 
Exchange Act?
     Should the Commission permit substituted compliance in 
transactions between registered non-U.S. dealers and U.S. persons?
     Should the Commission permit substituted compliance in 
transactions by registered non-U.S. dealers within the United States?
     Would allowing substituted compliance impair the 
Commission's ability to enforce the business conduct standards that the 
Dodd-Frank Act added to the Exchange Act relating to counterparty 
protection, particularly with respect to ``special entities''?
     Should the Commission not permit substituted compliance 
with respect to the conflicts of interest duties described in Section 
15F(j)(5) of the Exchange Act and the rules and regulations thereunder? 
Why or why not? In particular, would allowing substituted compliance 
with respect to these requirements impair the Commission's ability to 
enforce these counterparty protections that the Dodd-Frank added to the 
Exchange Act? Why or why not? Should the foreign dealing subsidiaries 
of U.S. parents be allowed to take advantage of substituted compliance 
for entity-level requirements if they engage in U.S. Business?
     Should there be a threshold requirement that foreign 
security-based swap dealers engage in a predominately foreign business 
in order to rely on substituted compliance? If so, how should the 
``predominantly foreign business'' threshold be measured? Should it be 
based on the relative notional amount of the security-based swap 
business of foreign security-based swap dealers with U.S. persons 
compared to the notional amount of their security-based swap business 
with

[[Page 31092]]

non-U.S. persons? If so, what should the threshold be (e.g., 80% 
Foreign Business by notional amount? More than 50%?)?
     Should the Commission consider providing substituted 
compliance determinations related to capital regulation in 
jurisdictions that apply Basel-based capital standards to nonbank 
security-based swap dealers? Why or why not?
     In what ways are Basel-based capital standards as applied 
to nonbank security-based swap dealers consistent with the Commission's 
own capital standards for nonbank security-based swap dealers? In what 
ways are they inconsistent?
     While the Commission is determining whether to make an 
initial set of substituted compliance determinations, should the 
Commission delay compliance with the requirements of the Exchange Act, 
and the rules and regulations thereunder, relating to security-based 
swap dealers for foreign security-based swap dealers? Are there some 
requirements that would be appropriate for delayed compliance? If so, 
please specify which ones and explain why. Are there other regulatory 
or market interests that the Commission should consider in determining 
the scope of the delayed compliance provision? If so, please describe 
those interests and how the proposed rule should address them.
     What would be the market impact of the proposed policy and 
procedural framework for making substituted compliance determinations 
for registered foreign security-based swap dealers? How would the 
application of the proposed policy and procedural framework affect the 
competitiveness of U.S. entities in the global marketplace (both in the 
United States as well as in foreign jurisdictions)? Would the proposed 
approach place any market participants at a competitive disadvantage or 
advantage? If so, please explain. Would the proposed approach be a more 
general burden on competition? If so, please explain. What other 
measures should the Commission consider to implement the proposed 
policy and procedural framework? What would be the market impacts and 
competitiveness effects of alternatives to the proposed approach 
discussed in this release?
     Should the Commission permit substituted compliance in 
transactions between registered non-U.S. dealers and U.S. persons?
     Should the Commission permit substituted compliance in 
transactions by registered non-U.S. dealers within the United States?

D. Regulatory Reporting and Public Dissemination

    As initially proposed, Regulation SBSR did not contemplate that the 
reporting and public dissemination requirements associated with cross-
border security-based swaps could be satisfied by complying with the 
rules of a foreign jurisdiction instead of U.S. rules. Thus, 
counterparties to a security-based swap would be required to comply 
with proposed Regulation SBSR even if the security-based swap also was, 
for example, reported to a foreign data repository or a foreign 
regulatory authority.
    In response to this proposed approach, several commenters stated 
that requiring counterparties to report cross-border security-based 
swaps in more than one jurisdiction could result in duplicative or 
inconsistent reporting, unnecessary expense and administrative burden, 
and potential conflicts with another jurisdiction's confidentiality 
requirements.\1136\ Commenters suggested various ways to address these 
issues. Some recommended generally that the Commission coordinate our 
trade reporting regime with those of other jurisdictions.\1137\ Two 
commenters urged regulators to encourage the development of a single, 
global trade repository for each asset class.\1138\ One of these 
commenters also stated that, in the absence of a global trade 
repository, regulators should implement internationally compatible 
reporting systems so that cross-border security-based swaps would not 
have to be reported twice.\1139\ Another commenter suggested that the 
Commission define the term ``security-based swap'' to exclude a 
transaction that is reported to a non-U.S. trade repository, which 
would have the effect of eliminating any U.S. reporting requirement 
because the transaction would not be a security-based swap.\1140\ 
Several commenters recommended that the Commission refrain from 
imposing any reporting requirements on security-based swaps that are 
reported pursuant to comparable rules of another jurisdiction.\1141\
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    \1136\ See, e.g., AIMA Letter at 6; DTCC Letter II at 21; ISDA/
SIFMA Letter I at 18. While not specifically addressing reporting 
requirements, another commenter believed generally that the U.S. 
branches of Japanese banks should not be subject to Title VII 
requirements, because such banks will be subject to comprehensive 
regulation under Japanese law. See Japanese Banks Letter at 4 
(arguing that application of Title VII would be ``superfluous at 
best'' and could subject foreign banks to potentially inconsistent 
requirements).
    \1137\ See AIMA Letter at 6; ISDA/SIFMA Letter I at 18 (urging 
the Commission to ``consult with foreign regulators before 
establishing the extra-territorial scope of the rules promulgated 
under Title VII''); Markit Letter III at 2 (arguing that the SEC and 
CFTC should ``harmonize their regulations with those of 
international regulators to the extent possible'').
    \1138\ See AIMA Letter at 6; ISDA Letter at 14.
    \1139\ See ISDA Letter at 13.
    \1140\ See Davis Polk Letter II at 21.
    \1141\ See, e.g., Cleary Letter II at 17; Davis Polk Letter I at 
2 (urging the Commission to implement Title VII in a way that relies 
on home country supervision), 7 (arguing that a transaction required 
to be reported to a foreign trade repository should not also be 
required to be reported to an SDR); Davis Polk Letter II at 21-22; 
ISDA Letter at 14 (stating that, in the absence of a single 
international trade repository, regulators should recognize trade 
repositories in other jurisdictions); Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale Letter I at 11 (recommending deference to 
foreign regulators that have a comparable regulatory scheme).
---------------------------------------------------------------------------

    The Commission is sympathetic to the desire to avoid redundant or 
conflicting reporting requirements, to the extent consistent with 
applicable statutory requirements. The Commission participates in a 
number of international organizations and initiatives that seek to 
coordinate regulation of the global OTC derivatives market, and the 
Commission staff has engaged in ongoing bilateral discussions with a 
number of foreign regulators on the subject of cross-border security-
based swap activity. The Commission preliminarily believes that 
regulatory reporting of security-based swap transaction data is crucial 
to allow it and other regulators more effectively to carry out their 
statutorily assigned functions, which include the assessment of 
systemic risks.\1142\ In addition, the Commission preliminarily 
believes that public dissemination generally would increase efficiency 
and price competition in the security-based swap market.\1143\ The 
Commission preliminarily believes, therefore, that our own efforts to 
promote these goals should be implemented as quickly as practicable.
---------------------------------------------------------------------------

    \1142\ See Regulation SBSR Proposing Release, 75 FR 75262-64.
    \1143\ See Regulation SBSR Proposing Release, 75 FR 75280-82 
(discussing anticipated impact of proposed Regulation SBSR on 
efficiency, competition, and capital formation).
---------------------------------------------------------------------------

    It is possible that other jurisdictions will implement reporting 
and dissemination regimes for security-based swap transactions that are 
comparable to the one set forth in Title VII and Regulation SBSR. In 
anticipation of that possibility, the Commission is now proposing rules 
regarding substituted compliance relating to regulatory reporting and 
public dissemination of security-based swaps, which are described 
below.
1. General
    Proposed Rule 908(c)(2)(i) would provide that the Commission could, 
conditionally or unconditionally, by

[[Page 31093]]

order, make a substituted compliance determination with respect to 
regulatory reporting and public dissemination in a foreign jurisdiction 
if such foreign jurisdiction imposes a comparable system for the 
regulatory reporting and public dissemination of all security-based 
swaps.
    Section 13A(a)(1) of the Exchange Act \1144\ provides that all 
security-based swaps that are not accepted for clearing shall be 
subject to regulatory reporting. Section 13(m)(1)(G) of the Exchange 
Act \1145\ provides that each security-based swap (whether cleared or 
uncleared) shall be reported to a registered SDR, and Section 
13(m)(1)(C) of the Exchange Act \1146\ generally provides that 
transaction, volume, and pricing data of all security-based swaps shall 
be publicly disseminated. However, these statutory provisions do not 
address whether, or the extent to which, these requirements should 
apply to cross-border security-based swaps. Reporting security-based 
swap transactions pursuant to the regimes of both the United States and 
a foreign jurisdiction could be duplicative and potentially burdensome. 
Re-proposed Rule 908(c)(2)(i) would provide generally that compliance 
with a comparable system of a foreign jurisdiction for the regulatory 
reporting and public dissemination of all security-based swaps could, 
if certain conditions are met, be substituted for compliance with U.S. 
rules to satisfy the goals and objectives of these Title VII 
requirements.
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    \1144\ 15 U.S.C. 78m-1(a)(1).
    \1145\ 15 U.S.C. 78m(m)(1)(G).
    \1146\ 15 U.S.C. 78m(m)(1)(C).
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2. Security-Based Swaps Eligible and Not Eligible for Substituted 
Compliance
    The Commission preliminarily believes that, if a foreign 
jurisdiction applies a comparable system for the regulatory reporting 
and public dissemination of an entity's security-based swaps, it would 
be appropriate not to apply the U.S. requirements in addition to the 
requirements of that foreign jurisdiction. Where the Commission has 
found that a foreign jurisdiction's reporting and public dissemination 
requirements are comparable to those implemented by the Commission, we 
expect to make a substituted compliance determination with respect to 
such jurisdiction for these requirements. The Commission is re-
proposing Rule 908(c)(1) to provide that compliance with the regulatory 
reporting and public dissemination requirements in Sections 13(m) and 
13A of the Exchange Act, and the rules and regulations thereunder, may 
be satisfied by compliance with the rules of a foreign jurisdiction 
that is the subject of a substituted compliance order issued by the 
Commission, provided that, with respect to at least one of the direct 
counterparties to the security-based swap:
    (i) Such counterparty is either a non-U.S. person or a foreign 
branch; and
    (ii) No person within the United States is directly involved in 
executing, soliciting, or negotiating the terms of the security-based 
swap on behalf of such counterparty.
    The Commission preliminarily believes that, if at least one direct 
counterparty to a security-based swap is a non-U.S. person (even if the 
non-U.S. person is a security-based swap dealer or major security-based 
swap participant, or is guaranteed by a U.S. person) and no person 
within the United States is directly involved in executing, soliciting, 
or negotiating the terms of the security-based swap on behalf of that 
counterparty, the security-based swap should be eligible for 
substituted compliance with respect to regulatory reporting and public 
dissemination. Thus, substituted compliance with respect to regulatory 
reporting and public dissemination could apply even in the instance of 
a security-based swap with a direct counterparty that is operating from 
within the United States, so long as the other direct counterparty is a 
non-U.S. person and no person within the United States is directly 
involved in executing, soliciting, or negotiating the terms of the 
security-based swap on behalf of that non-U.S. person. This approach is 
designed to limit disincentives for non-U.S. persons to transact 
security-based swaps with U.S. persons by allowing compliance with the 
rules of a foreign jurisdiction to be substituted for compliance with 
U.S. rules when the non-U.S. person transacts with a U.S. person.
    The Commission also preliminarily believes that the approach 
proposed above with respect to non-U.S. persons should be extended to 
the foreign branches of U.S. banks. As a result, we are proposing to 
allow the possibility of substituted compliance with respect to 
regulatory reporting and public dissemination if at least one 
counterparty of a security-based swap is the foreign branch of a U.S. 
bank, as long as no person within the United States is directly 
involved in executing, soliciting, or negotiating the terms of the 
security-based swap on behalf of such foreign branch.\1147\ This 
approach is designed to promote access of foreign branches of U.S. 
banks to the local markets in which those branches are located. Assume, 
for example, that a substituted compliance determination with respect 
to regulatory reporting and public dissemination applied to a foreign 
jurisdiction and a transaction involved, on one side, a local, non-U.S. 
person market participant, and the security-based swap is required to 
be reported and publicly disseminated under the rules of that foreign 
jurisdiction regardless of whether the counterparty on the other side 
is a local dealer or a foreign branch of a U.S. bank. If substituted 
compliance with respect to regulatory reporting and public 
dissemination were in effect, the fact that the foreign branch is a 
counterparty would not cause the transaction to have to be reported 
pursuant to U.S. rules in addition to the foreign jurisdiction's rules.
---------------------------------------------------------------------------

    \1147\ See Section III.B.6, supra (discussing the definition of 
``foreign branch'' in proposed Rule 3a71-3(a)(1) under the Exchange 
Act).
---------------------------------------------------------------------------

    Consistent with the factors described above, the Commission 
preliminarily believes that certain kinds of security-based swaps 
should not be eligible for substituted compliance with respect to 
regulatory reporting and public dissemination, even if they might be 
subject to reporting and public dissemination requirements in a foreign 
jurisdiction.\1148\ As noted above, re-proposed Rule 908(c)(1) would 
provide that a security-based swap would be eligible for substituted 
compliance with respect to regulatory reporting and public 
dissemination where both of the following conditions apply to at least 
one direct counterparty to the transaction: (i) such counterparty is 
either a non-U.S. person or a foreign branch; and (ii) the security-
based swap transaction is not solicited, negotiated, or executed by a 
person within the United States on behalf of such counterparty. Thus, a 
security-based swap between two U.S. persons would not be eligible for 
substituted compliance with respect to regulatory reporting and public 
dissemination, even if the security-based swap were solicited, 
negotiated, and executed outside the United States.\1149\
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    \1148\ If the rules of a foreign jurisdiction would not apply to 
the security-based swap, there would be no need to consider the 
possibility of substituted compliance, because there would be no 
foreign rules that could substitute for the applicable U.S. rules.
    \1149\ This assumes that neither U.S. person is acting through a 
foreign branch. If either U.S. person were acting through a foreign 
branch, the security-based swap between those U.S. persons would be 
eligible for substituted compliance.

---------------------------------------------------------------------------

[[Page 31094]]

    Furthermore, re-proposed Rule 908(c)(1) would not allow for the 
possibility of substituted compliance with respect to regulatory 
reporting and public dissemination if both direct counterparties (or 
their agents)--regardless of place of domicile--solicit, negotiate, or 
execute a security-based swap from within the United States. The 
Commission preliminarily believes that U.S. rules for regulatory 
reporting and public dissemination should apply to transactions where 
all or the major part of actions associated with the security-based 
swap, on both sides of the transaction, are performed within the United 
States.
    The following examples explain the operation of re-proposed Rule 
908(c)(1). In all examples, assume that the Commission has issued a 
substituted compliance order with respect to regulatory reporting and 
public dissemination that applies to the foreign jurisdiction:
     Example 1. A bank in country X--solely through personnel 
located in country X--executes a security-based swap over the phone 
with a U.S. person located in New York, and no person within the United 
States is directly involved in soliciting, negotiating, or executing 
the terms of the security-based swap on behalf of the foreign bank. The 
security-based swap is not cleared. The security-based swap would be 
eligible for substituted compliance, regardless of whether the foreign 
bank is registered in any capacity with the Commission.
     Example 2. A foreign branch of a U.S. bank located in 
country X executes a security-based swap over the phone with a U.S. 
person located in New York. The foreign branch uses staff located 
solely in country X to solicit, negotiate, and execute the security-
based swap. The security-based swap is not cleared. The security-based 
swap would be eligible for substituted compliance.
     Example 3. Two foreign branches of U.S. banks, both 
located in country X, execute a security-based swap in country X. The 
security-based swap transaction is not solicited, negotiated, or 
executed by a person within the United States on behalf of either 
counterparty. The security-based swap would be eligible for substituted 
compliance.
     Example 4. Two New York branches of foreign banks execute 
a security-based swap. Persons acting on behalf of each bank are 
located within the United States and are involved in soliciting, 
negotiating, and executing the terms of the security-based swap. The 
security-based swap would not be eligible for substituted compliance.
     Example 5. Same facts as Example 4, except that one 
foreign bank, instead of soliciting, negotiating, or executing the 
security-based swap using persons associated with its New York branch, 
uses only persons located in its home office to perform such functions. 
The security-based swap would be eligible for substituted compliance.
     Example 6. A foreign subsidiary (C1) of a U.S. person 
executes a security-based swap with a U.S. person (C2). No person 
within the United States solicits, negotiates, or executes the 
security-based swap on behalf of the foreign subsidiary C1. The 
security-based swap would be eligible for substituted compliance, 
regardless of the location of persons who executed, solicited, or 
negotiated the security-based swap on behalf of the U.S. person C2, and 
regardless of whether the foreign subsidiary C1 is guaranteed by a U.S. 
person.
3. Requests for Substituted Compliance
    Proposed Rule 908(c)(2)(ii) would provide that any person that 
executes a security-based swap that would, in the absence of a 
substituted compliance order, be required to be reported pursuant to 
Regulation SBSR may file an application, pursuant to the procedures set 
forth in proposed Rule 0-13,\1150\ requesting that the Commission make 
a substituted compliance determination regarding regulatory reporting 
and public dissemination with respect to a foreign jurisdiction the 
rules of which also would require reporting and public dissemination of 
the security-based swap. Proposed Rule 908(c)(2)(ii) would further 
provide that such application shall include the reasons therefor and 
such other information as the Commission may request. The Commission 
would consider those reasons as well as information derived from other 
sources in considering whether to grant a substituted compliance order 
with respect to regulatory reporting and public dissemination.
---------------------------------------------------------------------------

    \1150\ See Section XI.B, supra.
---------------------------------------------------------------------------

4. Findings Necessary for Substituted Compliance
    Re-proposed Rule 908(c)(2)(iii) would provide that, in making a 
substituted compliance determination with respect to a foreign 
jurisdiction, the Commission shall take into account such factors as 
the Commission determines are appropriate, such as the scope and 
objectives of the relevant foreign regulatory requirements, as well as 
the effectiveness of the supervisory compliance program administered, 
and the enforcement authority exercised, by the foreign financial 
regulatory authority to support oversight of its regulatory reporting 
and public dissemination system for security-based swaps. Furthermore, 
the Commission would not make a substituted compliance determination 
with respect to regulatory reporting and public dissemination unless 
the Commission found that:
    (A) The data elements that are required to be reported pursuant to 
the rules of the foreign jurisdiction are comparable to those required 
to be reported pursuant to Sec.  242.901;
    (B) The rules of the foreign jurisdiction require the security-
based swap to be reported and publicly disseminated in a manner and a 
timeframe comparable to those required by Sec. Sec.  242.900-911;
    (C) The Commission has direct electronic access \1151\ to the 
security-based swap data held by a trade repository or foreign 
regulatory authority to which security-based swaps are reported 
pursuant to the rules of that foreign jurisdiction; and
---------------------------------------------------------------------------

    \1151\ New paragraph (k) of re-proposed Rule 900 would define 
the term ``direct electronic access'' to have the same meaning as in 
proposed Rule 13n-4(a)(5) under the Exchange Act, as proposed in the 
SDR Proposing Release, 75 FR 77318.
---------------------------------------------------------------------------

    (D) Any trade repository or foreign regulatory authority in the 
foreign jurisdiction that receives and maintains required transaction 
reports of security-based swaps pursuant to the laws of that foreign 
jurisdiction is subject to requirements regarding data collection and 
maintenance; systems capacity, resiliency, and security; and 
recordkeeping that are comparable to the requirements imposed on SDRs 
by sections 240.13n-5 to 240.13n-7 of the Exchange Act.
    As noted above, the Commission preliminarily believes that 
compliance with a foreign jurisdiction's rules for reporting and public 
dissemination of security-based swaps should be a substitute for 
compliance with the U.S. rules only when the foreign jurisdiction has a 
reporting and public dissemination regime comparable to that of the 
United States. Thus, re-proposed Rule 908(c)(2)(iii)(A) would provide 
that the data elements required to be reported pursuant to the rules of 
the foreign jurisdiction must be comparable to those required to be 
reported pursuant to Rule 901 of Regulation SBSR. If the data elements 
required by the foreign jurisdiction were

[[Page 31095]]

not comparable, certain important data elements about a security-based 
swap might not be captured by the foreign trade repository or foreign 
regulatory authority.
    Furthermore, re-proposed Rule 908(c)(2)(iii)(B) would provide that 
the rules of the foreign jurisdiction must require security-based swaps 
to be reported and publicly disseminated in a manner and a timeframe 
comparable to those required by Regulation SBSR. The Commission 
preliminarily believes that, given the Title VII requirements that all 
security-based swaps be reported to an SDR and that all security-based 
swaps be publicly disseminated in real time (except for block trades), 
allowing substituted compliance with the rules of a foreign 
jurisdiction that has standards significantly different from those in 
the United States would run counter to the objectives and requirements 
of Title VII. Thus, for example, the Commission would not, under re-
proposed Rule 908(c), permit substituted compliance with respect to 
regulatory reporting and public dissemination if the foreign 
jurisdiction did not (among other things) impose public dissemination 
requirements on a trade-by-trade basis; dissemination of trade 
information on an aggregate basis would not be sufficient. Furthermore, 
the Commission would not permit substituted compliance under re-
proposed Rule 908(c) with respect to regulatory reporting and public 
dissemination if security-based swaps of non-block size were publicly 
disseminated in other than real time, as required under Section 763 of 
the Dodd-Frank Act.
    Re-proposed Rule 908(c)(2)(iii)(C) would also provide that, to 
grant a substituted compliance order with respect to regulatory 
reporting and public dissemination, the Commission must have direct 
electronic access to the security-based swap data held by a trade 
repository or foreign regulatory authority to which security-based 
swaps are reported pursuant to the rules of that foreign jurisdiction. 
This requirement stems from the fact that the regulatory reporting 
provisions of Title VII are premised on the idea that the Commission 
will have direct electronic access to all the reported data. Not having 
direct electronic access could reduce the Commission's ability to 
effectively and efficiently monitor the U.S. security-based swap market 
and provide timely and complete data to other U.S. financial regulatory 
agencies. Thus, the Commission preliminarily believes that direct 
electronic access to the foreign trade repository or foreign regulatory 
authority to which security-based swap transactions are reported in the 
foreign jurisdiction should be a prerequisite to issuing a substituted 
compliance order with respect to regulatory reporting and public 
dissemination applying to that jurisdiction.
    An alternative to this proposed requirement would be to permit 
substituted compliance with respect to regulatory reporting and public 
dissemination if, instead, there existed an information-sharing 
agreement between the Commission and an appropriate body in the foreign 
jurisdiction that would permit the Commission to request and obtain 
transaction information from the foreign trade repository or foreign 
regulatory authority that otherwise would be reported to a registered 
SDR pursuant to Regulation SBSR. The Commission preliminarily believes, 
however, that it would be more appropriate to require direct electronic 
access to such data before allowing substituted compliance with respect 
to regulatory reporting and public dissemination. Without direct 
electronic access, the Commission could face substantial delays before 
a foreign entity, even acting expeditiously, could compile a 
substantial volume of data relating to a substantial volume of 
transactions. Delays in obtaining such data could compromise the 
ability of the Commission to supervise security-based swap market 
participants, and to share information with other U.S. financial 
regulators, in a timely fashion.
    Re-proposed Rule 908(c)(2)(iii)(D) would provide that, to grant a 
substituted compliance order regarding regulatory reporting and public 
dissemination, the Commission must be able to find that any trade 
repository or foreign regulatory authority in the foreign jurisdiction 
that receives and maintains transaction reports of security-based swaps 
pursuant to the laws of that foreign jurisdiction is subject to 
requirements regarding data collection and maintenance; systems 
capacity, resiliency, and security; and recordkeeping that are 
comparable to the requirements that the Commission would impose on 
SDRs. The Commission has proposed certain requirements for SDRs 
relating to data collection and maintenance; \1152\ systems capacity, 
resiliency, and security; \1153\ and recordkeeping.\1154\ These 
requirements are designed, among other things, to enhance the ability 
of SDRs to effectively receive and maintain security-based swap 
transaction data that are reported to them. Without appropriate system 
security, for example, the data held by an SDR could be destroyed or 
rendered unusable by a hacker attack or computer virus. Therefore, the 
Commission preliminarily believes that, to allow substituted compliance 
for regulatory reporting and public dissemination with respect to a 
foreign jurisdiction, any entity in that foreign jurisdiction that is 
required to receive and maintain security-based swap transaction data 
should be required to have comparable protections.
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    \1152\ See proposed Rule 13n-5 under the Exchange Act.
    \1153\ See proposed Rule 13n-6 under the Exchange Act.
    \1154\ See proposed Rule 13n-7 under the Exchange Act.
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    Re-proposed Rule 908(c)(2)(iv) would specify that, before issuing a 
substituted compliance order pursuant to this section, the Commission 
shall have entered into a supervisory and enforcement MOU or other 
arrangement with the relevant foreign financial regulatory authority or 
authorities under such foreign financial regulatory system addressing 
oversight and supervision of the applicable security-based swap market 
under the substitute compliance determination.
5. Modification or Withdrawal of Substituted Compliance Order
    Re-proposed Rule 908(c)(2)(v) would provide that the Commission 
may, on our own initiative, modify or withdraw a substituted compliance 
order with respect to regulatory reporting and public dissemination in 
a foreign jurisdiction, at any time, after appropriate notice and 
opportunity for comment. Such a modification or withdrawal could result 
from a situation where, after the Commission issues an order 
recognizing the reporting and public dissemination regime of a foreign 
jurisdiction as eligible for substituted compliance, the basis for that 
order ceases to be true. For example, if the foreign jurisdiction did 
not sufficiently enforce its reporting and public dissemination rules, 
compliance with the foreign rules might no longer be deemed an 
effective substitute for compliance with the U.S. rules. Therefore, the 
Commission preliminarily believes that it would be appropriate to 
establish a mechanism whereby it could, at any time and on our own 
initiative, modify or withdraw a previously issued substituted 
compliance order with respect to regulatory reporting and public 
dissemination, after appropriate notice and opportunity for comment.

[[Page 31096]]

6. Regulatory Reporting and Public Dissemination Considered Together in 
the Commission's Analysis of Substituted Compliance
    The Commission has considered, but has determined not to propose, 
treating regulatory reporting and public dissemination separately for 
purposes of allowing substituted compliance. Under such an approach, 
for example, the Commission could allow substituted compliance for 
regulatory reporting with respect to a particular foreign jurisdiction 
without permitting substituted compliance for public dissemination. The 
Commission preliminarily believes that this approach would not 
implement Title VII's regulatory reporting and public dissemination 
requirements as effectively as considering these requirements together 
for purposes of analyzing requests for substituted compliance 
determinations.
    One example of a potential problem with viewing these two 
requirements separately relates to the public dissemination of 
security-based swap transaction information. If the Commission were to 
permit substituted compliance for regulatory reporting but not for 
public dissemination, certain transactions could be reported to a 
foreign trade repository in lieu of an SDR that is registered with the 
Commission. However, the Commission has proposed that registered SDRs 
would be the entities charged with publicly disseminating information 
about security-based swap transactions. A registered SDR could carry 
out that function only if data about individual transactions are 
reported to it. If data about certain transactions were reported 
instead to a foreign trade repository, it would be impractical if not 
impossible for the SDR to publicly disseminate data about those 
transactions. The Commission also preliminarily believes that it would 
be impractical and unduly complicated to devise an alternate method for 
public dissemination of such transactions that did not involve 
registered SDRs.\1155\ The Commission preliminarily concludes, 
therefore, that transactions should be required to be reported to a 
registered SDR even if there are comparable foreign rules that would 
provide for reporting of such transactions to a foreign trade 
repository, unless the foreign rules also provide for public 
dissemination of such transactions in a manner comparable to Regulation 
SBSR. In such case, the Commission could, under re-proposed Rule 
908(c), issue a substituted compliance order for both regulatory 
reporting and public dissemination with respect to that foreign 
jurisdiction.
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    \1155\ A reporting side could be required to report to a 
registered SDR the data elements required by re-proposed Rule 
901(c), which are those that would be publicly disseminated, but not 
be required to report the elements required by re-proposed Rule 
901(d), which are the additional elements required for regulatory 
reporting. However, reporting the transaction to both a registered 
SDR and to a foreign trade repository (which it would be required to 
do by the rules of the foreign jurisdiction) would negate the effect 
of the substituted compliance order.
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    The Commission notes that, under re-proposed Rules 908(a) and 
908(b), certain security-based swap transactions would be subject to 
regulatory reporting but not public dissemination. The Commission also 
has considered, but has determined not to propose, treating regulatory 
reporting and public dissemination separately for purposes of allowing 
substituted compliance with respect to such transactions, even though 
Regulation SBSR would not require public dissemination of such 
transactions in any case. The Commission preliminarily believes that 
this approach could introduce unnecessary operational complexity for 
cross-border market participants and might yield few if any efficiency 
gains. Assume that a foreign branch of a U.S. bank is operating in a 
jurisdiction where a substituted compliance order were in effect for 
transactions that otherwise would be required to be reported but not 
publicly disseminated. With each transaction, the foreign branch would 
be required to determine whether the transaction was such that 
regulatory reporting but not public dissemination would be required 
under Regulation SBSR, in which case substituted compliance could apply 
and the transaction could instead be reported to the foreign trade 
repository, or whether both regulatory reporting and public 
dissemination would be required under Regulation SBSR, in which case 
substituted compliance would not apply and the transaction would be 
required to be reported to a registered SDR. The determination of the 
appropriate place to send the trade report would depend on the nature 
of the counterparty.\1156\ While market participants could be expected 
to develop the appropriate compliance systems to report through the 
appropriate channel depending on the circumstances, the Commission 
preliminarily sees only limited benefit to requiring market 
participants to do so. The Commission preliminarily believes instead 
that it would be simpler to permit substituted compliance for a foreign 
jurisdiction only when that foreign jurisdiction has rules for 
regulatory reporting and public dissemination that are comparable to 
Regulation SBSR. This approached is designed to minimize the necessity 
of determining, on a transaction-by-transaction basis, which 
jurisdiction's rules would apply.
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    \1156\ For example, if the foreign branch transacted with 
another foreign branch of a U.S. bank or with a non-U.S. person that 
was guaranteed by a U.S. person, the transaction would be subject to 
public dissemination (see re-proposed Rule 908(b)(2)(ii)) and 
substituted compliance would not apply. Thus, the transaction would 
have to be reported to an SDR registered with the Commission. 
However, if the foreign branch transacted outside the United States 
with a non-U.S. person that was not guaranteed by a U.S. person, 
public dissemination would not be required under Regulation SBSR. 
See re-proposed Rule 908(b)(2). Therefore, the transaction could be 
reported instead to the foreign trade repository.
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Request for Comment
    The Commission is re-proposing Regulation SBSR in a manner that 
would set forth when a security-based swap generally would be required 
to be reported and publicly disseminated, and when reporting and 
dissemination requirements could be satisfied by substituting 
compliance with the rules of a foreign jurisdiction for compliance with 
U.S. rules. The public is invited to comment on all aspects of these 
proposed rules. In particular, the Commission invites responses to the 
following questions about our proposed rules relating to substituted 
compliance:
     Should the Commission make determinations of substituted 
compliance for regulatory reporting separately from public 
dissemination? Why or why not? If so, how could a security-based swap 
transaction be publicly disseminated if substituted compliance were in 
effect for regulatory reporting but not for public dissemination?
     Do you believe the Commission, as proposed in Rule 
908(c)(2)(i), should have the ability to conditionally or 
unconditionally, by order, make a substituted compliance determination 
with respect to regulatory reporting and public dissemination in a 
foreign jurisdiction if such foreign jurisdiction imposes a comparable 
system for the regulatory reporting and public dissemination of all 
security-based swaps? Why or why not? Should the Commission allow for 
substituted compliance determinations under more limited circumstances? 
Why or why not? Under what other circumstances should the Commission 
consider substituted compliance? Please be specific.
     How should the Commission evaluate whether a foreign 
system is ``comparable'' for purposes of regulatory reporting and 
public dissemination? Please be specific.

[[Page 31097]]

     The Commission stated that our approach is designed to put 
the foreign branches of U.S. banks on a level playing field with non-
U.S. persons in foreign jurisdictions where those branches are located. 
Do you believe that the proposed formulation would accomplish this 
goal? Why or why not? How should the Commission restructure re-proposed 
Rule 908(c)(1) to accomplish this goal? Please be specific.
     Do you believe that the examples provided adequately 
describe the situations under which security-based swap transactions 
should and should not be eligible for substituted compliance? Why or 
why not? What additional situations should the Commission consider? 
Please be specific.
     Do you agree with the Commission proposal, in re-proposed 
Rule 908(c)(2)(ii), that any person that executes security-based swaps 
that would be required to be reported to Regulation SBSR be eligible to 
file an application requesting substituted compliance? Why or why not? 
Should any other entities (i.e., foreign regulators or industry 
associations) be eligible to file such an application? Why or why not?
     Do you agree with the factors the Commission would take 
into account when making a substituted compliance determination? Why or 
why not? What additional factors should the Commission take into 
account? Should a trade repository be subject to requirements that are 
comparable to all of Section 13(n) of the Exchange Act and the rules 
and regulations thereunder as a condition to a substituted compliance 
determination?
     Do you agree with the proposed findings that the 
Commission would be required to make pursuant to re-proposed Rule 
908(c)(2)(iii)? Why or why not? Are there any other findings the 
Commission should be required to make? Please be specific.
     Do you agree, as detailed in re-proposed Rule 
908(c)(2)(iv), that the Commission should have the ability, on our own 
initiative, to modify or withdraw a substituted compliance order at any 
time, after appropriate notice and opportunity for comment? Why or why 
not?
     The Commission is not at this time proposing that a duty 
to report and publicly disseminate a security-based swap would depend 
on the domicile of the issuer of the loan or security underlying the 
security-based swap. Should the Commission's rules for reporting and 
public dissemination take this factor into consideration? Why or why 
not?
     If a foreign jurisdiction has some form of public 
dissemination but the Commission does not believe that the foreign 
jurisdiction's rules are comparable to those of the United States to 
allow substituted compliance with respect to regulatory reporting and 
public dissemination, what would be the effect of having transaction 
reports of security-based swaps publicly disseminated in multiple 
jurisdictions? Do you believe that situation would impact price 
discovery or the market for such security-based swaps generally? If so, 
how, to what extent, and why? If not, why not? How practical would it 
be, and what would be the cost, for private actors to consolidate 
transaction reports of those security-based swaps emanating from 
potentially multiple feeds across multiple jurisdictions?
     Should the Commission permit substituted compliance with 
respect to regulatory reporting and public dissemination even if it 
does not have direct electronic access to the security-based swaps 
transactions reported to the foreign trade repository or foreign 
regulatory authority? If yes, how could the Commission ensure that it 
has timely access to the security-based swap transaction data held by 
the foreign entity that otherwise would have been reported pursuant to 
Regulation SBSR? If there were delays associated with obtaining data 
from the foreign entity, how long could those delays be for substituted 
compliance to still be appropriate? In addition to delays, do you 
foresee any other potential obstacles to the Commission obtaining this 
information from foreign entities?
     The Commission's re-proposed rules relating to substituted 
compliance for regulatory reporting and public dissemination 
requirements differ in certain respects from the CFTC's cross-border 
guidance. For example, the CFTC guidance provides that a swap between a 
U.S. person swap dealer and a non-U.S. person guaranteed by a U.S. 
person would be subject to public dissemination requirements, and that 
these requirements could not be satisfied through substituted 
compliance.\1157\ The Commission, on the other hand, is proposing that 
public dissemination of a security-based swap between two such direct 
counterparties could be satisfied by substituted compliance (assuming 
that no person is soliciting, negotiating, or executing the security-
based swap within the United States on behalf of the non-U.S. person 
that is guaranteed by a U.S. person).\1158\ Please describe any other 
differences that you believe might exist and what would be the impact 
of any such differences.
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    \1157\ See 77 FR 41237.
    \1158\ See re-proposed Rule 908(c)(1) of Regulation SBSR.
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     When making a comparability determination, the Commission 
would look not just at the rules of a foreign jurisdiction, but also at 
the comprehensiveness of the supervision and regulation by the 
appropriate governmental authorities of that jurisdiction. When 
assessing the effectiveness of a foreign jurisdiction's supervisory 
compliance program, should the Commission consider factors such as the 
existence of a dedicated examination program, the expertise of 
examiners, the existence of a risk monitoring framework and an 
examination plan; and the existence of a disciplinary program to 
enforce compliance with laws? Similarly, when assessing the 
effectiveness of a foreign jurisdiction's enforcement program, should 
the Commission consider factors such as whether the program is actively 
administered, resourced, and transparent?
     Is the Commission's holistic approach to making a 
comparability determination appropriate? Why or why not? Are there 
specific procedures or comparability considerations that would be 
useful for the Commission to incorporate in our proposed substituted 
compliance approach? If so, please describe. What would be the 
advantages of adopting such measures now? What would be the 
disadvantages of adopting such measures now?
     What would be the market impact of proposed approach to 
substituted compliance for regulatory reporting and public 
dissemination? How would the proposed approach affect the 
competitiveness of U.S. entities in the global marketplace (both in the 
United States as well as in foreign jurisdictions)? Would the proposed 
approach place any market participants at a competitive disadvantage or 
advantage? If so, please explain. Would the proposed approach be a more 
general burden on competition? If so, please explain. What other 
measures should the Commission consider to implement the proposed 
approach? What would be the market impacts and competitiveness effects 
of alternatives to the proposed approach discussed in this release?
     In making substituted compliance determinations for 
reporting, should the Commission require direct electronic access to 
data maintained at foreign SDRs or should we only require an 
information sharing arrangement? Why or why not?

[[Page 31098]]

E. Clearing Requirement

    Section 3C(a)(1) of the Exchange Act requires a security-based swap 
that is subject to the mandatory clearing requirement to be cleared at 
a clearing agency that is either registered with the Commission or 
exempt from registration.\1159\ The Commission recognizes, however, 
that in some circumstances counterparties may seek to clear security-
based swaps subject to mandatory clearing at a clearing agency that is 
neither registered with the Commission nor exempt from registration, 
which would fail to satisfy the Title VII mandatory clearing 
requirement. This scenario may occur where counterparties seek either 
due to their own preference or regulatory requirements in a foreign 
jurisdiction to clear a transaction through a clearing agency that does 
not have any U.S. members and does not clear transactions conducted 
within the United States, because this type of clearing agency would 
not be required to register with the Commission or obtain an exemption 
from registration under the Commission's proposed interpretation of the 
clearing agency registration requirement in Section 17A(g), discussed 
in Section V above.
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    \1159\ If a counterparty qualifies for the end-user clearing 
exception, then the security-based swap would not be required to be 
cleared unless the end user elects that it be cleared. See 15 U.S.C. 
78c-3(g)(2) (providing that application of the exception is solely 
at the discretion of the counterparty to security-based swaps that 
meets the conditions of the exception in Section 3C(g)(1) of the 
Exchange Act).
---------------------------------------------------------------------------

    In recognition of this situation and the potential for duplicative 
or conflicting clearing requirements, the Commission preliminarily 
believes that it would be appropriate in certain circumstances to 
permit substituted compliance in this area. Specifically, the 
Commission is proposing to use our authority, under Section 36 of the 
Exchange Act,\1160\ to exempt persons from the clearing mandate in 
Section 3C of the Exchange Act if a relevant transaction is submitted 
to a foreign clearing agency that is the subject of a substituted 
compliance determination by the Commission. Because such clearing 
agencies would not be engaged in activities that trigger the 
registration requirement, such substituted compliance determination 
would not be subject to the procedure outlined in Section 17A(k) to 
obtain an exemption from clearing agency registration, but would 
instead be considered in the context of an exemption from the clearing 
mandate. We preliminarily believe that providing substituted compliance 
in this area could help to facilitate the clearance and settlement of 
cross-border security-based swaps, while also promoting compliance with 
clearing mandates.
---------------------------------------------------------------------------

    \1160\ See 15 U.S.C. 78mm. Section 36 of the Exchange Act 
provides that, subject to certain exceptions, the Commission ``by 
rule, regulation, or order may conditionally or unconditionally 
exempt any person, security, or transaction, or any class or classes 
of person, securities, or transactions from any provision or 
provisions of [the Exchange Act] or of any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest and is consistent with the 
protection of investors.''
---------------------------------------------------------------------------

    Under the proposed approach, upon the Commission's issuance of an 
order making a substituted compliance determination with respect to a 
particular foreign clearing agency, a counterparty to a security-based 
swap transaction that is subject to the mandatory clearing requirement 
would be able to rely on the Commission's substituted compliance 
determination to satisfy the mandatory clearing requirement by clearing 
such transaction on the specified foreign clearing agency.
    The Commission's proposed approach to substituted compliance for 
clearing would be limited to foreign clearing agencies that have no 
U.S. person members or activities in the United States. A foreign 
clearing agency that meets these two threshold requirements could 
initiate the process of making a substituted compliance determination 
by filing an application, pursuant to the procedures set forth in 
proposed Rule 0-13,\1161\ requesting that the Commission make a 
substituted compliance determination. Such application would need to 
include the reasons therefor and such other documentation as the 
Commission may request. To provide the Commission with enough 
information to make a substituted compliance determination, the 
application would have to include sufficiently comprehensive 
information regarding the clearing agency and the foreign regime such 
that the Commission has an adequate basis to make the substituted 
compliance determination.
---------------------------------------------------------------------------

    \1161\ See Section XI.B, supra.
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    In making a substituted compliance determination, the Commission 
expects that our review in such cases would include seeking appropriate 
assurances from the foreign clearing agency regarding the absence of 
U.S. person members and relevant activity in the United States, 
including the volume of clearing activity originating in the United 
States. In addition, the review would look at the scope and objectives 
of the applicable foreign jurisdiction's regulatory requirements, as 
well as the effectiveness of the supervisory compliance program 
administered, and the enforcement authority exercised, by the relevant 
foreign financial regulatory authority or authorities to support the 
oversight of such clearing agency. Thus, the Commission's determination 
would take into account a foreign jurisdiction's overall regulatory 
framework, and would focus on the similarity of regulatory objectives 
in addition to the presence or absence of similar rules. We expect that 
our review of substituted compliance applications in this area would be 
aided by the resources available to the Commission as a result of 
cooperative relationships with other authorities that we expect would 
allow us to assess the risk characteristics of such foreign clearing 
agencies on an ongoing basis.\1162\
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    \1162\ See, e.g., FMI Principles, note 687, supra. Systemically 
important payment systems, central securities depositories, 
securities settlement systems, central counterparties and trade 
repositories (``Financial Market Infrastructures'') are expected to 
observe the standards as soon as possible, and CPSS and IOSCO 
members are seeking to adopt the standards in their respective 
jurisdictions by the end of 2012. CPSS and IOSCO have also proposed 
assessment methodologies to oversee implementation of the FMI 
Principles, including self-assessments and external assessments, 
such as those conducted by the International Monetary Fund and the 
World Bank under the Financial Sector Assessment Program. See CPSS 
and Technical Committee of IOSCO, Assessment Methodology for the 
Principles for FMIs and the Responsibilities of Authorities (April 
2012), available at: https://www.bis.org/publ/cpss101b.pdf. In 
addition, CPSS and the Technical Committee of IOSCO proposed a 
disclosure framework to ensure that disclosures made by FMIs are 
clear and comprehensive. See CPSS and Technical Committee of IOSCO, 
Disclosure Framework for Financial Market Infrastructures (April 
2012), available at: https://www.bis.org/publ/cpss101c.pdf. Finally, 
see Basel III for a discussion of the preferential capital treatment 
that exposures to a central counterparty will receive if such 
central counterparty is supervised in a manner consistent with the 
FMI Principles.
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    Subsequent to making a substituted compliance determination, the 
Commission would be able to modify or withdraw, at any time, an order 
containing such determination, after appropriate notice and opportunity 
for comment. This would allow the Commission to take action in the 
event that a foreign clearing agency, for any reason, is no longer 
suitable for substituted compliance.
    The Commission's proposed approach to substituted compliance with 
respect to the mandatory clearing requirement differs from other Title 
VII categories where substituted compliance would be permitted in that 
we are not proposing a specific rule related to substituted compliance. 
We preliminarily do not believe that a rule is necessary in the 
clearing space, although we are soliciting comment on the issue in the 
request for comments below. This belief

[[Page 31099]]

stems in part from the fact that we do not expect a large number of 
requests for substituted compliance in this area due to the small 
number of security-based swap clearing agencies in the market. In 
addition, the Title VII clearing agency registration regime already 
contains a category of exempt security-based swap clearing agencies, 
and clearing security-based swaps through these entities satisfies the 
mandatory clearing requirement. As a result, we preliminarily believe 
that the proposed approach to substituted compliance in this area, 
whereby we are proposing a policy and procedural framework for the use 
of our exemptive authority in Section 36 of the Exchange Act, is 
sufficient to promote Title VII's clearing mandate while addressing the 
regulatory complexities that stem from the global scope of the 
security-based swaps market.
Request for comment
    The Commission requests comment on all aspects of the proposed 
interpretation, including the following:
     Is substituted compliance related to the mandatory 
clearing requirement in Section 3C(a)(1) of the Exchange Act needed to 
prevent conflict with mandatory clearing requirements under foreign 
law? If so, is the proposed approach to substituted compliance 
sufficient to address the potential conflicts?
     Should the Commission apply Section 17A(k) of the Exchange 
Act under such circumstances to exempt particular foreign security-
based swap clearing agencies to permit such clearing agencies to be 
used by counterparties subject to the mandatory clearing requirement in 
Section 3C(a)(1) of the Exchange Act? Are investor protection 
considerations sufficiently addressed if transactions are permitted to 
be cleared on a CCP that is not registered or exempt from registration? 
What conditions would need to be included to ensure the policy goals in 
the Dodd-Frank Act regarding central clearing are fulfilled? Should the 
conditions identified in Section 17A(k) that the clearing agency be 
available for inspection by the Commission and make available 
information requested by the Commission apply? Why or why not?
     Should the Commission codify the proposed approach to 
substituted compliance in the mandatory clearing space? Or is the 
proposed approach's reliance on the Commission's exemptive authority in 
Section 36 of the Exchange Act, and the procedures set forth in 
proposed Rule 0-13, sufficient? Why or why not?
     Are the conditions limiting the potential availability of 
substituted compliance to foreign clearing agencies that have no U.S. 
persons as members or activities in the United States appropriate? Are 
there other approaches that the Commission should consider? Should the 
Commission only consider a foreign clearing agency's CCP activities 
with regard to securities based swaps, or all type securities, in 
making a substituted compliance determination?
     What would be the market impact of the proposed approach 
to substituted compliance for the mandatory clearing requirement? How 
would the proposed approach affect the competitiveness of U.S. entities 
in the global marketplace (both in the United States as well as in 
foreign jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach? What would be 
the market impacts and competitiveness effects of alternatives to the 
proposed approach discussed in this release?

F. Trade Execution Requirement

    Under the Commission's proposal, substituted compliance would be 
permitted for certain cross-border security-based swap transactions 
that would be subject to the mandatory trade execution requirement of 
Section 3C(h) of the Exchange Act. Specifically, under proposed Rule 
3Ch-2(b)(1), the Commission could, conditionally or unconditionally, by 
order, make a substituted compliance determination with respect to a 
foreign jurisdiction to permit a person subject to the mandatory trade 
execution requirement to execute such transaction, or have such 
transaction executed on their behalf, on a security-based swap market 
(or class of markets) that is neither registered under the Exchange Act 
nor exempt from registration under the Exchange Act if the Commission 
determines that such security-based swap market (or class of markets) 
is subject to comparable, comprehensive supervision and regulation by a 
foreign financial regulatory authority or authorities in such foreign 
jurisdiction. Upon the Commission's issuance of an order making a 
substituted compliance determination with respect to a particular 
foreign jurisdiction under proposed Rule 3Ch-2(b), a counterparty to a 
security-based swap transaction that is subject to the mandatory trade 
execution requirement would be able to rely on the substituted 
compliance determination by the Commission to satisfy the mandatory 
trade execution requirement by executing such transaction on a 
security-based swap market in such foreign jurisdiction, if such 
security-based swap market is covered by, or is in a class of markets 
that is covered by, the Commission's order.\1163\
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    \1163\ Proposed Rule 3Ch-2(a) under the Exchange Act.
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    Only transactions that meet the requirements of proposed Rule 3Ch-
2(a), however, would be eligible for substituted compliance with 
respect to the mandatory trade execution requirement. Specifically, 
with respect to a foreign security-based swap market (or class of 
markets) for which the Commission has made a substituted compliance 
determination pursuant to proposed Rule 3Ch-2(b)(1), substituted 
compliance would only be available for security-based swap transactions 
where both of the following conditions apply to at least one 
counterparty to the transaction: (i) the counterparty is either a non-
U.S. person or foreign branch of a U.S. bank;\1164\ and (ii) the 
security-based swap transaction is not solicited, negotiated, or 
executed by a person within the United States on behalf of such 
counterparty.
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    \1164\ Under proposed Rule 3Ch-1(c) under the Exchange Act, the 
term ``foreign branch'' would have the same meaning as set forth in 
proposed Rule 3a71-3(a)(1) under the Exchange Act. See Section 
III.B.7, supra.
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    Proposed Rule 3Ch-2(a) is designed to extend the availability of 
substituted compliance only to security-based transactions where one 
counterparty to the transaction is not acting directly or through an 
agent within the United States. The Commission preliminarily believes 
that transactions in which both counterparties utilize a U.S. person to 
act on their behalf to execute, solicit, or negotiate the transaction 
should not be eligible for substituted compliance and that it is 
appropriate to apply the mandatory trade execution requirement of 
Section 3C(h) of the Exchange Act to these transactions, and not 
foreign law. This approach should help mitigate any potential 
competitive advantage that non-U.S. intermediaries operating within the 
United States may have over U.S. intermediaries when facilitating 
security-based swap transactions on behalf of non-U.S. persons. It also 
should promote regulatory parity for U.S. and non-U.S. counterparties 
when they enter into security-based swap transactions within the United 
States. The Commission, however, solicits comments on this approach.

[[Page 31100]]

    By contrast, for transactions involving at least one counterparty 
that is a foreign branch or a non-U.S. person and for which no person 
within the United States is directly involved in executing, soliciting 
or negotiating the transaction on behalf of such non-U.S. person or 
foreign branch, the Commission preliminarily believes that such 
transactions should be eligible for substituted compliance in the 
foreign jurisdiction. The Commission believes that limiting eligibility 
for substituted compliance to such cross-border security-based swap 
transactions would promote the Title VII goals of transparency, access, 
competition, and anti-manipulation with respect to transactions that 
impact U.S. markets and market participants, and address the regulatory 
complexities that stem from the global scope of the security-based 
swaps market.
    Under proposed Rule 3Ch-2(b)(2), in making a substituted compliance 
determination, the Commission would take into account such factors as 
the Commission determines are appropriate, such as the scope and 
objectives of the applicable foreign jurisdiction's regulatory 
requirements, as well as the effectiveness of the supervisory 
compliance program administered, and the enforcement authority 
exercised, by the relevant foreign financial regulatory authority or 
authorities to support the oversight of such security-based swap market 
(or class of markets). Thus, the Commission's determination would take 
into account a foreign jurisdiction's overall regulatory framework, and 
would focus on the similarity of regulatory objectives in addition to 
the presence or absence of similar rules. In addition, in making a 
substituted compliance determination with respect to a foreign 
jurisdiction, the Commission's determination could be with respect to a 
single security-based swap market within such jurisdiction, or a class 
of security-based swap markets within the jurisdiction. For instance, 
if a foreign jurisdiction imposes different levels of supervisory 
oversight with respect to different classes or categories of security-
based swap markets, the Commission could apply a substituted compliance 
determination to an entire class of security-based swap markets in the 
foreign jurisdiction, enabling each security-based swap market of that 
class within such jurisdiction to rely on the substituted compliance 
determination.
    Furthermore, under proposed Rule 3Ch-2(b)(3) under the Exchange 
Act, before issuing a substituted compliance order pursuant to proposed 
Rule 3Ch-2(b)(1) under the Exchange Act, the Commission would be 
required to have entered into a supervisory and enforcement MOU or 
other arrangement with the relevant foreign financial regulatory 
authority or authorities addressing oversight and supervision of the 
security-based swap market (or class of markets) under the substituted 
compliance determination.
    Under proposed Rule 3Ch-2(b)(4) under the Exchange Act, the 
Commission also would be able to modify or withdraw, at any time, an 
order containing a substituted compliance determination, after 
appropriate notice and opportunity for comment. This would allow the 
Commission to take action in the event that a security-based swap 
market (or class of markets), for any reason, is no longer suitable for 
substituted compliance.
    The Commission notes that the factors the Commission would consider 
in making a substituted compliance determination with respect to 
mandatory trade execution would not necessarily be the same factors 
that the Commission would find relevant to a comparability 
determination for purposes of an exemption from registration as a SB 
SEF.\1165\ The Commission preliminarily believes that possible factors, 
among others, it could consider when assessing the effectiveness of a 
foreign jurisdiction's supervisory compliance program may include the 
existence of a dedicated examination program; examiners with proper 
expertise; the existence of a risk monitoring framework and an 
examination plan; and a disciplinary program to enforce compliance with 
laws. The Commission, for example, could find the presence or absence 
of certain regulatory requirements in a particular foreign jurisdiction 
to be more relevant to a determination of whether a security-based swap 
market in that foreign jurisdiction should be exempt from registration 
as a SB SEF than to a substituted compliance determination with respect 
to mandatory trade execution. Accordingly, the Commission preliminarily 
believes that allowing substituted compliance with respect to mandatory 
trade execution for a foreign security-based swap market (or class of 
markets) would not necessarily result in a determination to exempt that 
foreign market (or class of markets) from registration as a SB SEF. 
However, the Commission generally solicits comments on the 
appropriateness or feasibility of this approach.
---------------------------------------------------------------------------

    \1165\ See Section VII.C, supra.
---------------------------------------------------------------------------

    Proposed Rule 3Ch-2(c) under the Exchange Act provides that one or 
more security-based swap markets could initiate the process of making a 
substituted compliance determination by filing an application, pursuant 
to the procedures set forth in proposed Rule 0-13,\1166\ requesting 
that the Commission make a substituted compliance determination. Such 
application would need to include the reasons therefor and such other 
documentation as the Commission may request. To provide the Commission 
with enough information to make a substituted compliance determination, 
the application would have to include sufficiently comprehensive 
information regarding the security-based swap market and the foreign 
regime such that the Commission has an adequate basis to make the 
substituted compliance determination set forth in proposed Rule 3Ch-
2(b) under the Exchange Act.
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    \1166\ See Section XI.B, supra.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment on all aspects of proposed Rule 3Ch-2, 
including the following:
     The Commission generally solicits comments on the 
appropriateness and clarity of the proposed rule. Should additional 
details be included as to any aspect of this proposed rule? If so, for 
what aspects of the proposed rule would additional details be useful 
and why?
     As discussed above, under proposed Rule 3Ch-2(a) under the 
Exchange Act, substituted compliance would be permitted only for 
security-based swap transactions that have at least one counterparty 
that is a non-U.S. person or a foreign branch and the security-based 
swap transaction is not solicited, negotiated, or executed by a person 
within the United States on behalf of such counterparty. The Commission 
generally solicits comments on the appropriateness of permitting 
substituted compliance for the transactions described in proposed Rule 
3Ch-2(a). Is the Commission's approach to defining the transactions 
that qualify for substituted compliance appropriate? If not, why not? 
Should some or all of the transactions described by the proposed rule 
not be eligible for substituted compliance? Should additional 
transactions not covered by the proposed rule be eligible for 
substituted compliance? In either case, please describe the 
transactions that should be eligible or ineligible for substituted 
compliance and provide the rationale for each.
     Does the proposed substituted compliance rule 
appropriately promote

[[Page 31101]]

the statutory objectives of the mandatory trade execution requirement, 
as well as the goal of international coordination? If not, how could 
this be better achieved? Would the objectives of Title VII be hindered 
by permitting persons to seek substituted compliance for the eligible 
transactions? If so, how?
     What is the likelihood that cross-border transactions 
would be subject to the mandatory trade execution requirements of 
foreign jurisdictions that conflict with the mandatory trade execution 
requirement of Section 3C(h) of the Exchange Act? For such 
transactions, would the complications stemming from such conflicting 
mandatory trade execution requirements be adequately addressed by 
permitting substituted compliance for the transactions described in the 
proposed rule? If not, why not? Please describe the complications, if 
any, that might still ensue even with substituted compliance. Would any 
conflicts likely arise for security-based swaps transactions not 
covered by the proposed substituted compliance rule? If so, please 
describe those conflicts and how they would arise.
     Under proposed Rule 3Ch-2(b)(1), under the Exchange Act, 
the Commission may permit substituted compliance with respect to the 
mandatory trade execution requirement if a security-based swap market 
(or class of markets) is subject to comparable, comprehensive 
supervision and regulation by the relevant foreign financial regulatory 
authority or authorities. Is this comparability standard appropriate 
and sufficiently clear? Should additional detail be provided as to what 
would and would not satisfy this standard? If so, what additional 
detail should be provided? Should a different standard be used? If so, 
what should be the standard and why?
     In making a substituted compliance determination, under 
proposed Rule 3Ch-2(b)(2) under the Exchange Act, the Commission would 
consider such factors it determines are appropriate, such as the 
factors enumerated in proposed Rule 3Ch-2(b)(2) under the Exchange Act. 
Are these factors appropriate to such a determination? Are the 
enumerated factors too broad? Too narrow? Please explain. Should 
certain of these factors not be considered or should certain additional 
factors be enumerated in the proposed rule?
     As discussed above, in making a substituted compliance 
determination, the Commission would focus on the similarity of 
regulatory objectives in addition to the presence or absence of similar 
rules. Is this holistic approach to making a substituted compliance 
determination appropriate? Why or why not? If not, what approach should 
the Commission take and why?
     As discussed above, the Commission preliminarily believes 
that the factors relevant to the Commission's substituted compliance 
determination for mandatory trade execution purposes would not 
necessarily be the same as the factors that the Commission would find 
relevant to a comparability determination for purposes of an exemption 
from registration as a security-based swap execution facility. The 
Commission generally solicits comments on the appropriateness of 
distinguishing the two determinations. Should the Commission consider 
the same factors in making a substituted compliance determination for 
mandatory trade execution and a comparability determination with 
respect to an exemption from registration as a security-based swap 
execution facility? If not, what factors would be relevant and 
appropriate to both determinations? Please describe. What factors would 
only be relevant or appropriate to a substituted compliance 
determination for mandatory trade execution or a comparability 
determination for an exemption from registration as a security-based 
swap execution facility, respectively? Please describe.
     Under proposed Rule 3Ch-2(c) under the Exchange Act, one 
or more security-based swap markets may file an application with the 
Commission to request that the Commission make a substituted compliance 
determination with respect to the mandatory trade execution 
requirement. Should persons other than security-based swap markets be 
permitted to file such substituted compliance applications? Why or why 
not? If so, what other types of persons should be permitted to file 
such applications? Please explain.
     What would be the market impact of proposed Rule 3Ch-2? 
How would the application of the proposed rule affect the 
competitiveness of U.S. entities in the global marketplace (both in the 
United States as well as in foreign jurisdictions)? Would the proposed 
rule place any market participants at a competitive disadvantage or 
advantage? If so, please explain. Would the proposed rule be a more 
general burden on competition? If so, please explain. What other 
measures should the Commission consider to implement the proposed 
approach? What would be the market impacts and competitiveness effects 
of alternatives to the proposed approach discussed in this release?

Antifraud Authority

    The provisions of the proposed rules and interpretive guidance, 
discussed above, relate solely to the applicability of the registration 
and mandatory reporting, clearing, and trade execution requirements 
under Title VII. The proposed rules and interpretive guidance do not 
limit the cross-border reach of the antifraud or other provisions of 
the federal securities laws to these entities.
    In Section 929P(b) of the Dodd-Frank Act, Congress added provisions 
to the federal securities laws confirming the Commission's broad cross-
border antifraud authority. Congress enacted Section 929P(b) in 
response to the Supreme Court's decision in Morrison v. National 
Australia Bank,\1167\ which created uncertainty about the Commission's 
cross-border enforcement authority under the antifraud provisions of 
the federal securities laws. Prior to Morrison, the federal courts of 
appeals for nearly four decades had construed the antifraud provisions 
to reach cross-border securities frauds when the fraud either involved 
significant conduct within the United States causing injury to overseas 
investors, or had substantial foreseeable effects on investors or 
markets within the United States.\1168\ With respect to the 
Commission's enforcement authority, Section 929P(b) codified the court 
of appeals' prior interpretation both as to the scope of the antifraud 
provisions' cross-border reach and the nature of the inquiry as one of 
subject-matter jurisdiction.\1169\
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    \1167\ See 130 S. Ct. 2869, 2888 (2010) (holding in a Section 
10(b) class action that ``it is . . . only transactions in 
securities listed on domestic exchanges, and domestic transactions 
in other securities, to which Sec.  10(b) applies'').
    \1168\ See, e.g., Schoenbaum v. Firstbrook, 405 F.2d 200, 206 
(2d Cir. 1968), modified on other grounds, 405 F.2d 215 (1968) (en 
banc).
    \1169\ See 156 Cong. Rec. H5237 (daily ed. June 30, 2010) 
(statement of Rep. Kanjorski, author of Section 929P(b)) (``In the 
case of Morrison v. National Australia Bank, the Supreme Court last 
week held that section 10(b) of the Exchange Act applies only to 
transactions in securities listed on United States exchanges and 
transactions in other securities that occur in the United States. In 
this case, the Court also said that it was applying a presumption 
against extraterritoriality. This bill's provisions concerning 
extraterritoriality, however, are intended to rebut that presumption 
by clearly indicating that Congress intends extraterritorial 
application in cases brought by the SEC or the Justice Department. 
Thus, the purpose of the language of section 929P(b) of the bill is 
to make clear that in actions and proceedings brought by the SEC or 
the Justice Department, the specified provisions of the Securities 
Act, the Exchange Act and the Investment Advisers Act may have 
extraterritorial application, and that extraterritorial application 
is appropriate, irrespective of whether the securities are traded on 
a domestic exchange or the transactions occur in the United States, 
when the conduct within the United States is significant or when 
conduct outside the United States has a foreseeable substantial 
effect within the United States.''). See also 156 Cong. Rec. S5915-
16 (daily ed. July 15, 2010) (statement of Senator Reed).

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[[Page 31102]]

    Specifically, the Commission's antifraud enforcement authority 
under Section 17(a) of the Securities Act and the antifraud provisions 
of the Exchange Act--including Sections 9(j) and 10(b)--extends to 
``(1) conduct within the United States that constitutes significant 
steps in furtherance of [the antifraud violation], even if the 
securities transaction occurs outside the United States and involves 
only foreign investors,'' and ``(2) conduct occurring outside the 
United States that has a foreseeable substantial effect within the 
United States.'' \1170\ Similarly, the Commission's enforcement 
authority under Section 206 of the Investment Advisers Act applies 
broadly to reach ``(1) conduct within the United States that 
constitutes significant steps in furtherance of the violation, even if 
the violation is committed by a foreign adviser and involves only 
foreign investors,'' and ``(2) conduct occurring outside the United 
States that has a foreseeable substantial effect within the United 
States.'' \1171\
---------------------------------------------------------------------------

    \1170\ Section 22 of the Securities Act, 15 U.S.C. 77v(a); 
Section 27 of the Exchange Act, 15 U.S.C. 78aa.
    \1171\ Section 214 of the Investment Advisers Act, 15 U.S.C. 
80b-14.
---------------------------------------------------------------------------

    The Commission's broad antifraud enforcement authority reflects the 
strong interest of the United States in applying the antifraud 
provisions to cross-border frauds that implicate U.S. territory, U.S. 
markets, U.S. investors or other U.S. market participants, or other 
U.S. interests.\1172\ Doing so is necessary to ensure honest securities 
markets and high ethical standards in the U.S. securities industry, and 
thereby to promote confidence in our securities markets among both 
domestic and foreign investors. Cross-border application of the 
antifraud provisions is also critical for the protection of U.S. 
investors from securities frauds executed outside of the United States, 
but that threaten to produce, foreseeably do produce, or were otherwise 
intended to produce effects upon U.S. markets, U.S. investors or other 
U.S. market participants, or other U.S. interests.
---------------------------------------------------------------------------

    \1172\ See generally Restatement (Third) of Foreign Relations 
Law of the United States section 402 (1987), stating that ``the 
United States has authority to prescribe law with respect to . . . 
conduct that, wholly or in substantial part, takes place within its 
territory; the status of persons, or interests in things, present 
within its territory'' and ``conduct outside its territory that has 
or is intended to have substantial effect within its territory'').
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XIII. General Request for Comment

A. General Comments

    In responding to the specific requests for comment above, 
interested persons are encouraged to provide supporting data and 
analysis and, when appropriate, suggest modifications to proposed rule 
text. Responses that are supported by data and analysis provide great 
assistance to the Commission in considering the practicality and 
effectiveness of proposed new requirements as well as assessing the 
benefits and costs of proposed requirements. In addition, commenters 
are encouraged to identify in their responses a specific request for 
comment by indicating the section number of the release.
    The Commission also seeks comment on the proposals as a whole. In 
particular, the Commission seeks comment on the following questions:
     How would the proposals integrate with provisions in other 
Titles and Subtitles of the Dodd-Frank Act and any domestic or global 
regulations or proposed regulations under those other Titles and 
Subtitles of the Dodd-Frank Act? For example, the Commission invites 
comment on how certain aspects of the proposals, such as registration 
and regulation of foreign security-based swap dealers and major 
security-based swap participants, and application of the transaction-
level requirements, would integrate with regulation of systemically 
important financial institutions in Title I of the Dodd-Frank Act, 
regulation of registered broker-dealers and investment advisers, 
regulation of bank holding companies in the Bank Holding Company Act, 
and regulation of global systemically important financial institutions 
in other jurisdictions.
     For what aspects of the proposal should the Commission 
consider invoking our authority under Section 30(c) of the Exchange Act 
to prevent evasion? Please explain.

B. Consistency with CFTC's Cross-Border Approach

    The CFTC has proposed interpretative guidance and a policy 
statement describing the cross-border application of certain swaps 
provisions of the CEA that were enacted by Title VII, and the CFTC's 
regulations promulgated thereunder.\1173\ Specifically, the proposal 
addresses the registration requirement for swap dealers and major swap 
participants that are not U.S. persons, the application of Title VII 
requirements appurtenant to such registered entities, and the 
application of the clearing, trade execution, and certain reporting 
provisions under the CEA to cross-border swap transactions involving 
counterparties that are not swap dealers or major swap participants.
---------------------------------------------------------------------------

    \1173\ The CFTC's guidance interprets Section 2(i) of the 
Commodity Exchange Act (``CEA''), as revised by Section 722(d) of 
the Dodd-Frank Act. Section 2(i) provides that Title VII's 
provisions relating to swaps, ``(including any rule prescribed or 
regulation promulgated under that Act), shall not apply to 
activities outside the United States unless those activities--(1) 
have a direct and significant connection with activities in, or 
effect on, commerce of the United States; or (2) contravene such 
rules or regulations as the Commission may prescribe or promulgate 
as are necessary or appropriate to prevent the evasion of any 
provision of this Act that was enacted by the [Dodd-Frank Act].''
---------------------------------------------------------------------------

    Understanding that the Commission and the CFTC regulate different 
products, participants, and markets, and have different statutory 
authority, and thus, appropriately may take different approaches to 
various issues, we nevertheless are guided by the objective of 
establishing consistent and comparable requirements to U.S. market 
participants. Accordingly, we request comments generally on (i) the 
impact of any differences between the Commission and CFTC approaches to 
the application of Title VII to cross-border activities, including the 
application of registration requirements and the substantive 
requirements of Title VII, (ii) whether the Commission's proposed 
application of Title VII in the cross-border context should be modified 
to conform to the proposals made by the CFTC, and (iii) whether any 
cross-border interpretations proposed by the CFTC, but not proposed by 
the Commission (whether as interpretations or rules), should be adopted 
by the Commission.

XIV. Paperwork Reduction Act

A. Introduction

    The Paperwork Reduction Act of 1995 (``PRA'') \1174\ imposes 
certain requirements on Federal agencies in connection with their 
conducting or sponsoring any ``collection of information.'' \1175\ 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. In addition, 44 U.S.C. 3507(a)(1)(D) provides 
that before adopting (or revising) a collection of information 
requirement, an agency must, among other things, publish a notice in 
the Federal Register stating that the agency has submitted the proposed 
collection

[[Page 31103]]

of information to the Office of Management and Budget (``OMB'') and 
setting forth certain required information, including: (1) A title for 
the collection of information; (2) a summary of the collection of 
information; (3) a brief description of the need for the information 
and the proposed use of the information; (4) a description of the 
likely respondents and proposed frequency of response to the collection 
of information; (5) an estimate of the paperwork burden that shall 
result from the collection of information; and (6) notice that comments 
may be submitted to the agency and director of OMB.\1176\
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    \1174\ 44 U.S.C. 3501 et seq.
    \1175\ 44 U.S.C. 3502(3).
    \1176\ 44 U.S.C. 3507(a)(1)(D) (internal formatting omitted); 
see also 5 CFR 1320.5(a)(1)(iv).
---------------------------------------------------------------------------

    Certain provisions of proposed Rule 3a71-3, proposed Rule 3a71-5, 
proposed Rule 3Ch-2, re-proposed Forms SBSE, SBSE-A, and SBSE-BD, 
proposed Rule 18a-4, and re-proposed Rules 242.900 through 242.911 of 
Regulation SBSR contain ``collection of information requirements'' 
within the meaning of the PRA. Accordingly, the Commission is 
submitting these requirements to OMB for review in accordance with 44 
U.S.C. 3507 and 5 CFR 1320.11. The title of these collections are 
[``Registration Rules for Security-Based Swap Entities,'' ``Disclosures 
by Certain Foreign Security-Based Swap Dealers and Major Security-Based 
Swap Participants,'' ``Reliance on Counterparty Representations 
Regarding Activity Within the United States,'' ``Requests for Cross-
Border Substituted Compliance Determinations,'' and ``Reporting and 
Dissemination of Security-Based Swap Information.''] We are applying 
for OMB Control Numbers for the collections listed above in accordance 
with 44 U.S.C. 3507(j) and 5 CFR 1320.13.

B. Re-proposal of Form SBSE, Form SBSE-A, and Form SBSE-BD

1. Summary of Collection of Information
    On October 24, 2011, the Commission proposed Rules 15Fb1-1 through 
15Fb6-1 and Forms SBSE, SBSE-A, SBSE-BD, SBSE-C, and SBSE-W to 
facilitate registration of, certification by, and withdrawal of SBS 
Entities, as required by Section 15F of the Exchange Act.\1177\ In 
light of the Commission's proposed rules regarding substituted 
compliance, the Commission is re-proposing Forms SBSE, SBSE-A, and 
SBSE-BD to add three questions to Form SBSE and Form SBSE-A, one 
question to Form SBSE-BD, and to amend Schedule F to those Forms as 
described in more detail below.\1178\ The Commission is not proposing 
to amend any of the other Forms, or any of the rules, proposed in the 
Registration Proposing Release. The burden estimates described below 
are designed to update our burden estimates for proposed Forms SBSE and 
SBSE-A to account for the revisions we are proposing to those two re-
proposed forms. For information regarding the other burdens associated 
with proposed Rules 15Fb1-1 through 15Fb6-1 and Forms SBSE, SBSE-A, 
SBSE-BD, SBSE-C, and SBSE-W, please refer to the Registration Proposing 
Release.\1179\
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    \1177\ See Registration Proposing Release, 76 FR 65784.
    \1178\ See Proposed Rule 3a71-5(c) under the Exchange Act; see 
also Section III.C, supra. The Commission is not proposing any 
changes to Form SBSE-BD, Form SBSE-C, or Form SBSE-W.
    \1179\ See Registration Proposing Release, 76 FR 65807.
---------------------------------------------------------------------------

    Pursuant to paragraph (a) of proposed Rule 15Fb2-1, each SBS Entity 
would be required to file an application to register with the 
Commission.\1180\ The Commission sought to reduce burdens and costs 
associated with the application process by providing alternate 
registration forms for certain types of SBS Entities (including Forms 
SBSE-A and SBSE-BD). Each SBS Entity would only need to research, 
complete, and file one of the proposed Forms.
---------------------------------------------------------------------------

    \1180\ Id. at 65820-21.
---------------------------------------------------------------------------

    Proposed Rule 15Fb2-3 would require that SBS Entities promptly 
amend their applications if they find that the information contained 
therein has become inaccurate.\1181\ While SBS Entities may need to 
update their Forms periodically, each firm would only need to amend 
that aspect of the Form that has become inaccurate.
---------------------------------------------------------------------------

    \1181\ Id. at 65822.
---------------------------------------------------------------------------

    Proposed Rules 15Fb1-1 through 15Fb6-1 and re-proposed Forms SBSE, 
SBSE-A, and SBSE-BD would require that each respondent retain certain 
records and information for three years.\1182\
---------------------------------------------------------------------------

    \1182\ See id. at 65821.
---------------------------------------------------------------------------

2. Proposed Use of Information
    Re-proposed Forms SBSE, SBSE-A, and SBSE-BD, as applicable, are 
applications through which SBS Entities would register with the 
Commission. Information collected through these re-proposed Forms SBSE, 
SBSE-A, and SBSE-BD would allow the Commission to determine whether 
applicants meet the standards for registration, including provisions 
regarding substituted compliance, and would help the Commission to 
fulfill our oversight responsibilities.
    The Commission intends to make the information collected pursuant 
to proposed Rule 15Fb1-1 through 15Fb6- 1 and re-proposed Forms SBSE, 
SBSE-A, and SBSE-BD public.
    Any collections of information required pursuant to proposed Rules 
15Fb1-1 through 15Fb6-1 and re-proposed Forms SBSE, SBSE-A, and SBSE-BD 
would be mandatory to permit the Commission to determine whether 
applicants meet the standards for registration, and to fulfill our 
oversight responsibilities.
3. Respondents
    In the Intermediary Definitions Adopting Release and Registration 
Proposing Release the Commission staff estimated, based on data 
obtained from DTCC and conversations with market participants, that 
approximately 50 entities would fit within the definition of a 
security-based swap dealer.\1183\ The Commission staff also estimated 
in the Registration Proposing Release that up to five entities fit 
within the definition of major security-based swap participant.\1184\ 
The Commission sought comment on the reasonableness and accuracy of our 
estimates, but received no comments regarding these estimates.
---------------------------------------------------------------------------

    \1183\ See Intermediary Definitions Adopting Release, 77 FR 
30725; Registration Proposing Release, 76 FR 65808; see also Trade 
Acknowledgment Proposing Release, 76 FR 3868; External Business 
Conduct Standards Proposing Release, 76 FR 46668.
    \1184\ See Registration Proposing Release, 76 FR 65821; see also 
Intermediary Definitions Proposing Release, 75 FR 80209 n.188; Trade 
Acknowledgment Proposing Release, 76 FR 3868; External Business 
Conduct Standards Proposing Release, 76 FR 46668.
---------------------------------------------------------------------------

    Of the 55 entities likely to be either security-based swap dealers 
or major security-based swap participants, the Commission staff 
estimates that 18 entities will be registered foreign security-based 
swap dealers, as defined in proposed Rule 3a71-3(a)(3) or foreign major 
security-based swap participants, as defined in proposed Rule 3a67-
10(a)(1) (collectively, ``Nonresident SBS Entities'').\1185\ The 
Commission staff expects that most registered Nonresident SBS Entities 
will be based in one of a small number of non-U.S. jurisdictions; 
however, the Commission understands that approximately 19 jurisdictions 
are in the process of developing regulations and/or infrastructure for 
swaps, security-based

[[Page 31104]]

swaps, and other OTC derivatives.\1186\ In addition, the Commission 
anticipates that a small number of security-based swap market 
participants could be based in other jurisdictions. As a result, the 
Commission staff estimate that cross-border issues may arise in 
connection with security-based swap market participants and 
transactions in and between up to 30 discrete jurisdictions.\1187\
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    \1185\ While the Commission estimated in the Registration 
Proposing Release that 22 non-resident entities would likely 
register with the Commission as SBS Entities (see Registration 
Proposing Release, 76 FR 65807-12), our estimates have changed based 
on the staff's further analysis of the cross-border issues and 
likely respondents.
    \1186\ See FSB Progress Report April 2013. These 19 
jurisdictions are: Argentina, Australia, Brazil, Canada, China, the 
European Union, Hong Kong, India, Indonesia, Japan, Mexico, the 
Republic of Korea, Russia, Saudi Arabia, Singapore, South Africa, 
Switzerland, Turkey, and the United States. See also notes 35 and 
36, supra.
    \1187\ The European Union is regulating OTC derivatives 
reporting, clearing, and bilateral risk management on a pan-European 
basis. Accordingly, the Commission may treat the European Union as a 
single jurisdiction for purposes of certain cross-border issues. 
However, the Commission notes that there may be variation between 
individual European countries even within this consolidated approach 
(e.g., privacy laws or supervisory oversight or enforcement may 
differ in various European countries).
---------------------------------------------------------------------------

    In the Registration Proposing Release, Commission staff further 
estimated, based on its experience and understanding of the swap and 
security-based swap markets that of the firms that may register as SBS 
Entities, approximately 35 also will register with the CFTC as swap 
dealers or major swap participants, approximately 16 would also be 
registered with the Commission as broker-dealers, and approximately 4 
firms not otherwise registered with the CFTC or the Commission will 
seek to become an SBS Entity.\1188\ The Commission sought comment on 
the reasonableness and accuracy of our estimates, but has received no 
comments regarding these estimates to date.
---------------------------------------------------------------------------

    \1188\ See External Business Conduct Standards Proposing 
Release, 76 FR 46668.
---------------------------------------------------------------------------

    The Commission again seeks comment on the reasonableness and 
accuracy of our estimates as to the number of participants in the 
security-based swap market that will be required to register with the 
Commission through the use of re-proposed Forms SBSE, SBSE-A, and SBSE-
BD, including the number of registered foreign security-based swap 
dealers. The Commission also seeks comment on our estimate of the 
number of jurisdictions with security-based swap participants or 
infrastructure that may transact with or be used by U.S.-regulated 
entities.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
(a) Paperwork Burden Associated With Filing Application Forms
    As indicated in the Registration Proposing Release, proposed Rule 
15Fb2-1 would require that each SBS Entity register with the Commission 
by filing an application on Form SBSE, Form SBSE-A, or Form SBSE-BD, as 
appropriate. Each SBS Entity would only need to research, complete, and 
file one form.\1189\ The Commission is not proposing to amend this 
rule, but is re-proposing the Forms that would be filed to facilitate 
registration. The modifications to re-proposed Forms SBSE, SBSE-A, and 
SBSE-BD would add two questions to Form SBSE and Form SBSE-A, add one 
question to all three Forms, and would modify Schedule F to all the 
Forms.
---------------------------------------------------------------------------

    \1189\ Id. at 65820-21.
---------------------------------------------------------------------------

    The Commission staff does not believe that the addition of these 
questions will significantly increase the burdens associated with the 
filing of these forms. In the Registration Proposing Release, the 
Commission staff estimated that approximately four firms would need to 
register using proposed Form SBSE and that the total paperwork burden 
associated with filing each proposed Form SBSE (including the Schedules 
\1190\ and disclosure reporting pages (``DRPs'')) would be 
approximately 40 hours for each firm that would use this Form.\1191\ 
The Commission staff acknowledged that it is likely that the time 
necessary to complete these forms would vary depending on the nature 
and complexity of an entity's business.\1192\ The Commission staff 
believes, based on its experience with Form BD, that the addition of 
three new questions to Form SBSE included in the re-proposed Form SBSE 
could increase the amount of time it would take for an SBS Entity to 
complete this form by about two hours. Thus, the Commission staff 
estimates that it would take all 4 SBS Entities who may use Form SBSE 
to register with the Commission a total of approximately 168 hours to 
register using re-proposed Form SBSE.\1193\ As each SBS Entity would 
only be required to file 1 complete form once, this would be a one-time 
burden associated with registration \1194\ (the burden associated with 
amendments to the form are discussed below).
---------------------------------------------------------------------------

    \1190\ Except Schedule G (which we are not proposing to amend) 
and Schedule F (which is dealt with separately below).
    \1191\ Registration Proposing Release, 76 FR 65808.
    \1192\ Id.
    \1193\ 42 hours * 4 firms = 168 hours.
    \1194\ While it is possible that another firm may choose to 
register as an SBS Entity at some future time, we presently estimate 
for purposes of this PRA that no additional firms will register in 
the next three years. This is because the Dodd-Frank Act imposed 
regulation on an existing industry and we expect those industry 
participants presently engaged in this business to either register 
when the rules become effective or decide to withdraw from this 
business. In addition, the costs to start-up an SBS Entity will 
likely be high, which may discourage new entrants. Finally, as the 
Commission has not yet promulgated rules to register or regulate 
these entities and we have no experience with the registration 
trends of SBS Entities over time, any estimate regarding the number 
of possible new entrants over time would be speculative.
---------------------------------------------------------------------------

    As proposed, Form SBSE-A contains fewer questions than the proposed 
Form SBSE and is available only to firms that are (or will be) familiar 
with the registration process because they are registered (or will be 
registering) with the CFTC as a swap dealer or major swap participant. 
As a result, the Commission staff estimated in the Registration 
Proposing Release that it would take SBS Entities filing proposed Form 
SBSE-A approximately 80% of the time that it would take for an 
unregistered entity to research, complete, and file proposed Form SBSE 
(including the Schedules and DRPs).\1195\ Accordingly, the Commission 
staff estimated that the total paperwork burden associated with filing 
each proposed Form SBSE-A across 35 firms would be approximately 32 
hours for each firm who would use this Form.\1196\ The Commission staff 
believes, based on its experience with Form BD, that the addition of 3 
new questions to Form SBSE-A included in the re-proposed Form SBSE-A 
could increase the amount of time it would take for an SBS Entity to 
complete this form by about two hours. Thus, the Commission staff 
estimates that it would take all 35 SBS Entities who may use Form SBSE-
A to register with the Commission a total of approximately 1,190 hours 
to register using re-proposed Form SBSE-A.\1197\ As each SBS Entity 
would only be required to file 1 complete form once, this would be a 
one-time burden associated with registration \1198\ (the burden 
associated with amendments to the form are discussed below).
---------------------------------------------------------------------------

    \1195\ Registration Proposing Release, 76 FR 65808. This 
estimate assumes that an entity that is familiar with an analogous 
registration process would require approximately 20% less time to 
complete Form SBSE-A compared to an unregistered entity completing 
Form SBSE.
    \1196\ Id.
    \1197\ 34 hours * 35 firms = 1,190 hours.
    \1198\ See note 1194, supra.
---------------------------------------------------------------------------

    As proposed, Form SBSE-BD contains fewer questions than both the 
proposed Form SBSE and Form SBSE-A and is available only to firms that 
are (or will

[[Page 31105]]

be) familiar with the registration process because they are registered 
(or will be registering) with the Commission as a broker-dealer. As a 
result, the Commission staff estimated in the Registration Proposing 
Release that it would take SBS Entities filing proposed Form SBSE-BD 
approximately 25% of the time that it would take for an unregistered 
entity to research, complete, and file proposed Form SBSE (including 
the Schedules and DRPs).\1199\ Accordingly, the Commission staff 
estimated that the total paperwork burden associated with filing each 
proposed Form SBSE-BD across sixteen firms would be approximately ten 
hours for each firm that would use this Form.\1200\ The Commission 
staff believes, based on its experience with Form BD, that the addition 
of one new question to Form SBSE-BD included in the re-proposed Form 
SBSE-BD could increase the amount of time it would take for an SBS 
Entity to complete this form by about one half hour. Thus, the 
Commission staff estimates that it would take all sixteen SBS Entities 
that may use Form SBSE-BD to register with the Commission a total of 
approximately 168 hours to register using re-proposed Form SBSE-
BD.\1201\ As each SBS Entity would only be required to file one 
complete form once, this would be a one-time burden associated with 
registration\1202\ (the burden associated with amendments to the form 
are discussed below).
---------------------------------------------------------------------------

    \1199\ Registration Proposing Release, 76 FR 65808.
    \1200\ Id.
    \1201\ 10\1/2\; hours * 16 firms = 168 hours.
    \1202\ See note 1194, supra.
---------------------------------------------------------------------------

(b) Paperwork Burden Associated With Amending Schedule F
    As indicated in the Registration Proposing Release, proposed Rule 
15Fb2-4 would require that each nonresident SBS Entity file an 
additional schedule (Schedule F) with its Form SBSE, Form SBSE-A, or 
Form SBSE-BD, as appropriate, to identify its U.S. agent for service of 
process and to certify that the firm can, as a matter of law, provide 
the Commission with access to its books and records and can, as a 
matter of law, submit to onsite inspection and examination by the 
Commission.\1203\ The Commission is not proposing to amend this rule, 
but is re-proposing Schedule F. The modifications to re-proposed 
Schedule F would divide Schedule F into two sections. Section I would 
include the full text of the originally proposed Schedule F. Section II 
would elicit additional information regarding foreign regulators with 
which the applicant may be registered or that otherwise have 
jurisdiction over the applicant.
---------------------------------------------------------------------------

    \1203\ Registration Proposing Release, 76 FR 65822.
---------------------------------------------------------------------------

    The Commission staff does not believe that the addition of this new 
Section would significantly increase the burdens associated with the 
filing of Schedule F because information regarding the foreign 
regulators with jurisdiction over the entity should be known and 
readily available. In the Registration Proposing Release, the 
Commission staff estimated, based on its experience relative to the 
securities industry and Form BD, that the average time necessary for 
each Nonresident SBS Entity to complete and file Schedule F would be 
approximately one hour.\1204\ The Commission staff believes, based on 
its experience with Form BD, that adding the new section to Schedule F 
could increase the amount of time it would take for an SBS Entity to 
complete this form by about one-half hour. Thus, the Commission staff 
estimates that it would take all 18 Non-resident SBS Entities who may 
use Schedule F to register with the Commission a total of approximately 
27 hours complete Schedule F.\1205\ As each SBS Entity would only be 
required to file Schedule F once, this would be a one-time burden 
associated with registration\1206\ (the burden associated with 
amendments to the form--including the schedules--are discussed below).
---------------------------------------------------------------------------

    \1204\ Id. at 65811.
    \1205\ 1\1/2\; hours * 18 Non-resident SBS Entities = 27 hours.
    \1206\ See note 1194, supra.
---------------------------------------------------------------------------

(c) Paperwork Burden Associated With Amending Application Forms
    As discussed in the Registration Proposing Release, proposed Rule 
15Fb2-3 would require that SBS Entities amend their applications if 
they find that information contained in a prior filing has become 
inaccurate.\1207\ The Commission is not proposing to amend this rule; 
however, the addition of three questions to proposed Forms SBSE and 
SBSE-A, the addition of one question to Form SBSE-BD, and the revisions 
to Schedule F would provide additional information that could change 
over time and require amendment of these Forms. As indicated in the 
Registration Proposing Release, the staff does not expect that the 
requirement to amend these Forms would impose a significant burden 
because each SBS Entity would have already completed proposed Forms 
SBSE, SBSE-A, or SBSE-BD, as applicable, and would only need to amend 
those aspects of the Forms that may become inaccurate. In the 
Registration Proposing Release, the staff estimated, based on the 
number of amendments the Commission receives annually on Form BD, that 
each SBS Entity would file approximately three amendments 
annually.\1208\ The staff also estimated in the Registration Proposing 
Release that, although the time necessary to file an amendment to 
proposed Forms SBSE, SBSE-A, or SBSE-BD, as applicable, would vary 
depending on the nature and complexity of the amendment, the Commission 
staff estimates the average total annual burden associated with 
amending proposed Forms SBSE, SBSE-A, and SBSE-BD would be 
approximately one hour for each amendment.\1209\ The staff does not 
believe the addition of 3 questions included in each of re-proposed 
Forms SBSE and SBSE-A, the addition of one new question to re-proposed 
Form SBSE-BD, and the revision of Schedule F would increase either the 
number of amendments each firm may be required to file or the amount of 
time it would take for a firm to file an amendment.\1210\ Thus we 
continue to believe the annual burden for associated with Rule 15Fb2-3 
would be approximately 165 hours.\1211\
---------------------------------------------------------------------------

    \1207\ Registration Proposing Release, 76 FR 65809.
    \1208\ Id.
    \1209\ Id.
    \1210\ The estimated number of amendments filed by each SBS 
Entity in the Registration Proposing Release was based on the number 
of amendments to Form BD filed annually by broker-dealers. See 
Registration Proposing Release, 76 FR 65809. We did not base our 
estimate on a comparison of the number or content of the questions, 
because we have no data upon which to base that type of estimate and 
we believe it would be too speculative.
    \1211\ 1 hour * 3 amendments per year * 55 SBS Entities = 165 
hours.
---------------------------------------------------------------------------

    As indicated in the Registration Proposing Release, the collection 
of information relating to Forms SBSE, SBSE-A, SBSE-BD and Schedule F 
would be mandatory, and the Commission intends to make the information 
provided through these forms and Schedule F public.
5. Request for Comment on Paperwork Burden Estimates
    The Commission seeks comment on the paperwork burdens associated 
with proposed Rules 15Fb1-1 through 15Fb6-1 and re-proposed Forms SBSE, 
SBSE-A, and SBSE-BD, as applicable.
     What burdens, if any, would respondents incur with respect 
to system design, programming, expanding systems capacity, and 
establishing compliance programs to comply with re-proposed Forms SBSE, 
SBSE-A, and SBSE-BD, as applicable?

[[Page 31106]]

     Is it likely that SBS Entities would complete re-proposed 
Forms SBSE, SBSE-A, and SBSE-BD, as applicable, themselves or is it 
more likely that they would obtain assistance in completing these forms 
from some outside entity (e.g., outside counsel)? If an SBS Entity 
obtains assistance in completing the forms from an outside entity, what 
type of entity may be utilized and what may the relative costs to 
employ such an entity for this purpose be?
     The Commission estimates that no new SBS Entities will 
register after year 1 because the security-based swap market is already 
well-developed and because of potentially significant barriers to entry 
for prospective market participants. Is this estimate accurate? If not, 
how many SBS Entities will register after year 1?
     Would there be different or additional paperwork burdens 
associated with the collection of information under re-proposed Forms 
SBSE, SBSE-A, and SBSE-BD, as applicable, that a respondent does not 
currently undertake in the ordinary course of business that the 
Commission has failed to identify? If so, please both describe and 
quantify any additional burden(s).

C. Disclosures by Certain Foreign Security-Based Swap Dealers and Major 
Security-Based Swap Participants

1. Summary of Collection of Information
    A registered foreign security-based swap dealer must disclose to 
any counterparty that is a U.S. person, prior to accepting any assets 
from, for, or on behalf of such counterparty to margin, guarantee, or 
secure a security-based swap, the potential treatment of any assets 
segregated by the registered foreign security-based swap dealer 
pursuant to Exchange Act Section 3E in an insolvency proceeding under 
U.S. bankruptcy law and any applicable foreign insolvency laws.\1212\
---------------------------------------------------------------------------

    \1212\ Proposed Rule 18a-4(e)(3) under the Exchange Act.
---------------------------------------------------------------------------

2. Proposed Use of Information
    The required disclosures would give U.S. counterparties important 
information regarding the treatment of their collateral and the role of 
U.S. and foreign law in any insolvency proceedings. The Commission 
preliminarily believes that this information would promote transparency 
and help counterparties in fully assessing the risks associated with 
their transactions. Moreover, without these disclosures, the Commission 
preliminarily believes that there is a risk that some U.S. 
counterparties could assume, incorrectly, that any security-based swap 
transaction with a registered foreign security-based swap dealer or 
major security-based swap participant is automatically and fully 
subject to Title VII and other potentially applicable U.S. laws (e.g., 
U.S. bankruptcy law). These disclosures would make such confusion less 
likely and, as a result, help to ensure that U.S. counterparties 
conduct appropriate due diligence when transacting with foreign 
security-based swap dealers.
    The disclosures required pursuant to proposed Rule 18a-4(e) under 
the Exchange Act would be mandatory for all registered foreign 
security-based swap dealers that enter into security-based swaps with 
counterparties that are not U.S. persons.
    Registered foreign security-based swap dealers are required to 
disclose information pursuant to proposed Rule 18a-4(e) to their U.S. 
counterparties. Therefore, the Commission would not typically receive 
confidential information as a result of this collection of information. 
However, to the extent that the Commission receives confidential 
information pursuant to proposed Rule 18a-4(e) through our examination 
and oversight program, an investigation, or some other means, such 
information would be kept confidential, subject to the provisions of 
applicable law.\1213\
---------------------------------------------------------------------------

    \1213\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of 
Information Act provides an exemption for ``trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the 
Freedom of Information Act provides an exemption for matters that 
are ``contained in or related to examination, operating, or 
condition reports prepare by, or on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions.'' 5 U.S.C. 552(b)(8)).
---------------------------------------------------------------------------

3. Respondents
    As discussed in Section B.3 above, the Commission staff estimates 
that there will be 18 Nonresident SBS Entities and that most of these 
firms will be based in one of a small number of non-U.S. 
jurisdictions.\1214\ In addition, the Commission staff anticipates that 
a small number of security-based swap market participants could be 
based in other jurisdictions.\1215\ As a result, the Commission staff 
estimates that cross-border issues may arise in connection with 
security-based swap market participants and transactions in and between 
up to 30 discrete jurisdictions.\1216\
---------------------------------------------------------------------------

    \1214\ See Section XIV.B.3, supra.
    \1215\ Id.
    \1216\ Id.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting Burdens
    The estimates in this section reflect the Commission's experience 
with burden estimates for similar disclosure requirements and our 
staff's discussions with market participants.\1217\ Pursuant to 
proposed Rule18a-4(e)(3), registered foreign security-based swap 
dealers would be required to provide disclosures to their U.S. 
counterparties. The Commission believes that, in most cases, these 
disclosures would be made through amendments to the registered foreign 
security-based swap dealer's existing trading documentation. Because 
these disclosures relate to new regulatory requirements, the Commission 
anticipates that all registered foreign security-based swap dealers 
would need to incorporate new language into their existing trading 
documentation with U.S. counterparties. Disclosure of the potential 
treatment of segregated assets in insolvency proceedings under U.S. 
bankruptcy law and foreign insolvency laws pursuant to proposed Rule 
18a-4(e)(3) would likely vary depending on the counterparty's 
jurisdiction. Accordingly, the Commission expects that these 
disclosures often may need to be tailored to address the particular 
circumstances of each trading relationship. However, in some cases, 
trade associations or industry working groups may be able to develop 
standard disclosure forms that can be adopted by foreign security-based 
swap dealers with little or no modification. In either case, the 
paperwork burden associated with developing new disclosure language and 
incorporating this language into a registered foreign security-based 
swap dealer's trading documentation will vary depending on: (1) the 
number of non-U.S. counterparties with whom the registered foreign 
security-based swap dealer trades; (2) the number of jurisdictions 
represented by the registered foreign security-based swap dealer's 
counterparties; and (3) the availability of standardized disclosure 
language. To the extent standardized disclosures become available, the 
paperwork burden on registered foreign security-based swap dealers 
would be limited to amending existing trading

[[Page 31107]]

documentation to incorporate the standardized disclosures. Conversely, 
more time will be necessary where a greater degree of customization is 
required to develop the required disclosures and incorporate this 
language into existing documentation.
---------------------------------------------------------------------------

    \1217\ See External Business Conduct Standards Proposing 
Release, 76 FR 42396; see also Disclosure of Accounting Policies for 
Derivative Financial Instruments and Derivative Commodity 
Instruments and Disclosure of Quantitative and Qualitative 
Information about Market Risk Inherent in Derivative Financial 
Instruments, Other Financial Instruments and Derivative Commodity 
Instruments, Securities Act Release No. 7386 (Jan. 31, 1997), 62 FR 
6044 (Feb. 10, 1997).
---------------------------------------------------------------------------

    The Commission estimates the maximum total paperwork burden 
associated with developing new disclosure language would be 
approximately 2,700 hours, plus $2.1 million for all 18 foreign 
security-based swap dealers and 30 jurisdictions.\1218\ This estimate 
assumes little or no reliance on standardized disclosure language. In 
addition, the Commission estimates the total paperwork burden 
associated with incorporating new disclosure language into each foreign 
security-based swap dealer's trading documentation would be 
approximately 9,000 hours for all 18 foreign security-based swap 
dealers.\1219\
---------------------------------------------------------------------------

    \1218\ The Commission staff estimates the total paperwork burden 
associated with developing new disclosure language for each foreign 
security-based swap dealer would be 150 hours of in-house counsel 
time (5 hours of in-house counsel time * up to 30 potential 
jurisdictions), plus $120,000 (based on 10 hours of outside counsel 
time * $400 * up to 30 potential jurisdictions).
    \1219\ The Commission staff estimate that the average 
Nonresident SBS Entity will have 50 active non-U.S. counterparties. 
Accordingly, the Commission staff estimates the cost of 
incorporating new disclosure language into the trading documentation 
of an average foreign security-based swap participant would be 500 
hours per foreign security-based swap participant (based on 10 hours 
of in-house counsel time * 50 active non-U.S. counterparties).
---------------------------------------------------------------------------

    The Commission expects that the majority of the paperwork burden 
associated with the new disclosure requirements will be experienced 
during the first year as language is developed, whether by individual 
foreign security-based swap dealers or through collaborative efforts, 
and trading documentation is amended. After the new disclosure language 
is developed and incorporated into trading documentation, the 
Commission believes that the ongoing burden associated with proposed 
Rule 18a-4(e) would be limited to periodically updating the disclosures 
to reflect changes in the applicable law or to incorporate new 
jurisdictions with security-based swap counterparties. The Commission 
estimates that this ongoing paperwork burden would not exceed 100 hours 
per year for all 18 foreign security-based swap dealers (approximately 
5 hours per foreign security-based swap dealer per year).
5. Request for Comment on Paperwork Burden Estimates
    The Commission seeks comment on the paperwork burdens associated 
with proposed Rule18a-4(e).
     Is it likely that foreign security-based swap participants 
will have more than 50 active non-U.S. counterparties?
     In how many discrete jurisdictions do most foreign 
security-based swap participants have counterparties?
     In general, is the proposed collection of information 
necessary for the proper performance of the Commission's functions? 
Will the proposed collection of information have practical utility to 
the Commission and Commission staff?
     Are the Commission's estimates of the paperwork burden of 
the proposed collection accurate?
     Is the Commission's estimate of the expected ongoing 
burden associated with updating and maintaining the disclosures in 
proposed Rule 18a-4(e) reasonable? If not, why?
     Are there ways for the Commission to enhance the quality, 
utility, and clarity of the information collected? Are there ways for 
the Commission to minimize the paperwork burden of the proposed 
collection of information (e.g., through the use of automated 
collection techniques or other forms of information technology)? If so, 
please describe.

D. Reliance on Counterparty Representations Regarding Activity Within 
the United States

1. Summary of Collection of Information
    When determining whether a security-based swap is a ``transaction 
conducted through a foreign branch,'' as defined in proposed Rule 3a71-
3(a)(4)(i) under the Exchange Act, a party may rely on a representation 
from its counterparty indicating that ``no person within the United 
States is directly involved in soliciting, negotiating, or executing'' 
the transaction on behalf of the counterparty, unless the party 
receiving the representation knows that it is not accurate.\1220\ 
Similarly, when determining whether a security-based swap is a 
``transaction conducted within the United States,'' as defined in 
proposed Rule 3a71-3(a)(5)(i), a party may rely on a representation 
from its counterparty indicating that the transaction ``is not 
solicited, negotiated, executed, or booked within the United States by 
or on behalf of such counterparty,'' unless the party receiving the 
representation knows that it is not accurate.\1221\
---------------------------------------------------------------------------

    \1220\ Proposed Rule 3a71-3(a)(4)(ii) under the Exchange Act.
    \1221\ Proposed Rule 3a71-3(a)(5)(ii) under the Exchange Act.
---------------------------------------------------------------------------

2. Proposed Use of Information
    Under the proposed rules, certain Title VII requirements would not 
apply to cross-border transactions conducted through a foreign branch 
of a U.S. bank where the foreign branch is the named counterparty to 
the transaction and no person within the United States is directly 
involved in soliciting, negotiating, or executing the security-based 
swap on behalf of the foreign branch or its counterparty. For example, 
under the proposed rules, a non-U.S. person would not be required to 
count toward the de minimis threshold in the security-based swap dealer 
definition its transactions with the foreign branch of a U.S. bank. 
Conversely, certain Title VII requirements would apply to transactions 
conducted within the United States, even if both counterparties are 
non-U.S. persons.
    The Commission acknowledges that verifying whether a security-based 
swap falls within the definition of a ``transaction conducted through a 
foreign branch'' or a ``transaction conducted within the United 
States'' could require significant due diligence. The Commission 
preliminarily believes that the representations described in proposed 
Rule 3a71-3(a)(4)(ii) and proposed Rule 3a71-3(a)(5)(ii) would mitigate 
the operational difficulties that could arise in connection with 
investigating the activities of a counterparty to ensure compliance 
with the corresponding rules.
    The representations described in proposed Rule 3a71-3(a)(4)(ii) and 
proposed Rule 3a71-3(a)(5)(ii) would be provided voluntarily by the 
counterparties to certain security-based swap transactions; therefore, 
the Commission would not typically receive confidential information as 
a result of this collection of information. However, to the extent that 
the Commission receives confidential information described in proposed 
Rule 3a71-3(a)(4)(ii) or proposed Rule 3a71-3(a)(5)(iii) through our 
examination and oversight program, an investigation, or some other 
means, such information would be kept confidential, subject to the 
provisions of applicable law.\1222\
---------------------------------------------------------------------------

    \1222\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of 
Information Act provides an exemption for ``trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the 
Freedom of Information Act provides an exemption for matters that 
are ``contained in or related to examination, operating, or 
condition reports prepare by, or on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions.'' 5 U.S.C. 552(b)(8)).

---------------------------------------------------------------------------

[[Page 31108]]

3. Respondents
    Based on our understanding of the OTC derivatives markets, 
including the size of the market, the number of counterparties that are 
active in the market, and how market participants currently structure 
security-based swap transactions, the Commission preliminarily 
estimates that 50 entities may include a representation that a 
security-based swap is a ``transaction conducted through a foreign 
branch'' in their trading relationship documentation (e.g., the 
schedule to a master agreement). Similarly, the Commission 
preliminarily estimates that 250 entities may include a representation 
that a security-based swap is not a ``transaction conducted within the 
United States.'' \1223\
---------------------------------------------------------------------------

    \1223\ For a more detailed discussion, see discussion of the 
number of market participants that may be reporting counterparties 
in Section XIV.F.2.d.ii, infra.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The estimates in this section reflect the Commission's experience 
with burden estimates for similar requirements and our discussions with 
market participants.\1224\ Pursuant to proposed Rules 3a71-3(a)(4)(ii) 
and 3a71-3(a)(5)(iii), parties to security-based swaps would be 
permitted to rely on certain representations from their counterparties 
when determining whether a transaction falls within the definition of a 
``transaction conducted through a foreign branch'' or a ``transaction 
conducted within the United States.'' The Commission preliminarily 
believes that, in most cases, these representations would be made 
through amendments to the parties' existing trading documentation 
(e.g., the schedule to a master agreement).\1225\ Because these 
representations relate to new regulatory requirements, the Commission 
anticipates that counterparties may elect to develop and incorporate 
these representations in trading documentation soon after the effective 
date of the Commission's security-based swap regulations, rather than 
incorporating specific language on a transactional basis. The 
Commission believes that parties would be able to adopt, where 
appropriate, standardized language across all of their security-based 
swap trading relationships. This language may be developed by 
individual firms or through a combination of trade associations and 
industry working groups.
---------------------------------------------------------------------------

    \1224\ See External Business Conduct Standards Proposing 
Release, 76 FR 42396.
    \1225\ The Commission preliminarily believes that because 
trading relationship documentation is established between two 
counterparties, whether one or both counterparties is able to 
represent that it is entering into a ``transaction conducted through 
a foreign branch'' or a ``transaction conducted within the United 
States'' would not change on a transaction-by-transaction basis and, 
therefore, such representations would generally be made in the 
schedule to a master agreement, rather than in individual 
confirmations.
---------------------------------------------------------------------------

    The Commission estimates the maximum total paperwork burden 
associated with developing new representations would be, for each 
entity, no more than approximately three to five hours, plus between 
$1,200 and $2,000 for the services of outside professionals, for a 
maximum of approximately 1,500 hours and $600,000 across all security-
based swap counterparties.\1226\ This estimate assumes little or no 
reliance on standardized disclosure language. In addition, the 
Commission estimates the total paperwork burden associated with 
incorporating new disclosure language would be no more than 
approximately three to five hours per counterparty, for a maximum of 
approximately 15,000 hours across all applicable security-based swap 
counterparties.\1227\
---------------------------------------------------------------------------

    \1226\ Because the representations will be short and based on 
facts that should be known and readily available to the entity 
making the representation, the Commission staff estimates the 
paperwork burden associated with developing new representations 
would range from three to five hours of in-house counsel time, plus 
$1,200 to 2,000 for the services of outside professionals (based on 
three to five hours of outside counsel time * $400)). The Commission 
staff estimates that the burden for counterparties that only require 
one of the two representations would be at the lower end of this 
range.
    \1227\ The Commission staff estimates that the average security-
based swap counterparty (including security-based swap dealers and 
buy-side counterparties) will have no more than 10 active 
counterparties able to represent that a transaction is conducted 
through a foreign branch, not conducted within the United States, or 
both. Accordingly, the Commission staff estimates the total burden 
associated with incorporating new disclosure language into the 
relevant trading documentation would be 15,000 hours (based on five 
hours per counterparty * 300 respondents * 10 applicable security-
based swap counterparties).
---------------------------------------------------------------------------

    The Commission expects that the majority of the burden associated 
with the new disclosure requirements will be experienced during the 
first year as language is developed and trading documentation is 
amended. After the new representations are developed and incorporated 
into trading documentation, the Commission believes that the annual 
paperwork burden associated with this requirement would be no more than 
approximately 10 hours per counterparty for verifying representations 
with existing counterparties and onboarding new counterparties, for a 
maximum of approximately 3,000 hours across all applicable security-
based swap counterparties.\1228\
---------------------------------------------------------------------------

    \1228\ The Commission staff estimates that this burden would 
consist of 10 hours of in-house counsel time for each security-based 
swap market participant.
---------------------------------------------------------------------------

5. Request for Comment on Paperwork Burden Estimates
    The Commission seeks comment on the paperwork burdens associated 
with proposed Rules 3a71-3(a)(4)(ii) and 3a71-3(a)(5)(ii).
     Are the Commission's estimates of the numbers of market 
participants that will include a representation that a security-based 
swap is a ``transaction conducted through a foreign branch'' or not a 
``transaction conducted within the United States'' reasonable? Are 
these estimates likely to become incorrect as a result of changes in 
the OTC derivatives markets? If so, how?
     Is the Commission's estimate that a representation that a 
security-based swap is a ``transaction conducted through a foreign 
branch'' or not a ``transaction conducted within the United States'' 
will be made in a schedule to a master agreement rather than in 
individual confirmations reasonable? If not, where will these 
representations be made?
     In general, is the proposed collection of information 
necessary for the proper performance of the Commission's functions? 
Will the proposed collection of information have practical utility to 
the Commission and Commission staff?
     Are the Commission's estimates of the paperwork burden of 
the proposed collection accurate?
     Is the Commission's estimate of the cost of outside 
counsel reasonable?
     Are there ways for the Commission to enhance the quality, 
utility, and clarity of the information collected? Are there ways for 
the Commission to minimize the paperwork burden of the proposed 
collection of information (e.g., through the use of automated 
collection techniques or other forms of information technology)? If so, 
please describe.

E. Requests for Cross-Border Substituted Compliance Determinations

1. Summary of Collection of Information
    The Commission is proposing to apply various Title VII provisions 
to SBS Entities and related market infrastructures on a cross-border 
basis. However, as noted above, the Commission would permit, in 
appropriate circumstances, compliance

[[Page 31109]]

with comparable regulatory requirements in a foreign jurisdiction to 
substitute for compliance with certain requirements of the Exchange 
Act, and rules and regulations thereunder, relating to security-based 
swaps. As proposed, the Commission would consider making substituted 
compliance determinations with respect to four distinct categories of 
rules: (1) requirements applicable to registered foreign security-based 
swap dealers under Section 15F of the Exchange Act and the rules and 
regulations thereunder pursuant to proposed Rule 3a71-5(c) under the 
Exchange Act; (2) requirements relating to regulatory reporting and 
public dissemination of security-based swaps pursuant to re-proposed 
Rule 242.908(c)(2)(ii) of Regulation SBSR; (3) requirements relating to 
clearing for security-based swaps; \1229\ and (4) requirements relating 
to trade execution for security-based swaps pursuant to proposed Rule 
3Ch-2(c) under the Exchange Act.
---------------------------------------------------------------------------

    \1229\ The Commission is not proposing a rule regarding the 
substituted compliance process for the mandatory clearing 
requirement. See Section XI.E, supra.
---------------------------------------------------------------------------

    Requests for a substituted compliance determination would come from 
registered foreign security-based swap dealers or other persons.\1230\ 
However, under the proposed rules noted above, the Commission would 
make any determinations with respect to particular requirements on a 
class or jurisdiction basis, depending on the specific characteristics 
of the foreign regulatory regime, rather than on a firm-by-firm 
basis.\1231\ Once the Commission has made a substituted compliance 
determination, other similarly situated market participants would be 
able to rely on that determination to the extent applicable and subject 
to any corresponding conditions. Accordingly, the Commission expects 
that requests for a substituted compliance determination would be made 
only where an entity seeks to rely on particular requirements of a 
foreign jurisdiction that have not previously been the subject of a 
substituted compliance request. The Commission believes that this 
approach would substantially reduce the burden associated with 
requesting substituted compliance determinations for an entity that 
relies on a previously issued determination, and, therefore, complying 
with the Commission's rules and regulations more generally.\1232\
---------------------------------------------------------------------------

    \1230\ As discussed above, the Commission is not proposing to 
permit substituted compliance for registered foreign major security-
based swap participants.
    \1231\ Requests for substituted compliance determinations under 
proposed Rule 3a71-5(c) under the Exchange Act must come directly 
from a foreign security-based swap dealer (or a group of such 
dealers); foreign financial regulatory authorities may not request 
such a determination. Proposed Rule 3a71-5(c) under the Exchange 
Act.
    \1232\ The paperwork burden associated with requesting 
substituted compliance determinations is discussed in detail in 
Section XIV.E.4 below.
---------------------------------------------------------------------------

    When applying for a substituted compliance determination under one 
of the proposed rules, an entity would be required to provide the 
Commission with any supporting documentation as the Commission may 
request, in addition to information that the entity believes is 
necessary for the Commission to make a determination, such as 
information demonstrating that the requirements applied in the foreign 
jurisdiction are comparable to the Commission's and describing the 
methods used by relevant foreign financial regulatory authorities to 
monitor compliance with those requirements. A foreign security-based 
swap dealer (or a group of foreign security-based swap dealers of the 
same class) seeking a substituted compliance determination with respect 
to one or more requirements in Section 15F of the Exchange Act and the 
rules and regulations thereunder also must demonstrate that it is 
directly supervised by the foreign financial regulatory authority (with 
respect to requirements relating to the applicable requirements in 
Section 15F of the Exchange Act) and provide the certification and 
opinion of counsel, as described in Rule 15Fb2-4(c).\1233\
---------------------------------------------------------------------------

    \1233\ Proposed Rule 3a71-5(c); see also Section XIV.B, supra.
---------------------------------------------------------------------------

    The Commission is proposing that applicants follow the procedures 
set forth in proposed Rule 0-13 under the Exchange Act for an 
application requesting a substituted compliance determination.\1234\
---------------------------------------------------------------------------

    \1234\ See Section XI.B, supra (discussing proposed Rule 0-13 
under the Exchange Act).
---------------------------------------------------------------------------

2. Proposed Use of Information
    The Commission would use the information collected pursuant to 
proposed Rule 3a71-5(c) under the Exchange Act to evaluate requests for 
substituted compliance with respect to requirements applicable to 
registered security-based swap dealers (or classes thereof) under 
Section 15F of the Exchange Act and the rules and regulations 
thereunder. The Commission would use the information collected pursuant 
to re-proposed Rule 242.908(c)(2)(ii) of Regulation SBSR to evaluate 
requests for substituted compliance with regard to requirements 
applicable to regulatory reporting and public dissemination of 
security-based swaps. Finally, the Commission would use the information 
collected pursuant to proposed Rule 3Ch-2(c) under the Exchange Act to 
evaluate requests for substituted compliance with regard to 
requirements relating to trade execution for security-based swaps.
    The requests for substituted compliance determinations in proposed 
Rule 3a71-5, re-proposed Rule 242.908(c)(2)(ii), and proposed Rule 3Ch-
2(c) under the Exchange Act are required when a person seeks a 
substituted compliance determination.
    The Commission intends to make public the information submitted to 
it pursuant to any request for a substituted compliance determination 
under proposed Rules 3a71-(5), re-proposed Rule 242.908(c)(2)(ii), and 
proposed Rule 3Ch-2(c) under the Exchange Act, including supporting 
documentation provided by the requesting party.
3. Respondents
    As discussed in Section XIV.B.3 above, the Commission preliminarily 
estimates that there will be 22 Nonresident SBS Entities and that most 
of these firms will be based in one of a small number of non-U.S. 
jurisdictions.\1235\ In addition, the Commission staff anticipates that 
a small number of security-based swap market participants could be 
based in other jurisdictions.\1236\ As a result, the Commission staff 
estimates that requests for substituted compliance determinations may 
arise in connection with security-based swap market participants and 
transactions in and between up to 30 discrete jurisdictions.\1237\
---------------------------------------------------------------------------

    \1235\ See Section XIV.B.3, supra.
    \1236\ Id.
    \1237\ Id.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    Proposed Rule 3a71-5 under the Exchange Act, proposed Rule 3Ch-2(c) 
under the Exchange Act, and re-proposed Rule 242.908(c)(2)(ii) of 
Regulation SBSR would require submission of certain information to the 
Commission to the extent entities elect to request a substituted 
compliance determination with respect to one or more areas where the 
Commission has issued rules under the Dodd-Frank Act.
(a) Proposed Rule 3a71-5
    Proposed Rule 3a71-5(c) under the Exchange Act would apply only to 
registered foreign security-based swap dealers (or classes thereof) 
that request a substituted compliance determination with regard to one 
or more requirements

[[Page 31110]]

in Section 15F of the Exchange Act and the rules and regulations 
thereunder. As discussed above, in connection with each request, a 
registered foreign security-based swap dealer would be required to 
provide the Commission with any supporting documentation it believes 
necessary for the Commission to make a determination that its foreign 
financial regulatory authority or authorities have established 
requirements that are comparable to requirements otherwise applicable 
to a U.S. security-based swap dealer. Among other things, a foreign 
security-based swap dealer would be required to provide the Commission 
with information regarding applicable requirements established by the 
foreign financial regulatory authority or authorities, as well as the 
methods used by the foreign financial regulatory authority or 
authorities to monitor compliance with these rules. All such supporting 
documentation would be made public.\1238\
---------------------------------------------------------------------------

    \1238\ See Section XIV.B, supra.
---------------------------------------------------------------------------

    A registered foreign security-based swap dealer would not be 
required to make a request with respect to rules and regulations of a 
foreign jurisdiction that have previously been the subject of a 
substituted compliance determination. Given that only a relatively 
small number of jurisdictions have substantial OTC derivatives markets 
and are implementing OTC derivatives reforms, the Commission estimates 
that it will receive no more than 50 requests for substituted 
compliance determinations pursuant to proposed Rule 3a71-5.\1239\ This 
estimate accounts for the fact that the Commission may receive multiple 
requests from each jurisdiction (e.g., separate requests from bank and 
nonbank entities).\1240\ Because the Commission preliminarily expects 
that registered foreign security-based swap dealers will seek to rely 
on substituted compliance upon registration, the Commission believes 
that these requests will be made during the first year following the 
effective date.\1241\
---------------------------------------------------------------------------

    \1239\ See Section XIV.B.3, supra.
    \1240\ The Commission preliminarily estimates that is may 
receive requests for substituted compliance determinations for up to 
30 different jurisdictions. In approximately two-thirds of those 
jurisdictions, the Commission preliminarily estimates that it may 
receive requests from more than one type of market participant 
(e.g., a bank and a non-bank security-based swap dealer).
    \1241\ For purposes of this estimate, the Commission has assumed 
that proposed Rules 3a71-3 and 3a71-5 will be implemented 
contemporaneously. If the Commission requires registration before 
certain substituted compliance determinations are finalized, the 
Commission staff may receive requests for substituted compliance 
determinations pursuant to proposed Rule 3a71-5 after the first year 
following the effective date.
---------------------------------------------------------------------------

    The Commission staff estimates that the total paperwork burden 
associated with preparing and submitting a request for a substituted 
compliance determination pursuant to proposed Rule 3a71-5(c) would be 
approximately 4,000 hours, plus $4 million for the services of outside 
professionals for all 50 requests.\1242\ These total costs include all 
collection burdens associated with the proposed rule, including burdens 
associated with analyzing and comparing the regulatory requirements of 
the foreign jurisdiction with the requirements in Section 15F of the 
Exchange Act and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \1242\ The Commission staff estimates that the paperwork burden 
associated with making each substituted compliance request pursuant 
to proposed Rule 3a71-5 would be approximately 80 hours of in-house 
counsel time, plus $80,000 for the services of outside professionals 
(based on 200 hours of outside counsel time * $400). The paperwork 
burden associated with the opinion of counsel referenced in proposed 
Rule 3a71-5 is discussed in the Registration Proposing Release in 
connection with proposed Rule 15Fb2-4(c). See Registration Proposing 
Release, 76 FR 65811.
---------------------------------------------------------------------------

(b) Re-proposed Rule 242.908(c)(2)(ii) of Regulation SBSR
    Re-proposed Rule 242.908(c)(2)(ii) of Regulation SBSR would apply 
to any person that requests a substituted compliance determination with 
respect to a foreign jurisdiction's rules regarding regulatory 
reporting and public dissemination of security-based swaps. In 
connection with each request, the requesting party would be required to 
provide the Commission with any supporting documentation that the 
entity believes is necessary for the Commission to make a 
determination, including information demonstrating that the 
requirements applied in the foreign jurisdiction are comparable to the 
Commission's and describing the methods used by relevant foreign 
financial regulatory authorities to monitor compliance with those 
requirements.\1243\ The Commission preliminarily estimates that the 
total paperwork burden associated with submitting a request for a 
substituted compliance determination with respect to regulatory 
reporting and public dissemination would be approximately 1,120 hours, 
plus $1,120,000 for 14 requests.\1244\ This estimate includes all 
collection burdens associated with the request, including burdens 
associated with analyzing whether the regulatory requirements of the 
foreign jurisdiction impose a comparable, comprehensive system for the 
regulatory reporting and public dissemination of all security-based 
swaps. Furthermore, this estimate assumes that each request would be 
prepared de novo, without any benefit of prior work on related 
subjects. The Commission notes, however, that as such requests are 
developed with respect to certain jurisdictions, the cost of preparing 
such requests with respect to other foreign jurisdictions could 
decrease.
---------------------------------------------------------------------------

    \1243\ See Section VIII.C, supra.
    \1244\ The Commission staff estimates that the paperwork burden 
associated with making a substituted compliance request pursuant to 
re-proposed Rule 242.908(c)(2)(ii) of Regulation SBSR would be 
approximately 80 of in-house counsel time, plus $80,000 for the 
services of outside professionals (based on 200 hours of outside 
counsel time * $400).
---------------------------------------------------------------------------

    Because only a small number of jurisdictions have substantial OTC 
derivatives markets and are implementing OTC derivatives reforms, the 
Commission preliminarily estimates that it would receive approximately 
10 requests in the first year for substituted compliance determinations 
with respect to regulatory reporting and public dissemination pursuant 
to re-proposed Rule 242.908(c)(2)(ii) of Regulation SBSR. Assuming 10 
requests in the first year, the Commission staff estimates an 
aggregated burden for the first year would be 800 hours, plus $800,000 
for the services of outside professionals.\1245\ The Commission 
preliminarily estimates that it would receive 2 requests for 
substituted compliance determinations pursuant to re-proposed Rule 
242.908(c)(2)(ii) in each subsequent year. Assuming the same 
approximate time and costs, the aggregate burden for each year 
following the first year would be up to 160 hours of company time and 
$160,000 for the services of outside professionals.\1246\
---------------------------------------------------------------------------

    \1245\ The Commission staff estimates that the paperwork burden 
associated with making a substituted compliance request pursuant to 
re-proposed Rule 242.908(c)(2)(ii) of Regulation SBSR would be up to 
approximately 800 hours (80 hours of in-house counsel time * 10 
respondents), plus $800,000 for the services of outside 
professionals (based on 200 hours of outside counsel time * $400 * 
10 respondents).
    \1246\ The Commission staff estimates that the paperwork burden 
associated with making a substituted compliance request pursuant to 
re-proposed Rule 242.908(c)(2)(ii) of Regulation SBSR would be up to 
approximately 160 hours (80 hours of in-house counsel time * two 
respondents) + plus $160,000 for the services of outside 
professionals (based on 200 hours of outside counsel time * $400 * 
two respondents).
---------------------------------------------------------------------------

(c) Proposed Rule 3Ch-2(c)
    Finally, proposed Rule 3Ch-2(c) under the Exchange Act would apply 
to any person who requests a substituted compliance determination with 
respect to the rules of a foreign jurisdiction relating to trade 
execution for security-based swaps. In connection with each request, 
the requesting party would be required to provide the Commission

[[Page 31111]]

with certain supporting information.\1247\ However, a person would not 
be required to make a request with respect to rules and regulations of 
a foreign jurisdiction related to trade execution that have previously 
been the subject of a substituted compliance determination. As 
discussed above, because only a relatively small number of 
jurisdictions have substantial OTC derivatives markets and are 
implementing OTC derivatives reforms, the Commission estimates that it 
will receive no more than 25 requests for substituted compliance 
determinations pursuant to proposed Rule 3Ch-2(c).\1248\ Moreover, 
because market participants will likely seek to rely on substituted 
compliance upon registration, the Commission believes that many of 
these requests will be made during the first year following the 
effective date. However, because some jurisdictions may not fully 
implement their trade execution requirements in the immediate future, 
the Commission staff estimates that it may receive requests for 
substituted compliance determinations pursuant to proposed Rule 3Ch-
2(c) for several years following the effective date.\1249\
---------------------------------------------------------------------------

    \1247\ See Section XIV.E.1, supra.
    \1248\ See Section XIV.B.3, supra. The Commission notes that it 
may not receive requests for substituted compliance determinations 
pursuant to proposed Rule 3Ch-2(c) from every jurisdiction will have 
a security-based swap market that is potentially eligible for such a 
determination.
    \1249\ The Commission notes that certain jurisdictions may 
implement OTC derivatives reforms incrementally. Accordingly, the 
Commission's estimates in this section are based on the assumption 
that certain jurisdictions may implement trade execution 
requirements later in time than other OTC derivatives reforms (e.g., 
dealer regulation, reporting, and mandatory clearing requirements).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the total paperwork 
burden associated with preparing and submitting a request for a 
substituted compliance determination pursuant to proposed Rule 3Ch-2(c) 
will be 2,000 hours and associated costs of $2 million for the services 
of outside professionals, including attorneys.\1250\ These total costs 
include all collection burdens associated with the proposed rule, 
including burdens associated with analyzing whether the regulatory 
requirements of the foreign jurisdiction impose a comparable, 
comprehensive system for the regulatory reporting and public 
dissemination of all security-based swaps.
---------------------------------------------------------------------------

    \1250\ The Commission staff estimates that the paperwork burden 
associated with making each substituted compliance request pursuant 
to proposed Rule 3Ch-2(c) would be approximately 2,000 hours of in-
house counsel time (80 hours * 25 respondents), plus $2,000,000 for 
the services of outside professionals (based on 200 hours of outside 
counsel time * $400 * 25 respondents).
---------------------------------------------------------------------------

    Assuming 17 requests in the first year, the Commission staff 
estimates an aggregated burden for the first year would be 1,360 hours, 
plus approximately $1,360,000 for the services of outside 
professionals.\1251\ The Commission preliminarily estimates that it 
would receive 4 requests for substituted compliance determinations 
pursuant to re-proposed Rule 3Ch-2(c) in each subsequent year. Assuming 
the same approximate time and costs, the aggregate burden for each year 
following the first year would be up to 320 hours of company time and 
$320,000 for the services of outside professionals.\1252\
---------------------------------------------------------------------------

    \1251\ The Commission staff estimates that the paperwork burden 
associated with making a substituted compliance request pursuant to 
proposed Rule 3Ch-2(c) would be up to approximately 1,360 hours (80 
hours of in-house counsel time * 17 respondents), plus approximately 
$1,360,000 for the services of outside professionals (based on 200 
hours of outside counsel time * $400 * 17 respondents).
    \1252\ The Commission staff estimates that the paperwork burden 
associated with making a substituted compliance request pursuant to 
proposed Rule 3Ch-2(c) would be up to approximately 320 hours (80 
hours of in-house counsel time * four respondents), plus $320,000 
for the services of outside professionals (based on 200 hours of 
outside counsel time * $400 * four respondents).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment on the paperwork burdens associated 
with proposed Rules 3a71-5(c) under the Exchange Act, re-proposed Rule 
242.908(c)(2)(ii) of Regulation SBSR, and proposed Rule 3Ch-2(c) under 
the Exchange Act.
     Are the Commission's estimates of the numbers of 
substituted compliance determinations reasonable? Are these estimates 
likely to become incorrect as a result of changes in the OTC 
derivatives markets? If so, how?
     In general, is the proposed collection of information 
necessary for the proper performance of the Commission's functions? 
Will the proposed collection of information have practical utility to 
the Commission and Commission staff?
     Are the Commission's estimates of the paperwork burden of 
the proposed collection accurate? Is the Commission's estimate of the 
cost of outside counsel reasonable?
     Are there ways for the Commission to enhance the quality, 
utility, and clarity of the information collected? Are there ways for 
the Commission to minimize the paperwork burden of the proposed 
collection of information (e.g., through the use of automated 
collection techniques or other forms of information technology)? If so, 
please describe.

F. Reporting and Dissemination of Security-Based Swap Information

1. Background on the Re-proposed Rules
    The Commission is re-proposing Regulation SBSR to address a number 
of cross-border issues, many of which were discussed in comments to the 
cross-border provisions of the initial proposal. The changes made 
between the proposed and re-proposed versions of Regulation SBSR, and 
the Commission's preliminary estimates of the paperwork burdens that 
would result from re-proposed Regulation SBSR, are described below.
2. Modifications to ``Reporting Party'' Rules
    Proposed Rule 901 of Regulation SBSR, as amended herein, contains 
``collection of information requirements'' within the meaning of the 
PRA. The title of this collection is ``Rule 901--Reporting 
Obligations.''
(a) Summary of Collection of Information
    Under Rule 901(a), as initially proposed, a non-U.S. person 
security-based swap dealer or major security-based swap participant 
might incur the duty to report only if the security-based swap was 
executed in the United States or through any means of interstate 
commerce, or was cleared through a clearing agency having its principal 
place of business in the United States. If a non-U.S. person security-
based swap dealer or major security-based swap participant entered into 
a swap with an unregistered U.S. person, the unregistered U.S. person 
would have incurred the duty to report. As set forth in more detail 
above, the Commission is re-proposing Rule 901(a) to provide that a 
security-based swap dealer or major security-based swap participant 
that is not a U.S. person could incur the duty to report a security-
based swap in various cases. Re-proposed Rule 901(a) now provides as 
follows:
     If both sides of the security-based swap include a 
security-based swap dealer, the sides would be required to select the 
reporting side.
     If only one side of the security-based swap includes a 
security-based swap dealer, that side would be the reporting side.
     If both sides of the security-based swap include a major 
security-based swap participant, the sides would be required to select 
the reporting side.
     If one side of the security-based swap includes a major 
security-based

[[Page 31112]]

swap participant and the other side includes neither a security-based 
swap dealer nor a major security-based swap participant, the side 
including the major security-based swap participant would be reporting 
side.
     If neither side of the security-based swap includes a 
security-based swap dealer or major security-based swap participant: 
(i) If both sides include a U.S. person or neither side includes a U.S. 
person, the sides would be required to select the reporting side; and 
(ii) If only one side includes a U.S. person, that side would be the 
reporting side.
    In addition, in re-proposed Rule 901, the Commission is proposing 
certain technical or conforming changes. Specifically, the Commission 
is proposing certain changes to proposed Rules 901(c) and 901(d), which 
address the data elements to be reported to a registered SDR, to 
reflect that, under the re-proposal, certain security-based swaps might 
be subject to regulatory reporting but not public dissemination. Rule 
901(c), as initially proposed, was titled ``Information to be reported 
in real time.'' Under Rule 902(a), as originally proposed, the 
registered SDR to which such information was reported would be required 
to promptly disseminate to the public such information (except in the 
case of a block trade). However, the Commission preliminarily believes 
that, if a security-based swap were subject to regulatory reporting but 
not public dissemination, there is no need to require that information 
about the security-based swap be reported in real time. Therefore, the 
introductory language to Rule 901(c) is being re-proposed as follows: 
``For any security-based swap that must be publicly disseminated 
pursuant to Sec. Sec.  242.902 and 242.908 and for which it is the 
reporting side, the reporting side shall report the following 
information in real time. If a security-based swap is required by 
Sec. Sec.  242.901 and 242.908 to be reported but not publicly 
disseminated, the reporting side shall report the following information 
no later than the time that the reporting side is required to comply 
with paragraph (d) of this section.'' In addition, re-proposed Rule 
901(c) would be retitled ``Primary trade information,'' thus 
eliminating the reference to real-time reporting--since the information 
required to be reported under Rule 901(c) would no longer in all cases 
be required to be reported in real time. Furthermore, re-proposed Rule 
901(d) would be retitled ``Secondary trade information.''
    Rule 901(c)(10), as initially proposed, provided that the following 
data element would be required to be reported: ``If both counterparties 
to a security-based swap are security-based swap dealers, an indication 
to that effect.'' As the Commission stated in the Regulation SBSR 
Proposing Release: ``Prices of transactions involving a dealer and a 
non-dealer are typically `all-in' prices that include a mark-up or 
mark-down, while interdealer transaction prices typically do not. Thus, 
the Commission believes that requiring an indication of whether a 
[security-based swap] was an interdealer transaction or a transaction 
between a dealer and a non-dealer counterparty would enhance 
transparency by allowing market participants to more accurately assess 
the reported price for a [security-based swap].''\1253\ The Commission 
is now re-proposing Rule 901(c)(10) as follows: ``If both sides of the 
security-based swap include a security-based swap dealer, an indication 
to that effect.'' The re-proposed rule clarifies that a security-based 
swap dealer might be a direct or indirect counterparty to a security-
based swap. The Commission continues to believe that, in either case, a 
security-based swap having a security-based swap dealer on each side 
could, all other things being equal, be priced differently than a 
security-based swap having a security-based swap dealer on only one 
side. Therefore, the Commission continues to believe that the existence 
of a security-based swap dealer on each side should be reported to the 
registered SDR and made known to the public.
---------------------------------------------------------------------------

    \1253\ See Regulation SBSR Proposing Release, 75 FR 75214.
---------------------------------------------------------------------------

    The Commission is re-proposing Rule 901(d)(1)(ii) to require 
reporting of the broker ID, desk ID, and trader ID, as applicable, only 
of the direct counterparty on the reporting side. The Commission 
preliminarily believes that it would be impractical and unnecessary to 
report such data elements with respect to an indirect counterparty, as 
such elements might not be applicable to an indirect counterparty. 
Similarly, Rule 901(d)(1)(iii) is being re-proposed to require 
reporting of a description of the terms and contingencies of the 
payment streams only of each direct counterparty to the other. The 
Commission is including the word ``direct'' to avoid extending Rule 
901(d)(1)(iii) to indirect counterparty relationships, where payments 
might not (except in unusual circumstances) flow to or from an indirect 
counterparty.
    Proposed Rule 901(e) set forth provisions for reporting life cycle 
events of a security-based swap. The basic approach set forth in 
proposed Rule 901(e) was that, generally, the original reporting party 
of the initial transaction would have the responsibility to report any 
subsequent life cycle event; this approach remains unchanged in the re-
proposal. However, if the life cycle event were an assignment or 
novation that removed the original reporting party, either the new 
counterparty or the original counterparty would have to be the 
reporting party. Further, Rule 901(e), as initially proposed, would 
provide that the new counterparty would be the reporting party if it 
were a U.S. person, whereas the other counterparty would be the new 
reporting party if the new counterparty were not a U.S. person.
    However, as discussed above, the Commission is now proposing the 
concept of a ``reporting side,'' which would include the direct and any 
indirect counterparty. Further, as discussed above, the Commission is 
proposing that non-U.S. person security-based swap dealers or major 
security-based swap participants would, in certain instances, incur a 
duty to report. Thus, the Commission is re-proposing Rule 901(e) to 
provide that the duty to report would switch to the other side only if 
the new side did not include a U.S. person (as in the originally 
proposed rule) or a security-based swap dealer or major security-based 
swap participant (references to which are being added to Rule 901(e)). 
The Commission preliminarily believes that, if the new side includes a 
registered person such as a security-based swap dealer or major 
security-based swap participant, the new side should retain the duty to 
report. This approach is designed to align reporting duties with the 
market participants that the Commission preliminarily believes are 
better suited to carrying them out because non-U.S. security-based swap 
dealers and major security-based swap participants likely have already 
taken significant steps to establish and maintain the systems, 
processes and procedures, and staff resources necessary to report 
security-based swaps currently.\1254\
---------------------------------------------------------------------------

    \1254\ See note 913 and accompanying text, supra; see also 15 
U.S.C. 78m-1(a)(3).
---------------------------------------------------------------------------

    Aside from some technical changes to the titles of Rules 901(c) and 
(d) and to the introductory language to Rule 901(c) noted above, the 
Commission is not proposing to add or delete any data elements from 
Rules 901(c) and 901(d). Therefore, no revisions to the Commission's 
paperwork estimates are being made to increase or decrease paperwork 
burdens because of more or fewer required data elements to be reported. 
However, other changes to the

[[Page 31113]]

paperwork burdens initially proposed for Rule 901 are necessitated by 
the other changes to the proposed rule noted above.
(b) Proposed Use of Information
    As described by the Commission in the Regulation SBSR Proposing 
Release, the security-based swap transaction information required to be 
reported pursuant to re-proposed Rule 901 would be used by SDRs, market 
participants, the Commission, and other regulators. The information 
reported by reporting parties pursuant to re-proposed Rule 901 would be 
used by SDRs to publicly disseminate real-time reports of security-
based swap transactions, as well as to offer a resource for regulators 
to obtain detailed information about the security-based swap market. 
Market participants would use the public market data feed, among other 
things, to assess the current market for security-based swaps and to 
mark their own positions. The Commission and other regulators would use 
information about security-based swap transactions reported to and held 
by SDRs to monitor and assess prudential and systemic risks, as well as 
to examine for improper behavior and to take enforcement actions, as 
appropriate.
(c) Respondents
    Re-proposed Rule 901(a) would designate which side of a security-
based swap transaction would be the reporting side.\1255\ In the 
Regulation SBSR Proposing Release, the Commission stated our 
preliminary belief that up to 1,000 entities could incur duties to 
report transactions under proposed Rule 901(a), and that it was 
reasonable to use the figure of 1,000 respondents for estimating 
collection of information burdens under the PRA.\1256\ As discussed in 
more detail below, the Commission now preliminarily estimates there 
would be 300 respondents to re-proposed Rule 901.
---------------------------------------------------------------------------

    \1255\ See Section VIII.D, supra (discussing the use of the term 
``reporting side'').
    \1256\ See Regulation SBSR Proposing Release, 75 FR 75247.
---------------------------------------------------------------------------

    In the Regulation SBSR Proposing Release, the Commission noted that 
proposed Rule 901 would impose certain duties on SDRs. The Commission 
preliminarily estimated that the number of SDRs would not exceed 10. 
The Commission continues to believe that it is reasonable to use 10 as 
an estimate of the number of SDRs for the purpose of estimating 
collection of information burdens for re-proposed Regulation SBSR.
(d) Total Initial and Annual Reporting and Recordkeeping Burdens
i. Baseline Burdens
    In the Regulation SBSR Proposing Release, the Commission estimated 
that respondents would face 3 categories of burdens to comply with 
proposed Rule 901. First, each entity that would incur a duty to report 
security-based swap transactions pursuant to Regulation SBSR would have 
to develop an internal order and trade management system (``OMS'') 
capable of capturing the relevant transaction information. Second, each 
reporting party would have to implement a reporting mechanism. Third, 
each reporting party would have to establish an appropriate compliance 
program and support for the operation of the OMS and reporting 
mechanism. In the Regulation SBSR Proposing Release, the Commission 
preliminarily estimated that the initial, aggregate annualized burden 
associated with proposed Rule 901 would be 1,438 hours per reporting 
party--for a total of 1,438,300 hours for all reporting parties--in 
order to develop an OMS, implement a reporting mechanism, and establish 
an appropriate compliance program and support system.\1257\ The 
Commission preliminarily estimated that the ongoing aggregate 
annualized burden associated with proposed Rule 901 would be 731 hours 
per reporting party, for a total of 731,300 hours for all reporting 
parties.\1258\ The Commission further estimated that the initial 
aggregate annualized dollar cost burden on reporting parties associated 
with Rule 901 would be $201,000 per reporting party, for a total of 
$201,000,000 for all reporting parties.\1259\
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    \1257\ See id. at 75250.
    \1258\ See id.
    \1259\ See id. The Commission notes that the Regulation SBSR 
Proposing Release incorrectly stated this total as $301,000 per 
reporting party. The correct number is $201,000 per reporting party 
($200,000 + $1,000).
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ii. Re-Proposed Burdens
    For the reasons discussed above, the Commission now believes that 
it is appropriate to re-propose those aspects of Regulation SBSR that 
would set out who must report security-based swaps. First, the 
Commission is proposing to redefine the counterparties to a security-
based swap. Specifically, ``counterparty'' would be defined as ``a 
direct or indirect counterparty of a security-based swap.'' Re-proposed 
Rule 900 would define ``direct counterparty'' as ``a person that enters 
directly with another person into a contract that constitutes a 
security-based swap'' and ``indirect counterparty'' as ``a person that 
guarantees the performance of a direct counterparty to a security-based 
swap or that otherwise provides recourse to the other side for the 
failure of the direct counterparty to perform any obligation under the 
security-based swap.'' Second, proposed Rule 900 would revise the term 
``reporting party'' to ``reporting side'' and would further define 
``reporting side'' as ``the side of a security-based swap having the 
duty to report information in accordance with re-proposed rules 
242.900-911 of Regulation SBSR to a registered security-based swap data 
repository, or if there is no registered security-based swap data 
repository that would receive the information, to the Commission.'' 
``Side'' would be defined as ``a direct counterparty and any indirect 
counterparty that guarantees the direct counterparty's performance of 
any obligation under a security-based swap.''
    As re-proposed, Rule 901(a) would provide that a security-based 
swap dealer or major security-based swap participant that is not a U.S. 
person could incur the duty to report a security-based swap in various 
cases, as detailed above. The Commission preliminarily believes that no 
aspect of the re-proposal would significantly affect the burdens that 
an entity with a duty to report would incur to establish the systems, 
policies and procedures, and staff resources necessary to comply with 
Regulation SBSR. Therefore, the Commission is not revising these 
initial infrastructure-related burdens on a per-entity basis.
    However, the Commission is revising our initial estimate of the 
total infrastructure-related burdens of re-proposed Rule 901(a) due to 
a reduction in the estimate of the number of reporting counterparties. 
In the Regulation SBSR Proposing Release, the Commission stated our 
preliminary belief that up to 1,000 respondents could be reporting 
parties under proposed Rule 901(a), and that it was reasonable to use 
the figure of 1,000 respondents for estimating collection of 
information burdens under the PRA.\1260\ Since issuing the Regulation 
SBSR Proposing Release, the Commission has obtained additional and more 
granular data regarding participation in the security-based swap market 
from DTCC-TIW. These historical data suggest that approximately 30 
counterparties--which are likely to be

[[Page 31114]]

required to register with the Commission as security-based swap 
dealers--account for the vast majority of recent security-based swap 
transactions and transaction reports. These data further suggest that 
there are only a limited number of security-based swap transactions 
that do not include at least one of these larger counterparties on 
either side. In other words, the vast majority of recent transactions 
have included a larger counterparty that reports the transaction 
currently, and that would likely be required to report a similar 
transaction in the future.
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    \1260\ See Regulation SBSR Proposing Release, 75 FR 75247. The 
Commission did not receive any comments related to its preliminary 
belief that up to 1,000 respondents could be reporting parties under 
proposed Rule 901(a) of Regulations SBSR.
---------------------------------------------------------------------------

    In addition, the Commission is attempting in re-proposed Regulation 
SBSR to further align reporting obligations to larger market 
participants that are better able to bear them. As a result of all of 
these factors, and to the extent that recent security-based swap market 
activity may be indicative of future activity, the Commission 
preliminarily believes that the more appropriate estimate of reporting 
counterparties is 300, 700 fewer than in the original proposal.\1261\ 
This revised estimate continues to include some smaller counterparties 
to security-based swaps that would incur a reporting duty, but many 
fewer than estimated in the PRA of the initial Regulation SBSR 
proposal.
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    \1261\ The Commission is basing this new estimate on CDS data 
from the DTCC-TIW, but not from data from data repositories for 
other security-based swap asset classes, which are not currently 
available to the Commission. The Commission preliminarily believes 
that entities that are likely to incur obligations to report 
security-based swaps in other asset classes are already likely to be 
reporting CDS transactions to DTCC-TIW. The Commission also 
preliminarily believes that, to avoid duplicative compliance costs, 
such entities are likely to leverage their existing infrastructure 
for reporting CDS transactions to carry out reporting obligations 
for other asset classes, even though these other asset classes might 
be booked in different affiliated entities. The Commission 
preliminarily estimates that these other security-based swap asset 
classes consist of less than one-fifth of the overall security-based 
swap market. Therefore, the Commission preliminarily believes that 
reporting counterparties across all security-based swap asset 
classes should not exceed the estimate of 300 derived from the DTCC-
TIW CDS data. See note 1301, infra.
---------------------------------------------------------------------------

    As a result of the revision to the number of reporting 
counterparties, the Commission preliminarily believes that the one-time 
burdens of Regulation SBSR could decrease by 1,006,600 aggregated hours 
and $140,700,000.\1262\ In addition, the Commission preliminarily 
believes that the annual ongoing burden of Regulation SBSR could 
decrease by 511,700 aggregated hours and $140,700,000.\1263\ The 
Commission seeks comment on and data to quantify these potential cost 
reductions.
---------------------------------------------------------------------------

    \1262\ The Commission estimates: ((1,000 reporting parties - 300 
reporting sides) * 1,438 hours) = 1,006,600 burden reduction for all 
reporting counterparties. The Commission estimates: ((1,000 
reporting parties -300 reporting sides) * $201,000) = $140,700,000 
burden reduction for all reporting counterparties.
    \1263\ The Commission estimates: ((1,000 reporting parties - 300 
reporting sides) * 731 hours) = 511,700 burden reduction for all 
reporting counterparties. The Commission estimates: ((1,000 
reporting parties - 300 reporting sides) * $201,000) = $140,700,000 
burden reduction for all reporting counterparties.
---------------------------------------------------------------------------

    Although re-proposed Rule 901(a) could result in a significant 
reduction in aggregate costs due to reduction in the number of 
reporting counterparties that would be required to establish the 
systems, policies and procedures, and staff resources to carry out the 
reporting function, the Commission preliminarily believes that there 
may be a slight increase in burden for certain individual reporting 
counterparties due to a re-allocation of reportable security-based swap 
transactions among those reporting counterparties that continue to be 
covered. Specifically, small unregistered counterparties that may have 
been required to report a small number of security-based swaps under 
the original proposal would be less likely to incur the reporting duty 
under re-proposed Rule 901(a). Thus, the counterparties that would 
continue to have the reporting duty under re-proposed Rule 901(a), 
primarily security-based swap dealers and major security-based swap 
participants, would likely incur the reporting duty for most of these 
transactions. Consequently, re-proposed Rule 901(a) could result in 
each reporting counterparty being required to report, on average, a 
larger percentage of the total security-based swap transactions than 
envisioned under the original proposal. In the Regulation SBSR 
Proposing Release, the Commission estimated that, collectively, the 
reporting parties would spend 77,300 hours reporting specific security-
based swap transactions to a registered SDR, as required by proposed 
Rule 901.\1264\ Nonetheless, as explained below, the Commission's 
estimate of the anticipated number of security-based swap transactions 
to be reported pursuant to Regulation SBSR is being revised 
significantly downward.
---------------------------------------------------------------------------

    \1264\ See Regulation SBSR Proposing Release, 75 FR 75248-49. In 
arriving at this figure, the Commission preliminarily estimated that 
1,000 reporting parting would be responsible for reporting 
15,458,824 security-based swap transactions. The Commission further 
estimated that each transaction would take 0.005 hours to report for 
a total burden of 77,300 hours, or 77.3 burden hours per reporting 
party. The Commission preliminarily believes that the hourly burden 
of reporting individual security-based swap transactions would not 
change.
---------------------------------------------------------------------------

    In the Regulation SBSR Proposing Release, the Commission 
preliminarily estimated that 15.5 million security-based swap 
transactions per year would be required to be reported.\1265\ In 
addition to revising our estimate of the number of reporting sides from 
1,000 to 300, as discussed above, the Commission is now also revising 
our estimate of the number of reportable security-based swap 
transactions covered by re-proposed Regulation SBSR, for the following 
reasons. First, the Commission notes that the Regulation SBSR Proposing 
Release inadvertently overstated the number of historical security-
based swap transactions such that the number of security-based swap 
transactions based on data available at the time of the Regulation SBSR 
Proposing Release should have been stated as approximately 
2,200,000.\1266\ Second, since issuing the Regulation SBSR Proposing 
Release, the Commission has obtained additional and more granular data 
regarding participation in the credit default swap market from DTCC-
TIW. These more recent data further suggest that the Commission 
initially overestimated both the number of reporting counterparties and 
the number of security-based swap transactions that would be reportable 
to DTCC-TIW. As a result, the Commission now estimates that 300 
reporting sides would be required to report approximately 5 million new 
security-based swaps and life cycle events (collectively, ``reportable 
events'') under re-proposed Regulation SBSR per year.\1267\
---------------------------------------------------------------------------

    \1265\ See Regulation SBSR Proposing Release, 75 FR 75248.
    \1266\ See id. at 75248 nn. 182-85 and accompanying text. 
Specifically, in the SBSR Proposing Release, the Commission 
misinterpreted weekly CDS volume data as daily volume data. Based on 
the weekly data available at the time, a more accurate estimate for 
the number of CDS transactions per year would have been 1,872,000. 
This number is based on the following: (36,000 (estimated CDS 
transactions per week) * 52 (weeks/year)) = 1,872,000 CDS 
transactions/year. Based on the Commission's preliminary assumption 
in the SBSR Proposing Release that CDS transactions represent 
approximately eight- to nine-tenths of all security-based swap 
transactions, a more accurate estimate for the number of security-
based swap transactions per year would have been 2,202,353. This 
number was based on the following: (1,872,000 (number of CDS 
transactions per year)/0.85) = 2,202,353 security-based swap 
transactions/year.
    \1267\ The Commission now estimates that single-name CDS 
transactions for 2012 were approximately 4 million transactions. The 
data studied by the Commission cover CDS transactions, which the 
Commission continues to preliminarily believe account for 
approximately eight- to nine-tenths of the security-based swap 
market. As a result, and to the extent that recent security-based 
swap market activity may be indicative of future activity, the 
Commission preliminarily estimates that 300 reporting sides will 
have the duty to report 5 million security-based swap transactions 
(i.e., 4,000,000/0.82 = 4,878,049 reportable events). See also note 
1641, infra.

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[[Page 31115]]

    The Commission notes that the change in the estimate of the number 
of reportable events per year since the initial proposal of Regulation 
SBSR from more than 2,000,000 to approximately 5 million may be due to 
better and more precise data available from the industry on the scope, 
size, and composition of the security-based swap market. As a result, 
and to the extent that the available data regarding recent security-
based swap market activity may be indicative of future activity, the 
Commission now preliminarily believes that a more appropriate estimate 
of the number of reportable events would be approximately 5 million per 
year.
    The Commission preliminarily believes that, once a respondent's 
reporting infrastructure and compliance systems are in place, the 
burden of reporting a single reportable event would be de minimis when 
compared to the burdens of establishing the reporting infrastructure 
and compliance systems.\1268\ The Commission now preliminarily 
estimates that re-proposed Regulation SBSR would result in total burden 
hours of 5,080 attributable to the reporting to security-based swap 
data repositories all reportable events over the course of a 
year.\1269\ The Commission preliminarily believes that many reportable 
events would be reported through electronic means and that the ratio of 
electronic reporting to manual reporting is likely to increase over 
time. The Commission further preliminarily believes that the bulk of 
the burden hours estimated above would be attributable to manually 
reported transactions. Thus, reporting counterparties that capture and 
report transactions electronically would likely incur bear fewer burden 
hours than those reporting counterparties that capture and report 
transactions manually.
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    \1268\ In the Regulation SBSR Proposing Release, the Commission 
preliminarily estimated that reporting specific security-based swap 
transactions to a registered SDR would impose an annual aggregate 
cost of approximately $5,400,000. See Regulation SBSR Proposing 
Release, 75 FR 75265. The Commission further estimated that 
Regulation SBSR would impose an aggregate total first-year cost of 
approximately $1,039,000,000 and an ongoing annualized aggregate 
cost of approximately $703,000,000. See id. at 75280.
    \1269\ The Commission estimates: ((5 million * 0.005)/(300 
reporting sides)) = 83.3 burden hours per reporting side or 25,000 
total burden hours. Since the number of respondents would decline 
from 1,000 reporting parties to 300 reporting sides, the transaction 
based reporting burden would be concentrated among fewer 
respondents.
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iii. Summary of Re-Proposed Burdens
    Based on the foregoing, the Commission preliminarily estimates that 
re-proposed Regulation SBSR would impose an estimated total first-year 
burden of approximately 1,444 hours \1270\ per reporting counterparty 
for a total first-year burden of 433,200 hours for all reporting 
counterparties.\1271\ The Commission preliminarily estimates that re-
proposed Regulation SBSR would impose ongoing annualized aggregate 
burdens of approximately 737 hours \1272\ per reporting counterparty 
for a total aggregate annualized cost of 221,100 hours for all 
reporting counterparties.\1273\ The Commission further estimates that 
re-proposed Regulation SBSR would impose initial and ongoing annualized 
dollar cost burdens of $201,000 per reporting counterparty, for total 
aggregate initial and ongoing annualized dollar cost burdens of 
$60,300,000.\1274\
---------------------------------------------------------------------------

    \1270\ The Commission derived its estimate from the following: 
(1,438 (Regulation SBSR Proposing Release estimated total burden)-
77.3 (Regulation SBSR Proposing Release estimated transaction 
reporting burden) + 83.3 (revised estimated transaction reporting 
burden)) = 1,444 hours. See Section XIV.F.2(d)ii.
    \1271\ The Commission derived its estimate from the following: 
(1,444 * 300 reporting counterparties) = 433,200 hours.
    \1272\ The Commission derived its estimate from the following: 
(731 (Regulation SBSR Proposing Release estimated total burden)-77.3 
(Regulation SBSR Proposing Release estimated transaction reporting 
burden) + 83.3 (revised estimated transaction reporting burden)) = 
737 hours. See Section XIV.F.2(d)ii, infra.
    \1273\ The Commission derived its estimate from the following: 
(737 * 300 reporting counterparties) = 221,000 hours.
    \1274\ The Commission derived its estimate from the following: 
($201,000 * 300 reporting counterparties) = $60,300,000.
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    The Commission does not preliminarily believe that the proposed 
changes to Regulation SBSR would have any material impact on SDRs not 
discussed in Regulation SBSR, as originally proposed. The changes 
discussed herein do not impact the previously estimated burdens for 
SDRs. The Commission preliminarily believes that re-proposed Rule SBSR 
would not result in the registration of additional SDRs, and would not 
require existing SDRs to bear the burden of connecting to additional 
reporting counterparties. SDRs would already be required under proposed 
Regulation SBSR to have established mechanisms to receive and process 
security-based swap transaction reports, and none of the costs 
identified in the Regulation SBSR Proposing Release relating to SDRs 
were dependent upon the number of security-based swap transactions or 
the number of reporting counterparties.
iv. Recordkeeping Requirements
    Concurrently with proposed Regulation SBSR, the Commission issued 
the SDR Proposing Release, which includes (among other things) 
recordkeeping requirements for security-based swap transaction data 
received by a registered SDR pursuant to proposed Regulation SBSR. 
Specifically, proposed Rule 13n-5(b)(4) under the Exchange Act would 
require a registered SDR to maintain the transaction data that it 
collects for not less than five years after the applicable security-
based swap expires, and historical positions and historical market 
values for not less than five years.\1275\ Accordingly, security-based 
swap transaction reports received by a registered SDR pursuant to 
proposed Rule 901 would be required to be retained by the registered 
SDR for not less than five years.
---------------------------------------------------------------------------

    \1275\ See SDR Proposing Release, 75 FR 77369.
---------------------------------------------------------------------------

(e) Collection of Information Is Mandatory
    Each collection of information discussed above would be a mandatory 
collection of information.
(f) Confidentiality
    Re-proposed Rule 901(a) would not affect the confidentiality of 
responses to the collection of information provided under Rule 901 of 
Regulation SBSR as originally proposed. As described in the Regulation 
SBSR Proposing Release, information collected pursuant to proposed Rule 
901(c) would be widely available to the public to the extent it is 
incorporated into security-based swap transaction reports that are 
publicly disseminated by a registered SDR pursuant to proposed Rule 
902. A registered SDR, pursuant to Sections 13(n)(5) of the Exchange 
Act and proposed Rule 13n-9 thereunder, would be under an obligation to 
maintain the confidentiality of any information reported pursuant to 
proposed Rule 901(d) of Regulation SBSR. To the extent that the 
Commission receives confidential information pursuant to this 
collection of information, such information would be kept confidential, 
subject to the provisions of applicable law.
Request for Comment
    The Commission requests public comment on our analysis of burdens 
associated with re-proposed Rule 901(a) and proposed Rule 901 
generally. The Commission also seeks comment on the following:
     Would re-proposed Rule 901(a) impose burdens on parties 
additional to those imposed by Rule 901, as originally

[[Page 31116]]

proposed? If so, what are these additional burdens? Please describe 
fully and quantify to the extent possible.
     Would re-proposed Rule 901(a) reduce overall burdens by 
aligning the security-based swap transaction reporting obligation with 
those market participants better able to carry out the reporting 
function? Why or why not?
     Are there any methods to enhance Rule 901 while minimizing 
the overall burdens associated with that rule?
     Would re-proposed Rule 901(a) reduce the total number of 
entities potentially subject to the reporting requirements? Is the 
Commission's revised estimate of 300 reporting sides reasonable?
     Would re-proposed Rule 901(a) have any impact on the 
burden imposed on SDRs? Are those costs dependent upon the number of 
reporting counterparties or the number of transactions submitted to 
SDRs?
3. Rules 902, 905, 906, 907, and 909
    Regulation SBSR, as originally proposed, contained certain proposed 
rules, each of which was considered a ``collection of information'' 
within the meaning of the PRA, but that now either remains unchanged--
or contains only technical, or conforming changes--as a result of re-
proposed SBSR.
(a) Rule 902
    In the Regulation SBSR Proposing Release, the Commission stated our 
preliminary belief that certain provisions of proposed Rule 902 
contained ``collection of information requirements'' within the meaning 
of the PRA.\1276\ As such, the Commission preliminarily estimated 
certain burdens resulting from the proposed rule.\1277\
---------------------------------------------------------------------------

    \1276\ See Regulation SBSR Proposing Release, 75 FR 75251.
    \1277\ See id. at 75251-52.
---------------------------------------------------------------------------

    As set forth in more detail above, the Commission is now proposing 
technical or conforming revisions to proposed Rule 902.
    Rule 902(a), as initially proposed, would require a registered SDR 
to publicly disseminate a transaction report of any security-based swap 
immediately upon receipt of information about the security-based swap, 
except in the case of a block trade. Re-proposed Rule 908, however, 
contemplates situations where a security-based swap would be required 
to be reported to a registered SDR but not publicly disseminated.\1278\ 
Therefore, the Commission is re-proposing Rule 902(a) to provide that a 
registered SDR would not have an obligation to publicly disseminate a 
transaction report for any such security-based swap.
---------------------------------------------------------------------------

    \1278\ See Section VIII.C, supra.
---------------------------------------------------------------------------

(b) Rule 905
    In the Regulation SBSR Proposing Release, the Commission stated our 
preliminary belief that certain provisions of proposed Rule 905 
contained ``collection of information requirements'' within the meaning 
of the PRA.\1279\ As such, the Commission preliminarily estimated 
certain burdens resulting from the proposed rule.\1280\
---------------------------------------------------------------------------

    \1279\ See Regulation SBSR Proposing Release, 75 FR 75254.
    \1280\ See id. at 75254-56.
---------------------------------------------------------------------------

    As set forth in more detail in Section VIII above, in re-proposed 
Regulation SBSR, the Commission has proposed technical or conforming 
revisions to proposed Rule 905. Rule 905(b)(2) is being re-proposed to 
clarify that, if a registered SDR receives corrected information 
relating to a previously submitted transaction report, it would be 
required to publicly disseminate a corrected transaction report only if 
the initial security-based swap were subject to public 
dissemination.\1281\ In addition, re-proposed Rule 905 conforms the 
rule language to incorporate the use of the term ``side.''
---------------------------------------------------------------------------

    \1281\ Re-proposed Rule 905(b)(2) of Regulation SBSR also 
substitutes the word ``counterparties''--which is a formally defined 
term in the regulation--for the word ``parties,'' which was used in 
the initial proposal but was not a formally defined term.
---------------------------------------------------------------------------

(c) Rule 906
    In the Regulation SBSR Proposing Release, the Commission stated our 
preliminary belief that certain provisions of proposed Rule 906 
contained ``collection of information requirements'' within the meaning 
of the PRA.\1282\ As such, the Commission preliminarily estimated 
certain burdens on reporting parties and SDRs resulting from the 
proposed rule.\1283\
---------------------------------------------------------------------------

    \1282\ See Regulation SBSR Proposing Release, 75 FR 75256.
    \1283\ See id. at 75256-58.
---------------------------------------------------------------------------

    As set forth in more detail above, the Commission is now proposing 
technical revisions to proposed Rule 906. Re-proposed Rule 906 conforms 
the rule language to incorporate the use of the term ``side.''
(d) Rule 907
    In the Regulation SBSR Proposing Release, the Commission stated our 
preliminary belief that certain provisions of proposed Rule 907 
contained ``collection of information requirements'' within the meaning 
of the PRA.\1284\ As such, the Commission preliminarily estimated 
certain burdens on reporting parties and SDRs resulting from the 
proposed rule.\1285\
---------------------------------------------------------------------------

    \1284\ See id. at 75258.
    \1285\ See id. at 75258-60.
---------------------------------------------------------------------------

    As set forth in more detail above, the Commission is now proposing 
technical or conforming revisions to proposed Rule 907. Re-proposed 
Rule 907(a)(6) would require a registered SDR to establish and maintain 
written policies and procedures ``[f]or periodically obtaining from 
each participant information that identifies the participant's ultimate 
parent(s) and any other participant(s) which the counterparty is 
affiliated, using ultimate parent IDs and participant IDs'' (emphasis 
added). The Commission now is re-proposing Rule 907(a)(6) with the word 
``participant'' in place of the word ``counterparty.'' Re-proposed Rule 
907 also conforms the rule language to incorporate the use of the term 
``side.''
(e) Rule 909
    In the Regulation SBSR Proposing Release, the Commission stated our 
preliminary belief that certain provisions of proposed Rule 909 
contained ``collection of information requirements'' within the meaning 
of the PRA.\1286\ As such, the Commission preliminarily estimated 
certain burdens SDRs resulting from the proposed rule.\1287\
---------------------------------------------------------------------------

    \1286\ See id. at 75260.
    \1287\ See id. at 75260-61.
---------------------------------------------------------------------------

i. Impact of Re-Proposed Rules 902, 905, 906, 907, and 909 on the 
Commission's PRA Analysis
    Since re-proposed Rules 902, 905, 906, 907, and 909 of Regulations 
SBSR either remain unchanged from the Regulation SBSR Proposing Release 
or contain only technical or conforming changes, the Commission 
preliminarily believes that our original PRA analysis, as set forth in 
the Regulation SBSR Proposing Release, continues to apply. The 
Commission preliminarily believes that our original analysis does not 
require revision, in part, because the burdens described in the 
Regulation SBSR Proposing Release are not dependent upon the number of 
respondents or the number of security-based swap transactions that 
would be reported to a registered SDR. In addition, the Commission 
preliminarily believes that the burdens described in relation to Rule 
906 would not change because the number of reports required under and 
the universe of respondents subject to Rule 906 would not change. 
Furthermore, the Commission preliminarily believes that these re-
proposed rules would not result in a

[[Page 31117]]

change in the Commission's original estimate of SDRs.
    The Commission requests public comment on our analysis of burdens 
associated with these re-proposed rules, and whether re-proposed Rule 
902, 905, 906, 907, or 909 would impose any collection of information 
requirements that the Commission has not considered. If so, please 
describe them.
4. Rules 900, 903, 908, 910, and 911
    Regulation SBSR, as originally proposed, contained certain proposed 
rules that were not considered a ``collection of information'' within 
the meaning of the PRA.
(a) Modification of the Definition of ``U.S. Person''
    In the Regulation SBSR Proposing Release, the Commission stated our 
belief that proposed Rule 900, since it contains only definitions of 
relevant terms, would not be a ``collection of information'' within the 
meaning of the PRA.\1288\ Rule 900 of re-proposed Regulation SBSR 
contains a revised definition of ``U.S. person'' that cross-references 
proposed Rule 3a71-3(a)(7) under the Exchange Act. Re-proposed Rule 900 
also contains definitions for new terms such as ``side,'' ``reporting 
side,'' and ``direct electronic access.'' The Commission continues to 
believe that, because Rule 900 contains only definitions of relevant 
terms, it would not be a ``collection of information'' within the 
meaning of the PRA.
---------------------------------------------------------------------------

    \1288\ See id. at 75246.
---------------------------------------------------------------------------

(b) Rule 903
    In the Regulation SBSR Proposing Release, the Commission stated our 
belief that proposed Rule 903 would not be a ``collection of 
information'' within the meaning of the PRA because the rule would 
merely permit reporting parties and SDRs to use codes in place of 
certain data elements, subject to certain conditions.\1289\ Re-proposed 
Rule 903 conforms the rule language to incorporate the use of the term 
``side.'' Because these are only technical changes to the proposed 
rule, the Commission continues to believe that re-proposed Rule 903 
would not be a ``collection of information'' within the meaning of the 
PRA.
---------------------------------------------------------------------------

    \1289\ See id. at 75252-53.
---------------------------------------------------------------------------

(c) Re-proposed Rules 908(a) and 908(b)
    Rule 908(a), as initially proposed, provided that a security-based 
swap would be subject to regulatory reporting and public dissemination 
under Regulation SBSR if the security-based swap: (1) has at least one 
counterparty that is a U.S. person; (2) is executed in the United 
States or through any means of interstate commerce; or (3) is cleared 
through a registered clearing agency having its principal place of 
business in the United States. Thus, original Rule 908(a) would not 
impose reporting requirements in connection with a security-based swap 
solely because one of the counterparties were guaranteed by a U.S. 
person or were a non-U.S. person security-based swap dealer or major 
security-based swap participant.
    The Commission stated our preliminary belief that proposed Rule 908 
would not be a ``collection of information'' within the meaning of the 
PRA, as the rule merely described the jurisdictional reach of proposed 
Regulation SBSR.
    As set forth in more detail above, the Commission now believes 
that, where a security-based swap is executed outside the United States 
by a non-U.S. person direct counterparty but performance of any duties 
under that security-based swap is guaranteed by a U.S. person, the 
security-based swap should be subject to Title VII regulatory reporting 
requirements.\1290\ In addition, a security-based swap dealer or major 
security-based swap participant that is a non-U.S. person would, under 
Rule 908(a) of re-proposed Regulation SBSR, be required to report a 
security-based swap executed outside the United States with a non-U.S. 
person counterparty (assuming no guarantee extended by a U.S. person).
---------------------------------------------------------------------------

    \1290\ However, as discussed above, the Commission preliminarily 
believes that certain of these cross-border security-based swaps 
need not be subject to Title VII's public dissemination 
requirements. See Section VIII.C.1, supra.
---------------------------------------------------------------------------

    Re-proposed Rule 908(a) is now divided into subparagraphs (1) and 
(2), which address regulatory reporting and public dissemination, 
respectively. The Commission also is re-proposing Rule 908(a) to 
require reporting and public dissemination in certain cases not 
required by the original proposal, and to make certain other changes 
described above (such as eliminating the ``interstate commerce 
clause''). Because re-proposed Rule 908(a) continues merely to describe 
the situations to which proposed Regulation SBSR would apply, the 
Commission continues to believe that re-proposed Rule 908(a) would not 
be a ``collection of information'' within the meaning of the PRA. 
However, to the extent that additional types of security-based swaps 
would be subject to regulatory reporting and public dissemination under 
re-proposed Regulation than under the initial proposal, the additional 
burdens on respondents are considered under re-proposed Rule 901 above.
    Rule 908(b), as initially proposed, described when duties would be 
imposed on foreign counterparties of security-based swaps when some 
connections to the United States might be present. Rule 908(b), as 
initially proposed, provided that no duties would be imposed on a 
counterparty unless one of the following conditions were true: (1) the 
counterparty is a U.S. person; (2) the security-based swap is executed 
in the United States or through any means of interstate commerce; or 
(3) the security-based swap is cleared through a clearing agency having 
its principal place of business in the United States.
    The Commission stated our preliminary belief that proposed Rule 908 
would not be a ``collection of information'' within the meaning of the 
PRA, as the rule merely described the jurisdictional reach of proposed 
Regulation SBSR.
    As set forth in more detail above, the Commission is proposing 
several technical revisions to proposed Rule 908(b). Specifically, Rule 
908(b) is being revised to account for the possibility that a non-U.S. 
person registered with the Commission as a security-based swap dealer 
or major security-based swap participant could incur a duty to report. 
Moreover, the ``interstate commerce clause'' is being replaced with the 
new concept of a ``transaction conducted within the United States.''
    Since re-proposed Rule 908(b) continues merely to describe the 
jurisdictional reach of Regulation SBSR, the Commission continues to 
believe that re-proposed Rule 908(b) would not be a ``collection of 
information'' within the meaning of the PRA. However, the Commission 
notes that re-proposed Rule 908(b) could result in a non-U.S. person 
security-based swap dealer or major security-based swap participant 
incurring a duty to report. To the extent that this could result in a 
change in the number of reporting counterparties, such burdens are 
considered in connection with re-proposed Rule 901 above.
    The Commission requests public comment on our analysis of burdens 
associated with re-proposed Rules 908(a) and 908(b) generally. In 
particular:
     Would re-proposed Rules 908(a) and 908(b) impose any 
collection of information requirements that the Commission has not 
considered? If so, please describe.
    Re-proposed Rule 908 contains a new subparagraph (c), dealing with 
substituted compliance, a subject that

[[Page 31118]]

was not addressed in the original proposal. The PRA analysis for re-
proposed Rule 908(c) is provided elsewhere, together with the PRA 
analysis of the substituted compliance provisions of the other Title 
VII proposed rules described in this release.\1291\
---------------------------------------------------------------------------

    \1291\ See Section XIV.E.4, supra.
---------------------------------------------------------------------------

(d) Rule 910
    As originally proposed, the Commission stated our belief that 
proposed Rule 910 would not be a ``collection of information'' within 
the meaning of the PRA, as it merely describes when a registered SDR 
and its participants would be required to comply with the various parts 
of proposed Regulation SBSR, and would not create any additional 
collection of information requirements.
    As set forth in more detail above, the Commission is now proposing 
technical, or conforming revisions to proposed Rule 910. Rule 
910(b)(4), as originally proposed, would provide that, in Phase 4 of 
the Regulation SBSR compliance schedule, ``[a]ll security-based swaps 
reported to the registered security-based swap data repository shall be 
subject to real-time public dissemination as specified in Sec.  
242.902.'' As noted above, under re-proposed Rule 908, certain 
security-based swaps would be subject to regulatory reporting but not 
public dissemination requirements. Therefore, the Commission is re-
proposing Rule 910(b)(4) to provide that, ``All security-based swaps 
received by the registered security-based swap data repository shall be 
treated in a manner consistent with Sec. Sec.  242.902, 242.905, and 
242.908.'' Re-proposed Rule 910 also conforms the rule language to 
incorporate the use of the term ``side.''
    The Commission continues to believe that re-proposed Rule 910 would 
not be a ``collection of information'' within the meaning of the PRA.
(e) Rule 911
    Rule 911, as originally proposed, would restrict the ability of a 
reporting party to report a security-based swap to one registered SDR 
rather than another, but would not otherwise create any duties or 
impose any collection of information requirements beyond those already 
required by proposed Rule 901. Therefore, the Commission stated our 
belief that proposed Rule 911 would not be a ``collection of 
information'' within the meaning of the PRA.\1292\ As set forth in more 
detail above, the Commission is now proposing technical revisions to 
proposed Rule 911. Re-proposed Rule 911 conforms the rule language to 
incorporate the use of the term ``side.'' The Commission continues to 
believe that re-proposed Rule 911 would not be a ``collection of 
information'' within the meaning of the PRA.
---------------------------------------------------------------------------

    \1292\ See Regulation SBSR Proposing Release, 75 FR 75261.
---------------------------------------------------------------------------

G. Request for Comments by the Commission and Director of OMB

    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 proper performance of our functions, including 
whether the information shall have practical utility;
    2. Evaluate the accuracy of our 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. Evaluate whether there are ways to 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 submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File Number S7-02-13, and 
File Numbers S7-34-10 (Regulation SBSR) and/or S7-40-11 (registration 
of security-based swap dealers and major security-based swap 
participants), as applicable. Requests for materials submitted to OMB 
by the Commission with regard to this collection of information should 
be in writing, with reference to File Number S7-02-13, and File Numbers 
S7-34-10 (Regulation SBSR) and/or S7-40-11 (registration of security-
based swap dealers and major security-based swap participants), as 
applicable, and be submitted to the Securities and Exchange Commission, 
Office of FOIA/PA Operations, 100 F Street NE., Washington, DC 20549-
2736. As OMB is required to make a decision concerning the collections 
of information between 30 and 60 days after publication, a comment to 
OMB is best assured of having its full effect if OMB receives it within 
30 days of publication.

XV. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic consequences and 
effects, including costs and benefits, of our rules. In proposing the 
rules and interpretations in this release, the Commission has been 
mindful of the economic consequences of the decisions it makes 
regarding the scope of application of the Title VII requirements to 
cross-border activities pursuant to the proposed rules. The Commission 
has taken into account the costs and benefits associated with applying 
the Title VII regulatory requirements to cross-border transactions and 
market participants who would be required to register pursuant to these 
proposed rules and interpretations, as well as the costs associated 
with determining whether Title VII applies to a specific person or 
transaction, which we refer to as direct assessment costs these rules 
and interpretations would impose on market participants, if adopted as 
proposed. Some of these economic consequences and effects stem from 
statutory mandates, while others are affected by the discretion we 
exercise in implementing the mandates. Further, Section 3(f) of the 
Exchange Act requires the Commission, whenever we engage in rulemaking 
pursuant to the Exchange Act and are 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 will promote efficiency, competition, and capital 
formation.\1293\ In addition, Section 23(a)(2) of the Exchange Act 
requires the Commission, when making rules under the Exchange Act, to 
consider the impact such rules would have on competition. Section 
23(a)(2) 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.\1294\ The Commission 
requests comment on all aspects of the economic analysis of the 
proposed rules, including their costs and benefits, as well as any 
effect these rules may have on competition, efficiency, and capital 
formation.
---------------------------------------------------------------------------

    \1293\ 15 U.S.C. 78c(f).
    \1294\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    As stated above, the Commission is proposing rules and 
interpretations regarding the application of Title VII to cross-border 
activities holistically in a single proposing release to provide market 
participants, foreign regulators, and other interested parties with an 
opportunity to consider, as an integrated

[[Page 31119]]

whole, the Commission's proposed approach to the application of various 
Title VII requirements to cross-border security-based swap transactions 
and to persons whose cross-border security-based swap activity is 
regulated under Title VII.\1295\
---------------------------------------------------------------------------

    \1295\ See Section I, supra.
---------------------------------------------------------------------------

    In analyzing the economic consequences and effects of the rules and 
interpretations proposed in this release, the Commission has been 
guided by the objectives of the Dodd-Frank Act to mitigate risks to the 
U.S. financial system, promote counterparty protection, increase swap 
market transparency, and facilitate financial stability. We have also 
taken into account the importance of maintaining a well-functioning 
security-based swap market. In evaluating these rules the Commission 
has considered the importance of avoiding unnecessary market 
disruption, and preserving market participants' access to liquidity 
irrespective of geography. This analysis also reflects the importance 
of regulatory harmonization and maintaining consistent international 
standards. In this regard, we recognize that regulators in other 
jurisdictions are currently engaged in implementing their own 
regulatory reforms of the OTC derivatives markets and that our proposed 
application of Title VII to cross-border activities may affect the 
policy decisions of these other regulators as they seek to address 
potential conflicts or duplication in the regulatory requirements that 
apply to market participants under their authority.
    In addition, the Commission is aware of the development of OTC 
derivatives regulatory reform in other jurisdictions. In particular, 
the EU and certain other G20 members have taken various steps to 
develop and implement new regulations with respect to OTC 
derivatives.\1296\ Moreover, market participants, foreign regulators, 
and other interested parties have provided views on the application of 
Title VII requirements to cross-border activities through both written 
comment letters to the Commission and/or the CFTC and meetings with 
Commissioners and Commission staff.\1297\ These developments, comments, 
and discussions have been informative in the Commission's consideration 
of our proposed approach to the application of Title VII in the cross-
border context and the economic consequences of the proposed rules and 
interpretations.
---------------------------------------------------------------------------

    \1296\ See Section I and notes 35-35, supra.
    \1297\ See Section I and notes 24-25, supra.
---------------------------------------------------------------------------

B. Economic Baseline

1. Overview
    To assess the economic impact of the proposed rules described in 
this release, the Commission is using as our baseline the security-
based swap market as it exists at the time of this proposal, including 
applicable rules adopted by the Commission but excluding the rules and 
interpretations proposed here. The analysis incorporates the statutory 
and regulatory provisions that currently govern the security-based swap 
market pursuant to the Dodd-Frank Act. Many of the resulting costs and 
benefits are difficult to quantify with any degree of certainty, 
especially as the practices of market participants are expected to 
evolve and adapt to changes in technology and market developments.
    In assessing the economic impact of the rules, we refer to the 
broader costs and benefits associated with the application of the 
proposed rules and interpretations as ``programmatic'' costs and 
benefits. These include the costs and benefits of applying the 
substantive Title VII requirements to transactions by market 
participants active in the cross-border context, as well as to the 
functions performed by infrastructure participants (clearing agencies, 
SDRs, and SB SEFs) in the global security-based swap market. In several 
places we also consider how the programmatic costs and benefits might 
change when comparing the proposed approach to the other alternatives 
suggested by industry comment letters and the other regulators. Our 
analysis also considers ``assessment costs.''
    Our analysis also recognizes that certain market participants may 
be subject to Title VII requirements under the proposed rules and 
interpretations while potentially also being subject to another set of 
foreign regulatory requirements. Concurrent, and potentially 
duplicative or conflicting, regulatory requirements could be imposed on 
persons because of their resident or domicile status or because of the 
place their security-based swap transactions are conducted. In certain 
circumstances, the Commission is proposing to consider permitting 
substituted compliance subject to certain conditions. In determining 
whether to propose rules that would permit market participants to seek 
substituted compliance determinations for particular requirements in 
certain circumstances, the Commission has considered the programmatic 
benefits intended by the specific Title VII requirements with respect 
to which substituted compliance may be permitted, the programmatic 
costs associated with such Title VII requirements when they become 
fully effective, and the relevant assessment costs.\1298\
---------------------------------------------------------------------------

    \1298\ The Commission is proposing to permit market participants 
to seek a substituted compliance determination in connection with 
certain requirements--it has not yet made any such specific 
determinations. The Commission does not believe it is possible at 
this point to estimate the number of such determinations that it is 
likely to make for any given set of requirements, as such estimate 
would depend on information that is generally not yet available. 
However, the maximum programmatic benefits and costs associated with 
substituted compliance could occur in circumstances where the 
Commission grants every substituted compliance request. This does 
not in any way indicate that the Commission will make any number of 
substituted compliance determinations. Accordingly, the following 
analysis does not assume that such substituted compliance will be 
allowed. Where appropriate, however, we do discuss the economic 
implications if such substituted compliance were ultimately to be 
allowed.
---------------------------------------------------------------------------

    The proposed rules and interpretations reflect the Commission's 
preliminary determination regarding which participants and transactions 
in the security-based swap market warrant regulation under Title VII, 
and in making this determination, we have focused on whether a market 
participant is incorporated or resident, or has its principal place of 
business, within the United States and whether a transaction occurs 
within the United States. The economic impact of these proposed rules 
and interpretations will occur predominantly through the application in 
a cross-border context of the substantive requirements outlined in 
other releases, without, as a general matter, altering the nature of 
those substantive requirements.\1299\ We have already analyzed many of 
the costs and benefits of the proposed substantive requirements in 
separate proposing and adopting releases. As a result, the following 
analysis focuses on the economic impacts and trade-offs of application 
of these substantive requirements in a cross-border context, that is, 
the economic implications of the decisions to include certain persons 
that reside or are organized (or have their principal place of 
business), or transactions that occur, within the United States within 
the scope of Title VII and the economic effects arising from that 
inclusion.
---------------------------------------------------------------------------

    \1299\ We recognize that we are re-proposing Regulation SBSR in 
this release, which would have an impact on the security-based swap 
reporting obligations beyond the cross-border context, and we 
discuss these effects in our economic analysis of the re-proposal 
below.
---------------------------------------------------------------------------

    To the extent that future adopting releases implementing the 
substantive requirements under Title VII reflect substantive changes to 
the proposals, those releases will incorporate the

[[Page 31120]]

relevant economic analysis. We also expect that our respective adopting 
releases for each of these substantive areas will discuss the economic 
consequences of the final substantive rules together with our final 
rules on the application of those rules in the cross-border context.
2. Current Security-Based Swap Market
    Our analysis of the state of the current security-based swap market 
is based on data obtained from DTCC-TIW, especially data regarding the 
activity of market participants in the single-name credit default swap 
(or CDS) market during the years of 2008 to 2011. Because of the lack 
of market data in the context of total return swaps on equity and debt, 
we do not have the same amount of information regarding those products 
(or other products that are security-based swaps) as we have in 
connection with the present market for single-name CDS. With the 
exception of the analysis regarding the level of security-based swap 
clearing, we did not consider data regarding index credit default swaps 
for purposes of the analysis below. The data for index CDS encompasses 
both broad-based security indices and narrow-based security indices, 
and ``security-based swap'' in relevant part encompasses swaps based on 
single securities or on narrow-based security indices.\1300\ We 
previously noted that the definition of security-based swaps is not 
limited to single-name CDS but we believed that the single-name CDS 
data are sufficiently representative of the market to help inform the 
analysis of the state of the current security-based swap market.\1301\
---------------------------------------------------------------------------

    \1300\ See Section 3(a)(68)(A) of the Exchange Act, 15 U.S.C. 
78c(a)(68)(A).
    \1301\ According to data published by BIS, the global notional 
amount outstanding in equity forwards and swaps as of June 2012 was 
$1.88 trillion. The notional amount outstanding in single-name CDS 
was approximately $15.57 trillion, in multi-name index CDS was 
approximately $9.73 trillion, and in multi-name, non-index CDS was 
approximately $1.63 trillion. See Semi-annual OTC derivatives 
statistics at end-June 2012 (Nov. 2012), Table 19, available at: 
https://www.bis.org/statistics/otcder/dt1920a.pdf. For the purposes 
of this analysis, we assume that multi-name index CDS are not 
narrow-based index CDS and therefore, do not fall within the 
security-based swap definition. See Section 3(a)(68)(A) of the 
Exchange Act; see also the Product Definitions Adopting Release, 77 
FR 48208. We also assume that all instruments reported as equity 
forwards and swaps are security-based swaps, potentially resulting 
in underestimation of the proportion of the security-based swap 
market represented by single-name CDS. Therefore, single-name CDS 
appear to constitute roughly 82% of the security-based swap market. 
Although the BIS data reflects the global OTC derivatives market, 
and not just the U.S. market, we have no reason to believe that 
these ratios differ significantly in the U.S. market.
---------------------------------------------------------------------------

    We believe that the data underlying our analysis here provide 
reasonably comprehensive information regarding the single-name CDS 
transactions and composition of the single-name CDS market 
participants. In our analysis of market participants and their 
domiciles in subsections (a) and (c) below, we base our analysis on 
firms and accounts that have engaged in one or more trades with a U.S.-
person counterparty or involving a U.S. reference entity according to 
data obtained from DTCC-TIW. Our analysis of trading activity in the 
security-based swap market in subsections (b) and (d) focuses on 
transactions involving a single-name CDS referencing a U.S. entity 
(``U.S. single-name CDS''). We note that the data available to us from 
DTCC-TIW do not encompass those CDS transactions that both: (i) do not 
involve U.S. counterparties; and (ii) are based on non-U.S. reference 
entities. Notwithstanding this limitation, we preliminarily believe 
that the DTCC-TIW data provides sufficient information to identify the 
types of market participants active in the security-based swap market 
and the general pattern of deal flow within that market.
(a) Security-Based Swap Market Participants
    Although most security-based swap activity is concentrated among a 
relatively small number of dealer entities,\1302\ there are thousands 
of security-based swap market participants, including, but not limited 
to, investment companies, pension funds, private (hedge) funds, 
sovereign entities, and industrial companies.\1303\ In the analysis 
below, we observe that most end users of security-based swaps do not 
engage directly in the trading of swaps, but use dealers, banks, or 
investment advisers as agents to establish their positions. Based on an 
analysis of the counterparties to trades reported to the DTCC-TIW, 
there were 1,489 entities \1304\ engaged in trading of single-name CDS 
shortly after the enactment of the Dodd-Frank Act. Table 1, below, 
highlights that nearly three-quarters of these entities (DTCC-defined 
``firms'' shown in DTCC-TIW, which we refer to here as ``transacting 
agents'') were identified as investment advisers, of which 40% (30% of 
all transacting agents) were registered investment advisers under the 
Investment Advisers Act.\1305\ Although investment advisers comprise 
the vast majority of transacting agents, the transactions they executed 
account for only 10.2% of all single-name CDS trading activity reported 
to the DTCC-TIW, measured by number of transaction-sides (each 
transaction has two transaction sides, i.e., two transaction 
counterparties). The vast majority of transactions (83.7%) measured by 
number of transaction-sides were executed by ISDA-recognized 
dealers.\1306\
---------------------------------------------------------------------------

    \1302\ See Intermediary Definitions Adopting Release, 77 FR 
30636-37, 30740, and the accompanying notes 485 and 1573.
    \1303\ Staff of the Division of Risk, Strategy, and Financial 
Innovation review of DTCC-defined ``firms'' shown in DTCC-TIW as 
transaction counterparties.
    \1304\ The 1,489 entities included all DTCC-defined ``firms'' 
shown in DTCC-TIW as transaction counterparties that report at least 
one transaction to DTCC-TIW as of October, 2010. The staff in the 
Division of Risk, Strategy, and Financial Innovation classified 
these firms that are shown as transaction counterparties by machine 
matching names to known third-party databases and by manual 
classification. Manual classification included searching the EDGAR 
and Bloomberg databases, the SEC's Investment Adviser Public 
Disclosure database, and the firm's public Web site or the public 
Web site of the account represented by the firm. The staff also 
referred to ISDA protocol adherence letters available on the ISDA 
Web site. All but 52 of the 1,489 DTCC-defined ``firms'' were 
identified and classified.
    \1305\ As identified through matches to Form ADV.
    \1306\ For the purpose of this analysis, the ISDA-recognized 
dealers are those defined as G14 by ISDA. See https://www.isda.org/c_and_a/pdf/ISDA-Operations-Survey-2010.pdf. G14 refers to JP 
Morgan Chase NA (and Bear Stearns), Morgan Stanley, Bank of America 
NA (and Merrill Lynch), Goldman Sachs, Deutsche Bank AG, Barclays 
Capital, Citigroup, UBS, Credit Suisse AG, RBS Group, BNP Paribus, 
HSBC Bank, Lehman Brothers, and Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale.

   Table 1--Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                   November, 2006 through October, 2010, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
                                                                                                    Transaction
                       Transacting agents                             Number          Percent          share
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
Investment advisers.............................................           1,099            73.8            10.2
--SEC registered................................................             446            30.0             5.3
Banks...........................................................             239            16.1             4.9

[[Page 31121]]

 
Pension Funds...................................................              23             1.5             0.0
Insurance Companies.............................................              22             1.5             0.3
ISDA-Recognized Dealers.........................................              16             1.1            83.7
Other...........................................................              90             6.0             0.8
                                                                 =================
    Total.......................................................           1,489           100.0           100.0
----------------------------------------------------------------------------------------------------------------

    The staff's further analysis of the ``accounts'' in DTCC-TIW shows 
that transaction agents classified in Table 1 represent over 8,500 
accounts and funds who are the principal risk holders of the 
transactions. Table 2, below, classifies these ``accounts'' or 
principal risk holders by their counterparty type and whether they are 
represented by a registered or unregistered investment adviser.\1307\ 
For instance, 239 banks in Table 1 allocated transactions to 353 
accounts, of which 29 were represented by investment advisers and 324 
were represented directly by banks, while 16 ISDA-recognized dealers in 
Table 1 allocated transactions to 69 accounts.
---------------------------------------------------------------------------

    \1307\ Unregistered investment advisers include all investment 
advisers not registered under the Investment Advisers Act, and may 
include investment advisers registered with a state or a foreign 
authority.
---------------------------------------------------------------------------

    Among the accounts, there are over 1,400 Dodd-Frank Act-defined 
special entities and 482 investment companies registered under the 
Investment Company Act of 1940.\1308\ Private funds comprise the 
largest type of account holders that we were able to classify, and 
although not verified through a recognized database, most of the funds 
we were not able to classify appear to be private funds. The data 
analyzed here largely predate the effectiveness of our rules 
implementing the Dodd-Frank Act's requirement that previously exempt 
advisers to hedge funds and certain other private investment funds 
register with the Commission.\1309\
---------------------------------------------------------------------------

    \1308\ There remain 3,746 DTCC ``accounts'' unclassified by 
type. Although unclassified, each was manually reviewed to verify 
that it was not likely to be a special entity within the meaning of 
the Dodd-Frank Act and instead was likely to be an entity such as a 
corporation, an insurance company, or a bank.
    \1309\ See Rules Implementing Amendments to the Investment 
Advisers Act of 1940, Investment Advisers Act Release No. 3221 (June 
22, 2011), 76 FR 42950 (July 19, 2011).

   Table 2--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based Swap
Market Through a Registered Investment Adviser, an Unregistered Investment Adviser, or Directly as a Transacting
                                 Agent, From November 2006 Through October 2010
----------------------------------------------------------------------------------------------------------------
                                                         Represented by  a  Represented by an
                                                             registered        unregistered      Participant is
          Account holders by type              Number        investment         investment     transacting agent
                                                              adviser            adviser             \1310\
----------------------------------------------------------------------------------------------------------------
Private Funds.............................        2,154            952 44%          1,202 56%               0 0%
DFA Special Entities......................        1,474          1,359 92%              46 3%              69 5%
Registered Investment Companies...........          482            477 99%               5 1%               0 0%
Banks (non G14)...........................          353              25 7%               4 1%            324 92%
Insurance Companies.......................          192            145 76%             19 10%             28 15%
ISDA-recognized Dealers...................           69               0 0%               0 0%            69 100%
Foreign Sovereigns........................           53             35 66%              6 11%             12 23%
Non-financial Corporations................           37             26 70%               1 3%             10 27%
Finance Companies.........................            7              1 14%               0 0%              6 86%
Other/unclassified........................        3,746          2,522 67%          1,158 31%              66 2%
                                           ==============
    All...................................        8,567          5,542 65%          2,441 28%             584 7%
----------------------------------------------------------------------------------------------------------------

(b) Levels of Security-Based Swap Trading Activity
---------------------------------------------------------------------------

    \1310\ This column reflects the number of participants who are 
also trading on their own accounts.
---------------------------------------------------------------------------

    CDS contracts make up the vast majority of security-based swap 
products and most are written on corporate issuers, corporate 
securities, sovereign countries, or sovereign debt (reference entities 
and reference securities).\1311\ Figure 1 below describes the 
percentage of global, notional transaction volume \1312\ in U.S. 
single-name CDS reported to the DTCC-TIW between January 2008 and 
December 2011, separated by whether transactions are between two ISDA-
recognized dealers (interdealer transactions) or whether a transaction 
has at least one non-dealer counterparty.
---------------------------------------------------------------------------

    \1311\ See Intermediaries Adopting Release, 77 FR 30636 n.476. 
See also Chen, Kathryn, Michael Flemming, John Jackson, Ada Li, and 
Asani Sarkar, ``An Analysis of CDS Transactions: Implications for 
Public Reporting,'' Federal Reserve Bank of New York Staff Report, 
No. 517 (Sep. 2011) (decomposing single-name CDS contracts into 
corporate, sovereign, and other).
    \1312\ This volume includes all price-forming CDS transactions 
(trades, assignments, and terminations) on U.S.-based reference 
entities reported to the DTCC-TIW during calendar years 2008 through 
2011, including those executed between two foreign counterparties. 
``Price-forming transactions'' include all new transactions, 
assignments, modifications to increase the notional amounts of 
previously executed transactions, and terminations of previously 
executed transactions. Transactions terminated, transactions entered 
into in connection with a compression exercise, and expiration of 
contracts at maturity are not considered price-forming and are 
therefore excluded, as are replacement trades and all bookkeeping-
related trades.

---------------------------------------------------------------------------

[[Page 31122]]

    The level of trading activity with respect to U.S. single-name CDS 
in terms of notional volume has declined from more than $5 trillion in 
2008 to less than $2.5 trillion in 2011. The start of this decline 
predates the enactment of the Dodd-Frank Act and the rules proposed 
thereunder. For the purpose of establishing an economic baseline, this 
seems to indicate that CDS market demand shrank prior to the enactment 
of the Dodd-Frank Act, and therefore the causes of trading volume 
declines may be independent of those related to the development of 
security-based swap market regulation. If the security-based swap 
market experiences further declines in trading activity, it would be 
difficult to isolate the effects of the newly-developed security-based 
swap market regulation and to identify whether the changes in trading 
activity are due to natural market forces or the anticipation of (or 
reaction to) proposed (or adopted) Title VII requirements.
    Although notional volume had declined over the past four years, the 
percentage of interdealer transactions has remained fairly constant, at 
a little more than 80% of the total notional volume. This is consistent 
with the 83.7% of transactions involving ISDA-recognized dealers on one 
side of the transactions executed from November 2006 through October 
2010 as shown in Table 1.
[GRAPHIC] [TIFF OMITTED] TP23MY13.000

(c) Market Participant Domiciles
    In analyzing data to identify an economic baseline of trading 
activity for purposes of this proposal, we found that there has been a 
distinct shift in country of domicile since the enactment of the Dodd-
Frank Act. Prior to the enactment of the Dodd-Frank Act, the majority 
of the funds and accounts \1313\ that were allocated CDS transactions 
reported to the DTCC-TIW were domiciled within the United States, 
according to self-reported registered office location recorded by the 
DTCC-TIW.\1314\ Since the enactment of Dodd-Frank Act, there has been a 
significant shift in reported domiciles, with far fewer funds and 
accounts reporting a U.S. domicile. Figure 2, left, shows that more 
than two-thirds of funds and accounts in existence as of October of 
2010 reported a U.S. domicile.\1315\ Figure 2, right, reports the 
domicile of the more than 2,600 new funds and accounts that were 
allocated trades reported to the DTCC-TIW for the first time since 
October 2010. For these funds and accounts, only 43% report a 
registered office location in the United States, a decline of 25 
percentage points. While the fraction of foreign domiciled funds 
increases by nine percentage points, most of the shift in domicile is a 
result of funds and accounts reporting a foreign registered office 
location while being managed by an adviser in the United States, or a 
result of accounts of foreign branches of U.S. banks or subsidiaries of 
U.S. entities, an increase from 3% prior to the enactment of the Dodd-
Frank Act to 19% after the enactment of the Dodd-Frank Act.\1316\
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    \1313\ The DTCC accounts are not the same as entities. One 
entity may have multiple accounts and, depending on where accounts 
are located, may report multiple domicile locations. For example, a 
bank may have one DTCC account for its U.S. headquarters and one 
DTCC account for one of its foreign branches. The self-reported 
registered office location for the U.S. headquarters account is 
different from that for the foreign branch account.
    \1314\ Following the Warehouse Trust Guidance on CDS data access 
(see text accompanying notes 83-85, supra), the DTCC-TIW surveyed 
market participants, asking for the physical address associated with 
each of their accounts (i.e., where the account is incorporated as a 
legal entity). This is designated the registered office location. 
For purposes of this discussion, we have assumed that the registered 
office location reflects the place of domicile for the fund or 
account.
    \1315\ When the fund does not report a registered office 
location, we assume that the settlement country reported by the 
investment adviser or parent entity to the fund or account is the 
place of domicile.
    \1316\ In these instances, the fund or account lists a non-U.S. 
registered office location while the investment adviser, U.S. bank, 
or U.S. parent lists the United States as its settlement country.

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[[Page 31123]]

    While it is likely that some of the shift in domicile is in 
reaction to development of the new Title VII regulatory regime, with 
many funds shifting their registered office locations offshore in 
anticipation of potential future compliance costs and burdens, some of 
the activity could be attributed to more precise reporting of domicile 
by funds and accounts relative to information that was on record for 
older funds and accounts. In particular, prior to the enactment of the 
Dodd-Frank Act, funds and accounts did not formally report their 
domicile because there was no systematic requirement to do so. Since 
Dodd-Frank Act enactment, the DTCC-TIW has collected the account or 
fund registered office location, which is self-reported and 
voluntary.\1317\ Among funds and accounts that signed up for DTCC-TIW 
services for the first time after October 2010, most have self-reported 
domiciles that are outside the United States (57% of first-time DTCC-
TIW users), but a sizeable proportion of these are managed from within 
the United States (19% of all first-time DTCC-TIW users).
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    \1317\ SEC Staff discussions with DTCC.
    [GRAPHIC] [TIFF OMITTED] TP23MY13.001
    
(d) Level of Current Cross-Border Activity in Single-Name CDS
    About half of the trading activity in U.S. single-name CDS 
reflected in the set of data we analyzed was between counterparties 
domiciled in the United States and counterparties domiciled abroad. 
When counterparty domicile is based on the registered office location 
\1318\ of the DTCC-TIW accounts, only 7% of the global transaction 
volume by notional volume in 2011 was between two U.S.-domiciled 
counterparties, compared to 49% entered into between one U.S.-domiciled 
counterparty and a foreign-domiciled counterparty and 44% entered into 
between two foreign-domiciled counterparties (see figure 3). When the 
domicile locations of DTCC-TIW accounts are defined according to the 
domicile of their ultimate parent, headquarters or home office (e.g., 
classifying a foreign bank branch or foreign subsidiary of a U.S. 
entity as domiciled in the United States), the fraction of transactions 
entered into between two U.S.-domiciled counterparties increases to 
25%, and to 57% for transactions entered into between a U.S.-domiciled 
counterparty and a foreign-domiciled counterparty.
---------------------------------------------------------------------------

    \1318\ DTCC-TIW collects certain information from its users, 
including registered office location, which is defined as the 
``place of organization of the legal entity.'' DTCC, ``Multifund 
User Agreement Form & Key Contacts,'' at 5, available at: https://www.dtcc.com/customer/membership/derivserv/derivserv.php.

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[[Page 31124]]

[GRAPHIC] [TIFF OMITTED] TP23MY13.002

    By either definition of domicile, the data indicate that a large 
fraction of U.S. single-name CDS transaction volume is entered into 
between counterparties domiciled in two different jurisdictions or 
between counterparties domiciled outside the United States. For the 
purpose of establishing an economic baseline, this observation 
indicates that a large fraction of security-based swap activity would 
be affected by the scope of any cross-border approach we could propose 
to take in applying the Title VII requirements. The large fraction of 
U.S. single-name CDS transactions between U.S.-domiciled and foreign-
domiciled counterparties also highlights the extent to which security-
based swap activity transfers risk across geographical boundaries. 
Moreover, the legal domicile of a counterparty may not represent the 
only location of risk.
(e) Levels of Security-Based Swap Clearing
    Although no mandatory clearing regime yet exists, a substantial 
proportion of single name CDS and index CDS are cleared on a voluntary 
basis. Voluntary clearing of security-based swaps in the United States 
is currently limited to CDS products, including single-name CDS and 
index CDS. At present, there is no central clearing in the United 
States for security-based swaps that are not CDS products.
    The analysis below is based on information reported by ICE Clear 
Credit on its public Web site and is based on price-forming 
transactions,\1319\ which includes the clearing of transactions on the 
same day as the transaction was executed as well as the clearing of 
transactions submitted for clearing on a retroactive basis. The data 
presented here do not include transactions that result from the 
compression \1320\ of transactions previously submitted for clearing.
---------------------------------------------------------------------------

    \1319\ See note 1312, supra. Transactions reported to the DTCC-
TIW used for this analysis reflect all global activity, including 
transactions between two foreign counterparties. See Clearing 
Procedures Adopting Release, 77 FR 41636-37.
    \1320\ In compression, counterparties agree to terminate or 
change the notional amount of some or all of their outstanding 
contracts and replace any terminated contracts with new contracts. 
Compression reduces counterparties' gross notional amount, while 
leaving their net notional amount unchanged. Transactions entered 
into in connection with a compression exercise are not considered 
price-forming and are therefore excluded from the analysis here.
---------------------------------------------------------------------------

    Figure 4 shows that index CDS in U.S. names account for the bulk of 
current voluntary clearing activity. The proportion of transactions in 
names accepted for clearing that are ultimately cleared also appears to 
be higher in index CDS in U.S. names than in single-name CDS 
referencing U.S. corporate issuers or securities. In calendar years 
2010 and 2011, Figure 4 indicates that 90% of the total notional volume 
of transactions is in index names that are accepted for clearing as of 
the end of each calendar year and that cleared index transactions 
correspond to more than 50% of the total notional volume during the 
same period. By contrast, the figure suggests that the proportion of 
transactions in single-name corporate CDS referencing names that were 
accepted for clearing was only 33% of the total single-name CDS during 
2011, with cleared transactions during the same year totaling only 25% 
of all the single-name CDS executed during the same period.

[[Page 31125]]

[GRAPHIC] [TIFF OMITTED] TP23MY13.003

    While a large fraction of CDS trading activity continues to settle 
bilaterally, particularly in light of limited eligibility to clear 
among market participants, clearing activity has steadily increased 
alongside the Title VII rulemaking process, and in advance of mandatory 
clearing requirements.\1321\ Figure 5 shows that member positions at 
ICE Clear Credit in the United States are roughly half held by foreign-
domiciled dealing members.\1322\ Hence, there is considerable credit 
exposure between ICE Clear Credit and these foreign-domiciled clearing 
members, in both directions.
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    \1321\ See Clearing Procedures Adopting Release, 77 FR 41636-38.
    \1322\ Positions represent each side of an original swap 
contract such that the aggregated numbers reported here are twice 
the amount of the notional exposure from the original contract.
[GRAPHIC] [TIFF OMITTED] TP23MY13.004


[[Page 31126]]



C. Analysis of Potential Effects on Efficiency, Competition, and 
Capital Formation

1. Introduction
    In developing our approach to the application of Title VII to 
cross-border activities, we have focused on meeting the goals of Title 
VII, including the promotion of the financial stability of the United 
States by improving accountability and transparency in the U.S. 
financial system, the reduction of systemic risk, and the protection of 
counterparties to security-based swaps.\1323\ We also have sought to 
take into account a range of principles relevant to regulation of this 
market, as described above.\1324\ As reflected in our discussion of the 
various policy choices we are proposing above \1325\ and of the 
potential costs and benefits associated with our proposed approach in 
the economic analyses below,\1326\ we also have considered effects on 
competition, efficiency, and capital formation.\1327\
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    \1323\ See note 4, supra.
    \1324\ See Section II.C, supra.
    \1325\ See Sections III-XI, supra.
    \1326\ See Sections XV.D-I, infra.
    \1327\ As noted above, Section 3(f) of the Exchange Act requires 
that whenever pursuant to the Exchange Act the Commission is engaged 
in rulemaking and is required to consider or determine whether an 
action is necessary or appropriate in the public interest, the 
Commission shall consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f). In addition, Section 
23(a)(2) of the Exchange Act requires the Commission, when making 
rules under the Exchange Act, to consider the impact such rules 
would have on competition and 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. 15 
U.S.C. 78w(a)(2).
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    In this section, we focus particularly on these effects. Given the 
complexity and inter-relatedness of the potential effects of the 
proposed rules--both on a rule-by-rule basis and taken together as a 
whole--on the market for security-based swaps, we provide a framework 
for a general analysis of the effects of the proposed rules on 
competition, efficiency, and capital formation. We then use this 
framework to engage in an analysis of the possible effects of our 
proposed approach.
    In developing the general analytical framework for considering the 
effects of our proposed cross-border approach on competition, 
efficiency, and capital formation, we have noted certain distinct 
analytical issues. First, various proposed rules may give rise to 
similar or overlapping effects. Second, each proposed rule or 
interpretation is a component of the Title VII regulatory framework and 
operates in tandem with the other Title VII components to form a 
comprehensive regulatory regime. To the extent that the proposed rules 
interact with each other, it is appropriate to broaden the analysis 
beyond a single rule. For example, although each of the rules and 
interpretations regarding registration of security-based swap dealers 
and the application of the public dissemination, regulatory reporting, 
mandatory clearing, and mandatory trade execution requirements in the 
cross-border context serve distinct regulatory purposes,\1328\ together 
they may have combined effects on dealer participation in the U.S. 
security-based swap market and on the ability of certain market 
participants to access other parts of the global security-based swap 
market.
---------------------------------------------------------------------------

    \1328\ For example, registration of security-based swap dealers 
is intended, among other things, to increase the safety and 
soundness of security-based swap dealers and improve the stability 
of the U.S. financial system, while application of the public 
dissemination and mandatory trade execution requirements in the 
cross-border context are intended, among other things, to increase 
the transparency of the U.S. security-based swap market.
---------------------------------------------------------------------------

    The analytical framework we establish here for considering the 
effects of our proposed approach to analyzing effects related to 
competition, efficiency, and capital formation is premised upon our 
understanding of the existing state of the security-based swap market. 
Two important features of the security-based swap market inform our 
analysis.
    First, the security-based swap market is global in nature, and 
dealers and other market participants are highly interconnected within 
this global market. While most end users have only a few 
counterparties, dealers can have hundreds of counterparties, consisting 
of both end users and other dealers.\1329\ This interconnectedness 
provides a myriad of paths for liquidity and risk to move throughout 
the financial system. As a result, it can be difficult to attribute 
liquidity and risk to a particular entity. The interconnected nature of 
the global security-based swap market contributes to an increased 
potential for sequential counterparty failures, liquidity shocks, and 
market dislocation during times of financial market stress.\1330\
---------------------------------------------------------------------------

    \1329\ See Section XV.B.2(a), supra (discussing current 
security-based swap market participants). In addition, based on an 
analysis of 2011 transaction data by staff in the Division of Risk, 
Strategy, and Financial Innovation, the entities recognized by ISDA 
as dealers had on average 292 counterparties, with a minimum of 17 
and a maximum of 695. All other entities (i.e., those more likely to 
be end users), averaged 4 counterparties, with a minimum of 1 and a 
maximum of 52.
    \1330\ ``Rethinking the financial network,'' speech by Andrew G. 
Haldane, Executive Director for Financial Stability at the Bank of 
England, delivered to Financial Student Association, Amsterdam (Apr. 
28, 2009), available at: https://www.bis.org/review/r090505e.pdf?frames=0.
---------------------------------------------------------------------------

    In other words, the failure of one firm can have consequences 
beyond the firm itself, and the loss of trading confidence and 
willingness to trade in one market can have consequences beyond the 
firm's home jurisdiction or market. If firms consider the implications 
of security-based swap activity only on their own operations, without 
considering aggregate financial sector risk, including lack of 
liquidity and market disruption or the possibility of spillover 
effects, the financial system may end up bearing more risk than the 
aggregate capital of the intermediaries in the system can support and 
may cease to function normally.\1331\
---------------------------------------------------------------------------

    \1331\ See Viral V. Acharya, Lasse H. Pedersen, Thomas 
Philippon, and Matthew Richardson, ``Measuring Systemic Risk'' (May 
2010), available at: https://vlab.stern.nyu.edu/public/static/SR-v3.pdf. The authors use a theoretical model of the banking sector to 
show that, unless the external costs of their trades are considered, 
financial institutions will have an incentive to take risks that are 
borne by the aggregate financial sector). Under this theory, in the 
context of Title VII, the relevant external cost is systemic risk 
(i.e., the potential for risk spillovers and sequential counterparty 
failure), leading to an aggregate systemic capital shortfall and 
breakdown of financial intermediation in the financial sector.
---------------------------------------------------------------------------

    Second, the security-based swap market developed as an over-the-
counter market, without transparent pricing or volume 
information.\1332\ In markets without transparent pricing, access to 
information confers a competitive advantage. Within the security-based 
swap market, large dealers and other large market participants with a 
large share of order flow have an informational advantage over smaller 
dealers and end users who observe a smaller subset of the market. 
Greater private order flow enables better assessment of current market 
values that dealers may use to extract rents from counterparties who 
are less informed.\1333\ End users are aware of this information 
asymmetry, and certain end users--particularly larger entities who 
transact with many dealers--may be able to obtain access to competitive 
pricing. Typically, however, the value of private information will be 
captured by those who have the information--in this case, predominantly 
dealers who observe the greatest order flow.
---------------------------------------------------------------------------

    \1332\ See SB SEF Proposing Release, 76 FR 10949.
    \1333\ Martin D. D. Evans and Richard K. Lyons, ``Exchange Rate 
Fundamentals and Order Flow,'' NBER Working Paper No. 13151 (June 
2007), available at: https://128.97.165.17/media/files/evans_lyons.pdf. Using data on end-user currency trades, the authors find 
evidence that transaction flows forecast future macro variables such 
as output growth, money growth, and inflation.
---------------------------------------------------------------------------

    In sum, the security-based swap market is a global market 
characterized

[[Page 31127]]

by a high level of interconnectedness and spillover risk and by 
significant information asymmetries that result from the opacity of the 
OTC market. The global nature of this market, combined with the 
interconnectedness of market participants, means that it is difficult 
to isolate risk and liquidity problems to one geographical segment of 
the market, or to one asset class. Because U.S. market participants and 
transactions regulated under Title VII are a subset of the overall 
global security-based swap market, concerns surrounding these types of 
spillovers are part of the framework in which we analyze the 
competitive effects of our proposed rules and interpretations.
    The interconnectedness of this market also highlights the need for 
coordination among international regulators.\1334\ Because liquidity 
and risk spillovers, even from entities that engage in security-based 
swap activity entirely outside the United States, have the potential to 
put the U.S. market at risk, consistent regulation of the security-
based swap market across jurisdictions may be necessary to effectively 
reduce those risks. However, the regulatory developments in various 
jurisdictions are not necessarily consistent in pace and scope, which 
may result in certain types of risks being addressed in different ways.
---------------------------------------------------------------------------

    \1334\ The Commission has entered into bilateral and 
multilateral discussions with foreign regulatory authorities 
concerning the regulation of OTC derivatives. See Section I and 
notes 34 and 35, supra.
---------------------------------------------------------------------------

    In our assessment of the economic effects of the proposed rules and 
interpretations, we also are mindful that these differences in scope 
and timing may affect the behavior of some market participants. In 
particular, the United States being first-mover in many areas of 
security-based swap market regulation presents unique challenges to 
maintaining high regulatory standards and avoiding disruptions in the 
global security-based swap market.
    We also recognize that regulations designed to mitigate systemic 
risk and improve transparency can impose a barrier to entry and access 
for foreign participants, which could have an effect on liquidity in 
the security-based swap market. For example, regulatory requirements in 
the U.S. that conflict with foreign laws may preclude foreign entities 
from participating in U.S. markets. We also recognize that regulators 
in other jurisdictions are currently engaged in implementing their own 
regulatory reforms of the OTC derivatives markets and are faced with a 
similar tradeoff between preserving market access and reducing risks to 
their financial systems. Our proposed application of Title VII to 
cross-border activities may affect the policy decisions of these other 
regulators as they seek to address this tradeoff under their authority.
    Regulatory differences among jurisdictions in the global security-
based swap markets driven by lack of coordination could create 
incentives for business restructuring solely for the purposes of 
operating outside of Title VII regulation. Furthermore, barriers to 
market access may produce competitive distortions and lead to 
fragmented markets.\1335\ We also note that the potential effects of 
our proposed application of Title VII in the cross-border context on 
competitive frictions and market fragmentation would be moderated or 
amplified by the substantive requirements ultimately adopted by the 
Commission. The Commission is reopening the comment periods for our 
outstanding rulemaking releases that concern security-based swaps and 
security-based swap market participants and were proposed pursuant to 
certain provisions of the Exchange Act, as amended by Title VII of the 
Dodd-Frank Act.\1336\
---------------------------------------------------------------------------

    \1335\ See, e.g., Arnoud W.A. Boot, Silva Dezelan, and Todd T. 
Milbourn, ``Regulatory Distortions in a Competitive Financial 
Services Industry,'' J. of Fin. Serv. Res., Vol. 17, No. 1 (2000) 
(showing that, in a simple industrial organization model of bank 
lending, a change in the cost of capital resulting from regulation 
results in a greater loss of profits when regulated banks face 
competition from non-regulated banks than when regulations apply 
equally to all competitors). See also Victor Fleischer, ``Regulatory 
Arbitrage,'' 89 Tex. L. Rev. 227 (Mar. 4, 2010) (discussing how, 
when certain firms are able to choose their regulatory structure, 
regulatory burdens are shifted onto those entities that cannot 
engage in regulatory arbitrage).
    \1336\ See note 29, supra.
---------------------------------------------------------------------------

2. Competition
    The proposed rules and interpretations discussed in this release 
will likely affect competition in the U.S. security-based swap market 
and potentially change the set of available counterparties that would 
compete for business and provide liquidity to U.S. market participants. 
Some of these proposed rules and interpretations will likely enhance 
competition and participation in the U.S. market, as application of 
Title VII requirements to entities that are engaged in security-based 
swap activity conducted with U.S. persons or otherwise conducted within 
the United States will likely promote safety and soundness, 
transparency, and competition within the U.S. security-based swap 
market and the U.S. financial system as a whole. At the same time, 
these proposed rules and interpretations may impose certain costs or 
other burdens that may reduce the level of competition in this market.
    Assessing the net effect of these proposed rules and 
interpretations on competition is particularly complicated in the 
cross-border context. As already noted, cross-border activity involving 
market participants domiciled in different jurisdictions accounts for 
the vast majority of transactions in the security-based swap market. 
U.S. persons routinely enter into security-based swap transactions with 
market participants located in other jurisdictions or have operations 
outside the United States that engage in security-based swap activity; 
similarly, non-U.S. persons routinely enter into transactions with U.S. 
persons and maintain operations within the United States. The global 
nature of the market and of market participants' operations may lead to 
differences in the application of Title VII to firms active in the 
global security-based swap market and may create incentives for firms 
to restructure their operations to minimize contact with the United 
States that would be less likely in a less global market.
    In our preliminary view, there are three key factors that will 
contribute to the effects our proposed cross-border rules and 
interpretations will have on competition in the security-based swap 
market: (1) how Title VII requirements apply to U.S. persons and non-
U.S. persons when they transact security-based swaps within the United 
States; (2) how these requirements apply to U.S. persons and non-U.S. 
persons when they transact security-based swaps outside the United 
States; and (3) whether the regulatory requirements that foreign 
jurisdictions impose on U.S. persons and non-U.S. persons are 
comparable to those that we are proposing in this release. In addition, 
as noted above, the magnitude of any competitive effects flowing from 
our proposed application of the Title VII requirements described in 
this release will also be determined by the substantive rules we 
ultimately adopt to implement Title VII.
    For example, in response to our proposal to impose Title VII 
requirements on non-U.S. persons that engage in security-based swap 
activity with U.S. persons or within the United States, some non-U.S. 
persons may seek to restructure their operations to minimize their 
contact with the United States in an effort to avoid having to comply 
with Title VII; some non-U.S. persons may determine to exit the U.S. 
market entirely. Similarly, to the extent that our proposed rules treat 
the foreign business of U.S. persons and non-U.S.

[[Page 31128]]

persons differently from their U.S. business, these entities may have 
incentives to restructure their business to separate their foreign and 
U.S. operations. Both of these potential responses to our proposal may 
result in lessened competition in the security-based swap market within 
the United States. The decision to restructure and move operations 
outside the United States does not necessarily indicate reduction of 
the exposures of the U.S. financial system to systemic risk if, for 
example, the foreign operations are supported by a guarantee provided 
by a U.S. person, which provides a path for the transmission of risk to 
transmit to the United States.
    The competitive effects of our proposal will also be affected by 
whether entities potentially subject to Title VII are also subject to 
similar regulations in foreign jurisdictions when they transact 
security-based swaps or perform infrastructure functions in the 
security-based swap market, and, if so, whether those regulations are 
inconsistent with, or duplicative of applicable Title VII regulations. 
Many other jurisdictions are implementing reforms of the OTC 
derivatives market (including those products defined as security-based 
swaps within the United States), but this regulation can be expected to 
develop along different timelines and impose different substantive 
requirements.
    To the extent that these timelines or requirements are different, 
market participants may have the opportunity to take advantage of these 
differences by making strategic choices, at least in the short term, 
with respect to their transaction counterparties and operating business 
models. For example, at a larger scale, firms may choose whether to 
withdraw from, or participate in the U.S. security-based swap market. 
This may change the number of participants in the U.S. market and could 
have a direct impact on competition in the U.S. market. In addition, 
differences in regulatory requirements may make it difficult for U.S. 
dealers to provide competitive spreads relative to foreign dealers. 
While we do not anticipate that this disadvantage would cause U.S. 
dealers to exit foreign markets, it could have a direct effect on 
competition in foreign markets unless U.S. dealers restructure their 
business to conduct foreign transactions through subsidiaries that 
satisfy the requirements to be considered non-U.S. persons.
    In developing the approach we are proposing in this release, we 
have considered the potential for competitive distortions as a result 
of these inconsistencies. At the same time, the Commission believes 
that, while the potential of regulatory arbitrage is real, the effects 
of these strategic choices may be mitigated to some extent as 
regulators in other jurisdictions implement the G20 commitments.\1337\ 
Efforts are underway to achieve robust derivatives market regulation, 
including regulations of the security-based swap markets, in various 
jurisdictions.\1338\ As jurisdictions progress toward full 
implementation of the G20 commitments, competitive distortions should 
decline to some extent, blunting the incentives for this type of 
strategic behavior.
---------------------------------------------------------------------------

    \1337\ See note 32 and accompanying text, supra.
    \1338\ See, e.g., Joint Press Statement of Leaders on Operating 
Principles and Areas of Exploration in the Regulation of the Cross-
Border OTC Derivatives Market, available at: https://www.sec.gov/news/press/2012/2012-251.htm.
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(a) Security-Based Swap Dealers
    Our proposed approach would generally apply dealer registration and 
other Title VII requirements to entities that conduct dealing activity 
with U.S. persons \1339\ or in the United States.\1340\ Because the 
full range of Title VII requirements are applied generally to activity 
in the United States regardless of the counterparty's U.S.-person 
status,\1341\ persons choosing to transact a security-based swap in the 
United States may have no incentive to favor a non-U.S. counterparty 
over a U.S. counterparty.\1342\
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    \1339\ See the proposed definition of ``U.S. person'' in 
proposed Rule 3a71-3(a)(7) under the Exchange Act.
    \1340\ See the proposed definition of ``transaction conducted 
within the United States'' in proposed Rule 3a71-3(a)(5) under the 
Exchange Act.
    \1341\ See the proposed de minimis rule in proposed Rule 3a71-
3(b) under the Exchange Act, the proposed application of the 
mandatory clearing requirement to cross-border security-based swap 
transactions in proposed Rule 3Ca-3, as discussed in Section IX 
above; the proposed application of the mandatory trade execution 
requirement to cross-border security-based swap transactions in 
proposed Rule 3Ch-1, as discussed in Section X above; and the 
proposed application of the regulatory reporting and public 
dissemination requirements in proposed Rule 908 of Regulation SBSR, 
as discussed in Section VIII above.
    \1342\ This is in general the case, however, proposed Rules 3Ca-
3(b) and 3Ch-1(b) would not apply the mandatory clearing and 
mandatory trade execution requirements to transactions between two 
non-U.S. persons who are not security-based swap dealers and whose 
performances under security-based swaps are not guaranteed by a U.S. 
person, even though such transactions are conducted in the United 
States.
---------------------------------------------------------------------------

    At the same time, some entities may determine that the compliance 
costs arising from the requirements of Title VII warrant exiting the 
security-based swap market in the United States. Non-U.S. persons may 
find this option more attractive than U.S. persons because they may 
find it easier to structure their foreign business so as to prevent it 
from falling within the scope of Title VII. To the extent that entities 
engaged in dealing activity exit the U.S. security-based swap market, 
the level of competition in the market may decline. These exits could 
result in higher spreads and affect the ability and willingness of end 
users to engage in security-based swaps.\1343\
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    \1343\ Barclay, Michael, William G. Christie, Jeffrey H. Harris, 
Eugene Kandel and Paul H. Schultz, ``Effects of Market Reform on the 
Trading Costs and Depths of Nasdaq Stocks,'' Journal of Finance, 
Vol. 54, No. 1 (Feb. 1999) (measuring the impact of rules designed 
to enhance public competition with Nasdaq dealers, and observing 
evidence of lower quoted and effective spreads without adverse 
effects on market quality).
---------------------------------------------------------------------------

    We noted in the Intermediary Definitions Adopting Release that the 
registration requirement would impose dealer registration costs on 
entities that engage in the bulk of dealing activity in the market, 
while the de minimis threshold would allow persons who account for a 
small portion of dealing activity to avoid incurring these costs to 
obtain what would likely be comparatively modest benefits, given the 
small size of these dealers.\1344\ We noted in that release that the de 
minimis threshold may mitigate some of the potential competitive 
burdens that could fall on entities engaged in a smaller amount of 
dealing activity without leaving an undue amount of dealing activity 
outside of the ambit of dealer regulation.\1345\
---------------------------------------------------------------------------

    \1344\ See Intermediary Definitions Adopting Release, 77 FR 
30741.
    \1345\ See id.
---------------------------------------------------------------------------

    In the cross-border context, the proposed de minimis exception 
\1346\ could reduce the number of entities likely to exit the U.S. 
market because it would enable an established foreign entity to 
transact a de minimis amount of security-based swap dealing activity in 
the U.S. market before it determines whether to expand its U.S. 
business \1347\ and become a registered security-based swap dealer. 
However, since the ability of smaller entities to access the U.S. 
security-based swap market without registration would be limited to 
conducting dealing activity below the de minimis threshold, these 
entities

[[Page 31129]]

would have an incentive to curtail their security-based swap dealing 
activity with U.S. persons as they approach the de minimis threshold to 
avoid having to register as a dealer. To the extent that such entities 
choose to operate in the U.S. market at levels below the de minimis 
threshold, the net effect on competition of their decision to remain in 
the U.S. market is likely to be small and unlikely to deter the 
accumulation of market power by a relatively smaller number of large 
dealing entities than are currently active in the U.S. market.
---------------------------------------------------------------------------

    \1346\ The proposed application of the de minimis exception 
would allow a U.S. and foreign dealing entity to conduct dealing 
activity in the U.S. security-based swap market without registering 
as a security-based swap dealer so long as their trailing 12-month 
notional volume of transactions with U.S. persons and transactions 
conducted within the United States in its dealing capacity is below 
the de minimis threshold. See proposed Rule 3a71-3(b) under the 
Exchange Act.
    \1347\ See proposed Rule 3a71-3(a)(6) under the Exchange Act.
---------------------------------------------------------------------------

    On the other hand, Title VII regulatory requirements may allow 
registered dealers to credibly signal high quality, better risk 
management, and better counterparty protection relative to unregistered 
dealers that compete for the same order flow. End users in the U.S. 
market may be willing to pay higher prices for higher-quality services 
from registered entities.\1348\ These regulatory benefits could 
mitigate the competitive burdens imposed by the proposed cross-border 
rules and substantive Title VII requirements applicable to registered 
security-based swap dealers by, for example reducing incentives for 
firms to exit the market.
---------------------------------------------------------------------------

    \1348\ Cf. Carl Shapiro, ``Investment, Moral Hazard, and 
Occupational Licensing,'' The Review of Economic Studies, Vol. 53, 
No. 5 (1986) (using a theoretical model to show ``that licensing and 
certification tend to benefit consumers who value quality highly at 
the expense of those who do not''). Oren Fuerst, ``A Theoretical 
Analysis of the Investor Protection Regulations Argument for Global 
Listing of Stocks,'' Working Paper (1998) (using a theoretical model 
of the listing decision to show how managers of high quality firms 
signal their quality more effectively in a strict regulatory 
regime). Craig Doidge, G. Andrew Karolyi and Rene M. Stulz, ``Why 
are Foreign Firms Listed in the U.S. Worth More?'' Journal of 
Financial Economics, Vol. 71, Issue 2 (2004) (hypothesizing that 
firms cross-listed in the United States are better able to take 
advantage of growth opportunities, and finding that ``expected sales 
growth is valued more highly for firms listed in the U.S. and that 
this effect is greater for firms from countries with poorer investor 
rights'').
---------------------------------------------------------------------------

    The proposed approach to application of Title VII requirements to 
dealing activities outside the United States may also have distinct 
competitive effects that interact with the effects just described. 
Because we are proposing to take a different approach to the 
application of Title VII to dealing activity outside the United States 
from the application of Title VII to dealing activity in the United 
States, certain dealing entities may have incentives to restructure 
their existing dealing business \1349\ in order to prevent all or part 
of their security-based swap business from becoming subject to Title 
VII. For example, a foreign dealing entity conducting its U.S. Business 
\1350\ in excess of the de minimis threshold may be motivated to 
separate its U.S. Business from its Foreign Business into two or more 
distinct entities.\1351\ Such a firm may conduct U.S. Business and 
Foreign Business through two separate entities and confine its U.S. 
Business in an entity registered as security-based swap dealer, 
potentially allowing the firm to insulate its Foreign Business from 
Title VII requirements. Alternatively, some foreign dealing entities 
may choose to exit the U.S. market entirely.
---------------------------------------------------------------------------

    \1349\ See Section II.A.2, supra (describing the dealing 
structures used by dealing entities to conduct global security-based 
swap business).
    \1350\ See proposed Rule 3a71-3(a)(6) under the Exchange Act.
    \1351\ See proposed Rule 3a71-3(a)(2) under the Exchange Act.
---------------------------------------------------------------------------

    Similarly, application of the transaction-level requirements for 
public dissemination, mandatory clearing, and mandatory trade execution 
may generally be triggered, in part, by the choice of non-U.S. persons 
to conduct security-based swap transactions within the United 
States.\1352\ This may give foreign security-based swap dealers and 
other market participants an incentive to restructure their operations 
or otherwise avoid using an agent in the United States to conduct 
security-based swap transactions in order to avoid the transaction-
level requirements.\1353\
---------------------------------------------------------------------------

    \1352\ This is in general the case, however, proposed Rules 3Ca-
3(b) and 3Ch-1(b) would not apply the mandatory clearing and 
mandatory trade execution requirements to transactions between two 
non-U.S. persons who are not security-based swap dealers and whose 
performances under security-based swaps are not guaranteed by a U.S. 
person, even though such transactions are conducted in the United 
States.
    \1353\ This is especially the case with respect to the public 
dissemination requirement; however, with respect to mandatory 
clearing and mandatory trade execution requirements, this incentive 
would not exist with respect to a non-U.S. person who is not a 
security-based swap dealer and whose performance under security-
based swaps is not guaranteed by a U.S. person, if such non-U.S. 
person transacts with another non-U.S. person that is not a 
security-based swap dealer and is not guaranteed by a U.S. person. 
See note 1352, supra.
---------------------------------------------------------------------------

    For example, a foreign security-based swap dealer operating within 
the United States whose performance under security-based swaps are not 
guaranteed by a U.S. person (``foreign non-guaranteed security-based 
swap dealer'') would be required to comply with the mandatory clearing 
requirement with respect to a security-based swap with a non-U.S. 
person counterparty whose security-based swap transaction is not 
guaranteed by a U.S. person (``non-U.S. non-guaranteed counterparty''). 
However, the same security-based swap between a foreign non-guaranteed 
security-based swap dealer and a non-U.S. non-guaranteed counterparty 
would not be subject to mandatory clearing if the transaction were 
conducted outside the United States. Therefore, foreign non-guaranteed 
security-based swap dealers and non-U.S. non-guaranteed counterparties 
may be motivated to avoid using their U.S. operations, such as a sales 
and trading desk in the United States, to conduct security-based swaps 
with non-guaranteed non-U.S. counterparties in order to avoid 
application of the mandatory clearing, public dissemination, and trade 
execution requirements under Title VII. They may be further motivated 
to move part of their operations, such as the sales and trading desk in 
the United States that currently conducts security-based swaps with 
non-guaranteed non-U.S. counterparties to a location outside the United 
States.
    These potential restructurings may impact competition in the U.S. 
market. On one hand, the ability to restructure one's business rather 
than exit the U.S. market entirely to avoid application of Title VII to 
an entity's non-U.S. operations may reduce the number of entities that 
exit the market, thus mitigating the negative effects on competition 
described above. On the other hand, U.S. end users may find that the 
only foreign security-based swap dealers that are willing to deal with 
them are those whose security-based swap business is sufficiently large 
to afford the costs of restructuring and of registration as well as the 
ensuing compliance costs associated with applicable Title VII 
requirements. To the extent that smaller dealers continue to have an 
incentive to exit the market, the overall level of competition in the 
market may decline.
    Moreover, regardless of the response of dealers to our proposed 
approach, we cannot preclude the possibility that large end users in 
the United States who have the resources to restructure their business 
also may pursue restructuring and move part of their business offshore 
in order to transact with dealers outside the reach of Title VII. This 
may reduce liquidity within the U.S. market and provide additional 
incentives for U.S. persons and non-U.S. persons to shift a higher 
proportion of their security-based swap business off-shore, further 
reducing the level of competition within the United States. In this 
scenario, the competitive frictions caused by the application, in the 
cross-border context, of a de minimis threshold for dealing activity 
may affect the ability of small end users of security-based swaps to 
access the security-based swap market more than large ones, as smaller 
end

[[Page 31130]]

users are less likely to have the resources that would enable or 
justify a restructuring of their business.
    To reduce the likelihood of market fragmentation and increase U.S. 
persons' access to foreign markets, we are proposing not to require 
non-U.S. persons to count transactions with foreign branches of U.S. 
banks toward their de minimis threshold if the transactions are 
conducted outside the United States.\1354\ We preliminarily believe 
that this would reduce the incentives of non-U.S. person dealers to 
avoid engaging in security-based swap dealing activity with foreign 
branches of U.S. banks. In addition, we are proposing not to apply 
certain market-wide transaction-level requirements (i.e., mandatory 
clearing, public dissemination, and mandatory trade execution 
requirements) to foreign branches and non-U.S. persons whose 
performance under security-based swap transactions is guaranteed by a 
U.S. person, when foreign branches and guaranteed non-U.S. persons 
transact with non-U.S. persons whose performance under security-based 
swap transactions is not guaranteed by a U.S. person and who are not 
registered security-based swap dealers. This approach to transaction-
level requirements reduces the likelihood of conflicting regulations 
for foreign branches of U.S. banks and guaranteed non-U.S. persons 
operating in foreign jurisdictions as these jurisdictions adopt 
regulatory requirements for security-based swap participants.
---------------------------------------------------------------------------

    \1354\ See proposed Rule 3a71-3(b) under the Exchange Act.
---------------------------------------------------------------------------

    Finally, our proposed cross-border approach includes a substituted 
compliance policy framework that allows market participants to request 
substituted compliance. Substituted compliance, if granted, would allow 
certain security-based swap transactions or participants to satisfy 
their compliance obligations with respect to the applicable Title VII 
requirements by complying with the rules of a foreign jurisdiction. 
This should reduce market participants' compliance costs by reducing 
the effects of duplicative regulation. Substituted compliance could 
encourage foreign firms' participation in the U.S. market and U.S. 
firms' access to the global market. This might result in increased 
competition between both U.S. and foreign intermediaries without 
compromising the regulatory benefits intended by the applicable Title 
VII requirements.
    Conflicting regulations may impose a legal barrier to entry that 
goes beyond firms' willingness to participate in U.S. markets as a 
result of duplicative compliance costs. In these cases, substituted 
compliance determinations may remove this legal barrier, even if 
offered conditionally, and allow market participants to more easily 
access U.S. markets. This may also facilitate U.S. participants' access 
to foreign liquidity. Access to more liquidity providers and 
infrastructure services, as well as the general benefits of increased 
market participation, should promote competition in the security-based 
swap market.
    The overall effects of the proposed approach described in this 
release on competition among dealing entities in the U.S. security-
based swap market will depend on the way market participants respond to 
these different elements of our proposal. For example, suppose the 
proposed application of the security-based swap dealer registration 
requirement increases concentration among security-based swap dealers 
providing services to U.S. end users. Application of market-wide 
transaction-level requirements that facilitate competition (as 
discussed further below) may offset any competitive effects caused by 
increased concentration. Fewer dealing entities may lead to decreased 
competition and wider spreads in the security-based swap market; 
however, implementation of the public dissemination and mandatory trade 
execution requirements would increase pre-trade and post-trade 
transparency, making it more difficult for dealing entities to post 
wider spreads.\1355\
---------------------------------------------------------------------------

    \1355\ Michael A. Goldstein, Edith S. Hotchkiss, and Erik R. 
Sirri, ``Transparency and Liquidity: A Controlled Experiment on 
Corporate Bonds,'' Review of Financial Studies, Vol. 20, No. 2 
(2007) (using a controlled experiment in the BBB bond market to show 
how, in some cases, spreads on newly post-trade transparent bonds 
decline relative to bonds that remain opaque).
---------------------------------------------------------------------------

(b) Security-Based Swap Market Infrastructure Requirements
i. Registration of Clearing Agencies, SDRs and SB SEFs
    The Commission has considered the effects of the proposed 
application in the cross-border context, of the registration 
requirements with respect to clearing agencies, SDRs, and SB SEFs on 
competition in the U.S. security-based swap market.
    The proposed approach to applying the registration requirements 
with respect to security-based swap market infrastructures is based on 
whether a CCP, a data repository, or a security-based swap trading 
facility has performed the type of activity in the United States or 
with respect to U.S. persons that constitutes clearing services, data 
repository services, or trading facility services within the meaning of 
the Exchange Act that would trigger the registration requirement. One 
of the indicators of performing security-based swap infrastructure 
services in the United States is to provide such services to a U.S. 
person. In the case of clearing services, this would include accepting 
a U.S. person as a member of a CCP. Similar to our analysis of the 
effects of the proposed application of the security-based swap dealer 
registration requirement on competition in the cross-border context, we 
are mindful that the proposed approach would directly affect the total 
number of clearing agencies, SDRs, and SB SEFs that would be required 
to register with the Commission. Registration would trigger certain 
Title VII requirements, which would entail compliance costs. Certain 
CCPs, data repositories, or security-based swap trading facilities may 
choose to withdraw from the U.S. market to avoid registration.
    However, the burden on competition imposed by the proposed approach 
to infrastructure registration requirements would likely be less acute 
than the security-based swap dealer registration requirement. Clearing, 
trade reporting, and execution on trading platforms are relatively 
recent services for the security-based swap market, and only a limited 
number of CCPs, trade repositories, and execution facilities currently 
perform these services \1356\ and may therefore be required to register 
under the Dodd-Frank Act. In addition, the proposed interpretation with 
respect to availability of an exemption from registration for foreign 
SB SEFs should reduce or eliminate the duplicative regulatory costs for 
foreign SB SEFs subject to comparable regulatory requirements and 
increase the likelihood that foreign SB SEFs will enter the United 
States, which, in turn, would increase competition.
---------------------------------------------------------------------------

    \1356\ See Clearing Agency Standards Adopting Release, 77 FR 
66258 (estimating that between seven and 10 entities would be likely 
to register as CCPs); SDR Proposing Release, 75 FR 77347 n.207 
(estimating that 10 entities would be likely to register as SDRs); 
SB SEF Proposing Release, 76 FR 11023 (estimating that up to 20 
entities could seek to register as SB SEFs).
---------------------------------------------------------------------------

    Nonetheless, the proposed application of Title VII regulation in 
the cross-border context generates competitive frictions similar to 
those discussed above in the context of dealers. Broadly, providers of 
security-based swap infrastructure may seek to limit their exposure to 
the U.S. portion of the market in order to avoid Title VII

[[Page 31131]]

regulation. For example, a foreign CCP that does not otherwise perform 
clearing services in the United States may refuse to accept U.S. 
persons as members to avoid registration and compliance costs, which 
would limit U.S. persons' access to foreign clearing services to 
correspondent arrangements. Similar arguments apply to U.S. persons' 
access to execution venues and data repositories.
    The Commission also has considered the ways in which the structure 
of the market for infrastructure services may affect the benefits that 
flow from certain Title VII regulations. Providing incentives for entry 
of SDRs could result in fragmentation of regulatory data across 
multiple repositories, which would complicate oversight of the 
security-based swap market and require that regulators take additional 
steps to consolidate data sets.\1357\ In this release, the Commission 
has proposed the availability of conditional exemptive relief for non-
U.S. persons performing SDR functions that potentially reduces the 
number of SDRs that would receive regulatory data.\1358 \ Further, the 
proposed indemnification exemption may discourage the establishment of 
SDRs on jurisdictional lines.\1359\
---------------------------------------------------------------------------

    \1357\ See Section VI.B, supra.
    \1358\ See Section XV.H.1(a)(ii), infra.
    \1359\ See Section XV.H.2, infra.
---------------------------------------------------------------------------

    Similarly, a single CCP serving the entire security-based swap 
market may result in more effective netting of offsetting positions 
among members, potentially reducing aggregate counterparty risk borne 
by the CCP and making risk management less costly.\1360\ Indeed, high 
fixed costs and low variable costs associated with the provision of 
clearing services may contribute to a natural monopoly in this market. 
A second benefit of a single CCP is that it would preclude the 
possibility that risk management standards could erode as CCPs compete 
for clearing business. However, if the market evolves so that a single 
CCP emerges, it could require additional regulatory monitoring to 
address issues associated with natural monopolies.\1361\
---------------------------------------------------------------------------

    \1360\ See Craig Pirrong, ``The Economics of Central Clearing: 
Theory and Practice,'' ISDA Discussion Papers Series, No. 1 (2011). 
Concentration of risk in a CCP can itself also become a source of 
systemic risk. See Section II.A.6.(c), supra.
    \1361\ See, e.g., Section 17A(b)(3)(D) of the Exchange Act, 15 
U.S.C. 78q-1(b)(3)(D) (requiring that the rules of a ``clearing 
agency provide for the equitable allocation of reasonable dues, 
fees, and other charges among its participants''). See also Kenneth 
Train, ``Optimal Regulation: The Economic Theory of Natural 
Monopoly,'' Cambridge: The MIT Press (1991) (discussing price 
regulation of natural monopolies).
---------------------------------------------------------------------------

    These arguments are less clear in the case of SB SEFs. Evidence 
from equity markets seems to indicate benefits from both consolidation 
and fragmentation.\1362\ On the one hand, some research supports the 
conclusion that consolidation of order flow onto a small number of 
trading venues may facilitate efficient matching between supply and 
demand, reduce price volatility within the trading venue,\1363\ and 
reduce spreads.\1364\ On the other hand, other researchers have found 
that the competitive effects flowing from multiple trading venues can 
outweigh the effects of fragmentation, resulting in more efficient 
pricing and narrower spreads.\1365\
---------------------------------------------------------------------------

    \1362\ See Haim Mendelson, ``Consolidation, Fragmentation and 
Market Performance,'' Journal of Financial and Quantitative 
Analysis, Vol. 22, Issue 2 (1987) (using a theoretical model to 
examine the tradeoffs between consolidation and fragmentation). See 
also James L. Hamilton, ``Marketplace Fragmentation, Competition, 
and the Efficiency of the Stock Exchange,'' Journal of Finance, Vol. 
34, Issue 1 (1979) (examining data from the NYSE and showing that 
off-board trading that competes with specialists tends to reduce 
spreads more than the fragmentation of trade tends to increase 
them).
    \1363\ See Mendelson, note 1362, supra.
    \1364\ See Pankaj Jain, ``Institutional Design and Liquidity at 
Stock Exchanges around the World,'' Working Paper (2003). Using data 
on institutional features of stock exchanges around the world, the 
author observes that consolidated order flow is associated with 
lower spreads.
    \1365\ See Hamilton, note 1362, supra.
---------------------------------------------------------------------------

    The Commission has considered the above effects and proposed a 
cross-border approach that would require a CCP or execution facility to 
register if it performs clearing agency function in the United States 
or operates a facility for the trading or processing of security-based 
swaps in the United States or with respect to U.S. persons. Similarly, 
the Commission has proposed an approach that would require a trade 
repository to register if it performs SDR functions within the United 
States. The Commission preliminarily believes that this approach would 
promote transparency, improve systemic risk management, and allow 
better regulatory oversight, which in turn, would encourage broader 
market participation in the U.S. security-based swap market.
ii. Application of Mandatory Clearing, Public Dissemination, Regulatory 
Reporting, and Trade Execution Requirements in the Cross-Border Context
    The proposed application of the market-wide transaction-level 
requirements to cross-border activities may have significant effects on 
competition in the U.S. security-based swap market. As noted above, the 
Commission is proposing an approach that would generally apply Title 
VII transaction-level requirements evenly to persons who conduct 
security-based swap activity with U.S. persons or within the United 
States.\1366\ Because these requirements are generally applied evenly 
and expansively in the United States, a foreign person who wishes to 
avoid clearing, public dissemination, or pre-trade transparency 
requirements would have to avoid either transacting with U.S. persons 
or involving a U.S. person as agent in negotiating, soliciting, or 
executing security-based swap transactions on its behalf within the 
United States.\1367\
---------------------------------------------------------------------------

    \1366\ See the proposed definition of ``transaction conducted 
within the United States'' in proposed Rule 3a71-3(a)(5) under the 
Exchange Act and notes 1340 and 1341 above.
    \1367\ However, with respect to the mandatory clearing and 
mandatory trade execution requirements, transactions between two 
non-U.S. persons whose performance of obligations under security-
based swaps is not guaranteed by U.S. persons and who are not 
security-based swap dealers would not be subject to mandatory 
clearing and mandatory trade execution even though these 
transactions are conducted within the United States. See proposed 
Rules 3Ca-3 and 3Ch-1 under the Exchange Act.
---------------------------------------------------------------------------

    Notwithstanding a possible reduction in competition, the Commission 
believes that these market-wide transaction-level requirements should 
be applied to such transactions because they reduce systemic risk, 
promote transparency, and improve regulatory oversight. All of these 
contribute to the integrity and efficiency of the U.S. security-based 
swap market and should increase competition among those who choose to 
participate under Title VII.
    The proposed cross-border approach would generally not apply the 
market-wide transaction-level requirements to foreign branches and non-
U.S. persons whose performance under security-based swap transactions 
is guaranteed by a U.S. person, when foreign branches and guaranteed 
non-U.S. persons transact with non-U.S. persons whose performance under 
security-based swap transactions is not guaranteed by a U.S. person and 
who are not registered security-based swap dealers. As stated in the 
competition analysis with respect to security-based swap dealers,\1368\ 
this proposed approach would facilitate U.S.-based dealing entities' 
access to foreign markets and help prevent market fragmentation. 
However, the guarantees provided by U.S. persons remain a conduit for 
systemic risk to be transmitted to the United States.
---------------------------------------------------------------------------

    \1368\ See Section XV.C.2(a), supra.
---------------------------------------------------------------------------

    However, the Commission is mindful that, in the near term and until 
full implementation of transparency requirements in the other 
jurisdictions that are comparable to the U.S. market-wide transaction-
level requirements, if

[[Page 31132]]

any part of the global market is left opaque without either public 
dissemination or pre-trade transparency, there may be opportunities for 
market participants to restructure and move their transactions to the 
OTC part of the global market. The value of transparency in the U.S. 
market would be reduced to the extent that liquidity migrates to less-
transparent jurisdictions.
3. Efficiency
    As noted above, in proposing the rules and interpretations 
discussed in this release, we are required to consider whether these 
actions would promote efficiency. In significant part, the effects of 
our proposed cross-border approach on efficiency are linked to the 
effects on competition. Minimizing impediments to access to the 
security-based swaps not only promotes competition, but also encourages 
participants to express their true valuation for security-based swaps 
and, as a result, is expected to promote efficiency. Generally, rules 
and interpretations that delineate an appropriate scope of application 
of the Title VII requirements can be expected to promote the efficient 
allocation of risk, capital, and other resources by facilitating price 
discovery and reducing costs associated with dislocations in the market 
for security-based swaps.
    The proposed application of Title VII rules to cross-border 
transactions potentially increases the volume of transactions that will 
take place on transparent venues. For example, while the proposed rules 
allow exceptions to the mandatory trade execution requirement for 
certain transactions involving a foreign branch of a U.S. bank or a 
guaranteed non-U.S. person as one counterparty, these exceptions do not 
apply when a foreign security-based swap dealer is the other 
counterparty to the transactions, and such transactions would be 
exposed to pre-trade transparency on SB SEFs or exchanges. As stated 
above, the OTC security-based swap market is characterized by search 
frictions and asymmetric information.\1369\ Currently, in order to 
trade, market participants must contact intermediaries on a bilateral 
basis to locate counterparties. Intermediaries may capture these search 
costs by behaving less competitively. Search-based inefficiencies in 
the bilateral OTC market manifest explicitly in the costs of matching 
with counterparties and are implicit in the somewhat wider spreads that 
dealers might quote as a strategic response to customer search 
costs.\1370\ In addition, large intermediaries who observe vast volumes 
of order flows from the breadth of their customer base have an 
informational advantage over customers or small dealers who observe 
less order flow. This means that end users potentially face adverse 
selection in addition to search costs which may reduce their 
willingness to participate in the security-based swap market even when 
they might benefit from increased risk-sharing.
---------------------------------------------------------------------------

    \1369\ See SB SEF Proposing Release, 76 FR 10949.
    \1370\ See Darrell Duffie, Nicolae Garleanu, and Lasse Heje 
Pedersen, ``Over-the-Counter Markets,'' Econometrica, Vol. 73, Issue 
6 (2005) (using a theoretical model of an over-the-counter market to 
show a reduction in spreads when investors have easier access to 
multiple counterparties).
---------------------------------------------------------------------------

    In markets with impartial access, such as those characterized by 
our proposed regime for SB SEFs, participants would face lower search 
costs when they decide to enter or exit a security-based swap position. 
Moreover, access to the security-based swap market would be available 
to more participants, increasing the likelihood of efficient 
reallocation of risks carried by security-based swap contracts.\1371\ 
At the same time, pre- and post-trade transparency requirements under 
Title VII reduce dealers' ability to benefit from private information 
that comes from observing order flow.\1372\ This change may increase 
the willingness of market participants to lay off risks they are 
relatively less-equipped to bear. Increased liquidity in a transparent 
security-based swap market should facilitate price discovery.\1373\
---------------------------------------------------------------------------

    \1371\ See John Cochrane, Asset Pricing, Princeton University 
Press, Princeton, NJ (2001). Chapter 3 discusses the role of 
securities markets, new securities, and financial innovation in 
allowing individuals to share and diversify risks.
    \1372\ We recognize that intermediaries' informational advantage 
may not be completely eliminated by the mandatory trade execution 
and public dissemination requirements. For example, intermediaries 
would have the advantage of seeing order flows or inquiries that are 
not ultimately executed and disseminated. In addition, the executing 
intermediary still has informational advantage from knowing the 
counterparty's identity, and intermediaries may know about an order 
or inquiry before anyone else in the market.
    \1373\ See Terrence Hendershott and Charles M. Jones, ``Island 
Goes Dark: Transparency, Fragmentation, and Regulation,'' Review of 
Financial Studies, Vol. 18, No. 3 (2005) (showing that a decrease in 
limit order book transparency on Island was followed by substantial 
price discovery movement from the ETF market to the futures market). 
See also Bengt Holmstrom and Jean Tirole, ``Market Liquidity and 
Performance Monitoring,'' Journal of Political Economy, Vol. 101, 
No. 4 (1993) (using a theoretical model to show how increased 
liquidity can increase the marginal value of information and the 
informativeness of stock prices).
---------------------------------------------------------------------------

    Increased price efficiency in the security-based swap market, in 
turn, produces important externalities. Transparency in the security-
based swap market could result in more accurate valuation of security-
based swaps generally, as all market participants would have the 
benefit of knowing how counterparties to a security-based swap valued 
the security-based swap at a specific moment in time.\1374\ Especially 
with complex instruments, investment decisions generally are predicated 
on a significant amount of due diligence to value the instrument 
properly. A post-trade transparency system permits other market 
participants to derive at least some informational benefit from 
obtaining the views of the two counterparties who traded that 
instrument. Finally, central clearing of security-based swaps could 
make it easier for market participants who observe prices to 
disentangle the default risk of counterparties from the fundamental 
risks priced into the underlying contract. This has the benefit of 
enhancing the incremental price discovery already associated with the 
transparency requirements.
---------------------------------------------------------------------------

    \1374\ See Regulation SBSR Proposing Release, 75 FR 75281.
---------------------------------------------------------------------------

    Better valuations could have a significant impact on efficiency and 
capital allocation. In particular, under the pre-trade and post-trade 
transparency regimes contemplated by Title VII, persons outside the 
security-based swap market could use information produced and 
aggregated by the security-based swap market as an input to both real 
investment decisions as well as financial investments in related 
markets for equity and debt.\1375\ By helping asset valuations move 
closer to their fundamental values, transparency encourages efficient 
capital allocation.\1376\
---------------------------------------------------------------------------

    \1375\ See Philip Bond, Alex Edmans, and Itay Goldstein, ``The 
Real Effects of Financial Markets,'' Annual Review of Financial 
Economics, Vol. 4 (Oct. 2012) (reviewing the theoretical literature 
on the feedback between financial market price and the real 
economy). See also Sugato Chakravarty, Huseyin Gulen, and Stewart 
Mayhew, ``Informed Trading in Stock and Option Markets,'' Journal of 
Finance, Vol. 59, No. 3 (2004) (estimating that the proportion of 
information about underlying stocks revealed first in option markets 
ranges from 10 to 20 percent).
    \1376\ See Regulation SBSR Proposing Release, 75 FR 75281.
---------------------------------------------------------------------------

    In the cross-border context, our proposed approach generally 
applies the full range of Title VII requirements (including mandatory 
clearing, regulatory reporting, public dissemination, and mandatory 
trade execution requirements) to transactions with U.S. persons and 
transactions conducted within the United States,\1377\ with the 
objective of promoting

[[Page 31133]]

transparency and efficiency in the U.S. security-based swap market. For 
example, as noted above,\1378\ the Commission is re-proposing certain 
provisions of Regulation SBSR to, among other things, extend the scope 
of security-based swaps that would be subject to regulatory reporting 
and public dissemination. As a result of the re-proposal, more 
transactions with a nexus to the United States would be reported to 
SDRs and thus would be made available to regulators.\1379\ Furthermore, 
by possessing more comprehensive data on security-based swap 
transactions, regulators will be able to observe pockets of risk in the 
global marketplace that heretofore would not have been accessible to 
them. Early awareness of such risks provided by access to such data may 
enable regulators to respond by taking actions to mitigate the 
potential impact of such risks on the market, which could in turn 
prevent the deterioration of market conditions that could result if 
such risks remain hidden.
---------------------------------------------------------------------------

    \1377\ See note 1367, supra.
    \1378\ See Section VIII, supra.
    \1379\ Due to corresponding impacts on the market not realized 
under Rule 908(a) as originally proposed, under the re-proposal, 
security-based swap transactions executed outside the United States 
by a non-U.S. person direct counterparty but performance of which is 
guaranteed by a U.S. person would now be subject to regulatory 
reporting.
---------------------------------------------------------------------------

    Besides impacts on price efficiency and the efficient allocation of 
capital, the Commission also has considered more generally the impact 
of the rules and interpretations in this release on the efficient use 
of resources. In our re-proposal of Regulation SBSR, the Commission is 
revising our approach to assigning the reporting duty to place less 
emphasis on the domicile of the counterparties, and to focus more on 
their status (i.e., whether or not a counterparty is a security-based 
swap dealer or major security-based swap participant).\1380\ We 
preliminarily believe that the revisions in the re-proposal reallocate 
the reporting burden to those entities that face a relatively lower 
cost of reporting, thus promoting efficiency. These revisions are 
designed to assign the responsibility to report a security-based swap 
transaction to persons that the Commission preliminarily believes are 
more easily able to fulfill that responsibility, and in a manner 
consistent with the reporting hierarchy set forth in Section 13A(a)(3) 
of the Exchange Act.\1381\ In addition, the Commission expects any 
transaction reporting systems implemented by security-based swap 
dealers and major security-based swap participants to be automated.
---------------------------------------------------------------------------

    \1380\ See Section VIII, supra (describing the Regulation SBSR 
re-proposal).
    \1381\ 15 U.S.C. 78m-1(a)(3). Section 13A(a)(3) of the Exchange 
Act assigns to specific kinds of counterparties the duty to report 
uncleared security-based swaps to an SDR or to the Commission. The 
Commission previously noted that it ``understands that many 
reporting parties already have established linkages to entities that 
may register as [SDRs], which could significantly reduce the out-of-
pocket costs associated with establishing the reporting function.'' 
See Regulation SBSR Proposing Release, 75 FR 75249 n. 193. The 
Commission preliminarily believes that the additional cost for non-
U.S. person security-based swap dealers and major security-based 
swap participants absorbing the costs of reporting these additional 
transactions should be de minimis, since these larger market 
participants have likely already taken significant steps to 
establish and maintain the systems, processes, and procedures, and 
have likely devoted staff resources to report security-based swaps 
currently to existing data repositories. See Section XV.H.3(a)(ii), 
infra.
---------------------------------------------------------------------------

    However, we recognize that certain aspects of our proposal may 
reduce efficiency in the U.S. security-based swap market. Increasing 
market transparency, in some instances, may cause certain market 
participants to abstain from trading that would otherwise be efficient. 
For example, market participants might be less willing to trade on 
centralized, transparent markets if it means exposing their trading 
strategies to their competitors.\1382\
---------------------------------------------------------------------------

    \1382\ 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).
---------------------------------------------------------------------------

    Further, as we noted in our competition analysis, various 
jurisdictions are developing transparency rules at different paces. If 
stringent regulation under Title VII results in less access for U.S. 
persons to foreign segments of the security-based swap market, 
opportunities for efficient risk-sharing may correspondingly decline. 
Furthermore, to the extent that we have implemented the transparency 
requirements and the other jurisdictions have not (or to the extent 
that the scope of the transparency requirement among various 
jurisdictions is not comparable), market participants may have an 
incentive to restructure their business in order to move transactions 
to opaque corners of the global security-based swap market.
    If such restructuring results in a large and opaque market outside 
the reach of Title VII at the expense of liquidity in a transparent 
market regulated under Title VII, the efficiency benefits of Title VII 
would be undermined, in terms of price efficiency, efficient risk-
sharing, and the efficient allocation of capital across real and 
financial assets. Moreover, insofar as the types of restructuring 
contemplated above purely constitute attempts at regulatory arbitrage, 
they represent a use of resources that could potentially be put to more 
productive uses. In addition, the effect of the proposed application of 
the Title VII requirements described in this release on efficiency also 
would be affected by the substantive rules we ultimately adopted to 
implement the relevant Title VII requirements.
    In the cross-border context, we try to strike a balance between 
promoting efficiency in the U.S. security-based swap market and 
mitigating potential disruptions to other parts of the global market by 
including certain carve-outs in our proposed application of market-wide 
transaction-level requirements.\1383\ These exceptions are designed to 
enable foreign branches and foreign affiliates whose performance under 
security-based swaps is guaranteed by a U.S. person to maintain access 
to other parts of the global security-based swap markets when they 
transact with non-U.S. persons whose performance under security-based 
swaps is not guaranteed by a U.S. person. This should help ensure that 
U.S. banks operating through foreign branches and foreign affiliates of 
U.S. persons are able to continue to access global liquidity. However, 
as stated in our analysis of competition effects, the tradeoff is that 
the guarantees provided by U.S. persons represent a conduit for 
systemic risk to flow to the United States.
---------------------------------------------------------------------------

    \1383\ See proposed Rule 3Ca-3(b), proposed Rule 3Ch-1(b), and 
re-proposed Rule 908(a)(2) under the Exchange Act.
---------------------------------------------------------------------------

    By seeking to minimize, where appropriate, interruption to existing 
relationships of U.S. banks and foreign affiliates of U.S. persons with 
foreign market participants, the Commission's proposed cross-border 
approach could help preserve existing conduits for global risk-sharing. 
We considered this benefit and the efficiency costs that may result 
because these transactions are not occurring in the transparent market 
envisioned under Title VII.
    Finally, recognizing that the U.S. security-based swap market is an 
integral part of the global security-based swap market, the Commission 
has proposed exemptive relief from registration for foreign SB SEFs and 
SDRs in certain cases. The Commission's proposal to consider an 
exemption from SB SEF registration for foreign security-based swap 
markets may facilitate the consolidation of global order flow onto 
certain particular trading venues for security-based swap contracts 
written on certain reference

[[Page 31134]]

entities. The Commission believes this may promote participation in the 
transparent market and, in turn, market efficiency, without sacrificing 
the benefits of requiring SB SEF registration.
    The proposed exemptive relief for non-U.S. persons performing the 
functions of SDRs within the United States would allow non-U.S. persons 
to continue to receive data reported pursuant to the reporting 
requirements of a foreign jurisdiction without registering with the 
Commission as an SDR, subject to a condition that would help ensure 
that the confidentiality of the data and Commission access to data is 
maintained. The potential for exemptive relief from SDR registration 
requirements might reduce the incentive for market participants to 
restructure their operations to avoid triggering registration 
requirements.\1384\ Further, the potential for an Indemnification 
Exception, proposed in this release, could reduce the potential for 
SDRs to be established along purely jurisdictional lines.\1385\
---------------------------------------------------------------------------

    \1384\ See Section XV.H.1(b)(i), infra.
    \1385\ See Section XV.H.2, infra.
---------------------------------------------------------------------------

    Similarly, the proposed cross-border approach permits substituted 
compliance in certain circumstances if the Commission determines that 
the applicable foreign regulatory requirements are comparable to the 
related Title VII requirements. By allowing certain security-based swap 
transactions or participants to satisfy their compliance obligations 
with respect to the applicable Title VII requirements by complying with 
the rules of a foreign jurisdiction, duplicative compliance costs could 
be reduced and compliance burdens minimized. This could allow security-
based swap counterparties to operate more efficiently, as by allocating 
resources to other activities, such as improving operational efficiency 
or engaging in other investment activity. Therefore, the possibility of 
substituted compliance would encourage foreign firms' participation in 
the U.S. market and would help preserve U.S. firms' access to the other 
parts of the global market, while helping to ensure that substantially 
equivalent regulatory benefits are generated by meeting foreign 
regulatory standards comparable to Title VII.
(4) Capital Formation
    The Commission preliminarily believes that many aspects of the 
proposed cross-border approach are likely to promote capital formation. 
As mentioned above,\1386\ a security-based swap market with pre-trade 
and post-trade price transparency, and enhanced regulatory oversight 
may facilitate entry by a wide range of market participants seeking to 
engage in a broad range of hedging and trading activities. However, we 
recognize that, to the extent that Title VII imposes barriers to entry 
and access, or results in market fragmentation, it may impair capital 
formation and result in a redistribution of capital across 
jurisdictional boundaries.
---------------------------------------------------------------------------

    \1386\ See Section XV.C.3, supra (discussing the effects of our 
proposed cross-border approach on efficiency).
---------------------------------------------------------------------------

    As stated above, pre- and post-trade transparency should result in 
more accurate valuation, which should promote efficient allocation of 
capital.\1387\ In general, market participants benefit from knowing how 
counterparties to a security-based swap transaction value the security-
based swap at a specific moment in time; information revealed through 
pre- and post-trade transparency allows market participants to derive 
more-informed assessments with respect to asset valuations, leading to 
more efficient capital allocation. This should be true for the 
underlying assets as well. That is, information learned from security-
based swap quoting and trading provides signals not only about 
security-based swap valuation, but also about the value of the 
reference assets underlying the swap. Similarly, we expect pre- and 
post-trade transparency to benefit the real economy as well. 
Transparent prices provide better signals about the quality of a 
business investment, promoting capital formation in the real economy by 
helping managers to make more-informed decisions and making it easier 
for firms to obtain financing for new business opportunities.\1388\
---------------------------------------------------------------------------

    \1387\ See id.
    \1388\ See Bond, et al. and Chakravarty, et al., note 1211, 
supra.
---------------------------------------------------------------------------

    Furthermore, as discussed above, our proposed cross-border approach 
strives to address the disruptions that implementation of Title VII may 
cause to the foreign branch of U.S. banks and foreign affiliates of 
U.S. persons by proposing certain exceptions to the application of the 
de minimis exception to security-based swap dealer registration\1389\ 
and the market-wide transaction-level requirements.\1390\ We 
preliminarily believe that by doing so, our proposed cross-border 
approach to application of the Title VII requirements, as a whole, 
would address the disruptions to the global security-based swap market. 
Integrated markets provide more risk-sharing opportunities, which 
encourages efficient risk-sharing and capital allocation; the more 
integrated U.S. participants are into the global security-based swap 
market, the more access, liquidity, and participation we would expect 
to see in both the U.S. security-based swap market and the global 
security-based swap market as a whole.
---------------------------------------------------------------------------

    \1389\ See proposed Rule 3a71-3(b), proposed Rule 3Ca-3(b), 
proposed Rule 3Ch-1(b), and re-proposed Rule 908(a)(2) under the 
Exchange Act. See also Section XV.C.3, supra (discussing the effects 
of our proposed cross-border approach on efficiency).
    \1390\ See Sections VIII.C, IX.C, and X.B.3, supra.
---------------------------------------------------------------------------

    Similarly, the proposed policy framework of substituted compliance 
should encourage foreign firms' participation in the U.S. security-
based swap market and facilitate U.S. firms' access to the other parts 
of the global market while helping to ensure that the regulatory 
benefits of the applicable Title VII requirements are achieved by 
requiring the related foreign regulatory standards to be comparable to 
the requirements of Title VII. Substituted compliance is designed to 
accommodate the global nature of the security-based swap market and, 
therefore, should similarly help the security-based swap market 
continue to integrate various segments or subparts of the markets. As 
stated above, the integration of the U.S. market into the global market 
should encourage efficient global risk-sharing, which should, in turn, 
potentially free up more capital for investment in real assets.
Request for Comment
    The Commission generally requests comment about our preliminary 
analysis of the effects of our proposal on efficiency, competition, and 
capital formation. In particular, the Commission requests comment on 
any effect the proposed rules, rule amendments, and interpretations may 
have on efficiency, competition, and capital formation, including the 
competitive or anticompetitive effects the proposed rule may have on 
market participants.

D. Economic Analysis of Proposed Rules Regarding ``Security-Based Swap 
Dealers'' and ``Major Security-Based Swap Participants''

    To promote the goals of reduced risk, increased transparency, and 
improved market integrity in the financial system, Title VII of the 
Dodd-Frank Act requires, among other things, registration and 
regulation of security-based swap dealers and major security-based swap 
participants. The Commission and the CFTC jointly adopted final rules 
in 2012 to further define ``security-based swap dealer'' and ``major 
security-based swap

[[Page 31135]]

participant.'' \1391\ Of particular importance is the de minimis 
exception to dealing activity, which excepts a dealer in security-based 
swaps from the definition and designation of ``security-based swap 
dealer'' if the notional amount of its dealing activity in the trailing 
12-month period is below a particular threshold. As discussed in the 
Intermediary Definitions Adopting Release, the costs and benefits of 
the dealer and participant definitions fall into two categories. First, 
there are costs and benefits associated with identifying a subset of 
current and future market participants as either security-based swap 
dealers or major security-based swap participants (i.e., the assessment 
costs). Second, there are costs and benefits associated with subjecting 
that subset to a complete, fully effective complement of Title VII 
statutory and regulatory requirements (i.e., the programmatic costs and 
benefits).
---------------------------------------------------------------------------

    \1391\ See Intermediary Definitions Adopting Release, 77 FR 
30596.
---------------------------------------------------------------------------

    In the Intermediary Definitions Adopting Release, the Commission 
estimated that, out of more than 1,000 entities engaged in CDS activity 
worldwide in 2011, 166 had worldwide CDS activity at a level high 
enough such that they would perform the dealer-trader analysis 
prescribed under the security-based swap dealer definition. 
Furthermore, based on an analysis of trading activity using DTCC-TIW 
data, the Commission estimated that, based on their global trading 
volumes, potentially 50 of these entities would exceed the de minimis 
threshold and thus ultimately have to register as security-based swap 
dealers. Similarly, based on position data from DTCC-TIW, the 
Commission estimated that, based on positions arising from their 
worldwide CDS activity, as many as 12 entities would perform 
substantial position and substantial counterparty exposure tests 
prescribed under the major security-based swap participant definition.
    These estimates represent a baseline against which the Commission 
can analyze the costs and benefits of the proposed application of the 
intermediary definitions to cross-border activities. More specifically, 
because the proposed cross-border rules would allow non-U.S. persons to 
exclude from the de minimis and major participant thresholds certain 
transactions and positions with non-U.S. counterparties, the ultimate 
number of entities that would exceed the dealer de minimis or the major 
participant thresholds will likely be lower than estimated in the 
Intermediary Definitions Adopting Release, and this decline will have a 
corresponding impact on the programmatic costs and benefits associated 
with these definitions. On the other hand, the cross-border rules are 
likely to increase assessment costs, as certain non-U.S. persons may 
need to determine which transactions and positions may be excluded from 
the thresholds. These costs and benefits are discussed more fully 
below.
1. Programmatic Costs and Benefits
(a) Registration of Security-based Swap Dealers and Major Security-
Based Swap Participants
    Title VII requires the registration of security-based swap dealers 
and major security-based swap participants in accordance with rules 
promulgated by the Commission.\1392\ The Commission proposed rules and 
forms to facilitate registration of security-based swap dealers and 
major security-based swap participants in the Registration Proposing 
Release.\1393\ In that release, the Commission provided an economic 
analysis relating to the proposed registration requirements and 
forms.\1394\ As discussed in more detail therein, the Commission 
expects that dealers engaging in security-based swap activity exceeding 
the de minimis amount will incur costs associated with 
registration.\1395\ In addition, persons who are not security-based 
swap dealers but hold substantial security-based swap positions that 
create an especially high level of risk that could have systemic impact 
on the U.S. financial system will incur costs associated with 
registration as a major securities-based swap participant.\1396\ 
Registration will provide the Commission with information regarding 
security-based swap dealers and major security-based swap participants, 
which will enable the Commission to oversee these registered entities 
with respect to their security-based swap activity and oversee 
compliance with the substantive requirements applicable to them. The 
Commission believes that the revisions included in re-proposed Forms 
SBSE, SBSE-A, and SBSE-BD would not significantly impact our analysis 
of the costs and benefits of the rules and forms to facilitate 
registration of security-based swap dealers and major security-based 
swap participants.
---------------------------------------------------------------------------

    \1392\ See Section 15F(b)(5) of the Exchange Act, 15 U.S.C. 78o-
10(b)(5).
    \1393\ See Registration Proposing Release, 76 FR 65784.
    \1394\ Id. at 65812-19.
    \1395\ In the Registration Proposing Release, the Commission 
described the costs we expect security-based swap dealers and major 
security-based swap participants to incur in connection with 
completing and filing forms, providing related certifications, 
addressing additional requirements in connection with associated 
persons, as well as certain additional costs. See Registration 
Proposing Release, 76 FR 65812-19.
    \1396\ Id.
---------------------------------------------------------------------------

(b.) Security-Based Swap Dealers--De Minimis Exception
    Title VII requires entities engaged in security-based swap dealing 
activity to register as security-based swap dealers unless such 
transactions constitute only ``a de minimis quantity of security-based 
swap dealing'' and the dealer, therefore, is sufficiently small not to 
warrant regulation as a security-based swap dealer.\1397\ The statutory 
de minimis exception is silent on its application to the cross-border 
security-based swap dealing activity of U.S. persons and non-U.S. 
persons, and the Commission did not address this issue in the 
Intermediary Definitions Adopting Release. The Commission proposes Rule 
3a71-3(b) under the Exchange Act in this release to address this issue.
---------------------------------------------------------------------------

    \1397\ See Section III.C.3(b)(2), supra; see also Section 
3(a)(71)(D) of the Exchange Act, 15 U.S.C. 78c(a)(71)(D), and 17 CFR 
240.3a71-2.
---------------------------------------------------------------------------

    Proposed Rule 3a71-3(b)(1) under the Exchange Act sets forth the 
application of the de minimis exception to the activities of U.S. 
persons and non-U.S. persons, describing which security-based swap 
transactions conducted in a dealing capacity should be counted for 
purposes of the de minimis exception. Because proposed Rule 3a71-
3(b)(1) under the Exchange Act would exclude certain transactions from 
the de minimis calculation and thereby may allow certain entities to 
remain below the de minimis threshold, it affects the programmatic 
benefits and costs of security-based swap dealer regulation under Title 
VII,\1398\ as these programmatic costs depend on the number of persons 
that will ultimately be required to register as security-based swap 
dealers as well as the substantive requirements that are to be adopted 
in connection with the security-based swap dealer regime.
---------------------------------------------------------------------------

    \1398\ See Intermediary Definitions Adopting Release, 77 FR 
30596.
---------------------------------------------------------------------------

    This does not mean, however, that there would be a one-to-one 
relationship between the exclusion of any particular person as a 
security-based swap dealer as a result of the de minimis exception and 
any change in the programmatic benefits and costs that would be 
associated with the non-regulation of that person. In other words, 
although Proposed Rule 3a71-3(b)(1) may allow certain entities to 
remain below the de minimis threshold, it does not follow that the 
programmatic costs and benefits will change by an amount proportional

[[Page 31136]]

to the volume of those entities' dealing activity. As the Commission 
explained in the Intermediary Definitions Adopting Release, some of the 
costs and benefits of regulating an intermediary may be fixed, while 
other costs and benefits of regulation may be variable, depending on a 
particular person's security-based swap dealing activity.\1399\ For 
example, the programmatic benefits associated with the registration and 
regulation of persons engaged in security-based swap dealing activity--
in other words, the expected mitigation of risks to the stability and 
transparency of the U.S. financial system and to the protection of 
counterparties in the United States--will likely vary depending on the 
type and nature of those persons' dealing activity. Estimating the de 
minimis exception's effects on the programmatic costs and benefits 
(through including or excluding any particular person within the 
intermediary definition) will be further complicated by the other 
proposed rules regarding application of the entity-level and 
transaction-level requirements, as discussed more fully below.
---------------------------------------------------------------------------

    \1399\ See id. at 30724 (``Some of the costs of regulating a 
particular person as a dealer or major participants, such as costs 
of registration, may largely be fixed. At the same time, other costs 
associated with regulating that person as a dealer or major 
participant (e.g., costs associated with margin and capital 
requirements) may be variable, reflecting the level of the person's 
security-based swap activity. Similarly, the regulatory benefits 
that would arise from deeming that person to be a dealer or major 
participant (e.g., benefits associated with increased transparency 
and efficiency, and reduced risks faced by customers and 
counterparties), although not quantifiable, may be expected to be 
variable in a way that reflects the person's security-based swap 
activity.'').
---------------------------------------------------------------------------

    Given the same limitations on our ability to conduct a quantitative 
assessment of the programmatic costs and benefits associated with 
intermediary definitions as stated in the Intermediary Definitions 
Adopting Release,\1400\ we believe the methodology used in the 
Intermediary Definitions Adopting Release is appropriate and 
potentially most illustrative in demonstrating our consideration of 
programmatic costs and benefits associated with proposed Rule 3a71-3(b) 
under the Exchange Act regarding application of the de minimis 
exception in the definition of security-based swap dealer.
---------------------------------------------------------------------------

    \1400\ The limitations stated in the Intermediary Definitions 
Adopting Release are those related to (i) the data available to us 
and (ii) the set of data we use to draw inferences from in order to 
estimate the number of dealers. See Section XV.B, supra.
    With respect to the availability of data, we have taken into 
account data obtained from DTCC-TIW, especially data regarding the 
activity of participants in the single-name credit default swap 
market. See Intermediary Definitions Adopting Release, 77 FR 30635. 
We also have considered more limited publicly available data 
regarding equity swaps. Id. at 30636 n.476, and 30637 n.485. The 
lack of market data is significant in the context of total return 
swaps on equity and debt. We do not have the same amount of 
information regarding those products as we have in connection with 
the present market for single name CDS. Id. at 30724 n.1456. We did 
not consider data regarding index CDS for purposes of the economic 
analysis of the security-based swap dealer definition because the 
data for index CDS encompasses both broad-based security indices and 
narrow-based security indices, and ``security-based swap'' in 
relevant part encompasses swaps based on single securities or on 
narrow-based security indices. See Section 3(a)(68)(A) of the 
Exchange Act, 15 U.S.C. 78c(a)(68)(A); see also Intermediary 
Definitions Adopting Release, 77 FR 30635 n.472. We noted that the 
definition of security-based swaps is not limited to single-name CDS 
but we believed that the single-name CDS data are sufficiently 
representative of the market to help inform the analysis. See 
Section XV.B.2 and note 1278, supra, and accompanying text.
    With respect to the dataset we use, we have based, in part, our 
economic analysis of the security-based swap dealer definition on 
certain data addressed by an analysis regarding the market for 
single-name CDS performed by the SEC's Division of Risk, Strategy, 
and Financial Innovation made available to the public. See 
``Information regarding activities and positions of participants in 
the single-name credit default swap market'' (Mar. 15, 2012), 
available at: https://www.sec.gov/comments/s7-39-10/s73910-154.pdf 
(``CDS Data Analysis''). As stated in the Intermediary Definitions 
Adopting Release, we believe that the data underlying the CDS Data 
Analysis provides reasonably comprehensive information regarding the 
CDS activities and positions of U.S. market participants, but we 
noted that the data does not encompass those CDS that both: (i) do 
not involve U.S. counterparties; and (ii) are based on non-U.S. 
reference entities. We also noted that the CDS Data Analysis 
contains transactions reflecting both dealing activity and non-
dealing activity, including transactions by persons who may engage 
in no dealing activity whatsoever. Id. at 30635-36.
    We also recognized in the Intermediary Definitions Adopting 
Release, and in our discussion of the limitations of this data 
above, that the CDS Data Analysis may be imperfect as a tool for 
identifying dealing activity, given that the presence or absence of 
dealing activity ultimately turns upon the relevant facts and 
circumstances of an entity's security-based swap transactions, as 
informed by the dealer-trader distinction. Nonetheless, various 
criteria used in the CDS Data Analysis appear to be useful for 
identifying apparent dealing activity in the absence of full 
analysis of the relevant facts and circumstances. Id. at 30636.
---------------------------------------------------------------------------

    In the Intermediary Definitions Adopting Release, we sought to 
identify a subset of entities that appear to be the types of entities 
for which the statutory requirements of Title VII were created based on 
the volume of their dealing activity. We then sought to adopt 
definitions that would capture these entities, as Title VII required us 
to do, without imposing the costs of Title VII on those entities for 
which regulation currently may not be justified in light of those 
purposes. In developing Rule 3a71-2, which establishes the de minimis 
threshold for security-based swap dealers, we took into account data 
regarding the security-based swap market and especially data regarding 
the activity--including activity that may be suggestive of dealing 
behavior--of participants in the single-name CDS market.\1401\ Based on 
the CDS Data Analysis,\1402\ we estimated in the economic analysis of 
the de minimis exception to the dealer definition in the Intermediary 
Definitions Adopting Release that 50 or fewer entities ultimately may 
have to register as security-based swap dealers.\1403\
---------------------------------------------------------------------------

    \1401\ See Intermediary Definitions Adopting Release, 77 FR 
30635.
    \1402\ See CDS Data Analysis.
    \1403\ See Intermediary Definitions Adopting Release, 77 FR 
30725 and n.1457. We stated that this estimate of 50 security-based 
swap dealers that would be required to register was a 
``conservative'' estimate. See id. In establishing the de minimis 
threshold in that release, we analyzed the percentage of the market 
activity that would likely be attributable to registered security-
based swap dealers under various thresholds and various screens 
designed to identify entities that are engaged in dealing activity. 
See Intermediary Definitions Adopting Release, 77 FR 30636; CDS Data 
Analysis at 8-21. Our analysis placed particular weight on the 
screen that identified entities that engaged in security-based swap 
transactions with three or more counterparties that themselves were 
not identified as dealers by ISDA. See Intermediary Definitions 
Adopting Release, 77 FR 30636. Twenty-eight firms and corporate 
groups satisfied this criterion, and 25 of these entities also 
engaged in trading activity over the $3 billion threshold. See id. 
Based on this analysis, together with our expectation that some of 
the included corporate groups would register more than a single 
security-based swap dealer and that new entrants may be likely to 
enter the market, we estimated that as many as 50 entities would 
ultimately be required to register as a security-based swap dealer. 
See Intermediary Definitions Adopting Release, 77 FR 30725 n.1457.
---------------------------------------------------------------------------

    In developing proposed Rule 3a71-3(b), we have applied a 
methodology and analytical framework similar to that employed in the 
Intermediary Definitions Adopting Release to ensure that our proposed 
cross-border approach captures only those entities that we believe are 
likely, because activity relevant to the statutory dealer definition as 
interpreted in the Intermediary Definitions Adopting Release occurs 
with U.S. persons or otherwise within the United States, to raise the 
types of concerns with respect to the U.S. financial system that Title 
VII was intended to address, including stability, transparency, and 
counterparty protection. We continue to believe that entities engaged 
in such activity at levels above the de minimis threshold may be 
expected to raise these concerns and, therefore, warrant regulation 
under Title VII as security-based swap dealers. Conversely, we do not 
believe that entities engaged in dealing activity wholly outside the 
United States directly raise these types of concerns with respect to 
the U.S. financial system, and our proposed approach would not require 
non-U.S. persons engaged in dealing activity wholly

[[Page 31137]]

outside the United States to register as security-based swap dealers.
    We recognize that security-based swap activity outside the United 
States, including the activity of foreign persons that engage in 
security-based swap dealing activity wholly outside the United States, 
may affect the U.S. financial system either because the foreign 
person's positions are guaranteed by a U.S. person or through risk 
spillover effects that may arise from, for example, counterparty 
defaults, asset fire sales, capital shortfalls, and asymmetric 
information about the positions of unregistered persons active in the 
global network of security-based swap market participants. However, to 
the extent that the risks presented by an entity engaged in security-
based swap dealing activity to the U.S. financial system arise solely 
from such guarantees or from these spillover effects, rather than from 
the entity engaging in relevant activity within the United States, we 
preliminarily do not believe that Title VII dealer registration 
provides the appropriate mechanism for addressing these risks.
    As we have already discussed, we believe that Title VII's dealer 
registration requirements are intended to apply to those entities that 
pose risks to the U.S. financial system or to counterparties in the 
United States or to the transparency of the U.S. financial market by 
virtue of their dealing activity within the United States. To the 
extent that an entity engaged in dealing activity wholly outside the 
United States poses risks to the U.S. financial system, we 
preliminarily believe that subjecting it to dealer registration and the 
related requirements would not generate the types of programmatic 
benefits that Title VII dealer regulation is intended to produce, as 
the dealing activity of such entity poses risks to counterparties 
outside the United States.
    Our proposed Rule 3a71-3 identifies the types of transactions that 
U.S. persons and non-U.S. persons engaged in dealing activity within 
the United States, and that may therefore be expected to raise Title 
VII concerns, must count toward their de minimis threshold. As 
described above,\1404\ because dealing activity engaged in by U.S. 
persons generally involves activity within the United States and 
results in risks being borne by a person within the United States, 
proposed Rule 3a71-3(b)(1)(i) would require U.S. persons to count 
toward their de minimis threshold all transactions that they enter into 
in a dealing capacity, regardless of the location or U.S.-person status 
of the counterparty, including any such transactions that the dealing 
entity conducts through a foreign branch. Similarly, as we discuss 
above, because security-based swap dealing activity conducted entirely 
outside the United States with non-U.S. persons will generally not give 
rise to the concerns addressed by security-based swap dealer regulation 
under Title VII within the United States, proposed Rule 3a71-
3(b)(1)(ii) would require non-U.S. persons to include in their de 
minimis calculation only those transactions arising out of their 
dealing activity with U.S. persons or otherwise conducted within the 
United States.
---------------------------------------------------------------------------

    \1404\ See Section III.B.3, supra.
---------------------------------------------------------------------------

    As discussed above, our proposed rule allows non-U.S. persons to 
exclude transactions with foreign branches of U.S. banks from their de 
minimis threshold, if those transactions are conducted outside the 
United States.\1405\ Although requiring non-U.S. persons to count these 
transactions toward the de minimis threshold would be consistent with 
the view that a foreign branch is part of a U.S. person, we are 
proposing not to require non-U.S. persons to count these transactions. 
As noted above, since U.S. banks are U.S. persons subject to certain 
exemptions, foreign branches that engage in security-based swap 
activity will generally be subject to applicable provisions of Title 
VII (e.g., mandatory clearing, mandatory trade execution, public 
dissemination, and SDR reporting requirements) regardless of whether 
their non-U.S. person counterparty is a registered security-based swap 
dealer. If a foreign branch engages in security-based swap activity in 
a dealing capacity with non-U.S. persons outside the United States 
exceeding the de minimis level, the bank (including the foreign branch) 
will be required to register as a security-based swap dealer and the 
entire bank will be subject to the entity-level and transaction-level 
requirements discussed above.\1406\
---------------------------------------------------------------------------

    \1405\ See Section III.B.7, supra.
    \1406\ See Sections III.C.3 and 4, supra.
---------------------------------------------------------------------------

    The security-based swap transactions excepted from the de minimis 
calculation of non-U.S. persons take place outside the United States. 
Requiring non-U.S. persons to count these transactions occurring in 
their foreign local markets could discourage non-U.S. persons from 
transacting with foreign branches, which could increase the likelihood 
of market disruption and fragmentation, including liquidity and order 
flow fragmentation, while decreasing the ability of U.S. banks to 
access foreign markets and foreign liquidity. Therefore, we 
preliminarily believe that the proposed approach to excepting non-U.S. 
persons' transactions with foreign branches outside the U.S. from the 
de minimis calculation would have the benefit of minimizing disruption 
to U.S. banks' access to foreign markets without significantly 
diminishing the benefits that flow from Title VII dealer regulation and 
the proposed application of the de minimis exception in the cross-
border context.
    As stated above, the most significant programmatic effects of the 
de minimis exception result from how it changes the number of entities 
that are required to register as security-based swap dealers. We 
preliminarily believe that under our proposed Rule 3a71-3(b) under the 
Exchange Act, the number of entities that may have to register with the 
Commission may be somewhat smaller than the upper bound of 50 that we 
estimated in the Intermediary Definitions Adopting Release and in any 
case should not exceed that previous estimate of 50 or fewer 
entities.\1407\ The

[[Page 31138]]

entities that are not captured under our proposed approach would be 
those that engage in security-based swap dealing activity entirely (or 
almost entirely) with non-U.S. persons outside the United States.
---------------------------------------------------------------------------

    \1407\ See note 1218, supra. After further experience with the 
data used in the CDS Data Analysis, we have estimated the trading 
activity and number of counterparties of firms within a corporate 
group, which allows us to conduct a more granular analysis of the 
potential number of entities that will be required to register as 
security-based swap dealers. In the CDS Data Analysis, we estimated 
that 28 entities and corporate groups had three or more 
counterparties that are not ISDA dealers and that 25 of these 
entities had trailing notional transactions exceeding $3 billion. 
See CDS Data Analysis at 14. Under our refined approach, which 
identifies the number of entities within a corporate group that may 
have to register, we estimate that 46 individual firms have three or 
more non-ISDA-dealer counterparties; of these, we estimate that 31 
firms also engaged in a total of $3 billion in worldwide security-
based swap dealing activity during 2011. Of these firms, we estimate 
that 27 also engaged in at least $3 billion of security-based swap 
activity during 2011 that these entities would be required to count 
toward their de minimis threshold under proposed Rule 3a71-3(b). We 
further estimate that the aggregation requirement for unregistered 
dealers may result in an additional two firms being required to 
register, for a total of 29 security-based swap dealers based on the 
current structure of the security-based swap market.
     We continue to believe that an estimate of 50 or fewer entities 
that would be required to register with the Commission as security-
based swap dealers is reasonable in light of this analysis. As 
explained in note 1403 above, our estimate of as many as 50 
potential registrants was consistent with our analysis showing 25 
entities that had both three or more non-ISDA-dealer counterparties 
and $3 billion or more in trailing notional security-based swap 
transactions and our recognition of the potential for growth in the 
security-based swap market, for new entrants into the dealing space, 
and the possibility that some corporate groups may register more 
than one entity. Because our current estimate of 29 firms that may 
be required to register as security-based swap dealers includes 
individual entities within corporate groups (rather than treating 
corporate groups as a single entity), it accounts for the 
possibility that some corporate groups may register more than one 
security-based swap dealer. It also accounts for the likely results 
of our proposed aggregation requirement. Further allowing for the 
possibility of additional new entrants and growth in the security-
based swap market, while also recognizing the possibility that our 
analysis overestimates the volume of dealing activity (and thus 
likely dealers), we think that our analysis in this release remains 
consistent with our earlier estimate of 50 or fewer entities.
---------------------------------------------------------------------------

    We recognize that the U.S. market participants and transactions 
regulated under Title VII are a subset of the overall global security-
based swap market and that there may be spillover risks arising from a 
foreign entity's dealing activity outside the United States. This 
spillover risk has the potential to affect the U.S. financial system 
either through that foreign entity's transactions with foreign 
entities, which, in turn, transact with U.S. persons (and may, as a 
result, be registered security-based swap dealers or major security-
based swap participants) or through membership in a clearing agency 
which may be providing CCP services in the United States or have a U.S. 
person as a clearing member. We have considered these spillover risks 
in connection with discussing the effects of our proposed cross-border 
approach on efficiency, competition, and capital formation.\1408\
---------------------------------------------------------------------------

    \1408\ See Section XV.C.1, supra.
---------------------------------------------------------------------------

(c) Major Security-Based Swap Participants--``Substantial Position'' 
and ``Substantial Counterparty Exposure'' Thresholds
    Title VII requires a person with a ``substantial position'' or 
``substantial counterparty exposure'' in security-based swaps to 
register as a major security-based swap participant. As described in 
the Intermediary Definitions Adopting Release, the substantial position 
and substantial counterparty exposure tests prescribed by Rules 3a67-3 
and 3a67-5 under the Exchange Act seek to capture persons whose 
security-based swap positions pose sufficient risk to counterparties 
and the markets generally, thus, warranting regulation as a major 
security-based swap participant.\1409\ Furthermore, based on a review 
of notional positions maintained in 2011 by entities with single-name 
CDS positions, the Commission estimated that approximately 12 entities 
may reasonably find it necessary to engage in the requisite 
calculations, and that the number of major security-based swap 
participants likely will be fewer than five.\1410\
---------------------------------------------------------------------------

    \1409\ See Intermediary Definitions Adopting Release, 77 FR 
30727.
    \1410\ Id. at 30734.
---------------------------------------------------------------------------

    As proposed, Rule 3a67-10(c) under the Exchange Act provides that 
when determining whether a non-U.S. person falls within the major 
security-based swap participant definition, only transactions entered 
into with a U.S. person \1411\ as the counterparty would be 
considered.\1412\ Under this proposed rule, a non-U.S. person would 
calculate its security-based swap positions under the major security-
based swap definition based solely on its security-based swap 
transactions with U.S. persons as counterparties (including foreign 
branches of U.S. banks), and all security-based swap transactions with 
non-U.S. persons would be excluded from the analysis. We recognize that 
there may be indirect spillover risks to the U.S. financial system 
resulting from the security-based swap positions entered into by non-
U.S. persons with other non-U.S. person counterparties, but we 
preliminarily believe that such indirect risk may be more appropriately 
regulated by the foreign regulatory authorities with responsibilities 
for such non-U.S. persons. Similar to the de minimis exception to 
dealer designation and registration, the most significant programmatic 
effects of the application in the cross-border context of the major 
participant thresholds flow from the number of entities that will fall 
within the definition of major security-based swap participant given a 
particular threshold. Because non-U.S. persons must count only 
transactions with U.S. counterparties toward the substantial position 
and substantial counterparty exposure thresholds, the final number of 
registered major participants may be lower than the preliminary upper 
bound of five estimated in the Intermediary Definitions Adopting 
Release.
---------------------------------------------------------------------------

    \1411\ The proposed rule uses the same definition of ``U.S. 
person'' as developed in the context of foreign security-based swap 
dealer registration. See Section III.B.5, supra.
    \1412\ Proposed Rule 3a67-10(c) under the Exchange Act.
---------------------------------------------------------------------------

    We also are proposing interpretive guidance regarding the 
attribution of guaranteed positions for purposes of the major security-
based swap participant calculation. In the Intermediary Definitions 
Adopting Release, we provided interpretive guidance that requires a 
person that guarantees or otherwise provides direct recourse to an 
affiliate or guaranteed entity's security-based swap counterparties to 
include those transactions in its own major participant 
calculations.\1413\ We are proposing further guidance in this release 
regarding the application of this interpretation in the cross-border 
context. As proposed, this guidance would require U.S. persons that 
guarantee the obligations of a non-U.S. person's security-based swap 
transactions to count those transactions in their major participant 
calculations. Our proposed guidance also would require a non-U.S. 
person to include in its calculations transactions of a U.S. person 
that it guarantees and transactions entered into by a non-U.S. person 
with U.S. persons that it guarantees. A non-U.S. person would not 
include in its calculation transactions it guarantees that are entered 
into by a non-U.S. person with another non-U.S. person.
---------------------------------------------------------------------------

    \1413\ See Intermediary Definitions Adopting Release, 77 FR 
30689.
---------------------------------------------------------------------------

    We preliminarily believe that this guidance identifies the 
guaranteed security-based swap positions that are likely to pose risks 
to the U.S. financial system. Title VII envisions the establishment of 
a comprehensive regulatory regime that will identify, monitor, and 
mitigate risks to the U.S. financial system and protect counterparties 
in security-based swap transactions. Our proposed application of the 
major securities-based swap participant calculation in the cross-border 
context, and related guidance, is designed to include only those market 
participants whose security-based swap activity may directly affect the 
U.S. financial system in a manner relevant to the concerns of Title 
VII.
    With respect to U.S. persons that provide a guarantee, our proposed 
interpretive guidance confirms that they must include in their major 
security-based swap participant calculations all security-based swap 
transactions that they guarantee, regardless of the U.S.-person status 
of the guaranteed person or the status of the counterparty to the 
transaction. Such interpretation is consistent with the rules and 
interpretations adopted in the Intermediary Definitions Adopting 
Release. We recognize that attributing security-based swap positions to 
the person guaranteeing another person's security-based swap 
transactions may increase the number of major participants and 
therefore affect the programmatic benefits discussed above. As stated 
in the Intermediary Definition Adopting Release, we do not currently 
possess data relating to the existence of guarantees of the security-
based swap positions of other parties and thus

[[Page 31139]]

cannot reasonably estimate the number of additional entities that may 
be brought within the ambit of major security-based swap participant 
regulation by virtue of the interpretation related to guarantees.\1414\ 
However, to the extent that a guarantee provided by a U.S. person of 
the security-based swap positions of another person, whether such other 
person is a U.S. person or a non-U.S. person, creates the level of 
exposure--and corresponding risk to the U.S. guarantor and the U.S. 
financial system--that warrants regulation under Title VII, it would 
appear inconsistent with the purposes of the statute not to attribute 
all of the security-based swap positions guaranteed by a U.S. person to 
such U.S. person and subject such U.S. person to major participant 
regulation.\1415\
---------------------------------------------------------------------------

    \1414\ See Intermediary Definitions Adopting Release, 77 FR 
30730.
    \1415\ Id.
---------------------------------------------------------------------------

    Our proposed interpretive guidance regarding guarantees provided by 
non-U.S. persons also is likely to have no effect on the programmatic 
costs and benefits of major security-based swap participant regulation. 
The proposed guidance would allow non-U.S. persons to exclude security-
based swap positions guaranteed by them from their major security-based 
swap participant calculations if the security-based swaps giving rise 
to the positions are entered into by a non-U.S. person with another 
non-U.S. person. By contract, non-U.S. persons would be required to 
include security-based swap positions guaranteed by them in their major 
security-based swap participant calculations if the security-based 
swaps are entered into by a non-U.S. person with a U.S. person. To the 
extent that any non-U.S. persons who guarantees security-based swap 
positions with U.S. persons that do not rise to the major security-
based swap participant thresholds, they are unlikely to pose the types 
of risks addressed by the major security-based swap participant 
definition, and, as a result, not requiring them to register should not 
reduce the programmatic benefits that the major security-based swap 
participant definition was intended to achieve.
    As stated above, we do not currently possess data relating to the 
existence of guarantees of the security-based swap positions of other 
parties and thus cannot reasonably estimate the number of additional 
entities that may be brought within the ambit of major security-based 
swap participant regulation by virtue of the interpretation related to 
guarantees. However, any non-U.S. person that is required to register 
under our proposed approach because of guarantees extended to U.S. 
persons or to non-U.S. persons that have positions arising from 
transactions with U.S. persons would have security-based swap exposures 
of the nature and size that would raise concerns that the major 
security-based swap participant requirements established by Title VII 
were intended to address. We therefore preliminarily believe that the 
registration of such persons as major security-based swap participants 
would increase the programmatic benefits of our rule by ensuring that 
the risks presented by such entities to the U.S. financial system and 
U.S. counterparties to such transactions are regulated under the 
framework established by Title VII. Imposing Title VII on such entities 
would also increase programmatic costs, as such entities would be 
required to comply with the substantive requirements of Title VII.
    Moreover, where a non-U.S. person's home country supervisor has 
adopted capital standards consistent in all respects with the Capital 
Accord of the Basel Committee on Banking Supervision (Basel Accord), to 
the extent that such non-U.S. person's security-based swap positions 
are guaranteed, we preliminarily believe that it is not necessary to 
attribute such guaranteed security-based swap positions to the 
guarantor, regardless of the guarantor's U.S.-person status. To the 
extent that this proposed interpretive guidance reduces the number of 
entities that would be required to register as major security-based 
swap participants as estimated in the Intermediary Definitions Adopting 
Release, we preliminarily believe that it would not significantly 
reduce the programmatic benefits expected under Title VII because the 
risk arising from the guaranteed security-based swap positions posed to 
the United States, and that Title VII was intended to address, would be 
addressed by the foreign regulation of the non-U.S. person's capital 
that is consistent with the Basel Accord. At the same time, excluding 
such entities from the definition of major security-based swap 
participant would further reduce the programmatic costs associated with 
the various requirements that apply to major security-based swap 
participants.
2. Assessment Costs
(a) Security-Based Swap Dealers--De Minimis Exception
    Because proposed Rule 3a71-3(b) explains how the dealer de minimis 
exception adopted in Rule 3a71-2(a)(1) \1416\ should be applied to 
cross-border dealing activity, the analysis of the assessment costs 
relating to the proposed Rule 3a71-3(b) is closely related to the 
analysis of the assessment costs relating to the dealer determination 
described in the Intermediary Definitions Adopting Release.\1417\ Our 
proposed approach to the de minimis calculation in the cross-border 
context would require potential registrants that are non-U.S. persons, 
in assessing the applicability of Title VII's dealer registration and 
regulation requirements, to apply the new definitions of ``U.S. 
person,'' ``transactions conducted within the United States,'' and 
``transactions conducted through a foreign branch,'' which are used in 
Proposed Rule 3a71-3(b) of the Exchange Act to identify transactions 
that should be included in the de minimis calculation given the 
purposes of Title VII. Our proposed approach would also allow non-U.S. 
persons to exclude from this assessment and the de minimis calculation 
security-based swap transactions with a foreign branch of a U.S. bank, 
which would require them to make a separate determination that a 
particular counterparty satisfies the definition of ``foreign branch.''
---------------------------------------------------------------------------

    \1416\ 17 CFR 240.3a71-2(a)(1).
    \1417\ See Intermediary Definitions Adopting Release, 77 FR 
30731-32.
---------------------------------------------------------------------------

    As noted in the Intermediary Definitions Adopting Release, some 
market participants whose security-based swap activities exceed, or are 
not materially below, the de minimis threshold may be expected to incur 
assessment costs in connection with the dealer analysis.\1418\ In the 
Intermediary Definitions Adopting Release, we estimated that 123 
entities out of over 1,000 entities (U.S. and non-U.S.) that engaged in 
single-name CDS transactions in 2011 had more than $3 billion in 
single-name CDS transactions over the previous 12 months.\1419\ We also 
assumed that the 43 entities that engaged in security-based swap 
activity during the trailing 12-month period totaling between $2 and $3 
billion notional may opt to engage in the dealer analysis out of an 
abundance of caution or to meet internal compliance requirements, 
leading to a total of 166 entities.\1420\ We concluded that this

[[Page 31140]]

estimate of 166 entities represented a potential upper bound for the 
total assessment costs arising from security-based swap dealer 
determinations.\1421\ To the extent that all of these entities retain 
outside counsel to analyze their status under the security-based swap 
dealer definition, including the de minimis exception, we estimated 
that the assessment costs may approach $4.2 million.\1422\
---------------------------------------------------------------------------

    \1418\ Id. at 30731. These assessment costs include costs 
associated with analyzing an entity's security-based swap activities 
to determine whether those activities constitute dealing activity 
and the costs of monitoring the volume of dealing activity against 
the de minimis threshold.
    \1419\ Intermediary Definitions Adopting Release, 77 FR 30731-
32.
    \1420\ Id.
    \1421\ Id.
    \1422\ Id. We estimated that the per-entity cost of the dealer 
analysis would be approximately $25,000. Our estimate of aggregate 
industry-wide costs of $4.2 million reflects the costs that may be 
incurred by all 166 entities. See id.
---------------------------------------------------------------------------

    In considering the assessment costs associated with the proposed 
Rule 3a71-3(b), we hold the same expectation as we noted in the 
Intermediary Definitions Adopting Release that market participants 
generally would be aware of the notional amount of their activity 
involving security-based swaps as a matter of good business practice. 
However, as discussed below, proposed Rule 3a71-3(b) introduces a few 
variables that may result in higher overall assessment costs associated 
with the dealer registration analysis for certain non-U.S. persons that 
may result in different aggregate assessment costs for all entities 
performing this dealer analysis from the figure that we estimated in 
the Intermediary Definitions Adopting Release.
    Because non-U.S. persons would be required to count toward the 
dealer de minimis threshold only those transactions they enter into, in 
a dealing capacity, with U.S. persons (other than foreign branches of 
U.S. banks) or otherwise conducted within the United States, we believe 
that such persons would likely implement systems to identify 
transactions that involve U.S. persons or that are conducted within the 
United States \1423\ and monitor the notional amount of dealing 
activity reflected in such transactions.\1424\ We preliminarily believe 
that the costs of establishing a system capable of identifying the 
volume of transactions with U.S. persons or within the United States 
should be similar to the costs estimated in the Intermediary 
Definitions Adopting Release for a system to monitor positions for 
purposes of the major security-based swap participant thresholds 
because such a system would involve monitoring the total volume of an 
entity's dealing transactions in a system capable of flagging those 
transactions that involve U.S. persons or otherwise occur within the 
United States. We preliminarily believe that this system would have 
similar functionality and requirements to the system that potential 
major security-based swap participants would be likely to adopt in 
order to track their exposures for purposes of the major security-based 
swap participant thresholds. In the Intermediary Definitions Adopting 
Release, we noted that entities establishing such a system would likely 
incur one-time programming costs of $15,287 and ongoing annual systems 
costs of $17,040.\1425\
---------------------------------------------------------------------------

    \1423\ See proposed Rule 3a71-3(a)(5) under the Exchange Act. 
``Transactions conducted within the United States'' refers to 
security-based swap transactions that are solicited, negotiated, or 
executed within the United States.
    \1424\ Given the ability of non-U.S. persons under our proposed 
rule to exclude certain transactions from their de minimis 
calculation, we expect that potentially all 166 of the entities 
identified in our Intermediary Definitions Adopting Release as 
likely to perform the dealer analysis may engage in analysis to 
determine whether they are U.S. persons. Because our proposed 
definition of U.S. person is relatively straightforward to apply, we 
believe that any market participant should be able readily to 
identify its U.S.-person status by referring to its residence 
status, its principal place of business, or its organizational 
documents. To the extent that an entity seeks the assistance of 
outside counsel, we expect that the cost of this analysis will be 
encompassed in the $25,000 in assessment costs that we have 
estimated in the Intermediary Definitions Adopting Release. See 
Intermediary Definitions Adopting Release, 77 FR 30732.
    \1425\ In the Intermediary Definitions Adopting Release, we 
estimated that the one-time programming costs of $13,692 per entity 
and annual ongoing assessment costs of $15,268. See Intermediary 
Definitions Adopting Release, 77 FR 30734-35 and accompanying text 
(providing an explanation of the methodology used to estimate these 
costs). The hourly cost figures in the Intermediary Definitions 
Adopting Release for the positions of Compliance Attorney, 
Compliance Manager, Programmer Analyst, and Senior Internal Auditor 
were based on data from SIFMA's Management & Professional Earnings 
in the Securities Industry 2010. For purposes of the cost estimates 
in this release, we have updated these figures with more recent data 
as follows: the figure for a Compliance Attorney is $310/hour, the 
figure for a Compliance Manager is $269/hour, the figure for a 
Programmer Analyst is $234/hour, and the figure for a Senior 
Internal Auditor is $217/hour, each from SIFMA's Management & 
Professional Earnings in the Securities Industry 2011, modified by 
SEC staff to account for an 1800-hour work-year and multiplied by 
5.35 to account for bonuses, firm size, employee benefits, and 
overhead. We also have updated the Intermediary Definitions Adopting 
Release's $464/hour figure for a Chief Financial Officer, which was 
based on 2011 data. Using the consumer price index to make an 
inflation adjustment to this figure, we have multiplied the 2011 
estimate by 1.02 and arrived at a figure of $473/hour for a Chief 
Financial Officer in 2012. Incorporating these new cost figures, the 
updated one-time programming costs based upon our assumptions 
regarding the number of hours required in the Intermediary 
Definitions Adopting Release would be $15,287 per entity, i.e., 
(Compliance Attorney at $310 per hour for 2 hours) + (Compliance 
Manager at $269 per hour for 8 hours) + (Programmer Analyst at $234 
per hour for 40 hours) + (Senior Internal Auditor at $217 per hour 
for 8 hours) + (Chief Financial Officer at $473 per hour for 3 
hours) = $15,287, and the annual ongoing costs would be $17,040 per 
entity, i.e., ((Senior Internal Auditor at $217 per hour for 16 
hours) + Compliance Attorney at $310 per hour for 4 hours) + 
(Compliance Manager at $269 per hour for 4 hours) + (Chief Financial 
Officer at $473 per hour for 4 hours) + (Programmer Analyst at $234 
per hour for 40 hours) = $17,040.
---------------------------------------------------------------------------

    The Commission preliminarily believes that market participants 
would also incur costs arising from the need to identify and maintain 
records concerning the U.S.-person status of their counterparties and 
the location of their transactions. We anticipate that potential 
dealers are likely to request representations from their transaction 
counterparties to determine the counterparties' U.S.-person status and 
whether the transaction was conducted within the United States. 
Therefore, the Commission preliminarily believes that the assessment 
costs associated with determining the status of counterparties and the 
location of transactions should be primarily one-time costs of 
establishing a practice or compliance procedure of requesting and 
collecting representations from trading counterparties and maintaining 
the representations collected as part of the recordkeeping procedures 
and limited ongoing costs associated with requesting and collecting 
representations. The Commission preliminarily believes that such one-
time costs would be approximately $15,160.\1426\ The Commission 
preliminarily believes that requesting and collecting representations 
would be part of the standardized transaction process reflected in the 
policies and procedures described above regarding security-based swap 
sales and trading practices and should not result in separate 
assessment costs.\1427\
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    \1426\ This estimate is based on estimated 40 hours of in-house 
legal or compliance staff's time to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representation may be 
built into form of standardized trading documentation. Based upon 
data from SIFMA's Management & Professional Earnings in the 
Securities Industry 2012 (modified by the Commission staff to 
account for an 1800-hour-work-year and multiplied by 5.35 to account 
for bonuses, firm size, employee benefits, and overhead), the staff 
estimates that the average national hourly rate for an in-house 
attorney is $379.
    \1427\ There will be ongoing costs associated with processing 
representations received from counterparties, including additional 
due diligence and verification to the extent that a counterparty's 
representation is contrary to or inconsistent with the knowledge of 
the collecting party. The Commission believes that these would be 
compliance costs encompassed within programmatic costs associated 
with the security-based swap dealer definition.
---------------------------------------------------------------------------

    The Commission also considers it likely that market participants 
will implement modifications to the system described above to monitor 
counterparty status for purposes of future trading of

[[Page 31141]]

security-based swaps. The Commission preliminarily believes that there 
would be one-time programming costs associated with the system 
implementation by market participants to maintain a record of 
counterparty status for purposes of performing the dealer de minimis 
calculation and estimates such programming costs to be $12,870.\1428\
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    \1428\ This is based on an estimate of the time required for a 
programmer analyst to modify the software to track the U.S. person 
status of a counterparty and to record and classify whether a 
transaction is a transaction conducted within the United States, 
including consultation with internal personnel, and an estimate of 
the time such personnel would require to ensure that these 
modifications conformed to proposed definitions of U.S. person and 
transaction conducted within the United States. Using the estimated 
hourly costs described above, we estimate the costs as follows: 
(Compliance Attorney at $310 per hour for 2 hours) + (Compliance 
Manager at $269 per hour for 4 hours) + (Programmer Analyst at $234 
per hour for 40 hours) + (Senior Internal Auditor at $217 per hour 
for 4 hours) + (Chief Financial Officer at $473 per hour for 2 
hours) = $12,870. See note 1425, supra (for source of the estimated 
per hour costs).
---------------------------------------------------------------------------

    Based on the foregoing discussion, the Commission estimates the 
total one-time per-entity costs for non-U.S. persons engaged in dealing 
activity within the United States associated with the de minimis 
calculation would be $43,317.\1429\ Estimated annual ongoing costs 
would be $17,040. Based on available data provided by the DTCC-TIW, we 
preliminarily believe that as many as 70 of the firms with over $2 
billion in total worldwide notional trading activity in single-name CDS 
during 2011 may be non-U.S. persons under our proposed rule and thus 
will likely incur these costs. Assuming that each of these 70 entities 
perceived the need to monitor the status of its counterparties and the 
location of its transactions to perform the dealer de minimis 
calculation, we preliminarily believe that the total annual one-time 
industry-wide costs associated with establishing such systems would 
amount to $3,032,190. Total annual ongoing costs would amount to 
$1,192,800.
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    \1429\ The estimated one-time costs of $43,317 represent the 
costs for programming a system to monitor the dealing activity of a 
non-U.S. person ($15,287), the costs for programming a system to 
monitor the U.S.-person status of its counterparties and the 
location of its dealing activity ($12,870), and the costs for 
establishing a practice or compliance procedure of requesting and 
collecting representations from trading counterparties and 
maintaining the representations collected as part of the 
recordkeeping procedures ($15,160).
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    In addition to assessment costs discussed above associated with 
determining the volume of U.S.-facing transactions, market participants 
would also incur assessment costs relating to performing the analysis 
as to whether certain security-based swaps involve dealing activity. At 
the same time, some non-U.S. persons that establish such systems may be 
expected to forgo the costs of performing the dealing activity 
analysis. As noted above, we assumed in the Intermediary Definitions 
Adopting Release that only entities with more than $2 billion in 
security-based swap transactions over the previous 12 months would be 
likely to engage in the full dealer analysis. We believe that it 
similarly is unlikely that non-U.S. persons with less than $2 billion 
in U.S.-facing security-based swap transactions over the previous 12 
months would engage in the dealer analysis. Available data from the 
Trade Information Warehouse shows that 39 of these 70 non-U.S. persons 
had total U.S.-facing security-based swap transactions under $2 billion 
in 2011. We preliminarily believe that, under our proposed rule, these 
entities would not engage in the full dealer analysis and thus would 
not be likely to incur the $25,000 in assessment costs described in the 
Intermediary Definitions Adopting Release, reducing the estimated 
assessment costs in that release by approximately $975,000. The 
combined effect of our proposed rule on non-U.S. persons, therefore, 
should result in a net increase in assessment costs over those 
estimated in the Intermediary Definitions Adopting Release of 
approximately $2,057,190.\1430\
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    \1430\ As noted above, in the Intermediary Definitions Adopting 
Release, we estimated total annual one-time industry-wide costs 
associated with the dealer analysis to be $4.2 million. See note 
1422, supra. According to the analysis above, non-U.S. persons are 
likely to incur additional annual one-time industry-wide costs of 
$3,032,190 associated with new systems to monitor the volume of 
dealing activity, while annual one-time industry-wide costs 
associated with the dealing activity analysis may decline by 
$975,000. We therefore estimate the annual one-time industry-wide 
costs associated with the dealer analysis for both U.S. persons and 
non-U.S. persons to be $6,257,190 ($4,200,000 + $3,032,190-$975,000 
= $6,257,190), or $2,057,190 more than our initial estimate of $4.2 
million.
    We have not separately estimated the assessment costs that 
market participants may incur associated with identifying the 
special entity status of their counterparties. The Intermediary 
Definitions Adopting Release noted that the de minimis threshold for 
dealing activity involving special entities would cause market 
participants to incur costs independent of those associated with the 
general de minimis threshold based on the CDS Data Analysis, which 
showed that all entities engaged in security-based swap transactions 
with special entities appeared to also engage in more than $8 
billion in security-based swap transactions in 2011. See CDS Data 
Analysis at 21 n.8 and Intermediary Definitions Adopting Release, 77 
FR 30732 n.1510.
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(b) Major Security-Based Swap Participants--``Substantial Position'' 
and ``Substantial Counterparty Exposure'' Thresholds
    Proposed Rule 3a67-10(c) and the proposed interpretive guidance 
regarding the attribution of guaranteed positions, which is discussed 
below, together identify the security-based swap positions that 
entities would be required to include in determining whether they 
exceed the major security-based swap participant thresholds that were 
established in the Intermediary Definitions Adopting Release. We 
preliminarily believe that entities that perceive the need to perform 
the threshold calculations associated with the major security-based 
swap definition will incur only relatively minor incremental costs to 
those described in the Intermediary Definitions Adopting Release as a 
result of our proposed rule and interpretive guidance applying these 
thresholds in the cross-border context.
    In the Intermediary Definitions Adopting Release, we estimated that 
certain market participants could be expected to incur costs in 
connection with the determination of whether they have a ``substantial 
position'' in security-based swaps or pose ``substantial counterparty 
exposure'' in connection with security-based swaps in connection with 
their determination as to whether or not they are a major security-
based swap participant.\1431\
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    \1431\ See Intermediary Definitions Adopting Release, 77 FR 
30734-36.
---------------------------------------------------------------------------

    Based on the data available at that time, we estimated that as many 
as 12 entities might perceive the need to perform these calculations, 
given the size of their security-based swap positions.\1432\ We further 
estimated that each of these entities would likely incur annual one-
time costs of $15,287 and ongoing annual costs of $17,040 in monitoring 
these positions and performing the necessary calculations.\1433\
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    \1432\ See Intermediary Definitions Adopting Release, 77 FR 
30734.
    \1433\ See note 1425, supra.
---------------------------------------------------------------------------

    Our proposal would require non-U.S. persons to include in these 
calculations only transactions they enter into directly with, or that 
they guarantee, that involve U.S.-person counterparties. As noted 
above, Proposed Rule 3a67-10(c) would require a non-U.S. person that 
performs the major security-based swap participant calculation to 
identify the U.S.-person status of its counterparties. Our proposed 
interpretive guidance would further clarify that a non-U.S. person must

[[Page 31142]]

include in its calculation all transactions of other entities that it 
guarantees where a U.S. person has direct recourse to the non-U.S. 
person performing the major security-based swap participant 
calculation.\1434\ A non-U.S. person performing this calculation would 
therefore be required to identify the U.S.-person status of its 
counterparties, and the counterparties of transactions it guarantees, 
and monitor the positions arising from transactions involving U.S. 
person as counterparties.
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    \1434\ Our proposed interpretive guidance also would clarify 
that U.S. persons performing the major security-based swap 
participant calculation must include all positions entered into by 
other parties where it guarantees the transaction. Because this 
interpretive guidance would not change the scope of the transactions 
that a U.S. person must consider in performing this calculation, we 
do not expect it to have any effect on the assessment costs incurred 
by such persons.
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    The Commission preliminarily believes that market participants 
would request representations from their transaction counterparties to 
determine the U.S. person status of their counterparties. Therefore, 
the Commission preliminarily believes that the one-time assessment 
costs associated with the counterparty status should be limited to the 
costs of establishing a practice or compliance procedure or requesting 
and collecting representations from trading counterparties and 
maintaining the representations collected as part of the recordkeeping 
procedures. The Commission preliminarily believes that such assessment 
costs would be approximately $15,160.\1435\
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    \1435\ This estimate is based on estimated 40 hours of in-house 
legal or compliance staff's time to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representation may be 
built into form of standardized trading documentation. Based upon 
data from SIFMA's Management & Professional Earnings in the 
Securities Industry 2012 (modified by the SEC staff to account for 
an 1800-hour-work-year and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead), the staff 
estimates that the average national hourly rate for an in-house 
attorney is $379.
    Similar to our analysis of the assessment costs associated with 
the de minimis exception relating to the definition of the security-
based swap dealer, we preliminarily believe that requesting and 
collecting representations would be part of the standardized 
transaction process reflected in the policies and procedures 
described above regarding security-based swap sales and trading 
practices. There would be ongoing costs associated with processing 
representations received from counterparties, including additional 
due diligence and verification to the extent that a counterparty's 
representation is contrary to or inconsistent with the knowledge of 
the collecting party. The Commission believes that these costs would 
be compliance costs encompassed within programmatic costs associated 
with the major security-based swap participant definition.
---------------------------------------------------------------------------

    The Commission also considers it likely that market participants 
will implement systems to keep track of counterparty status for 
purposes of future trading of security-based swaps. The Commission 
preliminarily believes that there would be one-time programming costs 
associated with the system implementation by market participants to 
maintain a record of counterparty status for purposes of assessing the 
major security-based swap participant status and estimates such 
programming costs to be $12,870.\1436\ Therefore, the Commission 
estimates the total one-time costs per entity associated with the 
proposed Rule 3a67-10(c) and the interpretive guidance regarding 
guarantee could be $28,030.\1437\ This is in addition to the estimate 
of ongoing annual costs of $17,040 associated with performing the major 
security-based swap participant threshold calculations and the one-time 
programming costs of $15,287 related to establishing an automated 
system or modifying the existing automated system to perform the major 
participant threshold calculations as described in the Intermediary 
Definitions Adopting Release.\1438\
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    \1436\ This is based on an estimate of the time required for a 
programmer analyst to modify the software to track the U.S. person 
status of a counterparty and to record and classify whether a 
transaction is a transaction conducted within the United States, 
including consultation with internal personnel, and an estimate of 
the time such personnel would require to ensure that these 
modifications conformed to proposed definitions of U.S. person and 
transaction conducted within the United States. Using the estimated 
hourly costs described above, we estimate the costs as follows: 
(Compliance Attorney at $310 per hour for 2 hours) + (Compliance 
Manager at $269 per hour for 4 hours) + (Programmer Analyst at $234 
per hour for 40 hours) + (Senior Internal Auditor at $217 per hour 
for 4 hours) + (Chief Financial Officer at $473 per hour for 2 
hours) = $12,870. For the source of the estimated per hour costs. 
See note 1263, supra.
    \1437\ The $28,030 per entity cost is derived from $15,160 cost 
of establishing a written compliance policy and procedures regarding 
obtaining counterparty representations and plus $12,870 one-time 
programming cost relating to system implementation to maintain 
counterparties representations and track the U.S. person status of 
each counterparty in the system.
    \1438\ See note 1433, supra.
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Request for Comment
    The Commission generally requests comment about our preliminary 
estimates of the number and composition of dealing entities and major 
participants that may be required to register as security-based swap 
dealers as a result of the proposed application of the de minimis 
exception in the cross-border context. The Commission also requests 
comments about our estimates of the effect of our proposed approach on 
programmatic costs and benefits and assessment costs. The Commission 
requests that commenters provide data and sources of data to support 
any comments.
     Are the Commission's estimates regarding the number of 
U.S.-person and non-U.S. persons active as dealers in security-based 
swaps, both in the United States and worldwide, and the number of these 
that engage in security-based swap dealing transactions above the de 
minimis threshold reasonable in light of the proposed rule?
     Are the Commission's estimates of assessment costs 
associated with the dealer registration analysis, including the costs 
associated with the determination of the status of counterparties as 
U.S. persons, non-U.S. persons, foreign branches and the costs 
associated with the determination of transactions conducted within the 
United States reasonable?
     Are the Commission's estimates of the number of U.S. 
persons and non-U.S. persons whose security-based swap positions may 
rise to the major security-based swap participant level reasonable, 
both in the United States and worldwide?
     Are the Commission's estimates of the number of U.S. 
persons and non-U.S. persons whose security-based swap positions may be 
attributed to other persons because of guarantees and whether such 
attribution may result in such persons becoming major security-based 
swap participants reasonable?
     Is the Commission's estimate that the revisions included 
in re-proposed Form SBSE and re-proposed Form SBSE-A would not 
significantly impact the costs and benefits associated with the rules 
and forms to facilitate registration accurate?
     Has the Commission accurately explained the relationship 
between the proposed application of the dealer de minimis threshold 
(including the definition of U.S. person) and the programmatic effects 
and the programmatic costs and benefits of our dealer definition?
     Has the Commission appropriately accounted for the 
programmatic benefits and costs of subjecting (or not subjecting) 
certain entities to the security-based swap dealer or major security-
based swap participant requirements under the proposed approach?
     Does the Commission's analysis of the proposed treatment 
of non-U.S. persons who are guaranteed by U.S. persons adequately 
reflect the expected programmatic costs and benefits associated with 
this treatment?
     Has the Commission properly analyzed the programmatic 
costs and benefits associated with requiring U.S. persons to include 
dealing activity

[[Page 31143]]

conducted through a foreign branch in their dealer de minimis 
calculations?
     Has the Commission properly analyzed the programmatic 
costs and benefits associated with permitting non-U.S. persons not to 
count dealing transactions with a foreign branch toward their de 
minimis threshold?
     Is the Commission's estimate of the assessment costs 
associated with determining whether one falls within the security-based 
swap dealer or major security-based swap participant definitions 
accurate? Do the Commission's estimates reflect reasonable assumptions 
about the types of systems that would be necessary to perform the 
required analyses?
     Does the Commission's estimate of assessment costs 
appropriately reflect the cost to an entity of determining its U.S.-
person status? Does it appropriately reflect the cost of determining 
whether its counterparty is a U.S. person or is engaging in a 
transaction conducted within the United States?
     Has the Commission accurately estimated the costs 
associated with identifying and maintaining records concerning the 
U.S.-person status of counterparties and the location of transactions?
3. Alternatives Considered
(a) De Minimis Exception
    As stated above, market participants, foreign regulators and other 
interested parties have provided views on the application of Title VII 
requirements in the cross-border context through written comment 
letters (on other proposed rulemakings by the Commission and on the 
cross-border interpretive guidance proposed by the CFTC) and meetings 
with the Commission and our staff.\1439\ In particular, commenters have 
provided their views on how the term ``U.S. person'' should be defined 
and how the de minimis exception in the security-based swap dealer 
definition should be applied in the cross border context.\1440\ These 
comments have been informative in the Commission's development of our 
proposed approach to the application of the de minimis exception in the 
cross-border context, and our understanding of the economic 
consequences of the proposed U.S. person definition and the proposed de 
minimis exception. In this section, we briefly describe our analysis of 
the economic impact of these alternative approaches suggested by the 
commenters.
---------------------------------------------------------------------------

    \1439\ See Section I, supra.
    \1440\ See, e.g., Cleary Letter IV at 2, 6-9; Davis Polk Letter 
I at 6 n.6.
---------------------------------------------------------------------------

i. Alternatives to the Proposed Definition of U.S. Person
    The proposed definition of U.S. person plays a central role in the 
application of Title VII in the cross-border context. It directly 
affects the number of entities that will have to register as security-
based swap dealers: A potential security-based swap dealer performing 
its de minimis calculation must first determine its own U.S.-person 
status and then, if it is a non-U.S. person, identify the U.S.-person 
status of its counterparties in transactions arising out of its dealing 
activity.\1441\ We also propose to use the U.S. person definition in 
determining the applicability of certain transaction-level requirements 
under Title VII.\1442\ As a result, the U.S. person definition in the 
proposed rule directly affects the scope of the application of Title 
VII requirements to the cross-border security-based swap market and, in 
particular, the number of entities that will be required to register as 
security-based swap dealers.\1443\
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    \1441\ See proposed Rule 3a71-3(b) under the Exchange Act, as 
discussed in Section III.B.3, supra.
    \1442\ See Sections VIII--X, supra (discussing the application 
of the reporting and public dissemination of security-based swap 
information, mandatory clearing, and mandatory trade execution 
requirements). As further discussed in these sections, the U.S. 
person definition plays a significant role in determining whether a 
particular transaction is subject to transaction-level requirements.
    \1443\ See Section XV.C.1, supra (discussing economic analysis 
of the proposed de minimis exception).
---------------------------------------------------------------------------

    As explained above, our proposed definition of U.S. person is 
designed to identify those market participants whose security-based 
swap activity may be particularly likely to affect the U.S. market in a 
manner relevant to the concerns of Title VII or that may warrant the 
protections of Title VII. In our view, the security-based swap activity 
of a person that has its place of residence, incorporation, or its 
principal place of business within the United States may be 
particularly likely to warrant the application of Title VII because its 
security-based swap activity is likely to result in risks being borne 
by the person within the United States or because its activity raises 
other concerns that Title VII is intended to address, such as the 
stability or transparency of the U.S. financial system or the 
protection of counterparties. Consistent with this view, we have 
proposed a definition of U.S. person that looks to the location of the 
person's residence, incorporation, or principal place of business.
    In developing our proposed definition of U.S. person, we have 
considered two alternative definitions: One suggested by commenters, 
and one proposed by the CFTC in its own cross-border guidance 
proposal.\1444\ In the discussion that follows, we briefly describe 
these alternatives and the related benefits and costs. A more in-depth 
analysis of the programmatic costs and benefits of these alternatives 
will continue in the following sections, in which we analyze the role 
that these definitions play in the specific application of our proposed 
approach to the de minimis calculations to different types of entities.
---------------------------------------------------------------------------

    \1444\ See, e.g., Cleary Letter IV at 2; SIFMA Letter at 5; see 
also CFTC Cross-Border Proposal, 77 FR 41218) (discussing the 
definition of U.S. person proposed by the CFTC).
---------------------------------------------------------------------------

    Several commenters suggested that we consider the definition of 
U.S. person found in Regulation S of the Securities Act, noting that at 
least some market participants would find the definition familiar and 
easy to apply.\1445\ As explained above, we declined to take this 
approach because we believe that the U.S. person definition in 
Regulation S addresses specific concerns associated with the offshore 
offering of unregistered securities that are different from the 
concerns of Title VII.\1446\ Regulation S, among other things, provides 
safe harbors for offshore offerings of unregistered securities, and a 
central concern of Regulation S is ensuring that unregistered 
securities offered abroad do not come to rest within the United 
States.\1447\ Given this concern, the definition of U.S. person used in 
the Regulation S safe harbors appropriately focuses on the location of 
the person making the decision to purchase unregistered 
securities.\1448\
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    \1445\ See SIFMA Letter at 5. Regulation S provides, among other 
things, certain safe harbors regarding registration requirements as 
they relate to the offshore offering of securities. See Offshore 
Offers and Sales, Final Rules, 55 FR 18306 (May 2, 1990). Under 
Regulation S, an entity's U.S.-person status is a relevant factor in 
determining whether certain of the safe harbors are available to a 
specific offering or sale of securities. See 17 CFR 230.902(o) 
(defining ``U.S. person'').
    \1446\ See Section III.B.4, supra.
    \1447\ See Regulation S Adopting Release, 55 FR 18308. Whether 
securities come to rest in the United States or abroad is relevant 
to whether the interests served by the registration requirement are 
affected by the securities offering.
    \1448\ See 17 CFR 230.902(o).
---------------------------------------------------------------------------

    On the other hand, as already noted, Title VII addresses the 
potential impact of swap and security-based swap transactions on the 
stability of the U.S. financial system, market transparency, and 
counterparty protection.\1449\ In this

[[Page 31144]]

context and in light of the nature of the risk arising from such 
transactions, the location of the person making the decision to enter 
into a security-based swap appears to us to be less relevant than the 
location of the person bearing the risk of the transaction. For 
example, as discussed further below, if the definition of U.S. person 
in Regulation S were used to determine whether a potential security-
based swap dealer should be registered or whether a security-based swap 
should be subject to Title VII transaction-level requirements, a dealer 
may not be required to register as a security-based swap dealer based 
on its dealing activity conducted through its foreign branch, despite 
the fact that such transactions generally create the same risks for the 
dealing entity as any other security-based swap activity that it 
conducts directly from its headquarters. Excluding foreign branches 
from the definition of U.S. person could result in U.S. banks engaging 
in significant levels of security-based swap dealing activity, and 
bearing the risk of such activity, entirely outside the requirements of 
Title VII, including the registration requirements. This result would 
reduce the programmatic benefits that the Title VII security-based swap 
dealer definition or the security-based swap dealer registration 
requirement is intended to achieve, which are to subject to regulation 
those dealing entities that we believe are likely, by virtue of 
engaging in dealing activity within the United States, to pose risk to 
the U.S. financial system that Title VII was intended to 
regulate.\1450\ Therefore, the definition of U.S. person in Regulation 
S, with its focus on the location of the person making the investment 
decision and not on the person bearing the risk of the transaction, is 
ill-suited to address these types of concerns.
---------------------------------------------------------------------------

    \1449\ See note 4, supra.
    \1450\ Similarly, under the definition of U.S. person in 
Regulation S, certain dealers may not be required to register as a 
security-based swap dealer based on their dealing activity with an 
investment manager located outside the United States who manages a 
discretionary account on behalf of a U.S. person, even though the 
resulting transactions are with that U.S. person and that U.S. 
person bears the risk arising out of that transaction.
---------------------------------------------------------------------------

    We also considered the interpretation of U.S. person proposed by 
the CFTC in its cross-border interpretive guidance.\1451\ The CFTC 
definition resembles our proposed definition in many respects, as it 
also focuses on the location of the person bearing the risk of the 
transaction. However, we have declined to include in our proposed 
definition certain categories of entities (or their equivalent in the 
security-based swap market) that the CFTC has defined as U.S. persons. 
Most significant of these are (i) entities ``in which the direct or 
indirect owners thereof are responsible for the liabilities of such 
entity and one or more of such owners is a U.S. person''; (ii) certain 
investment vehicles, wherever organized or incorporated, ``of which a 
majority ownership is held, directly or indirectly, by a U.S. person;'' 
and (iii) certain investment vehicles ``the operator of which would be 
required to register as a commodity pool operator with the CFTC.'' 
\1452\ The Commission has preliminarily determined not to include 
within the definition of ``U.S. person'' any entity that is not 
resident, organized, or incorporated within the United States or does 
not have its principal place of business in the United States, 
regardless of any ownership interest by a U.S. person.
---------------------------------------------------------------------------

    \1451\ See CFTC Cross-Border Proposal, 77 FR 41218.
    \1452\ Id.
---------------------------------------------------------------------------

    We are proposing this approach because we preliminarily believe 
that Title VII is primarily concerned about security-based swap 
activity that raises the types of concerns--including the stability of 
the U.S. financial system, swap market transparency, and counterparty 
protection--within the United States that Title VII was intended to 
address.\1453\ If U.S. residents or U.S.-based entities suffer losses 
from their investments in investment vehicles or their investments in 
entities organized, incorporated, or having the principal place of 
business located outside the United States, such losses are generally 
limited to their investments in the form of equity or debt securities. 
Such investment risks are not related to security-based swaps, and the 
protection of U.S. investors with respect to investments in equity, 
debt securities, or investment vehicles, as well as investment 
management or investment advisory activity, is addressed by other 
provisions of U.S. securities law pertaining to issuances and offerings 
of equity or debt securities.
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    \1453\ See Section III.B.3, supra. As noted above, we do not 
believe that Title VII's security-based swap dealer registration 
requirements are the appropriate mechanism for addressing the 
potential for spillover effects caused by non-U.S. persons that 
engage in security-based swap dealing activity or other security-
based swap activity wholly outside the United States.
---------------------------------------------------------------------------

    Therefore, the Commission does not believe that it would advance 
the programmatic benefits of Title VII to include foreign entities or 
foreign investment vehicles in the U.S. person definition because U.S.-
based entities or U.S. residents own them or because a U.S.-based 
entity is responsible for the foreign entities' liabilities (as 
proposed by the CFTC). Furthermore, given our focus on reducing risk 
to, and promoting transparency in, the U.S. security-based swap market, 
we do not think the U.S.-person status of a commodity pool operator or 
fund adviser (as opposed to the fund actually entering into the 
transaction) is in itself relevant in determining whether security-
based swap activity occurs within the United States and should 
therefore be subject to the full range of Title VII requirements 
because those entities do not bear the risk of the transactions.\1454\
---------------------------------------------------------------------------

    \1454\ We also note that, to the extent that the commodity pool 
operator or fund advisor enters into a security-based swap 
transaction that is conducted within the United States, Title VII 
would generally apply to that transaction. See proposed Rule 3a71-
3(a)(5) under the Exchange Act (defining ``transaction conducted 
within the United States''), as discussed in Section III.B.5, supra. 
However, proposed Rules 3Ca-3(b)(2) and 3Ch-1(b)(2) would not apply 
the mandatory clearing and mandatory trade execution requirements to 
transactions between two non-U.S. persons who are not security-based 
swap dealers and whose performances under security-based swaps are 
not guaranteed by a U.S. person, even though such transactions are 
conducted in the United States.
---------------------------------------------------------------------------

    Finally, the Commission preliminarily believes that the alternative 
definition of U.S. person in Regulation S and the definition of U.S. 
person proposed by the CFTC would likely cause potential security-based 
swap dealers and end users to incur higher assessment costs. For 
example, Regulation S classifies accounts differently depending on 
whether they are discretionary or non-discretionary,\1455\ while our 
proposed definition would focus on the status of the counterparty to a 
security-based swap transaction.\1456\ The Regulation S definition 
specifies the U.S. person status of more types of entities than does 
our proposed definition and would introduce a level of complexity into 
the definition that is not relevant to the purposes of Title VII. 
Similarly, the CFTC's proposed interpretation likely would increase 
assessment costs compared to our proposed definition by, for example, 
requiring investment funds or their counterparties to determine the 
U.S.-person status of the direct and indirect owners of such funds. It 
may be operationally costly and otherwise impracticable to identify the 
indirect ownership of an investment vehicle given the legal structure 
of the

[[Page 31145]]

investment vehicle and the beneficial ownership in book-entry form, and 
it is unnecessary as those entities bear risks only to the amount of 
their investment (as opposed to the open-ended risks that can be 
associated with security-based swap positions). We expect that this 
complexity could significantly raise assessment costs for market 
participants.
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    \1455\ Cf. 17 CFR 230.902(o)(1)(vi), (vii) (defining certain 
types of accounts to be U.S. persons) with 17 CFR 230.902(o)(2) 
(defining certain types of accounts not to be U.S. persons).
    \1456\ Proposed Rule 3a71-3(a)(7)(iii) under the Exchange Act 
(defining an account as a U.S. person by looking at the status of 
the account holder or owner), as discussed in Section III.B.4, 
supra.
---------------------------------------------------------------------------

    Based on the above, we preliminarily believe that our proposed 
definition appropriately focuses on the types of entities that are 
likely to be actively engaged in the security-based swap market and on 
the specific categories of such entities whose security-based swap 
activity has the potential to impact the U.S. financial system. We do 
not believe that following either the Regulation S approach or the 
CFTC's proposed interpretation would achieve the benefits of Title VII. 
We also believe that either approach would result in higher assessment 
costs.\1457\
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    \1457\ We will discuss the relative costs and benefits of these 
alternatives in more detail in the context of our analysis of 
alternatives to proposed rules that use the U.S. person definition 
in the following sections.
---------------------------------------------------------------------------

ii. Alternatives to the Proposed Rule Regarding Application of the De 
Minimis Exception
    As described above, our proposal also includes a proposed rule 
regarding the application of the de minimis exception in the cross-
border context.\1458\ This rule prescribes how a person's transactions 
arising out of its dealing activity must be included in its de minimis 
calculation, depending on whether it is a U.S. person or non-U.S. 
person. The definition of U.S. person, described above, is central to 
this rule, as it is used to identify both the status of the person 
engaged in security-based swap dealing activity and, with respect to a 
non-U.S. person engaged in dealing activity, the status of its 
counterparties in transactions connected to dealing activity.
---------------------------------------------------------------------------

    \1458\ See Proposed Rule 3a71-3(b) under the Exchange Act, as 
discussed in Section III.B.3, supra. See also 17 CFR 240.3a71-2.
---------------------------------------------------------------------------

    In this section, we will describe certain alternatives to our 
proposed application of the de minimis exception and explain how these 
alternatives would have affected the programmatic costs and benefits of 
Title VII. Some of these alternatives have been considered in our 
discussions of the U.S. person definition.
a. Calculation of U.S. Persons' Transactions for De Minimis Exception
    Our proposed approach would require a U.S. person to count toward 
the de minimis threshold all transactions it enters into in a dealing 
capacity, including those it conducts through a foreign branch, 
regardless of the location of the counterparty to the 
transaction.\1459\ Some commenters suggested that the Commission lacks 
the authority to subject the dealing activity of a foreign branch of a 
U.S. bank to Title VII, including our registration requirements, to the 
extent that it does business only with counterparties that are not U.S. 
persons outside the United States.\1460\ As noted above, commenters 
generally took the view that the Commission should consider using the 
Regulation S definition of U.S. person for purposes of applying the de 
minimis exception in the cross border context, as Regulation S 
specifically excludes from its definition of U.S. person foreign 
branches of U.S. banks.\1461\ Presumably, under the approach suggested 
by some commenters, the headquarters of a U.S. bank would be designated 
a U.S. person, whereas each of its foreign branches would be classified 
as a separate non-U.S. person for purposes of Title VII.
---------------------------------------------------------------------------

    \1459\ See proposed Rule 3a71-3(b)(1)(i) under the Exchange Act, 
as discussed in Section III.B.3, supra.
    \1460\ See, e.g., Sullivan & Cromwell Letter at 2.
    \1461\ See notes 218 and 219, supra.
---------------------------------------------------------------------------

    For the reasons already noted above,\1462\ we are not proposing to 
follow this approach. Because of the nature of the risks posed by 
security-based swaps, which are borne by the entire legal entity even 
if the transaction is entered into by a foreign branch of such entity, 
consistent with the Commission's approach to the meaning of ``person'' 
in the security-based swap dealer definition, as discussed above,\1463\ 
we are proposing to define the term ``U.S. person'' to include the 
entire entity, including its foreign branches. In addition, such 
separation is inconsistent with the focus in Title VII on the effect of 
a person's dealing activity on the U.S. financial system, including the 
risks such person bears as a result of its dealing activity. Although 
we recognize that certain U.S.-based banks have chosen to conduct some 
or all of their foreign security-based swap business through foreign 
branches,\1464\ we preliminarily believe that, given Title VII's goal 
of addressing potential dealing risk to the U.S. financial system 
caused by security-based swap dealing activity, the de minimis 
exception should apply to all security-based swap dealing activity of a 
person that has its principal place of business within, or is 
incorporated or organized within, the United States, regardless of 
which part of such person carries out such dealing activity wherever 
its counterparties are located, even if elements of that activity occur 
outside the United States.
---------------------------------------------------------------------------

    \1462\ See Section III.B.3, supra
    \1463\ See Section III.B.4, supra.
    \1464\ See Sections II.A.2 and III.B.6, supra (discussing the 
dealing structures used by U.S.-based entities).
---------------------------------------------------------------------------

    We preliminarily believe that the alternative approach suggested by 
commenters could reduce the programmatic benefits of security-based 
swap dealer registration under Title VII and the ensuing substantive 
requirements applicable to registered security-based swap dealers if 
the de minimis calculation for U.S. persons engaged in dealing activity 
does not include the entire volume of such persons' dealing activity. 
Drawing a distinction between the branches, desks, or offices of a U.S. 
person and the entity as a whole would be inconsistent with the fact 
that the U.S. person as a whole bears the risk of all security-based 
swap transactions that it enters into, including those transactions 
conducted through a foreign branch or office with non-U.S. person 
counterparties located outside the United States.\1465\
---------------------------------------------------------------------------

    \1465\ See Section II.A.3, supra (discussing the example of AIG 
FP).
---------------------------------------------------------------------------

    Even if the headquarters of a U.S. bank were already registered by 
virtue of its own security-based swap dealing activity in the United 
States, the commenters' suggested approach would presumably allow the 
same bank, through its foreign branches, to engage in unlimited dealing 
activity with non-U.S. persons outside the United States without 
registering those branches.\1466\ We do not view such disparate 
regulatory treatment of two parts of the same legal entity to be 
consistent with the purposes of Title VII, particularly given that this 
approach would appear to place entirely outside the scope of regulation 
under Title VII transactions that pose risks to a U.S. bank that are 
indistinguishable from those arising from transactions done directly 
from the home office of that bank.\1467\ We believe that excluding 
transactions conducted through foreign branches from the de minimis 
calculations would not achieve the programmatic benefits intended by

[[Page 31146]]

the Title VII requirements because it would leave unaddressed risks 
associated with security-based swap dealing activity that occurs within 
the United States and therefore raises the types of concerns with 
respect to the U.S. market that Title VII's dealer requirements were 
intended to address.
---------------------------------------------------------------------------

    \1466\ For example, treating the branch differently may remove 
the branch entirely from Title VII's rules. This could prevent 
regulation of capital adequacy and other risk mitigating 
requirements, even though all of the risk from the transaction is 
residing within the entity as a whole, creating risk for the U.S. 
financial system.
    \1467\ Security-based swap activity conducted through a foreign 
branch poses risks to the entire entity to which the branch belongs 
that are generally indistinguishable from those posed by security-
based swap activity conducted through an office. The experience of 
AIG FP demonstrates that the security-based swap activity of a 
foreign office can lead to the default of the entire entity. See 
Section II.A.3, supra.
---------------------------------------------------------------------------

b. Calculation of Non-U.S. Persons' Transactions for De Minimis 
Exception (including transactions conducted within the United States)
    Our proposed application of the de minimis exception to non-U.S. 
persons engaged in security-based swap dealing activity would require 
them to include in their de minimis calculations any transactions with 
U.S. persons or any transactions otherwise conducted within the United 
States, to the extent they are entered into in a dealing capacity. 
Given the focus on Title VII on the stability and transparency of the 
U.S. financial system and the protection of counterparties,\1468\ we 
preliminarily believe that it is appropriate to require non-U.S. 
persons that engage in dealing activity within the United States and 
therefore are likely to raise these types of concerns to count such 
dealing activity toward their de minimis thresholds. To the extent that 
the aggregate notional amount of transactions arising from a non-U.S. 
person's dealing activity involving U.S. persons or otherwise conducted 
within the United States exceeds the de minimis threshold in the 
trailing 12-month period, we would require a non-U.S. person to 
register as a security-based swap dealer.
---------------------------------------------------------------------------

    \1468\ Pub. L. No. 111-203 Preamble. See Section I and note 4, 
supra.
---------------------------------------------------------------------------

    In developing our proposed application of the de minimis threshold 
to non-U.S. persons, we have considered alternatives suggested by 
commenters or proposed by the CFTC. We declined to incorporate these 
alternatives into our approach.
    Some commenters suggested that a non-U.S. person that engages in 
dealing activity with U.S.-person counterparties through an affiliated 
U.S. intermediary should be permitted to register in a limited capacity 
or should not be required to register as a security-based swap 
dealer.\1469\ Specifically, some commenters suggested that the 
Commission adopt an approach that is modeled on the Commissions' 
existing regimes, permitting non-U.S. security-based swap dealers to 
transact with U.S. persons without registering in the United States if 
those transactions are intermediated by a U.S.-registered security-
based swap dealer.\1470\
---------------------------------------------------------------------------

    \1469\ See, e.g., Soci[eacute]t[eacute] G[eacute]n[eacute]rale 
Letter II; Cleary Letter IV.
    \1470\ See, e.g., Davis Polk Letter I at 11 n.17 (``This model 
is similar to the mode of operation permitted by Rule 15a-6 under 
the Securities Exchange Act of 1934, pursuant to which foreign 
broker-dealers interface with U.S. customers under arrangements with 
affiliated or non-affiliated broker-dealers without themselves 
registering as broker-dealers in the U.S.''); Cleary Letter IV at 22 
(``Accordingly, as one alternative, we suggest that the Commissions 
adopt an approach that is modeled on the Commissions' existing 
regimes, permitting non-U.S. swap dealers to transact with U.S. 
persons without registering in the U.S. if those transactions are 
intermediated by a U.S.-registered swap dealer. This would be 
consistent with the approach adopted by the SEC under Rule 15a-6 and 
prior interpretative precedents with respect to non-U.S. securities 
dealers.'').
---------------------------------------------------------------------------

    We preliminarily believe that the above alternative suggested by 
commenters would potentially reduce the programmatic benefits intended 
by Title VII. To the extent that a non-U.S. person engages in security-
based swap dealing entirely with U.S. persons or within the United 
States, that person's security-based swap activity raises the concerns 
that security-based swap dealer regulation under Title VII intends to 
address: First, the entity's dealing activity raises customer 
protection concerns, which the external business conduct standards and 
segregation requirements of Title VII are intended to address; second, 
the entity's dealing activity raises financial responsibility concerns, 
which Title VII's entity-level requirements applicable to registered 
security-based swap dealers are intended to address; finally, the 
entity's dealing activity raises transparency, regulatory oversight, 
counterparty risk and systemic risk concerns, which Title VII intends 
to address through its regulatory reporting, public reporting, 
mandatory clearing, and mandatory trade execution requirements. 
Although the Commission recognizes that some of these concerns might be 
addressed by regulating the intermediary, as in the broker-dealer 
context, we preliminarily believe that only if the non-U.S. person 
dealer itself is subject to Title VII would it be possible to address 
the entire range of concerns that Title VII dealer regulation is 
intended to address.\1471\
---------------------------------------------------------------------------

    \1471\ See Section III.B.4, supra.
---------------------------------------------------------------------------

    The CFTC has proposed that non-U.S. persons that are guaranteed by 
U.S. persons be required to include in their de minimis calculation all 
transactions carried out in a dealing capacity with any counterparty, 
wherever that counterparty is located, just as a U.S. person acting in 
a dealing capacity would be required to do.\1472\ As discussed above, 
the Commission recognizes that such guarantees of the security-based 
swap transactions of non-U.S. persons may pose risk to the U.S. 
financial system; however, the Commission does not believe that the 
security-based swap dealer regulation in Title VII is the appropriate 
vehicle for regulating the dealing activity of non-U.S. persons 
occurring outside the United States with other non-U.S. persons.\1473\ 
As discussed above, the Commission preliminarily believes that the risk 
posed to the U.S. markets by the dealing activity of non-U.S. persons 
outside the United States whose performance under security-based swaps 
is guaranteed by a U.S. person does not necessarily raise the full 
range of concerns that Title VII dealer regulation is intended to 
address. Such activity may give rise to security-based swap positions 
that raise concerns within the United States that are relevant to the 
purposes of Title VII if those positions are large enough to affect the 
stability of the institution providing the guarantee and potentially 
the stability of the U.S. financial system more generally. This risk, 
however, arises from attribution of security-based swap positions to 
the guarantor due to the guarantee rather than the dealing activity per 
se. In these circumstances, we preliminarily believe that the risks 
relating to these positions warrant registration only to the extent 
that the positions exceed the thresholds established for major 
security-based swap participant registration.\1474\
---------------------------------------------------------------------------

    \1472\ See CFTC Cross-Border Proposal, 77 FR 41221.
    \1473\ See Section III.B.7, supra.
    \1474\ Id.
---------------------------------------------------------------------------

    In light of the foregoing, we do not believe that requiring a non-
U.S. person that is guaranteed by a U.S. person to count every 
transaction entered into in a dealing capacity toward its de minimis 
threshold and to register as a security-based swap dealer even if it 
engaged in no dealing activity with U.S. persons or otherwise within 
the United States would materially increase the programmatic benefits 
of the dealer registration requirements. Although it is likely that 
such an approach would cause more entities to register as dealers than 
does our proposed approach, to the extent that these entities were 
required to register as security-based swap dealers even though they 
engaged in dealing activity only with non-U.S. persons outside the 
United States, we preliminarily believe that this alternative would 
impose programmatic costs on these entities without a corresponding 
increase of the programmatic benefits to the U.S. security-based swap 
markets that are intended by the security-based swap dealer 
requirements in Title VII, as we

[[Page 31147]]

do not believe that the dealing activity of such persons (to the extent 
that it involves only non-U.S. counterparties outside the United 
States) raises the types of concerns within the United States that 
Title VII dealer registration was intended to address.
    Another alternative to our proposed approach would be not to 
require non-U.S. persons that engage in dealing activity with other 
non-U.S. persons through transactions conducted within the United 
States to include such transactions in their de minimis 
calculations.\1475\ As noted above, Title VII is intended to promote 
accountability and transparency in the U.S. financial system,\1476\ and 
to do so, it is necessary to ensure that security-based swap dealing 
activity that occurs within the United States is subjected to the 
requirements of Title VII,\1477\ including those related to external 
business conduct protections and other transaction-level requirements. 
Even if a non-U.S. person located outside the United States is engaging 
in dealing activity with non-U.S. persons located in the United States, 
it is, among other things, providing liquidity in the U.S. security-
based swap market and thus engaging in dealing activity within the 
United States. Excluding such dealing activity from Title VII would 
reduce the programmatic benefits of security-based swap dealer 
regulation because it would reduce the transparency of the U.S. market 
and deprive counterparties within the United States of the protections 
of Title VII. We recognize that the ultimate programmatic benefits 
discussed here associated with the application of the security-based 
swap dealer regulation in the cross-border context would be affected by 
the substantive rules adopted by the Commission. The Commission is 
reopening the comment periods for our outstanding rulemaking releases 
that concern security-based swaps and security-based swap market 
participants and were proposed pursuant to certain provisions of the 
Exchange Act, as amended by Title VII of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \1475\ The CFTC's proposed guidance does not trigger application 
of Title VII requirements based on the location of the security-
based swap activity.
    \1476\ See Section II, supra.
    \1477\ See proposed Rule 3a71-3(a)(5) under the Exchange Act 
(defining ``transaction conducted within the United States''), as 
discussed in Section III.B.5, supra.
---------------------------------------------------------------------------

iii. Aggregation of Affiliate Dealing Activity
    Our proposed rule regarding the application of the de minimis 
exception in the cross-border context also requires a U.S. person who 
enters into security-based swap transactions in a dealing capacity, or 
non-U.S. person who enters into security-based swap transactions with 
U.S. persons or transactions conducted within the United Sates in a 
dealing capacity, to count toward such person's de minimis threshold 
certain transactions of its affiliates. Specifically, such persons 
would be required to include in the de minimis calculation the notional 
amount of (1) the transactions entered into in a dealing capacity by 
all of their commonly controlled affiliates who are U.S. persons and 
(2) the transactions with U.S. persons or transactions conducted within 
the United States entered into in a dealing capacity by all of its 
commonly controlled affiliates who are non-U.S. persons. However, such 
calculation would exclude any affiliate that is a registered security-
based swap dealer if such person who relies on the de minimis exception 
maintains separate operations independent of any affiliate who is a 
registered security-based swap dealer and does not involve, or act in 
concert with, any affiliate that is a registered security-based swap 
dealer in any stage of a security-based swap transaction that arises 
out of its dealing activity.\1478\
---------------------------------------------------------------------------

    \1478\ See proposed Rule 3a71 under the Exchange Act. This 
approach is consistent with the aggregation requirement described in 
the Intermediary Definitions Release. See Intermediary Definitions 
Release, 77 FR 30631 (requiring aggregation of dealing activity by 
commonly controlled affiliates for purposes of de minimis 
calculation).
---------------------------------------------------------------------------

    In developing this rule, we considered the approach proposed by the 
CFTC, which we understand to permit non-U.S. persons to aggregate only 
the transactions carried out in a dealing capacity by their commonly 
controlled affiliates that are also non-U.S. persons, rather than 
including all such transactions by all commonly controlled affiliates, 
wherever located. As noted above,\1479\ we declined to follow the 
CFTC's proposal in part out of concern that doing so could confer 
competitive advantages on affiliated corporate groups that engage in 
security-based swap dealing activity through both U.S. and foreign 
affiliates by allowing them to operate with an effective de minimis 
threshold twice higher than the threshold applicable to security-based 
swap dealers operating solely within the United States or solely in one 
or more foreign-based affiliates.
---------------------------------------------------------------------------

    \1479\ See Section III.B.4.(c), supra.
---------------------------------------------------------------------------

    We recognize that our approach may require some persons to register 
that might not be required to register under the CFTC's approach and 
thus would impose programmatic costs on those entities that they might 
not otherwise incur. It may also require more firms to engage in 
assessment, as even those with activity levels far below the threshold 
will probably perform these calculations, if they are part of a larger 
corporate family with a number of security-based swap dealers. However, 
we believe that those corporate groups operating a centralized booking 
model or centralized risk management should be able to have the central 
booking entity or central risk management location perform the de 
minimis aggregation calculation for the entire corporate group. For 
purposes of this analysis, we have assumed that corporate groups are 
likely to perform such assessments centrally.\1480\
---------------------------------------------------------------------------

    \1480\ We understand, based on comment letters and our staff's 
discussion with market participants, that many market participants 
keep a global swap book and operate a central booking model. See, 
e.g., Cleary Letter I at 9. If this is not the case with respect to 
a particular market participant, then the number of entities that 
need to perform the de minimis calculation would increase. The 
Commission currently does not have available information with 
respect to the number of market participants active in the security-
based swap market that utilize a central booking model.
---------------------------------------------------------------------------

    We preliminarily conclude that our proposed application of the 
aggregation requirement to the de minimis calculation in the cross-
border context is appropriate in light of the purposes of Title VII and 
of dealer regulation in particular. The aggregation requirement is 
designed to discourage evasion of the dealer registration requirement 
by a corporate group by engaging in large volumes of dealing activity 
through multiple affiliates, none of which engages in activity 
exceeding the de minimis threshold.\1481\ Therefore, we have 
preliminarily determined that a corporate group's dealing activity 
should be considered as a whole.
---------------------------------------------------------------------------

    \1481\ See Intermediary Definitions Release, 77 FR 30631.
---------------------------------------------------------------------------

    Similarly, to be entitled to rely on the de minimis exception, an 
unregistered affiliate within a corporate group must have an 
independent operation separate from any affiliate who is a registered 
security-based swap dealer and must not act in concert with the 
registered affiliate in any stage of a security-based swap transaction. 
The Commission preliminarily believes that this requirement would have 
the benefit of preventing evasion.
(b) Major Security-Based Swap Participants
    Several commenters suggested that foreign government-related 
entities, such as sovereign wealth funds and multilateral development 
institutions,

[[Page 31148]]

should be excluded from the major security-based swap participant 
definition.\1482\ By potentially capturing fewer major security-based 
swap participants, this alternative approach would correspondingly 
decrease the programmatic costs and benefits associated with Title VII 
regulation of major security-based swap participants. We preliminarily 
believe that security-based swap transactions entered into by these 
types of foreign government-related entities with U.S. persons pose the 
same risks to the U.S. security-based swap markets as transactions 
entered into by entities that are not foreign-government related. 
Moreover, as noted above,\1483\ based upon our conversations with 
market participants we understand that foreign government-related 
entities rarely enter into security-based swap transactions (as opposed 
to other types of swap transactions) in amounts that would trigger the 
obligation to register as a major security-based swap participant. 
Therefore, we preliminarily believe that the proposed approach 
considering only security-based swap transactions entered into with a 
U.S. person as counterparty in determining a non-U.S. person's status 
as a major security-based swap participant, regardless of whether such 
non-U.S. person is a foreign government-related entity, is more 
appropriately tailored to the objectives of Title VII.
---------------------------------------------------------------------------

    \1482\ See note 382, supra.
    \1483\ See Section IV.C.3, supra.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comments on all aspects of the economic 
analysis of the alternatives to the proposed definition of U.S. person, 
the proposed application of the de minimis exception and the proposed 
application of the major security-based swap participant definition in 
the cross-border context. The Commission requests that commenters 
provide data and sources of data to support any comments. In addition, 
the Commission requests commenters' views on the following:
     Has the Commission appropriately considered the costs and 
benefits associated with adopting the definition of U.S. person found 
in Regulation S? If not, please explain why and provide information on 
how such costs and benefits should be assessed.
     Has the Commission appropriately considered the costs and 
benefits associated with adopting the same definition of U.S. person as 
proposed by the CFTC? If not, please explain why and provide 
information on how such costs and benefits should be assessed.
     Has the Commission appropriately considered the costs and 
benefits associated with adopting a rule to permit foreign branches of 
U.S. banks to exclude transactions conducted through a foreign branch 
from their de minimis calculations? If not, please explain why and 
provide information on how such costs and benefits should be assessed.
     Has the Commission appropriately considered the costs and 
benefits associated with not requiring a non-U.S. person to count its 
transactions conducted within the United States with non-U.S. persons 
towards its de minimis threshold? If not, please explain why and 
provide information on how such costs and benefits should be assessed.
     Has the Commission appropriately considered the costs and 
benefits associated with requiring a non-U.S. person whose performance 
under security-based swaps is guaranteed by a U.S. person to count all 
transactions connected to its security-based swap dealing activity 
toward its de minimis threshold, even though such non-U.S. person only 
conducts dealing activity with non-U.S. persons outside the United 
States? If not, please explain why and provide information on how such 
costs and benefits should be assessed.
     Has the Commission appropriately considered the costs and 
benefits associated with the proposed rule regarding aggregation of 
security-based swap transactions entered into in a dealing capacity by 
a person and its affiliates under common control and requiring that 
such aggregated notional amount be included in such person's de minimis 
calculation? If not, please explain why and provide information on how 
such costs and benefits should be assessed. Should the Commission 
require operational independence, from the cost and benefit point of 
view, as a condition to excluding transactions of an affiliate that is 
a registered security-based swap dealer from a person's de minimis 
calculation?
     Has the Commission appropriately considered the costs and 
benefits associated with excluding foreign government-related entities, 
such as sovereign wealth funds and multilateral development 
institutions, from the definition of major security-based swap 
participant? If not, please explain why and provide information on how 
such costs and benefits should be assessed.
     Should the Commission take into account the potential 
impact of the Push-Out Rule and the Volcker Rule in considering the 
approach to application of the Title VII requirements to foreign 
branches of the U.S. banks? For example, what would the costs and 
benefits be with respect to requiring foreign branches of U.S. banks to 
include transaction conducted through a foreign branch in its de 
minimis calculation, or requiring a non-U.S. person to include its 
transactions with foreign branches in its major security-based swap 
participant calculation, after taking into account the effects of the 
Push-Out Rule and the Volcker Rule on U.S. banks? Please explain how 
such costs and benefits should be assessed.

E. Economic Analysis of the Proposed Application of the Entity-Level 
and Transaction-Level Requirements to Security-Based Swap Dealers and 
Major Security-Based Swap Participants

    As stated above, persons who fall within the statutory definitions 
of security-based swap dealer and major security-based swap 
participant, as further defined by the rules adopted in the 
Intermediary Definition Adopting Release, will be required to register 
with the Commission and comply with a host of ensuing substantive 
requirements.\1484\ These requirements include entity-level 
requirements \1485\ and transaction-level requirements \1486\ set forth 
in Sections 15F and 3E of the Exchange Act and rules and regulations 
thereunder.\1487\
---------------------------------------------------------------------------

    \1484\ See Section XV.D.1, supra.
    \1485\ See Section III.C.3(a), supra.
    \1486\ See Section III.C.3(b), supra.
    \1487\ See Section 15F of the Exchange Act, 15 U.S.C. 78o-8, and 
Section 3E of the Exchange Act, 15 U.S.C. 78c-4.
---------------------------------------------------------------------------

1. Entity-Level Requirements
    Section 764(a) of the Dodd Frank Act adds a new Section 15F(e) to 
the Exchange Act, which imposes capital and margin requirements on 
security-based swap dealers and major security-based swap 
participants.\1488\ These requirements are designed to reduce the 
probability of these institutions' failure, mitigate the consequences 
of these institutions failures, protect customer assets, and contribute 
to the stability of the security-based swap market in particular and 
the U.S. financial system more generally.\1489\ The benefits of the 
capital and margin requirements for security-based swap dealers are 
expected to include enhancing protection of customer assets and 
mitigation of the consequences of a firm failure, while allowing 
security-based swap dealers appropriate flexibility in how they conduct 
their security-based swaps business.\1490\ Similarly, the

[[Page 31149]]

benefits of the capital and margin requirements for major security-
based swap participants are expected to include neutralization of the 
credit risk between a major security-based swap participant and a 
counterparty, which would lessen the impact on the counterparty if the 
major security-based swap participant failed.\1491\ We believe the 
capital and margin requirements strengthen the financial system by 
reducing the potential for defaults by entities engaging in security-
based swap activity and mitigating the impact of such defaults, 
including the adverse spillover or contagion effect of a default by 
security-based swap dealers and major security-based swap 
participants.\1492\
---------------------------------------------------------------------------

    \1488\ See Section 15F(e) of the Exchange Act, 15 U.S.C. 78o-
10(e).
    \1489\ See Capital, Margin, and Segregation Proposing Release, 
77 FR 70218 and 70303.
    \1490\ See id. at 70218.
    \1491\ Id.
    \1492\ These spillover effects could create instability for the 
financial markets more generally, such as by limiting the 
willingness of market participants to extend credit to each other, 
and thus substantially reduce liquidity and valuations for 
particular types of financial instruments. See, e.g., Markus K. 
Brunnermeier and Lasse Heje Pedersen, ``Market Liquidity and Funding 
Liquidity,'' Review of Financial Studies (2009); Denis Gromb and 
Dimitri Vayanos, ``A Model of Financial Market Liquidity,'' Journal 
of the European Economic Association (2010).
---------------------------------------------------------------------------

    In addition, registered security-based swap dealers and major 
security-based swap participants are required to establish robust risk 
management systems adequate for managing their day-to-day 
business,\1493\ keep books and records and maintain daily trading 
records of the security-based swaps they enter into,\1494\ establish 
internal systems and controls,\1495\ diligently supervise the security-
based swap business,\1496\ designate a chief compliance officer,\1497\ 
and keep books and records open to inspection and examination by the 
Commission.\1498\
---------------------------------------------------------------------------

    \1493\ See Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o-
10(j)(2); see also Section III.C.3(b)(3), supra.
    \1494\ See Sections 15F(f) and (g) of the Exchange Act, 15 
U.S.C. 78o-10(f) and (g); see also Section III.C.3(b)(4), supra.
    \1495\ See Sections 15F(j)(3) and (4) of the Exchange Act, 15 
U.S.C. 78o-10(j)(3) and (4); Section III.C.3(b)(5), supra. See also 
proposed Rule 15Fh-3(i)(2)(iv) under the Exchange Act.
    \1496\ See Section 15F(h)(1)(B) of the Exchange Act, 15 U.S.C. 
78o-10(h)(1)(B). The Commission has proposed a rule that would 
establish supervisory obligations that incorporates principles from 
Section 15(b) of the Exchange Act and existing SRO rules. Proposed 
Rule 15fh-3(i) under the Exchange Act, as discussed in the External 
Business Conduct Standards Proposing Release, 76 FR 42419-21. See 
also Section IIIC.3(b)(6), supra.
    \1497\ See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o-
10(k); see also Section III.C.3(b)(7), supra.
    \1498\ See Section 15F(l)(C) of the Exchange Act, 15 U.S.C. 78o-
10(l)(C); see also Section III.C.3(b)(8), supra.
---------------------------------------------------------------------------

    The programmatic costs and benefits associated with the entity-
level requirements applicable to security-based dealers and major 
security-based swap participants under Title VII are (or will be) 
addressed in more detail in connection with the applicable rulemakings 
implementing Title VII.\1499\
---------------------------------------------------------------------------

    \1499\ See, e.g., Capital, Margin, and Segregation Proposing 
Release, 77 FR 70214.
---------------------------------------------------------------------------

    With respect to the application of the entity-level requirements in 
the cross-border context, as stated above, the Commission preliminarily 
believes that it would be consistent with the objective of Title VII to 
ensure the safety and soundness of registered security-based swap 
dealers \1500\ to require foreign security-based swap dealers to comply 
with the entity-level requirements.\1501\ Similarly, the Commission 
preliminarily does not believe that foreign major security-based swap 
participants should be excluded from the application of any entity-
level requirements.\1502\ However, the Commission recognizes the 
concerns raised by commenters regarding the possibility that foreign 
security-based swap dealers may be subject to conflicting or 
duplicative regulatory requirements and proposes to mitigate the costs 
associated with the potential duplicative compliance obligations 
through the Commission's proposed approach to substituted 
compliance.\1503\ We have considered the effect of the proposed rules 
regarding substituted compliance on its effect on efficiency, 
competition and capital formation above \1504\ and will discuss the 
economic considerations of the proposed rules regarding substituted 
compliance more fully below.\1505\
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    \1500\ See Section 15F(e)(3)(A) of the Exchange Act, 15 U.S.C. 
78o-8(e)(3)(A) (``To offset the greater risk to the security-based 
swap dealer . . . and the financial system arising from the use of 
security-based swaps that are not cleared, the requirements imposed 
under paragraph (2) shall--(i) help ensure the safety and soundness 
of the security-based swap dealer . . . .'').
    \1501\ See Section III.C.5, supra.
    \1502\ Id.
    \1503\ See Section XI, supra (discussing the Commission's 
overall proposed approach to substituted compliance in the context 
of Title VII).
    \1504\ See Section XV.C, supra.
    \1505\ See Section XV.I, infra.
---------------------------------------------------------------------------

Alternative
    The CFTC proposed to treat Title VII margin requirements with 
respect to non-cleared swaps as transaction-level requirements and 
would not apply the margin requirements to foreign non-bank swap 
dealers (including foreign affiliates of U.S. persons regardless of 
whether such foreign affiliates' performance obligations under swaps 
are guaranteed by U.S. persons) when they transact swaps with non-U.S. 
person counterparties whose performance obligations under the swaps are 
not guaranteed by U.S. persons.\1506\ The prudential regulators' margin 
proposal does not apply Title VII margin requirements to a foreign 
covered swap entity \1507\ with respect to foreign non-cleared swaps or 
foreign non-cleared security-based swaps.\1508\ In practice, the 
Commission's proposed treatment of the margin requirements as an 
entity-level requirement differs from the CFTC's and the Prudential 
regulators' proposals in that non-bank foreign security-based swap 
dealers (regardless of whether their performance of obligations under 
security-based swaps are guaranteed by U.S. persons) would be subject 
to the margin requirements with respect to their transactions with non-
U.S. person counterparties whose performance obligations under the 
security-based swaps are not guaranteed by U.S. persons.
---------------------------------------------------------------------------

    \1506\ See CFTC Cross-Border Proposal, 77 FR 41226, 41228, and 
41237.
    \1507\ A ``foreign covered swap entity'' is defined as any 
entity prudentially regulated by the prudential regulators and 
required to register as a swap dealer, major swap participant, 
security-based swap dealer or major security-based swap participant 
under section 4s of the Commodity Exchange Act or section 15F of the 
Exchange Act that (i) is not a company organized under the laws of 
the United States or any State; (ii) is not a branch or office of a 
company organized under the laws of the United States or any State; 
(iii) is not a U.S. branch, agency or subsidiary of a foreign bank; 
and (iv) is not controlled, directly or indirectly, by a company 
that is organized under the laws of the United States or any State. 
See Prudential Regulator Margin and Capital Proposal, 76 FR 27581.
    \1508\ A ``foreign non-cleared swap or foreign non-cleared 
security-based swap'' is defined as a non-cleared swap or non-
cleared security-based swap with respect to which: (i) The 
counterparty to the foreign covered swap entity is not a company 
organized under the laws of the United States or any State, not a 
branch or office of a company organized under the laws of the United 
States or any State, and not a person resident in the United States; 
and (ii) performance of the counterparty's obligations to the 
foreign covered swap entity under the swap or security-based swap 
has not been guaranteed by an affiliate of the counterparty that is 
a company organized under the laws of the United States or any 
State, a branch of a company organized under the laws of the United 
States or any State, or a person resident in the United States. See 
Prudential Regulator Margin and Capital Proposal, 76 FR 27581.
---------------------------------------------------------------------------

    The Commission could have taken the CFTC's approach to treat margin 
requirements as transaction-level requirements by proposing not to 
apply margin to non-bank foreign security-based swap dealers with 
respect to their transactions with non-U.S. person counterparties whose 
performance obligations under the security-based swaps are not 
guaranteed by U.S. persons. We also could have taken the prudential 
regulators' approach by proposing not to apply margin to foreign non-
bank security-based swap dealers

[[Page 31150]]

that are not controlled by a U.S. person with respect to their 
transactions with non-U.S. person counterparties whose performance 
obligations under the security-based swaps are not guaranteed by U.S. 
persons. Either approach would not treat margin as an entity-wide 
requirement.
    The Dodd-Frank Act seeks to address the counterparty credit risk 
exposures arising from OTC derivatives by, among other things, imposing 
mandatory clearing and margin requirements for non-cleared security-
based swaps.\1509\ The margin requirements established by the 
Commission with respect to non-cleared security-based swaps will 
operate in tandem with mandatory clearing provisions in the Dodd-Frank 
Act.\1510\ Registered clearing agencies that operate as CCPs manage 
credit and other risks through a range of controls and methods, 
including prescribed margin rules for their participants.\1511\ Thus, 
the mandatory clearing requirements in effect will establish margin 
requirements for cleared security-based swaps and, thereby, complement 
the margin requirements for non-cleared security-based swaps 
established by the Commission and the prudential regulators.\1512\
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    \1509\ See Capital, Margin, and Segregation Proposing Release, 
77 FR 70258; see also Section 3C(a)(1) and Section 15F(e)(1) of the 
Exchange Act, 15 U.S.C. 78c-3(a)(1) and 78o-10(e)(1).
    \1510\ See Section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-
3(a)(1) (requiring that security-based swaps must be cleared through 
a registered clearing agency unless an exception to mandatory 
clearing exists).
    \1511\ See Clearing Agency Standards Adopting Release, 77 FR 
66230-32.
    \1512\ See Capital, Margin, and Segregation Proposing Release, 
77 FR 70259; see also Prudential Regulator Margin and Capital 
Proposal, 76 FR 27567 (``In the derivatives clearing process, 
central counterparties (CCPs) manage the credit risk through a range 
of controls and methods, including a margining regime that imposes 
both initial margin and variation margin requirements on parties to 
cleared transactions. Thus, the mandatory clearing requirement 
established by the Dodd-Frank Act for swaps and security-based swaps 
will effectively require any party to any transaction subject to the 
clearing mandate to post initial and variation margin to the CCP in 
connection with that transaction.'').
---------------------------------------------------------------------------

    In addition, margin requirements, along with the capital standards 
and segregation requirements, are an integral part of the proposed 
financial responsibility requirements for security-based swap dealers 
that are intended to enhance the financial integrity of these 
entities.\1513\ The margin requirements proposed by the Commission are 
intended to work in tandem with the capital requirements to strengthen 
the financial system by reducing the potential for default to an 
acceptable level and limiting the amount of leverage that can be 
employed by security-based swap dealers and other market 
participants.\1514\ For example, with respect to cleared security-based 
swaps, for which margin requirements will not be established by the 
Commission, the Commission proposed a capital charge that would apply 
if a nonbank security-based swap dealer collects margin collateral from 
a counterparty in an amount that is less than the deduction that would 
apply to the security-based swap if it was a proprietary position of 
the non-bank security-based swap dealer.\1515\ In addition, the 
Commission proposed capital charges to address exceptions from the 
margin collection requirements with respect to non-cleared security-
based swaps, as an alternative to margin collateral by requiring a non-
bank security-based swap dealer to hold sufficient net capital to 
enable it to withstand losses if a counterparty defaults.\1516\
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    \1513\ See Capital, Margin, and Segregation Proposing Release, 
77 FR 70303 and 70259.
    \1514\ See id. at 70304.
    \1515\ See id. at 70245-46.
    \1516\ See id. at 70246.
---------------------------------------------------------------------------

    In the context of the statutory framework and the Commission's 
proposed financial responsibility program for non-bank security-based 
swap dealers, if the Commission were to treat margin as a transaction-
level requirement and apply margin to certain non-cleared transactions 
but not others, any credit risk of such other transactions that are not 
collateralized by mutually agreed contractual arrangement between a 
security-based swap dealer and its counterparty would need to be 
addressed by imposing capital charges, which would increase the amount 
of net capital a non-bank security-based swap dealer is required to set 
aside. While the increased liquid capital would provide an additional 
buffer for a non-bank security-based swap dealer to withstand losses 
resulting from a default of its counterparties, it also would increase 
business costs. Depending on the size of a foreign security-based swap 
dealers' foreign business that is not collateralized, the size of the 
increased amount of the capital charge may be very large. As discussed 
in the Capital, Margin, and Segregation Proposing Release, if security-
based swap dealers are required to maintain an excessive amount of 
capital, that amount may result in certain costs for the markets and 
the financial system, including the potential for the reduced 
availability of security-based swaps for market participants who would 
otherwise use such transactions to hedge the risks of their business, 
or engage in other activities that would promote capital 
formation.\1517\ End users also may incur increased transaction costs 
in connection with the increased capital charges as security-based swap 
dealers are likely to pass on the financial burden of any increased 
capital requirements to customers.\1518\ If the transaction costs are 
too high, end users may seek other cheaper alternatives, such as 
cleared security-based swaps or voluntary collateral posting to reduce 
transaction pricing, or they may decide not to transact security-based 
swaps at all.
---------------------------------------------------------------------------

    \1517\ See id. at 70306.
    \1518\ Id.
---------------------------------------------------------------------------

    In the cross-border context, the Commission is proposing not to 
apply the mandatory clearing requirement to transactions between a 
foreign security-based swap dealer and non-U.S. person counterparties 
whose performance obligations under security-based swaps are not 
guaranteed by U.S. persons. Therefore, a foreign security-based swap 
dealer's exposure to counterparty credit risk arising from its 
transactions with these non-U.S. person counterparties would not be 
addressed by the Title VII mandatory clearing requirement. If margin 
requirements do not apply to these transactions, the counterparty 
credit risk arising from such transactions may be left 
uncollateralized. In the event that non-U.S. counterparties experience 
financial difficulties, and the foreign security-based swap dealer's 
uncollateralized exposures to such counterparties have grown 
exponentially due to severe market movement, the uncollateralized 
foreign credit exposures may jeopardize the safety and soundness of the 
foreign security-based swap dealer, whose failure would have negative 
impact on the U.S. security-based swap market and present risk to the 
U.S. financial system. Such uncollateralized credit risk could be 
addressed by imposing capital charges under the Commission's proposed 
capital rule, but taking this approach would result in increased costs 
and higher barrier for new foreign entrants into the U.S. security-
based swap market. To mitigate the cost of increased capital charges, a 
foreign security-based swap dealer may choose to enter into credit 
support arrangements and request some or all counterparties to post 
collateral. This would be particularly the case when a foreign 
security-based swap dealer is transacting in a foreign market where 
collateral posting is a common market practice to manage counterparty 
credit risk or in a foreign jurisdiction that

[[Page 31151]]

imposes margin requirements because the foreign security-based swap 
dealer would encounter less resistance to posting margin from foreign 
counterparties. To the extent that the costs of capital charges drive 
foreign security-based swap dealers to voluntarily collateralize their 
exposures to counterparty credit risks, the differences in the economic 
consequences between treating margin as an entity-level requirement as 
opposed to a transaction-level requirement would narrow.
    By contrast, under the proposed approach, the counterparty credit 
exposures arising from a foreign non-bank security-based swap dealers 
transactions with non-U.S. persons whose performance of obligations 
under non-cleared security-based swaps are not guaranteed by U.S. 
persons would be collateralized but the collateral would not be 
segregated.\1519\ The collateral received would protect the foreign 
security-based swap dealer against the default risk of the foreign 
counterparty and reduce the probability of the failure of the foreign 
security-based swap dealer and the spillover and contagion risk of a 
foreign counterparty's default that may impact the U.S. financial 
system. In addition, such collateral could finance the business needs 
of the foreign security-based swap dealer and increase its liquidity. 
The Commission preliminarily believes that the proposed treatment of 
margin as an entity-level requirement would generate the benefit of 
offsetting the greater risk to the foreign security-based swap dealer 
and the U.S. financial system arising from the use of non-cleared 
security-based swaps and help ensure the safety and soundness of the 
security-based swap dealers \1520\ without imposing excessive capital 
charges at the same time, which may raise the barrier for foreign 
dealers to enter the U.S. security-based swap market. The proposed 
treatment of margin also may increase funds available to finance a 
foreign security-based swap dealer's business activity, which would 
decrease the borrowing needs and lower the costs of business.
---------------------------------------------------------------------------

    \1519\ A foreign security-based swap dealer that is not a 
registered broker-dealer would not be required to segregate assets 
held as collateral received from a non-U.S. person counterparty with 
respect to non-cleared security-based swap transactions. A foreign 
security-based swap dealer that is a registered broker-dealer would 
be required to segregate margin collateral received from all 
counterparties. See proposed Rule 18a-4(e)(1) under the Exchange Act 
and discussion in Section III.C.4(b).ii, supra.
    \1520\ See Section 15F(e)(3)(A) of the Exchange Act, 15 U.S.C. 
78o-10(e)(3)(A).
---------------------------------------------------------------------------

    Commenters raised concerns about the potential costs and burdens of 
applying duplicative margin collection requirements to foreign 
transactions.\1521\ The Commission preliminarily believes that the 
costs of complying with duplicative margin requirements can be 
addressed by the proposed substituted compliance framework. As stated 
in our cost and benefit analysis with respect to substituted compliance 
below, the Commission preliminarily believes that substituted 
compliance would not substantially change the programmatic benefits 
intended by the entity-level requirements in Section 15F of the 
Exchange Act, including margin requirements; however, to the extent 
that substituted compliance eliminates duplicative compliance costs, 
registered foreign security-based swap dealers that are eligible for a 
substituted compliance determination may incur lower programmatic costs 
associated with implementation or compliance with the specified Title 
VII requirements (including margin requirements).\1522\
---------------------------------------------------------------------------

    \1521\ See Cleary Letter IV at 18 (``If non-U.S. margin 
requirements are essentially the same, or are merely different, but 
not significantly different, it is not obvious how the Agencies 
could justify their proposal or ex ante cost-benefit analysis.'')
    \1522\ See Section XV.I, infra.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comments on all aspects of the economic 
analysis of the alternatives to the proposed definition of U.S. person, 
the proposed application of the de minimis exception and the proposed 
application of the major security-based swap participant definition in 
the cross-border context. The Commission requests that commenters 
provide data and sources of data to support any comments. In addition, 
the Commission requests commenters' views on particular issues below. 
Responses that are supported by empirical data and analysis provide 
great assistance to the Commission in considering the economic 
consequences of the proposed treatment of certain requirements as 
entity-level and other requirements as transaction-level requirements.
     Has the Commission appropriately considered the costs and 
benefits associated with an approach that would treat all the 
requirements set forth in Section 15F of the Exchange Act, and rules 
and regulations thereunder, as entity-level requirements and apply them 
on an entity-wide basis, except for the external business conduct 
standards and segregation requirements? Has the Commission 
appropriately estimated the costs and benefits associated with 
requiring a foreign security-based swap dealer to conform its capital 
and risk management practices to the rules proposed by the Commission? 
If not, please explain why and provide information on how such costs 
and benefits should be assessed.
     Are there any requirements that are treated as entity-
level in the Commission's cross-border proposal that should be treated 
as transaction-level requirements from the cost and benefit point of 
view? If so, please explain how such treatment would affect the costs 
and benefits of the proposed approach.
     Has the Commission appropriately considered the costs and 
benefits associated with treating margin as an entity-level 
requirement, taking into account the interplay between the minimum 
capital requirement and margin requirement? If not, please explain why 
and provide information on how such costs and benefits should be 
assessed. What would be the economic impact of treating margin as an 
entity-level requirement? Should the Commission adopt the CFTC's 
approach by treating margin as a transaction-level requirement, given 
the costs and benefits of this alternative? Should the Commission adopt 
the prudential regulators' approach to exclude certain foreign 
security-based swaps from application of the margin requirement, given 
the costs and benefits of this alternative?
2. Transaction-Level Requirements
    With respect to the application of these transaction-level 
requirements to security-based swap dealers active in the cross-border 
context, the Commission proposes Rule 3a71-3(c) under the Exchange Act 
regarding application of customer protection requirements to security-
based swap dealers,\1523\ Rule 18a-4(e) regarding application of 
segregation requirements to foreign security-based swap dealers,\1524\ 
Rule 3a67-10(b) regarding application of customer protection 
requirements to foreign major security-based swap participants,\1525\ 
and Rule 18a-4(f) regarding application of segregation requirements to 
foreign major security-based swap participants.\1526\ In the following 
sections, we discuss the economic considerations of these proposed 
rules regarding application of transaction-

[[Page 31152]]

level requirements to security-based swap dealers or major security-
based swap participants in the cross-border context.
---------------------------------------------------------------------------

    \1523\ See proposed Rule 3a71-3(c) under the Exchange Act, as 
discussed in Section III.C.4(b).i, supra.
    \1524\ See proposed Rule 18a-4(e) under the Exchange Act, as 
discussed in Section III.C.4(b).ii, supra.
    \1525\ See proposed Rule 3a67-10(b) under the Exchange Act, as 
discussed in Section IV.D.1(b), supra.
    \1526\ Id.
---------------------------------------------------------------------------

(a) Proposed Rule 3a71-3(c)--Application of Customer Protection 
Requirements
    Title VII imposes certain external business conduct requirements on 
registered security-based swap dealers that govern their interactions 
with counterparties to security-based swap transactions.\1527\ These 
provisions are intended to protect the counterparties of registered 
dealers in such transactions by ensuring that security-based swap 
dealers, among other things, provide adequate disclosures to their 
counterparties about the risks of the transaction.\1528\
---------------------------------------------------------------------------

    \1527\ See Sections 15F(h) and 15F(j)(5) of the Exchange Act.
    \1528\ See Section III.C.3(a)i, supra.
---------------------------------------------------------------------------

    Proposed Rule 3a71-3(c) provides that registered security-based 
swap dealers, with respect to their Foreign Business, shall not be 
subject to the requirements relating to business conduct standards 
described in Section 15F(h) of the Exchange Act, and the rules and 
regulations thereunder, other than Section 15F(h)(1)(B) of the Exchange 
Act, and the rules and regulations thereunder. We are proposing to 
define ``Foreign Business'' as security-based swap transactions entered 
into, or offered to be entered into, by or on behalf of a foreign 
security-based swap dealer or a U.S. security-based swap dealer in a 
dealing capacity that are not its ``U.S. Business.'' \1529\
---------------------------------------------------------------------------

    \1529\ Proposed Rule 3a71-3(a)(2) under the Exchange Act, as 
discussed in Section III.C.4.(a), supra.
---------------------------------------------------------------------------

    ``U.S. Business'' would be defined separately for foreign security-
based swap dealers and U.S. security-based swap dealers. With respect 
to a foreign security-based swap dealer, ``U.S. Business'' would 
include any transaction entered into, or offered to be entered into, by 
or on behalf of such foreign security-based swap dealer, with a U.S. 
person (other than a foreign branch), or any transaction conducted 
within the United States.\1530\ With respect to a U.S. security-based 
swap dealer, ``U.S. Business'' would include any transaction by or on 
behalf of the U.S. security-based swap dealer, wherever entered into or 
offered to be entered into, other than a transaction conducted through 
a foreign branch with a non-U.S. person or another foreign 
branch.\1531\ With the exception of the exclusion of transactions 
conducted through a foreign branch from the definition of a U.S. 
security-based swap dealer's U.S. Business, these definitions closely 
track the application of the de minimis exception to the transactions 
of U.S. persons and non-U.S. persons under proposed Rule 3a71-3(b) 
under the Exchange Act. Moreover, whether a transaction occurs within 
the United States or with a U.S. person, which are key elements of the 
Foreign Business and U.S. Business definitions, would turn on the same 
factors that are used to determine whether the de minimis exception 
applies to the security-based swap activity of a non-U.S. person 
engaged in dealing activity.\1532\
---------------------------------------------------------------------------

    \1530\ Proposed Rule 3a71-3(a)(6)(i) under the Exchange Act, as 
discussed in Section III.C.4.(a), supra.
    \1531\ Proposed Rule 3a71-3(a)(6)(ii) under the Exchange Act, as 
discussed in Section III.C.4.(a), supra.
    \1532\ See proposed Rule 3a71-3(b)(1)(i) under the Exchange Act 
(identifying transactions that U.S. persons and non-U.S. persons 
must include in their de minimis calculations); proposed Rule 3a71-
3(a)(2) under the Exchange Act (defining ``Foreign Business''); 
proposed Rule 3a71-3(a)(6) under the Exchange Act (defining ``U.S. 
Business'').
---------------------------------------------------------------------------

    In the External Business Conduct Standards Proposing Release, we 
have considered the expected benefits and costs of the proposed rules 
regarding external business conduct standards as they apply to dealers 
generally, and we expect to discuss the benefits and costs associated 
with the final rules in our adopting release. In the proposing release, 
we noted that these rules may be expected to benefit security-based 
swap dealers and other market participants in a number of ways. For 
example, the requirement for security-based swap dealers to provide a 
daily mark should enable counterparties to have a clearer picture of 
their relationship with security-based swap dealers, including by 
providing a meaningful reference point for calculating variation 
margin.\1533\ Similarly, our proposed rules regarding security-based 
swap dealers' obligations to know their counterparties may be expected 
to help ensure that security-based swap dealers recommend only 
transactions that are appropriate to the needs and resources of their 
counterparties.\1534\ Proposed rules regarding the standards of conduct 
in transactions involving special entities should likewise help ensure 
that such business is awarded on the merits of the transaction.\1535\
---------------------------------------------------------------------------

    \1533\ External Business Conduct Standards Proposing Release, 76 
FR 42449.
    \1534\ See id. at 42450.
    \1535\ See id. at 42450.
---------------------------------------------------------------------------

    We also noted that the proposed external business conduct rules 
would be likely to impose certain costs on security-based swap dealers 
and other market participants. For example, they would require 
security-based swap dealers to make various disclosures and establish 
systems for monitoring compliance with these requirements.\1536\
---------------------------------------------------------------------------

    \1536\ See id. at 42443-448.
---------------------------------------------------------------------------

    Because this proposing release does not change the substantive 
external business conduct requirements but only potentially reduces the 
number of registered security-based swap dealers and the number of 
transactions involving registered security-based swap dealers that 
would be subject to the external business conduct requirements, our 
discussion below focuses on how proposed Rule 3a71-3(c) affects the 
scope of application of these rules. This change in scope will directly 
affect the resulting programmatic benefits and costs. We also discuss 
the assessment costs associated with distinguishing Foreign Business 
from U.S. Business.
i. Programmatic Benefits and Costs
    Our proposed rules may affect the programmatic costs and benefits 
associated with requirements regarding external business conduct 
standards in two ways. First, we are proposing rules regarding 
application of the de minimis exception in the cross-border context 
that may be expected to reduce the number of non-U.S. persons that 
would otherwise be required to register as security-based swap 
dealers.\1537\ Because the business conduct and conflict-of-interest 
rules apply only to registered dealers, reducing the number of 
registered dealers would reduce the number of entities required to 
comply with these dealer-specific rules. Second, we are proposing not 
to require foreign or U.S. security-based swap dealers to comply with 
requirements relating to external business conduct standards with 
respect to their Foreign Business, which would reduce the proportion of 
registered dealers' transactions that are required to comply with these 
rules. We preliminarily believe that these proposed rules will not 
significantly affect the programmatic benefits of the rules but should 
reduce programmatic costs that they impose on market participants.
---------------------------------------------------------------------------

    \1537\ See proposed Rule 3a71-3(b) under the Exchange Act, as 
discussed in Section III.B.3, supra.
---------------------------------------------------------------------------

    As already noted, Title VII is concerned directly with risk to the 
U.S. financial system, transparency, and the protection of 
investors,\1538\ and we preliminarily believe that our proposed

[[Page 31153]]

approach to applying requirements related to external business conduct 
standards is consistent with these goals. As noted above in our 
discussion of the programmatic costs and benefits associated with our 
application of the de minimis exception in the cross-border context, we 
believe that our proposed approach to the de minimis calculation 
appropriately identifies those entities whose dealing activity poses 
the type of stability, transparency, and counterparty-protection 
concerns that Title VII is intended to address.\1539\ To the extent 
that the number of entities required to comply with these requirements 
relating to external business conduct standards decline because the 
number of registered foreign security-based swap dealers declines, we 
do not believe that there will be a significant change in programmatic 
benefits, as foreign security-based swap dealers whose transactions 
with U.S. persons and transaction conducted within the United States 
falls below the de minimis threshold raise concerns no different from 
those posed by U.S. security-based swap dealers whose security-based 
swap activity falls below the threshold. We see no reason, therefore, 
for treating these two types of entities differently.
---------------------------------------------------------------------------

    \1538\ See note 4, supra.
    \1539\ See Section III.B.4, supra.
---------------------------------------------------------------------------

    We also preliminarily believe that our proposal not to require 
compliance with these requirements with respect to Foreign Business, 
even if a security-based swap dealer is registered, will have an 
insignificant effect, if any, on programmatic benefits and should 
reduce programmatic costs. We recognize that our proposed rule would 
not require foreign and U.S. security-based swap dealers to comply with 
these rules with respect to a significant proportion of their 
transactions. However, because Title VII is directed to the promoting 
the stability of the U.S. financial system and protecting 
counterparties, we do not believe that this proposed approach would 
reduce the programmatic benefits of our regulatory framework, given 
that such transactions, including any customer-facing activity, occur 
entirely or in significant part outside the United States where the 
parties typically do not expect U.S. customer-protection requirements 
to apply. At the same time, our definition of U.S. Business should 
ensure that registered dealers are required to comply with these 
requirements in their transactions with those counterparties that are 
entitled to protection in light of the purposes of Title VII or that 
reasonably expect to be protected in their dealings with registered 
security-based swap dealers.
    We preliminarily believe that our proposed approach will reduce 
programmatic costs for registered security-based swap dealers generally 
in proportion to their relative volume of Foreign Business, although 
certain of the costs associated with policies and procedures 
established to comply with these requirements are likely to remain 
fairly constant to the extent that a security-based swap dealer has any 
U.S. Business. Permitting security-based swap dealers to enter into 
transactions arising out of their Foreign Business without complying 
with these requirements should reduce the costs of compliance with 
Title VII for such registered security-based swap dealers and reduce 
the competitive effects of the Title VII dealer requirements by 
reducing unnecessary disparities between registered and unregistered 
security-based swap dealers in their foreign business.
ii. Assessment Costs
    The assessment costs associated with the proposed rules regarding 
these requirements would primarily flow from the determination of 
whether a given transaction is part of a registered security-based swap 
dealer's U.S. Business or its Foreign Business. Both for U.S. and 
foreign security-based swap dealers, ``U.S. Business'' is defined to 
capture largely the same transactions that these entities are required 
to calculate in determining whether they are required to register as 
security-based swap dealers.\1540\ Because of this overlap with the 
information needed to perform the de minimis calculation, the 
incremental costs of these determinations for registered security-based 
swap dealers should be minimal. We preliminarily believe that a 
registered foreign security-based swap dealer would not incur 
additional assessment costs above those already incurred in 
establishing and maintaining a system to identify and monitor the 
status of its counterparties and transactions for purposes of the de 
minimis calculation, as described above.\1541\
---------------------------------------------------------------------------

    \1540\ The sole exception is that, for U.S. security-based swap 
dealers, transactions conducted through a foreign branch, which 
would be counted toward the U.S. person's de minimis threshold, 
would not be treated as U.S. Business for purposes of applying the 
external business conduct requirements.
    \1541\ See Section XV.D.2, supra.
---------------------------------------------------------------------------

    U.S. security-based swap dealers would likely not have incurred 
these types of systems costs in performing the de minimis calculation 
because our proposed approach would require U.S. persons to count all 
of their dealing transactions toward their de minimis threshold. 
However, U.S. security-based swap dealers who conduct some or all of 
their security-based swap business through foreign branches and seek to 
rely on the Foreign Business exception to the external business conduct 
requirement would likely establish a similar system to identify such 
transactions. We believe that the costs of such a system would closely 
track the costs associated with the systems that non-U.S. persons are 
likely to establish to perform the dealer de minimis calculation and to 
determine whether a foreign security-based swap dealer must comply with 
Title VII external business conduct requirements, as described above, 
as U.S. security-based swap dealers conducting business through a 
foreign branch will also need to classify their counterparties and 
transactions in order to determine whether external business conduct 
requirements apply.\1542\ Based on a review of DTCC-TIW data relating 
to single-name credit default swap activity in 2011, there were no more 
than five U.S. security-based swap dealers that conducted dealing 
activity through foreign branches. Assuming that all such entities 
elected to establish a system to identify their Foreign Business, the 
total assessment costs associated with our proposed rule would be 
approximately $85,200 in one-time annual programming costs and $76,435 
in ongoing annual costs.\1543\
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    \1542\ See Section XV.D.2(a), supra.
    \1543\ As noted above in connection with the calculation of the 
de minimis threshold by foreign security-based swap dealers, we 
estimate the per-entity one-time annual programming costs to total 
approximately $17,040 and the per-entity ongoing annual costs to 
total $15,287. See note 1425, supra.
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iii. Alternatives
    The Commission's proposed approach to the application of the 
requirements relating to external business conduct standards is similar 
to the CFTC's proposed approach in certain aspects but differs from the 
CFTC's proposed approach in other aspects. With respect to U.S. 
security-based swap dealers, both the Commission's and the CFTC's 
proposed approaches would not apply the requirements relating to 
external business conduct standards to such U.S. security-based swap 
dealers' transactions conducted through a foreign branch outside the 
United States with non-U.S. person counterparties.\1544\ On the other 
hand,

[[Page 31154]]

with respect to foreign security-based swap dealers, the Commission's 
proposed approach would apply the requirements relating to external 
business conduct standards to such foreign security-based swap dealers' 
transactions conducted within the United States with all counterparties 
and transactions conducted outside the United States with foreign 
branches while the CFTC's proposed approach would not apply external 
business conduct standards to non-U.S. swap dealers' swap transactions 
with non-U.S. person counterparties even though such transactions are 
conducted within the United States.\1545\
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    \1544\ See CFTC Cross-Border Proposal, 77 FR 41230 and the text 
accompanying note 116. However, the CFTC's cross-border proposal did 
not address whether external business conduct standards would apply 
to transactions conducted through a foreign branch or agency of a 
U.S. security-based swap dealer within the United States where the 
counterparty is a non-U.S. person.
    \1545\ See CFTC Cross-Border Proposal, 77 FR 41229 and 41237.
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    The Commission could have proposed an approach to the application 
of the external business conduct standards that is the same as the 
CFTC's but instead, is proposing a territorial approach with a focus on 
counterparty protection in the United States. The Commission 
preliminarily believes that imposing external business conduct 
standards on U.S. security-based swap dealers with respect to their 
transactions conducted outside the United States through foreign 
branches would cause U.S. security-based swap dealers to incur 
compliance costs with respect to their foreign business \1546\ 
conducted through foreign branches, which would not be incurred by 
foreign security-based swap dealers when foreign security-based swap 
dealers conduct security-based swap transactions outside the United 
States in foreign markets.
---------------------------------------------------------------------------

    \1546\ See proposed Rule 3a71-3(a)(2) and the discussion in 
Section III.C.4(a), supra.
---------------------------------------------------------------------------

    The Commission recognizes that non-bank U.S. security-based swap 
dealers who do not conduct transactions through foreign branches would 
be subject to the external business conduct standards with respect to 
all transactions, including transactions with non-U.S. persons. The 
Commission preliminarily believes that, unlike U.S. security-based swap 
dealers who are banks and conduct foreign business through their 
foreign branches, a non-bank U.S. security-based swap dealer may 
conduct dealing activity with non-U.S. persons directly from its U.S. 
location or from its foreign offices that may not have separate 
operations that are subject to substantive local financial regulation 
and may not operate for valid business reasons. Therefore, transactions 
conducted by a non-bank U.S. security-based swap dealer with non-U.S. 
persons are an inseparable part of such non-bank dealer's security-
based swap business. Consistent with our traditional entity approach to 
the regulation of broker-dealers, the Commission preliminarily believes 
that it is appropriate to apply the external business conduct standards 
to a non-bank U.S. security-based swap dealer with respect to all 
transactions. To the extent that non-bank U.S. security-based swap 
dealers conduct dealing activity with non-U.S. persons through foreign 
affiliates, the proposed approach to application of the external 
business conduct standards would not impose burdens on non-bank U.S. 
security-based swap dealers' activity in the foreign security-based 
swap markets and would achieve the benefits of protecting investors 
from abusive financial services practices in the United States. The 
Commission requests comments on the costs and benefits associated with 
the proposed application of external business conduct standards to U.S. 
security-based swap dealers and whether the proposed approach would 
burden bank and non-bank U.S. security-based swap dealers' foreign 
dealing business.
    With respect to foreign security-based swap dealers, the Commission 
proposes to apply the external business conduct standards to their 
transactions with non-U.S. persons if such transactions are conducted 
within the United States. As stated above, the proposed approach to 
application of the external business conduct standards to transactions 
conducted within the United States would generate the benefit of 
protecting investors from abusive financial services practices. To 
permit registered foreign security-based swap dealers not to comply 
with the external business conduct standards when they conduct 
transactions in the United States with non-U.S. person may not 
adequately prevent abusive financial services practices in the U.S. 
security-based swap market and would permit double standards in 
security-based swap dealings in the United States. Therefore, the 
Commission preliminarily believes that the proposed territorial 
approach with a focus on counterparty protection in the United States 
is appropriate.
Request for Comment
     The Commission requests data to assess the costs and 
benefits of the proposed rule regarding application of external 
business conduct standards described above. Specifically, the 
Commission requests comment on (1) whether the proposed rule not to 
require a registered U.S. bank security-based swap dealer and foreign 
security-based swap dealer to comply with the external business conduct 
standards with respect to its foreign business would compromise 
counterparty protection from abusive financial services practices in 
the United States; (2) whether the proposed rule to require a 
registered non-bank U.S. security-based swap dealer to comply with the 
external business conduct standards with respect to all transactions 
regardless of whether the counterparties are U.S. persons or non-U.S. 
persons would affect its foreign dealing business; and (3) the 
Commission's estimate of the assessment costs with respect to the 
proposed rule. Commenters should provide an assessment of these costs 
and benefits, as well as any costs and benefits not already defined, 
that may result from the adoption of the proposed rule. Commenters 
should provide analysis and empirical data to support their views on 
the costs and benefits associated with the proposals.
(b) Proposed Rule 18a-4(e)--Application of Segregation Requirements
i. Programmatic Benefits and Costs
a. Pre-Dodd Frank Segregation Practice
    Segregation is intended to protect customer assets by ensuring that 
cash and securities that a registered security-based swap dealer holds 
for security-based swap customers are isolated from the proprietary 
assets of the security-based swap dealer and identified as property of 
such customers.\1547\ Customer assets related to OTC derivatives are 
currently not consistently segregated from dealer proprietary assets in 
today's OTC derivatives markets.\1548\ With respect to non-cleared 
derivatives, available information suggests that there is no uniform 
segregation practice but that collateral for most accounts is not 
segregated.\1549\ In the absence of a

[[Page 31155]]

segregation requirement, the likelihood that security-based swap 
customers would suffer losses upon a security-based swap dealer's 
default may be substantially higher than may be expected if security-
based swap dealers are subject to such a requirement.\1550\
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    \1547\ See Section III.C.4.(b)(2), supra. See also Capital, 
Margin, and Segregation Proposing Release 77 FR 70274.
    \1548\ See ISDA Margin Survey 2012. See also Capital, Margin, 
and Segregation Proposing Release, 77 FR 70325.
    \1549\ See generally ISDA Margin Survey 2012. According to this 
survey, where an independent amount (initial margin) is collected, 
ISDA members reported that most (approximately 72.2%) was commingled 
with variation margin and not segregated, and only 4.8% of the 
amount received was segregated with a third party custodian. The 
survey also notes that while the holding of the independent amounts 
and variation margin together continues to be the industry standard 
both contractually and operationally, it is interesting to note that 
the ability to segregate has been made increasingly available to 
counterparties over the past three years on a voluntary basis, and 
has led to 26% of independent amount received and 27.8% of 
independent amount delivered being segregated in some respects. See 
ISDA Margin Survey 2012 at 10. See also Capital, Margin, and 
Segregation Proposing Release, 77 FR 70325.
    \1550\ See Capital, Margin, and Segregation Proposing Release, 
77 FR 70325.
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b. Benefits of the Segregation Requirements
    Segregation requirements would limit the potential losses for 
security-based swap customers if a registered security-based swap 
dealer fails.\1551\ The extent to which assets are in fact protected by 
proposed Rule 18a-4(a)-(d) would depend on how effective they are in 
practice in allowing assets to be readily returned to customers.\1552\ 
In the cross-border context, the effectiveness of the segregation 
requirement with respect to foreign security-based swap dealers in 
practice may depend on many factors, including the type and objective 
of the insolvency or liquidation proceeding and how the U.S. Bankruptcy 
Code, SIPA, banking regulations, and applicable foreign insolvency laws 
are interpreted by the U.S. bankruptcy court, SIPC, Federal Deposit 
Insurance Corporation, and relevant foreign authorities. In the 
Capital, Margin, and Segregation Proposing Release, we stated that it 
would be difficult to measure the benefits of the segregation 
requirements proposed by the Commission under Section 3E of the 
Exchange Act;\1553\ however, we believe that Rule 15c3-3, the existing 
segregation rule for broker-dealers, would provide a reasonable 
template for crafting the segregation requirements for security-based 
swap dealers.\1554\ The ensuing increased confidence of market 
participants when transacting in security-based swaps, as compared to 
the OTC derivatives market as it exists today, should increase the 
desire to trade security-based swaps and generally benefit market 
participants.\1555\
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    \1551\ Id.; see also CFTC and Commission, Statement on MF Global 
about the deficiencies in customer futures segregated accounts held 
at the firm (Oct. 31, 2011).
    \1552\ See Capital, Margin, and Segregation Proposing Release, 
77 FR 70325.
    \1553\ Id.
    \1554\ Id.
    \1555\ Id. at 70326.
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c. Costs of the Segregation Requirements
    Segregation requirements also will impose certain costs on 
registered security-based swap dealers as well as other market 
participants. The costs associated with individual account segregation 
include fees charged by custodians to monitor individual account assets 
and to account for potential legal risks and liabilities of custodians 
to account beneficiaries or dealers, as well as operational costs to 
account for collateral on an individual customer basis.\1556\ The costs 
associated with omnibus segregation would include operational costs and 
increase in costs of funds to dealers due to inability to use customer 
funds,\1557\ compared to the baseline today that dealers in general do 
not segregate customer collateral for security-based swaps, and to the 
extent collateral is segregated, it is not done so on the terms that 
would be required by the segregation rules proposed by the Commission 
in the Capital, Margin, and Segregation Proposing Release.\1558\ The 
operational costs include costs to establish qualifying bank accounts 
and to perform the calculations required to determine the amount that 
is required at any one time to be maintained in the reserve 
account.\1559\ The increase in costs of funds to the extent that 
collateral a dealer holds that could otherwise be rehypothecated to 
finance business activity would no longer be permitted for that purpose 
could equal the borrowing costs of the dealer. The extent of the 
increase of cost of funds to dealers would depend on how much 
collateral associated with security-based swaps and held by dealers 
today consists of initial margin that they can rehypothecate, i.e., 
that is not now segregated as would be required under the new Rules 
18a-4(a)-(d) proposed by the Commission in the Capital, Margin and 
Segregation Proposing Release.\1560\ The Commission currently does not 
have sufficient information to quantify the increase of costs of funds 
to dealers as a result of the proposed segregation requirement and 
seeks comment on the impact of the proposed application of segregation 
requirements on the increase of costs of funds.\1561\
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    \1556\ In the Capital, Margin, and Segregation Proposing 
Release, we stated that a commenter to the CFTC raised concerns with 
the length of time and the costs to comply with an individual 
segregation mandate. Specifically, the commenter raised concerns 
regarding the number of collateral arrangements that would be 
required. The commenter estimated, based on discussion with its 
members, that ``a rough estimate of the time it would take to 
establish the necessary collateral arrangements is 1 year and eleven 
months, with an associated cost of $141.8 million, per covered swap 
entity.'' See Capital, Margin, and Segregation Proposing Release 77 
FR 70326.
    \1557\ See Capital, Margin, and Segregation Proposing Release 77 
FR 70326, citing SIFMA/ISDA Comment Letter to the Prudential 
Regulators (``First, because the collateral cannot be 
rehypothecated, and because the collateral amounts will be very 
large, CSEs will be limited to investing very large amounts of 
eligible collateral in assets that generate low returns.'').
    \1558\ See proposed Rules 18a-4(a)-(d) under the Exchange Act 
and Capital, Margin, and Segregation Proposing Release 77 FR 70274-
78.
    \1559\ See section V.C. of the Capital, Margin, and Segregation 
Proposing Release for a discussion of implementation costs. In cases 
where an SBSD is jointly registered as a broker-dealer, the costs of 
adapting existing systems to account for security-based swap 
transactions may not be material in light of the similarities 
between the systems and procedures required by Rule 15c3-3 and those 
that would be required by proposed Rules 18a-4(a)-(d).
    \1560\ See Capital, Margin, and Segregation Proposing Release, 
77 FR 70326. See also Manmohan Singh, ``Velocity of Pledged 
Collateral: Analysis and Implications,'' IMF Working Paper (Nov. 
2011), available at: https://nowandfutures.com/large/VelocityOfPledgedCollateral-wp11256(imf).pdf; Manmohan Singh and 
James Aitken, ``The (sizable) Role of Rehypothecation in the Shadow 
Banking System,'' IMF Working Paper (July 2010), available at: 
https://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf.
    \1561\ The amount of initial margin collateral associated with 
security-based swaps posted to and held by dealers today that they 
can rehypothecate is unknown to the Commission.
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d. Costs and Benefits of Proposed Rules 18a-4(e)(1) and (2) Regarding 
Application of Segregation Requirements to Foreign Security-Based Swap 
Dealers
    Proposed Rules 18a-4(e)(1) and (2) would not apply segregation 
requirements to a foreign security-based swap dealer in certain 
circumstances. Specifically, with respect to non-cleared security-based 
swap transactions, a foreign security-based swap dealer that is not a 
broker-dealer would not be subject to the segregation requirements set 
forth in Section 3E of the Exchange Act and paragraphs (a)-(d) of the 
proposed Rule 18a-4 with respect to margin received from non-U.S. 
person counterparties.\1562\ Therefore, under the proposed Rule 18a-
4(e)(1)(ii), non-U.S. person counterparties to non-cleared security-
based swaps with a registered foreign security-based swap dealer that 
is not a registered broker-dealer would not be ``customers'' of such 
registered foreign security-based swap dealer and would not be given 
the preferred priority status with respect to the segregated assets in 
the omnibus account maintained by such foreign security-based swap 
dealer in a stockbroker liquidation proceeding

[[Page 31156]]

under the U.S. Bankruptcy Code.\1563\ With respect to a registered 
foreign security-based swap dealer that is not a foreign bank with a 
branch or agency in the United States and is not a registered broker-
dealer, the proposed Rule 18a-4(e)(2)(ii) would subject such foreign 
security-based swap dealer to the segregation requirements with respect 
to any assets posted by a non-U.S. person counterparty to secure a 
cleared security-based swap transaction only if such foreign security-
based swap dealer accepts any assets from, for, or on behalf of a U.S. 
person counterparty to secure a security-based swap.\1564\ The proposed 
Rule 18a-4(e)(2)(iii) would not subject a registered foreign security-
based swap dealer that is a foreign bank with a branch or agency in the 
United States to the segregation requirements with respect to any 
assets posted by a non-U.S. person counterparty to a security-based 
swap transaction.\1565\
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    \1562\ See proposed Rule 18a-4(e)(1)(ii) under the Exchange Act. 
A foreign security-based swap dealer that is a broker-dealer shall 
be subject to the segregation requirements set forth in Section 3E 
of the Exchange Act and paragraphs (a)-(d) of the proposed Rule 18a-
4 with respect to margin received from any counterparties. See 
proposed Rule 18a-4(e)(1)(i) under the Exchange Act.
    \1563\ See Section III.C.4.(b)(2), supra.
    \1564\ See proposed Rule 18a-4(e)(2)(ii) under the Exchange Act. 
A registered foreign security-based swap dealer that is a registered 
broker-dealer shall be subject to the segregation requirements set 
forth in Section 3E of the Exchange Act and paragraphs (a)-(d) of 
the proposed Rule 18a-4 under the Exchange Act with respect to 
margin received from any counterparties. See proposed Rule 18a-
4(e)(2)(i) under the Exchange Act.
    \1565\ See proposed Rule 18a-4(e)(2)(iii) under the Exchange 
Act.
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    As stated above, the proposed Rules 18a-4(e)(1) and (2) regarding 
application of the segregation requirements to foreign security-based 
swap dealers would focus on applying the segregation requirements to 
provide customer protection to U.S. person counterparties and would not 
extend the same customer protection to non-U.S. person counterparties 
unless not doing so would result in losses to U.S. person 
counterparties.\1566\ To the extent that a foreign security-based swap 
dealer would not be subject to the segregation requirements, the 
programmatic benefits described above, such as prompt return of 
customer assets and limiting the potential losses for security-based 
swap customers in the event of a failure of a registered security-based 
swap dealer, would not be extended to non-U.S. person counterparties. 
In addition, the benefits of potential increased confidence of market 
participants when transacting in security-based swaps, as brought about 
by the segregation requirements, would not occur in the markets where 
such foreign security-based swap dealer transacts with non-U.S. person 
counterparties.
---------------------------------------------------------------------------

    \1566\ See Section III.C.4.(b)(2), supra.
---------------------------------------------------------------------------

    There also would be corresponding decrease in costs as a result of 
the proposed Rule 18a-4(e)(1)(ii) not requiring a foreign security-
based swap dealer that is not a registered broker-dealer to segregate 
assets collected from non-U.S. person counterparties as collateral to 
secure non-cleared security-based swaps. A foreign security-based swap 
dealer would not need to provide notice required pursuant to Section 
3E(f)(1)(A) of the Exchange Act to a non-U.S. person counterparty with 
respect to the right to elect individual account segregation.\1567\ 
This would save operational costs to account for collateral on an 
individual customer basis and save fees charged by custodians as 
described above.\1568\ A foreign security-based swap dealer that is not 
a registered broker-dealer also would have cost-savings associated with 
omnibus segregation, including less operational cost (such as the cost 
to perform the calculations required to determine the amount that is 
required at any one time to be maintained in the reserve account) as 
described above, and may be able to rehypothecate non-U.S. person 
counterparty's assets to finance its business activity, which would 
result in borrowing cost savings. The extent of these cost savings 
would depend on how much collateral posted by non-U.S. person 
counterparties and held by dealers today to secure security-based swaps 
consisting of margin that is available for dealers to use (i.e., that 
is not now segregated).
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    \1567\ See Section 3E(f)(1)(A) of the Exchange Act, 15 U.S.C. 
78c-5(f), and proposed Rule 18a-4(d)(1) under the Exchange Act.
    \1568\ Although the segregation requirements with respect to 
non-cleared security-based swaps described in Section 3E(f) and the 
proposed Rule 18a-4(a)-(d) would not apply to a foreign security-
based swap dealer when such foreign security-based swap dealer 
transacts with a non-U.S. person counterparty, proposed Rule 18a-
4(e)(1) does not prevent parties from making segregation 
arrangements by contractual agreement under applicable local law. If 
parties were to make segregation arrangements, certain benefits and 
costs would arise; however, these benefits and costs would be 
outside the Title VII regulatory regime and would not be 
attributable to the Title VII regulatory regime.
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    The Commission preliminarily believes that the above decreases in 
benefits and costs as a result of the proposed Rule 18a-4(e)(1) and (2) 
are not those programmatic benefits and costs intended by the 
segregation requirements set forth in Section 3E of the Exchange Act, 
and the rules and regulations thereunder. Such decreases reflect the 
exclusion of foreign security-based swap dealers (that are not 
registered broker-dealers) from the segregation requirements when they 
transact with non-U.S. persons in the foreign markets, which we believe 
is consistent with the objective of the Dodd-Frank Act to protect the 
U.S. markets and participants in those markets.\1569\
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    \1569\ See Section III.C.4.(b)(2), supra.
---------------------------------------------------------------------------

e. Costs and Benefits of Proposed Rule 18a-4(e)(3) Regarding 
Disclosures
    There would be new costs and benefits associated with compliance 
with the segregation requirements for foreign security-based swap 
dealers due to the disclosures requirements in the proposed Rule 18a-
4(e)(3). Specifically, proposed Rule 18a-4(e)(3) would require a 
registered foreign security-based swap dealer to disclose to its 
counterparty that is a U.S. person the potential treatment of the 
assets segregated by such registered foreign security-based swap dealer 
pursuant to Section 3E of the Exchange Act, and the rules and 
regulations thereunder, in insolvency proceedings under U.S. bankruptcy 
law and any applicable foreign insolvency laws. Such disclosure shall 
include whether the foreign security-based swap dealer is subject to 
the segregation requirement set forth in Section 3E of the Exchange 
Act, and the rules and regulations thereunder, with respect to the 
assets collected from the U.S. person counterparty who will receive the 
disclosure, whether the foreign security-based swap dealer could be 
subject to the stockbroker liquidation provisions in the U.S. 
Bankruptcy Code, whether the segregated assets could be afforded 
customer property treatment under the U.S. bankruptcy law, and any 
other relevant considerations that may affect the treatment of the 
assets segregated under Section 3E of the Exchange Act in insolvency 
proceedings of the foreign security-based swap dealer. The Commission 
preliminarily believes that such disclosure would greatly benefit U.S. 
person counterparties and assist them in evaluating the legal risk in 
respect of posting collateral to a foreign security-based swap dealer 
and the likely treatment of their assets held as collateral in the 
event of insolvency or liquidation of the foreign security-based swap 
dealer whom they transact with and post collateral to.
    With respect to costs, the Commission preliminarily believes that a 
foreign security-based swap dealer should be able to include such 
disclosure in the credit support agreement pursuant to which assets 
would be posted to margin, guarantee, or secure a security-based swap 
transaction. The costs associated with such disclosure may include 
legal costs related to consulting bankruptcy counsels, both U.S. 
counsel and relevant foreign counsel, in respect of the

[[Page 31157]]

potential treatment of the segregated assets under U.S. bankruptcy law 
and applicable foreign insolvency laws, the costs of drafting such 
disclosure, and the costs of updating such disclosure whenever there is 
a material change of U.S. bankruptcy law or applicable foreign laws 
that may render the prior disclosure inaccurate or misleading. The 
Commission preliminarily estimates that the average costs associated 
with such disclosure would be less than $2,000,000 and a narrow range 
could be between $760,000 and $920,000.\1570\
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    \1570\ This estimate is based on staff experience in undertaking 
legal analysis of U.S. bankruptcy law treatment of customer assets 
held by broker-dealers and assumes that foreign security-based swap 
dealers would seek outside legal counsel to prepare the disclosures 
described in proposed Rule 18a-4(e)(3) and that the legal analysis 
of the treatment of customer property under a complex foreign 
insolvency law regime may cost $50,000 per entity and the same legal 
analysis under a less complex foreign insolvency law regime or the 
U.S. bankruptcy law regime may cost $30,000 per entity. We recognize 
that the complexity of the insolvency laws relating to liquidation 
of a foreign security-based swap dealer may vary greatly, and that 
we do not have insight into various insolvency law regimes such that 
we could reasonably determine what insolvency law regime may be 
considered more or less complex for these purposes. Thus, based on 
our understanding of the U.S. bankruptcy law analysis relating to 
liquidation of a broker-dealer, taking into account the potential 
application of various foreign insolvency laws, we believe that an 
average of the costs associated with more complex and less complex 
insolvency law regimes equaling $40,000 per entity could reasonably 
approximate the average costs for a foreign security-based swap 
dealer to prepare the disclosures required in proposed Rule 18a-
4(e)(3). We have estimated that the total number of dealers that may 
be required to register under the proposed de minimis rule is 50 or 
fewer entities, and if the criterion of three or more non-ISDA 
dealer counterparties is applied to the analysis, we estimated that 
the total number of dealers that may be required to register is 
between 27 and 31. See Section XV.D.1(b), supra. Out of these 
dealers, we estimated that the number of non-U.S. domiciled dealers 
is between 19 and 23. Therefore, the aggregate costs of the 
disclosure requirement could be $2,000,000 ($40,000 * 50) or less 
with a narrow range from $760,000 ($40,000 * 19) to $920,000 
($40,000 * 23).
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ii. Assessment Costs
    The assessment cost associated with proposed Rule 18a-4(e)(1) and 
(2) should primarily be related to inquiries about a counterparty's 
U.S. person status, whether a security-based swap is a cleared or non-
cleared transaction, whether the foreign security-based swap dealer is 
a registered broker-dealer, whether the foreign security-based swap 
dealer, whether the foreign security-based swap dealer has a branch or 
agency in the United States, and whether the foreign security-based 
swap dealer accepts any assets from, or on behalf of, a U.S. person 
counterparty to security a security-based swap, in order to determine 
whether a transaction would be subject to the segregation requirements. 
A security-based swap dealer should know whether it is a registered 
broker-dealer and whether a particular transaction is submitted for 
clearing and should not incur any assessment costs relating to 
determining whether a transaction is cleared or non-cleared security-
based swap. A foreign security-based swap dealer may need to make an 
internal inquiry as to whether it has a branch or agency in the United 
States and whether it accepts collateral from, or on behalf of, a U.S. 
person counterparty. Such inquiry should be a factual inquiry involving 
consulting the corporate secretary, in-house attorney or compliance 
manager without the need for further research and, therefore, the cost 
of such inquiry should be minimal. The Commission preliminarily 
believes that the costs associated with inquiring about a 
counterparty's U.S. person status should be subsumed in the assessment 
costs of the de minimis rule and the requirements relating to the 
external business conduct standards since a security-based swap dealer 
only needs to inquire about a counterparty's U.S. person status and 
implement systems to record and track the counterparty status once in 
order to assess and comply with all the Title VII requirements that 
depend on such factual inquiry. Therefore, the Commission preliminarily 
believes that the assessment costs associated with proposed Rules 18a-
4(e)(1) and (2) alone should be minimal.
    The assessment cost associated with the disclosures in proposed 
Rule 18a-4(e)(3) would be related to inquiries about a counterparty's 
U.S. person status, which also would be subsumed in the assessment 
costs associated with proposed Rules relating to the de minimis 
exception and the requirements relating to the external business 
conduct standards.
Request for Comment
     Is it appropriate, from the cost and benefit point of 
view, not to require foreign security-based swap dealers to comply with 
the segregation requirements when they transact with non-U.S. person 
counterparties? Are there other costs and benefits not mentioned above? 
Specifically, the Commission requests comment on (1) whether the 
proposed approach to application of the segregation requirements to 
foreign security-based swap dealers based on their status as a broker-
dealer, foreign security-based swap dealer that is a bank with a branch 
or agency in the United States, or foreign security-based swap dealer 
that is not a broker-dealer and is not a bank with a branch or agency 
in the United States would generate the benefit of effectively 
administering the segregation requirement in practice and protecting 
U.S. counterparties, (2) the costs of custodian fees, the operation 
costs and the costs associated with increased costs of funds due to 
inability to use customer asserts as a result of a foreign security-
based swap dealer being required to comply with the segregation 
requirements, (3) the costs of preparing the disclosures required in 
proposed Rule 18a-4(e)(3) and (4) the assessment costs associated with 
the proposed Rule 18a-4(e).
     Is it appropriate, from the cost and benefit point of 
view, to require a foreign security-based swap dealer to disclose 
potential treatment of the assets segregated by such foreign security-
based swap dealer in insolvency proceedings under U.S. bankruptcy law 
and any applicable foreign insolvency laws? Are there other costs and 
benefits not mentioned above?
     Is it appropriate, from the cost and benefit point of 
view, to require a foreign security-based swap dealer to disclose to 
its non-U.S. person counterparty that it is not subject to the 
segregation requirements and that funds or property provided by such 
non-U.S. person counterparty would not be treated as ``customer 
property'' as that term is defined in 11 U.S.C. 741?

F. Economic Analysis of Application of Rules Governing Security-Based 
Swap Clearing in Cross-Border Context

    The Dodd-Frank Act amends the Exchange Act to require central 
clearing of security-based swaps that the Commission determines should 
be cleared,\1571\ and it directs entities that perform clearing agency 
functions for security-based swaps to register with the 
Commission.\1572\ In this section, we first discuss the costs and 
benefits resulting from clearing agency registration and then consider 
the costs and benefits associated with the proposed rule regarding 
application of the clearing agency registration requirement to foreign 
clearing agencies. Following this, we discuss the costs and benefits 
that result from requiring security-based swap market participants to 
centrally clear transactions and then examine the trade-offs associated 
with the proposed rule implementing the mandatory clearing requirement 
in the cross-border context.
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    \1571\ See Section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-
3(a)(1).
    \1572\ See Section 17A(g) of the Exchange Act, 15 U.S.C. 78q-
1(g).

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[[Page 31158]]

1. Programmatic Benefits and Costs Associated With the Clearing Agency 
Registration
(a) Proposed Interpretive Guidance Regarding Clearing Agency 
Registration
(i) Current State of Clearing Agency Registration
    At present, voluntary clearing of security-based swaps in the 
United States is limited to CDS products.\1573\ It began in December of 
2008, when the Commission acted to facilitate the clearing of OTC 
security-based swaps by permitting five clearing agencies, including 
three foreign clearing agencies,\1574\ to clear CDS on a temporary, 
conditional basis.\1575\ In each instance, these clearing agencies 
wanted to perform clearing functions with respect to CDS in the United 
States by providing CCP services directly to U.S. persons.\1576\ The 
temporary exemptive orders granted to four of these clearing agencies 
(including two foreign clearing agencies) were extended until July 16, 
2011.\1577\ Title VII of the Dodd-Frank Act provides that (1) a 
depository institution that cleared swaps as a multilateral clearing 
organization prior to the date of enactment of the Dodd-Frank Act or 
(2) a derivatives clearing organization registered with the CFTC that 
cleared swaps pursuant to an exemption from registration as a clearing 
agency prior to the date of enactment of the Dodd-Frank Act is deemed 
registered as a clearing agency for the purposes of clearing security-
based swaps (``Deemed Registered Provision'').\1578\ The Deemed 
Registered Provision, along with other general provisions under Title 
VII of the Dodd-Frank Act, became effective on July 16, 2011.\1579\ As 
a result, three clearing agencies, i.e., ICE Clear Europe, Limited, ICE 
Clear Credit LLC (formerly ICE Trust US LLC), and Chicago Mercantile 
Exchange Inc., which were performing CCP functions with respect to CDS 
in the United States, were deemed registered with the Commission on 
July 16, 2011.\1580\
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    \1573\ See Section XV.B.2(e), supra.
    \1574\ These three foreign clearing agencies are ICE Clear 
Europe Limited, Eurex Clearing AG, and LIFFE A&M and LCH Clearnet 
Ltd. See note 74, supra.
    \1575\ See note 74, supra.
    \1576\ Id.
    \1577\ See Exchange Act Release Nos. 63389 (Nov. 29, 2010), 75 
FR 75520 (Dec. 3, 2010) (order extending temporary conditional 
exemptions in connection with request on behalf of ICE Clear Europe, 
Limited), 63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 3, 2010), (order 
extending temporary conditional exemptions in connection with 
request on behalf of Eurex Clearing AG), 63388 (Nov. 29, 2010), 75 
FR 75522 (Dec. 3, 2010) (order extending temporary conditional 
exemptions in connection with request on behalf of Chicago 
Mercantile Exchange, Inc.), and 63387 (Nov. 29, 2010) 75 FR 75502 
(Dec. 3, 2010) (order extending and modifying temporary exemptions 
in connection with request of ICE Trust US LLC); LIFFE A&M and 
LCH.Clearnet Ltd. allowed their order to lapse without seeking 
renewal.
    \1578\ See 15 U.S.C. 78q-1(l). Under this Deemed Registered 
Provision, a clearing agency will be required to comply with all 
requirements of the Exchange Act, and the rules thereunder, 
applicable to registered clearing agencies to the extent it clears 
security-based swaps after the effective date of the Deemed 
Registered Provision, including, for example, the obligation to file 
proposed rule changes under Section 19(b) of the Exchange Act.
    \1579\ See Section 774 of the Dodd-Frank Act (stating, 
``[u]nless otherwise provided, the provisions of this subtitle shall 
take effect on the later of 360 days after the date of the enactment 
of this subtitle or, to the extent a provision of this subtitle 
requires a rulemaking, not less than 60 days after publication of 
the final rule or regulation implementing such provision of this 
subtitle.'').
    \1580\ Eurex Clearing AG did not meet the criteria in the Deemed 
Registered Provision and is not currently providing CCP services in 
the United States with respect to security-based swaps. See, e.g., 
Order Granting Temporary Exemptions Under the Securities Exchange 
Act of 1934 in Connection with the Pending Revision of the 
Definition of ``Security'' to Encompass Security-Based Swaps, and 
Request for Comment, Exchange Act Release No. 64795 (July 1, 2011) 
at n. 76.
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(ii) Programmatic Effect of the Proposed Interpretive Guidance
    As stated above,\1581\ the Commission is proposing interpretive 
guidance that a clearing agency performing the functions of a CCP for 
security-based swaps within the United States would be required to 
register pursuant to Section 17A(g) of the Exchange Act.\1582\ Under 
this proposed interpretive guidance, a registration requirement 
pursuant to Section 17A(g) of the Exchange Act would apply only to 
clearing agencies that provide CCP services directly to a U.S. person 
with respect to security-based swaps, since these entities would be 
performing the functions of a CCP within the United States. Three 
clearing agencies currently provide CCP services directly to U.S. 
persons with respect to swaps and security-based swaps.\1583\ All of 
these three clearing agencies are registered with the Commission under 
the Deemed Registered Provision. Therefore, the proposed interpretation 
would not increase the number of domestic or foreign clearing agencies 
required to register with the Commission until new clearing agencies 
desire to enter the U.S. market to provide CCP services directly to 
U.S. persons with respect to security-based swaps.
---------------------------------------------------------------------------

    \1581\ See Section V, supra.
    \1582\ 15 U.S.C. 78q-1(g).
    \1583\ See Clearing Agency Standards Adopting Release, 77 FR 
66265. These three clearing agencies are ICE Clear Europe, Limited, 
ICE Clear Credit LLC, and Chicago Mercantile Exchange, Inc.
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(iii) Costs and Benefits of the Proposed Interpretive Guidance
    The Commission has considered the costs and benefits associated 
with the clearing agency registration requirement in Section 17A(g) of 
the Exchange Act \1584\ in the cross-border context through the lens of 
a key Title VII goal: systemic risk mitigation. We discuss below the 
costs and benefits of the proposed interpretive guidance by looking at 
the role of the clearing agency in the security-based swap market and 
how clearing agencies transfer financial risks.
---------------------------------------------------------------------------

    \1584\ 15 U.S.C. 78q-1(g).
---------------------------------------------------------------------------

    The proposed interpretive guidance regarding clearing agency 
registration would generate significant programmatic benefits. These 
benefits are tied to mandatory clearing. As explained below, clearing 
agency registration promotes sound management of the counterparty risk 
concentrated in CCPs, the importance of which is magnified by the 
application of a mandatory clearing requirement. Registration would 
provide standards for CCPs' management of financial risks, including 
counterparty credit risk, legal risk and liquidity risk. Mandatory 
clearing of security-based swaps is one means by which Title VII of the 
Dodd-Frank Act seeks to reduce systemic risk in the U.S. financial 
system. Under Title VII, security-based swaps, ``whenever possible and 
appropriate,'' \1585\ shall be centrally cleared through a clearing 
agency that is registered or exempt from registration under the 
Exchange Act.\1586\ In a world of bilateral transactions in which each 
counterparty bears the other counterparty's credit risk, a large 
counterparty who transacts with many other counterparties and cumulates 
significant security-based swap positions may pose systemic risk when 
its failure would generate sequential counterparty defaults.\1587\
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    \1585\ See, e.g., S. Comm. on Banking, Hous., & Urban Affairs, 
The Restoring American Financial Stability Act of 2010, S. Rep. No. 
111-176, at 32 (``As a key element of reducing systemic risk and 
protecting taxpayers in the future, protections must include 
comprehensive regulation and rules for how the OTC derivatives 
market operates. Increasing the use of central clearinghouses, 
exchanges, appropriate margining, capital requirements, and 
reporting will provide safeguards for American taxpayers and the 
financial system as a whole.''); id. at 34 (``Some parts of the OTC 
market may not be suitable for clearing and exchange trading due to 
individual business needs of certain users. Those users should 
retain the ability to engage in customized, uncleared contracts 
while bringing in as much of the OTC market under the centrally 
cleared and exchange-traded framework as possible.'').
    \1586\ See 15 U.S.C. 78c-3(a)(1).
    \1587\ See Craig Pirrong, ``The Economics of Central Clearing: 
Theory and Practice,'' ISDA Discussion Papers Series, No. 1 (2011), 
at 6 (``Widespread defaults on derivatives contracts may harm more 
than the counterparties on the defaulted contracts. The losses 
suffered by the victims of the original defaults may be so severe as 
to force those victims into financial distress, which harms those 
who have entered into financial contracts with them--including their 
creditors, and the counterparties to derivatives on which they owe 
money. Such a cascade of defaults can result in a systemic financial 
crisis.'').

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[[Page 31159]]

    Central clearing through a CCP generally reduces counterparty risk 
by interposing a CCP as counterparty to all cleared transactions.\1588\ 
Where security-based swaps are subject to a mandatory clearing 
requirement the role of the CCP becomes even more critical, as the 
volume of positions in which the CCP is interposed and becomes the 
central counterparty will likely increase.\1589\
---------------------------------------------------------------------------

    \1588\ See Clearing Agency Standards Adopting Release, 77 FR 
66264 (``Central clearing facilitates the management of counterparty 
credit risk among dealers and other institutions by shifting that 
risk from individual counterparties to CCPs, thereby helping protect 
counterparties from each other's potential failures and preventing 
the buildup of risk in such entities, which could be systemically 
important.'').
    \1589\ See Clearing Procedures Adopting Release, 77 FR 41638.
---------------------------------------------------------------------------

    While central clearing may make sequential counterparty defaults 
less likely, it does not eliminate systemic risk. CCPs concentrate 
counterparty risk.\1590\ CCPs manage and reduce such concentrated risk 
by applying mark-to-market pricing and margin requirements to cleared 
transactions in a consistent manner \1591\ and through netting (i.e., 
by reducing the amounts of funds or other assets that must be exchanged 
at settlement).\1592\ In the event of a clearing member's default in 
which the losses exceed the collateral posted to the CCP and other 
available funds, residual losses will be mutualized among the other 
non-defaulting members.\1593\ By placing members under financial 
strain, mutualization may strain the entire financial system and create 
systemic impact.\1594\ Even in the absence of this feature of CCPs, the 
default of a CCP has the potential to harm the market in all financial 
instruments cleared by that CCP, creating liquidity constraints with 
respect to such financial instruments in the market. Such liquidity 
constraints would affect all parties transacting in such 
instruments.\1595\
---------------------------------------------------------------------------

    \1590\ See Clearing Agency Standards Adopting Release, 77 FR 
66264-65 (stating that ``a CCP also concentrates risks and 
responsibility for risk management in the CCP.'').
    \1591\ See Culp, supra note 111. See also Clearing Agency 
Standards Adopting Release, 77 FR 66264.
    \1592\ See e.g., Duffie and Zhu, supra note 110; see also 
Clearing Agency Standards Adopting Release, 77 FR 66264.
    \1593\ See Risk Management Supervision of Designated Clearing 
Entities (July 2011), Report by the Board of Governors of the 
Federal Reserve System, Securities and Exchange Commission and 
Commodity Futures Trading Commission to the Senate Committees on 
Banking, Housing, and Urban Affairs and Agriculture in fulfillment 
of Section 813 of Title VIII of the Dodd-Frank Act, at 12.
    \1594\ See Craig Pirrong, ``The Economics of Central Clearing: 
Theory and Practice,'' ISDA Discussion Papers Series, No. 1 (2011), 
at 34-35.
    \1595\ Id. See also Risk Management Supervision of Designated 
Clearing Entities (July 2011), Report by the Board of Governors of 
the Federal Reserve System, Securities and Exchange Commission and 
Commodity Futures Trading Commission to the Senate Committees on 
Banking, Housing, and Urban Affairs and Agriculture in fulfillment 
of Section 813 of Title VIII of the Dodd-Frank Act, at 8-9.
---------------------------------------------------------------------------

    Given the mutualization of losses, a CCP's concentration of risk, 
and its responsibility for risk management, the effectiveness of a 
CCP's risk controls and the adequacy of its financial resources are 
critical aspects of the infrastructure of the market it serves.\1596\ 
Registration and clearing agency standards are designed to address 
these considerations.
---------------------------------------------------------------------------

    \1596\ See Clearing Agency Standards Adopting Release, 77 FR 
66265.
---------------------------------------------------------------------------

    The Commission preliminarily believes its interpretation that a 
clearing agency that provides CCP services for security-based swaps 
directly to U.S. persons must register pursuant to Section 17A(g) of 
the Exchange Act \1597\ generates the benefits of protecting the U.S. 
financial system against systemic risk that may arise from central 
clearing functions performed in the United States. In the case of a 
foreign clearing agency that provides CCP services directly to U.S. 
persons, the Commission preliminarily believes that requiring such 
foreign clearing agency to register with the Commission and comply with 
the Commission's regulatory regime for security-based swap clearing 
would generate the key benefit of reducing the magnitude of any 
systemic risk flowing into or within the United States originating in 
the activities of other members of a clearing agency.
---------------------------------------------------------------------------

    \1597\ 15 U.S.C. 78q-1(g).
---------------------------------------------------------------------------

    Specifically, the clearing agency standards would provide the 
minimum standards for CCPs' management of financial risks, including 
counterparty credit risk, legal risk, and liquidity risk. For example, 
the clearing agency standards established by the Commission are 
designed to minimize the CCPs' credit risk by, among other things, 
establishing eligibility standards for clearing members and requiring 
registered clearing agencies to measure their credit exposures on a 
daily basis. The Commission's clearing agency standards also require a 
registered clearing agency that acts as a CCP to collect initial and 
variation margin from members, and maintain sufficient financial 
resources to withstand, at a minimum, a default by the participant 
family to which it has the largest exposure in extreme but plausible 
market conditions and, with respect to a registered clearing agency 
acting as a CCP for security-based swaps, maintain additional financial 
resources sufficient to withstand, at a minimum, a default by the two 
participant families to which it has the largest exposures in extreme 
but plausible market conditions.\1598\ The benefits and costs of the 
clearing agency standards have been discussed in detail in the Clearing 
Agency Standards Adopting Release.\1599\ The proposed interpretive 
guidance does not change the benefits associated with the substantive 
registration requirement and clearing agency standards. The aggregate 
programmatic benefits of the proposed interpretive guidance would flow 
from its programmatic effect on the number of clearing agencies 
registered as discussed above.
---------------------------------------------------------------------------

    \1598\ See 17 CFR 240.17Ad-22(b)(3); see also Clearing Agency 
Standards Adopting Release, 77 FR 66234-35 and 66274-75.
    \1599\ See Section V Economic analysis of the Clearing Agency 
Standards Adopting Release, 77 FR 66263-84.
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    The proposed interpretive guidance would also entail certain costs, 
such as direct registration and compliance costs on CCPs.\1600\ The 
proposed interpretive guidance does not change the costs associated 
with the substantive registration requirement and clearing agency 
standards. As with the programmatic benefits, the aggregate 
programmatic costs of the proposed interpretive guidance would flow 
from its programmatic effect on the number of clearing agencies 
registered as discussed above.
---------------------------------------------------------------------------

    \1600\ The Commission previously estimated the costs for each 
registered clearing agency associated with compliance with clearing 
agency standards adopted in the Clearing Agency Standards Adopting 
Release could total approximately $3.7 million in initial costs and 
$10.1 million in annual ongoing costs. See Clearing Agency Standards 
Adopting Release, 77 FR 66273.
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(iv) Assessment Costs
    A clearing agency would incur assessment costs to determine whether 
it would be required to register by determining whether it provides CCP 
services directly to a U.S. person. Such determination may be made as 
part of its clearing membership application approval process. As part 
of the membership application, a prospective clearing member would be 
required to provide corporate organization documents, such as 
certificates of incorporation or articles of organization, which would 
enable the clearing agency

[[Page 31160]]

to determine whether a prospective clearing member is a U.S. person. 
Since corporate organization documents are part of the clearing 
membership application package,\1601\ the Commission preliminarily 
believes that the assessment costs associated with the proposed 
interpretive guidance should be minimal.
---------------------------------------------------------------------------

    \1601\ See, e.g., Clearing membership Application Instructions 
and Forms, ICE Clear U.S., Inc. (Aug. 2012), available at: https://www.theice.com/publicdocs/clear_us/Clear_US_Member_Application.pdf.
---------------------------------------------------------------------------

(v) Alternatives
    An alternative to the proposed interpretive guidance would be to 
require a clearing agency to register if such clearing agency provides 
CCP services to non-U.S. intermediaries that have U.S. persons as 
customers. Such an alternative would focus on the fact that 
intermediaries, whose financial stress or failure would mostly likely 
affect the U.S. financial system, are exposed to the risk of CCPs, and 
also transmit that risk to their U.S. customers. However, the 
Commission believes that the risk exposure that a U.S. customer could 
incur under its contractual agreements with an intermediary is 
generally much lower than the risk exposure a U.S. member could incur 
under a membership agreement with a CCP because a customer is only 
risking up to the full amount of property entrusted to an intermediary, 
but is not under any obligation to perform under the contractual 
agreements that the intermediary enters into with third parties. 
Consequently, if a clearing agency provides CCP services to an 
intermediary that has a U.S. person as a customer, the ripple effect of 
the failure of such clearing agency on the U.S. financial system may 
not rise to the systemic level.
    Alternatively, the Commission could have proposed to require a 
clearing agency to register if such clearing agency has a member whose 
obligations under the clearing membership agreement are guaranteed by a 
U.S. person. The Commission recognizes that guarantees may expose the 
U.S. guarantor to the performance obligations under the clearing 
membership agreement and represent conduits through which the risks 
associated with foreign CCP default may transfer to the U.S. financial 
system. A non-U.S. member of a foreign CCP will still participate in 
loss mutualization in the event of member default. In the presence of a 
guarantee, the losses associated with mutualization may flow back to 
the guarantor.
    However, the Commission preliminarily believes that interpreting a 
U.S. person providing a guarantee to a non-U.S. clearing member with 
respect to obligations under a clearing membership agreement as an 
indication of the clearing agency providing CCP services to a U.S. 
person may lead to a result that is over-inclusive with respect to the 
statutory clearing agency registration requirement. A U.S. person could 
guarantee its foreign affiliate's obligations under a clearing 
membership agreement with a foreign clearing agency that does not 
provide CCP services to any U.S. persons. Therefore, as a matter of 
policy, the Commission declines to propose such alternative 
interpretation at this time.
    Finally, the Commission is not proposing to apply clearing agency 
registration requirements to a clearing agency solely based on a U.S. 
domicile of the clearing agency. The Commission believes that the 
domicile location of a clearing agency is not a sufficient indicator of 
whether a CCP is performing the functions of a CCP in the United States 
and the transmission of systemic risk across borders by providing CCP 
services directly to U.S. persons.
(b) Proposed Exemption of Foreign Clearing Agency From Registration
    As discussed above, the Commission preliminarily believes that it 
may be appropriate to consider an exemption as an alternative to 
application of the registration requirement to a foreign clearing 
agency in circumstances where the foreign clearing agency is subject to 
comparable, comprehensive supervision and regulation by appropriate 
government authorities in its home country, and the nature of the 
clearing agency's activities and performance of functions within the 
United States suggest that registration is not necessary to achieve the 
Commission's regulatory objectives.
    The Commission preliminarily believes that the benefits of 
considering such exemption would be to increase the range of registered 
and exempt clearing agencies that could be used to satisfy the 
mandatory clearing requirement. Since the exemption would be considered 
in circumstances where the foreign clearing agency is subject to 
comparable, comprehensive supervision and regulation in its home 
country, the Commission preliminarily believes that such exemption 
would not compromise the programmatic benefits of the mandatory 
clearing requirement and at the same time may decrease the costs to 
market participants associated with the mandatory clearing requirement. 
In addition, to the extent that the exemption eliminates or decreases 
duplicative compliance costs, a foreign clearing agency eligible for 
the exemption may incur lower programmatic costs associated with 
implementation of, or compliance with, the clearing agency registration 
requirements and clearing agency standards than it would otherwise 
incur without the option of the proposed exemption.
    On the other hand, in the case of an exemption order granted with 
Commission-imposed conditions, it is possible that the programmatic 
costs may increase because market participants would be required to 
incur costs to satisfy these conditions. However, the proposed 
availability of an exemption from registration may enable a foreign 
clearing agency that would, due to conflicting local laws, otherwise 
not be able to provide CCP services to U.S. market participants in the 
absence of an exemption. In such cases, an exemption with Commission-
imposed conditions may increase the number of clearing agencies in the 
U.S. security-based swap market, contributing to the programmatic 
benefits and costs that flow from the clearing agency registration 
requirement.
(c) Programmatic Effects of Alternative Standards
    As stated above,\1602\ Section 17A(i) of the Exchange Act permits 
the Commission to adopt rules for registered clearing agencies that 
clear security-based swaps and conform its regulatory standards and 
supervisory practices to reflect evolving United States and 
international standards.
---------------------------------------------------------------------------

    \1602\ See Section V.B.3, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that this approach may be 
appropriate where the Commission determines not to grant a general 
exemption from registration under Section 17A(k) of the Exchange Act, 
but where consistency with some regulatory standards suggests that a 
targeted regulatory approach is warranted. To avoid compromising the 
benefits of clearing agency registration discussed above, the 
Commission would consider the costs and benefits of applying such 
alternative standards when it contemplates such an action. The 
Commission preliminarily believes that the alternative standards 
approach could provide great flexibility for the Commission to promote 
a great range of registered and exempt clearing agencies for market 
participants to satisfy the mandatory clearing requirement without 
compromising the benefit of clearing

[[Page 31161]]

agency registration by considering the adoption of targeted standards 
when warranted by the circumstances.
2. Programmatic Benefits and Costs Associated With the Mandatory 
Clearing Requirement of Section 3C(a)(1) of the Exchange Act
    Prior to the Dodd-Frank Act, ICE Clear Credit and ICE Clear Europe 
engaged in credit default swap clearing activities pursuant to 
exemptive orders issued by the Commission.\1603\ In part, the exemptive 
orders were conditioned on those CCPs making certain information 
available to the Commission, including risk assessment reports and 
information regarding future changes to risk management 
practices.\1604\
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    \1603\ See, e.g., Exchange Act Release No. 59527 (Mar. 6, 2009), 
74 FR 10791 (Mar. 12, 2009) (``ICE Clear Credit Exemptive Order''); 
Exchange Act Release No. 60372 (July 23, 2009), 74 FR 37748 (July 
29, 2009) (``ICE Clear Europe Exemptive Order''). In connection with 
those orders, Commission staff considered a number of aspects of 
those CCPs' clearing practices, including, inter alia, their risk 
management methodologies.
    \1604\ See ICE Clear Credit Exemptive Order, supra note 1603, at 
10799; ICE Clear Europe Exemptive Order, supra note 1603, at 37756-
57.
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    Following the Dodd-Frank Act becoming effective, ICE Clear Credit 
and ICE Clear Europe were deemed to be registered with the Commission 
in July 2011 as clearing agencies for security-based swaps.\1605\ ICE 
Clear Credit began clearing corporate single-name credit default swaps 
in December 2009,\1606\ and, as of December 14, 2012, had cleared a 
total $1.8 trillion gross notional of single-name credit default swaps 
on 153 North American corporate reference entities.\1607\ ICE Clear 
Europe began clearing credit default swaps on single-name corporate 
reference entities in December 2009,\1608\ and, as of December 14, 
2012, had cleared a total [euro]1.5 trillion in gross notional of 
single-name credit default swaps on 121 European corporate reference 
entities.\1609\ The level of clearing activity appears to have steadily 
increased as more CDS have become eligible to be cleared.\1610\ To 
date, all of ICE Clear Credit's and ICE Clear Europe's security-based 
swap clearing activity has involved proprietary transactions between 
clearing members.\1611\
---------------------------------------------------------------------------

    \1605\ Section 17A(l) of the Exchange Act provides in relevant 
part that a derivative clearing organization registered with the 
CFTC that clears security-based swaps would be deemed to be 
registered as a clearing agency under section 17A if, prior to the 
enactment of the Dodd-Frank Act, it cleared swaps pursuant to an 
exemption from registration as a clearing agency.
     Both ICE Clear Credit and ICE Clear Europe also are registered 
with the CFTC as Designated Clearing Organizations.
    \1606\ See Exchange Act Release No. 61662 (Mar. 5, 2010), 75 FR 
11589, 11591 (Mar. 11, 2010) (discussing ICE Clear Credit's CDS 
clearing activities as of March 2010).
    ICE Clear Credit (then known as ICE US Trust LLC) began clearing 
index-based CDS in March 2009. See Exchange Act Release No. 59527 
(Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009) (order granting 
temporary exemptions under the Exchange Act on behalf of ICE US 
Trust LLC).
    \1607\ ICE Clear Credit also has cleared a total of $19.1 
trillion gross notional on 59 index CDS as of December 14, 2012. See 
ICE Clear Credit, Volume of ICE CDS Clearing, available at: https://www.theice.com/clear_credit.jhtml.
    In addition to clearing single-name CDS on North American 
corporate reference entities, ICE Clear Credit also clears CDS on 
certain non-U.S. sovereign entities, and on certain indices based on 
North American reference entities.
    \1608\ See Exchange Act Release No. 61973 (Apr. 23, 2010), 75 FR 
22656, 22657 (Apr. 29, 2010) (discussing ICE Clear Europe's CDS 
clearing activity as of April 2010).
    ICE Clear Europe commenced clearing index-based CDS in July 
2009. See Exchange Act Release No. 60372 (July 23, 2009), 74 FR 
37748 (July 29, 2009) (order granting temporary exemptions under the 
Exchange Act on behalf of ICE Clear Europe).
    \1609\ ICE Clear Europe also has cleared a total of [euro]9.7 
trillion in gross notional on 44 index-based CDS. See ICE Clear 
Europe, Volume of ICE CDS Clearing, available at: https://www.theice.com/clear_credit.jhtml.
    Aside from clearing single-name CDS on European corporate 
reference entities, ICE Clear Europe also clears CDS on indices 
based on European reference entities, as well as futures and 
instruments on OTC energy and emissions markets.
    \1610\ See Clearing Procedures Adopting Release, 77 FR 41636-38 
(discussing the steady increase in the volume of cleared CDS 
transactions).
    \1611\ For purposes of the discussion here, ``clearing 
members,'' ``clearing participants,'' and similar terms encompass 
market participants that are approved by a clearing agency to become 
the clearing agency's counterparty when a single-name CDS is 
cleared.
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    The economic effects of mandatory clearing may be expected to vary 
depending on the scope of the requirement and the financial instruments 
subject to mandatory clearing. Within the subset of instruments that 
could be subject to a mandatory clearing requirement, a broader 
clearing mandate may be expected generally to lead to more effective 
risk mitigation, but it may also increase costs to market participants. 
The ultimate economic impact of the mandatory clearing requirement in 
part will be affected by the total set of security-based swaps that 
will be subject to mandatory clearing, following Commission 
determinations pursuant to Section 3C(b) of the Exchange Act.\1612\
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    \1612\ 15 U.S.C. 78c-3(b). Section 3C(b) of the Exchange Act 
includes two mandatory clearing determination review processes. One 
is Commission-initiated review and the other is a swaps submissions 
review processes. The mandatory clearing determinations to be made 
by the Commission would have impact on the economic consequences of 
the mandatory clearing requirement. For example, with respect to 
single-name CDS on certain corporate entities that have high 
notional size outstanding but are not currently cleared on a 
voluntary basis, the determination of clearing of these single-name 
credit default swaps would have impact on the volume of security-
based swap transactions subject to mandatory clearing.
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    Accordingly, this section does not seek to address the full range 
of economic consequences of the mandatory clearing requirement and the 
proposed application of mandatory clearing in the cross-border context 
that may result from the Commission's determination to require certain 
security-based swap transactions to be subject to mandatory clearing. 
Instead, this section contains two subsections. The first discusses 
programmatic effects of the mandatory clearing requirement and the 
second discusses costs and benefits that result from the mandatory 
clearing requirement generally. We consider these programmatic costs 
and benefits through analyzing the potential programmatic effects of 
mandatory clearing based on the data of voluntary clearing activity 
available to us and the assumptions stated below.
(a) Programmatic Effects of the Mandatory Clearing Requirement
    As stated above, voluntary clearing of security-based swaps in the 
United Sates is currently limited to the CDS products cleared by ICE 
Clear Credit and ICE Clear Europe.\1613\ The level of clearing activity 
appears to have steadily increased over time as more products have 
become eligible to be cleared.\1614\ The notional volume of cleared 
transactions reported by ICE Clear Credit for U.S.-index CDS products 
in 2009, 2010 and 2011 represented approximately 32%, 54% and 57% of 
the total notional volume of the U.S.-index CDS market, and the 
notional volume of cleared transactions reported by ICE Clear Credit 
for single-name CDS products referencing U.S. corporate in 2009, 2010 
and 2011 represented approximately 0%, 16% and 25% of the total 
notional volume of the single-name U.S. corporate CDS market.\1615\ 
These figures were

[[Page 31162]]

calculated based on price-forming transactions submitted to the DTCC-
TIW.\1616\
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    \1613\ See the discussion of levels of security-based swap 
clearing in Section XV.B.2(e) above. See also Clearing Procedures 
Adopting Release, 77 FR 41636 (noting that central clearing of 
security-based swaps began in March 2009 for index-based CDS 
products, in December 2009 for single-name CDS products on corporate 
reference entities, and in November 2011 for single-name CDS 
products on sovereign reference entities; also noting that at 
present, there is no central clearing in the United States for 
security-based swaps that are not CDS products, such as those based 
on equity securities).
    \1614\ See Clearing Procedures Adopting Release, 77 FR 41636-38 
(discussing the steady increase in the volume of cleared CDS 
transactions).
    \1615\ These figures are based on information regarding names 
accepted for clearing reported by ICE Clear Credit on its public Web 
site and are calculated based on ``price forming transactions'' 
submitted to the DTCC-TIW. See Section XV.B.2(e), supra. These 
figures include the clearing of trades on the same day the trade was 
executed as well as the clearing of trades entered into in prior 
years and submitted for clearing on retroactive basis. These figures 
do not include trades that resulted from the compression of trades 
previously submitted for clearing. See id. The CME Group also clears 
index CDS products and has reported clearing $144 billion in gross 
notional volumes of transactions since inception, with $21 billion 
in open interest as of the end of 2011. See CME Group, Cleared OTC 
Credit Default Swaps, available at: https://www.cmegroup.com/trading/cds/. These volumes are small relative to total market activity and 
are not included in the calculation of notional volume of cleared 
index CDS in 2011 performed by the Commission staff in the Clearing 
Procedures Adopting Release. See Clearing Procedures Adopting 
Release, 77 FR 41636.
    \1616\ See Section XV.B.2(e) and note 1615, supra.
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    Our prior analysis of the level of clearing activity also 
demonstrated steady increases of CDS transaction volume in names 
accepted for clearing over time.\1617\ Such analysis compared two 
measures of transaction volumes in names accepted for clearing within a 
year and across years and showed the increase in percentage from 2009 
to 2011 in the volume of new transactions in names that have ``accepted 
for clearing'' status. See Table 1 below.
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    \1617\ See Clearing Procedures Adopting Release, 77 FR 41637-38. 
The analysis there presents two measures with respect to transaction 
volume accepted for clearing (which ultimately may have been cleared 
or uncleared). The first measure includes all transaction volume in 
names accepted for clearing at any time during the calendar year, 
whether or not a trade was accepted for clearing at the time of its 
execution. The calculation of this measure was performed by staff in 
the Division of Risk, Strategy, and Financial Innovation by totaling 
the sum of price forming transactions reported to DTCC-TIW in the 
calendar year for index-based and single-name corporate CDS products 
that match the list of names accepted for clearing at ICE Clear 
Credit during the same period. See ICE Clear Credit, Clearing 
Eligible Products, available at: https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Clearing_Eligible_Products.xls.
    The second measure includes only transaction volume in names 
accepted for clearing at the time of trade execution. The 
calculation of this measure was performed by staff in the Division 
of Risk, Strategy, and Financial Innovation by totaling the sum of 
price forming transactions reported to DTCC-TIW in the calendar year 
for index-based and single-name corporate CDS products that match 
the list of names accepted for clearing at ICE Clear Credit, 
including only those transactions executed following the accepted 
for clearing date reported by ICE Clear Credit. This measure 
accounts for the fact that, although transactions executed in names 
prior to the name being accepted for clearing can be cleared later 
in the same calendar year through a process referred to as 
``backloading,'' names accepted for clearing towards the end of the 
year allow less time for this to occur. Backloading refers to the 
submission for clearing of pre-existing bilateral trades that were 
not submitted for clearing on the date of the transaction. See 
Clearing Procedures Adopting Release, 77 FR 41637-38.

        Table 1--Cleared Trades and Accepted Trades as a Percentage of Gross Notional Transaction Volume
----------------------------------------------------------------------------------------------------------------
                                                U.S.-Index CDS                 Single Name U.S. Corporate CDS
                                   -----------------------------------------------------------------------------
                                        2009         2010         2011         2009         2010         2011
----------------------------------------------------------------------------------------------------------------
Notional volume ($ billions)......       10,400        8,900        9,900        4,100        3,900        2,800
Percentage of Notional in Names
 Accepted for Clearing............
    --at calendar year end........          88%          90%          91%           1%          23%          33%
    --at time of trade execution..          55%          87%          91%           0%          16%          29%
Cleared transactions: % of total            32%          54%          57%           0%          16%          25%
 notional volume..................
----------------------------------------------------------------------------------------------------------------

    Although data suggested that clearing of security-based swaps has 
been increasing, significant segments of the security-based swap market 
remain uncleared.\1618\ Due in part to this data, the Commission 
recognized in the Clearing Procedures Adopting Release that mandatory 
clearing determinations made pursuant to Section 3C(a)(1) of the 
Exchange Act \1619\ could alter current clearing practices at the time 
such determinations are made. One potential consequence of mandatory 
clearing determinations that require mandatory clearing for certain 
security-based swaps could be a higher level of clearing for security-
based swaps than would take place under a voluntary system.\1620\ Where 
the amount of clearing taking place under a voluntary system is 
significantly different from the level of clearing that would take 
place if trading in a product were mandatory and where such difference 
marks a shift in existing market clearing practices, the mandatory 
clearing determination could potentially have a material economic 
impact.\1621\
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    \1618\ Because clearing is voluntary, counterparties to the 
transaction have no obligation to clear and may elect not to do so 
for various individual reasons. Further, if the counterparties 
choose to transact in a reference entity that is accepted for 
clearing in a currency other than U.S. dollars, the transaction is 
no longer eligible for clearing. In addition, because clearing was 
performed exclusively on a backloading basis prior to April 2011, 
some transactions have not been cleared because they may have been 
subject to portfolio compression or otherwise terminated prior to 
when the option to submit the transactions for clearing became 
available. See Clearing Procedures Adopting Release, 77 FR 41638.
    \1619\ 15 U.S.C. 78c-3(a)(1).
    \1620\ See Clearing Procedures Adopting Release, 77 FR 41638.
    \1621\ Id.
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(b) Programmatic Benefits and Costs of the Mandatory Clearing 
Requirement
    A key benefit of mandatory clearing is reduction of counterparty 
credit risk. In a regime with central clearing, the CCP is the 
counterparty to all trades. Central clearing mitigates counterparty 
credit risk among dealers and other institutions by shifting that risk 
from individual counterparties to CCPs, thereby helping protect 
counterparties from sequential default. CCPs require that members apply 
mark-to-market pricing and margin requirements in a consistent manner, 
and generally use liquid margin collateral to manage the risk of a 
member's failure. Accordingly, where CCPs operate under high standards 
relating to risk management, counterparty credit risk can be lower than 
in a regime without CCPs where counterparties can engage only in 
bilateral netting and face margin requirements that may vary 
significantly between transactions.\1622\
---------------------------------------------------------------------------

    \1622\ See note 1021, supra.
---------------------------------------------------------------------------

    Although central clearing reduces counterparty risk, it is less 
certain whether a mandatory requirement to centrally clear security-
based swap transactions reduces the overall risks to the financial 
system. Some have expressed the view that central clearing should be 
imposed wherever possible to help control systemic risk; others, by 
contrast, have contended that concentrating the default risk of 
numerous counterparties within a single CCP (or within a small number 
of CCPs) could introduce new risks.\1623\ For

[[Page 31163]]

instance, those expressing concern about the systemic effects of 
central clearing state that risk sharing between members of a CCP may 
encourage excessive risk taking because the costs of imprudent 
decisions by one clearing member are borne by other clearing members. 
This moral hazard concern may be exacerbated to the extent that CCPs 
are viewed as too important to fail and thus would likely be subject to 
bailout remedies that would benefit all CCP members.\1624\
---------------------------------------------------------------------------

    \1623\ See Craig Pirrong, Mutualization of Default Risk, 
Fungibility, and Moral Hazard: The Economics of Default Risk Sharing 
in Cleared and Bilateral Markets, at 5 (Univ. of Houston Working 
Paper, 2010), available at: https://business.nd.edu/uploadedFiles/Academic_Centers/Study_of_Financial_Regulation/pdf_and_documents/clearing_moral_hazard_1.pdf (``Clearing of OTC 
derivatives has been touted as an essential component of reforms 
designed to prevent a repeat of the financial crisis. A back-to-
basics analysis of the economics of clearing suggests that such 
claims are overstated, and that traditional OTC mechanisms may be 
more efficient for some instruments and some counterparties.''); see 
also Derivatives Clearinghouses: Opportunities and Challenges: 
Hearing Before the Subcomm. on Secs., Ins., & Inv., of the S. Comm. 
on Banking, Hous., & Urban Affairs, 112th Cong. 21, 49 (2011) 
(statement of Chester S. Spatt, Professor of Finance, Carnegie 
Mellon Univ.) (stating that ``[t]he clearinghouse is subject to 
considerable moral hazard and systemic risk'' in part because 
``there is a strong incentive for market participants to trade with 
weak counterparties'' and noting that ``it is unclear whether the 
extent of use of clearinghouses will ultimately lead to a reduction 
in systemic risk in the event of a future crisis.'').
    \1624\ See Pirrong, note 1623, supra, at 5 (``Risk sharing 
through a clearinghouse makes the balance sheets of the 
clearinghouse members public goods, and encourages excessive risk 
taking. That is, the clearing mechanism is vulnerable to moral 
hazard.'').
---------------------------------------------------------------------------

    While lower counterparty credit risk benefits the financial system 
as a whole, it can also make hedging less expensive for market 
participants. An environment in which central clearing is common may 
see increased participation, greater liquidity, and more efficient risk 
sharing that promotes capital formation. There also are circumstances 
under which central clearing can increase participation costs for 
certain participants. In certain cases where counterparties to a 
security-based swap transaction are exposed to one another in multiple 
asset markets, they may face lower costs by bilaterally clearing new 
contracts against existing exposures instead of clearing through a 
central counterparty.\1625\
---------------------------------------------------------------------------

    \1625\ Duffie and Zhu, supra note 110, at 74-95.
---------------------------------------------------------------------------

    Mandatory clearing can play an important role in developing a 
strong infrastructure for central clearing.\1626\ For instance, 
mandatory clearing reduces operational risk by promoting the 
standardization of contract terms. Standardization can simplify the 
valuation of security-based swaps, increase the liquidity of security-
based swaps contracts, and promote competition. Standardized contract 
terms help avoid inefficiencies in contracting that result from human 
and processing errors. Standardized terms also facilitate the 
development of infrastructure technologies that facilitate the prompt 
and accurate clearance and settlement of security-based swaps.\1627\ 
Mandatory clearing may also have the effect of reducing total 
transaction costs by eliminating obscured margin-related pricing that 
customers may otherwise incur in connection with non-cleared 
instruments. As with standardization, this would promote inter-dealer 
competition. However, dealers may take other actions to offset lost 
revenues resulting from the shift from non-cleared to cleared 
instruments. Separate from these considerations, several analyses have 
been conducted suggesting that mandatory clearing would increase the 
overall margin costs associated with security-based swap transactions 
compared to the margin market participants would post in the absence of 
a clearing requirement, though the estimates of the aggregate cost to 
market participants vary widely.\1628\
---------------------------------------------------------------------------

    \1626\ See note 991 and accompanying text, supra.
    \1627\ See id.
    \1628\ See Manmohan Singh, Collateral, Netting and System Risk 
in the OTC Derivatives Market (IMF Working Paper, 2010), available 
at: https://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf 
(concluding that the initial margin requirements for the central 
clearing of approximately two-thirds of the then estimated $36 
trillion notional market for credit default swaps would amount to 
$40 to $80 billion, likely closer to $80 billion due to the 
increased jump risk associated with single-name credit default swaps 
even if portfolio compression is available); Daniel Heller & 
Nicholas Vause, Collateral Requirements for Mandatory Central 
Clearing of Over-the-Counter Derivatives (BIS Working Paper No. 373, 
Mar. 2012), available at: https://www.bis.org/publ/work373.pdf 
(concluding that margin required to clear multi-name and single-name 
credit default swaps held by the largest 14 derivative dealers would 
vary depending on market volatility, requiring $10 billion of 
collateral in a low volatility market, $51 billion in medium 
volatility, and $107 billion in high volatility; further stating 
that with the inclusion of non-dealer positions, margin requirements 
would amount to $36 billion in a low volatility market, $219 billion 
in medium volatility and $425 billion in high volatility; study 
assumed the existence of one centralized clearing entity, which 
produced an estimated 25 percent savings compared to a market with 
multiple regional clearing agencies, where the benefits of portfolio 
margining would be limited); Che Sidanius & Filip Zikes, OTC 
Derivatives Reform and Collateral Demand Impact, (Bank of England 
Fin. Stability Paper No. 18, Oct. 2012), available at: https://www.bankofengland.co.uk/publications/Documents/fsr/fs_paper18.pdf 
(estimating an incremental increase in total initial margin for 
central clearing of credit default swaps between $78 billion and 
$156 billion, assuming that 80 percent of credit default swaps are 
cleared and netting is achieved between 90 and 95 percent while 
noting that the presence and extent of portfolio margining available 
could affect the analysis); IMF, Safe Assets: Financial System 
Cornerstone, Global Financial Stability Report (April 2012), 
available at: https://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/c3.pdf (estimating incremental initial margin and guarantee fund 
contributions for central clearing of over-the-counter derivatives 
will amount to between $100 billion and $200 billion, and may be 
higher if mutual recognition is not common among CCPs); see also 
Letter from Robert Pickel, Chief Executive Officer, ISDA, and 
Kenneth Bentsen, EVP, Public Policy and Advocacy, SIFMA, to David 
Stawick, Secretary, CFTC, at 35-37, Sept. 14, 2012 (estimating that 
the initial margin call for all swap products would be $193 billion 
to financial entities and $428 billion to dealers, and that 
variation margin calls would total $320 billion to financial 
entities and $80 billion to dealers, further noting that anywhere 
from $20 to $228 billion in additional liquidity would be necessary 
to meet the variation margin calls).
---------------------------------------------------------------------------

    On the other hand, mandatory clearing of certain security-based 
swaps may reduce the use of security-based swaps to manage the risks 
associated with other financial products or commercial activity. This 
could occur if margin requirements prove too burdensome and make 
cleared transactions expensive relative to alternative means of risk 
management.
3. Programmatic Benefits and Costs of Proposed Rule 3Ca-3
    As discussed above, the Commission is proposing Rule 3Ca-3 to apply 
the mandatory clearing requirement of Section 3C(a)(1) of the Exchange 
Act \1629\ to cross-border security-based swap transactions. Proposed 
Rule 3Ca-3(a) specifies the security-based swap transactions to which 
the mandatory clearing requirement would apply, and proposed Rule 3Ca-
3(b) carves out certain security-based swap transactions from 
application of the mandatory clearing requirement.\1630\
---------------------------------------------------------------------------

    \1629\ 15 U.S.C. 78c-3(a)(1).
    \1630\ This is similar to the proposed approach for the 
mandatory trade execution requirement. See Section XV.G.4, infra.
---------------------------------------------------------------------------

    Specifically, under proposed Rule 3Ca-3(a), the mandatory clearing 
requirement would apply to a person that engages in a security-based 
swap transaction if such person engages in a security-based swap 
transaction in the United States. The Commission would view a person to 
be engaging in a security-based swap transaction in the United States 
if a security-based swap transaction involves (i) a counterparty that 
is a U.S. person; (ii) a counterparty that is a non-U.S. person whose 
performance under such security-based swap transaction is guaranteed by 
a U.S. person (hereinafter referred to as a ``guaranteed non-U.S. 
person''); or (iii) such security-based swap transaction is a 
transaction conducted within the United States.\1631\ Under proposed 
Rule 3Ca-3(b), the mandatory clearing requirement would not apply to 
(i) a security-based swap transaction described in proposed Rule 3Ca-
3(a) that is not a transaction conducted within the United States if 
(x) one counterparty is a foreign branch or a guaranteed non-U.S. 
person and (y) the other counterparty to the transaction is

[[Page 31164]]

a non-U.S. person whose performance under the security-based swap is 
not guaranteed by a U.S. person (hereinafter referred to as ``non-
guaranteed non-U.S. persons'') and who is not a foreign security-based 
swap dealer as defined in proposed Rule 3a71-3(a)(3) under the Exchange 
Act, and would not apply to (ii) a security-based swap transaction 
described in proposed Rule 3Ca-3(a) that is a transaction conducted 
within the United States if (x) both counterparties to the transaction 
are non-guaranteed non-U.S. persons and (y) neither counterparty to the 
transaction is a foreign security-based swap dealer, as defined in 
proposed Rule 3a71-3(a)(3) under the Exchange Act.\1632\
---------------------------------------------------------------------------

    \1631\ See proposed Rule 3Ca-3(a) under the Exchange Act. The 
terms ``transaction conducted within the United States'' and ``U.S. 
person'' would have the meanings set forth in proposed Rules 3a71-
3(a)(5) and (7) under the Exchange Act.
    \1632\ See proposed Rule 3Ca-3(b) under the Exchange Act.
---------------------------------------------------------------------------

    Therefore, proposed Rule 3Ca-3(a) and proposed Rule 3Ca-3(b) apply 
the mandatory clearing requirement to security-based swap transactions 
in the cross-border context based on the U.S.-person status of a 
counterparty, the existence of a guarantee provided by a U.S. person, 
the registered security-based swap dealer status of a non-U.S. person 
counterparty, and the location where the transaction is conducted. 
Taken together, proposed Rules 3Ca-3(a) and 3Ca-3(b) would not apply 
the mandatory clearing requirement to (i) transactions conducted 
outside the United States between two counterparties who are non-
guaranteed non-U.S. persons, (ii) transactions conducted outside the 
United States between a foreign branch or a guaranteed non-U.S. person, 
and a counterparty who is a non-guaranteed non-U.S. person and is not a 
foreign security-based swap dealer, and (iii) transactions conducted 
within the United States between two counterparties who are non-
guaranteed non-U.S. persons and are not foreign security-based swap 
dealers.
    The Commission preliminarily believes that the combined effect of 
the proposed Rules 3Ca-3(a) and (b) described above would be that non-
guaranteed non-U.S. persons who are not security-based swap dealers may 
engage in security-based swap transactions with each other both within 
and without the United States without being subject to the Commission's 
mandatory clearing requirement. These non-guaranteed non-U.S. persons 
that are not security-based swap dealers may include non-U.S. persons 
that are swap dealers, major swap participants, major security-based 
swap participants, commodity pools, private funds, employee benefit 
plans, or persons predominantly engaged in activities that are banking 
or financial in nature, as defined in Section 4(k) of the Bank Holding 
Company Act of 1956.\1633\ Such non-U.S. persons would also be able to 
engage in security-based swap transactions without being subject to the 
mandatory clearing requirement when the transaction is conducted 
outside the United States with U.S. persons that are foreign branches 
of U.S. banks or guaranteed non-U.S. persons or transacting with a 
foreign security-based swap dealer whose performance under security-
based swaps is not guaranteed by a U.S. person.\1634\ As discussed 
below,\1635\ the Commission preliminarily believes that the exclusion 
of transactions between two non-guaranteed non-U.S. persons who are not 
foreign security-based swap dealers could potentially reduce the 
aggregate programmatic costs associated with the mandatory clearing 
requirement. However, these non-guaranteed non-U.S. persons, despite 
their status of not being foreign security-based swap dealers, may be 
financial entities that play significant roles in the U.S. or a foreign 
financial system and their failure may present spillover effect on the 
stability of the U.S. financial system and security-based swap market.
---------------------------------------------------------------------------

    \1633\ 12 U.S.C. 1843(k).
    \1634\ In addition, transactions that are subject to the 
mandatory clearing requirement by operation of the proposed Rule 
3Ca-3(a) and (b) may be excepted from the mandatory clearing 
requirement if the end-user exception is applicable. See Section 
3C(g)(1) of the Exchange Act, 15 U.S.C. 78c-3(g)(1). Therefore, the 
combined effects of the proposed Rule 3Ca-3 may be affected by the 
implementation of the end-user exception to the mandatory clearing 
requirement. The Commission has proposed, but not yet adopted, Rule 
3Cg-1 under the Exchange Act regarding the end-user exception to 
mandatory clearing of security-based swaps. See End-User Exception 
Proposing Release, 75 FR 79992.
    \1635\ See Section XV.F.3(b), infra (discussing the programmatic 
benefits and costs of proposed Rule 3Ca-3).
---------------------------------------------------------------------------

(a) Programmatic Effect of Proposed Rule 3Ca-3
    It is not possible to quantify the potential programmatic effect of 
proposed Rule 3Ca-3 on the future volume of security-based swap 
transactions when the mandatory clearing requirement becomes effective 
partly because the Commission has not made any mandatory clearing 
determinations, partly because the Commission has yet to finalize the 
end-user exception to the mandatory clearing requirement,\1636\ and 
partly because we do not know future trading volumes of security-based 
swaps. However, the Commission has examined the data available to it to 
analyze the potential programmatic effects of proposed Rule 3Ca-3. In 
particular, the Commission has tried to analyze the effects of proposed 
Rule 3Ca-3 by looking at the portion of single-name U.S. reference CDS 
transactions that may provide an indication of the size of the 
security-based swap market that may be included in or excluded from the 
application of the mandatory clearing requirement as a result of 
proposed Rule 3Ca-3.
---------------------------------------------------------------------------

    \1636\ See id.
---------------------------------------------------------------------------

    A limitation we face when analyzing the data in order to estimate 
the size of the security-based swap market that may be affected by 
proposed Rule 3Ca-3 is that the domicile classifications in the DTCC-
TIW database are not identical to the counterparty status or 
transaction status, both of which are described in proposed Rules 3Ca-
3(a) and (b) and would trigger application of, or an exception from, 
the mandatory clearing requirement. Although the information provided 
by the data in the DTCC-TIW does not allow us to identify the existence 
of a guarantee provided by a U.S. person with respect to a counterparty 
to a transaction or the location where the transaction is conducted, 
the Commission nevertheless preliminarily believes that the approach 
taken below would provide the best available estimate of the size of 
the security-based swap market that could be included in or excluded 
from the application of the mandatory clearing requirement by proposed 
Rule 3Ca-3.
    As a starting point, the Commission has examined all transactions 
in single-name CDS during 2011 \1637\ and estimated that the notional 
amount of single-name CDS transactions executed during 2011 is $2,400 
billion.\1638\

[[Page 31165]]

Proposed Rule 3Ca-3(a) provides that the mandatory clearing requirement 
shall apply to a security-based swap transaction if (i) a counterparty 
to the transaction is a U.S. person or a non-U.S. person whose 
performance under the security-based swap is guaranteed by a U.S. 
person or (ii) such transaction is a transaction conducted within the 
United States. In applying proposed Rule 3Ca-3(a) to the $2,400 billion 
single-name CDS transactions executed in 2011, the Commission uses 
account holders and their domicile information in the DTCC-TIW database 
to determine the status of the counterparties.\1639\ Because the 
Commission's proposed definition of ``U.S. person'' is based primarily 
on the place of organization or principal place of business of a legal 
person and a legal person's principal place of business and place of 
organization are usually in the same country, the Commission believes 
that the domicile of a legal person is a reliable indicator of such 
person's U.S.-person status. In addition, based on the Commission's 
understanding that the security-based swap transactions of foreign 
subsidiaries of U.S. entities, unless sufficiently capitalized to have 
their own independent credit ratings, are generally guaranteed by the 
most creditworthy U.S.-based entity within the corporate group, i.e., 
the U.S. parent, the Commission preliminarily believes that it is 
reasonable to assume that foreign subsidiaries of U.S.-domiciled 
entities are non-U.S. persons whose performance under security-based 
swap transactions is guaranteed by a U.S. person. Finally, the DTCC-TIW 
data do not provide sufficient information for us to identify whether a 
transaction was conducted in the United States. Solely for purposes of 
this analysis, we have assumed that transactions involving a U.S.-
domiciled counterparty (excluding a foreign branch) or a U.S. foreign 
branch counterparty were conducted in the United States.\1640\
---------------------------------------------------------------------------

    \1637\ For purposes of analyzing the programmatic effect of 
proposed Rule 3Ca-3, we do not consider historical data regarding 
the U.S. index-based CDS transactions. The statutory definition of 
security-based swap in relevant part includes swaps based on single 
securities or on narrow-based security indices. See Section 
3(a)(68)(A) of the Exchange Act, 15 U.S.C. 78c(a)(68)(A). The 
historical data regarding the U.S. index-based CDS transactions 
encompass broad-based index CDS transactions that do not fall within 
the definition of security-based swaps.
    \1638\ This estimate is based on the calculation by staff of the 
Division of Risk, Strategy and Financial Innovation of all price-
forming DTCC-TIW single-name CDS transactions that are based on 
North American corporate reference entities, U.S. municipal 
reference entities, U.S. loans or mortgage-backed securities 
(``MBS''), using ISDA North American documentation, ISDA U.S. Muni 
documentation, or other standard ISDA documentation for North 
American Loan CDS and CDS on MBS, and are denominated in U.S. 
dollars and executed in 2011. Price-forming transactions include all 
new transactions, assignments, modifications to increase the 
notional amounts of previously executed transactions, and 
terminations of previously executed transactions. Transactions 
terminated, transactions entered into in connection with a 
compression exercise, and expiration of contracts at maturity are 
not considered price-forming and are therefore excluded, as are 
replacement trades and all bookkeeping-related trades. See note 
1312, supra.
    This figure differs from the single-name CDS notional volume 
calculated in the Clearing Procedures Adopting Release, $2,800 
billion, by $400 billion. See Clearing Procedures Adopting Release, 
77 FR 41638; see also Section XV.F.2(a) (discussing the programmatic 
effects of the mandatory clearing requirement), supra. This 
difference is primarily a result of removing the notional amount of 
security-based swap terminations in 2011 from the set of $2,800 
billion price-forming transactions.
    \1639\ For purposes of the analysis here, the determination of 
an account holder's domicile is based on the ``registered office 
location'' and the ``settlement location'' self-reported by account 
holders in DTCC-TIW. The registered office location typically 
represents the place of organization or principal place of business 
of a DTCC-TIW account holder. The settlement location may represent 
the parent, headquarter, or home office of a DTCC-TIW account 
holder. Staff in the Division of Risk, Strategy, and Financial 
Innovation has consistently observed that DTCC-TIW recorded the 
place of organization of an account holder that is a foreign 
subsidiary of a U.S. person or a foreign branch as such account 
holder's registered office location and the parent location or 
headquarter of the foreign branch (i.e., the United States) as such 
account holder's settlement location. For purposes of identifying a 
counterparty's U.S. person status in the analysis here, staff in the 
Division of Risk, Strategy, and Financial Innovation uses the 
registered office location in DTCC-TIW as the domicile for a foreign 
subsidiary of a U.S. person and the settlement office location in 
DTCC-TIW as the domicile for a foreign branch. It is possible that 
some market participants may misclassify their ``registered office 
location'' and the ``settlement location'' because the databases in 
DTCC-TIW do not assign a unique legal entity identifier to each 
separate entity.
    \1640\ Since the origination location of a transaction is not 
available in DTCC-TIW, the Commission recognizes that its analysis 
here may undercount transactions conducted within the United States 
because some transactions may be solicited, negotiated, or executed 
within the United States by an agent other than U.S. branches of 
foreign banks (such as a non-U.S. person counterparty using an 
unaffiliated third-party agent).
---------------------------------------------------------------------------

    Based on these assumptions, we estimate that the subset of the 
single-name U.S. reference CDS market that includes a U.S.-domiciled 
counterparty (excluding a foreign branch of a U.S. bank), a foreign 
subsidiary of a U.S.-domiciled entity, or a U.S. branch of a foreign 
bank as a counterparty is $1,900 billion notional amount of single-name 
U.S. reference CDS transactions.\1641\ The Commission preliminarily 
believes that this figure provides an indicative level of the single-
name U.S. reference CDS activity, which may present an indicative size 
of the security-based swap market, that could become subject to 
mandatory clearing under proposed Rule 3Ca-3(a) when the requirement 
becomes effective.\1642\ In addition, we recognize that the level of 
the security-based swap activity that could become subject to mandatory 
clearing under proposed Rule 3Ca-3(a) may be affected by the final 
rules adopted by the Commission regarding the end-user exception to 
mandatory clearing of security-based swaps.\1643\
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    \1641\ Such $1,900 billion estimate does not capture 
transactions between two non-U.S. domiciled counterparties involving 
an agent to solicit, negotiate and execute security-based swaps in 
the United States and therefore, may be an underestimate of the 
aggregate notional amount of the single-name U.S. reference CDS 
transactions that may be included in the application of the 
mandatory clearing requirement under proposed Rule 3Ca-3(a) because 
of the assumption we make herein regarding transactions conducted 
within the United States. By the same token, the difference between 
the $1,900 billion subset included in the application of the 
mandatory clearing requirement under proposed Rule 3Ca-3(a) and the 
$2,400 billion total single-name U.S. reference CDS transactions 
(i.e., $500 billion or 20.8% of the $2,400 billion) may represent an 
overestimate of single-name U.S. reference CDS transactions in 
notional amount that are not included in the application of the 
mandatory clearing requirement under proposed Rule 3Ca-3(a).
    \1642\ The Commission recognizes that the security-based swap 
market includes single-name CDS, CDS based on narrow-based indices, 
and other non-CDS security-based swaps, primary examples of which 
are equity swaps and total return swaps based on single equities or 
narrow-based indices of equities. As previously stated, we believe 
that the single-name CDS data are sufficiently representative of the 
security-based swap market as roughly 82% of the security-based swap 
market, as measured on a notional basis, appears likely to be 
single-name CDS. See Section XV.B.2 and the text accompanying note 
1301, supra.
    \1643\ Solely for purposes of this analysis, we assume that the 
end-user exception is not available for transactions included in the 
indicative volume estimated here.
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    Next, we apply proposed Rule 3Ca-3(b) to the transactions described 
above in order to estimate the portion of the single-name U.S. 
reference CDS activity, which may present an indicative size of the 
security-based swap market, that would not be subject to the mandatory 
clearing requirement under the proposed rule. We restate the 
assumptions described above with respect to the counterparty status of 
a U.S. person and a non-U.S. person whose performance under security-
based swap transactions is guaranteed by a U.S. person, and the 
assumption with respect to a transaction conducted within the United 
States. In addition, because of a lack of information about the 
location of transactions, solely for assessing the effect of proposed 
Rule 3Ca-3(b)(i), we have assumed that transactions between a 
counterparty that is a foreign branch or foreign subsidiary of a U.S.-
domiciled entity and another counterparty that is a foreign-domiciled 
entity that is not a subsidiary of a U.S.-domiciled entity or an ISDA-
recognized dealer are not transactions conducted within the United 
States; and solely for assessing the effect of proposed rule 3Ca-
3(b)(ii), we have assumed that transactions conducted between two 
foreign-domiciled counterparties that are not ISDA-recognized dealers 
and are not foreign subsidiaries of U.S.-domiciled entities are 
conducted within the United States. These assumptions likely 
overestimate the notional volume carved-out by proposed Rule 3Ca-3(b). 
With respect to the counterparty status as a registered security-based 
swap dealer, we recognize that as yet there are no dealers designated 
as security-based swap dealers and subject to the registration 
requirement. Solely for purposes of this analysis, we have assumed that 
those counterparties to

[[Page 31166]]

CDS transactions that were ISDA recognized dealers \1644\ would be 
required to register as security-based swap dealers.
---------------------------------------------------------------------------

    \1644\ See note 1306, supra.
---------------------------------------------------------------------------

    Based on the above assumptions, we have estimated that 
approximately 2.1% of the total notional amount \1645\ of single-name 
U.S. reference CDS transactions executed in 2011, would be excluded 
from the scope of the application of the mandatory clearing requirement 
by proposed Rule 3Ca-3(b). Therefore, we preliminarily believe that 
22.9% of the total size of the single-name U.S. reference CDS 
transactions in 2011 presents an indicative size of the U.S. security-
based swap market that could be excluded from the application of the 
mandatory clearing requirement under proposed Rule 3Ca-3.\1646\
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    \1645\ Based on calculations by staff of the Division of Risk, 
Strategy, and Financial Innovation applying the criteria provided in 
proposed Rule 3Ca-3(b) and the assumptions stated herein, 
approximately $51 billion in notional amount, constituting 
approximately 2.1% of the total notional amount, of single-name U.S. 
reference CDS transactions executed in 2011 would be excluded from 
the application of the mandatory clearing requirement. Because of 
the assumptions we make herein regarding transactions conducted 
within the United States and transactions conducted outside the 
United States, the 2.1% may be an overestimate of the aggregate 
notional amount of the single-name U.S. reference CDS transactions 
that may be excluded from the application of the mandatory clearing 
requirement under proposed Rule 3Ca-3(b) under the Exchange Act.
    \1646\ The 22.9% estimate is the sum of the 20.8% estimate of 
the single-name U.S. reference CDS transactions excluded from 
mandatory clearing under proposed Rule 3Ca-3(a) and the 2.1% 
estimate of the single-name U.S. reference CDS transactions excluded 
from mandatory clearing under proposed Rule 3Ca-3(b). The Commission 
reiterates that both 20.8% and 2.1% may overestimate the size of the 
single-name U.S. reference CDS transactions excluded from the 
application of the mandatory clearing requirement under proposed 
Rules 3Ca-3(a) and (b).
    In addition, as stated above, this calculation is conducted 
using U.S. reference single-name CDS transaction data in 2011. See 
the text accompanying notes 1637 and 1787, supra. The Commission 
recognizes that the same calculation could generate a different 
result if both U.S. reference and non-U.S. reference single-name CDS 
transaction data were used. However, with respect to non-U.S. 
reference single-name CDS transaction data, the Commission currently 
does not have access to the part of such data in DTCC-TIW regarding 
non-U.S. reference single-name CDS transactions that do not involve 
a U.S. counterparty on either side of the transaction. See Section 
XV.B.2, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that this estimate provides 
the best available proxy for the overall programmatic effect of the 
application of the mandatory clearing requirement in the cross-border 
context in terms of the portion of the single-name U.S. reference CDS 
activity that may be included or excluded in the scope of the 
application of the mandatory clearing requirement, given the data 
limitations and the underlying assumptions described above.\1647\ The 
Commission is mindful that the above analysis represents only an 
indicative estimate of the portion of the single-name U.S. reference 
CDS activity, which may present an indicative size of the security-
based swap market, that may be included or excluded from the scope of 
the application of the mandatory clearing requirement as a result of 
the proposed Rule 3Ca-3. The Commission also recognizes that the above 
analysis represents an extrapolation from the limited data that is 
currently available to the Commission.
---------------------------------------------------------------------------

    \1647\ The Commission reiterates that the assumptions made here 
are solely for purposes of this economic analysis.
---------------------------------------------------------------------------

(b) Programmatic Benefits and Costs of Proposed Rule 3Ca-3
    The Commission's approach to application of the mandatory clearing 
requirement generally focuses on any person engaging in a security-
based swap in the United States. As stated above, the Commission would 
preliminarily interpret the statutory language ``engage in a security-
based swap'' to include transactions in which a counterparty performs 
any of the functions that are central to carrying out a security-based 
swap transaction (i.e., solicitation, negotiation, execution, or 
booking of the transaction) within the United States. The Commission 
proposes to interpret that a transaction in which one of the 
counterparties is a U.S. person is a security-based swap in the United 
States. The Commission also is proposing to interpret the statutory 
language ``engage in a security-based swap'' to include transactions in 
which a U.S. person provides a guarantee on a non-U.S. person's 
performance under a security-based swap because of the involvement of 
the U.S. person in the transaction. Therefore, the Commission is 
proposing a rule that would apply the mandatory clearing requirements 
to a security-based swap if (i) a counterparty to the security-based 
swap transaction is (x) a U.S. person or (y) a non-U.S. person 
counterparty whose performance of obligations under the security-based 
swap is guaranteed by a U.S. person, or (ii) such transaction is a 
transaction conducted within the United States, subject to certain 
exceptions.
    Economically, a U.S. person's security-based swap activity poses 
risk to the U.S. financial system because security-based swap 
transactions give rise to ongoing obligations on the part of the U.S. 
person and at the same time the U.S. person is exposed to the credit 
risk of its non-U.S. counterparties. Similarly, a guarantee provided by 
a U.S. person gives the counterparty of the guaranteed entity direct 
recourse to the U.S. guarantor with respect to any obligations owed by 
the guaranteed entity under the security-based swap. As a result, the 
U.S. guarantor exposes itself to the security-based swap risk as if it 
were a direct counterparty. Therefore, the Commission preliminarily 
believes that U.S. persons and non-U.S. person whose performance in 
security-based swap transactions is guaranteed by U.S. persons serve as 
major conduits of systemic risk to the U.S. financial system, and 
therefore, transactions involving U.S. persons and non-U.S. persons 
whose performance under security-based swaps are guaranteed by U.S. 
persons should fall within the scope of application of the mandatory 
clearing requirement, regardless of where the security-based swap 
activity takes place.
    On the other hand, as previously discussed,\1648\ the Commission 
has acknowledged that subjecting U.S. persons and non-U.S. persons 
whose performance in security-based swap transactions is guaranteed by 
U.S. persons to these requirements may have key consequences for 
competition, liquidity, and efficiency, and for U.S. persons' access to 
the foreign security-based swap market.
---------------------------------------------------------------------------

    \1648\ See Section XV.C, supra,
---------------------------------------------------------------------------

    To the extent that foreign law does not subject participants in the 
foreign security-based swap market to mandatory clearing or impose 
margin requirements on non-cleared security-based swaps equivalent to 
margin that would be required by CCPs, this requirement under Title VII 
may make it more costly for non-U.S. persons to transact with U.S. 
person and guaranteed non-U.S. person counterparties because these 
transactions may be subject to higher margin requirements imposed by 
CCPs than under foreign law. This may make it difficult for U.S. 
persons and guaranteed non-U.S. persons to access foreign markets and 
liquidity provided by non-guaranteed non-U.S. persons, and could 
generate incentives for U.S. persons and guaranteed non-U.S. persons to 
restructure their security-based swap businesses to fall outside the 
scope of Title VII. In such instances, the incentive to restructure 
operations may decrease if foreign jurisdictions impose margin 
requirements on non-cleared security-based swaps. If these margin 
requirements on non-cleared security-based swaps are economically 
equivalent to or higher than CCP margin

[[Page 31167]]

requirements for cleared security-based swaps, restructuring operations 
would provide few private benefits for market participants.
    The Commission preliminarily believes that the carve-out in Rule 
3Ca-3(b)(1) excludes from the mandatory clearing requirement those 
transactions involving foreign branches and guaranteed non-U.S. persons 
who are most likely to engage in transactions under foreign law. Such a 
carve-out reduces potential disruption to the foreign business of U.S. 
persons and guaranteed non-U.S. persons in the foreign security-based 
swap market.\1649\ These benefits come at the cost of increased 
systemic risk. The counterparty risk associated with non-cleared 
transactions that involve foreign branches and guaranteed non-U.S. 
persons is ultimately borne by the U.S. financial system.
---------------------------------------------------------------------------

    \1649\ See Section XV.C, supra.
---------------------------------------------------------------------------

    The incremental increase in systemic risk would likely be small, 
since the carve-out in proposed Rule 3Ca-3(b)(1) does not apply to 
security-based swap dealers. Moreover, as mentioned before, the 
magnitude of these risks may be further reduced by subjecting non-
cleared security-based swap positions to margin requirements that are 
economically equivalent to margin requirements imposed by a CCP. 
However, the transactions carved-out by proposed Rule 3Ca-3(b)(1) 
remain a route over which systemic risk may enter the United States 
from abroad.
    In addition, the Commission recognizes that, in the case of 
counterparty risk and central clearing, the location of a transaction 
is not necessarily a proxy for the U.S. market's exposure to 
counterparty risk. As a result, proposed Rule 3Ca-3(b)(2) would except 
transactions conducted within the United States between two non-U.S. 
persons who are not security-based swap dealers and whose performance 
under security-based swap transactions are not guaranteed by U.S. 
persons. The Commission preliminarily believes that such an exception 
could potentially reduce the aggregate programmatic costs associated 
with the mandatory clearing requirement to non-U.S. participants that 
engage in security-based swap transactions within the United States. 
The Commission recognizes that non-guaranteed non-U.S. persons who are 
not foreign security-based swap dealers may include financial entities 
that are systemically important, such as major swap participants or 
major security-based swap participants, or otherwise play an important 
role in the U.S. or a foreign financial system or the derivatives 
market, such as swap dealers, commodity pools, private funds, or 
banking entities that are financial holding companies. The failure of 
such financial entities, although they are non-guaranteed non-U.S. 
persons, may have spillover effects on the U.S. financial system. Such 
spillover effects may be mitigated by the capital and margin 
requirements imposed on swap dealers, major swap participants, or major 
security-based swap participants, the prudential regulators' 
supervision under banking regulations, the Employee Retirement Income 
Security Act of 1974 \1650\ or other applicable law and regulations.
---------------------------------------------------------------------------

    \1650\ 28 U.S.C. 1002, et seq.
---------------------------------------------------------------------------

    On the other hand, the Commission also preliminarily believes that 
the proposed application of the mandatory clearing requirement in the 
cross-border context would still mitigate the U.S. financial system's 
exposure to systemic risk since the carve-out in proposed Rule 3Ca-
3(b)(2) would not apply to participants that are registered security-
based swap dealers and those that carry U.S. guarantees on their 
performance in security-based swap transactions. The Commission has 
separately considered the potential implications of this exception on 
competition and efficiency in the security-based swap market.\1651\ 
Specifically, the Commission preliminarily believes that imposing 
mandatory clearing on U.S. persons, guaranteed non-U.S. persons and 
foreign security-based swap dealers when they conduct security-based 
swaps in the United States will mitigate the counterparty credit risk 
among trading counterparties and increase confidence in trading 
security-based swaps, thereby increasing competition in the U.S. 
security-based swap market.
---------------------------------------------------------------------------

    \1651\ See Section XV.C, supra.
---------------------------------------------------------------------------

(c) Alternatives
    The Commission has considered several alternatives in proposing 
Rule 3Ca-3. First, commenters proposed an alternative framework in 
which transactions that are ``required to be cleared under foreign 
law'' not be ``required to be cleared under [Title VII].'' \1652\ 
Commenters noted, for example, that conflicts may arise between Title 
VII and ``foreign laws that require swaps to be cleared through local 
clearinghouses.'' \1653\ Another comment stated that mandatory clearing 
``is not necessary to protect U.S. financial institutions, markets or 
customers'' where mandatory clearing requirements are imposed by 
foreign law because ``the risks associated with such transactions 
reside in the relevant foreign central clearing counterparty.'' \1654\
---------------------------------------------------------------------------

    \1652\ Davis Polk Letter II at 21.
    \1653\ Id. at 22 n.92.
    \1654\ Davis Polk Letter I at 8.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the commenters' proposed 
approach to the mandatory clearing of cross-border security-based swap 
transactions would not sufficiently address the risk to the U.S. 
financial system posed by transactions being conducted by non-U.S. 
persons,\1655\ and accordingly seeks comment on whether this 
preliminary assessment is correct. Whether a security-based swap 
transaction that is cleared under foreign law represents a risk to the 
U.S. financial system depends upon whether the foreign jurisdiction has 
a robust legal framework for the regulation of, and maintains adequate 
regulatory oversight over, CCPs. Although the Commission recognizes 
that this alternative may reduce costs to counterparties, the 
Commission cannot at this time assess the quality of regulation of 
foreign CCPs. Rather than categorically exclude from the scope of the 
proposed rule any transaction required to be cleared under foreign law, 
the Commission preliminarily believes that such transactions should be 
captured by the rule to further the purposes of Title VII to, among 
other things, mitigate systemic risk. Determinations regarding 
substituted compliance and determinations imposing mandatory clearing 
could address whether and when to include or exclude transactions from 
the mandatory clearing requirement based on the particular 
characteristics of the foreign regulatory regime, counterparties, or 
swap instruments in question.
---------------------------------------------------------------------------

    \1655\ The Commission notes that commenters' concerns regarding 
a potential conflict arising between foreign law requirements that 
security-based swaps be cleared locally and Title VII are, in part, 
also addressed by the registration regime for clearing agencies 
proposed in Section V.B above.
---------------------------------------------------------------------------

    Second, the Commission could have proposed to apply the mandatory 
clearing requirement in the same way as the CFTC's proposed 
interpretive guidance. The CFTC would apply the mandatory clearing 
requirement to a transaction conducted outside the United States 
between a foreign branch and a non-guaranteed non-U.S. person. Although 
we recognize that the guarantees provided by U.S. persons remain a 
conduit for systemic risk to be transmitted to the United States, the 
Commission preliminarily believes that subjecting such a transaction to 
mandatory clearing would impede the ability of U.S.-based dealing 
entities to

[[Page 31168]]

access foreign markets and potentially promote market fragmentation.
    Finally, and in lieu of the proposed rule, the Commission could 
have proposed Rule 3Ca-3(a) only to apply the mandatory clearing 
requirement contained in Section 3C(a)(1) of the Exchange Act, without 
also proposing the carve-out in proposed Rule 3Ca-3(b). The Commission 
preliminarily believes, however, that proposed Rule 3Ca-3(a), acting 
alone, does not sufficiently account for the proposed approach's 
potential effect on competition between security-based swap market 
participants, as required under Section 3C(b)(4) of the Exchange 
Act.\1656\ As discussed above, market participants seeking to avoid 
clearing of cross-border security-based swaps may avoid doing business 
with members of clearing agencies registered with the Commission, U.S. 
persons who provide guarantees on performance under such swaps, or the 
foreign branches of U.S. persons, to avoid being subject to the 
mandatory clearing requirement. This may also create dislocations in 
the security-based swap market, reducing the anticipated risk-sharing 
benefits of clearing. As mentioned above, the Commission preliminarily 
believes that these benefits would come at the cost of increased risk 
that counterparty failures in foreign jurisdictions generate losses to 
U.S. financial market participants engaging in uncleared security-based 
swap transactions under Rule 3Ca-3(b).
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    \1656\ See 15 U.S.C. 78c-3(b)(4) (requiring the Commission, in 
considering whether to impose a mandatory clearing requirement for 
security-based swaps, to consider, among other factors, the ``effect 
on competition'').
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(d) Assessment Costs
    The assessment costs associated with proposed Rule 3Ca-3 would be 
primarily related to identification of counterparty status and where 
the transaction was conducted in order to determine whether the 
mandatory clearing requirement would apply. The same assessment would 
be performed not only in connection with the proposed application of 
the mandatory clearing requirement in the cross-border context but also 
in connection with proposed application of the SDR reporting,\1657\ 
real-time reporting,\1658\ and mandatory trade execution requirements 
\1659\ in the cross-border context, and therefore, would be part of 
overall Title VII compliance costs.
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    \1657\ See proposed Rule 908(a) under the Exchange Act, as 
discussed in Section VIII.C.1, supra, and Section XV.H.3(a), infra.
    \1658\ See proposed Rule 908(b) under the Exchange Act, as 
discussed in Section VIII.C.2, supra, and Section XV.H.3(c), infra.
    \1659\ See proposed Rule 3Ch-1 under the Exchange Act, as 
discussed in Section X.B, supra, and Section XV.G.4, infra.
---------------------------------------------------------------------------

    We preliminarily believe that market participants would request 
representations from their transaction counterparties to determine the 
U.S.-person status of their counterparties. In addition, if the 
transaction is guaranteed by a U.S. person, the guarantee would be part 
of the trading documentation, and therefore the existence of the 
guarantee would be a readily ascertainable fact. Similarly, market 
participants would be able to rely on their counterparty's 
representation as to whether a transaction is solicited, negotiated or 
executed by a person within the United States.\1660\ Therefore, the 
Commission preliminarily believes that the assessment costs associated 
with proposed Rule 3Ca-3 should be limited to the costs of establishing 
a compliance policy and procedure for requesting and collecting 
representations from trading counterparties and maintaining the 
representations collected as part of the recordkeeping procedures. The 
Commission preliminarily believes that such assessment costs would be 
approximately $15,160.\1661\ The Commission preliminarily believes that 
requesting and collecting representations would be part of the 
standardized transaction process reflected in the policies and 
procedures regarding security-based swap sales and trading practices 
and should not result in separate assessment costs.\1662\
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    \1660\ See proposed Rules 3a71-3(a)(4)(ii) and (a)(5)(ii) under 
the Exchange Act, as discussed in Section III.B.6, supra.
    \1661\ This estimate is based on an estimated 40 hours of in-
house legal or compliance staff's time to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representation may be 
built into the form of standardized trading documentation. Based 
upon data from SIFMA's Management & Professional Earnings in the 
Securities Industry 2012 (modified by the SEC staff to account for 
an 1800-hour-work year and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead), the staff 
estimates that the average national hourly rate for an in-house 
attorney is $379.
    \1662\ There will be ongoing costs associated with processing 
representations received from counterparties, including additional 
due diligence and verification to the extent that a counterparty's 
representation is contrary to or inconsistent with the knowledge of 
the collecting party. The Commission believes that these would be 
compliance costs encompassed within the programmatic costs 
associated with substituted compliance.
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    We also consider the likelihood that market participants may 
implement systems to maintain information about counterparty status for 
purposes of future trading of security-based swaps that are similar to, 
if not the same as, the systems implemented by market participants for 
purposes of assessing security-based swap dealer or major security-
based swap participant status. As stated above, we estimated that 
market participants that perceived the need to perform the security-
based swap dealer assessment or major security-based swap participant 
calculations would incur one-time programming costs of 12,870.\1663\ 
Therefore, the Commission estimates the total one-time costs per entity 
associated with proposed Rule 3Ca-3 could be $28,030.\1664\ To the 
extent that market participants have incurred costs relating to similar 
or the same assessments with respect to counterparty status and 
location of the transactions for other Title VII requirements, their 
assessment costs with respect to proposed Rule 3Ca-3 may be less.
---------------------------------------------------------------------------

    \1663\ This is based on an estimate of the time required for a 
programmer analyst to modify the software to track the U.S.-person 
status of a counterparty and to record and classify whether a 
transaction is a transaction conducted within the United States, 
including consultation with internal personnel, and an estimate of 
the time such personnel would require to ensure that these 
modifications conformed to proposed definitions of U.S. person and 
transaction conducted within the United States. Using the estimated 
hourly costs described above, we estimate the costs as follows: 
(Compliance Attorney at $310 per hour for 2 hours) + (Compliance 
Manager at $269 per hour for 4 hours) + (Programmer Analyst at $234 
per hour for 40 hours) + (Senior Internal Auditor at $217 per hour 
for 4 hours) + (Chief Financial Officer at $473 per hour for 2 
hours) = $12,870. For the source of the estimated per hour costs. 
See note 1425, supra.
    \1664\ The $28,030 per entity cost is derived from a $15,160 
cost of establishing a written compliance policy and procedures 
regarding obtaining counterparty representations plus a $12,870 one-
time programming cost relating to system implementation to maintain 
counterparties representations and track the counterparty status in 
the system.
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Request for Comment
    The costs and benefits of the proposed rule discussed above 
represent the Commission's preliminary view regarding the mandatory 
clearing requirement in the cross-border context. The Commission seeks 
comment on the proposed rule in all aspects. Interested persons are 
encouraged to provide supporting data and analysis and, when 
appropriate, suggest modifications to proposed rule text and 
interpretations. Responses that are supported by data and analysis 
provide great assistance to the Commission in considering the benefits 
and costs of proposed requirements, as well as considering the 
practicality and effectiveness of the proposed application. In 
addition, the Commission seeks comment on the following specific 
questions:
     Are there any benefits and costs not discussed herein? If 
so, please identify, discuss, analyze, and supply relevant

[[Page 31169]]

data, information, or statistics regarding any such costs or benefits?
     Are the benefits and costs discussed herein accurate? If 
not, how can the Commission most accurately assess the benefits and 
costs arising from the mandatory clearing requirement and the proposed 
rule?
     Are there quantifiable costs associated with either the 
mandatory clearing requirement generally or the proposed rule 
specifically that have not been addressed and should be? If so, 
identify and describe them as thoroughly as possible, using relevant 
data and statistics where available.
     To what extent, if any, do the benefits and costs change 
when comparing the application of mandatory clearing to security-based 
swap transactions occurring within the United States and outside the 
United States? Is there relevant data not considered here that would 
assist the Commission in assessing such potentially disparate benefits 
and costs? If so, supply the relevant data, information, or statistics.
     To what extent, if any, do the benefits and costs change 
when considering the application of mandatory clearing of security-
based swap transactions to a U.S. person in comparison to a guaranteed 
non-U.S. person? To a non-guaranteed non-U.S. person? To a foreign 
branch? To a counterparty that is a security-based swap dealer? Would 
the benefits and costs differ significantly if we applied mandatory 
clearing requirements to a person who is a member of a registered 
clearing agency? Is there relevant data not considered here that would 
assist the Commission in assessing such disparate costs and benefits? 
If so, supply the relevant data, information, or statistics.
     (i) The CFTC has proposed to apply the mandatory clearing 
requirement to all transactions entered into by U.S.-based swap 
dealers, including foreign branches and transactions entered into by 
foreign affiliates of U.S. persons or non-U.S.-based swap dealer with 
U.S. persons or non-U.S. persons guaranteed by U.S. persons, without 
differentiating where the swap transactions are conducted within the 
United States or outside the United States. Should the Commission adopt 
the CFTC's approach to application of the mandatory clearing 
requirement in the cross-border context from the cost and benefit 
perspective? What are the cost and benefit considerations associated 
with taking the CFTC's approach? (ii) The Commission's proposed 
approach to application of the mandatory clearing requirement 
differentiates transactions conducted within the United States and 
transactions conducted outside the United States. Is such 
differentiation appropriate from the cost and benefit perspective? Has 
the Commission appropriately considered the costs and benefits 
associated with such differentiation? (iii) Are there any other 
approaches to application of the mandatory clearing requirement that 
the Commission should consider adopting from a cost and benefit 
perspective?
     To what extent, if any, should the Commission consider the 
characteristics of the underlying reference entity in assessing the 
benefits and costs flowing from the mandatory clearing requirement? Are 
there any other characteristics of a security-based swap transaction 
not discussed here that might affect an assessment of the benefits and 
costs of imposing a mandatory clearing requirement?
     Has the Commission appropriately considered the benefits 
and costs of the alternative approaches discussed above for application 
of the mandatory clearing requirement in the cross-border context? In 
answering this question, consider addressing whether the Commission has 
appropriately valued the benefits and costs of possible duplicative 
clearing requirements and whether the Commission has appropriately 
valued the benefits and costs of creating overlap in the regulatory 
regimes of the United States and a foreign regulator. Also consider 
whether the Commission has appropriately valued the benefits and costs 
of the possible effects on the competitiveness of persons subject to 
the mandatory clearing requirement and those persons carved out or 
otherwise excluded from the requirement.

G. The Economic Analysis of Application of Rules Governing Security-
Based Swap Trading in the Cross-Border Context

    A key goal of the Dodd-Frank Act is to increase the transparency 
and oversight of the OTC derivatives market by, among other things, 
bringing trading of security-based swaps onto regulated markets.\1665\ 
Section 763 of the Dodd-Frank Act amends the Exchange Act by adding a 
mandatory trade execution requirement \1666\ and various new statutory 
provisions governing SB SEFs.\1667\ Specifically, 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 SB SEF or as a national securities exchange under that 
section.\1668\ In addition, Section 3C(h)(1) of the Exchange Act 
requires, with respect to transactions involving security-based swaps 
subject to the mandatory clearing requirement of Section 3C(a)(1) of 
the Exchange Act, that counterparties execute such transactions on an 
exchange or a SB SEF that is registered under Section 3D of the 
Exchange Act or is exempt from registration under Section 3D(e) of the 
Exchange Act,\1669\ subject to the exceptions set forth in Section 
3C(h)(2) of the Exchange Act.\1670\
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    \1665\ See Public Law 111-203, preamble.
    \1666\ See Public Law 111-203, section 763 (adding Section 3C(h) 
of the Exchange Act).
    \1667\ See Public Law 111-203, section 763 (adding Sections 3C 
and 3D of the Exchange Act).
    \1668\ See Public Law 111-203, section 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. See SB SEF Proposing Release, 76 FR 10949 n.10.
    \1669\ See 15 U.S.C. 78c-3(h)(1). Section 3D(e) of the Exchange 
Act states that the Commission may exempt, conditionally or 
unconditionally, a SB SEF from registration under Section 3D if the 
Commission finds that the facility is subject to comparable, 
comprehensive supervision and regulation on a consolidated basis by 
the CFTC. 15 U.S.C. 78c-4(e).
    \1670\ Section 3C(h)(2) provides two exceptions to compliance 
with the mandatory trade execution requirement: (i) if no exchange 
or SB SEF makes the security-based swap available to trade; or (ii) 
for security-based swap transactions subject to the clearing 
exception under Section 3C(g) of the Exchange Act. See 15 U.S.C. 
78c-3(h)(2). Security-based 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 OTC market for 
security-based swaps. See SB SEF Proposing Release, 76 FR 10949 
n.10.
---------------------------------------------------------------------------

    This portion of the economic analysis addresses the programmatic 
benefits and costs associated with these statutory requirements and 
their proposed application in the cross-border context. Specifically, 
this section addresses the programmatic benefits and costs of: (1) the 
Commission's proposed interpretation of the application of the 
registration requirements of Section 3D of the Exchange Act to foreign 
security-based swap markets; (2) the potential availability to foreign 
security-based swap markets of exemptive relief from the registration 
requirements; (3) the mandatory trade execution requirement of Section 
3C(h) of the Exchange Act; and (4) proposed Rule 3Ch-1 regarding 
application of the mandatory trade execution requirement in the cross-
border context.

[[Page 31170]]

1. Programmatic Benefits and Costs of the Proposed Application of the 
Registration Requirements of Section 3D of the Exchange Act to Foreign 
Security-Based Swap Markets
    As discussed above, the Commission has proposed herein to interpret 
when the registration requirements of Section 3D of the Exchange Act 
\1671\ would apply to a foreign security-based swap market.\1672\ The 
Commission is endeavoring to draw the appropriate lines for the 
application of those requirements to foreign security-based swap 
markets when they act in capacities that meet the definition of 
``security-based swap execution facility'' under the Dodd-Frank 
Act.\1673\ As stated above, not all foreign security-based swap markets 
would be subject to the registration requirements of Section 3D of the 
Exchange Act and the rules proposed thereunder. The Commission 
preliminarily believes that only those foreign security-based swap 
markets that engage in certain activities with respect to U.S. persons, 
or non-U.S. persons located in the United States, would be subject to 
the registration requirements.\1674\
---------------------------------------------------------------------------

    \1671\ 15 U.S.C. 78c-4.
    \1672\ See Section VII.B., supra. A foreign security-based swap 
market that would be subject to the registration requirement of 
Section 3D of the Exchange Act also would be subject to the proposed 
registration rules for SB SEFs, if adopted. See SB SEF Proposing 
Release, 76 FR 10949.
    \1673\ See Public Law 111-203, section 761(a) (adding Section 
3(a)(77) of the Exchange Act to define ``security-based swap 
execution facility,'' 15 U.S.C. 78c(a)(77)). Entities that do not 
meet the definition of SB SEF may nonetheless be required to 
register in another capacity under the Exchange Act.
    \1674\ See Section VII.B, supra, for the non-exhaustive 
discussion of activities that the Commission preliminarily believes 
would warrant the application of the SB SEF registration 
requirements to a foreign security-based swap market.
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    The Commission preliminarily believes that the lines the Commission 
is proposing to draw with respect to the application of Section 3D's 
registration requirements in the cross border context would result in 
programmatic benefits for the U.S. security-based swap market as a 
whole that are intended by Title VII, i.e., increased pre-trade 
transparency, increased competition, and improved oversight.\1675\ The 
Commission also is mindful, however, that certain costs would be 
associated with our proposal. The Commission's consideration and 
discussion of the programmatic benefits and costs of the formation and 
registration of a SB SEF in the SB SEF Proposing Release did not 
differentiate between domestic and foreign security-based swap markets. 
The Commission notes, however, that the SB SEF Proposing Release 
contemplated that foreign security-based swap markets would seek to 
register as SB SEFs and proposed certain requirements specifically for 
non-resident \1676\ persons seeking to register as a SB SEF.\1677\ The 
Commission received no comments on the SB SEF Proposing Release 
indicating that the benefits and costs associated with SB SEF 
registration would be different for foreign and domestic security-based 
swap markets.\1678\ Accordingly, the Commission preliminarily believes 
that the programmatic benefits and costs associated with a security-
based swap market registered with the Commission as a SB SEF and 
subject to the requirements set forth in Section 3D of the Exchange 
Act, and the proposed rules and regulations thereunder, would be 
substantially the same for both a domestic and a foreign security-based 
swap market.\1679\
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    \1675\ See SB SEF Proposing Release, 76 FR 11036-38.
    \1676\ See note 834, supra (noting that usage of the term ``non-
resident,'' as well as the term ``foreign,'' in connection with a 
security-based swap market refers to a security-based swap market 
that is not a U.S. person).
    \1677\ See note 1697, infra, and accompanying text.
    \1678\ In the SB SEF Proposing Release, the Commission estimated 
that as many as 20 security-based swap trading platforms or systems 
could seek to register with the Commission as SB SEFs. See SB SEF 
Proposing Release, 76 FR 11023. No commenter indicated that the 
Commission's estimate was erroneous.
    \1679\ A more detailed description of the benefits and costs 
associated with the formation and registration of SB SEFs is set 
forth in the SB SEF Proposing Release, 76 FR 11035-48. As set forth 
in the Request for Comment section below, the Commission invites 
comment on whether the benefits and costs associated with SB SEF 
registration would be the same for domestic and foreign security-
based swap markets.
---------------------------------------------------------------------------

(a) Programmatic Benefits
    The Commission preliminarily believes that application of the 
statutory registration requirements and Regulation SB SEF to foreign 
security-based swap markets that engage in the activities noted above 
with respect to U.S. persons, or non-U.S. persons located in the United 
States,\1680\ would generate programmatic benefits similar to those 
described in the SB SEF Proposing Release with respect to the 
registration and regulation of SB SEFs, i.e., enhanced transparency, 
competition, and oversight of security-based swaps,\1681\ which are 
discussed below. The Commission also believes that our proposed 
application of the statutory registration requirements and Regulation 
SB SEF to foreign security-based swap markets is appropriately tailored 
to extend these benefits to the security-based swap activity that is 
most likely to raise the concerns that Congress intended to address in 
Title VII.\1682\ In the Commission's preliminary view, a different 
application could undermine these goals. By way of example and without 
limitation, if a foreign security-based swap market could provide 
proprietary electronic trading screens for the execution or trading of 
security-based swaps by, or grant membership or participation in the 
foreign security-based swap market to, U.S. persons, or non-U.S. 
persons located in the United States, without being required to 
register under Section 3D, there could be security-based swap trading 
venues available to U.S. persons, or non-U.S. persons located in the 
United States, that are not subject to Commission regulation and 
oversight. The regulatory benefits that the Commission believes Title 
VII intends to bring to the U.S. security-based swap market would not 
be fully realized in such a scenario.
---------------------------------------------------------------------------

    \1680\ See Section VII.B, supra.
    \1681\ See SB SEF Proposing Release, 76 FR 11036. One commenter 
on the SB SEF Proposing Release stated that certain benefits would 
result from the trading of security-based swaps occurring on SB 
SEFs, including narrower bid-ask spreads and lower transaction costs 
as a result of increased competition and pre-trade price 
transparency. See SDMA Letter I at 8-9 and SDMA Letter II at 2; see 
also Section XXII, infra.
    \1682\ See Section II.B., supra.
---------------------------------------------------------------------------

    Improved Transparency. The trading of security-based swaps on 
regulated markets, such as SB SEFs, should help bring more transparency 
to the U.S. marketplace for security-based swaps. Increased pre-trade 
transparency should help alleviate informational asymmetries that may 
exist today in the security-based swap market and allow an increased 
number of market participants to see the trading interest of other 
market participants prior to submitting trades, which should lead to 
increased price competition among market participants.\1683\ As such, 
the Commission preliminarily believes that proposed Regulation SB SEF 
should lead to more efficient pricing in the security-based swap 
market,\1684\ but is mindful that, under certain circumstances, pre-
trade transparency also could discourage the provision of

[[Page 31171]]

liquidity by some market participants, as discussed in more detail 
below.\1685\
---------------------------------------------------------------------------

    \1683\ See SB SEF Proposing Release, 76 FR 11036; see also 
Ananth Madhavan, ``Market Microstructure: A Practitioner's Guide,'' 
Fin. Analysts J., Vol. 58 (2002), at 38 (nondisclosure of pre-trade 
price information benefits dealers by reducing price competition).
    \1684\ See SB SEF Proposing Release, 76 FR 11036; see also 
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).
    \1685\ See SB SEF Proposing Release, 76 FR 11036; see also 
Section XV.G.1(b), infra; see also 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).
---------------------------------------------------------------------------

    Improved Competition. The Commission preliminarily believes that 
registration and regulation of SB SEFs, as described in the SB SEF 
Proposing Release, also would foster greater competition in the trading 
of security-based swaps by increasing access to security-based swap 
trading venues.\1686\ The proposed SB SEF rules would require SB SEFs 
to permit all eligible persons that meet the requirements for becoming 
participants, as set forth in the SB SEF's rules, to become 
participants in the SB SEF.\1687\ The proposed SB SEF rules would 
require each SB SEF to establish fair, objective and not unreasonably 
discriminatory standards for granting impartial access to trading on 
the SB SEF.\1688\ These proposed requirements are designed to provide 
market participants with impartial access.\1689\ Having impartial 
access should, in turn, promote greater participation by liquidity 
providers and increased competition on each SB SEF.\1690\ Impartial 
access requirements also should help guard against the potential for 
certain participants in a SB SEF (who also might be owners of the SB 
SEF) to seek to limit the number of other participants in the SB SEF as 
a way to reduce competition and increase their own profits.\1691\
---------------------------------------------------------------------------

    \1686\ See SB SEF Proposing Release, 76 FR 11037-38.
    \1687\ Id. at 11037. Proposed Rule 809(a) in Regulation SB SEF 
would require SB SEFs to permit a person to become a participant in 
the SB SEF 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 Exchange 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 Exchange Act, 15 
U.S.C. 78c(a)(65)).
    \1688\ See SB SEF Proposing Release, 76 FR 11037.
    \1689\ Id.; see also Section 3D(d)(2)(B)(i) of the Exchange Act, 
15 U.S.C. 78c-4(d)(2)(B)(i).
    \1690\ See SB SEF Proposing Release, 76 FR 11037; see also 
Section XV.C.3, supra (stating that in markets with impartial 
access, security-based swaps would be available to more 
participants, and that fair and equal access to security-based swaps 
not only promotes competition, but also encourages participants to 
express their true valuations for security-based swaps and lowers 
search costs for participants deciding to enter or exit a security-
based swap position).
    \1691\ See SB SEF Proposing Release, 76 FR 11037.
---------------------------------------------------------------------------

    Improved Oversight. As set forth in the SB SEF Proposing Release, 
the proposed registration rules for SB SEFs would incorporate the 
requirement under the Dodd-Frank Act that a SB SEF, to be registered 
and maintain registration, must comply with the 14 Core Principles 
governing SB SEFs in Section 3D(d) of the Exchange Act \1692\ (``Core 
Principles'') and any requirement that the Commission may impose by 
rule or regulation.\1693\ The proposed SB SEF rules and proposed Form 
SB SEF are intended to implement the statutory registration 
requirements and assist the Commission in overseeing and regulating the 
security-based swap market.\1694\ The information to be provided on 
proposed Form SB SEF (and the exhibits thereto) is designed to enable 
the Commission to assess whether an applicant seeking to become a 
registered SB SEF has the capacity and the means to perform the duties 
of a SB SEF and to comply with the Core Principles and other 
requirements governing registered SB SEFs.\1695\ In addition, the 
amendments, supplemental information and notices that the Commission 
proposed to require registered SB SEFs to file pursuant to Rules 802, 
803, and 804 of proposed Regulation SB SEF 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 security-based swaps and, specifically, the trading of security-
based swaps on SB SEFs.\1696\ Moreover, as discussed in the SB SEF 
Proposing Release, any non-resident persons seeking to register as a SB 
SEF must comply with certain requirements, including that such non-
resident persons provide assurances that they are legally permitted to 
provide the Commission with prompt access to their books and records 
and to be subject to inspection and examination by the 
Commission.\1697\
---------------------------------------------------------------------------

    \1692\ 15 U.S.C. 78c-4(d).
    \1693\ See SB SEF Proposing Release, 76 FR 10949.
    \1694\ See id. at 10949-50.
    \1695\ See proposed Form SB SEF under the Exchange Act; see also 
SB SEF Proposing Release, 76 FR 11004-08.
    \1696\ See proposed Rules 802-804 under the Exchange Act; see 
also SB SEF Proposing Release, 76 FR 11002-04.
    \1697\ See proposed Rule 801(f) under the Exchange Act; see also 
SB SEF Proposing Release, 76 FR 11001.
---------------------------------------------------------------------------

    Registration and regulation of SB SEFs would require SB SEFs to 
maintain an audit trail and surveillance systems to monitor 
trading.\1698\ Proposed Regulation SB SEF also would require 
comprehensive reporting and recordkeeping by SB SEFs.\1699\ 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.\1700\ The proposed rules for SB SEFs 
also would provide the Commission with greater access to information on 
the trading of security-based swaps to support its responsibilities to 
oversee the security-based swap market.\1701\ Further, the proposed 
rules for SB SEFs would enable the Commission to share that information 
with other federal financial regulators, including in instances of 
broad market turmoil.\1702\
---------------------------------------------------------------------------

    \1698\ See proposed Rule 818(c) under the Exchange Act, which 
would require each SB SEF 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; and proposed Rules 811(j), 813(a)(2) 
and 813(b) under the Exchange Act, which would require each SB SEF 
to electronically surveil its market and to maintain an automated 
surveillance system; see also SB SEF Proposing Release, 76 FR 11037-
38.
    \1699\ See proposed Rule 818 under the Exchange Act; see also SB 
SEF Proposing Release, 76 FR 11037-38.
    \1700\ See SB SEF Proposing Release, 76 FR 11037.
    \1701\ Id.
    \1702\ Id.
---------------------------------------------------------------------------

    Improved regulatory oversight could encourage participation in the 
U.S. security-based swap market by investors who could benefit from 
such participation but currently choose to avoid transacting in that 
market in part because the market is opaque and largely has not been 
subject to oversight by U.S. regulatory authorities. Indeed, to the 
extent that 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 U.S. security-based swap market.\1703\
---------------------------------------------------------------------------

    \1703\ See id. at 11037.
---------------------------------------------------------------------------

(b) Programmatic Costs
    Although the Commission believes that application of the 
registration requirements of Section 3D and proposed Regulation SB SEF 
to foreign security-based swap markets would result in significant 
benefits to the U.S. security-based swap market, the Commission 
recognizes that foreign security-based swap markets also would incur 
significant costs to comply with the proposed registration requirements 
for foreign security-based swap markets similar to those that domestic 
SB SEFs would incur, as discussed in the Regulation SB SEF 
proposal.\1704\ These costs are summarized below.
---------------------------------------------------------------------------

    \1704\ See id. 11040-48. A detailed breakdown of the cost 
estimates associated with all aspects of SB SEF formation and 
compliance with the rules proposed under proposed Regulation SB SEF 
are contained in the SB SEF Proposing Release. See id. Moreover, the 
Commission notes that it has received comment letters on those cost 
estimates. See MarketAxess Letter and UBS Letter. One commenter 
remarked on the cost estimates in the SB SEF Proposing Release for 
many of the individual aspects of SB SEF formation, noting that, in 
its view, some cost estimates were high and others were low. See 
MarketAxess Letter at 15-17. The commenter stated that generally the 
estimates in the SB SEF Proposing Release were realistic and that 
accurate estimates of the true expected costs of establishing and 
operating a SB SEF and the hourly rates relied upon for the 
estimates were broadly consistent with industry standards. Id. 
Another commenter urged the Commission to consider the impact of the 
Regulation SB SEF proposal on broker-dealers and the potential costs 
that could result. See UBS Letter at 3. Neither of these commenters 
indicated that the costs associated with SB SEF formation and 
registration would be different for foreign security-based swap 
markets as compared to domestic security-based swap markets.

---------------------------------------------------------------------------

[[Page 31172]]

    SB SEF Formation. According to industry sources consulted by 
Commission staff in connection with the issuance of the SB SEF 
Proposing Release, 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.\1705\ The industry sources consulted by Commission staff 
estimated at that time that, for the SB SEF's 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.\1706\ The 
technological costs would be expected to decline considerably during 
the second and subsequent years of operation, with an estimated range 
of $3 million to $4 million per year per SB SEF.\1707\
---------------------------------------------------------------------------

    \1705\ See SB SEF Proposing Release, 76 FR 11041.
    \1706\ Id.
    \1707\ Id.
---------------------------------------------------------------------------

    For entities that currently own and/or operate platforms for the 
trading of security-based swaps, 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.\1708\ According to industry 
sources consulted by Commission staff in connection with the issuance 
of the SB SEF Proposing Release, the incremental costs of enhancing a 
trading platform to be compatible with any SB SEF requirements 
ultimately 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 make a particular platform compatible with the 
final Commission rules governing SB SEFs.\1709\ As noted in the SB SEF 
Proposing Release, the annual ongoing cost of maintaining the 
technology and any improvements is estimated to be in the range of $2 
million to $4 million.\1710\
---------------------------------------------------------------------------

    \1708\ Id. Several commenters on the SB SEF Proposing Release 
that currently operate swap trading facilities have indicated their 
intention to register as SB SEFs. See, e.g., Bloomberg Letter; GFI 
Letter; MarketAxess Letter; and Tradeweb Letter.
    \1709\ See SB SEF Proposing Release, 76 FR 11041.
    \1710\ Id.
---------------------------------------------------------------------------

    In the SB SEF Proposing Release, the Commission preliminarily 
estimated that the cost for an applicant to file Form SB SEF, including 
all exhibits thereto, would be approximately $675,297 per SB SEF.\1711\
---------------------------------------------------------------------------

    \1711\ Id. A more detailed breakdown of the cost estimates 
associated with each exhibit to Form SB SEF, as well as with 
registration withdrawal and supplementation, is contained in the SB 
SEF Proposing Release. See SB SEF Proposing Release, 76 FR 11041-43.
---------------------------------------------------------------------------

    Complying with Core Principles. As is also discussed in the SB SEF 
Proposing Release, the regulatory requirement that SB SEFs comply with 
the statutory Core Principles would increase the ongoing regulatory 
obligations of SB SEFs with respect to their operations and 
oversight.\1712\ Industry sources consulted by Commission staff in 
connection with the issuance of the SB SEF Proposing Release estimated 
that the cost to a SB SEF to comply with the rules relating to 
surveillance and oversight that they expect 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 that range, since a SB 
SEF would need to create the technology necessary to monitor and 
surveil its market participants, as well as establish a rulebook that 
reflects the Core Principles and related rules.\1713\ The ongoing 
annual compliance costs estimated by those same industry sources would 
be approximately $1 million, which would include the salary of a Chief 
Compliance Officer and at least two junior compliance personnel, who 
are expected to be attorneys.\1714\
---------------------------------------------------------------------------

    \1712\ See SB SEF Proposing Release, 76 FR 11041.
    \1713\ Id.
    \1714\ Id.
---------------------------------------------------------------------------

    Unquantifiable Costs. The Commission also has considered some costs 
relating to registered SB SEFs that are difficult to quantify 
precisely.\1715\ Security-based swaps traded on registered SB SEFs may 
be perceived to be subject to increased costs, monetary and otherwise. 
For example, some industry participants expressed their belief that any 
proposed pre-trade transparency requirement would force market 
participants to reveal valuable information regarding their trading 
interest more broadly than they believed would be economically prudent, 
which in their view could discourage participation in the security-
based swap market.\1716\ There are perceived costs associated with 
frontrunning, if customers or dealers were required to show their 
trading interest before a trade is executed.\1717\ These potential 
costs of pre-trade transparency could change market participants' 
trading strategies, which could result in their working more orders or 
finding ways to hide their interest.\1718\
---------------------------------------------------------------------------

    \1715\ These unquantifiable costs are discussed more fully in 
the SB SEF Proposing Release. See SB SEF Proposing Release, 76 FR 
11040.
    \1716\ Id. Several commenters on the SB SEF Proposing Release 
expressed concerns about pre-trade transparency requirements in the 
context of block trades. See ABC Letter at 2, 4-5; MFA Letter III at 
7; ISDA SIFMA Letter II at 7; SIFMA AMG Letter II at 4-5; Blackrock 
Letter at 8; Cleary Letter III at 20; CME Letter at 3-4; Phoenix 
Letter at 3-4.
    \1717\ See SB SEF Proposing Release, 76 FR 11040.
    \1718\ Id.
---------------------------------------------------------------------------

    If market participants viewed the Commission's proposed Regulation 
SB SEF as too burdensome with respect to pre-trade transparency, 
security-based swap dealers could be less willing to supply liquidity 
for security-based swaps that trade on SB SEFs, thus reducing liquidity 
and competition.\1719\ On the other hand, if the requirement with 
respect to pre-trade transparency were too loose, the result could be 
that there would be no substantive change from the status quo, and thus 
no potential reduction in asymmetric information, increase in price 
competition, or improvement in executions, beyond the changes in 
response to the other requirements of the Dodd-Frank Act.\1720\
---------------------------------------------------------------------------

    \1719\ Id.
    \1720\ Id.
---------------------------------------------------------------------------

    The import of this concern depends on the degree of pre-trade 
transparency required and the characteristics of the trading 
market.\1721\ The proposed rules for SB SEFs 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.\1722\
---------------------------------------------------------------------------

    \1721\ Id.
    \1722\ Id.
---------------------------------------------------------------------------

    An additional unquantifiable cost could result if foreign security-
based swap markets perceive the Commission's proposed requirements for 
SB SEFs as too burdensome or detrimental to their security-based swap 
business. A foreign security-based swap market that has such a view and 
that currently operates in a manner that would cause it to be subject 
to the SB SEF registration requirements could

[[Page 31173]]

decide to restructure its security-based swap business such that it 
would not be subject to the SB SEF registration requirements. This 
result could have several potential negative implications for 
participants in the U.S. financial system such as, among other things, 
fewer registered venues on which security-based swaps could be 
executed, less competition between the remaining SB SEFs, and thus 
potentially higher costs for such executions. If restructuring raises 
trading costs in the domestic security-based swap market, liquidity 
could flow away from SB SEFs and U.S. participants could find fewer 
trading opportunities and potentially decreased liquidity in the 
domestic security-based swap market.
(c) Alternatives
    The Commission could have proposed a different interpretation 
regarding registration of foreign security-based swap markets. For 
example, the Commission could have interpreted Section 3D of the 
Exchange Act broadly to apply the registration requirement to a foreign 
security-based swap market that meets the definition of ``security-
based swap execution facility,'' \1723\ regardless of whether such 
foreign security-based swap market has engaged in any of the 
activities, discussed above, with respect to U.S. persons, or non-U.S. 
persons located in the United States.\1724\ The Commission 
preliminarily believes that, if a foreign security-based swap market is 
not engaging in such activities with respect to U.S. persons, or non-
U.S. persons located in the United States, then it would not trigger 
the registration requirements under Section 3D of the Exchange Act.
---------------------------------------------------------------------------

    \1723\ See Section 3(a)(77) of the Exchange Act, 15 U.S.C. 
78c(a)(77).
    \1724\ See Section VII.B, supra.
---------------------------------------------------------------------------

    In addition, the Commission could have interpreted Section 3D of 
the Exchange Act more narrowly than proposed herein, such that, for 
example, the registration requirement would not apply to a foreign 
security-based swap market even if it meets the definition of 
``security-based swap execution facility'' and provides U.S. persons, 
or non-U.S. persons located in the United States, with proprietary 
electronic trading screens or similar devices for executing or trading 
security-based swaps on its market. The Commission preliminarily 
believes that such a narrow interpretation would not accommodate the 
evolving technological innovation of electronic trading and the 
availability of global access to electronic trading platforms, and 
therefore could result in U.S. persons, or non-U.S. persons located in 
the United States, having the ability to directly execute or trade 
security-based swaps on a foreign security-based swap market that is 
not subject to the SB SEF registration requirements. As discussed above 
in this section, the Commission preliminarily believes that this, in 
turn, could result in the intended programmatic benefits of the SB SEF 
registration requirements, i.e., increased pre-trade transparency, 
increased competition, and improved oversight, not being extended to 
all of the security-based swap activity that the Commission believes is 
most likely to raise the concerns that Congress intended to address in 
Title VII.\1725\
---------------------------------------------------------------------------

    \1725\ See Section II.B, supra.
---------------------------------------------------------------------------

2. Programmatic Benefits and Costs of the Potential Availability of 
Exemptive Relief to Foreign Security-Based Swap Markets
    As discussed above, the Commission may consider exempting a foreign 
security-based swap market from registration as a SB SEF under Section 
3D of the Exchange Act if the foreign security-based swap market is 
subject to comparable, comprehensive supervision and regulation by the 
appropriate governmental authorities in its home country.\1726\ Any 
foreign security-based swap market granted such an exemption would be 
subject to supervision and regulation as a registered security-based 
swap market in its home jurisdiction that the Commission has determined 
to be comparable to the supervision and regulation of registered SB 
SEFs. As a result, the Commission preliminarily believes that the 
programmatic benefits and costs, as discussed above,\1727\ that would 
result from subjecting registered SB SEFs to the Commission's 
supervision and regulation also would be realized by any exempted 
foreign security-based swap market because of the comparable 
supervision and regulation of that foreign market by its home 
jurisdiction.
---------------------------------------------------------------------------

    \1726\ See Section VII.C, supra.
    \1727\ See Section XV.G.1, supra.
---------------------------------------------------------------------------

    While a number of foreign jurisdictions are in the process of 
developing standards for the regulation of security-based swaps and the 
security-based swap market, few foreign jurisdictions have adopted such 
standards as yet.\1728\ As a result, at this time, the Commission 
believes that it does not have a sufficient basis to provide an 
estimate as to how many foreign security-based swap markets would be 
required to register as SB SEFs and potentially be eligible for an 
exemption from that requirement because the Commission currently has no 
basis to determine whether such foreign security-based swap markets 
would be subject to comparable, comprehensive supervision and 
regulation in their home jurisdictions.
---------------------------------------------------------------------------

    \1728\ See Section VII.C, supra.
---------------------------------------------------------------------------

    Nevertheless, the Commission believes that certain additional 
programmatic benefits and costs could result specifically from an 
exempted foreign security-based swap market not having to register as a 
SB SEF under Section 3D of the Exchange Act while continuing to serve 
U.S. security-based swap market participants. These additional benefits 
and costs are discussed below.
(a) Programmatic Benefits
    Facilitating Cross Border Security-Based Swap Transactions. As 
discussed above,\1729\ following the publication of the SB SEF 
Proposing Release, the Commission received comments from the public 
expressing concerns about the requirements and implications of Section 
3D of the Exchange Act and the Commission's proposed rules governing SB 
SEFs for foreign-security-based swap markets and the global security-
based swap market generally.\1730\ Several commenters urged the 
Commission to work with foreign regulators to develop harmonized rules 
for the trading of security-based swaps.\1731\ As noted above, the 
Commission currently is in discussions with its foreign counterparts to 
explore steps toward such harmonization.\1732\ The Commission is 
proposing, as a means to facilitate cross-border security-based swap 
transactions, that it may consider exempting a foreign security-based 
swap market from the registration requirements under Section 3D in the 
circumstances described above.\1733\ The Commission preliminarily 
believes that the potential availability of such an exemption should 
provide foreign security-based swap markets operating in the United 
States with appropriate flexibility with respect to SB SEF registration 
when they are subject to comparable, comprehensive supervision and 
regulation in their home markets. In addition, the Commission 
preliminarily

[[Page 31174]]

believes that the programmatic benefits associated with registration 
and other requirements for SB SEFs under Section 3D of the Exchange 
Act, and rules and regulations thereunder, would not be diminished as a 
result of the proposed exemptive relief. Therefore, those U.S. 
financial system participants that opt to trade on any exempted foreign 
security-based swap market operating in the United States would remain 
adequately protected because such an exempted foreign market would be 
subject to oversight and regulation in a manner comparable to the 
Commission's proposed requirements for SB SEFs.
---------------------------------------------------------------------------

    \1729\ Id.
    \1730\ See, e.g., Thomson Letter at 3-4; Blackrock Letter at 12-
13; Bloomberg Letter at 6-7; TradeWeb Letter at 2; ISDA SIFMA Letter 
II at 2; WMBAA Letter at 10-11; Cleary Letter III at 4; and Cleary 
Letter IV at 5, 13; see also Section XXII., infra.
    \1731\ See Thomson Letter; BlackRock Letter; TradeWeb Letter; 
ISDA SIFMA Letter II; and WMBAA Letter; see also Section XXI, infra.
    \1732\ See Section VII.C, supra.
    \1733\ Id.
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    Reduction in Programmatic Costs Associated with Registration. The 
Commission preliminarily believes that the availability of an exemption 
from SB SEF registration requirements based on comparable, 
comprehensive supervision and regulation in the foreign security-based 
swap market's home country could serve to reduce any potentially 
duplicative or conflicting regulatory burdens faced by security-based 
swap markets that operate on a cross-border basis and that otherwise 
would be required to register in both their home country and the United 
States. Therefore, to the extent that such foreign security-based swap 
markets would qualify for and pursue such an exemption, there could be 
a reduction in the programmatic costs that those foreign security-based 
swap markets otherwise would incur.
    One commenter on the SB SEF Proposing Release stated that 
harmonized rules for trading security-based swaps would reduce 
potentially duplicative or conflicting regulatory burdens.\1734\ As 
noted above, few foreign jurisdictions have enacted legislation or 
adopted standards for the regulation of security-based swaps markets, 
although a number of foreign jurisdictions are in the process of 
developing such standards.\1735\ As the process of developing 
legislation or regulation regarding security-based swaps continues in 
other jurisdictions, the Commission believes that the availability of 
an exemption from the U.S. registration requirements is a reasonably 
designed measure to address the potential for conflicting or 
unnecessarily duplicative regulatory burdens that could arise from 
requiring dual registration in the United States and in a comparably 
regulated foreign jurisdiction.
---------------------------------------------------------------------------

    \1734\ See Bloomberg Letter.
    \1735\ See Section VII.C, supra.
---------------------------------------------------------------------------

    For example, a foreign security-based swap market that is 
registered in a foreign jurisdiction and that provides U.S. persons, or 
non-U.S. persons located in the United States, the ability to execute 
or trade security-based swaps, or that facilitates the execution or 
trading of security-based swaps, on its market could be required to 
incur the cost of full registration twice--once to register in the 
foreign jurisdiction and once more to register as a SB SEF in the 
United States--if there was no possibility of obtaining an exemption 
from the U.S. registration requirements. As a further example, such a 
foreign security-based swap market, as a result of its registration as 
a SB SEF, would be required to establish rules governing the operation 
of its trading facility, including rules specifying trading procedures 
to be used in entering and executing orders traded or posted on the 
facility.\1736\ A conflict could arise if, for example, the U.S. 
requirements for SB SEFs require the foreign market's trading rules to 
allow trading interest in security-based swaps to be expressed or 
responded to in a manner that is different from, and that makes it 
impossible also to comply with, the foreign jurisdiction's requirements 
regarding trading rules. These examples are not meant to be exhaustive, 
but rather to be illustrative of scenarios involving potentially 
conflicting or unnecessarily burdensome regulation that foreign 
security-based swap markets could face, absent an exemption. The 
Commission preliminarily believes that the availability of an exemption 
from registration as a SB SEF should help mitigate the potential impact 
of such scenarios. At the same time, as discussed above, the Commission 
believes that granting such an exemption to a foreign security-based 
swap market would not reduce the programmatic benefits achieved by 
requiring security-based swap markets to register as a SB SEF because 
any exempted foreign market would be comparably supervised and 
regulated by its home country.
---------------------------------------------------------------------------

    \1736\ See SB SEF Proposing Release, 76 FR 10967, 10971-73.
---------------------------------------------------------------------------

    As stated above, few jurisdictions have adopted standards for the 
regulation of security-based swap markets and therefore the Commission 
does not have a sufficient basis to provide an estimate as to how many 
foreign security-based swap markets would request, and potentially 
receive, an exemption from registration.\1737\ The Commission 
preliminarily believes that the estimate in the SB SEF Proposing 
Release of programmatic costs associated with registration as a SB SEF 
would apply equivalently to a foreign security-based swap market that 
is subject to Section 3D's registration requirement.
---------------------------------------------------------------------------

    \1737\ See Section VII.C, supra.
---------------------------------------------------------------------------

    Any potential exemption from registration (even though the foreign 
security-based swap market would incur costs associated with compliance 
with the comparable regulation in its home country), could result in 
minimizing the burden of the programmatic costs associated with 
registration as a SB SEF, and so these programmatic costs constitute an 
upper bound for the potential cost savings from any such exemption. 
However, the Commission is not able to estimate the aggregate reduction 
in programmatic costs that would be associated with reliance on any 
proposed exemption by foreign security-based swap markets.
(b) Programmatic Costs
    Compliance with Potential Conditions of Exemption. As discussed 
above, any grant of an exemption from the SB SEF registration 
requirements may be subject to certain appropriate conditions, which 
could include, but not be limited to, requiring the exempted foreign 
security-based swap market to provide the Commission with prompt access 
to its books and records, including, for example, data related to 
orders, quotes and transactions, as well as providing an opinion of 
counsel that, as a matter of law, it is able to provide such 
access.\1738\ The Commission also could require that the foreign 
security-based swap market appoint an agent for service of process in 
the United States.\1739\
---------------------------------------------------------------------------

    \1738\ Id.
    \1739\ Id. These potential conditions of an exemption from SB 
SEF registration requirements for a foreign security-based swap 
market--granting the Commission access to its books and records, 
providing an opinion of counsel that such access can be granted 
under the foreign jurisdiction's law, and appointing a process agent 
in the United States--are proposed requirements of SB SEF 
registration. See SB SEF Proposing Release, 76 FR 11000. Thus, a 
foreign security-based swap market that is required to register as a 
SB SEF would incur the costs associated with complying with these 
requirements, which costs are included in the estimate provided in 
Section XV.G.1(b) above of the cost for an applicant to file Form SB 
SEF, including all exhibits thereto. See id. at 11016-17, 11041-42. 
A foreign security-based swap market that is granted an exemption 
from SB SEF registration requirements also could incur the costs of 
complying with these requirements to the extent that the Commission 
imposes them as conditions to the exemption.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the costs associated 
with a commitment by the foreign security-based swap market to provide 
the Commission with access to books and records would be part of the 
Commission's $1 million to $3 million

[[Page 31175]]

estimate of the annual cost to a SB SEF to comply with the Commission's 
proposed rules relating to surveillance and oversight,\1740\ but would 
be difficult to quantify separately at this time. The foreign security-
based swap market would maintain books and records in the ordinary 
course of its business and in conformance with the requirements of its 
appropriate regulatory authority.\1741\ If, after issuance of any such 
exemptive relief, the Commission considered it necessary to have access 
to the foreign security-based swap market's books and records, there 
would be costs to the foreign security-based swap market in granting 
such access, for example, in copying the requested books and records 
and supplying them to Commission staff. However, the circumstances that 
would prompt any Commission request for access to the foreign security-
based swap market's books and records and the exact scope of any such 
request would not be known at the time the Commission were to grant an 
exemption from the requirements of Section 3D of the Exchange Act.
---------------------------------------------------------------------------

    \1740\ See note 1713 and accompanying text, supra,; see also SB 
SEF Proposing Release, 76 FR 11041.
    \1741\ Prior to the issuance of any exemption the foreign 
security-based swap market could, however, need to incur the cost of 
obtaining an opinion of counsel letter stating that it is able to 
provide access to its books and records. See Section XV.G.2(d), 
infra.
---------------------------------------------------------------------------

    The Commission believes that the costs for a foreign security-based 
swap market to appoint an agent for service of process in the United 
States would be minimal in circumstances in which the foreign security-
based swap market has a subsidiary or staff in the United States that 
is capable of receiving service of process and acting as the foreign 
market's appointed agent. In circumstances in which a foreign security-
based swap market must appoint a third party as its process agent, 
Commission staff estimates, based on an industry source that provides 
process agent services, that the cost to do so would be approximately 
$400 for the first year and approximately $300 annually thereafter.
    The Commission also believes that an exempted foreign market could 
incur costs in complying with any additional conditions that accompany 
the grant of the exemption, but the scope of these conditions and the 
costs associated with them would depend on the specific circumstances 
for which the exemption is granted and could vary from foreign 
jurisdiction to foreign jurisdiction. As a result, the Commission 
cannot provide an estimated dollar value of the costs that would be 
associated with such additional conditions at this time.
(c) Alternatives
    Harmonization with Foreign Counterparts. Apart from interpreting 
Section 3D of the Exchange Act to apply to foreign security-based swap 
markets that engage in certain activities with respect to U.S. persons 
or non-U.S. persons located in the United States,\1742\ and potentially 
providing an exemption from the SB SEF registration requirements for 
qualifying foreign security-based swap markets that are covered by 
Section 3D,\1743\ the Commission could adopt the approach of 
harmonizing our rules with the rules of foreign jurisdictions. As noted 
above, few foreign jurisdictions have enacted legislation or adopted 
standards for the regulation of security-based swaps markets, although 
a number of foreign jurisdictions are in the process of developing such 
standards. Accordingly, the Commission preliminarily believes that our 
proposal to consider exemptive relief from SB SEF registration for 
foreign security-based swap markets that are subject to comparable, 
comprehensive supervision and regulation is a reasonable measure at 
this time that acknowledges the cross-border nature of the security-
based swap market.
---------------------------------------------------------------------------

    \1742\ See Section VII.B, supra.
    \1743\ See Section VII.C, supra.
---------------------------------------------------------------------------

    Not Consider Exemptive Relief. The Commission could have determined 
not to consider making exemptive relief from Section 3D's registration 
requirements available. In such a scenario, a foreign security-based 
swap market subject to Section 3D's registration requirements would be 
required to register as a SB SEF--and incur the costs attendant to such 
registration--even if it is subject to comparable, comprehensive 
supervision and regulation in its home jurisdiction. Moreover, without 
the availability of an exemption, the Commission believes that there 
would be a greater potential for such a dually-registered foreign 
security-based swap market to face duplicative or conflicting 
regulatory burdens. The Commission preliminarily believes that 
considering exemptive relief is a more cost-effective and, for the 
reasons stated above, reasonable measure given the cross-border nature 
of the security-based swap market.
(d) Assessment Costs
    A foreign security-based swap market would incur costs in 
submitting a request or application for an exemption from the SB SEF 
registration requirement. The Commission estimates that the costs of 
submitting such a request or application would be approximately 
$110,320.\1744\ The use of internal counsel in lieu of outside counsel 
would reduce this estimate.
---------------------------------------------------------------------------

    \1744\ The Commission preliminarily believes that the costs of 
submitting a request or application for the proposed exemption would 
be similar to the costs associated with submitting a request for a 
substituted compliance determination, i.e., $110,320. See Section 
XV.I.3, infra. This estimate is based on information regarding the 
average costs associated with preparing and submitting an 
application to the Commission for a Commission order for exemptive 
relief under Section 36 of the Exchange Act in accordance with the 
procedures set forth in 17 CFR 240.0-12. The Commission estimates 
that preparation of the request would require approximately 80 hours 
of in-house counsel time and 200 hours of outside counsel time. Such 
estimate takes into account the time required to prepare supporting 
documents necessary for the Commission to make a substituted 
compliance determination, including, without limitation, information 
regarding applicable requirements established by the foreign 
financial regulatory authority or authorities, as well as the 
methods used by the foreign financial regulatory authority or 
authorities to monitor compliance with these rules. Based upon data 
from SIFMA's Management & Professional Earnings in the Securities 
Industry 2012 (modified by the SEC staff to account for an 1800-
hour-work-year and multiplied by 5.35 to account for bonuses, firm 
size, employee benefits, and overhead), the staff estimates that the 
average national hourly rate for an in-house attorney is $379. The 
Commission estimates the costs for outside legal services to be $400 
per hour. Accordingly, the Commission estimates the cost to be 
$110,320 ($30,320 (based on 80 hours of in-house counsel time * 
$379) + $80,000 (based on 200 hours of outside counsel time * $400)) 
to submit a request for a substituted compliance determination.
---------------------------------------------------------------------------

    An additional assessment cost that a foreign security-based swap 
market could incur in connection with submitting such an exemption 
request or application would be obtaining an opinion of counsel letter 
stating that the foreign security-based swap market is able to give 
access to its books and records to the Commission, if the Commission 
were to include such a condition in any exemptive relief. The 
Commission estimates that the cost associated with obtaining such a 
letter would be approximately $25,000.\1745\
---------------------------------------------------------------------------

    \1745\ This estimate is based on prior Commission estimates of 
the cost of obtaining an opinion of counsel, and assumes that 
foreign security-based swap dealers would seek outside legal counsel 
to prepare the letter at an hourly rate of $400. See SB SEF 
Proposing Release, 76 FR 11025, 11042; Registration Proposing 
Release, 76 FR 65811; see also note 1744, supra. In the SB SEF 
Proposing Release, the Commission preliminarily estimated that the 
average initial paperwork cost for 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 its books and records and 
submit to onsite inspection and examination by representatives of 
the Commission would be one hour and $900 in outside legal costs per 
non-resident SB SEF. See SB SEF Proposing Release, 76 FR 11025, 
11042. In the Registration Proposing Release, the Commission stated 
that, upon further reflection, it believed that a non-resident 
security-based swap entity would incur, on average, approximately 
$25,000 in outside legal costs to obtain an opinion of counsel that 
a non-resident security-based swap entity could provide the 
Commission with access to its books and records and submit to onsite 
inspection and examination by the Commission. See Registration 
Proposing Release, 76 FR 65811. The Commission preliminarily 
believes that an estimate of $25,000 may be the more appropriate 
estimate of the cost that a foreign security-based swap market would 
incur in obtaining an opinion of counsel from outside counsel with 
respect to the ability to grant the Commission access to books and 
records given the research and legal analysis that the Commission 
believes would be involved in the preparation of the opinion.

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[[Page 31176]]

Request for Comment
     Would the benefits and costs associated with becoming a SB 
SEF be the same for domestic and foreign security-based swap markets? 
For example, would the costs of implementing the systems and other 
necessary technology to operate as a SB SEF be different for foreign 
security-based swap markets? To the extent the benefits or costs of SB 
SEF registration would be different for foreign security-based swap 
markets as compared to domestic markets, please identify, discuss, 
analyze, and supply relevant data, information, or statistics regarding 
any such different benefits or costs for foreign security-based swap 
markets.
     Would the costs associated with developing the other 
aspects of the infrastructure necessary for SB SEFs be different for 
foreign security-based swap markets? If so, please describe such 
differences and quantify them to the extent possible.
     Would the non-infrastructure costs associated with forming 
and operating a SB SEF be different for foreign security-based swap 
markets? If so, please describe such differences and quantify them.
     Are there any programmatic benefits and costs associated 
with the SB SEF registration requirements or the proposed availability 
of an exemption from those requirements that are not discussed herein? 
If so, please identify, discuss, analyze, and supply relevant data, 
information, or statistics regarding any such costs or benefits.
     Are the programmatic benefits and costs associated with 
the SB SEF registration requirements and the proposed availability of 
an exemption from those requirements that are discussed herein 
accurate? If not, how can the Commission more accurately estimate these 
costs?
     Do the benefits of the proposed availability of an 
exemption from the SB SEF registration requirements justify the costs? 
Are there quantifiable programmatic costs associated with the proposed 
availability of an exemption from those requirements that should be 
addressed? If so, please identify them. Are there any additional 
assessment costs not discussed herein? If so, what are they and are 
they quantifiable?
     Do commenters agree with the preliminary estimates of the 
assessment costs relating to the proposed exemption from the SB SEF 
registration requirement? Are the estimated costs a foreign security-
based swap market would incur in submitting an application for an 
exemption from the SB SEF registration requirements accurate? If not, 
how should the Commission adjust the cost estimate? Are there other 
assessment costs not considered here?
3. Programmatic Benefits and Costs Associated With the Mandatory Trade 
Execution Requirement of Section 3C(h) of the Exchange Act
    Unlike the markets for cash equity securities and listed options, 
the market for security-based swaps currently is characterized by 
bilateral negotiation in the OTC swap market and is largely 
decentralized.\1746\ The lack of uniform rules concerning the trading 
of security-based swaps and the historical one-to-one nature of trade 
negotiation in security-based swaps has resulted in the formation of 
distinct types of trading venues and execution practices, ranging from 
bilateral negotiations carried out over the telephone,\1747\ to single-
dealer RFQ platforms,\1748\ to multi-dealer RFQ platforms,\1749\ to 
central limit order books,\1750\ and brokerage trading.\1751\ These 
various trading venues and execution practices provide different 
degrees of pre-trade transparency and different levels of access. While 
the Commission currently does not have sufficient information with 
respect to the volume of security-based swap transactions executed 
across these different trading venues and execution practices, a common 
thread to these transactions is that they have all been executed in the 
unregulated OTC derivatives market. Thus, for purposes of analyzing the 
economic impact of the statutory mandatory trade execution requirement, 
as well as proposed Rule 3Ch-1, the Commission is starting from a 
baseline in which no security-based swaps are currently traded in the 
United States on an exchange or on a system or platform that otherwise 
meets the statutory definition of ``security-based swap execution 
facility,'' the statutory Core Principles governing SB SEFs, and the 
Commission's proposed requirements governing SB SEFs, if they were to 
be adopted by the Commission.\1752\
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    \1746\ See SB SEF Proposing Release, 76 FR 10951.
    \1747\ ``Bilateral negotiation'' refers to the execution 
practice whereby one party uses the telephone, email or other 
communications to contact directly a potential counterparty to 
negotiate and execute a security-based swap. The bilateral 
negotiation and execution practice provides no pre-trade or post-
trade transparency because only the two parties to the transaction 
are aware of the terms of the negotiation and the final terms of the 
agreement. See SB SEF Proposing Release, 76 FR 10951; see also 
Section II.A.5, supra.
    \1748\ A single-dealer RFQ platform refers to an electronic 
trading platform where a dealer may post indicative quotes for 
security-based swaps in various 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 
security-based swap, the customer requests an executable quote, the 
dealer provides one, and if the customer accepts the dealer's quote, 
the transaction is executed electronically. 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. See SB SEF Proposing Release, 76 FR 10951; see also 
Section II.A.5, supra.
    \1749\ A multi-dealer RFQ electronic trading platform refers to 
a multi-dealer RFQ system whereby a requester can send an RFQ to 
solicit quotes on a certain security-based swap from multiple 
dealers at the same time. 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. See SB SEF Proposing 
Release, 76 FR 10952; see also Section II.A.5, supra.
    \1750\ A limit order book system or similar system refers to a 
trading system 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. In general, a limit order book system 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. See SB SEF Proposing Release, 76 FR 10952; see also 
Section II.A.5, supra. Currently, limit order books for the trading 
of security-based swaps in the United States are utilized by inter-
dealer brokers for dealer-to-dealer transactions.
    \1751\ ``Brokerage trading'' refers to an execution practice 
used by brokers to execute security-based swaps 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 security-based swaps. The 
broker then interacts with other customers to fill the request and 
execute the transaction. 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. See SB SEF Proposing 
Release, 76 FR 10952; see also Section II.A.5, supra.
    \1752\ Several commenters on the SB SEF Proposing Release that 
currently operate swap trading facilities have indicated their 
intention to register as SB SEFs. See note 1708, supra. The 
Commission believes that it is likely that these entities would have 
to revise their operations to meet the definition of ``security-
based swap execution facility,'' the statutory Core Principles 
governing SB SEFs, and the proposed requirements set forth in the SB 
SEF Proposing Release, if they were to be adopted by the Commission.

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[[Page 31177]]

    As noted above, this section XV.G.3 addresses the programmatic 
effect, and benefits and costs of, the mandatory trade execution 
requirement of Section 3C(h) of the Exchange Act generally. Section 
XV.G.4 further below addresses the programmatic effect, and benefits 
and costs of, the proposed application of this requirement to cross-
border security-based swap transactions, as delineated by proposed Rule 
3Ch-1. The Commission preliminarily believes that proposed Rule 3Ch-1 
is appropriately tailored to extend the regulatory benefits intended by 
the mandatory trade execution requirement--i. e., enhanced transparency 
and competition, which are discussed below--to the security-based swap 
activity that the Commission believes is most likely to raise the 
concerns that Congress intended to address in Title VII.\1753\ In the 
Commission's preliminary view, a different rule, and in particular a 
rule that would not apply the mandatory trade execution requirement to 
all such security-based swap activity, could undermine these goals.
---------------------------------------------------------------------------

    \1753\ See Sections II.B., supra.
---------------------------------------------------------------------------

(a) Programmatic Effect of the Statutory Mandatory Trade Execution 
Requirement
    As discussed above, to increase the transparency and oversight of 
the OTC derivatives market, Section 763(a) of the Dodd-Frank Act 
amended the Exchange Act by adding the mandatory trade execution 
requirement of Section 3C(h).\1754\ Security-based swap transactions 
subject to Section 3C(h)'s mandatory trade execution requirement cannot 
be executed over-the-counter, but instead must be executed on an 
exchange or SB SEF that is registered or exempt from registration under 
the Exchange Act, unless an applicable exception applies.\1755\ As 
such, the mandatory trade execution requirement is important in helping 
to bring the trading of security-based swaps onto more transparent, 
regulated markets, from the unregulated OTC swap markets.\1756\
---------------------------------------------------------------------------

    \1754\ 15 U.S.C. 78c-3(h).
    \1755\ Id.
    \1756\ See SB SEF Proposing Release, 76 FR 10949.
---------------------------------------------------------------------------

    Consequently, the Commission preliminarily believes that an overall 
programmatic--and positive--effect of the mandatory trade execution 
requirement would be the potential for a large volume of security-based 
swap transactions that are currently executed in the OTC market to 
become subject to the mandatory trade execution requirement and, 
therefore, be required to be executed on a regulated platform, such as 
an exchange or SB SEF. Moreover, because the programmatic benefits and 
costs attendant to the mandatory trade execution requirement, which are 
discussed below, would be realized for the volume of security-based 
swap transactions that are executed on exchanges or SB SEFs, the 
Commission preliminarily believes that the extent to which those 
benefits and costs could be realized may best be demonstrated by 
generating an indicative volume estimate of security-based swap 
transactions that may potentially be subject to the mandatory trade 
execution requirement.
    As stated above, because the Commission currently does not have 
comprehensive information regarding the volume of security-based swap 
transactions currently executed on security-based swap trading 
platforms,\1757\ to estimate the volume of such transactions that could 
become subject to the mandatory trade execution requirement, as a 
starting point, the Commission relies on clearing data for single-name 
CDS transactions, which the Commission believes is currently the best 
available data for providing an indicative level of security-based swap 
transaction volume subject to the mandatory trade execution 
requirement.\1758\ The Commission utilizes this data regarding single-
name CDS transactions to generate an indicative volume of security-
based swap transactions in the U.S. security-based swap market that 
could be subject to the mandatory clearing requirement of Section 3C(a) 
of the Exchange Act.\1759\ Given that the mandatory trade execution 
requirement of Section 3C(h) of the Exchange Act \1760\ could apply to 
any security-based swap that is subject to the mandatory clearing 
requirement in Section 3C(a)(1) of the Exchange Act,\1761\ the 
Commission preliminarily believes that the volume of single-name CDS 
transactions that could be subject to the mandatory clearing 
requirement \1762\ presents an indicative level of the volume of 
security-based swap transactions that potentially could be subject to 
the mandatory trade execution requirement if these security-based swaps 
are made available to trade on an exchange or SB SEF.
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    \1757\ While several commenters on the SB SEF Proposing Release 
that currently operate swap trading facilities in the OTC market 
have indicated their intention to register as SB SEFs, see note 
1708, supra, as is currently the case for the security-based swap 
market as a whole, the Commission does not have comprehensive 
information regarding the volume of security-based swap transactions 
currently executed on security-based swap trading platforms.
    \1758\ For purposes of the analysis of the programmatic effect 
of the mandatory trade execution requirement, we do not consider the 
historical data regarding the clearing level of U.S. index CDS 
transactions. The statutory definition of security-based swap in 
relevant part includes swaps based on single securities or on 
narrow-based security-indices. See Section 3(a)(68)(A) of the 
Exchange Act, 15 U.S.C.78c(a)(68)(A). The historical data regarding 
the clearing level of U.S. index CDS transactions encompass broad-
based index CDS transactions that do not fall within the definition 
of security-based swaps. The Commission recognizes that the 
security-based swap market includes not only single-name CDS, but 
also CDS based on narrow-based indices, and other non-CDS security-
based swaps, primary examples of which are equity swaps and total 
return swaps based on single equities or narrow-based indices of 
equities. As previously stated, we believe that the single-name CDS 
data are sufficiently representative of the security-based swap 
market. See note 1301, supra.
    \1759\ See Section XV.F.3(a), supra.
    \1760\ 15 U.S.C. 78c-3(h).
    \1761\ 15 U.S.C. 78c-3(a)(1).
    \1762\ As previously stated, the estimate of the volume of 
single-name CDS transactions that could be subject to the mandatory 
clearing requirement is conditioned upon and will be affected by the 
mandatory clearing determination and the final rules regarding the 
end-user exception to the mandatory clearing requirement and other 
qualification. See Section XV.F.2, supra.
---------------------------------------------------------------------------

    The Commission notes that it has not yet determined the criteria 
for assessing whether an exchange or SB SEF has made a security-based 
swap available to trade. The Commission, however, recognizes that the 
``made available to trade'' determination is an essential element of 
the mandatory trade execution requirement. Any analysis of the benefits 
and costs flowing from the full complement of the mandatory trade 
execution requirement, when it is implemented, would need to take into 
consideration the Commission's determination of the scope of security-
based swaps that would be ``made available to trade,'' as well as the 
cross-border rules that may be adopted by the Commission regarding 
application of the mandatory trade execution requirement. As a result, 
the ``made available to trade'' determination, when made by the 
Commission, will affect the ultimate benefits and costs associated with 
the mandatory trade execution requirement discussed in this 
release.\1763\ Solely for purposes of analyzing herein the volume of 
security-based swap transactions that could be subject to the mandatory 
trade execution requirement, the Commission is assuming that all 
security-based

[[Page 31178]]

swaps that would be subject to mandatory clearing also would be deemed 
made available to trade and hence could be subject to the mandatory 
trade execution requirement.
---------------------------------------------------------------------------

    \1763\ The Commission has indicated its preliminary view that 
the decision as to when a security-based swap would be considered to 
be ``made available to trade'' should be made pursuant to objective 
measures to be established by the Commission. See SB SEF Proposing 
Release, 76 FR 10969.
---------------------------------------------------------------------------

    As stated above, due in part to the data of the level of clearing 
activity during the years of 2009 to 2011, the Commission has 
recognized that mandatory clearing determinations made pursuant to 
Section 3C(a)(1) of the Exchange Act could alter current clearing 
practices at the time such determinations are made and potentially 
could result in a higher level of clearing for security-based swaps 
than would take place under a voluntary system.\1764\ Therefore, the 
Commission preliminarily estimates that 33% of the $2,800 billion total 
gross notional volume of the total U.S. single-name CDS market \1765\ 
would provide an indicative volume of the U.S. single-name CDS 
transactions that may be subject to the mandatory clearing 
requirement.\1766\ Because the mandatory trade execution requirement of 
Section 3C(h) of the Exchange Act \1767\ could apply to any security-
based swap that is subject to the mandatory clearing requirement in 
Section 3C(a)(1) of the Exchange Act, subject to the ``made available 
to trade'' determination, this estimate may provide an indicative 
volume of U.S. single-name CDS transactions that could have been 
subject to the ``made available to trade'' determination in Section 
3C(h)(2) of the Exchange Act (if such determination had been made in 
2011) and, therefore, subject to the mandatory trade execution 
requirement.\1768\
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    \1764\ As stated above, due in part to the data of the level of 
clearing activity during the years of 2009 to 2011, the Commission 
has recognized that mandatory clearing determinations made pursuant 
to Section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-3(a)(1), 
could alter current clearing practices at the time such 
determinations are made and potentially could result in a higher 
level of clearing for security-based swaps than would take place 
under a voluntary system. See Section XV.F.2(a), supra, and the 
Clearing Procedures Adopting Release, 77 FR 41638.
    \1765\ The Commission previously calculated three measures to 
represent the clearing level of the U.S. single-name CDS 
transactions. The first measure is the gross notional volume of 
cleared U.S. single-name CDS transactions reported by ICE Clear 
Credit in 2011, which represents approximately 25% of the total 
$2,800 billion notional U.S. single-name CDS market. The second 
measure is the gross notional volume of U.S. single-name CDS 
accepted for clearing at any time during the calendar year of 2011, 
which represents approximately 33% of the total $2,800 billion 
notional U.S. single-name CDS market. The third measure is the gross 
notional volume of U.S. single-name CDS accepted for clearing at the 
time of execution, which represents approximately 29% of the total 
$2,800 billion notional U.S. single-name CDS market. For reasons 
stated above, the Commission preliminarily believes that the highest 
measure among these three would provide an indicative volume of the 
U.S. single-name CDS transaction that may be subject to the 
mandatory clearing requirement. See the text accompanying Table 1 in 
Section XV.F.2(a), supra.
    \1766\ The Commission recognizes that, even if a transaction is 
determined to be subject to mandatory clearing, such transaction may 
be excepted from clearing pursuant to the end-user clearing 
exception under Section 3C(g) of the Exchange Act. See 15 U.S.C. 
78c-3(g). However, based on the available data, the Commission 
estimated that commercial end users that are eligible for the 
clearing exception currently participate in the security-based swap 
market on a very limited basis. Data compiled by the Commission's 
Division of Risk, Strategy, and Financial Innovation on credit 
default transactions from the DTCC-TIW between January 1, 2011 and 
December 31, 2011 suggest that the total percentage of trades 
between buyer and seller principals during the calendar year 2011 
for single name credit default swaps was only 0.03% of the total 
trade counterparty distribution for non-financial end users, which 
are composed of non-financial companies and family trusts. See 
Capital, Margin and Segregation Proposing Release, 77 FR 70302, in 
particular, n.960. For purposes of the analysis and estimate here, 
we assume that the volume of transactions subject to the end user 
clearing exception under Section 3C(g) of the Exchange Act is 
negligible.
    \1767\ 15 U.S.C. 78c-3(h).
    \1768\ As stated earlier in this Section XV.G.3(a), this 
indicative volume estimate is based on an assumed scenario in which 
all mandatorily cleared security-based swaps are deemed made 
available to trade. The Commission reiterates that this assumption 
is being made solely for purposes of analyzing herein the volume of 
security-based swap transactions that could be subject to the 
mandatory trade execution requirement.
---------------------------------------------------------------------------

    The Commission is mindful that this estimate is only an indicative 
volume of U.S. single-name CDS transactions that may be subject to the 
mandatory trade execution requirement in Section 3C(h) of the Exchange 
Act,\1769\ as the Commission currently does not have reliable 
information available with respect to security-based swap transactions 
due to the fact that such transactions are currently executed on 
trading platforms that are not exchanges or SB SEFs. However, the 
Commission preliminarily believes that the statutory mandatory trade 
execution requirement, together with the statutory definition of SB SEF 
\1770\ and the Commission's proposed interpretation,\1771\ when 
implemented, could alter existing security-based swap execution 
practices. As more security-based swap products are determined to be 
mandatorily cleared and once the Commission addresses how to determine 
whether such security-based swaps are made available for trading on an 
exchange or SB SEF, the level of trade execution in security-based 
swaps taking place on such exchanges or SB SEFs should be higher than 
in the current trading environment, in which no security-based swaps 
are traded on exchanges or SB SEFs. As a result, the mandatory trade 
execution requirement could have a material programmatic impact on 
execution practices in the U.S. security-based swap market by 
increasing the volume of transactions executed on an exchange or SB 
SEF.
---------------------------------------------------------------------------

    \1769\ See 15 U.S.C. 78c-3(h).
    \1770\ See Section 3(a)(77) of the Exchange Act, 15 U.S.C. 
78c(a)(77).
    \1771\ See SB SEF Proposing Release, 76 FR 10952-58.
---------------------------------------------------------------------------

(b) Programmatic Benefits of the Statutory Mandatory Trade Execution 
Requirement
    Given that exchanges and SB SEFs are the essential infrastructure 
for implementing the mandatory trade execution requirement, there are 
additional benefits--separate from the fact that a large volume of 
security-based swap transactions would become subject to that 
requirement--flowing from the mandatory trade execution requirement 
that inevitably would overlap with the benefits associated with SB SEF 
registration, as described in the SB SEF Proposing Release. These 
benefits would be realized for the volume of security-based swap 
transactions that become subject to the mandatory trade execution 
requirement and are summarized below.
    Increased Pre-Trade Price Transparency. One of the primary benefits 
of the mandatory trade execution requirement is to bring increased pre-
trade transparency to the currently opaque security-based swap market. 
Increased pre-trade transparency should: (i) Help reduce informational 
asymmetries that may exist today in the security-based swap market, 
often to the benefit of large dealers who observe order flow; \1772\ 
(ii) allow an increased number of market participants to see the 
trading interest of other market participants prior to trading, which 
should lead to increased price competition among market participants; 
and, in turn, (iii) lead to more efficient pricing in the security-
based swap market.\1773\
---------------------------------------------------------------------------

    \1772\ See Sections XV.C.1, XV.C.2, and XV.C.3, supra.
    \1773\ See SB SEF Proposing Release, 76 FR 11036.
---------------------------------------------------------------------------

    Impartial Access and Competitive Security-Based Swaps Market. The 
Dodd-Frank Act's mandate to bring security-based swaps that are subject 
to the mandatory clearing requirement onto regulated markets, unless 
the security-based swap is not made available to trade, coupled with 
the proposed access requirements for SB SEFs in Regulation SB 
SEF,\1774\ should help foster greater competition in the trading of 
security-based swaps by increasing access to security-based swap

[[Page 31179]]

trading venues.\1775\ Such increased competition could lead to more 
efficient pricing in the security-based swap market.\1776\
---------------------------------------------------------------------------

    \1774\ See proposed Rules 809 and 811(b) under the Exchange Act; 
see also SB SEF Proposing Release, 76 FR 10961-62.
    \1775\ See SB SEF Proposing Release, 76 FR 11037.
    \1776\ Id.
---------------------------------------------------------------------------

(c) Programmatic Costs of the Statutory Mandatory Trade Execution 
Requirement
    The Commission is mindful that programmatic costs also would be 
incurred for security-based swap transactions that become subject to 
the mandatory trade execution requirement.\1777\ The Commission 
preliminarily believes that there would be transaction costs, such as 
fees and connectivity costs, that trading counterparties would incur in 
executing or trading security-based swaps subject to the mandatory 
trade execution requirement on SB SEFs. The Commission believes that a 
potential increase in transaction costs could result if the fees and 
connectivity costs associated with utilizing SB SEFs to secure trading 
interest and execute security-based swap transactions are higher than 
the current fees and costs associated with such practices in the OTC 
market. However, the Commission currently does not have information 
available to estimate the fees and costs that would be associated with 
transacting on SB SEFs, as no registered SB SEFs currently exist. 
Likewise, although unregulated trading venues exist in today's OTC 
derivatives market, the Commission does not have information regarding 
what, if any, fees and connectivity costs are associated with 
transacting on these unregulated trading venues.
---------------------------------------------------------------------------

    \1777\ The Commission's consideration of the programmatic costs 
associated with setting up a SB SEF in the SB SEF Proposing Release 
and further discussion of such costs in the context of discussing 
when the SB SEF registration requirements would apply to foreign 
security-based swap markets and in considering the proposed 
availability of an exemption to foreign security-based swap markets 
from the registration requirements could be relevant to the costs 
associated with the mandatory trade execution requirement given that 
security-based swaps subject to the mandatory trade execution 
requirement would be required to be traded on an exchange or a SB 
SEF that is registered under Section 3D of the Exchange Act or is 
exempt from such registration. See SB SEF Proposing Release, 76 FR 
11040-48; see also Sections XV.G.1 and XV.G.2, supra.
---------------------------------------------------------------------------

    In addition, studies suggest that pre-trade transparency can be 
costly for block trades as prices are likely to move adversely if the 
existence of a large unexecuted order becomes known.\1778\ As mentioned 
earlier, pre-trade transparency could also produce concerns about 
information leakage and frontrunning of trades. These effects could 
cause market participants to alter their trading strategies in order to 
hide their interest, potentially reducing liquidity on SB SEFs.\1779\
---------------------------------------------------------------------------

    \1778\ See SB SEF Proposing Release, 76 FR 11040; see also 
Minder Cheng and Ananth Madhavan, ``In Search of Liquidity: Block 
Trades in the Upstairs and Downstairs Markets,'' Review of Financial 
Studies, Vol. 10, No. 1 (1997) (analyzing data from equity block 
trades on components of the Dow Jones Industrial Average, the 
authors find that while the cost reductions for block trades on 
NYSE's ``upstairs'' market are economically small, the ``upstairs 
markets allow trades that may not otherwise occur''); Terrence 
Henderschott and Ananth Madhavan, ``Click or Call? Auction versus 
Search in the Over-the-Counter Market,'' Working Paper (2012) (using 
data from an electronic auction market, the authors find evidence 
that, controlling for venue selection, much of the cost savings from 
electronic platforms relative to dealer markets comes from small 
trades whereas coefficient estimates suggest that for large orders, 
the cost advantage of electronic auctions relative to the OTC market 
may be reversed).
    \1779\ See Section XV.G.1(b), supra.
---------------------------------------------------------------------------

4. Programmatic Benefits and Costs of Proposed Rule 3Ch-1 Regarding 
Application of the Mandatory Trade Execution Requirement in Cross-
Border Context
    As discussed above,\1780\ the Commission is proposing Rule 3Ch-1 to 
clarify the applicability of the mandatory trade execution requirement 
of Section 3C(h) of the Exchange Act\1781\ with respect to cross-border 
transactions in security-based swaps. Proposed Rule 3Ch-1(a) would 
identify the circumstances in which the mandatory trade execution 
requirement would apply, and proposed Rule 3Ch-1(b) then would carve 
out certain security-based swap transactions involving non-U.S. persons 
from the mandatory trade execution requirement.\1782\
---------------------------------------------------------------------------

    \1780\ See Section X, supra.
    \1781\ 15 U.S.C. 78c-3(h).
    \1782\ This is identical to the proposed approach for the 
mandatory clearing requirement. See Sections IX and XV.F.3, supra.
---------------------------------------------------------------------------

    Specifically, under proposed Rule 3Ch-1(a), the mandatory trade 
execution requirement would apply to a person that engages in a 
security-based swap transaction if: (1) A counterparty to the 
transaction is (i) a U.S. person, or (ii) a non-U.S. person whose 
performance under such security-based swap transaction is guaranteed by 
a U.S. person (``guaranteed non-U.S. person''); or (2) such transaction 
is a transaction conducted within the United States.\1783\ Under 
proposed Rule 3Ch-1(b), the mandatory trade execution requirement would 
not apply to: (1) A security-based swap transaction described in 
proposed Rule 3Ch-1(a) that is not a transaction conducted within the 
United States if (i) one counterparty is a foreign branch or a 
guaranteed non-U.S. person, and (ii) the other counterparty to the 
transaction is a non-U.S. person whose performance under the security-
based swap is not guaranteed by a U.S. person (hereinafter referred to 
as ``non-guaranteed non-U.S. persons'') and who is not a foreign 
security-based swap dealer; or (2) a security-based swap transaction 
described in proposed Rule 3Ch-1(a) that is a transaction conducted 
within the United States if (i) neither counterparty to the transaction 
is a U.S. person, (ii) neither counterparty's performance under the 
security-based swap is guaranteed by a U.S. person; and (iii) neither 
counterparty to the transaction is a foreign security-based swap 
dealer.\1784\
---------------------------------------------------------------------------

    \1783\ See proposed Rule 3Ch-1(a) under the Exchange Act. The 
term ``U.S. person'' and ``transaction conducted within the United 
States'' would have the meanings set forth in proposed Rule 3a71-
3(a) under the Exchange Act.
    \1784\ See proposed Rule 3Ch-1(b) under the Exchange Act.
---------------------------------------------------------------------------

    Therefore, proposed Rule 3Ch-1(a) and proposed Rule 3Ch-1(b) apply 
the mandatory trade execution requirement to security-based swap 
transactions in the cross-border context based on the U.S.-person 
status of a counterparty, the existence of a guarantee provided by a 
U.S. person, the registered security-based swap dealer status of a 
counterparty, and the location where the transaction is conducted. 
Taken together, proposed Rules 3Ch-1(a) and 3Ch-1(b) would not apply 
the mandatory trade execution requirement to: (i) Transactions 
conducted outside the United States between two counterparties who are 
non-guaranteed non-U.S. persons, (ii) transactions conducted outside 
the United States between a foreign branch or a guaranteed non-U.S. 
person, and another counterparty who is a non-guaranteed non-U.S. 
person and is not a foreign security-based swap dealer, and (iii) 
transactions conducted within the United States between two 
counterparties who are non-guaranteed non-U.S. persons and are not 
foreign security-based swap dealers. As stated above,\1785\ the 
Commission preliminarily believes that proposed Rule 3Ch-1 is 
appropriately tailored to extend the regulatory benefits intended by 
the mandatory trade execution requirement to the security-based swap 
activity that the Commission preliminarily believes is most likely to 
raise the concerns that Congress intended to address in Title 
VII.\1786\
---------------------------------------------------------------------------

    \1785\ See Section XV.G.3, supra.
    \1786\ See Section II.B, supra.
---------------------------------------------------------------------------

    The analysis in Section XV.G.4(a) below utilizes the best available 
information with respect to these criteria to assess the overall

[[Page 31180]]

programmatic effect of proposed Rules 3Ch-1(a) and 3Ch-1(b) by 
estimating the size of the security-based swap market that would be 
subject to the mandatory trade execution requirement as a result of 
proposed Rules 3Ch-1(a) and 3Ch-1(b). The Commission then discusses in 
Section XV.G.4(b) below the benefits and costs that would flow from 
proposed Rule 3Ch-1 regarding application of the mandatory trade 
execution requirement in the cross border context.
(a) Programmatic Effect of Proposed Rule 3Ch-1
    It is not possible to quantify the potential programmatic effect of 
proposed Rule 3Ch-1 by estimating the future volume of security-based 
swap transactions when the mandatory trade execution requirement 
becomes effective partly because no ``made available to trade'' 
determinations have been made and partly because we do not know future 
trading volumes of security-based swaps. However, the Commission has 
examined the data available to it to analyze the potential programmatic 
effects of proposed Rule 3Ch-1. In particular, the Commission has tried 
to analyze the potential effects of proposed Rule 3Ch-1 by looking at 
the portion of the single-name U.S. reference CDS transactions that may 
provide an indication of the size of the security-based swap market 
that may be included in or excluded from the application of the 
mandatory trade execution requirement as a result of proposed Rule 3Ch-
1.
    A limitation we face when analyzing the data in order to estimate 
the size of the security-based swap market that may be affected by 
proposed Rule 3Ch-1 is that the domicile classifications in the DTCC-
TIW database are not identical to the counterparty statuses that are 
described in proposed Rules 3Ch-1(a) and 3Ch-1(b), which would trigger 
application of, or an exception from, the mandatory trade execution 
requirement. Although the information provided by the data in the DTCC-
TIW database does not allow us to identify the existence of a guarantee 
provided by a U.S. person with respect to a counterparty in a 
transaction, the registered security-based swap dealer status of a 
counterparty, or the location where the transaction is conducted, the 
Commission nevertheless preliminarily believes that the approach taken 
below would provide the best available estimate of the size of the 
security-based swap market that could be included in or excluded from 
the mandatory trade execution requirement by proposed Rule 3Ch-1.
    As stated above, the commission has examined all transactions in 
single-name CDS during 2011 calendar year \1787\ and estimated that the 
notional amount of the single-name CDS transactions executed during the 
2011 calendar year is $2,400 billion.\1788\ Proposed Rule 3Ch-1(a) 
provides that the mandatory trade execution requirement shall apply to 
a security-based swap transaction if (1) a counterparty to the 
transaction is a U.S. person or a non-U.S. person whose performance 
under the security-based swap is guaranteed by a U.S. person or (2) 
such transaction is a transaction conducted within the United States. 
In applying proposed Rule 3Ch-1(a) to the $2,400 billion single-name 
CDS transactions executed in 2011, the Commission uses account holders 
and their domicile information in the DTCC-TIW database to determine 
the status of the counterparties.\1789\ Because the Commission's 
proposed definition of ``U.S. person'' is based primarily on the place 
of organization or principal place of business of a legal person and a 
legal person's principal place of business and place of organization 
are usually in the same country, the Commission believes that the 
domicile of a legal person is a reliable indicator of such person's 
U.S.-person status. In addition, based on the Commission's 
understanding that the security-based swap transactions of foreign 
subsidiaries of U.S. entities, unless sufficiently capitalized to have 
their own independent credit ratings, are generally guaranteed by the 
most creditworthy U.S.-based entity within the corporate group, i.e., 
the U.S. parent, the Commission preliminarily believes that it is 
reasonable to assume that foreign subsidiaries of U.S.-domiciled 
entities are non-U.S. persons whose performance under security-based 
swap transactions is guaranteed by a U.S. person. Finally, the DTCC-TIW 
data do not provide sufficient information for us to identify whether a 
transaction was conducted in the United States. Solely for purposes of 
this analysis, we have assumed that transactions involving a U.S.-
domiciled counterparty (excluding foreign branch) or a U.S. branch 
counterparty were conducted in the United States.\1790\
---------------------------------------------------------------------------

    \1787\ See note 1637, supra, and the accompanying text in 
Section XV.F.2(a), supra.
    \1788\ This estimate is based on the calculation by staff of the 
Division of Risk, Strategy, and Financial Innovation of all price-
forming DTCC-TIW single-name CDS transactions that are based on 
North American corporate reference entities, U.S. municipal 
reference entities, U.S. loans or mortgage-backed securities 
(``MBS''), using ISDA North American documentation, ISDA U.S. Muni 
documentation, or other standard ISDA documentation for North 
American Loan CDS and CDS on MBS, and are denominated in U.S. 
dollars and executed in 2011. Price-forming transactions include all 
new transactions, assignments, modifications to increase the 
notional amounts of previously executed transactions, and 
terminations of previously executed transactions. Transactions 
terminated, transactions entered into in connection with a 
compression exercise, and expiration of contracts at maturity are 
not considered price-forming and are therefore excluded, as are 
replacement trades and all bookkeeping-related trades. See notes 
1312 and 1638, supra.
    \1789\ See note 1639, supra, in Section XV.F.2(a) for 
explanations of the determination of an account holder's domicile by 
the Commission staff in the Division of Risk, Strategy, and 
Financial Innovation using information in the DTCC-TIW.
    \1790\ Since the origination location of a transaction is not 
available in DTCC-TIW, the Commission recognizes that its analysis 
here may undercount transactions conducted within the United States 
because some transactions may be solicited, negotiated, or executed 
within the United States by an agent other than U.S. branches of 
foreign banks (such as a non-U.S. person counterparty using an 
unaffiliated third-party agent).
---------------------------------------------------------------------------

    Based on these assumptions, we estimate that the subset of the size 
of the single-name U.S. reference CDS market that includes a U.S.-
domiciled counterparty (excluding a foreign branch of a U.S. bank), a 
foreign subsidiary of a U.S.-domiciled entity, or a U.S. branch of a 
foreign bank as a counterparty is $1,900 billion notional amount.\1791\ 
The Commission preliminarily believes that this figure provides an 
indicative level of the single-name U.S. reference CDS activity that 
may represent an indicative size of the security-based swap market that 
could become subject to the mandatory trade execution requirement under 
proposed Rule 3Ch-1(a) when the requirement becomes effective.\1792\ In

[[Page 31181]]

addition, we recognize that the level of the security-based swap 
activity that could become subject to mandatory trade execution under 
proposed Rule 3Ch-1(a) may be affected by the ``made available to 
trade'' determination by the Commission.\1793\
---------------------------------------------------------------------------

    \1791\ Such $1,900 billion estimate does not capture 
transactions between two non-U.S. domiciled counterparties involving 
an agent to solicit, negotiate and execute security-based swaps in 
the United States and therefore, may be an underestimate of the 
aggregate notional amount of the single-name U.S. reference CDS 
transactions that may be included in the application of the 
mandatory trade execution requirement under proposed Rule 3Ch-1(a) 
because of the assumption we make herein regarding transactions 
conducted within the United States. By the same token, the 
difference between the $1,900 billion subset included in the 
application of the mandatory trade execution requirement under 
proposed Rule 3Ch-1(a) and the $2,400 billion total single-name U.S. 
reference CDS transactions (i.e., $500 billion or 20.8% of the 
$2,400 billion) may represent an overestimate of single-name U.S. 
reference CDS transactions in notional amount that are not included 
in the application of the mandatory trade execution requirement 
under proposed Rule 3Ch-1(a).
    \1792\ The Commission recognizes that the security-based swap 
market includes single-name CDS, CDS based on narrow-based indices, 
and other non-CDS security-based swaps, primary examples of which 
are equity swaps and total return swaps based on single equities or 
narrow-based indices of equities. As previously stated, we believe 
that the single-name CDS data are sufficiently representative of the 
security-based swap market as roughly 82% of the security-based swap 
market, as measured on a notional basis, appears likely to be 
single-name CDS. See Section XV.B.2 and the text accompanying note 
1301, supra.
    \1793\ See note 1763 and accompanying text, supra.
---------------------------------------------------------------------------

    Next, we apply proposed Rule 3Ch-1(b) to the transactions included 
in the analysis described above regarding proposed Rule 3Ch-1 in order 
to estimate the portion of the single-name U.S. reference CDS activity 
that may represent an indicative size of the security-based swap market 
that would not be subject to the mandatory trade execution requirement 
under the proposed rule. We reiterate the assumptions described above 
with respect to the counterparty status of a U.S. person and a non-U.S. 
person whose performance under security-based swap transactions is 
guaranteed by a U.S. person, and the assumption with respect to a 
transaction conducted within the United States. In addition, because of 
the lack of information about the location of transactions, solely for 
assessing the effect of proposed Rule 3Ch-1(b)(1), we have assumed that 
transactions between a counterparty that is a foreign branch or foreign 
subsidiary of a U.S.-domiciled entity and another counterparty that is 
a foreign-domiciled entity that is not a subsidiary of a U.S.-domiciled 
entity or an ISDA-recognized dealer are not transactions conducted 
within the United States; and solely for purposes of assessing the 
effect of proposed rule 3Ch-1(b)(2), we have assumed that transactions 
conducted between two foreign-domiciled counterparties that are not 
ISDA-recognized dealers and are not foreign subsidiaries of U.S.-
domiciled entities are not conducted within the United States. These 
assumptions likely result in an overestimate of the notional volume 
carved-out by proposed Rule 3Ch-1(b). With respect to counterparty 
status as a registered security-based swap dealer, we recognize that as 
yet there are no dealers designated as security-based swap dealers and 
subject to the registration requirement. Solely for purposes of this 
analysis, we have assumed that those counterparties to CDS transactions 
that were ISDA recognized dealers \1794\ would be required to register 
as security-based swap dealers.
---------------------------------------------------------------------------

    \1794\ See note 1306, supra.
---------------------------------------------------------------------------

    Based on the above assumptions, we have estimated that 
approximately 2.1% of the total notional amount \1795\ of single-name 
U.S. reference CDS transactions executed in 2011 would be excluded from 
the application of the mandatory trade execution requirement by 
proposed Rule 3Ch-1(b). Therefore, we preliminarily believe that 22.9% 
of the total size of the single-name U.S. reference CDS transactions in 
2011 presents an indicative size of the U.S. security-based swap market 
that could be excluded from the application of the mandatory trade 
execution requirement under proposed Rule 3Ch-1.\1796\
---------------------------------------------------------------------------

    \1795\ Based on calculations by the staff of the Division of 
Risk, Strategy and Financial Innovation applying the criteria 
provided in proposed rule 3Ch-1(b) and the assumptions stated 
herein, approximately $51 billion in notional amount, constituting 
approximately 2.1% of the total notional amount, of single-name U.S. 
reference CDS transactions executed in 2011 would be excluded from 
the application of the mandatory trade execution requirement. 
Because of the assumptions we made herein regarding transactions 
conducted within the United States and transactions conducted 
outside the United States, the 2.1% may be an overestimate of the 
aggregate notional amount of the single-name U.S. reference CDS 
transactions that may be excluded from the application of the 
mandatory trade execution requirement under proposed Rule 3Ch-1(b).
    \1796\ The 22.9% estimate is the sum of the 20.8% estimate of 
the single-name U.S. reference CDS transactions excluded from the 
mandatory trade execution requirement under proposed Rule 3Ca-3(a) 
and the 2.1% estimate of the single-name U.S. reference CDS 
transactions excluded from the mandatory trade execution requirement 
under proposed Rule 3Ca-3(b). The Commission reiterates that both 
20.8% and 2.1% may overestimate the size of the single-name U.S. 
reference CDS transactions excluded from the application of the 
mandatory trade execution requirement under proposed Rules 3Ch-1(a) 
and (b).
    In addition, this calculation is conducted using U.S. reference 
single-name CDS transaction data in 2011. See the text accompanying 
notes 1637 and 1787, supra. The Commission recognizes that the same 
calculation could generate a different result if both U.S. reference 
and non-U.S. reference single-name CDS transaction data were used. 
However, with respect to non-U.S. reference single-name CDS 
transaction data, the Commission currently does not have access to 
the part of such data in DTCC-TIW regarding non-U.S. reference 
single-name CDS transactions that do not involve a U.S. counterparty 
on either side of the transaction. See Section XV.B.2, supra.
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    The Commission preliminarily believes that this estimate provides 
the best available proxy for the overall programmatic effect of the 
application of the mandatory trade execution requirement in the cross-
border context in terms of the portion of the single-name U.S. 
reference CDS market that may be included in or excluded from the scope 
of the application of the mandatory trade execution requirement, given 
the data limitations and the underlying assumptions described 
above.\1797\ The Commission is mindful that the above analysis 
represents only an indicative estimate of the portion of the single-
name U.S. reference CDS activity that may represent an indicative size 
of the security-based swap market that may be included in or excluded 
from the application of the mandatory trade execution requirement as a 
result of proposed Rule 3Ch-1. The Commission also recognizes that the 
above analysis represents an extrapolation from the limited data that 
is currently available to the Commission.
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    \1797\ The Commission reiterates that the assumptions made here 
are solely for purposes of this economic analysis.
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(b) Programmatic Benefits and Costs of Proposed Rule 3Ch-1
    The Commission preliminarily believes that, in addition to the 
programmatic effect of a large volume of cross-border security-based 
swap transactions becoming subject to the mandatory trade execution 
requirement as a result of proposed Rule 3Ch-1, certain benefits and 
costs that overlap with the benefits and costs associated with SB SEF 
registration, as described in the SB SEF Proposing Release, would flow 
from proposed Rule 3Ch-1 because cross-border security-based swaps 
covered by proposed Rule 3Ch-1 would have to be executed or traded on 
SB SEFs or exchanges. Indeed, these benefits and costs would be 
realized for the volume of cross-border security-based swap 
transactions, estimated in Section XV.G.4(a) above,\1798\ that would be 
covered by proposed Rule 3Ch-1(a) (and not excepted by proposed Rule 
3Ch-1(b)) and, therefore, subject to the mandatory trade execution 
requirement.\1799\ These benefits and costs, which are more fully 
described in the SB SEF Proposing Release, are summarized above.\1800\
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    \1798\ See Section XV.G.4(a), supra.
    \1799\ To the extent that the estimated volume of security-based 
swap transactions that would be subject to the cross-border 
application of the statutory mandatory trade execution requirement 
in proposed Rules 3Ch-1(a) and 3Ch-1(b) (as analyzed in Section 
XV.G.4(a) above) differs from the estimated upper bound volume of 
the security-based transactions that would be subject to the 
statutory requirement (as set forth in Section XV.G.3(a) above), 
such differential reflects the aggregate programmatic effect of 
proposed Rules 3Ch-1(a) and 3Ch-1(b), and that the volume of 
security-based swap transactions that would be subject to those 
proposed cross-border rules is a subset of the upper bound volume 
estimate of transactions subject to the statutory requirement, which 
is not limited to the cross-border context.
    \1800\ See Sections XV.G.3(b) and (c), supra.
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(c) Alternatives
    The Commission has considered alternatives to proposed Rule 3Ch-1. 
The Commission could propose to apply the mandatory trade execution 
requirement in the same way as the CFTC's proposed interpretive 
guidance.

[[Page 31182]]

The major difference between the CFTC's proposed application of the 
mandatory trade execution requirement and the Commission's proposed 
Rule 3Ch-1 is that the CFTC would apply the mandatory trade execution 
requirement to a transaction conducted outside the United States 
between a foreign branch and a non-guaranteed non-U.S. person. The 
Commission preliminarily believes that subjecting such a transaction to 
mandatory trade execution may hinder a foreign branch's ability to 
access the foreign local market to a degree that fails to justify the 
pre-trade transparency benefits to the U.S. financial market.
(d) Assessment Costs for Proposed Rule 3Ch-1
    The assessment costs associated with proposed Rule 3Ch-1 would be 
related primarily to identification of the counterparty status and 
origination location of the transaction to determine whether the 
mandatory trade execution requirement would apply. The same assessment 
would be performed not only in connection with the proposed application 
of the mandatory trade execution requirement in the cross border 
context, but also in connection with the proposed application of the 
reporting,\1801\ public dissemination,\1802\ and mandatory clearing 
\1803\ requirements in the cross-border context and, therefore, would 
be part of the overall Title VII compliance costs.
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    \1801\ See re-proposed Rule 908(a)(1) under the Exchange Act, as 
discussed in Section VIII.C.1, supra, and Section XV.H, infra.
    \1802\ See re-proposed Rule 908(a)(2) under the Exchange Act, as 
discussed in Section VIII.C.1, supra, and Section XV.H, infra.
    \1803\ See proposed Rule 3Ca-3 under the Exchange Act, as 
discussed in Sections IX.C and XV.F, supra.
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    The Commission preliminarily believes that market participants 
would request representations from their transaction counterparties to 
determine the U.S.-person status of their counterparties. In addition, 
if the transaction is guaranteed by a U.S. person, the guarantee would 
be part of the trading documentation and, therefore, the existence of 
the guarantee would be a readily ascertainable fact. Similarly, market 
participants would be able to rely on their counterparties' 
representations as to whether a transaction is solicited, negotiated or 
executed by a person within the United States.\1804\ Therefore, the 
Commission preliminarily believes that the assessment costs associated 
with proposed Rule 3Ch-1 should be limited to the costs of establishing 
a compliance policy and procedure of requesting and collecting 
representations from trading counterparties and maintaining the 
collected representations as part of the market participants' 
recordkeeping procedures. The Commission preliminarily believes that 
such assessment costs would be approximately $15,160.\1805\ The 
Commission preliminarily believes that requesting and collecting 
representations would be part of the standardized transaction process 
reflected in the policies and procedures regarding security-based swap 
sales and trading practices and should not result in separate 
assessment costs.\1806\
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    \1804\ See proposed Rules 3a71-3(a)(4)(ii) and (a)(5)(ii), as 
discussed in Sections III.B.5 and III.B.6, supra.
    \1805\ This estimate is based on an estimated 40 hours of in-
house legal or compliance staff's time to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representations may be 
built into a form of standardized trading documentation. Based upon 
data from SIFMA's Management & Professional Earnings in the 
Securities Industry 2012 (modified by the SEC staff to account for 
an 1800-hour-work-year and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead), the staff 
estimates that the average national hourly rate for an in-house 
attorney is $379.
    \1806\ There will be ongoing costs associated with processing 
representations received from counterparties, including additional 
due diligence and verification to the extent that a counterparty's 
representation is contrary to or inconsistent with the knowledge of 
the collecting party. The Commission believes that these would be 
compliance costs encompassed within the programmatic costs 
associated with substituted compliance.
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    The Commission also considers the likelihood that market 
participants may implement systems to keep track of counterparty status 
for purposes of future trading of security-based swaps that are similar 
to, if not the same as, the systems implemented by market participants 
for purposes of assessing security-based swap dealer or major security-
based swap participant status. As stated above, the Commission 
estimated that market participants that perceived the need to perform 
the security-based swap dealer assessment or major security-based swap 
participant calculations would incur one-time programming costs of 
$12,870.\1807\ Therefore, the Commission estimates the total one-time 
costs per entity associated with proposed Rule 3Ch-1 could be 
$28,030.\1808\ To the extent that market participants have incurred 
costs relating to similar or the same assessments with respect to 
counterparty status and transaction location for other Title VII 
requirements, their assessment costs with respect to proposed Rule 3Ch-
1 may be less.
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    \1807\ See note 1428, supra. For the source of the estimated per 
hour costs, see note 1425, supra.
    \1808\ The estimated $28,030 per-entity cost is the sum of the 
estimated $15,160 cost of establishing written compliance policies 
and procedures regarding obtaining counterparty representations and 
the estimated $12,870 one-time programming cost relating to system 
implementation to maintain counterparties' representations and track 
counterparty status in the system.
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Request for Comment
     Are there any benefits and costs not discussed herein? How 
would the benefits and costs affect the various groups of market 
participants involved in the trading of security-based swaps? To the 
extent the benefits or costs of complying with mandatory trade 
execution described above are different for different groups of market 
participants, please identify, discuss, analyze, and supply relevant 
data, information, or statistics regarding any such different benefits 
or costs.
     Would the benefits of complying with mandatory trade 
execution be the same for foreign and domestic market participants?
     Would the costs associated with complying with mandatory 
trade execution be the same for domestic and foreign market 
participants? If not, how would they be different and how could the 
Commission most accurately estimate them? For example, would either 
domestic or foreign market participants face higher costs in gaining 
access to SB SEFs to comply with the mandatory trade execution 
requirement? Or would the costs be comparable?
     To the extent that the benefits or costs of complying with 
mandatory trade execution would be different for foreign market 
participants as compared to domestic market participants, please 
identify, discuss, analyze, and supply relevant data, information, or 
statistics regarding any such different benefits or costs.
     Are the assessment cost estimates provided herein 
appropriate? If not, how should the estimates be adjusted? Please 
provide data and analysis to support differing cost estimates.

H. Application of Rules Governing Security-Based Swap Data Repositories 
in Cross-Border Context

    SDRs are intended to play a critical role in enhancing transparency 
in the security-based swap market, bolstering market efficiency and 
liquidity, promoting standardization, and reducing systemic risks by 
serving as centralized recordkeeping facilities that collect and 
maintain information relating to security-based swap 
transactions.\1809\ More broadly, the goal

[[Page 31183]]

of the Dodd-Frank Act is, among other things, to promote the financial 
stability of the United States by improving accountability and 
transparency in the financial system.\1810\ In furtherance of these 
goals, the Dodd Frank Act amended the Exchange Act to require the 
reporting of security-based swaps (whether cleared or uncleared) to an 
SDR registered with the Commission,\1811\ and to require certain 
persons that perform the functions of an SDR to register with the 
Commission.\1812\ SDRs that are registered with the Commission are 
subject to Section 13(n) of the Exchange Act \1813\ and the rules and 
regulations thereunder (collectively, ``SDR Requirements''), as well as 
other requirements applicable to SDRs registered with the 
Commission.\1814\ In this section, the Commission first discusses the 
benefits and costs of the Commission's proposed interpretive guidance 
regarding the application of the SDR Requirements and exemption from 
the SDR Requirements. The Commission then discusses the benefits and 
costs of the Commission's proposed interpretive guidance regarding 
relevant authorities' access to security-based swap information and 
exemption from the statutory indemnification requirement that could 
hinder such access. Finally, the Commission discusses the benefits and 
costs associated with the Commission's re-proposed Regulation SBSR, 
which sets forth the reporting obligations of counterparties to 
security-based swaps in the cross-border context.
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    \1809\ See SDR Proposing Release, 75 FR 77354; see also 156 
Cong. Rec. S5920 (daily ed. July 15, 2010) (statement of Sen. 
Lincoln) (``These new `data repositories' will be required to 
register with the CFTC and the SEC and be subject to the statutory 
duties and core principles which will assist the CFTC and the SEC in 
their oversight and market regulation responsibilities.'').
    \1810\ See Dodd-Frank Act, Public Law 111-203 at Preamble.
    \1811\ Section 13(m)(1)(G) of the Exchange Act, 15 U.S.C. 
78m(m)(1)(G), as added by Section 763(i) of the Dodd-Frank Act.
    \1812\ Section 3(a)(75) of the Exchange Act, 15 U.S.C. 
78c(a)(75), as added by Section 761(a) of the Dodd-Frank Act 
(defining a ``security-based swap data repository'' to mean ``any 
person that collects and maintains information or records with 
respect to transactions or positions in, or the terms and conditions 
of, security-based swaps entered into by third parties for the 
purpose of providing a centralized recordkeeping facility for 
security-based swaps'') and Section 13(n)(1) of the Exchange Act, 15 
U.S.C. 78m(n)(1), as added by Section 763(i) of the Dodd-Frank Act 
(providing that it is ``unlawful for any person, unless registered 
with the Commission, directly or indirectly, to make use of the 
mails or any means or instrumentality of interstate commerce to 
perform the functions of a security-based swap data repository'').
    \1813\ 15 U.S.C. 78m(n), as added by Section 763(i) of the Dodd-
Frank Act.
    \1814\ See note 703, supra.
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I. Benefits and Costs Associated With Application of the SDR 
Requirements in the Cross-Border Context
(a) Benefits of Proposed Approach to SDR Requirements
    As discussed above,\1815\ the Commission proposes that any U.S. 
person that performs the functions of an SDR would be required to 
register with the Commission pursuant to Section 13(n)(1) of the 
Exchange Act \1816\ and previously proposed Rule 13n-1 thereunder. As 
further discussed above,\1817\ the Commission further proposes that, to 
the extent that any non-U.S. person performs the functions of an SDR 
within the United States, it would be required to register with the 
Commission pursuant to Section 13(n)(1) of the Exchange Act \1818\ and 
previously proposed Rule 13n-1 thereunder, absent an exemption. The 
Commission also is proposing new Rule 13n-12 under the Exchange Act, 
which provides that a non-U.S. person that performs the functions of an 
SDR within the United States is exempt from the SDR Requirements, 
provided that each regulator with supervisory authority over such non-
U.S. person has entered into a supervisory and enforcement MOU or other 
arrangement with the Commission that addresses the confidentiality of 
data collected and maintained by such non-U.S. person, access by the 
Commission to such data, and any other matters determined by the 
Commission (``SDR Exemption'').\1819\
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    \1815\ See Section VI.B.3(a), supra.
    \1816\ 15 U.S.C. 78m(n)(1), as added by Section 763(i) of the 
Dodd-Frank Act.
    \1817\ See Section VI.B.3(b), supra.
    \1818\ 15 U.S.C. 78m(n)(1), as added by Section 763(i) of the 
Dodd-Frank Act.
    \1819\ See Section VI.B.3(b), supra.
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    The Commission has considered the benefits and costs associated 
both with the Commission's proposed interpretive guidance regarding 
U.S. persons and non-U.S. persons that would be required to register 
with the Commission as an SDR and with the SDR Exemption in light of 
the transparency and other objectives that the Dodd-Frank Act is 
intended to achieve. The Commission preliminarily believes that our 
proposed approach would be consistent with achieving these intended 
benefits of the SDR Requirements, but would avoid imposing the 
associated costs of these requirements on persons whose registration 
and regulation may not significantly advance these benefits.
i. Programmatic Benefits of Proposed Guidance Regarding Registration
    The Commission preliminarily believes that there are a number of 
programmatic benefits to our proposal to require U.S. persons that 
perform the functions of an SDR and non-U.S. persons that perform the 
functions of an SDR within the United States to register with the 
Commission and to comply with the other SDR Requirements. These 
requirements are intended to help ensure that SDRs function in a manner 
that will further the transparency and other goals of the Dodd-Frank 
Act.\1820\ The SDR Requirements, including requirements that SDRs 
register with the Commission, retain complete records of security-based 
swap transactions, maintain the integrity and confidentiality of those 
records, and provide effective access to those records to relevant 
authorities and the public in line with their respective information 
needs, are intended to help ensure that the data held by SDRs is 
reliable and that the SDRs provide information that contributes to the 
transparency of the security-based swap market while protecting the 
confidentiality of information provided by market participants.\1821\
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    \1820\ See SDR Proposing Release, 75 FR 77354. See also Dodd-
Frank Act, Public Law 111-203 at Preamble.
    \1821\ See SDR Proposing Release, 75 FR 77307.
---------------------------------------------------------------------------

    Enhanced transparency should produce market-wide benefits by, for 
example, promoting stability in the security-based swap market,\1822\ 
and it should indirectly contribute to improved stability in related 
financial markets, including equity and bond markets.\1823\ Enhanced 
transparency in the security-based swap market would assist the 
Commission and other relevant authorities in fulfilling their 
regulatory mandates and legal responsibilities such as performing 
market surveillance and detecting market manipulation, fraud, and other 
market abuses by providing the Commission and other relevant 
authorities with greater access to security-based swap 
information.\1824\

[[Page 31184]]

Increased regulatory effectiveness should improve the integrity and 
transparency of the market and improve the confidence of market 
participants.\1825\
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    \1822\ See id. (``SDRs may be especially critical during times 
of market turmoil, both by giving relevant authorities information 
to help limit systemic risk and by promoting stability through 
enhanced transparency. By enhancing stability in the [security-based 
swap] market, SDRs may also indirectly enhance stability across 
markets, including equities and bond markets.'').
    \1823\ See Darrell Duffie, Ada Li, and Theo Lubke, ``Policy 
Perspectives of OTC Derivatives Market Infrastructure,'' Federal 
Reserve Bank of New York Staff Report No. 424 (Jan. 2010, as revised 
Mar. 2010) (``Transparency can have a calming influence on trading 
patterns at the onset of a potential financial crisis, and thus act 
as a source of market stability to a wider range of markets, 
including those for equities and bonds'').
    \1824\ See SDR Proposing Release, 75 FR 77307 (``The enhanced 
transparency provided by an SDR is important to help regulators and 
others monitor the build-up and concentration of risk exposures in 
the [security-based swap] market.''); see also DTCC Letter I at 1 
(``A registered SDR should be able to provide (i) enforcement agents 
with necessary information on trading activity; (ii) regulatory 
agencies with counterparty-specific information about systemic risk 
based on trading activity; (iii) aggregate trade information for 
publication on market-wide activity; and (iv) a framework for real-
time reporting from swap execution facilities and derivatives 
clearinghouses.'').
    \1825\ See SDR Proposing Release, 75 FR 77356.
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring U.S. persons 
performing the functions of an SDR to register with the Commission as 
SDRs and comply with the SDR Requirements, as well as other 
requirements applicable to SDRs registered with the Commission,\1826\ 
would further the goals of the SDR Requirements and contribute to 
enhanced transparency in the security-based swap market in the United 
States. The Commission preliminarily believes that U.S. persons 
performing the functions of an SDR will play a key role in ensuring 
that security-based swap transactions affecting the transparency of the 
security-based swap market within the United States are reported; 
properly maintained; and made available to the Commission, other 
relevant authorities, and the public.\1827\ Requiring such U.S. persons 
to comply with the SDR Requirements would help ensure that they 
maintain data and make it available in a manner that advances the 
transparency benefits that Title VII is intended to produce.
---------------------------------------------------------------------------

    \1826\ See note 703, supra.
    \1827\ See SDR Proposing Release, 75 FR 77356.
---------------------------------------------------------------------------

    Non-U.S. persons performing the functions of an SDR within the 
United States also may affect the transparency of the security-based 
swap market within the United States, even if transactions involving 
U.S. persons or U.S. market participants are being reported to such 
non-U.S. persons in order to satisfy the reporting requirements of a 
foreign jurisdiction (and not those of Title VII). The Commission 
preliminarily believes that, to the extent that non-U.S. persons are 
performing the functions of an SDR within the United States, they will 
likely receive data relating to transactions involving U.S. persons and 
other U.S. market participants. Ensuring that such data is maintained 
and made available in a manner consistent with the SDR Requirements 
would likely contribute to the transparency of the U.S. market and 
reduce potential confusion that may arise from discrepancies in 
transaction data due to, among other things, differences in the 
operational standards governing persons who perform the functions of an 
SDR in other jurisdictions (or the absence of such standards for any 
such persons that are not subject to any regulatory regime). Moreover, 
given the sensitivity of reported security-based swap data and the 
potential for market abuse and subsequent loss of liquidity in the 
event that a person performing the function of an SDR within the United 
States fails to maintain the privacy of such data,\1828\ the Commission 
preliminarily believes that requiring non-U.S. persons that perform the 
functions of an SDR within the United States to register with the 
Commission would help ensure that data relating to transactions 
involving U.S. persons or U.S. market participants is handled in a 
manner consistent with the confidentiality protections applicable to 
such data, thereby reducing the risk both of the loss or disclosure of 
proprietary or other sensitive data and of market abuse arising from 
the misuse of such data.
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    \1828\ See id. at 77307.
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ii. Programmatic Benefits of the SDR Exemption
    As noted above, the Commission is proposing new Rule 13n-12 under 
the Exchange Act to provide an exemption from the SDR Requirements for 
non-U.S. persons that perform the functions of an SDR within the United 
States, provided that each regulator with supervisory authority over 
any such non-U.S. person has entered into a supervisory and enforcement 
MOU or other arrangement with the Commission that addresses the 
confidentiality of data collected and maintained by such non-U.S. 
person, access by the Commission to such data, and any other matters 
determined by the Commission.\1829\
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    \1829\ Proposed Rule 13n-12(b) under the Exchange Act.
---------------------------------------------------------------------------

    The Commission preliminarily believes that this SDR Exemption would 
not significantly reduce the programmatic benefits associated with the 
SDR Requirements. Although the proposed approach would potentially 
reduce the number of persons performing the functions of an SDR that 
are registered with the Commission,\1830\ data relating to transactions 
involving U.S. persons and U.S. market participants would still be 
required to be reported, pursuant to Regulation SBSR, to an SDR 
registered with the Commission and subject to all SDR Requirements, 
absent other relief from the Commission.\1831\
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    \1830\ It appears that, as of April 2013, there were several 
non-U.S. persons performing the functions of an SDR or intending to 
do so in the future. See FSB Progress Report April 2013 at 20-21, 
63-65. The Commission, however, does not possess data regarding how 
many, if any, of these persons perform the functions of an SDR 
within the United States.
    \1831\ See discussion of Regulation SBSR in Section VIII, supra 
and discussion of substituted compliance in Section XI, supra.
---------------------------------------------------------------------------

    Moreover, the SDR Exemption would be conditioned on a supervisory 
and enforcement MOU or other arrangement with each regulator with 
supervisory authority over the non-U.S. person that seeks to rely upon 
the SDR Exemption. This MOU or arrangement would address the 
Commission's interest in having access to security-based swap data 
involving U.S. persons and other U.S. market participants that is 
maintained by non-U.S. persons that perform the functions of an SDR 
within the United States and in protecting the confidentiality of such 
data. Further, proposed Rule 13n-12 should not impair the integrity and 
accessibility of security-based swap data. The Commission, therefore, 
preliminarily believes that exempting certain non-U.S. persons 
performing the functions of an SDR within the United States, subject to 
the condition described above, would likely not significantly affect 
the programmatic benefits that the SDR Requirements were intended to 
achieve.\1832\
---------------------------------------------------------------------------

    \1832\ The Commission also anticipates that non-U.S. persons 
that avail themselves of the SDR Exemption would be subject to the 
regulatory requirements of one or more foreign jurisdictions. The 
SDR Exemption would help ensure that such persons do not incur costs 
arising from being required to comply with duplicative regulatory 
regimes while also ensuring, through the condition that each 
regulator with supervisory authority enter into a supervisory and 
enforcement MOU or other arrangement with the Commission, that they 
are subject to regulatory requirements that would prevent them from 
undermining the transparency and other purposes of the Title VII SDR 
Requirements, for example, by failing to protect the confidentiality 
of data relating to U.S. persons and other U.S. market participants.
---------------------------------------------------------------------------

(b) Costs of Proposed Approach to SDR Requirements
i. Programmatic Costs of the Commission's Proposed Approach
    Registering with the Commission and complying with the SDR 
Requirements will impose certain costs on an SDR.\1833\ The 
Commission's proposed interpretive guidance and SDR Exemption do not 
change the costs associated with any particular SDR Requirement, but 
the Commission preliminarily believes that the SDR Exemption may reduce 
the costs for certain non-U.S. persons performing the functions of an 
SDR within the United

[[Page 31185]]

States without reducing the expected benefits of the SDR 
Requirements.\1834\ The Commission preliminarily believes that such 
persons would likely be performing the functions of an SDR in order to 
permit counterparties to satisfy reporting requirements under foreign 
law. An exemption, if available, would allow these non-U.S. persons to 
continue to perform this function within the United States, potentially 
reducing costs to U.S. market participants that have reporting 
obligations under foreign law and reducing the incentive for non-U.S. 
persons performing the functions of an SDR within the United States to 
restructure their operations to avoid registration with the Commission.
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    \1833\ See SDR Proposing Release, 75 FR 77354-64.
    \1834\ As noted above, the data currently available to the 
Commission does not indicate how many non-U.S. persons performing 
the functions of an SDR perform such functions within the United 
States. See note 1830, supra. However, even if counterparties with 
reporting obligations under Regulation SBSR reported their 
transactions to a non-U.S. person that performs the functions of an 
SDR within the United States but is exempt from registration, they 
would still be required to report transactions under Regulation SBSR 
to an SDR registered with the Commission.
---------------------------------------------------------------------------

    The Commission recognizes that making the exemption available 
subject to a condition may delay the availability of the exemption to 
certain non-U.S. persons. In some cases, the Commission may be unable 
to enter into an MOU or other arrangement with each regulator with 
supervisory authority over a non-U.S. person performing the functions 
of an SDR within the United States. The resulting delay or 
unavailability of the exemption may lead some of these non-U.S. persons 
to exit the U.S. market by, for example, restructuring their business 
so that they perform the functions of an SDR entirely outside the 
United States, potentially resulting in business disruptions in the 
security-based swap market.
ii. Assessment Costs
    Under the Commission's proposed approach, non-U.S. persons that 
perform the functions of an SDR may be expected to incur certain 
assessment costs related to determining whether they can rely on the 
SDR Exemption and, if not, whether they perform the functions of an SDR 
within the United States.\1835\
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    \1835\ The Commission recognizes that some non-U.S. persons that 
perform the functions of an SDR may do so entirely outside the 
United States and thus may determine that they do not need to incur 
any assessment costs related to the Commission's proposed approach.
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    With respect to determining the availability of the SDR Exemption, 
the Commission preliminarily believes that the costs for a non-U.S. 
person that performs the functions of an SDR to determine whether the 
condition for the availability of the SDR Exemption has been satisfied 
with respect to it would arise from confirming whether the Commission 
and each regulator with supervisory authority over such non-U.S. person 
have entered into a supervisory and enforcement MOU or other 
arrangement. The Commission preliminarily believes that, given that 
this information generally should be readily available,\1836\ the cost 
involved in making such assessment should not exceed one hour of in-
house counsel's time or $379 per person,\1837\ for an aggregate one-
time cost of $7,580.\1838\
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    \1836\ As a general matter, the Commission provides a list of 
MOUs and other arrangements, which are available at the following 
link: https://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml.
    \1837\ Based upon data from SIFMA's Management & Professional 
Earnings in the Securities Industry 2012 (modified by the SEC staff 
to account for an 1800-hour-work-year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead), 
the staff estimates that the average national hourly rate for an in-
house attorney is $379.
    \1838\ This total is based on the assumption that as many as 20 
non-U.S. persons that perform the functions of an SDR would seek 
outside legal counsel to determine the nature of any operations or 
other activity performed within the United States. Although there 
appear to be fewer than 10 such persons that are currently accepting 
and reporting on security-based swaps (see FSB Progress Report April 
2013 at 20-21, 63-65), our estimate that as many as 20 such persons 
may perform this analysis is intended to account for the possibility 
that new market entrants may seek to provide such services in the 
future.
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    If the condition for the SDR Exemption has not been satisfied with 
respect to any authority with supervisory authority over such non-U.S. 
person, that person may determine to analyze where it performs its SDR 
functions in order to determine whether it performs such functions 
within the United States. This analysis may involve two separate sets 
of costs: costs associated with determining whether it has entered into 
contracts, including user or technical agreements, with a U.S. person 
to enable the U.S. person to report security-based swap data to it, and 
costs associated with determining whether it otherwise performs the 
functions of an SDR within the United States, for example, by 
maintaining certain operations within the United States.
    The Commission preliminarily believes that the assessment costs 
associated with determining the U.S. person status of parties to 
agreements with the non-U.S. person that performs the functions of an 
SDR should be primarily one-time costs of establishing a practice or 
compliance procedure of requesting and collecting representations from 
the parties to such agreements and maintaining the representations 
collected as part of the recordkeeping procedures and limited ongoing 
costs associated with requesting and collecting representations. The 
Commission preliminarily believes that such one-time per-person costs 
would be approximately $15,160,\1839\ with aggregate one-time costs of 
approximately $303,200.
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    \1839\ This estimate is based on estimated 40 hours of in-house 
legal or compliance staff's time to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representation may be 
built into form of standardized trading documentation. As noted 
above, the staff estimates that the average national hourly rate for 
an in-house attorney is $379. See note 1426, supra.
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    The assessment costs associated with determining whether the non-
U.S. person otherwise performs the functions of an SDR within the 
United States would likely involve an analysis of the location of the 
non-U.S. person's various operations and, with respect to any 
operations that occur within the United States, a determination of 
whether such operations constitute the performance of the functions of 
an SDR. The Commission preliminarily believes that the aggregate one-
time costs associated with this analysis would be approximately 
$500,000.\1840\
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    \1840\ We have estimated that this analysis would cost an 
average of $25,000 per person and that as many as 20 non-U.S. 
persons may incur such costs. This estimate is based on staff 
experience in undertaking legal analysis of status under federal 
securities laws.
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(c) Alternative to Proposed Approach
    In developing our approach to the application of the SDR 
Requirements to non-U.S. persons that perform the functions of an SDR, 
the Commission considered requiring such persons that perform the 
functions of an SDR within the United States to comply with the SDR 
Requirements, including registering with the Commission, as well as 
other requirements applicable to SDRs registered with the 
Commission.\1841\ In such a scenario, a non-U.S. person performing the 
functions of an SDR within the United States would be required to 
register as an SDR and incur the costs associated with the SDR 
Requirements,\1842\ as well as other requirements applicable to SDRs 
registered with the Commission.\1843\ The Commission preliminarily 
believes that the marginal benefit of requiring all non-U.S. persons 
that perform the functions of an SDR within the United States to 
register with the Commission, even where similar objectives could be 
achieved through an

[[Page 31186]]

exemption conditioned on a supervisory and enforcement MOU or other 
arrangement with each regulatory authority with supervisory authority 
over such non-U.S. persons, would be insignificant, particularly in 
light of the costs that such non-U.S. persons would incur in complying 
with the SDR Requirements, as well as other requirements applicable to 
SDRs registered with the Commission.\1844\
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    \1841\ See note 703, supra.
    \1842\ See SDR Proposing Release, 75 FR 77354-64.
    \1843\ See note 703, supra.
    \1844\ See id.
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Request for Comment
    The Commission seeks comment on the proposed interpretive guidance 
and SDR Exemption, and alternatives to our proposed approach, in all 
aspects. Interested persons are encouraged to provide supporting data 
and analysis and, when appropriate, suggest modifications or 
alternatives to the proposed interpretive guidance and SDR Exemption. 
In addition, the Commission seeks comment on the specific questions 
below.
     Has the Commission appropriately considered the expected 
programmatic benefits of our proposed interpretive guidance and SDR 
Exemption? If not, please explain why and provide information on how 
such costs and benefits should be assessed.
     Are the programmatic benefits and costs discussed above 
accurate? If not, why not? How should the Commission assess the 
benefits and costs associated with our proposed interpretive guidance 
and SDR Exemption compared to their anticipated benefits of increasing 
transparency in the security-based swap market?
     Are there quantifiable programmatic benefits or costs 
associated with the Commission's proposed interpretive guidance and the 
SDR Exemption that are not discussed above, but that the Commission 
should consider? If so, please identify and describe them as thoroughly 
as possible, using relevant data and statistics where available.
     Has the Commission appropriately considered the benefits 
and costs of the alternative approach to the Commission's proposed 
interpretive guidance and SDR Exemption? In answering this question, 
consider addressing whether the Commission has appropriately considered 
the benefits and costs of duplicative regulatory regimes, including 
duplicative requirements governing SDRs.
     How would the Commission's proposed interpretive guidance 
and the SDR Exemption affect efficiency, competition, and capital 
formation, including the competitive or anticompetitive effects that 
such guidance and exemption may have on market participants? Are there 
other existing or proposed laws, rules, or regulations affecting SDRs 
in particular jurisdictions that affect efficiency, competition, and 
capital formation that the Commission should consider? If so, please 
identify and describe these effects as thoroughly as possible.
     Are there costs in fulfilling the condition in the SDR 
Exemption that the Commission has not discussed above? If so, what?
     Would the condition requiring a supervisory and 
enforcement MOU with a foreign supervisory regulator impose costs on 
non-U.S. persons performing the functions of an SDR within the United 
States? Further, would delay in entering into a supervisory and 
enforcement MOU or other arrangement (or the inability to enter into 
such MOU or arrangement) impose costs on such non-U.S. persons or 
market participants more generally? Would it have adverse consequences 
for liquidity in the security-based swap market?
     Should the Commission consider other alternatives to our 
proposed interpretive guidance and the SDR Exemption? What would be the 
benefits and costs of such alternative approaches?
2. Relevant Authorities' Access to Security-Based Swap Information and 
the Indemnification Requirement
    One key function that SDRs will perform is making available to the 
Commission and other relevant authorities information relating to 
security-based swap transactions. As described above,\1845\ Section 
13(n)(5)(G) of the Exchange Act \1846\ and previously proposed Rule 
13n-4(b)(9) thereunder provide that an SDR shall on a confidential 
basis, pursuant to Section 24 of the Exchange Act, and the rules and 
regulations thereunder, upon request, and after notifying the 
Commission (``Notification Requirement''), make available all data 
obtained by the SDR, including individual counterparty trade and 
position data, to certain domestic authorities and any other person 
that the Commission determines to be appropriate, including, but not 
limited to, foreign financial supervisors (including foreign futures 
authorities), foreign central banks, and foreign ministries. Section 
13(n)(5)(H) of the Exchange Act \1847\ and previously proposed Rule 
13n-4(b)(10) further provide that before sharing information with any 
entity described in Section 13(n)(5)(G)\1848\ or previously proposed 
Rule 13n-4(b)(9), respectively, an SDR must obtain a written agreement 
from the entity stating that the entity shall abide by the 
confidentiality requirements described in Section 24 of the Exchange 
Act,\1849\ and the rules and regulations thereunder, relating to the 
information on security-based swap transactions that is provided; in 
addition, the entity shall agree to indemnify the SDR and the 
Commission for any expenses arising from litigation relating to the 
information provided under Section 24 of the Exchange Act \1850\ and 
the rules and regulations thereunder (``Indemnification Requirement'').
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    \1845\ See Section VI.C., supra.
    \1846\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \1847\ 15 U.S.C. 78m(n)(5)(H), as added by Section 763(i) of the 
Dodd-Frank Act.
    \1848\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \1849\ 15 U.S.C. 78x.
    \1850\ Id.
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(a) Benefits and Costs of Relevant Authorities' Access to Security-
Based Swap Data Under the Dodd-Frank Act
    As discussed above,\1851\ the Commission believes that Sections 
13(n)(5)(G) and 13(n)(5)(H) of the Exchange Act \1852\ are intended to, 
among other things, obligate SDRs to make available security-based swap 
information to relevant authorities and maintain the confidentiality of 
such information. More broadly, the Dodd-Frank Act is intended to, 
among other things, promote the financial stability of the U.S. 
financial system by improving accountability and transparency in the 
financial system.\1853\ To the extent that SDRs fulfill these statutory 
goals, the Commission preliminarily believes that certain benefits and 
costs will result.
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    \1851\ See Section VI.C., supra.
    \1852\ 15 U.S.C. 78m(n)(5)(G) and (H), as added by Section 
763(i) of the Dodd-Frank Act; see also proposed Rules 13n-4(b)(9) 
and (10) under the Exchange Act.
    \1853\ See Dodd-Frank Act, Public Law 111-203 at Preamble.
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i. Benefits of Relevant Authorities' Access to Security-Based Swap Data
    As discussed below, the Commission preliminarily believes that 
there are a number of benefits associated with providing relevant 
authorities with access to security-based swap data maintained by SDRs 
registered with the Commission (``SDR Data'').
    First, the Commission preliminarily believes that providing 
relevant authorities with such access would increase transparency in 
the security-based swap market, thereby facilitating oversight of the 
security-based swap

[[Page 31187]]

market. SDRs are expected to retain complete records of security-based 
swap transactions and maintain the integrity of those records.\1854\ To 
the extent that SDRs provide relevant authorities with effective access 
to those records in line with the respective information needs arising 
out of the authorities' regulatory mandates and legal responsibilities, 
SDRs will play a key role in increasing transparency in the security-
based swap market. In having such effective access, these authorities 
will likely be better positioned to prevent market manipulation, fraud, 
and other market abuses; monitor the financial responsibility and 
soundness of market participants; perform market surveillance and 
macroprudential (systemic risk) supervision; resolve issues and 
positions after an institution fails; monitor compliance with relevant 
regulatory requirements; and respond to market turmoil.\1855\
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    \1854\ See SDR Proposing Release, 75 FR 77307; see also Section 
13(n)(5)(C) of the Exchange Act (requiring SDRs to maintain 
security-based swap data), as added by Section 763(i) of the Dodd-
Frank Act, and proposed Rules 13n-5(b)(3) and (4) under the Exchange 
Act (requiring SDRs to establish, maintain, and enforce policies and 
procedures reasonably designed to ensure that transaction data and 
positions are accurate and to maintain the transaction data and 
positions for specified periods of time).
    \1855\ See, e.g., SDR Proposing Release, 75 FR 77307, 77356, as 
corrected at 76 FR 79320 (``The data maintained by an SDR may also 
assist regulators in (i) preventing market manipulation, fraud, and 
other market abuses; (ii) performing market surveillance, prudential 
supervision, and macroprudential (systemic risk) supervision; and 
(iii) resolving issues and positions after an institution fails . . 
. . [I]ncreased transparency on where exposure to risk reside in 
financial markets . . . will allow regulators to monitor and act 
before the risks become systemically relevant. Therefore, SDRs will 
help achieve systemic risk monitoring.'').
---------------------------------------------------------------------------

    Second, the Commission preliminarily believes that providing 
relevant foreign authorities with access to SDR Data may minimize 
fragmentation of security-based swap data among trade repositories 
globally. If relevant foreign authorities are unable to access SDR 
Data, then they may establish trade repositories in their jurisdictions 
to ensure access to data that they need to perform their regulatory 
mandates and legal responsibilities.\1856\ By minimizing such 
fragmentation, relevant authorities would likely be able to access, 
aggregate, and analyze relevant data more efficiently, which should, in 
turn, enhance regulatory effectiveness.
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    \1856\ Cf. Cleary Letter IV at 31 (The Indemnification 
Requirement ``could be a significant impediment to effective 
regulatory coordination, since non-U.S. regulators may establish 
parallel requirements for U.S. regulators to access swap data 
reported in their jurisdictions.'').
---------------------------------------------------------------------------

    Third, the Commission preliminarily believes that providing 
relevant foreign authorities with access to SDR Data may reduce costs 
to market participants by reducing the potential for duplicative 
security-based swap transaction reporting requirements in multiple 
jurisdictions. The Commission anticipates that relevant foreign 
authorities will likely impose their own reporting requirements on 
market participants that fall within their jurisdiction; given the 
global nature of the security-based swap market and the large number of 
cross-border transactions, the Commission recognizes that it is likely 
that such transactions may be subject to the reporting requirements of 
at least two jurisdictions. The Commission preliminarily believes, 
however, that if relevant authorities are able to access security-based 
swap data in trade repositories outside their jurisdiction, such as 
SDRs registered with the Commission, as needed, then relevant 
authorities may be more inclined to permit market participants involved 
in such transactions to fulfill their reporting requirements by 
reporting the transactions to a single trade repository, rather than to 
separate trade repositories in each applicable jurisdiction, thereby 
potentially reducing market participants' compliance costs associated 
with establishing multiple reporting systems to multiple SDRs. 
Similarly, market participants would likely be able to access, 
aggregate, and analyze their data more efficiently in a single trade 
repository, than if they were required to report data to separate trade 
repositories in each applicable jurisdiction.
ii. Costs of Relevant Authorities' Access to Security-Based Swap Data
    The Commission preliminarily believes that although there are 
benefits to SDRs providing access to relevant authorities to SDR Data, 
such access will likely involve certain costs, or more specifically, 
risks. For example, the Commission expects that SDRs will maintain data 
that is proprietary and highly sensitive \1857\ and that is subject to 
strict confidentiality requirements.\1858\ Section 13(n)(5)(G) of the 
Exchange Act, however, requires an SDR to make available data obtained 
by the SDR to authorities identified in Section 13(n)(5)(G) of the 
Exchange Act.\1859\ Extending access to SDR Data to anyone, including 
relevant authorities, increases the risk of the confidentiality of SDR 
Data not being preserved.\1860\ A relevant authority's inability to 
maintain the confidentiality of SDR Data could erode market 
participants' confidence in the integrity of the security-based swap 
market, thereby leading to reduced liquidity in the security-based swap 
market, hindering price discovery, and impeding the capital formation 
process.\1861\
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    \1857\ As the Commission has noted in the SDR Proposing Release, 
such data could include information about a market participant's 
trades or its trading strategy; it may also include nonpublic 
personal information. See 75 FR 77339.
    \1858\ See Section 13(n)(5)(F) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(F), as added by Section 763(i) of the Dodd-Frank Act, and 
proposed Rules 13n-4(b)(8) and 13n-9 under the Exchange Act.
    \1859\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act; see also proposed Rules 13n-4(b)(9) and (b)(10) 
under the Exchange Act.
    \1860\ See, e.g., ESMA Letter at 2 (noting that relevant 
authorities must ensure the confidentiality of security-based swap 
data provided to them).
    \1861\ See SDR Proposing Release, 75 FR 77307, 77334 (``Failure 
to maintain privacy of [SDR Data] could lead to market abuse and 
subsequent loss of liquidity.'').
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    To help mitigate these risks, Sections 13(n)(5)(G) and (H) of the 
Exchange Act impose certain conditions on access to SDR Data by 
relevant authorities.\1862\ Specifically, Section 13(n)(5)(G) of the 
Exchange Act \1863\ limits the authorities that may access SDR Data to 
an enumerated list of domestic authorities and any other persons, 
including foreign authorities, determined by the Commission to be 
appropriate and requires that an SDR notify the Commission when the SDR 
receives a request for SDR Data from an authority. Section 13(n)(5)(H) 
of the Exchange Act \1864\ requires that, before an SDR shares 
security-based swap information with a relevant authority, the SDR must 
receive a written agreement from a relevant authority that it will 
abide by the confidentiality requirements described in Section 24 of 
the Exchange Act relating to the information provided by the SDR, and 
the relevant authority will agree to indemnify the SDR and the 
Commission for any expenses arising from litigation relating to the 
information provided under Section 24 of the Exchange Act.\1865\
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    \1862\ 15 U.S.C. 78m(n)(5)(G) and (H), as added by Section 
763(i) of the Dodd-Frank Act; see also proposed Rules 13n-4(b)(9) 
and (b)(10) under the Exchange Act. In addition, Section 13(n)(5)(F) 
of the Exchange Act, 15 U.S.C. 78m(n)(5)(F), as added by Section 
763(i) of the Dodd-Frank Act, and proposed Rules 13n-4(b)(8) and 
13n-9 under the Exchange Act, require SDRs to maintain the privacy 
of SDR Data.
    \1863\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act; see also proposed Rule 13n-4(b)(9) under the 
Exchange Act.
    \1864\ 15 U.S.C. 78m(n)(5)(H), as added by Section 763(i) of the 
Dodd-Frank Act; see also proposed Rule 13n-4(b)(10) under the 
Exchange Act.
    \1865\ 15 U.S.C. 78m(n)(5)(H), as added by Section 763(i) of the 
Dodd-Frank Act.

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[[Page 31188]]

(b) Benefits and Costs of Proposed Guidance and Exemptive Rule
    As discussed above, the Commission is (1) proposing interpretive 
guidance to specify how SDRs may comply with the Notification 
Requirement, (2) specifying how it proposes to determine whether a 
relevant authority is appropriate for purposes of receiving SDR Data, 
and (3) proposing the Indemnification Exemption.\1866\ The Commission 
is proposing each of these to facilitate access to SDR Data by relevant 
authorities and to enable SDRs to fulfill their obligations under 
Sections 13(n)(5)(G) and 13(n)(5)(H) of the Exchange Act \1867\ and 
previously proposed Rules 13n-4(b)(9) and 13n-4(b)(10) in a manner 
consistent with relevant authorities' need to have access to SDR Data 
that will enable them to carry out their regulatory mandates and legal 
responsibilities effectively and efficiently.\1868\ The Commission 
preliminarily believes that our proposed guidance and the 
Indemnification Exemption would help realize the anticipated benefits 
of access to SDR Data by relevant authorities, as discussed above in 
Section XV.H.2(a)i, while at the same time mitigating the risks and 
other costs associated with such access, as discussed above in Section 
XV.H.2(a)ii. The Commission also preliminarily believes that, taken 
together, our proposed guidance and the Indemnification Exemption will 
enable the Commission and SDRs to respond promptly and flexibly to the 
needs of relevant authorities.
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    \1866\ See Section VI.C.3, supra.
    \1867\ 15 U.S.C. 78m(n)(5)(G) and (H), as added by Section 
763(i) of the Dodd-Frank Act.
    \1868\ See SDR Proposing Release, 75 FR 77356.
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i. Notification Requirement
    The Commission preliminarily believes that an SDR can comply with 
the Notification Requirement in Section 13(n)(5)(G) of the Exchange Act 
\1869\ and previously proposed Rule 13n-4(b)(9) thereunder by notifying 
the Commission, upon the initial request for security-based swap data 
by a relevant authority, that such relevant authority has made a 
request for security-based swap data from the SDR, and maintaining 
records of the initial request and all subsequent requests.\1870\ Under 
this proposed interpretation, where an SDR complies with the above, the 
Commission will consider the notice provided and records maintained as 
satisfying the Notification Requirement.
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    \1869\ 15 U.S.C. 78m(n)(5)(G), as added by Section 763(i) of the 
Dodd-Frank Act.
    \1870\ See Section VI.C.3(a), supra.
---------------------------------------------------------------------------

    In the Commission's preliminary view, SDRs would be less burdened 
under this interpretation of the Notification Requirement than under an 
interpretation that would require SDRs to provide the Commission with 
actual notice of all requests for SDR Data by relevant authorities 
because SDRs would have to actually notify the Commission only one time 
for each relevant authority. The Commission estimates that 
approximately 200 relevant authorities may make requests for SDR Data 
from SDRs.\1871\ Based on the Commission's experience in making 
requests for security-based swap data from trade repositories, the 
Commission estimates that each relevant authority may make about 12 
requests for SDR Data per year. An alternative interpretation that 
would require SDRs to provide the Commission with actual notice of all 
requests for SDR Data by relevant authorities would naturally increase 
the burden on SDRs to notify the Commission. Therefore, over the course 
of a year, under the Commission's proposed interpretation of the 
Notification Requirement, the Commission estimates that an SDR would 
provide the Commission with actual notice approximately 200 times, 
whereas under an interpretation that would require SDRs to provide the 
Commission with actual notice of all requests for SDR Data by relevant 
authorities, the Commission estimates that the SDR would provide the 
Commission with actual notice approximately 2400 times. Because SDRs 
would be required to provide actual notification to the Commission only 
upon the first request of a relevant authority, rather than upon every 
request, SDRs should be able to respond to requests for SDR Data by 
relevant authorities more promptly and at lower cost than requiring 
SDRs to notify the Commission of every request.
---------------------------------------------------------------------------

    \1871\ The Commission preliminarily believes that each of the 
entities in the United States that is specifically listed in Section 
13(n)(5)(G) of the Exchange Act, 15 U.S.C. 78m(n)(5)(G), as added by 
Section 763(i) of the Dodd-Frank Act, may request SDR Data from 
SDRs. Section 13(n)(5)(G) specifically lists each appropriate 
prudential regulator (which includes the Board of Governors of the 
Federal Reserve System, the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, the Farm Credit 
Administration, and the Federal Housing Finance Agency), the 
Financial Stability Oversight Council, the CFTC, and the Department 
of Justice. The Commission also preliminarily expects that certain 
SROs and registered futures associations may request SDR Data from 
SDRs. Therefore, the Commission estimates that approximately 10 
relevant authorities in the United States may request SDR Data from 
SDRs. The Commission also estimates that each of the G20 countries 
will have no more than 10 relevant authorities that may request SDR 
Data from SDRs. Thus, the Commission estimates that there will be a 
total of no more than 200 relevant domestic and foreign authorities 
that may request SDR Data from SDRs.
---------------------------------------------------------------------------

    The Commission's proposed interpretation would also minimize an 
impediment to relevant authorities' direct access to SDR Data to 
fulfill their regulatory mandates and legal responsibilities because 
SDRs would not be required to provide the Commission with actual notice 
of every request prior to providing access to the requesting relevant 
authority. If SDRs had to actually notify the Commission every time 
that a relevant authority requested access to SDR Data (following the 
initial request), this could interfere with the ability of relevant 
authorities to obtain efficiently security-based swap data from SDRs to 
fulfill their own regulatory mandate or legal responsibilities. Such an 
impediment could be a factor in leading certain relevant authorities to 
seek to promote the establishment of trade repositories in their own 
jurisdictions, which would lead to fragmentation of security-based swap 
data and SDRs geographically. By reducing a potential barrier to 
relevant authorities' access to SDR Data and reducing the likelihood of 
fragmentation of data among trade repositories, the Commission's 
proposed interpretation of the Notification Requirement should enhance 
the ability of SDRs to perform their intended functions and thereby 
increase market transparency and regulatory effectiveness. Because SDRs 
would still be required to maintain records of relevant authorities' 
requests for SDR Data, the proposed interpretation would also allow the 
Commission to obtain this information as needed.
    The Commission is aware that our proposed interpretation of the 
Notification Requirement will not provide the Commission with actual 
notice of all relevant authorities' requests for SDR Data prior to an 
SDR fulfilling such requests. The Commission preliminarily believes, 
however, that the benefits of receiving such notice does not justify 
the additional costs that SDRs would incur in providing such notice and 
the potential delay in relevant authorities receiving SDR Data that 
they need to fulfill their regulatory mandates and legal 
responsibilities.
ii. Determination of Appropriate Regulators
    The Commission is proposing an approach to determining whether an 
authority, other than those expressly identified in Section 13(n)(5)(G) 
of the

[[Page 31189]]

Exchange Act \1872\ and previously proposed Rule 13n-4(b)(9) 
thereunder, should be determined to be appropriate for purposes of 
requesting SDR Data. As described above, the Commission preliminarily 
envisions that this process will involve consideration of, among other 
things, the scope of the relevant authority's regulatory mandate and 
legal responsibilities, the authority's ability to provide the 
Commission with reciprocal assistance in securities matters within the 
Commission's jurisdiction, and a supervisory and enforcement MOU or 
other arrangement that would be designed to protect the confidentiality 
of any SDR Data provided to the authority.\1873\
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    \1872\ 15 U.S.C. 78m(n)(5)(G) (permitting access to SDR Data by 
``any other person that the Commission determines to be 
appropriate''), as added by Section 763(i) of the Dodd-Frank Act.
    \1873\ See Section VI.C.3(b), supra.
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    The Commission preliminarily believes that our proposed approach 
has the benefit of appropriately limiting access to SDR Data by 
relevant authorities in order to seek to protect the confidentiality of 
SDR Data.\1874\ The Commission expects that relevant authorities from a 
wide range of jurisdictions may seek to obtain a determination by the 
Commission that they may appropriately have access to SDR Data. Each of 
these jurisdictions may have a distinct approach to supervision, 
regulation, or oversight of its financial markets or market 
participants and to the protection of proprietary and other 
confidential information. The Commission preliminarily believes that 
the process that it is contemplating has the benefit of enabling the 
Commission to determine whether an authority has a legitimate interest 
in the SDR Data, based on its regulatory mandate or legal 
responsibilities, and whether the authority is capable of protecting 
the confidentiality of SDR Data provided to it. In addition, the 
Commission preliminarily believes that this process will allow the 
Commission to be able to revoke its determination in certain instances, 
including, for example, if a relevant authority fails to keep 
confidential data that an SDR provides to the authority.
---------------------------------------------------------------------------

    \1874\ See ESMA Letter at 2 (noting that relevant authorities 
must ensure the confidentiality of security-based swap data provided 
to them).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that our proposed 
approach will reduce the potential for fragmentation of security-based 
swap data among trade repositories because it will reduce the risks of 
improper disclosure, misappropriation, or misuse of SDR Data. Concerns 
about these risks could prompt relevant authorities to promote the 
development and maintenance of SDRs in their own jurisdictions rather 
than entrusting data reported by persons within their jurisdictions to 
consolidated trade repositories. As described above, the Commission 
envisions that any determination order by the Commission will likely be 
conditioned on a relevant authority and the Commission entering into a 
supervisory and enforcement MOU or other arrangement, which will likely 
address the confidentiality of SDR Data obtained by the 
authority.\1875\ Because the Commission's determination process will 
likely address confidentiality concerns, the Commission preliminarily 
believes that our proposed approach would increase relevant 
authorities' confidence in the preservation of the confidentiality of 
SDR Data shared with the authorities' counterparts in other 
jurisdictions, and, in conjunction with the Commission's approach to 
ensuring access to SDR Data by relevant authorities discussed 
above,\1876\ may reduce incentives for relevant authorities to seek to 
promote the establishment and maintenance of SDRs in other 
jurisdictions. If concerns over confidentiality reduce relevant 
authorities' incentives to promote the establishment and maintenance of 
SDRs in their own jurisdictions and market participants operating in 
those jurisdictions conclude that they may, under applicable foreign 
law, use SDRs registered with the Commission for reporting purposes and 
therefore do so, then the Commission preliminarily believes that this 
will improve market transparency and regulatory efficiency.
---------------------------------------------------------------------------

    \1875\ See Section VI.C.3(b), supra.
    \1876\ See Section VI.C., supra.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that our 
proposal represents an efficient approach to the determination process 
that will promote the intended benefits of access by relevant 
authorities to SDR Data, as discussed above in Section XV.H.2(a)i. The 
Commission routinely negotiates MOUs or other arrangements with foreign 
authorities in order to secure mutual assistance or for other purposes, 
and the Commission preliminarily believes that the approach that it is 
proposing is generally consistent with this practice. As such, the 
Commission preliminarily believes that the burden of entering into 
supervisory and enforcement MOUs or other arrangements with relevant 
authorities during the Commission's determination process will be 
outweighed by the benefits to relevant authorities in gaining access to 
SDR Data to carry out their regulatory mandates or legal 
responsibilities.
iii. Exemptive Relief From the Indemnification Requirement
    Finally, the Commission is proposing the Indemnification Exemption, 
which would provide SDRs registered with the Commission with the option 
of permitting relevant authorities to obtain SDR Data without agreeing 
to indemnify the SDR and the Commission, subject to three conditions. 
The first two conditions would limit the exemption to (1) requests by a 
relevant authority for security-based swap information made to fulfill 
a regulatory mandate and/or legal responsibility of the requesting 
authority, and (2) requests pertaining to a person or financial product 
subject to the jurisdiction, supervision, or oversight of the 
requesting authority.\1877\ The third condition would require the 
relevant authority to have entered into a supervisory and enforcement 
MOU or other arrangement with the Commission that addresses the 
confidentiality of the security-based swap information provided and any 
other matters as determined by the Commission.\1878\ The Commission 
preliminarily believes that the benefits of the Indemnification 
Exemption would include the benefits associated with permitting 
relevant authorities to access SDR Data, as discussed in Section 
XV.H.2(a)i above.
---------------------------------------------------------------------------

    \1877\ See Section VI.C.3(c), supra.
    \1878\ See id.
---------------------------------------------------------------------------

    As discussed above, the Commission preliminarily believes that a 
rigid application of the Indemnification Requirement could prevent some 
relevant domestic authorities and some relevant foreign authorities 
from obtaining security-based swap information from SDRs because they 
cannot provide an indemnification agreement.\1879\ Effectively 
prohibiting access to SDR Data by authorities other than the Commission 
would greatly reduce the ability of an SDR to provide the market 
transparency and regulatory efficiency benefits intended under Title 
VII.\1880\ Although relevant authorities could obtain SDR Data from the 
Commission,\1881\ it would likely be less efficient for relevant 
authorities to do so than obtaining access to SDR Data directly from 
SDRs, particularly in periods of market stress and particularly

[[Page 31190]]

since SDRs are likely to have expertise in, and business incentives 
for, providing such data to relevant authorities efficiently.
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    \1879\ See Section VI.C.3(c), supra.
    \1880\ See SDR Proposing Release, 75 FR 77307 (describing 
expected benefits of SDRs, including the market transparency 
benefits of access by regulators); id. at 77356 (``The ability of 
the Commission and other regulators to monitor risk and detect 
fraudulent activity depends on having access to market data.'').
    \1881\ See Section VI.C.1, supra; see also SDR Proposing 
Release, 75 FR 77319.
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    The Commission also preliminarily believes that a rigid application 
of the Indemnification Requirement could reduce the amount of data held 
by SDRs registered with the Commission, thereby potentially reducing 
the usefulness of such SDRs to relevant authorities and market 
participants. To the extent that relevant foreign authorities are 
effectively limited in obtaining SDR Data, the relevant authorities may 
seek to promote the development and maintenance of SDRs in their own 
jurisdictions, which would likely lead to fragmentation of security-
based swap data among trade repositories in multiple 
jurisdictions.\1882\ Such fragmentation could result in higher 
reporting costs for market participants,\1883\ who may be subject to 
duplicative security-based swap transaction reporting requirements in 
multiple jurisdictions, and would likely increase other costs that both 
relevant authorities and market participants may incur, including, for 
example, their inability to aggregate data across multiple SDRs.\1884\
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    \1882\ Cf. Cleary Letter IV at 31 (The Indemnification 
Requirement ``could be a significant impediment to effective 
regulatory coordination, since non-U.S. regulators may establish 
parallel requirements for U.S. regulators to access swap data 
reported in their jurisdictions.'').
    \1883\ In the SDR Proposing Release, the Commission noted that 
multiple SDRs per asset class would allow for market competition to 
determine how data is collected. 75 FR 77358. Although the 
Commission continues to recognize that multiple SDRs may in some 
circumstances increase competition and lower costs associated with 
reporting and other Title VII requirements, the Commission 
preliminarily believes that fragmentation of security-based swap 
data among trade repositories under the circumstances described here 
would not likely increase competition or reduce costs. In a 
jurisdictionally-fragmented global market, an increase in the number 
of trade repositories in one jurisdiction may not increase the 
number of alternative trade repositories in another jurisdiction to 
which a counterparty may report. In such a market, counterparties to 
security-based swap transactions occurring wholly within one 
jurisdiction would likely not be free to choose to report to a trade 
repository in another jurisdiction to satisfy applicable reporting 
requirements. Similarly, cross-border transactions subject to the 
reporting requirements of two or more jurisdictions would likely be 
required to be reported to trade repositories in each of the 
jurisdictions that require the transactions to be reported.
    \1884\ See SDR Proposing Release, 75 FR 77358. The costs 
associated with aggregating the data of multiple SDRs would likely 
be significantly higher under the circumstances described here, as 
different jurisdictions are likely to impose different requirements 
regarding how data is to be reported and maintained.
---------------------------------------------------------------------------

    The Commission preliminarily believes that, in addition to 
addressing the concerns raised by a rigid application of the 
Indemnification Requirement, the Indemnification Exemption is 
beneficial because it would mitigate the risks associated with 
permitting relevant authorities to obtain access to SDR Data, as 
discussed above in Section XV.H.2(a)ii. The Indemnification Exemption 
would be available only for requests that are consistent with each 
requesting authority's regulatory mandate or legal responsibilities and 
only for SDR Data pertaining to a person or financial product subject 
to the requesting authority's jurisdiction, supervision, or oversight. 
The Commission preliminarily believes that these conditions 
significantly reduce the confidentiality concerns relating to relevant 
authorities' access to SDR Data,\1885\ as authorities are likely to be 
sensitive to the need for confidentiality of data, particularly if the 
data pertains to matters in which they have an interest, i.e., data 
within their own regulatory mandates or legal responsibilities and to 
persons and financial products under their own jurisdiction, 
supervision, or oversight. Similarly, because the Indemnification 
Exemption is voluntary, the SDR may choose not to rely on the 
Indemnification Exemption, such as under circumstances where the risks 
associated with providing access to SDR Data may be unreasonably high--
for example, where a relevant authority has a previous history of weak 
protections for preserving the confidentiality of SDR Data. Further, 
even where the SDR opts to rely on the Indemnification Exemption, the 
Commission will have an opportunity to evaluate the confidentiality 
protections provided by the relevant authority in the context of 
negotiations of a supervisory and enforcement MOU or other 
arrangement.\1886\
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    \1885\ See, e.g., ESMA Letter at 2 (noting that relevant 
authorities must ensure the confidentiality of security-based swap 
data provided to them).
    \1886\ For the Indemnification Exemption to apply to the 
requests of a particular requesting authority, the Commission would 
be required to enter into a supervisory and enforcement MOU or other 
arrangement with such authority, which would enable the Commission 
to determine, prior to operation of the Indemnification Exemption, 
that the authority has a regulatory mandate or legal 
responsibilities to access SDR Data, that it agrees to protect the 
confidentiality of any security-based swap information provided to 
it, and that it will provide reciprocal assistance in securities 
matters within the Commission's jurisdiction. See Section VI.C.3(c), 
supra. In addition, if an SDR determines that it would prefer not to 
invoke the exemption, it would have the option to require an 
indemnification agreement from a relevant authority that seeks to 
access SDR Data. See Section VI.C.3(c), supra.
---------------------------------------------------------------------------

    The Commission envisions that, to meet the first two conditions in 
the Indemnification Exemption, an SDR may incur costs in determining 
whether a relevant authority's request for data falls within its 
regulatory mandate or legal responsibilities and pertains to a person 
or financial product subject to the authority's jurisdiction, 
supervision, or oversight. The Commission preliminarily believes, 
however, that an SDR's costs for meeting the first two conditions in 
the Indemnification Exemption would be minimal, if any, in light of the 
burden already imposed by an SDR's statutory duty to maintain the 
privacy of security-based swap information that it receives.\1887\ With 
respect to the third condition in the Indemnification Exemption, the

[[Page 31191]]

Commission preliminarily believes that the costs for an SDR to confirm 
whether the Commission and a relevant authority have entered into a 
supervisory and enforcement MOU or other arrangement would be minimal 
because such information should generally be readily available.\1888\
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    \1887\ See Section 13(n)(5)(F) of the Exchange Act, 15 U.S.C. 
78m(n)(5)(F), as added by Section 763(i) of the Dodd-Frank Act; see 
also proposed Rule 13n-4(b)(8) under the Exchange Act (requiring 
SDRs to maintain the privacy of any and all security-based swap 
transaction information that the SDR receives from a security-based 
swap dealer, counterparty, or certain registered entity) and 
proposed Rule 13n-9 under the Exchange Act (requiring an SDR to 
protect the privacy of security-based swap transaction information 
that the SDR receives by, among other things, establishing 
safeguards, policies, and procedures that are reasonably designed to 
protect such information and that address, without limitation, the 
SDR limiting access to confidential information, material, nonpublic 
information, and intellectual property). The Commission 
preliminarily believes that in order to comply with an SDR's 
statutory privacy duty, the SDR will most likely decide that it is 
reasonable to consider whether a relevant authority's request for 
security-based swap information is within its regulatory mandate or 
legal responsibilities and pertains to a person or financial product 
within the authority's jurisdiction, supervision, or oversight 
before the SDR provides the information. If so, then the Commission 
preliminarily believes that the SDR's costs for meeting the first 
two conditions in the Indemnification Exemption would be minimal, if 
any, because these conditions will most likely be already addressed 
in the SDR's policies and procedures required by previously proposed 
Rule 13n-9 under the Exchange Act. As discussed in the SDR Proposing 
Release, the Commission anticipated that the primary costs to SDRs 
for complying with proposed Rule 13n-9 would be derived from 
developing, maintaining, and ensuring compliance with the required 
policies and procedures. 75 FR 77363. Based upon data from SIFMA's 
Management & Professional Earnings in the Securities Industry 2012 
(modified by the SEC staff to account for an 1800-hour-work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead), the Commission now estimates that the 
average initial paperwork cost associated with proposed Rule 13n-9 
would be 630 hours and $60,000 in outside legal costs for each SDR. 
The Commission also estimates that the average ongoing paperwork 
cost would be 180 hours per year for each SDR and that assuming a 
maximum of ten SDRs, the aggregate one-time estimated dollar cost to 
comply with proposed Rule 13n-9 would be $2,553,000, which is 
calculated as follows: ($60,000 for outside legal services + 
(Compliance Attorney at $310 per hour for 630 hours)) * 10 
registrants = $2,553,000. The Commission further estimates that the 
aggregate ongoing estimated dollar cost per year to comply with 
proposed Rule 13n-9 would be $558,000, which is calculated as 
follows: (Compliance Attorney at $310 per hour for 180 hours) * 10 
registrants = $558,000.
    \1888\ As a general matter, the Commission provides a list of 
MOUs and other arrangements, which are available at the following 
link: https://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml.
---------------------------------------------------------------------------

    Even if all the conditions in the Indemnification Exemption are 
satisfied, SDRs would have the option to seek to obtain an 
indemnification agreement from a relevant authority. The Commission 
recognizes that the conditions in the Indemnification Exemption would 
not necessarily provide SDRs that invoke the exemption with the same 
level of protection that an indemnification agreement would provide 
(i.e., coverage for any expenses arising from litigation relating to 
information provided to a relevant authority) and thus, SDRs may decide 
to weigh the potential risks in not seeking an indemnification 
agreement from a relevant authority with the benefits of invoking the 
exemption.
    The Commission preliminarily believes, however, that the conditions 
in the exemption would provide an additional layer of protection of the 
confidentiality of SDR Data--albeit different from the protection 
provided by an indemnification agreement--and that in cases where SDRs 
choose the exemption, such SDRs presumably believe that the benefits of 
the exemption, as discussed above, justify the costs of invoking the 
exemption. However, even in cases where the exemption is not chosen, 
the availability of the option is valuable to SDRs because the 
exemption would provide SDRs with an alternative to the Indemnification 
Requirement and an opportunity to choose the lower cost alternative.
(c) Alternatives to Proposed Guidance and Exemptive Relief
i. Notification Requirement
    The Commission considered requiring SDRs to provide actual notice 
to the Commission of all requests for SDR Data by relevant authorities 
prior to SDRs fulfilling such requests. The Commission preliminarily 
believes, however, that the benefits of receiving actual notice for 
each and every request does not justify the additional costs imposed on 
SDRs to provide such notice and the potential delay in relevant 
authorities receiving SDR Data that they need to fulfill their 
regulatory mandates and legal responsibilities. The Commission also 
preliminarily believes that our proposed approach is the most efficient 
way to interpret the Notification Requirement and would allow the 
Commission access to the information needed.
ii. Determination of Appropriate Regulators
    The Commission considered prescribing by rule a specific process to 
determine whether a relevant authority is appropriate for purposes of 
receiving security-based swap data directly from SDRs that would 
require, for example, a supervisory and enforcement MOU or other 
arrangement.\1889\ The Commission preliminarily believes, however, that 
such a rule is not necessary because our process for determining an 
appropriate authority provides the Commission and relevant authorities 
greater flexibility to consult on appropriate terms of access to SDR 
Data, confidentiality commitments, and reciprocal access commitments on 
a case-by-case basis.
---------------------------------------------------------------------------

    \1889\ See, e.g., CFTC Rule 49.17(b), 17 CFR 49.17(b) (requiring 
``Appropriate Foreign Regulators'' to have an MOU or similar type of 
information sharing agreement, or as the CFTC determines on a case-
by-case basis).
---------------------------------------------------------------------------

iii. Exemptive Relief From the Indemnification Requirement
    The Commission considered whether to not propose any exemptive 
relief from the Indemnification Requirement. For the reasons discussed 
below, the Commission believes that the Indemnification Exemption is a 
better, and more appropriate, alternative to a rigid application of the 
Indemnification Requirement.\1890\
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    \1890\ See also Section VI.C.3(c), supra (discussing how a rigid 
application of the Indemnification Requirement would frustrate the 
purposes of the Dodd-Frank Act).
---------------------------------------------------------------------------

    The Commission preliminarily believes that a rigid application of 
the Indemnification Requirement may reduce the expected benefits 
associated with relevant authorities' access to SDR Data, as discussed 
in Section XV.H.2(a)i above. In particular, the Indemnification 
Requirement may prevent some relevant authorities from accessing SDR 
Data directly from SDRs registered with the Commission.\1891\ Although 
relevant authorities could obtain SDR Data from the Commission,\1892\ 
it would likely be less efficient for relevant authorities to do so 
than obtaining SDR Data access directly from SDRs, particularly in 
periods of market stress and particularly since SDRs are likely to have 
expertise in, and business incentives for, providing such data to 
relevant authorities efficiently.
---------------------------------------------------------------------------

    \1891\ See, e.g., DTCC Letter I at 3 (discussing how the 
Indemnification Requirement would result in the reduction of 
information accessible to regulators on a timely basis and would 
greatly diminish regulators' ability to carry out oversight 
functions).
    \1892\ See Section VI.C.1, supra; see also SDR Proposing 
Release, 75 FR 77319.
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    Moreover, the inability of relevant foreign authorities to obtain 
direct access to SDR Data from SDRs registered with the Commission 
would likely increase the risk of data fragmentation among trade 
repositories, as many foreign authorities may require establishment and 
maintenance of trade repositories in their jurisdictions if such 
authorities determine that they are unable to satisfy the 
Indemnification Requirement; such fragmentation may lead to higher 
reporting costs for market participants and less transparency in the 
security-based swap market.\1893\
---------------------------------------------------------------------------

    \1893\ See, e.g., Cleary Letter IV at 31 (The Indemnification 
Requirement ``could be a significant impediment to effective 
regulatory coordination, since non-U.S. regulators may establish 
parallel requirements for U.S. regulators to access swap data 
reported in their jurisdictions.'').
---------------------------------------------------------------------------

    The Commission also considered whether to prescribe additional 
conditions in or limitations to the Indemnification Exemption, but 
decided against it. Any additional conditions or limitations to the 
Indemnification Exemption would likely impose additional costs on SDRs 
that the Commission preliminarily believes are not warranted at this 
time. The Commission presently believes that the Indemnification 
Exemption strikes the right balance in furthering the goals of the 
Dodd-Frank Act by providing relevant authorities with access to SDR 
Data to fulfill their regulatory mandates and legal requirements while 
incorporating appropriate limitations to such access to guard against 
over-broad or unfettered access to all SDR Data as well as certain 
mechanisms to seek to preserve the confidentiality of the SDR Data.
Request for Comment
    The Commission requests comments on all aspects of the economic 
analysis of our proposed interpretive guidance, Indemnification 
Exemption, and alternatives to our proposed approach. Interested 
persons are encouraged to provide supporting data and analysis and, 
when appropriate, suggest modifications to the Commission's proposed 
interpretive guidance and Indemnification Exemption. Responses that are 
supported by data and analysis provide great assistance to the 
Commission in considering the benefits and costs of proposed 
alternatives, as well as considering the practicality and effectiveness 
of the proposed alternatives. In addition, the

[[Page 31192]]

Commission requests commenters' views on the following:
     Has the Commission appropriately considered the expected 
programmatic benefits and costs of our proposed interpretative guidance 
and Indemnification Exemption? If not, please explain why and provide 
information on how such benefits and costs should be assessed.
     Are the programmatic benefits and costs discussed above 
accurate? If not, why not and how can the Commission more accurately 
describe such benefits and costs?
     Are there quantifiable programmatic benefits or costs 
associated with the Commission's proposed interpretive guidance and 
Indemnification Exemption that are not discussed above, but that the 
Commission should consider? If so, please discuss, analyze, and supply 
relevant data, information, or statistics regarding any such benefits 
or costs. For example, how many relevant authorities will likely 
request SDR Data from SDRs? What is the average number of requests for 
SDR Data that an SDR may receive from relevant authorities per year?
     Are there costs in fulfilling any of the conditions in the 
Indemnification Exemption that the Commission has not discussed above? 
If so, what?
     Do you agree that an SDR's costs for meeting the first two 
conditions in the Indemnification Exemption would be minimal, if any, 
because these conditions will most likely be already addressed in the 
SDR's policies and procedures required by previously proposed Rule 13n-
9 under the Exchange Act? If not, please explain.
     Do SDRs have appropriate incentives to rely on the 
Indemnification Exemption? Are there circumstances in which an SDR may 
rely on an Indemnification Exemption when it is inappropriate to do so? 
Conversely, would SDRs have incentives to require indemnification 
despite the availability of the Indemnification Exemption? Please 
explain.
     What kinds of legal frameworks will relevant authorities 
operate under? Will some relevant authorities operate under legal 
frameworks that do not impose confidentiality restrictions on the use 
of data that are comparable to those governing SDRs and those 
applicable to the Commission?
     Do the benefits of the Commission's proposed interpretive 
guidance and Indemnification Exemption justify the costs? If not, why 
not?
     Has the Commission appropriately considered the benefits 
and costs of the alternative approaches to the Commission's 
interpretive guidance and Indemnification Exemption? If not, why not?
3. Economic Analysis of the Re-proposal of Regulation SBSR
    As discussed above, although the Commission is re-proposing all of 
Regulation SBSR, the new elements of the re-proposal relate directly to 
cross-border issues, are conforming changes necessitated by those 
larger changes, or are technical changes designed to facilitate 
understanding of those other changes. However, since Regulation SBSR 
was proposed but has not yet been adopted, the discussion below will 
include costs and benefits of the initial proposal from a pre-statutory 
baseline and then consider the changes to the initial assessments of 
costs and benefits implied by the re-proposal.
    Broadly, the Commission continues to believe, as described in the 
Regulation SBSR Proposing Release, that Regulation SBSR taken as a 
whole would result in improved market quality, improved risk 
management, greater efficiency, and improved Commission 
oversight.\1894\ Today's re-proposal of Regulation SBSR is intended to 
further these goals while further limiting, to the extent practicable, 
the overall costs associated with security-based swap reporting and 
public dissemination in cross-border situations. As described in more 
detail below, the proposed revisions were suggested by many commenters 
to the initial proposal and are designed, among other things, to better 
align reporting duties with larger entities that have greater resources 
and capability to report \1895\ and to reduce the potential for 
duplicative reporting.\1896\ These revisions should help to maximize 
the benefits and minimize the potential costs of regulatory reporting 
and public dissemination of security-based swaps faced by market 
participants.
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    \1894\ See Regulation SBSR Proposing Release, 75 FR 75261-62.
    \1895\ See, e.g., SIFMA AMG Letter at 2 (stating that, due to 
their commercial interests and technological expertise, non-U.S. 
security-based swap dealers and major security-based swap 
participants would be as likely as U.S. security-based swap dealers 
and major security-based swap participants to comply with the 
reporting obligations, or would be best positioned to develop at the 
lowest cost the necessary technological infrastructure or 
relationships with third party service providers); Vanguard Letter 
at 6 (stating that requiring U.S. end users to report security-based 
swaps would be costly and burdensome for end users, particularly for 
end users that enter into security-based swaps on an isolated 
basis); MarkitSERV Letter I at 9 (noting that, in light of end 
users' resources and the operational and technical challenges of 
security-based swap reporting, it will often be most efficient for a 
U.S. end user to delegate reporting to its non-U.S. security-based 
swap dealer or major security-based swap participant counterparty); 
DTCC Letter II at 27 (stating that the Commission's failure to 
encourage arrangements through which non-U.S. dealers could submit 
transaction reports for customers that are U.S. persons would impose 
significant burdens and costs on U.S. money managers, which likely 
would be passed to individual investors, pension funds, and state 
and local governments); Cleary Letter IV at 28 (stating that 
requiring U.S. end users to report security-based swaps entered into 
with non-U.S. security-based swap dealers would be unduly burdensome 
for end users and could negatively impact the competitiveness of 
affected U.S. markets); ISDA/SIFMA Letter I at 19 (the end-user 
reporting requirement could result in the inadvertent exclusion of 
non-U.S. security-based swap dealers, which could increase systemic 
risk by decreasing liquidity and further concentrating the U.S. 
security-based swap market); Cleary Letter II at 18 (end users and 
other unregistered counterparties might refuse to enter into 
security-based swaps with foreign security-based swap dealers or 
major security-based swap participants to avoid the costs of 
developing the necessary reporting systems, thereby potentially 
reducing price competition).
    \1896\ See notes 1136-1141, supra.
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    The Commission seeks public comment on the costs and benefits that 
re-proposed Regulation SBSR would entail. The Commission encourages 
commenters to identify, discuss, analyze, and supply relevant data, 
information, or statistics regarding any such costs or benefits. In 
particular, the Commission seeks comment on the following:
     Taken together, what are the costs and benefits of re-
proposed Regulation SBSR?
     Would the revisions contained in re-proposed Regulation 
SBSR result in benefits or costs not identified by the Commission? If 
so, please describe.
     Has the Commission accurately identified and described all 
relevant benefits and costs associated with re-proposed Regulation 
SBSR?
     Could re-proposed Regulation SBSR be further enhanced, 
consistent with the Dodd-Frank Act, to maximize aggregate benefits and 
minimize costs to the security-based swap market?
(a) Modifications to ``Reporting Party'' Rules and Jurisdictional Reach 
of Regulation SBSR--Re-proposed Rules 901(a) and 908(a)
i. Initial Proposal
    Rule 901(a), as initially proposed, set forth three scenarios for 
assigning the duty to report a security-based swap transaction. 
Proposed Rule 901(a)(1) would provide that, where only one counterparty 
to a security-based swap is a U.S. person, the U.S. person would be the 
reporting party. Proposed Rule 901(a)(2) would assign reporting 
responsibilities as follows:
     With respect to a security-based swap in which only one 
counterparty is a security-based swap dealer or major

[[Page 31193]]

security-based swap participant, the security-based swap dealer or 
major security-based swap participant would be the reporting party;
     With respect to a security-based swap in which one 
counterparty is a security-based swap dealer and the other counterparty 
is a major security-based swap participant, the security-based swap 
dealer would be the reporting party; and
     With respect to any other security-based swap not 
described in the first two cases, the counterparties to the security-
based swap would select a counterparty to be the reporting party.
    Proposed Rule 901(a)(3), as originally proposed, would provide 
that, if neither party is a U.S. person but the security-based swap is 
executed in the United States or through any means of interstate 
commerce, or is cleared through a clearing agency having its principal 
place of business in the United States, the counterparties to the 
security-based swap would be required to select a counterparty to be 
the reporting party.
    Rule 908(a), as initially proposed, would delineate the scope of 
the security-based swap market that would be subject to regulatory 
reporting and public dissemination under Regulation SBSR. Proposed Rule 
908(a) provided that a security-based swap would be subject to these 
requirements if the security-based swap: (1) has at least one 
counterparty that is a U.S. person; (2) is executed in the United 
States or through any means of interstate commerce; or (3) is cleared 
through a registered clearing agency having its principal place of 
business in the United States. If a security-based swap met any of the 
tests in proposed Rule 908(a), the counterparties would then look to 
proposed Rule 901(a) to determine which of them would be required to 
report the security-based swap. Rule 908(a), as initially proposed, 
would not impose reporting requirements in connection with a security-
based swap solely because one of the counterparties is guaranteed by a 
U.S. person.
    Rule 902, as initially proposed, would require the public 
dissemination of security-based swaps that met the scope requirements 
of proposed Rule 908(a). Proposed Rule 902(a) set out the core 
requirement that a registered SDR, immediately upon receiving a 
transaction report of a security-based swap, would be required to 
publicly disseminate information about that security-based swap 
consisting of all the information reported by the reporting party 
pursuant to proposed Rule 901(c), plus any indicator(s) contemplated by 
the registered SDR's policies and procedures that would be required by 
proposed Rule 907.\1897\
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    \1897\ Block trades would be subject to special dissemination 
rules. Section 13(m)(1)(E) of the Exchange Act, 15 U.S.C. 
78(m)(1)(E), provides that, with respect to cleared security-based 
swaps, the rule promulgated by the Commission related to public 
dissemination shall contain provisions that ``specify the criteria 
for determining what constitutes a large notional security-based 
swap transaction (block trade) for particular market and contracts'' 
and ``specify the appropriate time delay for reporting large 
notional security-based swap transactions (block trades) to the 
public.'' The Commission in the Regulation SBSR Proposing Release 
did not propose how to define a ``block trade.'' As noted in 
Regulation SBSR Proposing Release, the Commission intends to do so 
in a separate proposal. See Regulation SBSR Proposing Release, 75 FR 
75228.
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a. Programmatic Benefits of Initial Proposal
    The Regulation SBSR Proposing Release discussed various benefits 
that could result from proposed Rule 901.\1898\ For example, the 
Commission anticipated that proposed Rule 901 would provide the 
Commission with a better understanding of the security-based swap 
market generally, including the size and scope of that market, as the 
Commission would have access to data held by SDRs.\1899\ Such access is 
designed to promote more effective systemic regulation, and provide the 
Commission with better information to examine for improper market 
behavior and to take enforcement actions. Furthermore, specifying 
general types of information to be reported and publicly disseminated 
could increase the efficiency and level of standardization in the 
security-based swap market. Proposed Rule 901 also could facilitate the 
reports about the security-based swap marketplace that the Commission 
is required to provide to Congress.\1900\
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    \1898\ See id. at 75262-64.
    \1899\ See, e.g., 15 U.S.C. 78m(n)(5)(D) (requiring SDRs to 
provide the Commission with direct electronic access to their data).
    \1900\ See Section 719 of the Dodd-Frank Act.
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    The Commission anticipated that proposed Rule 901 would likely 
require reporting parties to establish and maintain order management 
systems (``OMSs'') for capturing and transmitting data about their 
security-based swap transactions. Such systems would be necessary to 
report data within the timeframes set forth in proposed Rules 901(c) 
and 901(d), because it is unlikely that manual processes could capture 
and report in real time the numerous required data elements relating to 
a security-based swaps. There could be substantial benefits in the form 
of reduced operational risk in requiring all reporting parties to have 
such capability, as more timely capture and storage at firm level of 
all security-based swap transaction information would support effective 
risk management. Counterparties, SDRs, clearing agencies (in some 
cases), and regulators would obtain accurate knowledge of new security-
based swap transactions more quickly. Reporting parties that obtain 
such systems could see additional benefits in being able to process and 
manage risk or to exploit operational efficiency gains to expand their 
participation in the security-based swap market.
    The information reported by reporting parties pursuant to proposed 
Rule 901(c) would be used by registered SDRs to publicly disseminate 
real-time reports of security-based swap transactions under proposed 
Rule 902. In the Regulation SBSR Proposing Release, the Commission 
highlighted numerous benefits of the public dissemination requirement 
in proposed Rule 902. Among other things, the Commission stated that 
``[b]y reducing information asymmetries, post-trade transparency has 
the potential to lower transaction costs, improve confidence in the 
market, encourage participation by a larger number of market 
participants, and increase liquidity in the security-based swap 
market.'' \1901\ The Commission noted the opacity of the current 
security-based swap market and stated that ``[m]arket participants, 
even dealers, lack an effective mechanism to learn the prices at which 
other market participants transact.'' \1902\ Requiring prompt 
dissemination of last-sale information would provide all market 
participants with more extensive and more accurate information on which 
to make trading and valuation determinations. Moreover, the Commission 
noted that post-trade pricing and volume information ``could allow 
valuation models to be adjusted to reflect how [security-based swap] 
counterparties have valued a [security-based swap] instrument at a 
specific moment in time'' \1903\ and that public, real-time 
dissemination of last-sale information ``also could aid dealers in 
deriving better quotations, because they would know the prices at which 
other market participants have recently traded.'' \1904\ Post-trade 
transparency of security-based swap transactions also could improve 
market participants' ability to value security-based swaps, especially 
in opaque markets or markets with low liquidity where recent quotations 
or last-sale prices may not

[[Page 31194]]

exist or, if they do exist, may not be widely available. Better 
valuations could create a benefit in the form of more efficient capital 
allocation and ultimately could reduce systemic risks.\1905\
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    \1901\ See Regulation SBSR Proposing Release, 75 FR 75267.
    \1902\ Id.
    \1903\ Id.
    \1904\ Id.
    \1905\ See id. at 75268.
---------------------------------------------------------------------------

b. Programmatic Costs of Initial Proposal
    The proposed security-based swap reporting requirements would also 
impose initial and ongoing costs on reporting parties. In the 
Regulation SBSR Proposing Release, the Commission stated our 
preliminarily belief that certain of these costs would be a function of 
the number of reportable events \1906\ and the data elements required 
to be submitted for each reportable event. The Commission preliminarily 
estimated that security-based swap market participants would face three 
categories of costs to comply with proposed Rule 901. First, each 
reporting party would have to develop an internal OMS capable of 
capturing relevant security-based swap transaction information so that 
it could be reported. Second, each reporting party would have to 
implement a reporting mechanism. Third, each reporting party would have 
to establish an appropriate compliance program and support for 
operating the OMS and reporting mechanism.\1907\ The Commission 
preliminarily estimated that up to 1,000 entities could be reporting 
parties under proposed Rule 901(a) and that the first-year aggregate 
costs associated with proposed Rule 901 would be $511,013 per reporting 
party, for a total of $511,013,000 for all reporting parties.\1908\ The 
Commission preliminarily estimated that the ongoing aggregate 
annualized costs associated with proposed Rule 901 would be $316,116 
per reporting party, for a total of $316,116,000 for all reporting 
parties.\1909\ These cost estimates all relied on the Commission's 
preliminary estimate of 1,000 reporting parties. In the Regulation SBSR 
Proposing Release, the Commission did not break down the costs of Rule 
901 by each paragraph of Rule 901, but instead calculated costs arising 
from proposed Rule 901 as a whole.
---------------------------------------------------------------------------

    \1906\ A reportable event would include both an initial 
security-based swap transaction, required to be reported pursuant to 
proposed Rule 901(b) and the data elements of which would be set 
forth in proposed Rule 901(c), as well as a life cycle event, the 
reporting of which is governed by proposed Rule 901(e). See id. at 
75264-66.
    \1907\ See id. at 75264.
    \1908\ See id. at 75266.
    \1909\ See id.
---------------------------------------------------------------------------

    The Commission noted that the costs associated with required 
reporting pursuant to proposed Regulation SBSR could represent a 
barrier to entry for new, smaller firms that might not have the ability 
to comply with the proposed reporting requirements or for whom the 
expected benefits of compliance might not justify the costs of 
compliance. To the extent that proposed Regulation SBSR might deter new 
firms from entering the security-based swap market, this would be a 
cost of the proposal and could negatively impact competition. 
Nevertheless, the Commission preliminarily believed that the proposed 
reporting requirements would not impose insurmountable barriers to 
entry, as firms that were reluctant to acquire and build reporting 
infrastructure would be able to engage with third-party service 
providers that carry out any reporting duties that they incurred under 
Regulation SBSR.\1910\
---------------------------------------------------------------------------

    \1910\ See id.
---------------------------------------------------------------------------

    In the Regulation SBSR Proposing Release, the Commission 
preliminarily estimated that the initial one-time aggregate costs for 
registered SDRs to develop and implement the systems needed to 
disseminate the required transaction information would be $40,004,000, 
which corresponds to $4,000,400 per SDR. Further, the Commission 
preliminarily estimated that aggregate annual costs on registered SDRs 
for systems and connectivity upgrades associated with real-time public 
dissemination would be $24,002,400, which corresponds to $2,400,240 per 
SDR. Overall, the initial aggregate costs associated with proposed Rule 
901 for all SDRs were estimated to be $64,006,400, which corresponds to 
$6,400,640 per registered SDR.\1911\
---------------------------------------------------------------------------

    \1911\ See id. at 75269.
---------------------------------------------------------------------------

ii. Re-Proposal
    For the reasons discussed above, the Commission is now re-proposing 
certain provisions of Regulation SBSR that would extend the scope of 
security-based swaps that would be subject to regulatory reporting and 
public dissemination and, in some cases, to shift the duty to report to 
a different counterparty. This re-proposal is being made, in part, to 
reflect the Commission's preliminary belief that in many cases the 
reporting and public dissemination requirements of Regulation SBSR 
should extend to security-based swaps executed outside the United 
States but having a U.S. person as an indirect counterparty. The 
Commission also is revising our approach to assigning the duty to 
report to minimize consideration of the domicile of the counterparties, 
and to focus more on their registration status (i.e., whether or not a 
counterparty is a security-based swap dealer or major security-based 
swap participant).
    To facilitate these revisions, the Commission is proposing to add 
certain new terms and definitions and to redefine other terms contained 
in Rule 900. First, the Commission is now proposing to redefine the 
term ``counterparty'' as ``a direct or indirect counterparty of a 
security-based swap.'' Re-proposed Rule 900 would define ``direct 
counterparty'' as ``a person that enters directly with another person 
into a contract that constitutes a security-based swap'' and ``indirect 
counterparty'' as ``a person that guarantees the performance of a 
direct counterparty to a security-based swap or that otherwise provides 
recourse to the other side for the failure of the direct counterparty 
to perform any obligation under the security-based swap.'' Second, re-
proposed Rule 900 would eliminate the term ``reporting party'' and 
replace it with ``reporting side,'' and define ``reporting side'' as 
``the side of a security-based swap having the duty to report 
information in accordance with Sec. Sec.  242.900-911 to a registered 
security-based swap data repository, or if there is no registered 
security-based swap data repository that would receive the information, 
to the Commission.'' ``Side'' would be defined as ``a direct 
counterparty and any indirect counterparty that guarantees its 
performance on the security-based swap.''
    The Commission's revisions would leave much of Rule 901, as 
initially proposed, substantially unchanged. Importantly, the 
Commission is not proposing to modify the basic duty to report 
security-based swap transactions to a registered SDR, as set forth in 
proposed Rule 901(b). Nor is the Commission proposing to add, delete, 
or substantively change any of the specific data elements set forth in 
proposed Rules 901(c) and 901(d) that reporting sides would be required 
to report.\1912\ Rather, in this re-proposal, the Commission's 
substantive revisions to Rule 901 occur only in paragraph (a), which 
governs who must report security-based swap transactions. As described 
in more detail below, these changes are intended to better align 
reporting duties with larger entities that have greater resources and 
capability to

[[Page 31195]]

report. Specifically, re-proposed Rule 901(a) would provide that a 
security-based swap dealer or major security-based swap participant 
that is not a U.S. person could incur the duty to report a security-
based swap in various cases. Re-proposed Rule 901(a) would now provide 
as follows:
---------------------------------------------------------------------------

    \1912\ However, re-proposed Rules 901(c) and 901(d) under the 
Exchange Act include certain conforming changes due to the use of 
new and revised terms in re-proposed Rule 900 under the Exchange 
Act.
---------------------------------------------------------------------------

     If both sides of the security-based swap include a 
security-based swap dealer, the sides would be required to select the 
reporting side.
     If only one side of the security-based swap includes a 
security-based swap dealer, that side would be the reporting side.
     If both sides of the security-based swap include a major 
security-based swap participant, the sides would be required to select 
the reporting side.
     If one side of the security-based swap includes a major 
security-based swap participant and the other side includes neither a 
security-based swap dealer nor a major security-based swap participant, 
the side including the major security-based swap participant would be 
reporting side.
     If neither side of the security-based swap includes a 
security-based swap dealer or major security-based swap participant: 
(i) If both sides include a U.S. person or neither side includes a U.S. 
person, the sides would be required to select the reporting side; and 
(ii) If only one side includes a U.S. person, that side would be the 
reporting side.
    In conjunction with the proposed changes to Rule 901(a), the 
Commission also is now proposing to modify Rule 908(a) to extend the 
reporting requirement to all security-based swaps that are guaranteed 
by a U.S. person and all security-based swaps of security-based swap 
dealers and major security-based swap participants, regardless of 
whether or not they are U.S. persons.\1913\ To reflect these changes, 
re-proposed Rule 908(a)(1) would provide that a security-based swap is 
subject to regulatory reporting if:
---------------------------------------------------------------------------

    \1913\ However, the Commission also preliminarily believes that 
certain of these security-based swaps need not be subject to public 
dissemination. See Section VIII.C.1, supra.
---------------------------------------------------------------------------

     The security-based swap is a transaction conducted within 
the United States;
     There is a direct or indirect counterparty that is a U.S. 
person on either side of the transaction;
     There is a direct or indirect counterparty that is a 
security-based swap dealer or major security-based swap participant on 
either side of the transaction; or
     The security-based swap is cleared through a clearing 
agency having its principal place of business in the United States.
    Re-proposed Rule 908(a)(2) would provide that a security-based swap 
shall be subject to public dissemination if:
     The transaction is conducted within the United States;
     There is a direct or indirect counterparty that is a U.S. 
person on each side of the transaction;
     At least one direct counterparty is a U.S. person (except 
in the case of a transaction conducted through a foreign branch);
     One side includes a U.S. person and the other side 
includes a non-U.S. person that is a security-based swap dealer; or
     The security-based swap is cleared through a clearing 
agency having its principal place of business in the United States.
    Taken together, these changes to Rule 901(a) and 908(a) would have 
the cumulative effect of substantially preserving the reporting 
hierarchy contemplated in Section 766 of the Dodd-Frank Act while also 
taking into account the existence of indirect counterparties that could 
affect how the reporting duty is allocated. Thus, the new approach set 
forth in re-proposed Rule 901(a) would focus more on the status of an 
entity (i.e., whether it is a security-based swap dealer or major 
security-based swap participant), and less on whether or not the 
counterparties are U.S. persons. Moreover, re-proposed Rule 908(a)(1) 
would extend the requirement for regulatory reporting to all security-
based swaps that are guaranteed by a U.S. person or executed by 
security-based swap dealers and major security-based swap participants, 
regardless of whether or not they are U.S. persons.
    As discussed above, the Commission is re-proposing Rule 902(a) to 
provide that certain security-based swaps would be subject to 
regulatory reporting but not publically disseminated. Therefore, the 
Commission is re-proposing Rule 902(a) to provide that a registered SDR 
would have no obligation to publicly disseminate a transaction report 
for any such security-based swap. The remainder of Rule 902 is 
substantively unchanged.\1914\ However, as result of the modifications 
to Rule 908(a)(2), certain transactions involving non-U.S. person 
security-based swap dealers, non-U.S. person major swap participants, 
and/or U.S. person indirect counterparties that would not have been 
subject to public dissemination under the initial proposal would be 
required to be publicly disseminated under re-proposed Regulation SBSR.
---------------------------------------------------------------------------

    \1914\ However, re-proposed Rule 902 under the Exchange Act 
includes some conforming changes due to the use of new and revised 
terms in re-proposed Rule 900 under the Exchange Act.
---------------------------------------------------------------------------

a. Programmatic Benefits
    Re-proposed Rule 901(a) would, relative to the initial proposal, 
change which counterparty to a security-based swap transaction would be 
required to report the transaction in some instances, as the Commission 
is refocusing the reporting duty primarily on the status of the 
counterparties, rather than on whether or not they are U.S. persons. 
The remainder of the rule (aside from technical and conforming changes) 
would remain unchanged from the original proposal. The Commission 
preliminarily believes that the benefits identified in the Regulation 
SBSR Proposing Release associated with proposed Rule 901 would continue 
to be applicable to re-proposed Rule 901. These include providing a 
means for the Commission to gain a better understanding of the 
security-based swap market; facilitating public dissemination of 
security-based swap transaction information, thus enabling market 
participants and regulatory authorities to know the current state of 
the security-based swap markets and track those markets over time; and 
improving risk management by security-based swap counterparties, which 
would need to capture and store their transactions in security-based 
swaps to facilitate reporting.
    The Commission preliminarily believes that requiring reporting of 
security-based swap transactions that are guaranteed by U.S. persons 
would provide benefits beyond those under Rule 908(a), as originally 
proposed. As discussed above, the Commission's access to such 
additional information could facilitate more thorough and complete 
monitoring of individual security-based swap market participants and 
more accurate systemic risk monitoring across the security-based swap 
market. In addition, expanding the reach of the security-based swap 
reporting regime in this manner is designed to mitigate certain 
unintended consequences of the original proposal, such as market 
participants shifting business to other jurisdictions to avoid 
reporting obligations.
    The Commission preliminarily believes that the benefits identified 
in the Regulation SBSR Proposing Release associated with proposed Rule 
902 would continue to be applicable to re-proposed Rule 902. 
Specifically, the Commission continues to believe that post-trade 
transparency has the potential to lower transaction costs,

[[Page 31196]]

improve confidence in the market, encourage participation by a larger 
number of market participants, and increase liquidity in the security-
based swap market.\1915\ Furthermore, the Commission continues to 
believe that public, real-time dissemination of last-sale information 
could aid dealers in deriving better quotations, because they would 
know the prices at which other market participants have recently 
traded.\1916\ In addition, the Commission continues to believe that 
requiring prompt dissemination of last-sale information would provide 
all market participants with more extensive and more accurate 
information on which to make trading and valuation determinations and 
could allow valuation models to be adjusted to reflect how security-
based swap counterparties have valued a security-based swap instrument 
at a specific moment in time.\1917\ Such information, when made 
publicly available, could enhance market participants' ability to value 
security-based swaps, especially in opaque markets or markets with low 
liquidity where recent quotations or last-sale prices may not exist or 
are not widely available. Better valuations could create a benefit in 
the form of more efficient capital allocation and ultimately could help 
reduce systemic risks.\1918\
---------------------------------------------------------------------------

    \1915\ See Regulation SBSR Proposing Release, 75 FR 75267.
    \1916\ See id.
    \1917\ See id.
    \1918\ See id. at 75268.
---------------------------------------------------------------------------

b. Programmatic Costs
    Because the majority of proposed Rule 901 is not being revised and 
the overall emphasis of the rule and the majority of its specific 
provisions would not change under the re-proposal, the Commission 
preliminarily believes that the infrastructure-related costs identified 
in the Regulation SBSR Proposing Release associated with proposed Rule 
901, on a per-entity basis, would not change. These include the costs 
for each reporting party: (i) To develop an OMS capable of capturing 
relevant security-based swap transaction information so that it can be 
reported; (ii) to implement a reporting mechanism; and (iii) to 
establish an appropriate compliance program and support for the 
operation of the OMS and reporting mechanism.\1919\ The bulk of the 
costs resulting from Regulation SBSR derive from the infrastructure-
related costs of complying with reporting obligations, which include 
establishing and maintaining the systems necessary to capture, store, 
and report transaction information; the establishment and maintenance 
of appropriate policies and procedures; and employing and training the 
necessary compliance personnel.\1920\ The Commission preliminarily 
estimated and continues to believe that the marginal burden of 
reporting additional transactions once a respondent's reporting 
infrastructure and compliance systems are in place would be de minimis 
when compared to the costs of putting those systems in place. This is 
because the only additional costs of reporting an individual 
transaction would be entering the required data elements into the 
firm's OMS, which could subsequently deliver the required transaction 
information to a registered SDR. In many cases, particularly with 
standardized instruments and instruments traded electronically, 
transaction information could be generated and maintained in electronic 
form, which could then be provided to a registered SDR through wholly 
automated processes.
---------------------------------------------------------------------------

    \1919\ The Commission's complete assessment of the costs 
associated with proposed Rule 901 of Regulation SBSR is included in 
Section XIV.B of the Regulation SBSR Proposing Release. See id. at 
75264-66.
    \1920\ See id. at 75261-80.
---------------------------------------------------------------------------

    Re-proposed Rule 901(a) is designed to reduce the number of 
instances where a counterparty that is not a security-based swap dealer 
or major security-based swap participant would bear the responsibility 
to report a security-based swap transaction under Regulation SBSR. In 
other words, re-proposed Rule 901(a) is designed to assign the 
reporting duty to the larger counterparties that have greater resources 
and operational capability to carry out the reporting function. 
Consequently, re-proposed Rule 901(a) could result in each reporting 
counterparty being required to report, on average, more security-based 
swap transactions than envisioned under the original proposal, although 
smaller unregistered counterparties that previously would have been 
required to report a small number of security-based swap transactions 
under the original proposal would, under re-proposed Rule 901(a), be 
less likely to have to incur reporting duties under Regulation SBSR, 
and thus less likely to have to incur the initial infrastructure-
related costs of reporting.\1921\ The counterparties that would 
continue to have the reporting duty under re-proposed Rule 901(a)--
primarily security-based swap dealers and major security-based swap 
participants--would have the reporting duty for nearly all security-
based swap transactions. Security-based swap dealers and major 
security-based swap participants, whether or not they are U.S. persons, 
typically have greater resources and operational capability than non-
registered U.S. counterparties and are likely to already have the 
reporting infrastructure, policies and procedures, and staff that could 
be adapted to carry out the reporting obligations under Regulation 
SBSR. The Commission preliminarily agrees with certain commenters 
\1922\ that basing the reporting duty primarily on status as a 
security-based swap dealer or major security-based swap participant 
rather than on whether or not the entity is a U.S. person would, in the 
aggregate, reduce costs to the security-based swap market, as discussed 
in more detail below.
---------------------------------------------------------------------------

    \1921\ The Commission notes, however, that non-reporting sides 
would be required to provide certain information about a reportable 
transaction on a non-real-time basis. See Rule 906(a), as originally 
proposed (requiring reporting, if applicable, of participant ID, 
broker ID, desk ID, and trader ID). See also Regulation SBSR 
Proposing Release, 75 FR 75221 (discussing rationale for proposed 
Rule 906(a)).
    \1922\ See, e.g., DTCC I at 8; ICI Letter at 5; Multiple Firms 
Letter at 31. See also Vanguard Letter at 6; Multiple Firms Letter 
at 28 (stating that requiring U.S. end users to report security-
based swaps entered into with non-U.S. person security-based swap 
dealers would be unduly burdensome for end users and could 
negatively impact the competitiveness of affected U.S. markets).
---------------------------------------------------------------------------

    In addition, in re-proposing Rule 901(a), the Commission is 
proposing to revise the term ``reporting party'' to ``reporting side.'' 
Under the re-proposal, a reporting side could consist of multiple 
entities: the direct counterparty to the transaction and any guarantor 
of the direct counterparty. Although this has the potential to increase 
the number of counterparties that could incur a duty to report--by 
placing such duty on both the direct counterparty and any indirect 
counterparty--the Commission preliminarily believes that this would not 
be the result. The Commission preliminarily believes instead that, in 
practice, large groups that engage in security-based swaps transactions 
would likely centralize the reporting function for all entities within 
the group into a single operational unit. Thus, even if two 
counterparties on the reporting side each incurred the legal duty under 
re-proposed Rule 901(a) to report a security-based swap transaction, 
only one entity (either one of the counterparties itself or one of its 
affiliates) would in fact carry out the reporting function.
    Although the Commission preliminarily estimated that there

[[Page 31197]]

would be 1,000 reporting entities,\1923\ the Commission is now revising 
that estimate to 300.\1924\ In the original proposal, the Commission 
preliminarily estimated that the initial, aggregate annualized costs 
associated with proposed Rule 901 would be $511,013 per reporting 
party, and that the ongoing aggregate annualized costs associated with 
proposed Rule 901 would be $316,116 per reporting party.\1925\ The 
Commission continues to preliminarily believe that these per-respondent 
costs are appropriate. Given the same per-respondent costs--but 
adjusting for the decreased estimate of the number of respondents--the 
Commission now preliminarily believes that the total one-time costs of 
re-proposed Rule 901 would be $153,303,900,\1926\ and the annual 
ongoing costs would be $94,834,800.\1927\ The Commission seeks comment 
on and data to quantify these estimated costs.
---------------------------------------------------------------------------

    \1923\ See Regulation SBSR Proposing Release, 75 FR 75247.
    \1924\ See Section XIV.F.2(d)(ii), supra.
    \1925\ See Regulation SBSR Proposing Release, 75 FR 75266.
    \1926\ The Commission estimates: (300 reporting counterparties) 
* $511,013) = $153,303,900.
    \1927\ The Commission estimates: (300 reporting counterparties) 
* $316,116) = $94,834,800.
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    It is possible that certain smaller market participants that are 
currently active in the security-based swap market could reduce their 
trading activity or exit the market completely, if they believed the 
compliance costs of re-proposed Regulation SBSR to be too high. This 
could result in adverse impacts on competition if there were fewer 
participants competing in the market. However, the Commission 
preliminarily believes that this outcome would be unlikely, given that 
the re-proposal is designed to further limit the instances where non-
registered U.S. persons would be required to incur the infrastructure-
related costs of reporting. The Commission preliminarily believes 
instead that, by focusing the reporting duty more on the status and 
away from whether or not entities are U.S. persons, re-proposed Rule 
901(a) would lower the incentive of non-registered U.S. persons to 
reduce their participation in the market out of fear of incurring the 
infrastructure-related costs of complying with Regulation SBSR.
    Furthermore, although the Commission is now proposing to extend the 
reach of the security-based swap reporting requirements, as described 
in re-proposed Rule 908(a), to all transactions guaranteed by a U.S. 
person, the Commission preliminarily believes that this would not 
result in a significant increase in the number of entities that incur 
reporting duties. The Commission preliminarily believes that 
organizations that operate through foreign subsidiaries that are 
guaranteed by a U.S. parent are likely to be large financial 
institutions that already were included in the Commission's estimate of 
reporting parties in the Regulation SBSR Proposing Release. 
Furthermore, these organizations are the most likely to have robust 
risk management systems that extend across business units and across 
geographic boundaries, and likely already have a presence in the United 
States and currently are engaging in transactions that they are 
reporting (on a voluntary basis) to the DTCC-TIW. Thus, such entities 
were included in the Commission's initial estimate of reporting parties 
in the Regulation SBSR Proposing Release. Re-proposing Rule 908(a) to 
require non-U.S. person security-based swap dealers and major security-
based swap participants to report all of their transactions to a 
registered SDR would likely not impose any additional infrastructure-
related costs beyond those that were already assessed in the Regulation 
SBSR Proposing Release. However, this aspect of the re-proposal could 
impose small additional costs on a per-reporting entity basis in the 
form of having to report additional transactions using that existing 
infrastructure.
    The Commission notes that there may be a small number of entities 
that are in the business, or contemplate entering the business, of 
guaranteeing security-based swaps. Such entities may not have been 
included in the Commission's original analysis of potential reporting 
parties, because as indirect counterparties they may not have appeared 
in the TIW's records as counterparties. Under re-proposed Rule 908, any 
U.S. person that guarantees a security-based swap could incur the duty 
to report under re-proposed Regulation SBSR. However, based on 
consultation with market participants, the Commission preliminarily 
believes that the net effect on the number of reporting sides would be 
de minimis and would not impact the Commission's revised estimate of 
300 reporting counterparties, discussed above. To the extent that there 
could be entities that act only as an indirect counterparty to 
security-based swap transactions and would not otherwise have been 
required to report their security-based swap transactions, the 
Commission preliminarily believes that our estimate takes these 
entities into account.
    In addition, the Commission preliminarily believes that there may 
be a slight increase in costs for those reporting counterparties that 
continue to incur the reporting duty, as each such reporting 
counterparty would be required to report, on average, a larger 
percentage of the total number of reportable events than under the 
initial proposal. Under re-proposed Rule 901(a), smaller unregistered 
counterparties that previously would have been required to report a 
small number of security-based swap transactions under the original 
proposal would, under the re-proposal, be less likely to incur the 
reporting duty under re-proposed Rule 901(a). Under re-proposed Rules 
901(a) and 908(a)(1)(iii), non-U.S. person security-based swap dealers 
and major security-based swap participants, rather than unregistered 
U.S. persons, would have the reporting duty for most of these 
transactions. Nonetheless, under the re-proposal, the per-transaction 
reporting cost should not change from what was originally proposed. 
Moreover, the Commission preliminarily believes that the additional 
cost for non-U.S. person security-based swap dealers and major 
security-based swap participants absorbing the costs of reporting these 
additional transactions should be de minimis, since these larger market 
participants have likely already taken significant steps to establish 
and maintain the systems, processes and procedures, and staff resources 
to report security-based swap transactions to existing data 
repositories.
    In the Regulation SBSR Proposing Release, the Commission 
preliminarily estimated that 1,000 reporting parties would be required 
to report approximately 15.5 million security-based swap transactions 
at a total cost, exclusive of the infrastructure-related costs, of 
approximately $5,400,000.\1928\ The Commission preliminarily believes 
that nothing in the re-proposal would affect the initial estimate of 
the cost of an individual reportable event. However, the Commission now 
is revising our assumptions about the number of reportable events 
covered by re-proposed Regulation SBSR. Since issuing the Regulation 
SBSR Proposing Release, the Commission has obtained additional and more 
granular data regarding participation in the security-based swap market 
from DTCC-TIW. These historical data suggest that the Commission 
overestimated the number of security-based swap transactions that would 
be subject to regulatory reporting in the future. As a result, the 
Commission now estimates that 300 reporting counterparties would be 
required to report approximately 5

[[Page 31198]]

million security-based swap transactions per year.\1929\
---------------------------------------------------------------------------

    \1928\ See Regulation SBSR Proposing Release, 75 FR 75265.
    \1929\ Data provided by the DTCC-TIW indicate that there were 
approximately 4,000,000 transactions in single-name CDS in 2012. The 
Commission believes that the single-name CDS data are sufficiently 
representative of the security-based swap market. See Section XV.B.2 
and note 1301 and accompanying text, supra. The Commission believes 
that single-name CDS transactions account for 82% of the security-
based swap market. As a result, the Commission preliminarily 
estimates that there were 4.88 million (i.e., 4,000,000/0.82) 
security-based swap transactions in 2012, and is basing its estimate 
of the future number of transactions on recent historical activity.
---------------------------------------------------------------------------

    As discussed in the PRA section above, the Commission now 
preliminarily estimates that each reporting side would incur, on 
average, a burden of 83.3 hours per year--not including any 
infrastructure-related costs--to report individual security-based swap 
transactions to a registered SDR.\1930\ In the Regulation SBSR 
Proposing Release, the Commission estimated that each reporting party 
would spend $5,400 to report specific security-based swap transactions 
to a registered SDR as required by proposed Rule 901.\1931\ Given the 
Commission's revised estimate of the number of reportable events per 
year, the Commission also now preliminarily estimates that each 
reporting side would, on average, incur costs of $5,630 to report 
specific security-based swap transactions and life cycle events to a 
registered SDR.\1932\
---------------------------------------------------------------------------

    \1930\ The Commission estimates: (5 million * 0.005)/(300 
reporting sides) = 83.3 burden hours per reporting counterparty, or 
25,000 total burden hours for all reporting counterparties.
    \1931\ See Regulation SBSR Proposing Release, 75 FR 75265. In 
arriving at this figure, the Commission preliminarily estimated that 
1,000 reporting parties would be responsible for reporting 
15,458,824 security-based swap transactions at a total cost of 
approximately $5,400,000. The Commission is not revising its initial 
estimate of the average cost of reporting an individual security-
based swap transactions. However, the Commission now estimates that 
approximately 300 reporting sides will have the duty to report 
approximately 5 million security-based swap transactions per year.
    \1932\ The Commission estimates: ((Compliance Clerk (41.7 hours) 
at $59 per hour) + (Sr. Computer Operator (41.7 hours) at $76 per 
hour)) * 300 reporting sides = $1,688,850 for all reporting sides, 
or $5,630 per reporting side. See also note 1270, supra.
---------------------------------------------------------------------------

    The Commission further notes two factors that could serve to limit 
the per-transaction costs across all affected entities. First, to the 
extent that security-based swap instruments become more standardized 
and trade more frequently on electronic platforms (rather than 
manually), the act of reporting transactions to a registered SDR should 
become less costly. Together, these trends are likely to reduce the 
number of transactions that would necessitate the manual capture of 
bespoke data elements, which is likely to take more time and be more 
expensive than electronic capture. Second, the larger entities that 
would incur additional reporting duties under re-proposed Rules 901(a) 
and 908(a)(1)(iii)--i.e., non-U.S. person security-based swap dealers 
and major security-based swap participants--can benefit from certain 
economies of scale in carrying out reporting duties might elude 
smaller, unregistered counterparties. The Commission preliminarily 
believes that, all other things being equal, a larger reporting 
counterparty is likely to handle a greater number of reportable events, 
including those requiring manual data capture, than a smaller 
counterparty and thus would develop greater expertise and greater speed 
in reporting transactions. Moreover, a larger reporting counterparty is 
likely to have greater incentive and ability to develop systems that 
support the reporting function, and the fixed cost of this 
infrastructure can be spread across the larger number of transactions 
handled by the larger counterparty. The extent of these effects, 
however, is difficult to quantify. The Commission seeks comments on the 
extent of these effects and their impact on average per-transaction 
reporting costs.
    The Commission preliminarily believes that re-proposed Rule 901(a) 
would not increase the previously estimated costs for registered SDRs. 
The Commission preliminarily believes, rather, that the estimated costs 
for registered SDRs might be less than the original estimate, for two 
reasons. First, given that the Commission now estimates that there 
would be fewer entities incurring the duty to report (300 rather than 
the original estimate of 1,000), there would be fewer entities that 
would have to establish linkages to a registered SDR and thus fewer 
relationships for a registered SDR to manage. Second, given the 
Commission's reduced estimates of the number of reportable events, the 
Commission preliminarily believes that registered SDRs could face 
slightly lower costs because they would have fewer transactions to 
process than originally estimated. The extent of these effects, 
however, is difficult to quantify. The Commission seeks comments on the 
extent of these effects and their impact on average per-transaction 
costs. Finally, the Commission has no reason to believe and sees no 
reason to expect that re-proposed Rules 901(a) and 908(a)(1)(iii) would 
result in the registration of additional SDRs. Thus, given any fixed 
costs than any entity registering as a registered SDR might incur under 
re-proposed Regulation SBSR, the Commission is not increasing our cost 
estimates to account for a larger number of entities anticipated to 
incur those per-entity costs.
    Furthermore, the Commission preliminarily believes that extending 
the scope of transactions that would be subject to public 
dissemination, as reflected in re-proposed Rules 908(a)(2) and 902(a), 
would not significantly increase or decrease the previously estimated 
costs for registered SDRs identified in the Regulation SBSR Proposing 
Release. The Commission preliminarily believes that these revisions 
would not result in the registration of additional SDRs or require them 
to bear the costs of connecting to additional reporting sides. Even if 
there would be a slight increase in the percentage of security-based 
swap transactions subject to public dissemination as a result of the 
applicability of the re-proposed Regulation SBSR to a larger universe 
of transactions involving non-U.S. entities and/or U.S. indirect 
counterparties, given the Commission's reduced estimates of the overall 
number of reportable events,\1933\ the Commission now estimates that 
registered SDRs would be required to publicly disseminate fewer 
transactions than estimated in the Regulation SBSR Proposing Release. 
The Commission further notes that our original estimate of the costs of 
public dissemination was not calculated on a per-transaction basis, but 
represented instead the one-time aggregate estimated costs associated 
with development and implementation of the necessary infrastructure, as 
well as the aggregate annual estimated costs for supporting and 
upgrading that infrastructure as necessary.\1934\
---------------------------------------------------------------------------

    \1933\ See notes 1267-1268, supra.
    \1934\ See Regulation SBSR Proposing Release, 75 FR 75269.
---------------------------------------------------------------------------

    The Commission continues to believe that the preliminary estimates 
contained in the Regulation SBSR Proposing Release are valid, and that 
implementing and complying with the real-time public dissemination 
requirement of Rule 902 would add 20% to the start-up and ongoing 
operational expenses that would otherwise be required of a registered 
SDR.\1935\ In particular, the Commission continues to estimate that the 
initial one-time aggregate costs for development and implementation of 
the systems needed to disseminate the required transaction information 
would

[[Page 31199]]

be $40,004,000, which corresponds to $4,000,400 per registered SDR. 
Further, the Commission continues to estimate that aggregate annual 
costs for systems and connectivity upgrades associated with real-time 
public dissemination would be $24,002,400, which corresponds to 
$2,400,240 per registered SDR. Thus the initial aggregate costs 
associated with proposed Rule 902 are estimated to be $64,006,400, 
which corresponds to $6,400,640 per registered SDR.
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    \1935\ See SDR Proposing Release, 75 FR 77354-64. See also 
Regulation SBSR Proposing Release, 75 FR 75269.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on the costs and benefits of re-
proposed Rules 901, 902, and 908(a) 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 more accurately assess the costs 
and benefits of re-proposed Rule 901?
     How many entities would be affected by re-proposed Rule 
901? How many transactions would be subject to re-proposed Rule 901?
     Are there additional costs involved in complying with re-
proposed Rule 901 that have not been identified? What are the types and 
amounts of those costs?
     Do the reporting requirements in re-proposed Rule 901(a), 
by potentially placing the duty to report upon a security-based swap 
dealer or major security-based swap participant that is not a U.S. 
person, mitigate any barrier to entry that Rule 901, as originally 
proposed, might have created? How can this benefit or reduction in 
potential cost be tabulated?
     How should the Commission assess the benefits and costs 
associated with re-proposed Rule 901(a), if any, compared to the 
anticipated benefits from increased transparency to the security-based 
swap market from the re-proposal?
     Would there be additional benefits or costs of re-proposed 
Rule 901, 902, and 908(a) that have not been identified?
     Are there methods to minimize the costs associated with 
re-proposed Rule 908(a)?
     Would re-proposed Rule 908(a) create any additional costs 
not discussed here? If so, please identify and quantify these costs.
     Is the Commission's revised estimate of the number of 
transactions subject to Regulation SBSR accurate? If not, how many 
transactions would be impacted by re-proposed Regulation SBSR? Please 
provide detailed information on the number and types of transactions 
impacted.
     Would re-proposed Rule 902 result in benefits or costs 
that the Commission has not considered? Are the Commissions estimates 
of the costs and benefits of re-proposed Rule 902 accurate? If not, 
please provide detailed information identifying and quantifies the 
costs and benefits of re-proposed Rule 902.
(b) Proposed Modification of the Definition of ``U.S. Person''
    Regulation SBSR, as originally proposed, would have defined a 
``U.S. person'' as ``a natural person that is a U.S. citizen or U.S. 
resident or a legal person that is organized under the corporate laws 
of any part of the United States or has its principal place of business 
in the United States.'' In this re-proposal, the Commission is 
proposing a new definition of ``U.S. person'' that is consistent with 
usage in our other Title VII proposals.\1936\ The Commission 
preliminarily believes that these Title VII rules would benefit from 
having the same terms throughout and could, therefore, reduce 
assessment costs for market participants that might be subject to the 
proposed rules. Furthermore, the Commission preliminarily believes that 
the revised definition of ``U.S. person'' is intended to clarify 
application of Regulation SBSR and would not significantly change the 
number of entities that would be subject to Regulation SBSR. The 
Commission preliminarily believes that the revised definition of ``U.S. 
person'' would not entail any material costs to market participants, 
nor would it intrinsically impose any obligation or duty on market 
participants. Therefore, the Commission preliminarily believes that the 
new definition would not increase the aggregate compliance costs of re-
proposed Regulation SBSR.
---------------------------------------------------------------------------

    \1936\ Specifically, the re-proposed definition provides that 
the term ``U.S. person'' would have the same meaning as set forth in 
proposed Rule 3a71-3(a)(7) under the Exchange Act.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on the costs and benefits of the 
re-proposed definition of ``U.S. person'' as used in re-proposed 
Regulation SBSR, and data to support those comments. In particular, the 
Commission requests comment on the following:
     Would the re-proposed definition of ``U.S. person'' as 
used in Regulation SBSR result in any costs or benefits not discussed 
here? Please distinguish any costs and benefits stemming from the re-
proposed definition itself, rather than any costs or benefits 
attributable to other provisions of Regulation SBSR in which the term 
appears, such as re-proposed Rules 901, 902, and 908(a).
(c) Revisions to Proposed Rule 908(b)
i. Initial Proposal
    Rule 908(b), as initially proposed, attempted to clarify when 
reporting duties would be imposed on counterparties of security-based 
swaps that are not U.S. persons when some connections to the United 
States might be present. Proposed Rule 908(b) provided that no duties 
would be imposed on a counterparty unless one of the following 
conditions were true:
     The counterparty is a U.S. person;
     The security-based swap is executed in the United States 
or through any means of interstate commerce; or
     The security-based swap is cleared through a clearing 
agency having its principal place of business in the United States.
ii. Re-proposal
    As described above, the Commission now believes, in light of other 
revisions being made to Regulation SBSR, that certain conforming 
revisions to Rule 908(b) are appropriate. Specifically, Rule 908(b) is 
being re-proposed to account for the possibility that a non-U.S. person 
security-based swap dealer or major security-based swap participant 
could incur a duty to report. In addition, the ``interstate commerce 
clause'' is being replaced with the new concept of a ``transaction 
conducted within the United States.''
a. Programmatic Benefits
    The Commission now preliminarily believes that there are benefits 
to requiring all security-based swap dealers and major security-based 
swap participants, whether or not they are U.S. persons, to report 
their security-based swap transactions pursuant to re-proposed 
Regulation SBSR. Having access to security-based swaps of all such 
entities through data reported to a registered SDR would give the 
Commission greater ability to supervise such entities and assess the 
overall security-based swap market. Furthermore, requiring all such 
entities to report security-based swap information would help provide 
the Commission and other regulators with detailed, up-to-date 
information both about positions of particular entities and financial 
groups, as well as positions held by multiple market participants in 
particular instruments.
b. Programmatic Costs
    The Commission preliminarily believes that the revisions to Rule 
908(b)

[[Page 31200]]

would not result in any significant increase in the overall cost of 
compliance for affected entities. The Commission preliminarily 
believes, rather, that many unregistered U.S. persons that participate 
in the security-based swap market would face lower costs, as they could 
be more likely to avoid entirely having to incur the infrastructure-
related costs of reporting security-based swap transactions. 
Furthermore, to the extent that non-U.S. person security-based swap 
dealers and major security-based swap participants would be required to 
report security-based swap transactions, such entities were already 
included in the estimate of 1,000 reporting parties used in the 
Regulation SBSR Proposing Release and are also included in the new 
estimate of 300 reporting sides becoming subject to re-proposed 
Regulation SBSR. Although the number of security-based swap 
transactions that these reporting sides would be required to report 
would increase, the Commission preliminarily does not believe that they 
would be required to expand their systems capabilities to account for 
the additional transaction volume.
Request for Comment
    The Commission requests comment on the costs and benefits of re-
proposed Rule 908(b) and data to assess any potential costs or 
benefits. In addition, the Commission requests comment on the 
following:
     Would re-proposed Rule 908(b) result in any benefits or 
costs that the Commission has not considered?
     Are there methods to minimize the costs associated with 
re-proposed Rule 908(b)?
     Would re-proposed Rule 908(b) create any additional costs 
not discussed here? If so, please identify and quantify these costs.
(d) Other Technical Revisions in Re-Proposed Regulation SBSR
    In addition to the revisions described above, the Commission is re-
proposing certain technical or conforming changes to other rules 
contained in Regulation SBSR. Specifically, certain changes are 
required to re-proposed Rules 901(c) and 901(d), which address the data 
elements to be reported to a registered SDR, to reflect the re-
proposal's approach that certain security-based swaps may be subject to 
regulatory reporting but not public dissemination. The introductory 
language to Rule 901(c) is being re-proposed as follows: ``For any 
security-based swap that must be publicly disseminated pursuant to 
Sec. Sec.  242.902 and 242.908 and for which it is the reporting side, 
the reporting side shall report the following information in real time. 
If a security-based swap is required by Sec. Sec.  242.901 and 242.908 
to be reported but not publicly disseminated, the reporting side shall 
report the following information no later than the time that the 
reporting side is required to comply with paragraph (d) of this 
section:'' Re-proposed Rule 901(c) would be retitled ``Primary trade 
information''--since not all information reported pursuant to Rule 
901(c) would be required to be provided in real time--and re-proposed 
Rule 901(d) would be retitled ``Secondary trade information.'' The 
Commission also is re-proposing Rule 901(c)(10) as follows: ``If both 
sides of the security-based swap include a security-based swap dealer, 
an indication to that effect.'' The re-proposed rule clarifies that a 
security-based swap dealer might be a direct or indirect counterparty 
to a security-based swap. Rule 901(d)(1)(ii) is also being re-proposed 
to require reporting of the broker ID, desk ID, and trader ID, as 
applicable, only of the direct counterparty on the reporting side. Rule 
901(d)(1)(iii) is being re-proposed to require reporting of a 
description of the terms and contingencies of the payment streams only 
of each direct counterparty to the other. The word ``direct'' is 
necessary to avoid extending Rule 901(d)(1)(iii) to indirect 
counterparty relationships, where payments might not (except in unusual 
circumstances) flow to or from an indirect counterparty.
    Additional technical or conforming revisions include changes to 
Rule 901(e), which sets forth provisions for reporting life cycle 
events of a security-based swap. The Commission is re-proposing Rule 
901(e) to provide that the duty to report would switch to the other 
side only if the new side did not include a U.S. person (as in the 
originally proposed rule) or a security-based swap dealer or major 
security-based swap participant (references to which are being added to 
Rule 901(e)). Re-proposed Rule 908 contemplates situations where a 
security-based swap would be required to be reported to a registered 
SDR but not publicly disseminated. Therefore, the Commission is re-
proposing Rule 902(a) to provide that a registered SDR would have no 
obligation to publicly disseminate a transaction report for any such 
security-based swap.
    Re-proposed Rules 903, 905, 906, 907, 910, and 911 are each 
conformed to incorporate the use of the term ``side,'' while re-
proposed Rules 904, 905, 906, and 907 each replace ``Sec. Sec.  242.900 
through 242.911'' with ``Sec. Sec.  242.900-911.''
    Rule 905(b)(2) is being re-proposed to clarify that, if a 
registered SDR receives corrected information relating to a previously 
submitted transaction report, it would be required to publicly 
disseminate a corrected transaction report only if the initial 
security-based swap was subject to public dissemination.
    As originally proposed, Rule 907(a)(6) would require a registered 
SDR to establish and maintain written policies and procedures ``[f]or 
periodically obtaining from each participant information that 
identifies the participant's ultimate parent(s) and any other 
participant(s) which the counterparty is affiliated, using ultimate 
parent IDs and participant IDs.'' The Commission now is re-proposing 
Rule 907(a)(6) with the word ``participant'' in place of the word 
``counterparty.''
    Rule 910(b)(4), as originally proposed, would provide that, in 
Phase 4 of the Regulation SBSR compliance schedule, ``[a]ll security-
based swaps reported to the registered security-based swap data 
repository shall be subject to real-time public dissemination as 
specified in Sec.  242.902.'' As noted above, certain security-based 
swaps would be subject to regulatory reporting but not public 
dissemination. Therefore, the Commission is re-proposing Rule 910(b)(4) 
to provide that, ``All security-based swaps received by the registered 
security-based swap data repository shall be handled consistent with 
Sec. Sec.  242.902, 242.905, and 242.908.''
    Because the changes discussed above are technical in nature, the 
Commission preliminarily believes that they would not have any 
significant impact, negative or positive, on re-proposed Regulation 
SBSR. Nonetheless, the Commission preliminarily believes that, to the 
extent these changes clarify the application of certain aspects of 
Regulation SBSR, they could enhance consistency, reduce potential 
uncertainties related to the interpretation and application of 
Regulation SBSR, and thus reduce assessment costs. The Commission 
solicits comment on that preliminary view.
(e) Aggregate Total Quantifiable Costs
    Based on the foregoing, the Commission preliminarily estimates that 
re-proposed Regulation SBSR would impose an estimated total first-year 
cost of approximately $511,243 \1937\

[[Page 31201]]

per reporting counterparty for a total first-year cost of 
$153,372,900.\1938\ The Commission preliminarily estimates that re-
proposed Regulation SBSR would impose ongoing annualized aggregate 
costs of approximately $316,346 \1939\ per reporting side, for a total 
aggregate annualized cost of $94,903,800.\1940\
---------------------------------------------------------------------------

    \1937\ The Commission derived its estimate from the following: 
($511,013 (per entity total first-year cost of Regulation SBSR)--
($5,400 (entity transaction reporting cost of Regulation SBSR)--
$5,630 (revised reporting side transaction reporting cost))) = $511, 
243. See notes 1908, 1931, and 1932 and accompanying text, supra.
    \1938\ The Commission derived its estimate from the following: 
($511,243 * 300 reporting sides) = $153,372,900.
    \1939\ The Commission derived its estimate from the following: 
($316,116 (per entity annualized cost of Regulation SBSR)--($5,400 
(entity transaction reporting cost of Regulation SBSR)--$5,630 
(revised reporting side transaction reporting cost))) = $316,346. 
See notes 1909, 1931, and 1932 and accompanying text, supra.
    \1940\ The Commission derived its estimate from the following: 
($316,346 * 300 reporting sides) = $94,903,800.
---------------------------------------------------------------------------

    As noted above, the Commission preliminarily believes that re-
proposed Regulation SBSR would not significantly change the costs of 
registered SDRs, as estimated in the Regulation SBSR Proposing Release. 
The Commission preliminarily believes that the revisions contained in 
re-proposed Rules 901, 902, and 908(a) would not result in the 
registration of additional SDRs or require them to bear the costs of 
connecting to additional reporting sides. To the extent that the re-
proposal would assign reporting responsibilities to fewer respondents, 
registered SDRs could face lower costs to support their connectivity.
    In total, the Commission preliminarily estimates the total first-
year cost of re-proposed Regulation SBSR to be $681,307,400.\1941\ The 
Commission preliminarily estimates the total ongoing annual cost of re-
proposed Regulation SBSR to be $481,935,340.\1942\ The compliance costs 
attributable to re-proposed Regulation SBSR could be significantly 
reduced to the extent that foreign jurisdictions are deemed comparable 
in a substituted compliance order, which would enable market 
participants to comply with the foreign jurisdiction's rules relating 
to regulatory reporting and public dissemination and thus would relieve 
them of their primary obligations--and the associated costs--under 
Regulation SBSR.
---------------------------------------------------------------------------

    \1941\ The Commission derived its estimate from the following: 
($1,038,947,500 (total first-year cost of Regulation SBSR)--
$511,013,000 (Regulation SBSR Rule 901 first-year costs on reporting 
parties) + $153,372,900 (re-proposed Regulation SBSR Rule 901 first-
year costs on reporting sides)) = $681,372,900.
    \1942\ The Commission derived its estimate from the following: 
($703,147,540 (total ongoing annualized cost of Regulation SBSR)--
$316,116,000 (Regulation SBSR Rule 901 annual ongoing costs on 
reporting sides) + $94,903,800 (re-proposed Regulation SBSR Rule 901 
annual ongoing costs on reporting sides)) = $481,935,340.
---------------------------------------------------------------------------

I. Economic Analysis of Substituted Compliance

    The Commission is proposing a policy and procedural framework that 
would allow for the possibility of substituted compliance with respect 
to four categories of rules in recognition of the potential, in a 
market as global as the security-based swap market, for security-based 
swap market participants to be subject to conflicting or duplicative 
compliance obligations. These four categories are: (i) Requirements 
applicable to registered security-based swap dealers in Section 15F of 
the Exchange Act and the rules and regulations thereunder; (ii) 
requirements relating to regulatory reporting and public dissemination 
of security-based swaps; (iii) requirements relating to clearing for 
security-based swaps; and (iv) requirements relating to trade execution 
for security-based swaps.\1943\ Specifically, the Commission is 
proposing rules and interpretative guidance in this release to provide 
that: (i) The Commission may, conditionally or unconditionally, by 
order, make a substituted compliance determination with respect to a 
foreign regulatory system that compliance with specific requirements 
under such foreign regulatory system by a registered foreign security-
based swap dealer (or class thereof) may satisfy the corresponding 
requirements in Section 15F of the Exchange Act,\1944\ and the rules 
and regulations thereunder, that would otherwise apply to such foreign 
security-based swap dealer (or class thereof); \1945\ (ii) the 
Commission may, conditionally or unconditionally, by order, make a 
substituted compliance determination regarding regulatory reporting and 
public dissemination of security-based swaps in a foreign jurisdiction 
if such foreign jurisdiction's requirements for the regulatory 
reporting and public dissemination of security-based swaps are 
comparable to otherwise applicable requirements under Section 13A(a)(1) 
of the Exchange Act,\1946\ Section 13(m)(1)(G) of the Exchange Act 
\1947\ and Section 13(m)(1)(C) of the Exchange Act,\1948\ and the rules 
and regulations thereunder; \1949\ (iii) the Commission may exempt 
persons from the mandatory clearing requirement in Section 3C(a)(1) of 
the Exchange Act \1950\ if the relevant security-based swap transaction 
is submitted to a foreign clearing agency that is the subject of a 
substituted compliance determination by Commission order; \1951\ and 
(iv) the Commission may, conditionally or unconditionally, by order, 
make a substituted compliance determination with respect to a foreign 
jurisdiction to permit a person subject to the mandatory trade 
execution requirement in Section 3C(h) of the Exchange Act to execute 
such transaction, or have such transaction executed on their behalf, on 
a security-based swap market (or class of markets) that is neither 
registered under the Exchange Act nor exempt from registration under 
the Exchange Act if the Commission determines that such security-based 
swap market (or class of markets) is subject to comparable, 
comprehensive supervision and regulation by a foreign financial 
regulatory authority or authorities in such foreign jurisdiction.\1952\
---------------------------------------------------------------------------

    \1943\ See Section XI, supra (providing detailed discussions of 
substituted compliance).
    \1944\ 15 U.S.C. 78o-10.
    \1945\ See proposed Rule 3a71-5 under the Exchange Act, as 
discussed in Section XI.C, supra.
    \1946\ 15 U.S.C. 78m-1(a)(1).
    \1947\ 15 U.S.C. 78m(m)(1)(G).
    \1948\ 15 U.S.C. 78m(m)(1)(C).
    \1949\ See proposed Rule 908(c)(2) under the Exchange Act, as 
discussed in Section XI.D, supra.
    \1950\ 15 U.S.C 78c-3(a)(1).
    \1951\ See Section XI.E, supra.
    \1952\ See proposed Rule 3Ch-2(b)(1) under the Exchange Act, as 
discussed in Section XI.F, supra.
---------------------------------------------------------------------------

1. Programmatic Benefits and Costs
    The Commission recognizes that the programmatic costs and benefits 
of substituted compliance may vary depending on the specific nature of 
a particular substituted compliance determination. If the Commission 
imposes conditions on a substituted compliance determination, such 
conditions may have effects on the programmatic costs and benefits. The 
proposed rules and interpretive guidance regarding substituted 
compliance described above provide that the Commission would only make 
a determination that substituted compliance is permitted if the foreign 
regulatory system in a particular area, taking into consideration any 
relevant principles, regulations, or rules in other areas of the 
foreign regulatory system to the extent they are relevant to the 
analysis, achieves the regulatory outcomes that are comparable to the 
regulatory outcomes of the relevant provisions of the Exchange Act.
    The Commission preliminarily believes that substituted compliance 
would not substantially change the programmatic benefits intended by 
the requirements in Section 15F of the Exchange Act, the programmatic 
benefits intended by the regulatory

[[Page 31202]]

reporting and public dissemination requirements in Section 13(m)(1)(G), 
Section 13(m)(1)(C), and Section 13A(a)(1) of the Exchange Act, the 
programmatic benefits intended by the mandatory clearing requirement in 
Sections 3C(a)(1) of the Exchange Act, or the programmatic benefits 
intended by the mandatory trade execution requirement set forth in 
Section 3C(h) of the Exchange Act. To the extent that substituted 
compliance eliminates duplicative compliance costs, registered foreign 
security-based swap dealers or market participants entering into 
security-based swap transactions that are eligible for substituted 
compliance may incur lower programmatic costs associated with 
implementation or compliance with the specified Title VII requirements 
than they would otherwise incur without the option of substituted 
compliance available, either because such registered foreign security-
based swap dealers may have implemented or begun to implement the 
foreign regulatory requirements that are determined comparable by the 
Commission, or because parties to a security-based swap transaction 
eligible for substituted compliance determination do not need to 
duplicate compliance with two sets of comparable requirements.
    In the case of a substituted compliance determination made with 
Commission-imposed conditions in order to achieve comparable 
programmatic benefits intended by the applicable Title VII 
requirements, we cannot preclude the possibility that substituted 
compliance may increase programmatic costs because market participants 
would be required to incur costs to satisfy those conditions. On the 
other hand, substituted compliance also may enable certain foreign 
market participants subject to comparable foreign regulation to enter 
or stay in the U.S. security-based swap market. These are participants 
that would, due to conflicting local laws, otherwise not be able to 
participate under Title VII regulation in the absence of substituted 
compliance. In such cases, substituted compliance may either increase 
the number of market participants in the U.S. security-based swap 
market or prevent certain existing market participants from exiting the 
market, thereby contributing to the programmatic benefits and costs 
that flow from Title VII requirements.
    The decision to request substituted compliance is purely voluntary. 
Market participants would choose to make a request for a substituted 
compliance determination only if, in their own assessment, compliance 
with applicable requirements under a foreign regulatory system were 
less costly than compliance with both the foreign regulatory regime and 
the relevant Title VII requirement. Even after a substituted compliance 
determination is made, market participants would only choose 
substituted compliance if the private benefits they expect to receive 
from participating in U.S. markets exceeds the private costs they 
expect to bear, including any conditions the Commission may attach to 
the substituted compliance determination. Therefore, the proposed rules 
regarding substituted compliance are based on the consideration that 
the net programmatic benefits associated with specific Title VII 
requirements could be increased by the Commission making the 
substituted compliance option available. Where substituted compliance 
increases the number of market participants in the U.S. security-based 
swap market or prevents existing participants from leaving the U.S. 
security-based swap market, there may be contributions to both 
programmatic benefits and costs associated with the applicable Title 
VII requirements.
2. Alternatives
    The Commission could have proposed that substituted compliance 
determinations with respect to regulatory reporting, public 
dissemination and mandatory trade execution apply to all cross-border 
transactions involving at least one foreign counterparty or foreign 
branch of a U.S. bank. However, we propose in Rule 908(c)(2), the 
interpretive guidance regarding substituted compliance with the 
mandatory clearing requirement, and Rule 3Ch-2(b)(1) that substituted 
compliance would not be available to a security-based swap transaction 
that involves persons within the United States in executing, soliciting 
or negotiating the terms of such transaction on both sides of a 
transaction, even though at least one counterparty to the transaction 
is a non-U.S. person or foreign branch.\1953\ In other words, if both 
counterparties to a security-based swap transaction conduct such 
transaction within the United States, it is a transaction in the United 
States. One of the primary objectives of making substituted compliance 
available to cross-border security-based swap transactions is to 
accommodate the global nature of the security-based swap market and 
cross-border security-based swap activity. In circumstances where both 
parties to a security-based swap are transacting in the United States, 
either from a U.S. office or U.S. branch, or using an affiliate or 
agent, to conduct the security-based swap, we do not believe that 
substituted compliance would be necessary or appropriate. Both parties 
(or their respective agents) to the transaction are conducting a 
transaction in the United States and should be able to satisfy the 
applicable Title VII requirements by reporting the transaction to a 
registered SDR or executing the transaction on a registered exchange of 
SB SEF in the United States without the need to rely on substituted 
compliance. In addition, because both parties (or their respective 
agents) are conducting a transaction in the United States, there is a 
strong public interest to subject such transaction to the Title VII 
mandatory execution, regulatory reporting, and public dissemination 
requirements. Therefore, the Commission does not believe that it would 
be appropriate to provide substitute compliance with respect to a 
transaction where both parties (or their agents) conduct the 
transaction within the United States.
---------------------------------------------------------------------------

    \1953\ See proposed Rule 908(c)(2) under the Exchange Act, 
interpretive guidance regarding substituted compliance with the 
mandatory clearing requirement, and proposed Rule 3Ch-2(b)(1) under 
the Exchange Act, as discussed in Section XI.D-XI.F, supra.
---------------------------------------------------------------------------

3. Assessment Costs
    The assessment costs associated with the proposed rules regarding 
substituted compliance would, in part, flow from the assessment of 
whether a registered security-based swap dealer is a foreign security-
based swap dealer and whether a transaction counterparty is a non-U.S. 
person or a foreign branch and whether a transaction involves a person 
within the United States in soliciting, negotiating, or execution. The 
status of a foreign security-based swap dealer would be determined by 
analyzing the U.S. person definition, which may be done by an in-house 
counsel reviewing readily ascertainable information, such as the 
foreign security-based swap dealer's certificate of incorporation or 
formation or other internal documents evidencing residence, place of 
incorporation, or principal business location. The Commission 
preliminarily believes that the cost involved in making such assessment 
should not exceed one hour of in-house counsel's time or $379.\1954\
---------------------------------------------------------------------------

    \1954\ Based upon data from SIFMA's Management & Professional 
Earnings in the Securities Industry 2012 (modified by the SEC staff 
to account for an 1800-hour-work-year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead), 
the staff estimates that the average national hourly rate for an in-
house attorney is $379.

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[[Page 31203]]

    The assessment costs associated with proposed Rule 908(c), proposed 
interpretive guidance with respect to substituted compliance with the 
mandatory clearing requirement, and proposed Rule 3Ch-2(c)(2)(ii) would 
involve costs of determining a transaction counterparty's U.S. person 
status, as well as determining whether counterparty conducts the 
security-based swap in the United States or involves any persons in the 
United States to solicit, negotiate or execute a security-based swap 
transaction.
    The Commission preliminarily believes that market participants 
would likely incur costs arising from the need to identify and maintain 
records concerning the U.S.-person status of their counterparties and 
the location of their transactions. We anticipate that potential 
applicants for substituted compliance are likely to request 
representations from their transaction counterparties to determine the 
counterparties' U.S.-person status and whether the transaction was 
conducted within the United States. Therefore, the Commission 
preliminarily believes that the assessment costs associated with 
determining the status of counterparties and the location of 
transactions should be primarily one-time costs of establishing a 
practice or compliance procedure of requesting and collecting 
representations from trading counterparties and maintaining the 
representations collected as part of the recordkeeping procedures and 
limited ongoing costs associated with requesting and collecting 
representations. Consistent with the analysis of the assessment costs 
associated with the de minimis exception relating to the security-based 
swap dealer definition that involves determining the status of 
counterparties and the location of transactions,\1955\ the Commission 
preliminarily believes that such one-time costs would be approximately 
$15,160.\1956\ The Commission preliminarily believes that requesting 
and collecting representations would be part of the standardized 
transaction process reflected in the policies and procedures regarding 
security-based swap sales and trading practices and should not result 
in separate assessment costs.\1957\ To the extent that market 
participants have incurred costs relating to similar or same 
assessments with respect to the counterparty status and location of the 
transactions for other Title VII requirements, their assessment costs 
with respect to substituted compliance may be less.
---------------------------------------------------------------------------

    \1955\ See Section XV.D.2(a), supra.
    \1956\ This estimate is based on estimated 40 hours of in-house 
legal or compliance staff's time to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representation may be 
built into form of standardized trading documentation. Based upon 
data from SIFMA's Management & Professional Earnings in the 
Securities Industry 2012 (modified by the SEC staff to account for 
an 1800-hour-work-year and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead), the staff 
estimates that the average national hourly rate for an in-house 
attorney is $379.
    \1957\ There will be ongoing costs associated with processing 
representations received from counterparties, including additional 
due diligence and verification to the extent that a counterparty's 
representation is contrary to or inconsistent with the knowledge of 
the collecting party. The Commission believes that these would be 
compliance costs encompassed within the programmatic costs 
associated with substituted compliance.
---------------------------------------------------------------------------

    In addition, a registered security-based swap dealer or a security-
based swap transaction eligible for a substituted compliance 
determination would incur costs in submitting a request to the 
Commission for a substituted compliance determination. The Commission 
preliminarily estimates the costs of submitting such request pursuant 
to proposed Rule 3a71-5(c), proposed Rule 908(c), proposed interpretive 
guidance with respect to substituted compliance with the mandatory 
clearing requirement, or proposed Rule 3Ch-2(c)(2)(ii) would be 
approximately $110,320.\1958\ Once such request is made, however, other 
market participants that seek to request a substituted compliance 
determination with respect to the same area of a foreign regulatory 
system relevant to the requirements in Section 15F or regulatory 
reporting and public dissemination, the same foreign clearing agency, 
or the same foreign regulatory regime that a foreign exchange or SB SEF 
is subject to, would be able to rely on the Commission's substituted 
compliance determination. Accordingly, the assessment costs would only 
need to be incurred once with respect to the same area of a foreign 
regulatory system or the same foreign clearing agency.
---------------------------------------------------------------------------

    \1958\ This estimate is based on information indicating that the 
average costs associated with preparing and submitting an 
application to the Commission for a Commission order for exemptive 
relief under Section 36 of the Exchange Act in accordance with the 
procedures set forth in 17 CFR 240.0-12. The Commission recognizes 
that a substituted compliance determination request made pursuant to 
proposed Rule 3a71-5(c), proposed Rule 908(c), proposed interpretive 
guidance with respect to substituted compliance with the mandatory 
clearing requirement, and proposed Rule 3Ch-2(c)(2)(ii) would be 
made under proposed Rule 0-13 under the Exchange Act, which 
establishes procedures similar to those used by the Commission in 
considering exemptive order applications under Section 36 of the 
Exchange Act. The staff estimates that costs associated with a 
request pursuant to these proposed rules would be approximately 
$110,320. The Commission estimates that preparation of the request 
would require approximately 80 hours of in-house counsel time and 
200 hours of outside counsel time. Such estimate takes into account 
the time required to prepare supporting documents necessary for the 
Commission to make a substituted compliance determination, 
including, without limitation, information regarding applicable 
requirements established by the foreign financial regulatory 
authority or authorities, as well as the methods used by the foreign 
financial regulatory authority or authorities to monitor compliance 
with these rules. Based upon data from SIFMA's Management & 
Professional Earnings in the Securities Industry 2012 (modified by 
the SEC staff to account for an 1800-hour-work-year and multiplied 
by 5.35 to account for bonuses, firm size, employee benefits, and 
overhead), the staff estimates that the average national hourly rate 
for an in-house attorney is $379. The Commission estimates the costs 
for outside legal services to be $400 per hour. Accordingly, the 
Commission estimates the cost to be $110,320 ($30,320 (based on 80 
hours of in-house counsel time * $379) + $80,000 (based on 200 hours 
of outside counsel time * $400)) to submit a request for a 
substituted compliance determination.
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Request for Comment
    The Commission seeks comment on the costs and benefits associated 
with substituted compliance in all aspects. Responses that are 
supported by data and analysis provide great assistance to the 
Commission in considering the benefits and costs of the substituted 
compliance policy framework. In addition, the Commission seeks comment 
on the following specific questions:
     Would substituted compliance reduce costs associated with 
the applicable Title VII requirements? Would the analysis of the 
benefits and costs of substituted compliance differ between the case of 
regulatory duplication or overlap and the case of regulatory conflict?
     Does a substituted compliance determination based on 
comparability achieve the same benefits intended by Title VII? Could 
there be significant economic consequences if the Commission permitted 
substituted compliance in cases in which the foreign requirements are 
not identical, but, as contemplated, only comparable to the applicable 
Title VII requirements? What would those effects be? In cases where 
substituted compliance were granted but where requirements were 
comparable and not identical, are there certain differences, or types 
of differences, in regulation that would have more significant economic 
effects than others? Are there particular areas of Title VII regulation 
in which the effects of differences between comparable and identical 
standards would be more pronounced than in others?
     Could there be significant economic consequences, 
including effects on

[[Page 31204]]

competition, if a substituted compliance determination is made 
conditionally? What would those effects be?
     Could market participants be prompted to restructure in 
anticipation of substituted compliance determinations? What effects on 
market structure and competition might result? Are there other 
potential spillovers from strategic restructuring related to 
substituted compliance determinations?
     Do commenters agree with the preliminary estimates of the 
assessment costs and the costs to request a substituted compliance 
determination discussed above? Are there any other assessment costs not 
considered here? Specifically, the Commission requests comment on (i) 
the assessment costs of determining whether a market participant or a 
transaction is eligible for substituted compliance, and (ii) the costs 
of preparing and submitting a request for a substituted compliance 
determination.

J. General Request for Comments

    In responding to the specific requests above for comment on the 
economic effects of our proposed rules, interested persons are 
encouraged to provide supporting data and analysis and, when 
appropriate, identify alternative models for assessing the costs and 
benefits of our proposed rules, as well as their expected effect on 
efficiency, competition and capital formation. Responses that are 
supported by data and analysis provide great assistance to the 
Commission in considering the economic effects of proposed new 
requirements, including the associated benefits and costs.
    In addition to the specific requests for comment set forth above, 
the Commission also seeks comment on the expected economic effects of 
the interplay between our rules and those [adopted/proposed] by the 
CFTC. In particular, to the extent that the Commission's proposed rules 
and interpretations take a different approach from the CFTC's approach 
to the application of Title VII requirements in the cross-border 
context, what would be the economic impact, including the costs and 
benefits, of these differences on market participants and the U.S. 
security-based swap market as a whole? What effect would such 
differences have on efficiency, competition and capital formation in 
the U.S. security-based swap market? Commenters should provide analysis 
and empirical data to support their views on the costs, benefits and 
other economic effects associated with the differences between the 
Commission's proposed approach and the CFTC's approach.
    The Commission also seeks comment on the relevant economic 
considerations for the Commission if we modify our proposed approach to 
conform to the CFTC's [proposed/final] guidance. Similarly, what would 
the economic considerations be for the Commission to adopt any cross-
border interpretations proposed by the CFTC, but not proposed by the 
Commission?

XVI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA'')\1959\ the Commission must advise the OMB 
whether the proposed regulation constitutes 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) 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.
---------------------------------------------------------------------------

    \1959\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential impact of these 
proposed rules on the economy on an annual basis, on the costs or 
prices for consumers or individual industries, and on competition, 
investment, or innovation. Commenters are requested to provide 
empirical data and other factual support for their view to the extent 
possible.

XVII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \1960\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) of the Administrative Procedure 
Act,\1961\ 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.'' \1962\ Section 605(b) of the RFA \1963\ provides 
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.
---------------------------------------------------------------------------

    \1960\ 5 U.S.C. 601 et seq.
    \1961\ 5 U.S.C. 603(a).
    \1962\ 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 under the Exchange 
Act, 17 CFR 240.0-10. See Exchange Act Release No. 18451 (Jan. 28, 
1982), 47 FR 5215 (Feb. 4, 1982) (File No. AS-305).
    \1963\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    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; \1964\ 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,\1965\ 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.\1966\ Under the 
standards adopted by the Small Business Administration, small entities 
in the finance and insurance industry include the following: (i) For 
entities engaged in credit intermediation and related activities, 
entities with $175 million or less in assets; \1967\ (ii) for entities 
engaged in non-depository credit intermediation and certain other 
activities, entities with $7 million or less in annual receipts; \1968\ 
(iii) for entities engaged in financial investments and related 
activities, entities with $7 million or less in annual receipts; \1969\ 
(iv) for insurance carriers and entities engaged in related activities, 
entities with $7 million or less in annual receipts; \1970\ and (v) for 
funds, trusts, and other financial vehicles, entities with $7 million 
or less in annual receipts.\1971\
---------------------------------------------------------------------------

    \1964\ See 17 CFR 240.0-10(a).
    \1965\ 17 CFR 240.17a-5(d).
    \1966\ See 17 CFR 240.0-10(c).
    \1967\ See 13 CFR 121.201 (Subsector 522).
    \1968\ See id. at Subsector 522.
    \1969\ See id. at Subsector 523.
    \1970\ See id. at Subsector 524.
    \1971\ See id. at Subsector 525.
---------------------------------------------------------------------------

    Based on feedback from industry participants and our own 
information about the security-based swap markets, the Commission 
preliminarily believes that non-U.S. entities that would be required to 
register and be regulated as

[[Page 31205]]

security-based swap dealers and major security-based swap participants 
exceed the thresholds defining ``small entities'' set out above. Thus, 
the Commission preliminarily believes it is unlikely that the proposed 
rules regarding registration of security-based swap dealers and major 
security-based swap market participants would have a significant 
economic impact any small entity.
    In addition, based on the Commission's own information about the 
cross-border security-based swap market, the Commission believes that 
only persons or entities with assets significantly in excess of $5 
million participate in the security-based swap market, and such persons 
or entities would thus not qualify as ``small entities.'' Therefore, 
the Commission preliminarily believes that the application of the 
mandatory clearing requirement to cross-border security-based swap 
transactions is unlikely to impact any small entities. Moreover, the 
Commission preliminarily believes that the entities likely to register 
as a security-based swap clearing agency located outside the United 
States are not likely to qualify as a ``small entity'' as defined 
above. Thus, the Commission preliminarily believes it is unlikely that 
the proposed rules regarding registration of security-based swap 
clearing agencies located outside the United States would have a 
significant economic impact any small entity.
    In addition, as discussed in the Regulation SBSR Proposing Release, 
the Commission believes that the number of security based swap 
transactions involving a ``small entity'' is de minimis. Therefore, the 
Commission preliminarily believes that the application of the mandatory 
trade reporting requirement to cross-border security-based swap 
transactions is unlikely to impact any small entities. Moreover, the 
Commission preliminarily believes that the entities likely to register 
as a SDR located outside the United States are not likely to qualify as 
a ``small entity'' as defined above. Thus, the Commission preliminarily 
believes it is unlikely that the proposed rules regarding registration 
of SDRs located outside the United States would have a significant 
economic impact any small entity.
    In addition, based on the Commission's own information about the 
cross-border security-based swap market, the Commission preliminarily 
believes that the proposed application of the mandatory trade execution 
requirement to cross-border security-based swap transactions is not 
likely to impact any small entities. Moreover, as discussed in the SB 
SEF Proposing Release, based on our 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. Based on the Commission's 
existing information about the security-based 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.
    For the foregoing reasons, the Commission certifies that the 
proposed rules would not have a significant economic impact on a 
substantial number of small entities for purposes of the RFA. The 
Commission encourages written comments regarding this certification. In 
particular, the Commission encourages written comments regarding the 
Commission's preliminary belief that the proposed application of the 
mandatory clearing requirement and the mandatory trade reporting 
requirement to cross-border security-based swap transactions is 
unlikely to impact any small entities. 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.

Statutory Basis and Text of Proposed Rules

    Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and 
particularly, Section 3(b), Section 15(d)(1), Section 23(a)(1), Section 
30(c) thereof, Sections 712(a)(2), (6), and 761(b) of the Dodd-Frank 
Act, the SEC is proposing to adopt rules 0-13, 3a67-10, 3a71-3, 3a71-4, 
3a71-5, 3Ca-3, 3Ch-1, 3Ch-2, 13n-4(d), 13n-12, 18a-4, and 900 through 
911, and Forms SBSE, SBSE-A, and SBSE-BD, under the Exchange Act.

List of Subjects

17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and 
recordkeeping requirements, Securities.

17 CFR Part 242

    Brokers, Fraud, Reporting and recordkeeping requirements, 
Securities.

17 CFR Part 249

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of Proposed Rules

    For the reasons stated in the preamble, the SEC 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

0
1. The authority citation for part 240 is amended by adding an 
authority for Sec. Sec.  240.3a67-10, 240.3a71-3, 240.3a71-4, and 
240.3a71-5 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, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 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., 12 
U.S.C. 5221(e)(3), 15 U.S.C. 8302, and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    Sections 240.3a67-10, 240.3a71-3, 240.3a71-4, and 240.3a71-5 are 
also issued under Public Law 111-203, secs. 712, 761(b), 124 Stat. 
1754 (2010).
* * * * *
0
2. Add Sec.  240.0-13 to read as follows:


Sec.  240.0-13  Commission procedures for filing applications to 
request a substituted compliance order under the Exchange Act.

    (a) The application shall be in writing in the form of a letter, 
must include any supporting documents necessary to make the application 
complete, and otherwise must comply with Sec.  240.0-3. All 
applications must be submitted to the Office of the Secretary of the 
Commission. Requestors may seek confidential treatment of their 
applications to the extent provided under Sec.  200.81 of this chapter. 
If an application is incomplete, the Commission, through the Division 
of Trading and Markets, may request that the application be withdrawn 
unless the applicant can justify, based on all the facts and 
circumstances, why supporting materials have not been submitted and 
undertakes to submit the omitted materials promptly.
    (b) An applicant may submit a request electronically. The 
electronic mailbox to use for these applications is described on the 
Commission's Web site at www.sec.gov in the ``Exchange Act Substituted 
Compliance Applications''

[[Page 31206]]

section. In the event electronic mailboxes are revised in the future, 
applicants can find the appropriate mailbox by accessing the 
``Electronic Mailboxes at the Commission'' section.
    (c) All filings and submissions filed pursuant to this rule must be 
in the English language. If a filing or submission filed pursuant to 
this rule requires the inclusion of a document that is in a foreign 
language, a party must submit instead a fair and accurate English 
translation of the entire foreign language document. A party may submit 
a copy of the unabridged foreign language document when including an 
English translation of a foreign language document in a filing or 
submission filed pursuant to this rule. A party must provide a copy of 
any foreign language document upon the request of Commission staff.
    (d) An applicant also may submit a request in paper format. Five 
copies of every paper application and every amendment to such an 
application must be submitted to the Office of the Secretary at 100 F 
Street NE., Washington, DC 20549-1090. Applications must be on white 
paper no larger than 8\1/2\ by 11 inches in size. The left margin of 
applications must be at least 1\1/2\ inches wide, and if the 
application is bound, it must be bound on the left side. All 
typewritten or printed material must be set forth in black ink so as to 
permit photocopying.
    (e) Every application (electronic or paper) must contain the name, 
address, telephone number, and email address of each applicant and the 
name, address, telephone number, and email address of a person to whom 
any questions regarding the application should be directed. The 
Commission will not consider hypothetical or anonymous requests for a 
substituted compliance order. Each applicant shall provide the 
Commission with any supporting documentation it believes necessary for 
the Commission to make such determination, including information 
regarding applicable requirements established by the foreign financial 
regulatory authority or authorities, as well as the methods used by the 
foreign financial regulatory authority or authorities to monitor 
compliance with such rules. Applicants should also cite to and discuss 
applicable precedent.
    (f) Amendments to the application should be prepared and submitted 
as set forth in these procedures and should be marked to show what 
changes have been made.
    (g) After the filing is complete, the Division of Trading and 
Markets will review the application. Once all questions and issues have 
been answered to the satisfaction of the Division of Trading and 
Markets, the staff will make an appropriate recommendation to the 
Commission. After consideration of the recommendation by the 
Commission, the Commission's Office of the Secretary will issue an 
appropriate response and will notify the applicant.
    (h) The Commission, in its sole discretion, may choose to publish 
in the Federal Register a notice that the application has been 
submitted. The notice would provide that any person may, within the 
period specified therein, submit to the Commission any information that 
relates to the Commission action requested in the application. The 
notice also would indicate the earliest date on which the Commission 
would take final action on the application, but in no event would such 
action be taken earlier than 25 days following publication of the 
notice in the Federal Register.
    (i) The Commission may, in its sole discretion, schedule a hearing 
on the matter addressed by the application.
    [ssbox] 3a. Add Sec.  240-3a67-10 to read as follows:


Sec.  240.3a67-10  Foreign major security-based swap participants.

    (a) Definitions. As used in this rule, the following terms shall 
have the meanings indicated:
    (1) Foreign major security-based swap participant means a major 
security-based swap participant, as defined in section 3(a)(67) of the 
Act (15 U.S.C. 78c(a)(67)), and the rules and regulations thereunder, 
that is not a U.S. person.
    (2) U.S. person has the meaning set forth in Sec.  240.3a71-
3(a)(7).
    (b) Application of customer protection requirements. A registered 
foreign major security-based swap participant shall not be subject, 
with respect to its security-based swap transactions with 
counterparties that are not U.S. persons, to the requirements relating 
to business conduct standards described in section 15F(h) of the Act 
(15 U.S.C. 78o-10(h)), and the rules and regulations thereunder, other 
than rules and regulations prescribed by the Commission pursuant to 
section 15F(h)(1)(B) of the Act (15 U.S.C. 78o-10(h)(1)(B)).
    (c) Application of major security-based swap participant tests in 
the cross-border context. For purposes of calculating a person's status 
as a major security-based swap participant as defined in section 
3(a)(67) of the Act (15 U.S.C. 78c(a)(67)), and the rules and 
regulations thereunder, a person shall include the following security-
based swap transactions:
    (1) If such person is a U.S. person, all security-based swap 
transactions entered into by such person; or
    (2) If such person is a non-U.S. person, all security-based swap 
transactions entered into by such person with U.S. persons.
    [ssbox] 3b. Add Sec. Sec.  240.3a71-3, 240.3a71-4, and 240.3a71-5 
to read as follows:

Sec.
240.3a71-3 Cross-border security-based swap dealing activity.
240.3a71-4 Exception from aggregation for affiliated groups with 
registered security-based swap dealers.
240.3a71-5 Substituted compliance for foreign security-based swap 
dealers.
* * * * *


Sec.  240.3a71-3  Cross-border security-based swap dealing activity.

    (a) Definitions. As used in this rule, the following terms shall 
have the meanings indicated:
    (1) Foreign branch means any branch of a U.S. bank if:
    (i) The branch is located outside the United States;
    (ii) The branch operates for valid business reasons; and
    (iii) The branch is engaged in the business of banking and is 
subject to substantive banking regulation in the jurisdiction where 
located.
    (2) Foreign business means security-based swap transactions that 
are entered into, or offered to be entered into, by or on behalf of, a 
foreign security-based swap dealer or a U.S. security-based swap 
dealer, other than the U.S. Business of such person.
    (3) Foreign security-based swap dealer means a security-based swap 
dealer, as defined in section 3(a)(71) of the Act (15 U.S.C. 
78c(a)(71)), and the rules and regulations thereunder, that is not a 
U.S. person.
    (4) Transaction conducted through a foreign branch--(i) Definition. 
Transaction conducted through a foreign branch means a security-based 
swap transaction that is solicited, negotiated, or executed by a U.S. 
person through a foreign branch of such U.S. person if:
    (A) The foreign branch is the counterparty to such security-based 
swap transaction; and
    (B) The security-based swap transaction is not solicited, 
negotiated, or executed by a person within the United States on behalf 
of the foreign branch or its counterparty.
    (ii) Representations. A person shall not be required to consider 
its counterparty's activity in connection with paragraph (a)(4)(i)(B) 
of this

[[Page 31207]]

section in determining whether a security-based swap transaction is a 
transaction conducted through a foreign branch if such person receives 
a representation from its counterparty that no person within the United 
States is directly involved in soliciting, negotiating, or executing 
the security-based swap transaction on behalf of such counterparty, 
unless such person knows that the representation is not accurate.
    (5) Transaction conducted within the United States--(i) Definition. 
Transaction conducted within the United States means a security-based 
swap transaction that is solicited, negotiated, executed, or booked 
within the United States, by or on behalf of either counterparty to the 
transaction, regardless of the location, domicile, or residence status 
of either counterparty to the transaction.
    (ii) Foreign branch exception. Notwithstanding paragraph (a)(5)(i) 
of this section, a transaction conducted within the United States shall 
not include a transaction conducted through a foreign branch.
    (iii) Representations. A person shall not be required to consider 
its counterparty's activity in connection with a transaction in 
determining whether such transaction is conducted within the United 
States if such person receives a representation from its counterparty 
that the transaction is not solicited, negotiated, executed, or booked 
within the United States by or on behalf of such counterparty, unless 
such person knows that the representation is not accurate.
    (6) U.S. business means:
    (i) With respect to a foreign security-based swap dealer:
    (A) Any transaction entered into, or offered to be entered into, by 
or on behalf of such foreign security-based swap dealer, with a U.S. 
person (other than with a foreign branch); or
    (B) Any transaction conducted within the United States; and
    (ii) With respect to a U.S. security-based swap dealer, any 
transaction by or on behalf of such U.S. security-based swap dealer, 
wherever entered into or offered to be entered into, other than a 
transaction conducted through a foreign branch with a non-U.S. person 
or another foreign branch.
    (7) U.S. person. (i) Except as provided in paragraph (a)(7)(ii) of 
this section, U.S. person means:
    (A) Any natural person resident in the United States;
    (B) Any partnership, corporation, trust, or other legal person 
organized or incorporated under the laws of the United States or having 
its principal place of business in the United States; and
    (C) Any account (whether discretionary or non-discretionary) of a 
U.S. person.
    (ii) The term U.S. person does not include the International 
Monetary Fund, the International Bank for Reconstruction and 
Development, the Inter-American Development Bank, the Asian Development 
Bank, the African Development Bank, the United Nations, and their 
agencies and pension plans, and any other similar international 
organizations, their agencies and pension plans.
    (8) U.S. security-based swap dealer means a security-based swap 
dealer, as defined in section 3(a)(71) of the Act (15 U.S.C. 
78c(a)(71)), and the rules and regulations thereunder, that is a U.S. 
person.
    (9) United States means the United States of America, its 
territories and possessions, any State of the United States, and the 
District of Columbia.
    (b) Application of de minimis exception to cross-border dealing 
activity. For purposes of calculating the amount of security-based swap 
positions connected with dealing activity under Sec.  240.3a71-2(a)(1), 
a person shall include the following security-based swap transactions:
    (1)(i) If such person is a U.S. person, all security-based swap 
transactions connected with the dealing activity in which such person 
engages, including transactions conducted through a foreign branch; or
    (ii) If such person is a non-U.S. person, security-based swap 
transactions connected with the dealing activity in which such person 
engages that are entered into with a U.S. person (other than with a 
foreign branch) or that are transactions conducted within the United 
States; and
    (2) If such person engages in transactions described in paragraph 
(b)(1)(i) or (ii) of this section,
    (i) All security-based swap transactions connected with the dealing 
activity in which any U.S. person controlling, controlled by, or under 
common control with such person engages, including transactions 
conducted through a foreign branch; and
    (ii) All security-based swap transactions connected with the 
dealing activity in which any non-U.S. person controlling, controlled 
by, or under common control with such person engages that are entered 
into with U.S. persons (other than with a foreign branch) or that are 
transactions conducted within the United States.
    (c) Application of customer protection requirements. A registered 
foreign security-based swap dealer and a registered U.S. security-based 
swap dealer, with respect to their Foreign Business, shall not be 
subject to the requirements relating to business conduct standards 
described in section 15F(h) of the Act (15 U.S.C. 78o-10(h)), and the 
rules and regulations thereunder, other than the rules and regulations 
prescribed by the Commission pursuant to section 15F(h)(1)(B) of the 
Act (15 U.S.C. 78o-10(h)(1)(B)).


Sec.  240.3a71-4  Exception from aggregation for affiliated groups with 
registered security-based swap dealers.

    Notwithstanding Sec. Sec.  240.3a71-2(a)(1) and 240.3a71-3(b)(2), a 
person shall not include the security-based swap transactions of 
another person controlling, controlled by, or under common control with 
such person where such other person is registered with the Commission 
as a security-based swap dealer, provided that the security-based swap 
dealing activity of such person is operationally independent of the 
security-based swap dealing activity of such registered security-based 
swap dealer.


Sec.  240.3a71-5  Substituted compliance for foreign security-based 
swap dealers.

    (a) Determinations--(1) In general. Subject to paragraph (a)(2) of 
this section and except as provided in paragraph (a)(3) of this 
section, the Commission may, conditionally or unconditionally, by 
order, make a determination with respect to a foreign financial 
regulatory system that compliance with specified requirements under 
such foreign financial regulatory system by a registered foreign 
security-based swap dealer (or class thereof) may satisfy the 
corresponding requirements in section 15F of the Act (15 U.S.C. 78o-
10), and the rules and regulations thereunder, that would otherwise 
apply to such foreign security-based swap dealer (or class thereof).
    (2) Standard. The Commission shall not make a substituted 
compliance determination under paragraph (a)(1) of this section unless 
the Commission:
    (i) Determines that the requirements of such foreign financial 
regulatory system applicable to such foreign security-based swap dealer 
(or class thereof) are comparable to otherwise applicable requirements, 
after taking into account such factors as the Commission determines are 
appropriate, such as the scope and objectives of the relevant foreign 
regulatory requirements, as well as the

[[Page 31208]]

effectiveness of the supervisory compliance program administered, and 
the enforcement authority exercised, by a foreign financial regulatory 
authority or authorities in such system to support its oversight of 
such foreign security-based swap dealer (or class thereof); and
    (ii) Has entered into a supervisory and enforcement memorandum of 
understanding or other arrangement with the relevant foreign financial 
regulatory authority or authorities under such foreign financial 
regulatory system addressing oversight and supervision of applicable 
security-based swap dealers under the substituted compliance 
determination.
    (3) Limitation. The Commission will not make a substituted 
compliance determination under paragraph (a)(1) of this section with 
respect to the requirements relating to the registration process 
described in sections 15F(a) through (d) of the Act (15 U.S.C. 78o-
10(a) through (d)) and the rules and regulations thereunder.
    (4) Withdrawal or modification. The Commission may, on its own 
initiative, by order, modify or withdraw a substituted compliance 
determination under paragraph (a)(1) of this section, after appropriate 
notice and opportunity for comment.
    (b) Reliance by foreign security-based swap dealers. A registered 
foreign security-based swap dealer may satisfy requirements in section 
15F of the Act (15 U.S.C. 78o-10), and the rules and regulations 
thereunder, by complying with corresponding legislative requirements 
and rules and regulations under a foreign financial regulatory system, 
provided:
    (1) The Commission has made a substituted compliance determination 
pursuant to paragraph (a)(1) of this section regarding such foreign 
financial regulatory system providing that compliance with specified 
requirements under such foreign financial regulatory system by such 
registered foreign security-based swap dealer (or a class of registered 
foreign security-based swap dealers that includes such registered 
foreign security-based swap dealer) may satisfy the corresponding 
requirements in section 15F of the Act (15 U.S.C. 78o-10) and the rules 
and regulations thereunder; and
    (2) Such registered foreign security-based swap dealer satisfies 
any conditions set forth in a substituted compliance determination made 
by the Commission pursuant to paragraph (a)(1) of this section.
    (c) Requests for determinations. (1) A foreign security-based swap 
dealer or group of foreign security-based swap dealers of the same 
class may file an application, pursuant to the procedures set forth in 
Sec.  240.0-13, requesting that the Commission make a substituted 
compliance determination pursuant to paragraph (a)(1) of this section, 
with respect to one or more requirements in section 15F of the Act (15 
U.S.C. 78o-10), and the rules and regulations thereunder, and provide 
the reasons therefor and such other supporting documentation as the 
Commission may request.
    (2) A foreign security-based swap dealer or group of foreign 
security-based swap dealers may make a request under paragraph (a)(1) 
of this section only if the foreign security-based swap dealer(s):
    (i) Is directly supervised by the foreign financial regulatory 
authority or authorities under the system with respect to the foreign 
regulatory requirements relating to the applicable requirements in 
section 15F of the Act (15 U.S.C. 78o-10) and the rules and regulations 
thereunder; and
    (ii) Provides the certification and opinion of counsel as described 
in Sec.  240.15Fb2-4(c).
0
4. Add Sec.  240.3Ca-3 to read as follows:


Sec.  240.3Ca-3  Application of the mandatory clearing requirement to 
cross-border security-based swap transactions.

    (a) Application. Subject to paragraph (b) of this section, the 
clearing requirement in section 3C(a)(1) of the Act (15 U.S.C. 78c-
3(a)(1)), and the rules and regulations thereunder, shall apply to a 
person that engages in a security-based swap transaction if:
    (1) A counterparty to the transaction is:
    (i) A U.S. person; or
    (ii) A non-U.S. person whose performance under the security-based 
swap is guaranteed by a U.S. person; or
    (2) Such transaction is a transaction conducted within the United 
States.
    (b) Exceptions. The clearing requirement in section 3C(a)(1) of the 
Act (15 U.S.C. 78c-3(a)(1)), and the rules and regulations thereunder, 
shall not apply to a transaction described in paragraph (a) of this 
section if:
    (1) With respect to a security-based swap transaction that is not a 
transaction conducted within the United States,
    (i) One counterparty to the transaction is:
    (A) A foreign branch; or
    (B) A non-U.S. person whose performance under the security-based 
swap is guaranteed by a U.S. person; and
    (ii) The other counterparty to the transaction is a non-U.S. 
person:
    (A) Whose performance under the security-based swap is not 
guaranteed by a U.S. person; and
    (B) Who is not a foreign security-based swap dealer; or
    (2) With respect to a security-based swap transaction that is a 
transaction conducted within the United States,
    (i) Neither counterparty to the transaction is a U.S. person;
    (ii) Neither counterparty's performance under the security-based 
swap is guaranteed by a U.S. person; and
    (iii) Neither counterparty to the transaction is a foreign 
security-based swap dealer.
    (c) For purposes of this section, the terms foreign branch, foreign 
security-based swap dealer, transaction conducted within the United 
States, and U.S. person shall have the meanings set forth in Sec.  
240.3a71-3(a).
0
5. Add an undesignated center heading following Sec.  240.3Ca-2, and 
add Sec. Sec.  240.3Ch-1 and 240.3Ch-2 to read as follows:

Trade Execution of Security-Based Swaps

* * * * *
Sec.
240.3Ch-1 Application of the mandatory trade execution requirement 
to cross-border security-based swap transactions.
240.3Ch-2 Substituted compliance for mandatory trade execution.


Sec.  240.3Ch-1  Application of the mandatory trade execution 
requirement to cross-border security-based swap transactions.

    (a) Application. Subject to paragraph (b) of this section, the 
mandatory trade execution requirement in section 3C(h) of the Act (15 
U.S.C. 78c-3(h)), and the rules and regulations thereunder, shall apply 
to a person that engages in a security-based swap transaction if:
    (1) A counterparty to the transaction is:
    (i) A U.S. person; or
    (ii) A non-U.S. person whose performance under the security-based 
swap is guaranteed by a U.S. person; or
    (2) Such transaction is a transaction conducted within the United 
States.
    (b) Exceptions. The mandatory trade execution requirement in 
section 3C(h) of the Act (15 U.S.C. 78c-3(h)), and the rules and 
regulations thereunder, shall not apply to a transaction described in 
paragraph (a) of this section if:
    (1) With respect to a security-based swap transaction that is not a 
transaction conducted within the United States,
    (i) One counterparty to the transaction is:
    (A) A foreign branch; or
    (B) A non-U.S. person whose performance under the security-based

[[Page 31209]]

swap is guaranteed by a U.S. person; and
    (ii) The other counterparty to the transaction is a non-U.S. 
person:
    (A) Whose performance under the security-based swap is not 
guaranteed by a U.S. person; and
    (B) Who is not a foreign security-based swap dealer; or
    (2) With respect to a security-based swap transaction that is a 
transaction conducted within the United States,
    (i) Neither counterparty to the transaction is a U.S. person;
    (ii) Neither counterparty's performances under the security-based 
swap is guaranteed by a U.S. person; and
    (iii) Neither counterparty to the transaction is a foreign 
security-based swap dealer.
    (c) For purposes of this section, the terms foreign branch, foreign 
security-based swap dealer, and transaction conducted within the United 
States, and U.S. person shall have the meanings set forth in Sec.  
240.3a71-3(a).


Sec.  240.3Ch-2  Substituted compliance for mandatory trade execution.

    (a) A person that is subject to the mandatory trade execution 
requirement in section 3C(h) of the Act (15 U.S.C. 78c-3(h)), and the 
rules and regulations thereunder, with respect to a security-based swap 
transaction may execute such transaction, or have such transaction 
executed on its behalf, on a security-based swap market that is neither 
registered under the Act nor exempt from registration under the Act if 
such security-based swap market is covered by, or is in a class of 
markets that is covered by, a Commission order described in paragraph 
(b) of this section, provided that with respect to at least one of the 
counterparties to the transaction:
    (1) Such counterparty is either a non-U.S person or a foreign 
branch; and
    (2) The security-based swap transaction is not solicited, 
negotiated, or executed by a person within the United States on behalf 
of such counterparty.
    (b)(1) The Commission may, conditionally or unconditionally, by 
order, make a substituted compliance determination with respect to a 
foreign jurisdiction to permit a person subject to the mandatory trade 
execution requirement in section 3C(h) of the Act (15 U.S.C. 78c-3(h)), 
and the rules and regulations thereunder, with respect to a security-
based swap transaction to execute such transaction, or have such 
transaction executed on its behalf, on a security-based swap market (or 
class of markets) if it determines that such security-based swap market 
(or class of markets) is subject to comparable, comprehensive 
supervision and regulation by the relevant foreign financial regulatory 
authority or authorities in such foreign jurisdiction.
    (2) In making a determination under paragraph (b)(1) of this 
section, the Commission shall take into account such factors as the 
Commission determines are appropriate, such as the scope and objectives 
of the relevant foreign regulatory requirements, as well as the 
effectiveness of the supervisory compliance program administered, and 
the enforcement authority exercised, by the relevant foreign financial 
regulatory authority or authorities in the foreign jurisdiction to 
support the oversight of the security-based swap market (or class of 
markets).
    (3) Before issuing a substituted compliance order pursuant to 
paragraph (b)(1) of this section, the Commission shall have entered 
into a supervisory and enforcement memorandum of understanding or other 
arrangement with the relevant foreign regulatory authority or 
authorities in the foreign jurisdiction addressing the oversight and 
supervision of the security-based swap market (or class of markets).
    (4) The Commission may, on its own initiative, modify or withdraw 
such order at any time, after appropriate notice and opportunity for 
comment.
    (c) One or more security-based swap markets in a foreign 
jurisdiction may file an application, in writing, pursuant to the 
procedures set forth in Sec.  240.0-13, requesting that the Commission 
make a substituted compliance determination with respect to such 
foreign jurisdiction pursuant to paragraph (b)(1) of this section. Such 
application must include the reasons therefor and such other 
documentation as the Commission may request.
    (d) For purposes of this section, the terms foreign branch and U.S. 
person shall have the meanings set forth in Sec.  240.3a71-3(a).
0
6. Add paragraph (d) to Sec.  240.13n-4 as previously proposed at 75 FR 
77367, Dec. 10, 2010, to read as follows:


Sec.  240.13n-4  Duties and core principles of security-based swap data 
repository.

* * * * *
    (d) Exemption from the indemnification requirement. A registered 
security-based swap data repository is not required to comply with the 
indemnification requirement set forth in Section 13(n)(5)(H)(ii) of the 
Act (15 U.S.C. 78m(n)(5)(H)(ii)) and paragraph (b)(10) of this section 
with respect to disclosure of security-based swap information by the 
security-based swap data repository if:
    (1) An entity described in paragraph (b)(9) of this section 
requests security-based swap information from the security-based swap 
data repository to fulfill a regulatory mandate and/or legal 
responsibility of the entity;
    (2) The request of such entity pertains to a person or financial 
product subject to the jurisdiction, supervision, or oversight of the 
entity; and
    (3) Such entity has entered into a supervisory and enforcement 
memorandum of understanding or other arrangement with the Commission 
that addresses the confidentiality of the security-based swap 
information provided and any other matters as determined by the 
Commission.
0
7. Add Sec.  240.13n-12 following Sec.  240.13n-11 as previously 
proposed at 75 FR 77366, Dec. 10, 2010, to read as follows:


Sec.  240.13n-12  Exemption from requirements governing security-based 
swap data repositories for certain non-U.S. persons.

    (a) Definitions. For purposes of this section--
    (1) Non-U.S. person means a person that is not a U.S. person.
    (2) U.S. person shall have the same meaning as set forth in Sec.  
240.3a71-3(a)(7).
    (b) A non-U.S. person that performs the functions of a security-
based swap data repository within the United States shall be exempt 
from the registration and other requirements set forth in Section 13(n) 
of the Act (15 U.S.C. 78m(n)), and the rules and regulations 
thereunder, provided that each regulator with supervisory authority 
over such non-U.S. person has entered into a supervisory and 
enforcement memorandum of understanding or other arrangement with the 
Commission that addresses the confidentiality of data collected and 
maintained by such non-U.S. person, access by the Commission to such 
data, and any other matters determined by the Commission.
0
8. Add paragraphs (e) and (f) to Sec.  240.18a-4 as previously proposed 
at 77 FR 70350, Nov. 23, 2012, to read as follows:


Sec.  240.18a-4  Segregation requirements for security-based swap 
dealers and major security-based swap participants

* * * * *
    (e) Segregation requirements for foreign security-based swap 
dealers--(1) Non-cleared security-based swaps. (i) A registered foreign 
security-based swap dealer (as defined in Sec.  240.3a71-3(a)(3)) that 
is a registered broker-dealer shall be subject to the requirements 
relating to

[[Page 31210]]

segregation of assets held as collateral set forth in section 3E of the 
Act (15 U.S.C. 78c-5) and paragraphs (a) through (d) of this section, 
with respect to any assets received from, for, or on behalf of a 
counterparty to margin, guarantee, or secure a non-cleared security-
based swap (including money, securities, or property accruing to such 
counterparty as the result of such a security-based swap transaction).
    (ii) A registered foreign security-based swap dealer (as defined in 
Sec.  240.3a71-3(a)(3)) that is not a registered broker-dealer shall be 
subject to the requirements relating to segregation of assets held as 
collateral set forth in section 3E of the Act (15 U.S.C. 78c-5) and 
paragraphs (a) through (d) of this section, with respect to non-cleared 
security-based swap transactions, solely with respect to any assets 
received from, for, or on behalf of a counterparty that is a U.S. 
person (as defined in Sec.  240.3a71-3(a)(7)) to margin, guarantee, or 
secure a non-cleared security-based swap (including money, securities, 
or property accruing to such U.S. person counterparty as the result of 
such a security-based swap transaction).
    (2) Cleared security-based swaps. (i) A registered foreign 
security-based swap dealer (as defined in Sec.  240.3a71-3(a)(3)) that 
is a registered broker-dealer shall be subject to the requirements 
relating to segregation of assets held as collateral set forth in 
section 3E of the Act (15 U.S.C. 78c-5) and paragraphs (a) through (d) 
of this section, with respect to any assets received from, for, or on 
behalf of a counterparty to margin, guarantee, or secure a cleared 
security-based swap (including money, securities, or property accruing 
to such counterparty as the result of such a security-based swap 
transaction).
    (ii) A registered foreign security-based swap dealer (as defined in 
Sec.  240.3a71-3(a)(3)) that is not a registered broker-dealer and is 
not a person described in 11 U.S.C. 109(b)(3) shall be subject to the 
requirements relating to segregation of assets held as collateral set 
forth in section 3E of the Act (15 U.S.C. 78c-5) and paragraphs (a) 
through (d) of this section, with respect to cleared security-based 
swap transactions with any counterparty if such registered foreign 
security-based swap dealer accepts any assets from, for, or on behalf 
of a counterparty that is a U.S. person (as defined in Sec.  240.3a71-
3(a)(7)) to margin, guarantee, or secure a security-based swap 
(including money, securities, or property accruing to such U.S. person 
counterparty as the result of such a security-based swap).
    (iii) A registered foreign security-based swap dealer (as defined 
in Sec.  240.3a71-3(a)(3)) that is a person described in 11 U.S.C. 
109(b)(3) shall be subject to the requirements relating to segregation 
of assets held as collateral set forth in section 3E of the Act (15 
U.S.C. 78c-5) and paragraphs (a) through (d) of this section, with 
respect to cleared security-based swap transactions, solely with 
respect to any assets received from, for, or on behalf of a 
counterparty who is a U.S. person (as defined in Sec.  240.3a71-
3(a)(7)) to margin, guarantee, or secure a security-based swap cleared 
by or through a clearing agency (including money, securities, or 
property accruing to such U.S. person counterparty as the result of 
such a security-based swap transaction). The special account maintained 
by a registered foreign security-based swap dealer that is a person 
described in 11 U.S.C. 109(b)(3) in accordance with paragraph (c) of 
this section shall be designated for the exclusive benefit of U.S. 
person security-based swap customers.
    (3) Disclosures. A registered foreign security-based swap dealer 
(as defined in Sec.  240.3a71-3(a)(3)) must disclose to its 
counterparty that is a U.S. person, prior to accepting any assets from, 
for, or on behalf of such counterparty to margin, guarantee, or secure 
a security-based swap, the potential treatment of the assets segregated 
by such registered foreign security-based swap dealer pursuant to 
section 3E of the Act (15 U.S.C. 78c-5), and the rules and regulations 
thereunder, in insolvency proceedings under U.S. bankruptcy law and any 
applicable foreign insolvency laws. Such disclosure shall include 
whether the foreign security-based swap dealer is subject to the 
segregation requirement set forth in Section 3E of the Act, and the 
rules and regulations thereunder, with respect to the assets collected 
from the U.S. person counterparty who will receive the disclosure, 
whether the foreign security-based swap dealer could be subject to the 
stockbroker liquidation provisions in the U.S. Bankruptcy Code, whether 
the segregated assets could be afforded customer property treatment 
under the U.S. bankruptcy law, and any other relevant considerations 
that may affect the treatment of the assets segregated under Section 3E 
of the Act in insolvency proceedings of the foreign security-based swap 
dealer.
    (f) Segregation requirements for foreign major security-based swap 
participants. A registered foreign major security-based swap 
participant (as defined in Sec.  240.3a67-10(a)(1)) that is not a 
registered broker-dealer shall not be subject to the requirements 
relating to segregation of assets held as collateral set forth in 
section 3E(f) of the Act (15 U.S.C. 78c-5(f)) and paragraph (d) of this 
section, with respect to non-cleared security-based swap transactions, 
solely with respect to any assets received from, for, or on behalf of a 
counterparty that is a not a U.S. person (as defined in Sec.  240.3a71-
3(a)(7)) to margin, guarantee, or secure a non-cleared security-based 
swap (including money, securities, or property accruing to such non-
U.S. person counterparty as the result of such a security-based swap 
transaction).

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
9. The authority citation for part 242 continues to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-l(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.

0
10a. Revise the heading of part 242 to read as set forth above.
0
10b. Add an undesignated center heading and revise Sec. Sec.  242.900 
through 242.911 as previously proposed at 75 FR 75283, Dec. 2, 2010, to 
read as follows:

Regulation SBSR--Regulatory Reporting and Public Dissemination of 
Security-Based Swap Information

Sec.
242.900 Definitions
242.901 Reporting obligations.
242.902 Public dissemination of transaction reports.
242.903 Coded information.
242.904 Operating hours of registered security-based swap data 
repositories.
242.905 Correction of errors in security-based swap information.
242.906 Other duties of participants.
242.907 Policies and procedures of registered security-based swap 
data repositories.
242.908 Cross-border matters.
242.909 Registration of security-based swap data repository as a 
securities information processor.
242.910 Implementation of security-based swap reporting and 
dissemination.
242.911 Prohibition during phase-in period.
* * * * *


Sec.  242.900  Definitions.

    Terms used in Sec. Sec.  242.900 through 242.911 that appear in 
Section 3 of the Exchange Act (15 U.S.C. 78c) have the same meaning as 
in Section 3 of the Exchange Act and the rules or regulations 
thereunder. In addition, for purposes of Regulation SBSR (Sec. Sec.  
242.900 through 242.911), the following definitions shall apply:
    (a) Affiliate means any person that, directly or indirectly, 
controls, is

[[Page 31211]]

controlled by, or is under common control with, a person.
    (b) Asset class means those security-based swaps in a particular 
broad category, including, but not limited to, credit derivatives, 
equity derivatives, and loan-based derivatives.
    (c) Block trade means a large notional security-based swap 
transaction that meets the criteria set forth in Sec.  242.907(b).
    (d) Broker ID means the UIC assigned to a person acting as a broker 
for a participant.
    (e) Confirm means the production of a confirmation that is agreed 
to by the parties to be definitive and complete and that has been 
manually, electronically, or, by some other legally equivalent means, 
signed.
    (f) Control means, for purposes of Sec. Sec.  242.900 through 
242.911, 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. 
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.
    (g) Counterparty means a person that is a direct counterparty or 
indirect counterparty of a security-based swap.
    (h) Derivatives clearing organization means the same as provided 
under the Commodity Exchange Act.
    (i) Desk ID means the UIC assigned to the trading desk of a 
participant or of a broker of a participant.
    (j) Direct counterparty means a person that is a primary obligor on 
a security-bases swap.
    (k) Direct electronic access has the same meaning as in Sec.  
240.13n-4(a)(5) of this chapter.
    (l) Effective reporting date, with respect to a registered 
security-based swap data repository, means the date six months after 
the registration date.
    (m) Exchange Act means the Securities Exchange Act of 1934 (15 
U.S.C. 78a, et seq.), as amended.
    (n) Foreign branch has the same meaning as in Sec.  240.3a71-
3(a)(1) of this chapter.
    (o) Indirect counterparty means a guarantor of a direct 
counterparty's performance of any obligation under a security-based 
swap.
    (p) Life cycle event means, with respect to a security-based swap, 
any event that would result in a change in the information reported to 
a registered security-based swap data repository under Sec.  242.901, 
including a counterparty change resulting from an assignment or 
novation; a partial or full termination of the security-based swap; a 
change in the cash flows originally reported; for a security-based swap 
that is not cleared, any change to the collateral agreement; or a 
corporate action affecting a security or securities on which the 
security-based swap is based (e.g., a merger, dividend, stock split, or 
bankruptcy). Notwithstanding the above, a life cycle event shall not 
include the scheduled expiration of the security-based swap, a 
previously described and anticipated interest rate adjustment (such as 
a quarterly interest rate adjustment), or other event that does not 
result in any change to the contractual terms of the security-based 
swap.
    (q) Non-U.S. person means a person that is not a U.S. person.
    (r) Parent means a legal person that controls a participant.
    (s) Participant means a person that is a counterparty to a 
security-based swap that meets the criteria of Sec.  242.908(b).
    (t) Participant ID means the UIC assigned to a participant.
    (u) Phase-in period means the period immediately after a security-
based swap data repository has registered with the Commission during 
which it is not required to disseminate security-based swap data 
pursuant to an implementation schedule, as provided in Sec.  242.910.
    (v) Pre-enactment security-based swap means any security-based swap 
executed before July 21, 2010 (the date of enactment of the Dodd-Frank 
Act (Pub. L. 111-203, H.R. 4173)), the terms of which had not expired 
as of that date.
    (w) Price means the price of a security-based swap transaction, 
expressed in terms of the commercial conventions used in that asset 
class.
    (x) Product ID means the UIC assigned to a security-based swap 
instrument.
    (y) Publicly disseminate means to make available through the 
Internet or other electronic data feed that is widely accessible and in 
machine-readable electronic format.
    (z) Real time means, with respect to the reporting of security-
based swap information, as soon as technologically practicable, but in 
no event later than 15 minutes after the time of execution of the 
security-based swap transaction.
    (aa) Registered security-based swap data repository means a person 
that is registered with the Commission as a security-based swap data 
repository pursuant to section 13(n) of the Exchange Act (15 U.S.C. 
78m(n)) and any rules or regulations thereunder.
    (bb) Registration date, with respect to a security-based swap data 
repository, means the date on which the Commission registers the 
security-based swap data repository, or, if the Commission registers 
the security-based swap data repository before the effective date of 
Sec. Sec.  242.900 through 242.911, the effective date of Sec. Sec.  
242.900 through 242.911.
    (cc) Reporting side means the side of a security-based swap having 
the duty to report information in accordance with Sec. Sec.  242.900 
through 242.911 to a registered security-based swap data repository, or 
if there is no registered security-based swap data repository that 
would receive the information, to the Commission.
    (dd) Security-based swap instrument means each security-based swap 
in the same asset class, with the same underlying reference asset, 
reference issuer, or reference index.
    (ee) Side means a direct counterparty and any indirect counterparty 
that guarantees the direct counterparty's performance of any obligation 
under a security-based swap.
    (ff) Time of execution means the point at which the counterparties 
to a security-based swap become irrevocably bound under applicable law.
    (gg) Trader ID means the UIC assigned to a natural person who 
executes security-based swaps.
    (hh) Transaction conducted through a foreign branch has the same 
meaning as in Sec.  240.3a71-3(a)(4) of this chapter.
    (ii) Transaction conducted within the United States has the same 
meaning as in Sec.  240.3a71-3(a)(5) of this chapter.
    (jj) Transaction ID means the unique identification code assigned 
by a registered security-based swap data repository to a specific 
security-based swap.
    (kk) Transitional security-based swap means a security-based swap 
executed on or after July 21, 2010, and before the effective reporting 
date.
    (ll) Ultimate parent means a legal person that controls a 
participant and that itself has no parent.
    (mm) Ultimate parent ID means the UIC assigned to an ultimate 
parent of a participant.
    (nn) Unique Identification Code or UIC means the unique 
identification code assigned to a person, unit of a person, or product 
by or on behalf of an internationally recognized standards-

[[Page 31212]]

setting body that imposes fees and usage restrictions that are fair and 
reasonable and not unreasonably discriminatory. If no standards-setting 
body meets these criteria, a registered security-based swap data 
repository shall assign all necessary UICs using its own methodology. 
If a standards-setting body meets these criteria but has not assigned a 
UIC to a particular person, unit of a person, or product, a registered 
security-based swap data repository shall assign a UIC to that person, 
unit of a person, or product using its own methodology.
    (oo) United States has the same meaning as in Sec.  240.3a71-
3(a)(9) of this chapter.
    (pp) U.S. person has the same meaning as in Sec.  240.3a71-3(a)(7) 
of this chapter.


Sec.  242.901  Reporting obligations.

    (a) Reporting side. The reporting side for a security-based swap 
shall be as follows:
    (1) If both sides of the security-based swap include a security-
based swap dealer, the sides shall select the reporting side.
    (2) If only one side of the security-based swap includes a 
security-based swap dealer, that side shall be the reporting side.
    (3) If both sides of the security-based swap include a major 
security-based swap participant, the sides shall select the reporting 
side.
    (4) If one side of the security-based swap includes a major 
security-based swap participant and the other side includes neither a 
security-based swap dealer nor a major security-based swap participant, 
the side including the major security-based swap participant shall be 
the reporting side.
    (5) If neither side of the security-based swap includes a security-
based swap dealer or major security-based swap participant:
    (i) If both sides include a U.S. person or neither side includes a 
U.S. person, the sides shall select the reporting side.
    (ii) If only one side includes a U.S. person, that side shall be 
the reporting side.
    (b) Recipient of security-based swap information. For each 
security-based swap for which it is the reporting side, the reporting 
side shall provide the information required by Sec. Sec.  242.900 
through 242.911 to a registered security-based swap data repository or, 
if there is no registered security-based swap data repository that 
would accept the information, to the Commission.
    (c) Primary trade information. For any security-based swap that 
must be publicly disseminated pursuant to Sec. Sec.  242.902 and 
242.908 and for which it is the reporting side, the reporting side 
shall report the following information in real time. If a security-
based swap is required by Sec. Sec.  242.901 and 242.908 to be reported 
but not publicly disseminated, the reporting side shall report the 
following information no later than the time that the reporting side is 
required to comply with paragraph (d) of this section:
    (1) The asset class of the security-based swap and, if the 
security-based swap is an equity derivative, whether it is a total 
return swap or is otherwise designed to offer risks and returns 
proportional to a position in the equity security or securities on 
which the security-based swap is based;
    (2) Information that identifies the security-based swap instrument 
and the specific asset(s) or issuer(s) of any security on which the 
security-based swap is based;
    (3) The notional amount(s), and the currenc(ies) in which the 
notional amount(s) is expressed;
    (4) The date and time, to the second, of execution, expressed using 
Coordinated Universal Time (UTC);
    (5) The effective date;
    (6) The scheduled termination date;
    (7) The price;
    (8) The terms of any fixed or floating rate payments, and the 
frequency of any payments;
    (9) Whether or not the security-based swap will be cleared by a 
clearing agency;
    (10) If both sides of the security-based swap include a security-
based swap dealer, an indication to that effect;
    (11) If applicable, an indication that the transaction does not 
accurately reflect the market; and
    (12) If the security-based swap is customized to the extent that 
the information provided in paragraphs (c)(1) through (11) of this 
section does not provide all of the material information necessary to 
identify such customized security-based swap or does not contain the 
data elements necessary to calculate the price, an indication to that 
effect.
    (d) Secondary trade information. (1) In addition to the information 
required under paragraph (c) of this section, for each security-based 
swap for which it is the reporting side, the reporting side shall 
report:
    (i) The participant ID of each counterparty;
    (ii) As applicable, the broker ID, desk ID, and trader ID of the 
direct counterparty on the reporting side;
    (iii) The amount(s) and currenc(ies) of any up-front payment(s) and 
a description of the terms and contingencies of the payment streams of 
each direct counterparty to the other;
    (iv) The title of any master agreement, or any other agreement 
governing the transaction (including the title of any document 
governing the satisfaction of margin obligations), incorporated by 
reference and the date of any such agreement;
    (v) The data elements necessary for a person to determine the 
market value of the transaction;
    (vi) If the security-based swap will be cleared, the name of the 
clearing agency;
    (vii) If the security-based swap is not cleared, whether the 
exception in Section 3C(g) of the Exchange Act (15 U.S.C. 78c-3(g)) was 
invoked;
    (viii) If the security-based swap is not cleared, a description of 
the settlement terms, including whether the security-based swap is 
cash-settled or physically settled, and the method for determining the 
settlement value; and
    (ix) The venue where the security-based swap was executed.
    (2) Any information required to be reported pursuant to paragraph 
(d)(1) of this section must be reported promptly, but in no event later 
than:
    (i) Fifteen minutes after the time of execution for a security-
based swap that is executed and confirmed electronically;
    (ii) Thirty minutes after the time of execution for a security-
based swap that is confirmed electronically but not executed 
electronically; or
    (iii) Twenty-four hours after the time of execution for a security-
based swap that is not executed or confirmed electronically.
    (e) Duty to report any life cycle event of a security-based swap. 
For any life cycle event, and any adjustment due to a life cycle event, 
that results in a change to information previously reported pursuant to 
paragraph (c), (d), or (i) of this section, the reporting side shall 
promptly provide updated information reflecting such change to the 
entity to which it reported the original transaction, using the 
transaction ID, subject to the following exceptions:
    (1) If a reporting side ceases to be a counterparty to a security-
based swap due to an assignment or novation, the new side shall be the 
reporting side following such assignment or novation, if the new side 
includes a U.S. person, a security-based swap dealer, or a major 
security-based swap participant.
    (2) If, following an assignment or novation, the new side does not 
include a U.S. person, a security-based swap dealer, or a major 
security-based swap participant, the other side shall be the reporting 
side following such assignment or novation.

[[Page 31213]]

    (f) Time stamping incoming information. A registered security-based 
swap data repository shall time stamp, to the second, its receipt of 
any information submitted to it pursuant to paragraph (c), (d), (e), or 
(i) of this section.
    (g) Assigning transaction ID. A registered security-based swap data 
repository shall assign a transaction ID to each security-based swap.
    (h) Format of reported information. The reporting side shall 
electronically transmit the information required under this section in 
a format required by the registered security-based swap data 
repository, and in accordance with any applicable policies and 
procedures of the registered security-based swap data repository.
    (i) Reporting of pre-enactment and transitional security-based 
swaps. With respect to any pre-enactment security-based swap or 
transitional security-based swap, the reporting side shall report all 
of the information required by paragraphs (c) and (d) of this section, 
to the extent such information is available.


Sec.  242.902  Public dissemination of transaction reports.

    (a) General. Unless a security-based swap is a block trade or a 
cross-border security-based swap that is required to be reported but 
not publicly disseminated, a registered security-based swap data 
repository shall publicly disseminate a transaction report of the 
security-based swap immediately upon receipt of information about the 
security-based swap, or upon re-opening following a period when the 
registered security-based swap data repository was closed. The 
transaction report shall consist of all the information reported 
pursuant to Sec.  242.901, plus any indicator or indicators 
contemplated by the registered security-based swap data repository's 
policies and procedures that are required by Sec.  242.907.
    (b) Dissemination of block trades. A registered security-based swap 
data repository shall publicly disseminate a transaction report of a 
security-based swap that constitutes a block trade immediately upon 
receipt of information about the block trade from the reporting side. 
The transaction report shall consist of all the information reported by 
the reporting side pursuant to Sec.  242.901(c), except for the 
notional size, plus the transaction ID and an indicator that the report 
represents a block trade. The registered security-based swap data 
repository shall publicly disseminate a complete transaction report for 
such block trade (including the transaction ID and the full notional 
size) as follows:
    (1) If the security-based swap was executed on or after 05:00 UTC 
and before 23:00 UTC of the same day, the transaction report (including 
the transaction ID and the full notional size) shall be disseminated at 
07:00 UTC of the following day.
    (2) If the security-based swap was executed on or after 23:00 UTC 
and up to 05:00 UTC of the following day, the transaction report 
(including the transaction ID and the full notional size) shall be 
disseminated at 13:00 UTC of that following day.
    (3) Notwithstanding the foregoing, if a registered security-based 
swap data repository is in normal closing hours or special closing 
hours at a time when it would be required to disseminate information 
about a block trade pursuant to this section, the registered security-
based swap data repository shall instead disseminate information about 
the block trade immediately upon re-opening.
    (c) Non-disseminated information. A registered security-based swap 
data repository shall not disseminate:
    (1) The identity of either counterparty to a security-based swap;
    (2) With respect to a security-based swap that is not cleared at a 
registered clearing agency and that is reported to the registered 
security-based swap data repository, any information disclosing the 
business transactions and market positions of any person; or
    (3) Any information regarding a security-based swap reported 
pursuant to Sec.  242.901(i).
    (d) Temporary restriction on other market data sources. No person 
other than a registered security-based swap data repository shall make 
available to one or more persons (other than a counterparty) 
transaction information relating to a security-based swap before the 
earlier of 15 minutes after the time of execution of the security-based 
swap; or the time that a registered security-based swap data repository 
publicly disseminates a report of that security-based swap.


Sec.  242.903  Coded information.

    The reporting side may provide information to a registered 
security-based swap data repository pursuant to Sec.  242.901 and a 
registered security-based swap data repository may publicly disseminate 
information pursuant to Sec.  242.902 using codes in place of certain 
data elements, provided that the information necessary to interpret 
such codes is widely available on a non-fee basis.


Sec.  242.904  Operating hours of registered security-based swap data 
repositories.

    A registered security-based swap data repository shall have systems 
in place to continuously receive and disseminate information regarding 
security-based swaps pursuant to Sec. Sec.  242.900 through 242.911, 
subject to the following exceptions:
    (a) A registered security-based swap data repository may establish 
normal closing hours during periods when, in its estimation, the U.S. 
market and major foreign markets are inactive. A registered security-
based swap data repository shall provide reasonable advance notice to 
participants and to the public of its normal closing hours.
    (b) A registered security-based swap data repository may declare, 
on an ad hoc basis, special closing hours to perform system maintenance 
that cannot wait until normal closing hours. A registered security-
based swap data repository shall, to the extent reasonably possible 
under the circumstances, avoid scheduling special closing hours during 
periods when, in its estimation, the U.S. market and major foreign 
markets are most active; and provide reasonable advance notice of its 
special closing hours to participants and to the public.
    (c) During normal closing hours, and to the extent reasonably 
practicable during special closing hours, a registered security-based 
swap data repository shall have the capability to receive and hold in 
queue information regarding security-based swaps that has been reported 
pursuant to Sec. Sec.  242.900 through 242.911.
    (d) When a registered security-based swap data repository re-opens 
following normal closing hours or special closing hours, it shall 
disseminate transaction reports of security-based swaps held in queue, 
in accordance with the requirements of Sec.  242.902.
    (e) If a registered security-based swap data repository could not 
receive and hold in queue transaction information that was required to 
be reported pursuant to Sec. Sec.  242.900 through 242.911, it must 
immediately upon re-opening send a message to all participants that it 
has resumed normal operations. Thereafter, any participant that had an 
obligation to report information to the registered security-based swap 
data repository pursuant to Sec. Sec.  242.900 through 242.911, but 
could not do so because of the registered security-based swap data 
repository's inability to receive and hold in queue data, must 
immediately report the information to the registered security-based 
swap data repository.

[[Page 31214]]

Sec.  242.905  Correction of errors in security-based swap information.

    (a) Duty of counterparties to correct. Any counterparty to a 
security-based swap that discovers an error in information previously 
reported pursuant to Sec. Sec.  242.900 through 242.911 shall correct 
such error in accordance with the following procedures:
    (1) If a side that was not the reporting side for a security-based 
swap transaction discovers an error in the information reported with 
respect to such security-based swap, the counterparty shall promptly 
notify the reporting side of the error; and
    (2) If the reporting side for a security-based swap transaction 
discovers an error in the information reported with respect to a 
security-based swap, or receives notification from its counterparty of 
an error, the reporting side shall promptly submit to the entity to 
which the security-based swap was originally reported an amended report 
pertaining to the original transaction report. If the reporting side 
reported the initial transaction to a registered security-based swap 
data repository, the reporting side shall submit an amended report to 
the registered security-based swap data repository in a manner 
consistent with the policies and procedures contemplated by Sec.  
242.907(a)(3).
    (b) Duty of security-based swap data repository to correct. A 
registered security-based swap data repository shall:
    (1) Upon discovery of the error or receipt of a notice of the error 
from the reporting side, verify the accuracy of the terms of the 
security-based swap and, following such verification, promptly correct 
the erroneous information regarding such security-based swap contained 
in its system; and
    (2) If such erroneous information relates to a security-based swap 
that the registered security-based swap data repository previously 
disseminated and falls into any of the categories of information 
enumerated in Sec.  242.901(c), publicly disseminate a corrected 
transaction report of the security-based swap promptly following 
verification of the trade by the counterparties to the security-based 
swap, with an indication that the report relates to a previously 
disseminated transaction.


Sec.  242.906  Other duties of participants and guarantors.

    (a) Reporting by non-reporting-side. A registered security-based 
swap data repository shall identify any security-based swap reported to 
it for which the registered security-based swap data repository does 
not have the participant ID and (if applicable) the broker ID, desk ID, 
and trader ID of each direct counterparty. Once a day, the registered 
security-based swap data repository shall send a report to each 
participant identifying, for each security-based swap to which that 
participant is a counterparty, the security-based swap(s) for which the 
registered security-based swap data repository lacks participant ID and 
(if applicable) broker ID, desk ID, and trader ID. A participant that 
receives such a report shall provide the missing information to the 
registered security-based swap data repository within 24 hours.
    (b) Duty to provide ultimate parent and affiliate information. Each 
participant of a registered security-based swap data repository shall 
provide to the registered security-based swap data repository 
information sufficient to identify its ultimate parent(s) and any 
affiliate(s) of the participant that also are participants of the 
registered security-based swap data repository, using ultimate parent 
IDs and participant IDs. A participant shall promptly notify the 
registered security-based swap data repository of any changes to that 
information.
    (c) Policies and procedures of security-based swap dealers and 
major security-based swap participants. Each participant that is a 
security-based swap dealer or major security-based swap participant 
shall establish, maintain, and enforce written policies and procedures 
that are reasonably designed to ensure that it complies with any 
obligations to report information to a registered security-based swap 
data repository in a manner consistent with Sec. Sec.  242.900 through 
242.911 and the registered security-based swap data repository's 
applicable policies and procedures. Each such participant shall review 
and update its policies and procedures at least annually.


Sec.  242.907  Policies and procedures of registered security-based 
swap data repositories.

    (a) General policies and procedures. With respect to the receipt, 
reporting, and dissemination of data pursuant to Sec. Sec.  242.900 
through 242.911, a registered security-based swap data repository shall 
establish and maintain written policies and procedures:
    (1) That enumerate the specific data elements of a security-based 
swap or a life cycle event that the reporting side must report, which 
shall include, at a minimum, the data elements specified in Sec.  
242.901(c) and (d);
    (2) That specify one or more acceptable data formats (each of which 
must be an open-source structured data format that is widely used by 
participants), connectivity requirements, and other protocols for 
submitting information;
    (3) For specifying how reporting sides are to report corrections to 
previously submitted information, making corrections to information in 
its records that is subsequently discovered to be erroneous, and 
applying an appropriate indicator to any transaction report required to 
be disseminated by Sec.  242.905(b)(2) that the report relates to a 
previously disseminated transaction;
    (4) Describing how reporting sides shall report and, consistent 
with the enhancement of price discovery, how the registered security-
based swap data repository shall publicly disseminate, reports of, and 
adjustments due to, life cycle events; security-based swap transactions 
that do not involve an opportunity to negotiate any material terms, 
other than the counterparty; and any other security-based swap 
transactions that, in the estimation of the registered security-based 
swap data repository, do not accurately reflect the market;
    (5) For assigning:
    (i) A transaction ID to each security-based swap that is reported 
to it; and
    (ii) UICs established by or on behalf of an internationally 
recognized standards-setting body that imposes fees and usage 
restrictions that are fair and reasonable and not unreasonably 
discriminatory (or, if no standards-setting body meets these criteria 
or a standards-setting body meets these criteria but has not assigned a 
UIC to a particular person, unit of a person, or product, using its own 
methodology); and
    (6) For periodically obtaining from each participant information 
that identifies the participant's ultimate parent(s) and any 
participant(s) with which the participant is affiliated, using ultimate 
parent IDs and participant IDs.
    (b) Policies and procedures regarding block trades. (1) A 
registered security-based swap data repository 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 security-based swap data 
repository, in accordance with the criteria and formula for determining 
block size as specified by the Commission.
    (2) Exceptions. Notwithstanding the above, a registered security-
based swap data repository shall not designate as a block trade any 
security-based swap:
    (i) That is an equity total return swap or is otherwise designed to 
offer risks and returns proportional to a position in

[[Page 31215]]

the equity security or securities on which the security-based swap is 
based; or
    (ii) Contemplated by Section 13(m)(1)(C)(iv) of the Exchange Act 
((15 U.S.C. 78m(m)(1)(C)(iv)).
    (c) Public availability of policies and procedures. A registered 
security-based swap data repository shall make the policies and 
procedures required by Sec. Sec.  242.900 through 242.911 publicly 
available on its Web site.
    (d) Updating of policies and procedures. A registered security-
based swap data repository shall review, and update as necessary, the 
policies and procedures required by Sec. Sec.  242.900 through 242.911 
at least annually. Such policies and procedures shall indicate the date 
on which they were last reviewed.
    (e) A registered security-based swap data repository shall have the 
capacity to provide to the Commission, upon request, information or 
reports related to the timeliness, accuracy, and completeness of data 
reported to it pursuant to Sec. Sec.  242.900 through 242.911 and the 
registered security-based swap data repository's policies and 
procedures thereunder.


Sec.  242.908  Cross-border matters.

    (a) Application of Regulation SBSR to cross-border transactions--
(1) Regulatory reporting. A reporting side shall report a security-
based swap if:
    (i) The security-based swap is a transaction conducted within the 
United States;
    (ii) There is a direct or indirect counterparty that is a U.S. 
person on either side of the transaction;
    (iii) There is a direct or indirect counterparty that is a 
security-based swap dealer or major security-based swap participant on 
either side of the transaction; or
    (iv) The security-based swap is cleared through a clearing agency 
having its principal place of business in the United States.
    (2) Public dissemination. A security-based swap shall be subject to 
public dissemination if:
    (i) The security-based swap is a transaction conducted within the 
United States;
    (ii) There is a direct or indirect counterparty that is a U.S. 
person on each side of the transaction;
    (iii) At least one direct counterparty is a U.S. person (except in 
the case of a transaction conducted through a foreign branch);
    (iv) One side includes a U.S. person and the other side includes a 
non-U.S. person that is a security-based swap dealer; or
    (v) The security-based swap is cleared through a clearing agency 
having its principal place of business in the United States.
    (b) Limitation on counterparty duties. Notwithstanding any other 
provision of Sec. Sec.  242.900 through 242.911, a counterparty to a 
security-based swap shall not incur any obligation under Sec. Sec.  
242.900 through 242.911 unless it is:
    (1) A U.S. person;
    (2) A security-based swap dealer or major security-based swap 
participant; or
    (3) A counterparty to a transaction conducted within the United 
States.
    (c) Substituted compliance--(1) General. Compliance with the 
regulatory reporting and public dissemination requirements in sections 
13(m) and 13A of the Act (15 U.S.C. 78m(m) and 78m-1), and the rules 
and regulations thereunder, may be satisfied by compliance with the 
rules of a foreign jurisdiction that is the subject of a Commission 
order described in paragraph (c)(2) of this section, provided that with 
respect to at least one of the direct counterparties to the security-
based swap:
    (i) Such counterparty is either a non-U.S. person or a foreign 
branch; and
    (ii) The security-based swap transaction is not solicited, 
negotiated, or executed by a person within the United States on behalf 
of such counterparty.
    (2) Procedure. (i) The Commission may, conditionally or 
unconditionally, by order, make a substituted compliance determination 
regarding regulatory reporting and public dissemination of security-
based swaps with respect to a foreign jurisdiction if that 
jurisdiction's requirements for the regulatory reporting and public 
dissemination of security-based swaps are comparable to otherwise 
applicable requirements.
    (ii) Any person that executes security-based swaps that would, in 
the absence of a substituted compliance order, be required to be 
reported pursuant to Sec. Sec.  242.900 through 242.911 may file an 
application, pursuant to the procedures set forth in Sec.  240.0-13 of 
this chapter, requesting that the Commission make a substituted 
compliance determination regarding regulatory reporting and public 
dissemination with respect to a foreign jurisdiction the rules of which 
also would require reporting and public dissemination of those 
security-based swaps. Such application shall include the reasons 
therefor and such other information as the Commission may request.
    (iii) In making such a substituted compliance determination, the 
Commission shall take into account such factors as the Commission 
determines are appropriate, such as the scope and objectives of the 
relevant foreign regulatory requirements, as well as the effectiveness 
of the supervisory compliance program administered, and the enforcement 
authority exercised, by the foreign financial regulatory authority to 
support oversight of its regulatory reporting and public dissemination 
system for security-based swaps. The Commission shall not make such a 
substituted compliance determination unless it finds that:
    (A) The data elements that are required to be reported pursuant to 
the rules of the foreign jurisdiction are comparable to those required 
to be reported pursuant to Sec.  242.901;
    (B) The rules of the foreign jurisdiction require the security-
based swap to be reported and publicly disseminated in a manner and a 
timeframe comparable to those required by Sec. Sec.  242.900 through 
242.911;
    (C) The Commission has direct electronic access to the security-
based swap data held by a trade repository or foreign regulatory 
authority to which security-based swaps are reported pursuant to the 
rules of that foreign jurisdiction; and
    (D) Any trade repository or foreign regulatory authority in the 
foreign jurisdiction that receives and maintains required transaction 
reports of security-based swaps pursuant to the laws of that foreign 
jurisdiction is subject to requirements regarding data collection and 
maintenance; systems capacity, resiliency, and security; and 
recordkeeping that are comparable to the requirements imposed on 
security-based swap data repositories by Sec. Sec.  240.13n-5 through 
240.13n-7 of this chapter.
    (iv) Before issuing a substituted compliance order pursuant to this 
section, the Commission shall have entered into a supervisory and 
enforcement memorandum of understanding or other arrangement with the 
relevant foreign financial regulatory authority or authorities under 
such foreign financial regulatory system addressing oversight and 
supervision of the applicable security-based swap market under the 
substitute compliance determination.
    (v) The Commission may, on its own initiative, modify or withdraw 
such order at any time, after appropriate notice and opportunity for 
comment.


Sec.  242.909  Registration of security-based swap data repository as a 
securities information processor.

    A registered security-based swap data repository shall also 
register with the

[[Page 31216]]

Commission as a securities information processor on Form SIP (Sec.  
249.1001 of this chapter).


Sec.  242.910  Implementation of security-based swap reporting and 
dissemination.

    (a) Reporting of pre-enactment security-based swaps. The reporting 
side shall report to a registered security-based swap data repository 
any pre-enactment security-based swaps no later than January 12, 2012 
(180 days after the effective date of the Dodd-Frank Act (Pub. L. 111-
203, H.R. 4173)).
    (b) Phase-in of compliance dates. A registered security-based swap 
data repository and its participants shall be subject to the following 
phased-in compliance schedule:
    (1) Phase 1, six months after the registration date (i.e., the 
effective reporting date):
    (i) Reporting sides shall report to the registered security-based 
swap data repository any transitional security-based swaps.
    (ii) With respect to any security-based swap executed on or after 
the effective reporting date, reporting sides shall comply with Sec.  
242.901.
    (iii) Participants and the registered security-based swap data 
repository shall comply with Sec.  242.905 (except with respect to 
public dissemination) and Sec.  242.906(a) and (b).
    (iv) Participants that are security-based swap dealers or major 
security-based swap participants shall comply with Sec.  242.906(c).
    (2) Phase 2, nine months after the registration date: Wave 1 of 
public dissemination--The registered security-based swap data 
repository shall comply with Sec. Sec.  242.902 and 242.905 (with 
respect to public dissemination of corrected transaction reports) for 
50 security-based swap instruments.
    (3) Phase 3, 12 months after the registration date: Wave 2 of 
public dissemination--The registered security-based swap data 
repository shall comply with Sec. Sec.  242.902 and 242.905 (with 
respect to public dissemination of corrected transaction reports) for 
an additional 200 security-based swap instruments.
    (4) Phase 4, 18 months after the registration date: Wave 3 of 
public dissemination--All security-based swaps received by the 
registered security-based swap data repository shall be treated in a 
manner consistent with Sec. Sec.  242.902, 242.905, and 242.908.


Sec.  242.911  Prohibition during phase-in period.

    A reporting side shall not report a security-based swap to a 
registered security-based swap data repository in a phase-in period 
described in Sec.  242.910 during which the registered security-based 
swap data repository is not yet required or able to publicly 
disseminate transaction reports for that security-based swap instrument 
unless:
    (a) The security-based swap is also reported to a registered 
security-based swap data repository that is disseminating transaction 
reports for that security-based swap instrument consistent with Sec.  
242.902; or
    (b) No other registered security-based swap data repository is able 
to receive, hold, and publicly disseminate transaction reports 
regarding that security-based swap instrument.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
11. The authority citation for Part 249 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
12. Section 249.1600, Sec.  249.1600a, and Sec.  249.1600b as 
previously proposed to be added at 76 FR 65824, Oct. 24, 2011, are 
further revised to read as follows:

Subpart Q--Registration of Security-Based Swap Dealers and Major 
Security-Based Swap Participants

Sec.
249.1600 Form SBSE, for application for registration as a security-
based swap dealer or major security-based swap participant or to 
amend such an application for registration.
249.1600a Form SBSE-A, for application for registration as a 
security-based swap dealer or major security-based swap participant 
or to amend such an application for registration by firms registered 
or registering with the Commodity Futures Trading Commission as a 
swap dealer or major swap participant that are not also registered 
or registering with the Commission as a broker or dealer.
249.1600b Form SBSE-BD, for application for registration as a 
security-based swap dealer or major security-based swap participant 
or to amend such an application for registration by firms registered 
or registering with the Commission as a broker or dealer.
* * * * *


Sec.  249.1600  Form SBSE, for application for registration as a 
security-based swap dealer or major security-based swap participant or 
to amend such an application for registration.

    This form shall be used for application for registration as a 
security-based swap dealer or major security-based swap participant by 
firms that are not registered with the Commission as a broker or dealer 
and that are not registered or registering with the Commodity Futures 
Trading Commission as a swap dealer or major swap participant, pursuant 
to Section 15F(b) of the Securities Exchange Act of 1934 (15 U.S.C. 
78o-10(b)) and to amend such an application for registration.


Sec.  249.1600a  Form SBSE-A, for application for registration as a 
security-based swap dealer or major security-based swap participant or 
to amend such an application for registration by firms registered or 
registering with the Commodity Futures Trading Commission as a swap 
dealer or major swap participant that are not also registered or 
registering with the Commission as a broker or dealer.

    This form shall be used instead of Form SBSE (Sec.  249.1600) to 
apply for registration as a security-based swap dealer or major 
security-based swap participant by firms that are not registered or 
registering with the Commission as a broker or dealer but that are 
registered or registering with the Commodity Futures Trading Commission 
as a swap dealer or major swap participant, pursuant to Section 15F(b) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10(b)) and to 
amend such an application for registration. An entity that is 
registered or registering with the Commission as a broker or dealer and 
is also registered or registering with the Commodity Futures Trading 
Commission as a swap dealer or major swap participant shall apply for 
registration as a security-based swap dealer or major security-based 
swap participant on Form SBSE-BD (Sec.  249.1600b) and not on this Form 
SBSE-A.

[[Page 31217]]

Sec.  249.1600b  Form SBSE-BD, for application for registration as a 
security-based swap dealer or major security-based swap participant or 
to amend such an application for registration by firms registered or 
registering with the Commission as a broker or dealer.

    This form shall be used instead of either Form SBSE (Sec.  
249.1600) or SBSE-A (Sec.  249.1600a) to apply for registration as a 
security-based swap dealer or major security-based swap participant 
solely by firms registered or registering with the Commission as a 
broker or dealer, pursuant to Section 15F(b) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78o-10(b)) and to amend such an application for 
registration. An entity that is registered or registering with the 
Commission as a broker or dealer and is also registered or registering 
with the Commodity Futures Trading Commission as a swap dealer or major 
swap participant, the entity shall apply for registration as a 
security-based swap dealer or major security-based swap participant on 
this Form SBSE-BD and not on Form SBSE-A.

    Note: The following Appendices will not appear in the Code of 
Federal Regulations.

Appendix A: Application of Subtitle B of Title VII in the Cross-Border 
Context

    The following tables summarize the Commission's proposed 
approach to applying requirements in Subtitle B of Title VII of the 
Dodd-Frank Act in the cross-border context.\1972\ Specifically, as 
explained more fully in the main body of the release, the tables 
show how the entity-level requirements in Title VII apply to various 
dealing entities (identified in row 1 of each of the tables).\1973\ 
The tables also show how various transaction-level requirements in 
Title VII apply to transactions between such dealing entities and 
various transaction counterparties (identified in row 8 of each of 
the tables), depending on the location of the dealer or the dealer's 
agent (identified in row 7). For the sake of completeness, these 
tables may include transaction scenarios that are unlikely to occur 
in practice.
---------------------------------------------------------------------------

    \1972\ The tables in this appendix are only a summary of the 
rules and interpretations proposed in this release and are provided 
for ease of reference. They do not supersede, and should be read in 
conjunction with, the proposed rules and interpretations discussed 
in the release. All defined terms used in the tables have the same 
meaning as set forth in the release, unless otherwise indicated.
    \1973\ Tables III and V also apply to non-U.S. dealers and other 
non-U.S. market participants.
---------------------------------------------------------------------------

Guide to Reading the Title VII Tables

    The following provides a guide to reading the tables below.
     ``Yes''--Indicates that the Commission is proposing to 
apply a particular transaction-level requirement in Title VII to a 
security-based swap transaction between the dealing entity 
identified in row 1 and the transaction counterparty identified in 
row 8, or that the Commission is proposing to apply a particular 
entity-level requirement in Title VII to the dealing entity 
identified in row 1, and that substituted compliance would not be 
permitted.
     ``No''--Indicates that the Commission is not proposing 
to apply the particular Title VII requirement.
     ``N/A''--Indicates that the Title VII requirement is 
not applicable because it applies only to registered security-based 
swap dealers.
     ``Substituted Compliance'' (or ``Sub Comp'')--Indicates 
that the Commission is proposing to apply the Title VII requirement, 
but that we also are proposing to establish a policy and procedural 
framework under which we would consider permitting compliance with 
comparable regulatory requirements in a foreign jurisdiction to 
substitute for compliance with requirements of the Exchange Act, and 
the rules and regulations thereunder, relating to security-based 
swaps.
     ``Location of Dealer/Agent''--Refers to the location of 
the dealing entity booking the transaction or its agent.
    [cir] Table I describes the application of Title VII to 
registered U.S. security-based swap dealers and is divided between 
security-based swap transactions that are conducted:
    [ssquf] Other than through a U.S. bank's foreign branch (columns 
2 through 6); or
    [ssquf] Through a U.S. bank's foreign branch (columns 7 through 
11).\1974\
---------------------------------------------------------------------------

    \1974\ The transactions identified in columns 7 and 8 of Table I 
are transactions in which a foreign branch of a U.S. bank is the 
counterparty to the transaction, but such transactions would not 
fall within the definition of ``transaction conducted through a 
foreign branch'' in proposed Rule 3a71-3(a)(4) under the Exchange 
Act.
---------------------------------------------------------------------------

    [cir] Tables II-V are divided between transactions in which the 
dealing entity or its agent is:
    [ssquf] ``Within the U.S.''--Indicates that a person within the 
United States acting on behalf of such non-U.S. dealer has 
solicited, negotiated, executed, or booked the transaction within 
the United States; or
    [ssquf] ``Outside the U.S.''--Indicates that such non-U.S. 
dealer has solicited, negotiated, executed, and booked the 
transaction, without involving any person within the United States 
acting on its behalf.\1975\
---------------------------------------------------------------------------

    \1975\ A transaction in which the non-U.S. dealing entity and 
its agent are outside the United States may still be a ``transaction 
conducted within the United States,'' as defined in proposed Rule 
3a71-3(a)(5) under the Exchange Act. For example, the non-U.S. 
dealing entity may direct its solicitation activity to a U.S. or 
non-U.S. person counterparty located within the United States.
---------------------------------------------------------------------------

     ``Transaction counterparty''--Refers to the 
counterparty with which the dealing entity (identified in row 1) 
enters into a transaction and whose counterparty credit risk the 
dealing entity ultimately bears. Therefore, the transaction 
counterparty is the booking location or booking entity of the 
trading counterparty with which the dealing entity transacts. A 
transaction counterparty may use personnel or an agent in a 
different location than the booking location or booking entity to 
negotiate the transaction with the dealing entity. The five 
transaction counterparties identified in the tables are as follows:
    [cir] ``U.S. Person (other than Foreign Branch)''--Indicates the 
transaction counterparty of the dealing entity (identified in row 1) 
is a U.S. person (other than a foreign branch of a U.S. bank);
    [cir] ``Non-U.S. Person Within the U.S.''--Indicates the 
transaction counterparty of the dealing entity (identified in row 1) 
is a non-U.S. person and the security-based swap transaction is 
conducted (i.e., solicited, negotiated, executed, or booked) by or 
on behalf of the non-U.S. person transaction counterparty within the 
United States. This includes a non-U.S. person counterparty that 
uses its own personnel in its U.S. branch or office to conduct the 
transaction or that uses a U.S. affiliate or third party acting as 
its agent to conduct the transaction on its behalf; \1976\
---------------------------------------------------------------------------

    \1976\ If the non-U.S. person transaction counterparty is a 
registered security-based swap dealer, see Table II or IV for 
application of other transaction-level requirements. If the non-U.S. 
person transaction counterparty is an unregistered dealer or market 
participant that receives a U.S. guarantee, see Table II or III for 
application of other transaction-level requirements.
---------------------------------------------------------------------------

    [cir] ``Foreign Branch of U.S. Bank''--Indicates the transaction 
counterparty of the dealing entity (identified in row 1) is a 
foreign branch of a U.S. bank and the security-based swap 
transaction is conducted (i.e., solicited, negotiated, executed, and 
booked) by or on behalf of such foreign branch without involving any 
person within the United States acting on behalf of the foreign 
branch;
    [cir] ``Non-U.S. Person w/U.S. Guarantee Outside the U.S.''--
Indicates the transaction counterparty of the dealing entity 
(identified in row 1) is a non-U.S. person whose performance under 
the security-based swap is guaranteed by a U.S. person (the ``U.S. 
Guarantor'') such that its counterparty has direct recourse to the 
U.S. Guarantor for performance of obligations owed by such non-U.S. 
person (i.e., the guaranteed entity) under the security-based swap, 
and the security-based swap transaction is conducted (i.e., 
solicited, negotiated, executed, and booked) by or on behalf of such 
non-U.S. person counterparty without involving any person within the 
United States acting on behalf of such non-U.S. person; and
    [cir] ``Non-U.S. Person w/o U.S. Guarantee Outside the U.S.''--
Indicates the transaction counterparty of the dealing entity 
(identified in row 1) is a non-U.S. person whose performance under 
the security-based swap is not guaranteed by a U.S. person, and the 
security-based swap transaction is conducted (i.e., solicited, 
negotiated, executed, and booked), by or on behalf of such non-U.S. 
person counterparty, without involving any person within the United 
States acting on behalf of such non-U.S. person.\1977\
---------------------------------------------------------------------------

    \1977\ If the non-U.S. person counterparty is a registered 
security-based swap dealer, see Table IV for application of other 
transaction-level requirements.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

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BILLING CODE 8011-01-C

Appendix B: Registration of Security-Based Swap Dealers

    This table shows the Commission's proposed approach to applying 
the de minimis threshold in the security-based swap dealer 
definition in the cross-border context.\1978\ Specifically, it 
indicates whether a potential security-based swap dealer listed 
along the top of the table would be required to count a transaction 
conducted in a dealing capacity with the various counterparties 
listed along the left hand column of the table toward its de minimis 
threshold.

    \1978\ This table in this appendix is only a summary of the 
rules and interpretations proposed in this release and is provided 
for ease of reference. It does not supersede, and should be read in 
conjunction with, the proposed rules and interpretations discussed 
in the release. All defined terms used in this table have the same 
meaning as set forth in the release, unless otherwise indicated.

---------------------------------------------------------------------------

[[Page 31223]]

[GRAPHIC] [TIFF OMITTED] TP23MY13.010

Appendix C: Re-Proposal of Registration Forms

    Form SBSE
    Form SBSE-A
    Form SBSE-BD


[[Page 31224]]


[GRAPHIC] [TIFF OMITTED] TP23MY13.011

Form SBSE Instructions

A. General Instructions

    1. FORM--Form SBSE is the Application for Registration as either a 
Security-based Swap Dealer or Major Security-based Swap Participant 
(collectively, ``SBS Entities''). SBS Entities that are not registered 
with the Commission as broker-dealers nor registered or registering 
with the Commodity Futures Trading Commission (``CFTC'') as a swap 
dealer or major swap participant must file this form to register with 
the Securities and Exchange Commission. An applicant must also file 
Schedules A, B, D, E, F, and G as appropriate. There is no Schedule C.
    2. ELECTRONIC FILING--The applicant must file Form SBSE through the 
EDGAR system, and must utilize the EDGAR Filer Manual (as defined in 17 
CFR 232. 11) to file and amend Form SBSE electronically to assure the 
timely acceptance and processing of those filings.\1979\
---------------------------------------------------------------------------

    \1979\ As discussed in the release proposing this Form, the 
Commission is currently developing a system to facilitate receipt of 
applications electronically. More specific instructions on how to 
file this Form may be included in the final version of the Form.
---------------------------------------------------------------------------

    3. UPDATING--By law, the applicant must promptly update Form SBSE 
information by submitting amendments whenever the information on file 
becomes inaccurate or incomplete for any reason [17 CFR 240.15Fb2-2]. 
In addition, the applicant must update any incomplete or inaccurate 
information contained on Form SBSE prior to filing a notice of 
withdrawal from registration on Form SBSE-W [17 CFR 15Fb3-2(a)].
    4. CONTACT EMPLOYEE--The individual listed as the contact employee 
must be authorized to receive all compliance information, 
communications, and mailings, and be responsible for disseminating it 
within the applicant's organization.
    5. FEDERAL INFORMATION LAW AND REQUIREMENTS--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

[[Page 31225]]

15F, 17(a) and 23(a) of the Exchange Act authorize the SEC to collect 
the information on this form from registrants. See 15 U.S.C. Sec. Sec.  
78o-10, 78q and 78w. Filing of this form is mandatory; however, the 
social security number information, which aids in identifying the 
applicant, is voluntary. The principal purpose of this Form is to 
permit the Commission to determine whether the applicant meets the 
statutory requirements to engage in the security-based swap business. 
The Commission maintain[s] a file of the information on this form and 
will make certain information collected via the form publicly 
available. Any member of the public may direct to the Commission any 
comments concerning the accuracy of the burden estimate on this Form, 
and any suggestions for reducing this burden. This collection of 
information has been reviewed by the Office of Management and Budget in 
accordance with the clearance requirements of 44 U.S.C. Sec.  3507. The 
information contained in this form is part of a system of records 
subject to the Privacy Act of 1974, as amended. The Securities and 
Exchange Commission has published in the Federal Register the Privacy 
Act Systems of Records Notice for these records.

B. Filing Instructions

    1. FORMAT
    a. Sections 1-14 must be answered and all fields requiring a 
response must be completed before the filing will be accepted.
    b. Failure to follow instructions or properly complete the form may 
result in the application being delayed or rejected.
    c. Applicant must complete the execution screen certifying that 
Form SBSE and amendments thereto have been executed properly and that 
the information contained therein is accurate and complete.
    d. To amend information, the applicant must update the appropriate 
Form SBSE screens.
    e. A paper copy, with original signatures, of the initial Form SBSE 
filing and amendments to Disclosure Reporting Pages (DRPs) must be 
retained by the applicant and be made available for inspection upon a 
regulatory request.
    2. DISCLOSURE REPORTING PAGE (DRP)--Information concerning the 
applicant or control affiliate that relates to the occurrence of an 
event reportable under Item 12 must be provided on the applicant's 
appropriate DRP.
    3. DIRECT AND INDIRECT OWNERS--Amend the Direct Owners and 
Executive Officers screen and the Indirect Owners screen when changes 
in ownership occur.
    The mailing address for questions and correspondence is:

Explanation of Terms

(The Following Terms are Italicized Throughout This Form.)

1. General

    APPLICANT--The security-based swap dealer or major security-based 
swap participant applying on or amending this form.
    CONTROL--The power, directly or indirectly, to direct the 
management or policies of a company, whether through ownership of 
securities, by contract, or otherwise. Any person that (i) is a 
director, general partner or officer exercising executive 
responsibility (or having similar status or functions); (ii) directly 
or indirectly has the right to vote 25% or more of a class of a voting 
security or has the power to sell or direct the sale of 25% or more of 
a class of voting securities; or (iii) in the case of a partnership, 
has the right to receive upon dissolution, or has contributed, 25% or 
more of the capital, is presumed to control that company.
    STATE--Any state of the United States, the District of Columbia, 
the Commonwealth of Puerto Rico, the U.S. Virgin Islands, any other 
territory of the United States, or any subdivision or regulatory body 
thereof.
    PERSON--An individual, partnership, corporation, trust, or other 
organization.
    SELF-REGULATORY ORGANIZATION (SRO)--Any national securities or 
futures exchange, registered securities or futures association, 
registered clearing agency, or derivatives clearing organization.
    SUCCESSOR--The term ``successor'' is defined to be an unregistered 
entity that assumes or acquires substantially all of the assets and 
liabilities, and that continues the business of, a predecessor 
security-based swap dealer or major security-based swap participant 
that ceases its security-based swap activities. [See Exchange Act Rule 
15Fb2-5 (17 CFR 240.15Fb2-5]

2. FOR THE PURPOSE OF ITEM 12 AND THE CORRESPONDING DISCLOSURE 
REPORTING PAGES (DRPs)

    CHARGED--Being accused of a crime in a formal complaint, 
information, or indictment (or equivalent formal charge).
    CONTROL AFFILIATE--A person named in Items 10 or 11 as a control 
person or any other individual or organization that directly or 
indirectly controls, is under common control with, or is controlled by, 
the applicant, including any current employee of the applicant except 
one performing only clerical, administrative, support or similar 
functions, or who, regardless of title, performs no executive duties or 
has no senior policy making authority.
    ENJOINED--Includes being subject to a mandatory injunction, 
prohibitory injunction, preliminary injunction, or a temporary 
restraining order.
    FELONY--For jurisdictions that do not differentiate between a 
felony and a misdemeanor, a felony is an offense punishable by a 
sentence of at least one year imprisonment and/or a fine of at least 
$1,000. The term also includes a general court martial.
    FOUND--Includes adverse final actions, including consent decrees in 
which the respondent has neither admitted nor denied the findings, but 
does not include agreements, deficiency letters, examination reports, 
memoranda of understanding, letters of caution, admonishments, and 
similar informal resolutions of matters.
    INVESTMENT OR INVESTMENT-RELATED--Pertaining to securities, 
commodities, banking, savings association activities, credit union 
activities, insurance, or real estate (including, but not limited to, 
acting as or being associated with a broker-dealer, municipal 
securities dealer, government securities broker or dealer, issuer, 
investment company, investment adviser, futures sponsor, bank, 
security-based swap dealer, major security-based swap participant, 
savings association, credit union, insurance company, or insurance 
agency).
    INVOLVED--Doing an act or aiding, abetting, counseling, commanding, 
inducing, conspiring with or failing reasonably to supervise another in 
doing an act.
    MINOR RULE VIOLATION--A violation of a self-regulatory organization 
rule that has been designated as ``minor'' pursuant to a plan approved 
by the SEC or CFTC. A rule violation may be designated as ``minor'' 
under a plan if the sanction imposed consists of a fine of $2,500 or 
less, and if the sanctioned person does not contest the fine. (Check 
with the appropriate self-regulatory organization to determine if a 
particular rule violation has been designated as ``minor'' for these 
purposes).
    MISDEMEANOR--For jurisdictions that do not differentiate between a 
felony and a misdemeanor, a misdemeanor is an offense punishable by a 
sentence of less than one year imprisonment and/or a fine of less than

[[Page 31226]]

$1,000. The term also includes a special court martial.
    ORDER--A written directive issued pursuant to statutory authority 
and procedures, including orders of denial, suspension, or revocation; 
does not include special stipulations, undertakings or agreements 
relating to payments, limitations on activity or other restrictions 
unless they are included in an order.
    PROCEEDING--Includes a formal administrative or civil action 
initiated by a governmental agency, self-regulatory organization or a 
foreign financial regulatory authority; a felony criminal indictment or 
information (or equivalent formal charge); or a misdemeanor criminal 
information (or equivalent formal charge). Does not include other civil 
litigation, investigations, or arrests or similar charges effected in 
the absence of a formal criminal indictment or information (or 
equivalent formal charge).
BILLING CODE 8011-01-P

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BILLING CODE 8011-01-C

Form SBSE-A Instructions

A. General Instructions

    1. FORM--Form SBSE-A is the Application for Registration as either 
a Security-based Swap Dealer or Major Security-based Swap Participant 
(collectively, ``SBS Entities'') by an entity that is not registered or 
registering with the Commission as a broker-dealer but is registered or 
registering with the Commodity Futures Trading Commission (``CFTC'') as 
a swap dealer or major swap participant. These SBS Entities must file 
this form and a copy of the Form 7-R they file with the CFTC (or its 
designee) to register with the Securities and Exchange Commission. An 
applicant must also file Schedules A, B, C, F, and G, as appropriate. 
There are no Schedules D, or E. An entity that is registered with the 
Commission as a broker-dealer and also is registered or registering 
with the Commodity Futures Trading Commission (``CFTC'') as a swap 
dealer or major swap participant should file Form SBSE-BD to register 
with the Commission as an SBS Entity.
    2. ELECTRONIC FILING--This Form SBSE-A must be filed electronically 
with the Commission through the EDGAR system, and must utilize the 
EDGAR Filer Manual (as defined in 17 CFR 232. 11) to file and amend 
Form SBSE-A electronically to assure the timely acceptance and 
processing of those filings.\1980\ Additional documents shall be 
attached to this electronic application.
---------------------------------------------------------------------------

    \1980\ As discussed in the release proposing this Form, the 
Commission is currently developing a system to facilitate receipt of 
applications electronically. More specific instructions on how to 
file this Form may be included in the final version of the Form.
---------------------------------------------------------------------------

    3. UPDATING--By law, the applicant must promptly update Form SBSE-A 
information by submitting amendments whenever the information on file 
becomes inaccurate or incomplete for any reason [17 CFR 240.15Fb2-2]. 
In addition, the applicant must update any incomplete or inaccurate 
information contained on Form SBSE-A prior to filing a notice of 
withdrawal from registration on Form SBSE-W [17 CFR 15Fb3-2(a)].
    4. CONTACT EMPLOYEE--The individual listed as the contact employee 
must be authorized to receive all compliance information, 
communications, and mailings, and be responsible for disseminating it 
within the applicant's organization.
    5. FEDERAL INFORMATION LAW AND REQUIREMENTS--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 15F, 17(a) and 23(a) of the Exchange Act authorize the 
SEC to collect the information on this form from registrants. See 15 
U.S.C. Sec. Sec.  78o-10, 78q and 78w. Filing of this form is 
mandatory; however, the social security number information, which aids 
in identifying the applicant, is voluntary. The principal purpose of 
this Form is to permit the Commission to determine whether the 
applicant meets the statutory requirement to engage in the security-
based swap business. The Commission maintain[s] a file of the 
information on this form and will make certain information collected 
via the form publicly available. Any member of the public may direct to 
the Commission any comments concerning the accuracy of the burden 
estimate on this Form, and any suggestions for reducing this burden. 
This collection of information has been reviewed by the Office of 
Management and Budget in accordance with the clearance requirements of 
44 U.S.C. Sec.  3507. The information contained in this form is part of 
a system of records subject to the Privacy Act of 1974, as amended. The 
Securities and Exchange Commission has published in the Federal 
Register the Privacy Act Systems of Records Notice for these records.

B. Filing Instructions

    1. FORMAT
    a. Items 1-16 and the accompanying Schedules and DRP pages must be 
answered and all fields requiring a response must be completed before 
the filing will be accepted.
    b. Failure to follow instructions or properly complete the form may 
result in the application being delayed or rejected.
    c. Applicant must complete the execution screen certifying that 
Form SBSE-A and amendments thereto have been executed properly and that 
the information contained therein is accurate and complete.
    d. To amend information, the applicant must update the appropriate 
Form SBSE-A screens.
    e. A paper copy, with original signatures, of the initial Form 
SBSE-A filing [and amendments to Disclosure Reporting Pages (DRPs)] 
must be retained by the applicant and be made available for inspection 
upon a regulatory request.
    2. DISCLOSURE REPORTING PAGE (DRP)--Information concerning a 
principal that relates to the occurrence of an event reportable in 
Schedule C must be provided on the appropriate DRP.
    The mailing address for questions and correspondence is:

Explanation of Terms

(The following terms are italicized throughout this form.)

1. General

    Terms used in this Form SBSE-A that are defined in the form the 
CFTC requires that swap dealers and major swap participants use to 
apply for registration with the CFTC shall have the same meaning as set 
forth in that form.
    APPLICANT--The security-based swap dealer or major security-based 
swap participant applying on or amending this form.
    CONTROL--The power, directly or indirectly, to direct the 
management or policies of a company, whether through ownership of 
securities, by contract, or otherwise. Any person that (i) is a 
director, general partner or officer exercising executive 
responsibility (or having similar status or functions); (ii) directly 
or indirectly has the right to vote 25% or more of a class of a voting 
security or has the power to sell or direct the sale of 25% or more of 
a class of voting securities; or (iii) in the case of a partnership, 
has the right to receive upon dissolution, or has contributed, 25% or 
more of the capital, is presumed to control that company.
    JURISDICTION--A state, the District of Columbia, the Commonwealth 
of Puerto Rico, the U.S. Virgin Islands, or any subdivision or 
regulatory body thereof.
    SUCCESSOR--The term ``successor'' is defined to be an unregistered 
entity that assumes or acquires substantially all of the assets and 
liabilities, and that continues the business of, a predecessor 
security-based swap dealer or major security-based swap participants 
that ceases its security-based swap activities. [See Exchange Act Rule 
15b2-5 (17 CFR 240.15Fb2-5)]

3. For the Purpose of Schedule C and the Corresponding Disclosure 
Reporting Pages (DRPs)

    FOREIGN FINANCIAL REGULATORY AUTHORITY--Includes (1) a foreign 
securities authority; (2) other governmental body or foreign equivalent 
of a self-regulatory organization empowered by a foreign government to 
administer or enforce its laws relating to the regulation of financial 
services industry-related activities; and (3) a foreign membership 
organization, a function of which is to regulate the participation of 
its members in the activities listed above.

[[Page 31252]]

    FINANCIAL SERVICES INDUSTRY-RELATED--Pertaining to securities, 
commodities, banking, savings association activities, credit union 
activities, insurance, or real estate (including, but not limited to, 
acting as or being associated with a broker-dealer, municipal 
securities dealer, government securities broker or dealer, issuer, 
investment company, investment adviser, futures sponsor, bank, 
security-based swap dealer, major security-based swap participant, 
savings association, credit union, insurance company, or insurance 
agency). (This definition is used solely for the purpose of Form SBSE-
A.)
    INVOLVED--Doing an act or aiding, abetting, counseling, commanding, 
inducing, conspiring with or failing reasonably to supervise another in 
doing an act.
    ORDER--A written directive issued pursuant to statutory authority 
and procedures, including orders of denial, suspension, or revocation; 
does not include special stipulations, undertakings or agreements 
relating to payments, limitations on activity or other restrictions 
unless they are included in an order.
    PROCEEDING--Includes a formal administrative or civil action 
initiated by a governmental agency, self-regulatory organization or a 
foreign financial regulatory authority; a felony criminal indictment or 
information (or equivalent formal charge); or a misdemeanor criminal 
information (or equivalent formal charge). Does not include other civil 
litigation, investigations, or arrests or similar charges effected in 
the absence of a formal criminal indictment or information (or 
equivalent formal charge).
BILLING CODE 8011-01-P

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BILLING CODE 8011-01-C

Form SBSE-BD Instructions

A. General Instructions

    1. FORM--Form SBSE-BD is the Application for Registration as either 
a Security-based Swap Dealer or Major Security-based Swap Participant 
(collectively, ``SBS Entities'') by an entity that is registered or 
registering with the Commission as a broker or dealer. These SBS 
Entities must file this form to register with the Securities and 
Exchange Commission. An applicant must also file Schedules F and G, as 
appropriate. There are no Schedules A, B, C, D, or E.
    2. DEFINITIONS--Form SBSE-BD uses the same definitions as in Form 
BD.
    3. ELECTRONIC FILING--This Form SBSE-BD must be filed 
electronically with the Commission through the EDGAR system, and must 
utilize the EDGAR Filer Manual (as defined in 17 CFR 232.11) to file 
and amend Form SBSE-BD electronically to assure the timely acceptance 
and processing of those filings.\1981\ Additional documents shall be 
attached to this electronic application.
---------------------------------------------------------------------------

    \1981\ As discussed in the release proposing this Form, the 
Commission is currently developing a system to facilitate receipt of 
applications electronically. More specific instructions on how to 
file this Form may be included in the final version of the Form.
---------------------------------------------------------------------------

    4. UPDATING--By law, the applicant must promptly update Form SBSE-
BD information by submitting amendments whenever the information on 
file becomes inaccurate or incomplete for any reason [17 CFR 240.15Fb2-
2]. In addition, the applicant must update any incomplete or inaccurate 
information contained on Form SBSE-BD prior to filing a notice of 
withdrawal from

[[Page 31274]]

registration on Form SBSE-W [17 CFR 15Fb3-2(a)].
    5. FEDERAL INFORMATION LAW AND REQUIREMENTS--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 15F, 17(a) and 23(a) of the Exchange Act authorize the 
SEC to collect the information on this form from registrants. See 15 
U.S.C. Sec. Sec.  78o-10, 78q and 78w. Filing of this form is 
mandatory. The principal purpose of this Form is to permit the 
Commission to determine whether the applicant meets the statutory 
requirements to engage in the security-based swap business. The 
Commission maintain[s] a file of the information on this form and will 
make certain information collected via the form publicly available. Any 
member of the public may direct to the Commission any comments 
concerning the accuracy of the burden estimate on this Form, and any 
suggestions for reducing this burden. This collection of information 
has been reviewed by the Office of Management and Budget in accordance 
with the clearance requirements of 44 U.S.C. Sec.  3507. The 
information contained in this form is part of a system of records 
subject to the Privacy Act of 1974, as amended. The Securities and 
Exchange Commission has published in the Federal Register the Privacy 
Act Systems of Records Notice for these records.

B. Filing Instructions

    1. FORMAT
    a. Items 1-4 and the accompanying Schedules must be answered and 
all fields requiring a response must be completed before the filing 
will be accepted.
    b. Failure to follow instructions or properly complete the form may 
result in the application being delayed or rejected.
    c. Applicant must complete the execution screen certifying that 
Form SBSE-BD and amendments thereto have been executed properly and 
that the information contained therein is accurate and complete.
    d. To amend information, the applicant must update the appropriate 
Form SBSE-BD screens.
    e. A paper copy, with original signatures, of the initial Form 
SBSE-BD filing and Schedules must be retained by the applicant and be 
made available for inspection upon a regulatory request.
    The mailing address for questions and correspondence is:
BILLING CODE 8011-01-P

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BILLING CODE 8011-01-C

Appendix D: List of Commenters

    Market participants, foreign regulators, and other interested 
parties have submitted to the Commission (and the CFTC) numerous 
written comment letters that address the application of Title VII to 
cross-border activities. Because of the interdisciplinary nature of 
cross-border issues, these comments were filed in connection with 
several rulemakings and following the joint public roundtable 
regarding the application of Title VII to cross-border activities 
held by the Commission and the CFTC on August 1, 2011. The 
Commission has provided the legend and table below to facilitate the 
public's ability to access and review these comment letters.

------------------------------------------------------------------------
        Abbreviation                 Source               Location
------------------------------------------------------------------------
Definitions Concept Release   Definitions           https://www.sec.gov/
 (Advanced Joint Notice of     Contained in Title    comments/s7-16-10/
 Proposed Rulemaking or        VII of Dodd-Frank     s71610.shtml.
 ``ANPR'').                    Wall Street Reform
                               and Consumer
                               Protection Act.
Study on International Swap   Comments on           https://www.sec.gov/
 Regulation (``ISR'').         Acceptance of         comments/4-635/4-
                               Public Submissions    635.shtml.
                               for a Study on
                               International Swap
                               Regulation Mandated
                               by Section 719(c)
                               of the Dodd-Frank
                               Wall Street Reform
                               and Consumer
                               Protection Act.
Intermediary Definitions      SEC Final Rules on    https://www.sec.gov/
 Adopting Release (``IDAR'').  the Further           comments/s7-39-10/
                               Definition of         s73910.shtml.
                               ``Swap Dealer,''
                               ``Security-Based
                               Swap Dealer,''
                               ``Major Swap
                               Participant,''
                               ``Major Security-
                               Based Swap
                               Participant'' and
                               ``Eligible Contract
                               Participant''.
Registration Proposing        SEC Proposed Rules    https://www.sec.gov/
 Release (``RPR'').            on the Registration   comments/s7-40-11/
                               of Security-Based     s74011.shtml.
                               Swap Dealers and
                               Major Security-
                               Based Swap
                               Participants.
Regulation SBSR Proposing     SEC Proposed Rules    https://www.sec.gov/
 Release (``RSPR'').           on Regulation SBSR--  comments/s7-34-10/
                               Reporting and         s73410.shtml.
                               Dissemination of
                               Security-Based Swap
                               Information.

[[Page 31278]]

 
Regulation SB SEF Proposing   SEC Proposed Rules    https://www.sec.gov/
 Release (``PRSBR'').          on the Registration   comments/s7-06-11/
                               and Regulation of     s70611.shtml.
                               Security-Based Swap
                               Execution
                               Facilities.
Product Definitions (``PD'')  Product Definitions   https://www.sec.gov/
                               Contained in Title    comments/s7-16-11/
                               VII of the Dodd-      s71611.shtml.
                               Frank Wall Street
                               Reform and Consumer
                               Protection Act.
Public Comments on SEC        Security-Based Swap   https://www.sec.gov/
 Regulatory Initiatives        Dealers and Major     comments/df-title-
 Under the Dodd-Frank Act      Security-Based Swap   vii/swap/
 (``PC'').                     Participants: Title   swap.shtml.
                               VII Provisions of
                               the Dodd-Frank Wall
                               Street Reform and
                               Consumer Protection
                               Act.
Roundtable (``T7R'')........  August 1, 2011--      https://www.sec.gov/
                               Joint Public          comments/4-636/4-
                               Roundtable on         636.shtml.
                               International
                               Issues Relating to
                               the Implementation
                               of Title VII of the
                               Dodd-Frank Wall
                               Street Reform and
                               Consumer Protection
                               Act.
SDR Proposing Release         Security-Based Swap   https://www.sec.gov/
 (``SPR'').                    Data Repository       comments/s7-35-10/
                               Registration,         s73510.shtml.
                               Duties, and Core
                               Principles.
CFTC Title VII Definitions    CFTC Proposed Rule    https://
 (``CFTC-D'').                 75 FR 51429:          comments.cftc.gov/
                               Definitions           PubliPublicCom/
                               Contained in Title    CommentList.aspa?id
                               VII of Dodd-Frank     =759.
                               Wall Street Reform
                               and Consumer
                               Protection Act.
CFTC Further Definitions of   CFTC Proposed Rule    https://
 ``Swap Dealer'' (``FDSD'').   75 FR 80174:          comments.cftc.gov/
                               Further Definition    PublicComments/
                               of ``Swap Dealer,''   CommentList.aspx?id
                               ``Security-Based      =933.
                               Swap Dealer,''
                               ``Major Swap
                               Participant,''
                               ``Major Security-
                               Based Swap
                               Participant'' and
                               ``Eligible Contract
                               Participant''.
CFTC Further Definition of    CFTC Proposed Rule    https://
 ``Swap'' (``FDS'').           76 FR 29818:          comments.cftc.gov/
                               Further Definition    PublicComments/
                               of ``Swap,''          CommentList.aspx?id
                               ``Security-Based      =1032.
                               Swap,'' and
                               ``Security-Based
                               Swap Agreement'';
                               Mixed Swaps;
                               Security-Based Swap
                               Agreement
                               Recordkeeping.
CFTC Cross-Border Guidance    CFTC Proposed         https://
 (``CBG'').                    Interpretive          comments.cftc.gov/
                               Guidance and Policy   PublicComments/
                               Statement 77 FR       CommentList.aspx?id
                               41214: Cross-Border   =1234.
                               Application of
                               Certain Swaps
                               Provisions of the
                               Commodity Exchange
                               Act.
Interim Final Rule on         Interim Final         https://sec.gov/
 Reporting of Security-Based   Temporary Rule for    comments/s7-28-10/
 Swap Transaction Data         Reporting of          s72810.shtml.
 (``IFTR'').                   Security-Based Swap
                               Transaction Data.
End-User Exception Proposing  SEC Proposed Rules    https://www.sec.gov/
 Release (``EUEPR'').          on the End-User       comments/s7-43-10/
                               Exception to          s74310.shtml.
                               Mandatory Clearing
                               of Security-Based
                               Swaps.
Sequencing Policy Release     SEC Statement of      https://www.sec.gov/
 (``SQPR'').                   General Policy on     comments/s7-05-12/
                               the Sequencing of     s70512.shtml.
                               the Compliance
                               Dates for Final
                               Rules Applicable to
                               Security-Based-
                               Swaps Adopted
                               Pursuant to the
                               Securities Exchange
                               Act of 1934 and the
                               Dodd-Frank Wall
                               Street Reform and
                               Consumer Protection
                               Act.
------------------------------------------------------------------------

    Below is a list of comment letters that we considered in this 
release.
1. ``ABC Letter'' American Benefits Council, to Elizabeth M. Murphy, 
Secretary, SEC (Apr. 8, 2011) (available in PRSBR)
2. ``ACP/AMF Letter'' Christian Noyer, Chairman, Autorit[eacute] de 
Controle Prudential and Jean-Pierre Jouyet, Chairman, 
Autorit[eacute] des March[eacute]s Financiers to Mary Schapiro, 
Chairman, SEC (Feb. 11, 2011) (available in IDAR)
3. ``AIMA Letter'' Mary Richardson, Director of Regulatory and Tax 
Department, Alternative Investment Management Association to David 
A. Stawick, Secretary, CFTC and Elizabeth M. Murphy, Secretary, SEC 
(Feb. 22, 2011) (available in IDAR)
4. ``APG Asset Management Letter'' Guus Warringa, Chief Counsel, 
Legal, Tax, Regulations and Compliance, APG Algemene Pensioen Groep 
NV/APG Asset Management to David A. Stawick, Secretary, CFTC and 
Elizabeth M. Murphy, Secretary, SEC (undated) (available in IDAR)
5. ``AFGI Letter'' Bruce Stern, Chairman, Association of Financial 
Guaranty Insurers (AFGI) to David A. Stawick, Secretary, CFTC and 
Elizabeth M. Murphy, Secretary, SEC (Sept. 19, 2011) (available in 
T7R)
6. ``Asian-Pacific Regulators Letter'' Belinda Gibson, Deputy 
Chairman, Australian Securities and Investments Commission; Malcolm 
Edey, Assistant Governor (Financial System), Reserve Bank of 
Australia; Arthur Yuen, Deputy Chief Executive, Hong Kong Monetary 
Authority; Keith Lui, Executive Director, Supervision of Markets, 
Securities and Futures Commission, Hong Kong; Teo Swee Lian, Deputy 
Managing Director (Financial Supervision), Monetary Authority of 
Singapore to Gary Gensler, Chairman, CFTC (Aug. 27, 2012) 
(unavailable online)
7. ``BaFin Letter'' Thomas Happel, Executive Director for Banking 
Supervision, Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht to 
Mary Schapiro, Chairman, SEC and Gary Gensler, Chairman, CFTC (Mar. 
25, 2011) (available in IDAR)
8. ``Better Markets Letter'' Dennis M. Kelleher, President & CEO, 
Stephen W. Hall, Securities Specialist, Wallace C. Turbeville, 
Derivatives Specialist, Better Markets, Inc., to Elizabeth M. 
Murphy, Secretary, SEC (Feb. 4, 2011) (available in EUEPR)
9. ``BIS Letter I'' Gunter Pleines, Head of Banking, and Diego 
Devos, General Counsel, Bank for International Settlements to Ananda 
Radhakrishnan, Director of Clearing and Intermediary Oversight, CFTC 
and James Brigagliano, Deputy Director, Division of Trading and 
Markets, SEC (Mar. 18, 2011) (available in ANPR)
10. ``BIS Letter II'' G[uuml]nter Pleines, Head of Banking 
Department, and Diego Devos, General Counsel, Bank for International 
Settlements to David A. Stawick, Secretary, CFTC, and Elizabeth M. 
Murphy, Secretary, SEC (July 20, 2011) (available in PD)
11. ``BlackRock Letter'' Joanne Medero, Richard Prager, and Supurna 
VedBrat, BlackRock, Inc. to Elizabeth M. Murphy, Secretary, SEC 
(Apr. 4, 2011) (available in PRSBR)
12. ``Bloomberg Letter'' Ben Macdonald, Global Head Fixed Income, 
Bloomberg

[[Page 31279]]

LP to Elizabeth M. Murphy, Secretary, SEC (Apr. 4, 2011) (available 
in PRSBR)
13. ``CEB Letter'' Jacques Mirante-Per[eacute], Chief Financial 
Officer, and Jan De Bel, General Counsel, Council of Europe 
Development Bank to Elizabeth M. Murphy, Secretary, SEC, and David 
A. Stawick, Secretary, CFTC (July 22, 2011) (available in PD)
14. ``China Investment Letter'' Wang Jianxi, Executive Vice 
President, China Investment Corp. to David A. Stawick, Secretary, 
CFTC and Elizabeth Murphy, Secretary, SEC (Feb. 22, 2011) (available 
in IDAR)
15. ``Citadel Letter'' Adam C. Cooper, Senior Managing Director and 
Chief Legal Officer, Citadel LLC, to Elizabeth M. Murphy, Secretary, 
SEC (Aug. 13, 2012) (available in SQPR)
16. ``Citigroup Letter'' James A. Forese, Chief Executive Officer, 
Securities & Banking, Citigroup Inc. to David A. Stawick, Secretary, 
CFTC (Aug. 27, 2012) (available in CBG)
17. ``Cleary Letter I'' Edward Rosen, Cleary Gottlieb Steen & 
Hamilton, LLP to David A. Stawick, Secretary, CFTC and Elizabeth M. 
Murphy, Secretary, SEC (Sept. 21, 2010) (available in ANPR)
18. ``Cleary Letter II'' Edward Rosen, Cleary Gottlieb Steen & 
Hamilton, LLP, for Bank of America, BNP Paribas, Citi, Credit 
Agricole, Credit Suisse (USA), Deutsche Bank AG, Morgan Stanley, 
Nomura Securities International, Inc., PNC Bank, National 
Association, Soci[eacute]t[eacute] G[eacute]n[eacute]rale, UBS 
Securities LLC, and Wells Fargo & Co. to David A. Stawick, 
Secretary, CFTC and Elizabeth M. Murphy, Secretary, SEC (Feb. 14, 
2011) (available in RSPR)
19. ``Cleary Letter III'' Edward J. Rosen, Partner, Cleary Gottlieb 
Steen & Hamilton LLP, for Bank of America, Merrill Lynch, Barclays 
Capital, BNP Paribas, Citi, Cr[eacute]dit Agricole Corporate and 
Investment Bank, Credit Suisse Securities (USA), Deutsche Bank AG, 
HSBC, Morgan Stanley, Nomura Securities International, Inc., 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale, UBS Securities LLC, 
and Wells Fargo & Co. to Elizabeth M. Murphy, Secretary, SEC and 
David A. Stawick, Secretary, CFTC (April 5, 2011) (available in 
PRSBR)
20. ``Cleary Letter IV'' Edward Rosen, Cleary Gottlieb Steen & 
Hamilton, LLP, for Bank of America, Barclays Capital, BNP Paribas, 
Citi, Credit Agricole, Credit Suisse (USA), Deutsche Bank AG, HSBC, 
Morgan Stanley, Nomura Securities International, Inc., 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale, and UBS Securities LLC 
to David A. Stawick, Secretary, CFTC, Elizabeth M. Murphy, 
Secretary, SEC, Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, Office of the Comptroller of the 
Currency, Robert E. Feldman, Executive Secretary, Federal Deposit 
Insurance Corp., Gary K. Van Meter, Director, Office of Regulatory 
Policy, Farm Credit Administration, and Alfred Pollard, General 
Counsel, Federal Housing Finance Agency (Sept. 20, 2011) (available 
in T7R)
21. ``CME Letter'' Craig S. Donohue, Chief Executive Officer, CME 
Group Inc., to Elizabeth M. Murphy, Secretary, SEC (Apr. 4, 2011) 
(available in PRSBR)
22. ``Davis Polk Letter I'' Lanny Schwartz, Arthur Long, Bob Colby, 
and Courtenay Myers, Davis Polk & Wardwell, for Barclays Bank PLC, 
BNP Paribas S.A., Deutsche Bank AG, Royal Bank of Canada, The Royal 
Bank of Scotland Group PLC, Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale, and UBS AG to David A. Stawick, Secretary, 
CFTC, Elizabeth M. Murphy, Secretary, SEC, and Jennifer J. Johnson, 
Secretary, Board of Governors of the Federal Reserve System (Jan. 
11, 2011) (available in IDAR)
23. ``Davis Polk Letter II'' Lanny Schwartz, Arthur Long, Bob Colby, 
and Courtenay Myers, Davis Polk & Wardwell, for Barclays Bank PLC, 
BNP Paribas S.A., Credit Suisse AG, Deutsche Bank AG, HSBC, Nomura 
Securities International, Inc., Rabobank Nederland, Royal Bank of 
Canada, The Royal Bank of Scotland Group PLC, Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale, The Toronto-Dominion Bank, and UBS AG to 
David A. Stawick, Secretary, CFTC, Elizabeth M. Murphy, Secretary, 
SEC, and Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System (Feb. 17, 2011) (available in IDAR)
24. ``Deutsche Bank Letter'' Ernest C. Goodrich, Jr., Managing 
Director--Legal Department, and Marcelo Riffaud, Managing Director--
Legal Department, Deutsche Bank AG to David A. Stawick, Secretary, 
CFTC, Elizabeth M. Murphy, Secretary, SEC (Nov. 5, 2010) (available 
in IFTR)
25. ``DTCC Letter I'' Larry E. Thompson, General Counsel, Depository 
Trust & Clearing Corporation to Mary Schapiro, Chairman, SEC and 
Gary Gensler, Chairman, CFTC (Nov. 15, 2010) (available in SPR)
26. ``DTCC Letter II'' Larry E. Thompson, General Counsel, 
Depository Trust & Clearing Corporation to Elizabeth M. Murphy, 
Secretary, SEC (Jan. 18, 2011) (available in RSPR)
27. ``DTCC Letter III'' Larry E. Thompson, General Counsel, 
Depository Trust & Clearing Corporation to Elizabeth M. Murphy, 
Secretary, SEC (Jan. 24, 2011) (available in SPR)
28. ``DTCC Letter IV'' Larry E. Thompson, General Counsel, 
Depository Trust & Clearing Corporation to Mary Schapiro, Chairman, 
SEC and Gary Gensler, Chairman, CFTC (June 3, 2011) (available in 
RSPR and SPR)
29. ``ECB Letter I'' Daniela Russo, Director General, Directorate 
General Payments and Market Infrastructure, and Antonio Sainz de 
Vicuna, General Counsel, European Central Bank to Ananda 
Radhakrishnan, Director of Clearing and Intermediary Oversight, CFTC 
and James Brigagliano, Deputy Director, Division of Trading and 
Markets, SEC (May 6, 2011) (available in CFTC-D; not available on 
SEC Web site, but accessible via CFTC Web site)
30. ``ECB Letter II'' Daniela Russo, Director General, Directorate 
General Payments and Market Infrastructure, European Central Bank to 
Natalie Markman Radhakrishnan, Office of International Affairs, 
CFTC, and Babbak Sabahi, Office of International Affairs, SEC (Sep. 
29, 2011) (available in ISR)
31. ``EDF Letter'' Eric Dennison, Sr. Vice President and General 
Counsel, Stephanie Miller, Assistant General Counsel-Commodities, 
Bill Hellinghausen, Director of Regulatory Affairs, EDF Trading 
North America, LLC to David A. Stawick, Secretary, CFTC (Feb. 22, 
2011) (available in IDAR)
32. ``EIB Letter'' A. Querejeta, Secretary General and General 
Counsel, and B. de Mazi[egrave]res, Director General, European 
Investment Bank to Ananda Radhakrishnan, Director of Clearing and 
Intermediary Oversight, CFTC, and James Brigagliano, Deputy 
Director, Division of Trading and Markets, SEC (July 22, 2011) 
(available in PD)
33. ``ESMA Letter'' Carlos Tavares, Vice-Chairman, European 
Securities and Markets Authority to Mary Schapiro, Chairman, SEC 
(Jan. 17, 2011) (available in SPR)
34. ``European Commission Letter I'' Michel Barnier, European 
Commissioner for Internal Markets and Services, European Commission 
to Mary Schapiro, Chairman, SEC and Gary Gensler, Chairman, CFTC 
(July 19, 2011) (unavailable online)
35. ``European Commission Letter II'' Michel Barnier, European 
Commissioner for Internal Markets and Services, European Commission 
to Mary Schapiro, Chairman, SEC and Gary Gensler, Chairman, CFTC 
(Oct. 24, 2011) (unavailable online)
36. ``European Financial Markets Letter'' Antonio Sainz de Vicuna, 
European Financial Markets Lawyers Group to David A. Stawick, 
Secretary, CFTC and Elizabeth M. Murphy, Secretary, SEC (Mar. 24, 
2011) (available in PC)
37. ``Financial Services Roundtable Letter'' Richard M. Whiting, 
Executive Director and General Counsel, Financial Services 
Roundtable to David A. Stawick, Secretary, CFTC and Elizabeth M. 
Murphy, Secretary, SEC (Feb. 22, 2011) (available in IDAR)
38. ``GFI Letter'' Scott Pintoff, General Counsel, GFI Group Inc., 
to Elizabeth Murphy, Secretary, SEC (July 12, 2011) (available in 
PRSBR)
39. ``GIC Letter'' Lee Ming Chua, General Counsel, Government of 
Singapore Investment Corp. Pte Ltd. to David A. Stawick, Secretary, 
CFTC and Elizabeth M. Murphy, Secretary, SEC (Feb. 22, 2011) 
(available in ANPR)
40. ``ICI Letter'' Karrie McMillan, General Counsel, Investment 
Company Institute to Elizabeth M. Murphy, Secretary, SEC, dated 
(Jan.18, 2011) (available in RSPR)
41. ``IIB Letter'' Sarah A. Miller, Chief Executive Officer, 
Institute of International Bankers to David A. Stawick, Secretary, 
CFTC and Elizabeth M. Murphy, Secretary, SEC (Jan. 10, 2011) 
(available in IDAR)
42. ``ISDA Letter I'' Robert Pickel, Executive Vice Chairman, 
International Swaps and

[[Page 31280]]

Derivatives Association, Inc. to David A. Stawick, Secretary, CFTC 
and Elizabeth M. Murphy, Secretary, SEC (Feb. 22, 2011) (available 
in IDAR)
43. ``ISDA Letter II'' Robert Pickel, Executive Vice Chairman, 
International Swaps and Derivatives Association, Inc. to Elizabeth 
M. Murphy, Secretary, SEC (Feb. 22, 2011) (available in IFTR)
44. ``ISDA/SIFMA Letter I'' Robert Pickel, Executive Vice Chairman, 
International Swaps and Derivatives Association, Inc. and Kenneth 
Bentsen, Jr. Executive Vice President, Public Policy and Advocacy, 
Securities Industry and Financial Markets Association to Elizabeth 
M. Murphy, Secretary, SEC (Jan. 18, 2011) (available in RSPR)
45. ``ISDA/SIFMA Letter II'' Robert Pickel, Executive Vice Chairman, 
International Swaps and Derivatives Association, Inc. and Kenneth E. 
Bentsen, Jr., Executive Vice President, Public Policy and Advocacy, 
Securities Industry and Financial Markets Association to Elizabeth 
M. Murphy, Secretary, SEC (Apr. 4, 2011) (available in PRSBR)
46. ``Japanese Banks Letter'' Bank of Tokyo-Mitsubishi UFJ, Ltd., 
Mizuho Corporate Bank, Ltd., and Sumitomo Mitsui Banking Corp. to 
David A. Stawick, Secretary, CFTC, Elizabeth M. Murphy, Secretary, 
SEC, and Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System (May 6, 2011) (available in RSPR)
47. ``JFSA Letter I'' Katsunori Mikuniya, Commissioner and Chief 
Executive, Financial Services Agency, Government of Japan to Gary 
Gensler, Chairman, CFTC; copy recipients include Chairman Mary 
Schapiro and Commissioners Luis Aguilar, Kathleen Casey, Troy 
Parades, and Elisse Walter, SEC (Apr. 1, 2011) (unavailable online)
48. ``JFSA Letter II'' Chikahisa Sumi, Deputy Commissioner for 
International Affairs, Financial Services Agency, Government of 
Japan to Jill Sommers, Commissioner, CFTC; copy recipients include 
Chairman Mary Schapiro and Commissioners Luis Aguilar, Kathleen 
Casey, Troy Parades, and Elisse Walter, SEC (June 3, 2011) 
(unavailable online)
49. ``Jones Day Letter'' Joel Telpner, Jones Day to David A. 
Stawick, Secretary, CFTC, and Elizabeth M. Murphy, Secretary, SEC 
(Feb. 22, 2011) (available in IDAR)
50. ``KfW Letter'' Dr. Lutz-Christian Funke, Sr. Vice President, and 
Dr. Frank Czichowski, Sr. Vice President and Treasurer, KfW 
Bankengruppe to David A. Stawick, Secretary, CFTC, and Elizabeth M. 
Murphy, Secretary, SEC (Mar. 20, 2012) (available in PD)
51. ``MFA Letter I'' Stuart J. Kaswell, Executive Vice President, 
Managing Director, and General Counsel, Managed Funds Association to 
David A. Stawick, Secretary, CFTC, and Elizabeth M. Murphy, 
Secretary, SEC (Jan. 24, 2011) (available in SPR)
52. ``MFA Letter II'' Stuart J. Kaswell, Executive Vice President 
and Managing Director, General Counsel, Managed Funds Association to 
David A. Stawick, Secretary, CFTC, and Elizabeth M. Murphy, 
Secretary, SEC (Feb. 22, 2011) (available in IDAR)
53. ``MFA Letter III'' Stuart J. Kaswell, Executive Vice President, 
Managing Director & General Counsel, Managed Funds Association, to 
Elizabeth M. Murphy, Secretary, SEC (Apr. 4, 2011) (available in 
PRSBR)
54. ``MFA Letter IV'' Stuart J. Kaswell, Executive Vice President & 
Managing Director, General Counsel, Managed Funds Association to 
Elizabeth M. Murphy, Secretary, SEC (Aug. 13, 2012) (available in 
SQPR)
55. ``MarketAxess Letter'' Richard M. McVey, Chairman and Chief 
Executive Officer, MarketAxess Holdings Inc. to Elizabeth M. Murphy, 
Secretary, SEC (April 4, 2011) (available in PRSBR)
56. ``Markit Letter'' Kevin Gould, President, Markit North America, 
Inc. to David A. Stawick, Secretary, CFTC and Elizabeth M. Murphy, 
Secretary, SEC (Sept. 19, 2011) (available in T7R)
57. ``MarkitSERV Letter I'' Jeff Gooch, Chief Executive Officer, 
MarkitSERV to Elizabeth M. Murphy, Secretary, SEC (Jan. 24, 2011) 
(available in RSPR and SPR)
58. ``MarkitSERV Letter II'' Jeff Gooch, CEO, MarkitSERV to David A. 
Stawick, Secretary, CFTC, Elizabeth M. Murphy, Secretary, SEC (Sept. 
19, 2011) (available in T7R)
59. ``Milbank Tweed Letter'' Winthrop N. Brown, Milbank, Tweed, 
Hadley & McCloy, LLP to David A. Stawick, Secretary, CFTC, and 
Elizabeth M. Murphy, Secretary, SEC (Feb. 22, 2011) (available in 
IDAR)
60. ``Multiple Associations Letter I'' Financial Services Forum, 
Futures Industry Association, International Swaps and Derivatives 
Association, and Securities Industry and Financial Markets 
Association to David A. Stawick, Secretary, CFTC, and Elizabeth M. 
Murphy, Secretary, SEC (May 4, 2011) (available in ANPR)
61. ``Multiple Associations Letter II'' Futures Industry 
Association, the Financial Services Roundtable, Institute of 
International Bankers, Insured Retirement Institute, International 
Swaps and Derivatives Association, Securities Industry and Financial 
Markets Association, and U.S. Chamber of Commerce to Elizabeth M. 
Murphy, Secretary, SEC (May 31, 2011) (available in ANPR)
62. ``Multiple Associations Letter III'' Conrad Voldstad, CEO, 
International Swaps and Derivatives Association; T. Timothy Ryan, 
Jr., President and CEO, Global Financial Markets Association; Guido 
Ravoet, CEO, Alternative Investment Management Association; Anthony 
Belchambers, CEO, Futures and Options Association; Jane Lowe, 
Director, Markets, Investment Management Association; and Alex 
McDonald, CEO, Wholesale Market Brokers' Association and London 
Energy Brokers' Association to Michel Barnier, Commissioner for the 
Internal Market and Services, The European Commission, and Timothy 
Geithner, Secretary, The Department of the Treasury; copy recipients 
include Chairman Mary Schapiro and Commissioners Luis Aguilar, 
Kathleen Casey, Troy Parades, and Elisse Walter, SEC (July 5, 2011) 
(available in ISR)
63. ``Multiple Associations Letter IV'' ABA Securities Association; 
American Council of Life Insurers; Financial Services Roundtable; 
Futures Industry Association; Institute of International Bankers; 
International Swaps and Derivatives Association; and Securities 
Industry and Financial Markets Association to David A. Stawick, 
Secretary, CFTC; Elizabeth M. Murphy, Secretary, SEC; Jennifer J. 
Johnson, Secretary, Board of Governors of the Federal Reserve 
System; Office of the Comptroller of the Currency; Robert E. 
Feldman, Executive Secretary, Federal Deposit Insurance Corporation; 
Alfred M. Pollard, General Counsel, Federal Housing Finance Agency; 
Gary K. Van Meter, Director, Office of Regulatory Policy, Farm 
Credit Administration (Sept. 8, 2011) (available in ANPR)
64. ``Newedge Letter'' Gary DeWaal, Senior Managing Director and 
General Counsel, Newedge Group to David A. Stawick, Secretary, CFTC 
and Elizabeth M. Murphy, SEC (Feb. 24, 2011) (available in IDAR)
65. ``NIB Letter'' Heikki Cantell, General Counsel, and Lars 
Eibeholm, Vice President, Chief Financial Officer, Head of Treasury, 
and Pernelle de Klauman, Deputy Chief Counsel, Nordic Investment 
Bank to David A. Stawick, Secretary, CFTC and Elizabeth M. Murphy, 
Secretary, SEC (Aug. 2, 2011) (available in PD)
66. ``Norges Bank Letter'' Yngve Slyngstad, CEO, and Marius Nygaard 
Haug, Global Head of Legal, Norges Bank Investment Management to 
David A. Stawick, Secretary, CFTC and Elizabeth M. Murphy, 
Secretary, SEC (Feb. 18, 2011) (available in IDAR)
67. ``Phoenix Letter'' Nicholas J. Stephan, Chief Executive Officer, 
Phoenix Partners Group LP, to Elizabeth M. Murphy, Secretary, SEC 
(Apr. 4, 2011) (available in PRSBR)
68. ``Rabobank Letter'' William R. Mansfield, Managing Director, 
Head of Global Financial Markets Americas, Rabobank Nederland to 
David A. Stawick, Secretary, CFTC, and Jennifer J. Johnson, 
Secretary, Board of Governors of the Federal Reserve System (Apr. 5, 
2011) (available in FDSD; not available on SEC Web site, but 
accessible via CFTC Web site)
69. ``SDMA Letter I'' Michael Hisler, Swaps & Derivatives Market 
Association, to Elizabeth M. Murphy, Secretary, SEC (Feb. 18, 2012) 
(available in PRSBR)
70. ``SDMA Letter II'' Michael Hisler, Swaps & Derivatives Market 
Association, to Elizabeth M. Murphy, Secretary, SEC (Apr. 21, 2012) 
(available in PRSBR)
71. ``SIFMA Letter I'' Kenneth Bentsen, Executive Vice President, 
Public Policy

[[Page 31281]]

and Advocacy, Securities Industry and Financial Markets Association 
to David A. Stawick, Secretary, CFTC, Elizabeth M. Murphy, 
Secretary, SEC, Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, John Walsh, Acting Comptroller, 
Office of the Comptroller of the Currency, Administrator of National 
Banks, Robert E. Feldman, Executive Secretary, Federal Deposit 
Insurance Corp., Edward DeMarco, Acting Director, Federal Housing 
Finance Agency, and Gary Van Meter, Acting Director, Farm Credit 
Administration (Feb. 3, 2011) (available in IDAR)
72. ``SIFMA Letter II'' Kenneth E. Bentsen, Executive Vice 
President, Public Policy and Advocacy, Securities Industry and 
Financial Markets Association to Elizabeth M. Murphy, Secretary, SEC 
(Dec. 16, 2011) (available in RPR)
73. ``SIFMA AMG Letter I'' Timothy W. Cameron, Managing Director, 
Asset Management Group, Securities Industry and Financial Markets 
Association to Elizabeth M. Murphy, Secretary, SEC (Jan. 18, 2011) 
(available in RSPR)
74. ``SIFMA AMG Letter II'' Timothy W. Cameron, Managing Director, 
Asset Management Group, Securities Industry and Financial Markets 
Association, to Elizabeth M. Murphy, Secretary, SEC (Apr. 4, 2011) 
(available in PRSBR)
75. ``Soci[eacute]t[eacute] G[eacute]n[eacute]rale Letter I'' Laura 
J. Schisgall, Managing Director and Senior Counsel, 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale to Ananda 
Radhakrishnan, Director of Clearing and Intermediary Oversight, 
CFTC, John M. Ramsay, Deputy Director, Division of Trading and 
Markets, SEC, and Mark E. Van Der Weide, Senior Associate Director, 
Division of Supervision and Regulation, Board of Governors of the 
Federal Reserve System (Nov. 23, 2010) (available in PC)
76. ``Soci[eacute]t[eacute] G[eacute]n[eacute]rale Letter II'' Laura 
J. Schisgall, Managing Director and Senior Counsel, 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale to David A. Stawick, 
Secretary, Commodity Futures Trading Commission, Elizabeth M. 
Murphy, Secretary, SEC (Feb. 18, 2011) (available in IDAR)
77. ``Sullivan & Cromwell Letter'' Kenneth Raisler, Sullivan & 
Cromwell LLP, on behalf of Bank of America Corp., Citigroup Inc., 
and JP Morgan Chase & Co. to David A. Stawick, Secretary, CFTC, 
Elizabeth M. Murphy, Secretary, SEC, and Jennifer J. Johnson, 
Secretary, Board of Governors of the Federal Reserve System (Feb. 
22, 2011) (available in IDAR)
78. ``TCX Letter'' Joost Zuidberg, Managing Director, Chief 
Executive Officer and Brice Ropion, Director and Chief Operating 
Officer, TCX Investment Management Company B.V. to Marcia Blase, 
Counsel, Office of Commissioner Jill E. Sommers, CFTC (Dec. 15, 
2011) (available in FDSD; not available on SEC Web site, but 
accessible via CFTC Web site)
79. ``Thomson Letter'' Nancy C. Gardner, Executive Vice President 
and General Counsel, Thomson Reuters Markets to Elizabeth M. Murphy, 
Secretary, SEC (Apr. 4, 2011) (available in PRSBR)
80. ``TradeWeb Letter'' Lee H. Olesky, Chief Executive Officer, and 
Douglas L. Friedman, General Counsel, Tradeweb Markets LLC to 
Elizabeth M. Murphy, Secretary, SEC (Apr. 4, 2011) (available in 
PRSBR)
81. ``UBS Letter'' David Kelly, Managing Director, and Paul Hamill, 
Executive Director, UBS Securities LLC, to Elizabeth M. Murphy, 
Secretary, SEC (Nov. 2, 2011) (available in PRSBR)
82. ``Vanguard Letter'' Gus Sauter, Managing Director and Chief 
Investment Officer, and John Hollyer, Principal and Head of Risk 
Management and Strategy Analysis, Vanguard to Elizabeth M. Murphy, 
Secretary, SEC (Jan. 18, 2011) (available in RSPR)
83. ``WMBAA Letter'' Stephen Merkel, Chairman, Shawn Bernardo, Vice 
Chairman, Christopher Ferreri, Board Member, J. Christopher 
Giancarlo, Board Member, and Julian Harding, Board Member, Wholesale 
Market Brokers' Association, Americas to Elizabeth M. Murphy, 
Secretary, SEC (Apr. 4, 2011) (available in PRSBR)
84. ``World Bank Letter I'' John Gandolfo, Acting Vice President and 
Treasurer, The World Bank to Jill Sommers, Commissioner, CFTC (Apr. 
5, 2011) (available in ANPR)
85. ``World Bank Letter II'' Vincenzo La Via, World Bank Group CFO, 
Anne-Marie Leroy, Senior Vice President and Group General Counsel, 
and Rachel Robbins, Vice President and General Counsel of 
International Finance Corp. to David A. Stawick, Secretary, CFTC 
(July 22, 2011) (available in FDS; not available on SEC Web site, 
but accessible via CFTC Web site)

    By the Commission.

    Dated: May 1, 2013.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-10835 Filed 5-22-13; 8:45 am]
BILLING CODE 8011-01-P