Exemption From the Definition of “Clearing Agency” for Certain Activities of Security-Based Swap Dealers and Security-Based Swap Execution Facilities, 7637-7643 [2020-28194]
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Federal Register / Vol. 86, No. 19 / Monday, February 1, 2021 / Rules and Regulations
17 CFR Part 240
exception under 17 CFR 240.3a71–2(a)
(or subject to the period set forth in 17
CFR 240.3a71–2(b)) 3 from the definition
of ‘‘clearing agency.’’
[Release No. 34–90667; File No. S7–08–11]
Table of Contents
RIN 3235–AK74
I. Background
II. New Rule 17Ad–24
A. Proposed Rule Text
B. Comment Received
C. Final Rule
III. Economic Analysis
A. Baseline
B. Consideration of Benefits, Costs, and the
Effect on Competition, Efficiency, and
Capital Formation
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act Certification
VI. Other Matters
VII. Statutory Authority
PART 2636—LIMITATIONS ON
OUTSIDE EARNED INCOME,
EMPLOYMENT AND AFFILIATIONS
FOR CERTAIN NONCAREER
EMPLOYEES
SECURITIES AND EXCHANGE
COMMISSION
5. The authority citation for part 2636
continues to read as follows:
■
Authority: 5 U.S.C. App. (Ethics in
Government Act of 1978); Pub. L. 101–410,
104 Stat. 890, 28 U.S.C. 2461 note (Federal
Civil Penalties Inflation Adjustment Act of
1990), as amended by Sec. 31001, Pub. L.
104–134, 110 Stat. 1321 (Debt Collection
Improvement Act of 1996) and Sec. 701, Pub.
L. 114–74 (Federal Civil Penalties Inflation
Adjustment Act Improvements Act of 2015);
E.O. 12674, 54 FR 15159, 3 CFR, 1989 Comp.,
p. 215, as modified by E.O. 12731, 55 FR
42547, 3 CFR, 1990 Comp., p. 306.
6. Section 2636.104 is amended by
revising paragraph (a) to read as follows:
■
§ 2636.104
action.
Civil, disciplinary and other
(a) Civil action. Except when the
employee engages in conduct in good
faith reliance upon an advisory opinion
issued under § 2636.103, an employee
who engages in any conduct in violation
of the prohibitions, limitations and
restrictions contained in this part may
be subject to civil action under 5 U.S.C.
app. 504(a) and a civil monetary penalty
of not more than the amounts set in
Table 1 to this section, as adjusted in
accordance with the inflation
adjustment procedures prescribed in the
Federal Civil Penalties Inflation
Adjustment Act of 1990, as amended, or
the amount of the compensation the
individual received for the prohibited
conduct, whichever is greater.
TABLE 1 TO § 2636.104
Date of violation
Penalty
Violation occurring between Sept. 29,
1999 and Nov. 2, 2015 ..........................
Violation occurring after Nov. 2, 2015 ......
$11,000
20,731
*
*
*
*
*
[FR Doc. 2021–00714 Filed 1–29–21; 8:45 am]
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Exemption From the Definition of
‘‘Clearing Agency’’ for Certain
Activities of Security-Based Swap
Dealers and Security-Based Swap
Execution Facilities
Securities and Exchange
Commission.
ACTION: Final rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
adopting a rule pursuant to Section 36
of the Securities Exchange Act of 1934
(‘‘Exchange Act’’) to exempt from the
definition of ‘‘clearing agency’’ in
Section 3(a)(23) of the Exchange Act
certain activities of a registered securitybased swap dealer, a registered securitybased swap execution facility, and a
person engaging in dealing activity in
security-based swaps that is eligible for
an exception from registration as a
security-based swap dealer because the
quantity of dealing activity is de
minimis.
SUMMARY:
DATES:
Effective date: April 2, 2021.
FOR FURTHER INFORMATION CONTACT:
Matthew Lee, Assistant Director, or
Jesse Capelle, Special Counsel, Office of
Clearance and Settlement, Division of
Trading and Markets, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549–7010, at (202)
551–5710.
SUPPLEMENTARY INFORMATION: The
Commission is adopting 17 CFR
240.17Ad–24 (‘‘Rule 17Ad–24’’) to
exempt certain activities of a registered
security-based swap execution facility,1
a registered security-based swap dealer,2
and an entity that is eligible for an
1 15 U.S.C. 78c–4(a) (setting forth the registration
requirement for security-based swap execution
facilities). The Commission has not yet adopted
rules regarding the registration of security-based
swap execution facilities. The Commission has
granted a temporary exemption from the
registration requirement for security-based swap
execution facilities. See Release No. 34–64678 (June
15, 2011), 76 FR 36287, 36292–93, 36306 (June 22,
2011). This exemption will expire on the earliest
compliance date set forth in any of the final rules
regarding registration of security-based swap
execution facilities. See id. at 36292–93, 36306.
2 15 U.S.C. 78o–10(a)(1); see also Release No. 34–
75611 (Aug. 5, 2015), 80 FR 48964, 48988 (Aug. 14,
2015). A security-based swap market participant
that meets the definition of ‘‘security-based swap
dealer’’ as of August 6, 2021 is required to register
with the Commission no later than November 1,
2021. See Release No. 34–87780 (Dec. 18, 2019), 85
FR 6270, 6345–46 (Feb. 4, 2020).
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I. Background
The term ‘‘clearing agency’’ is broadly
defined in Section 3(a)(23)(A) of the
Exchange Act and includes a variety of
functions.4 Section 3(a)(23)(B) of the
Exchange Act excludes a number of
3 In contrast to the definition of ‘‘dealer’’ in
Section 3(a)(5) of the Exchange Act, Section
3(a)(71)(D) of the Exchange Act and 17 CFR
240.3a71–2(a) thereunder contain an exception
from the definition of ‘‘security-based swap dealer’’
for any entity that engages in a de minimis quantity
of security-based swap dealing in connection with
transactions with or on behalf of its customers. See
15 U.S.C. 78c(a)(71)(D); 17 CFR 240.3a71–2(a). In
addition, 17 CFR 240.3a71–2(b) provides that a
person that has not registered as a security-based
swap dealer by virtue of satisfying the requirements
of paragraph (a) of the rule, but that no longer can
take advantage of the de minimis exception, will be
deemed not to be a security-based swap dealer
under section 3(a)(71) of the Act (15 U.S.C.
78c(a)(71)) and subject to the requirements of
section 15F of the Act (15 U.S.C. 78o–10) and the
rules, regulations and interpretations issued
thereunder until the earlier of the date on which it
submits a complete application for registration
pursuant to section 15F(b) (15 U.S.C. 78o–10(b)) or
two months after the end of the month in which
that person becomes no longer able to take
advantage of the exception.
4 Specifically, the term ‘‘clearing agency’’
includes, among other things, any person who acts
as an intermediary in making payments or
deliveries or both in connection with transactions
in securities or that provides the 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. The definition also includes any
person, such as a securities depository, who (i) 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, or (ii) otherwise
permits or facilitates the settlement of securities
transactions or the hypothecation or lending of
securities without physical delivery of securities
certificates. 15 U.S.C. 78c(a)(23)(A); see also Release
Nos. 34–71699 (Mar. 12, 2014), 79 FR 16865 (Mar.
26, 2014), corrected at 79 FR 29507, 29510–11 (May
22, 2014); 34–68080 (Oct. 22, 2012), 77 FR 66219,
66221–22 (Nov. 2, 2012) (‘‘Clearing Agency
Standards adopting release’’) (discussing the same).
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entities and activities from the
definition of ‘‘clearing agency,’’
including certain activities of, among
other types of market intermediaries,
national securities exchanges and
securities dealers that are also clearing
agency functions.5 These exclusions are
designed to limit the potential for
overlapping or duplicative requirements
that may otherwise be imposed on these
regulated entities.6
Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010 (‘‘Dodd-Frank Act’’) created
new categories of entities in the
security-based swap market that may
perform clearing agency functions
similar to the functions performed by
entities excluded from the definition of
‘‘clearing agency’’ in Section 3(a)(23)(B)
of the Exchange Act in the traditional
securities markets. However, Title VII
did not amend the scope of the term
‘‘clearing agency’’ to address these new
types of financial intermediaries for the
security-based swap markets or their
potential clearing agency functions,
even if those new intermediaries
perform similar functions as entities
excluded from the ‘‘clearing agency’’
definition, such as a national securities
exchange or a securities dealer. As a
result, certain activities performed for
security-based swaps by security-based
swap dealers and security-based swap
execution facilities are also clearing
agency functions that trigger the
requirement to either register as a
clearing agency or obtain an exemption
from registration as a clearing agency,
while the same activities performed for
securities that are not security-based
swaps do not carry the same legal and
regulatory implications.7
Specifically, Section 3(a)(23)(B)(ii) of
the Exchange Act provides that the term
‘‘clearing agency’’ does not include,
among other things, any national
securities exchange solely by reason of
its providing facilities for comparison of
data respecting the terms of settlement
of securities transactions effected on
such exchange.8 As noted above, the
Dodd-Frank Act did not amend the
Exchange Act definition of ‘‘clearing
agency’’ to provide a comparable
exclusion for a registered security-based
swap execution facility. A securitybased swap execution facility is 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
5 See
15 U.S.C. 78c(a)(23)(B).
No. 34–64017 (Mar. 3, 2011), 76 FR
14472, 14531 (Mar. 16, 2011) (‘‘proposing release’’).
7 See 15 U.S.C. 78q–1(b)(1).
8 15 U.S.C. 78c(a)(23)(B).
6 Release
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multiple participants in the facility or
system.9 This function, similar to that
provided by a national securities
exchange, facilitates the execution of a
security-based swap transaction
between two counterparties by
providing facilities for the comparison
of data respecting the terms of
settlement of that transaction.10
Accordingly, although a national
securities exchange performing this
clearing agency function is excluded
under Section 3(a)(23)(B)(ii) from the
definition of ‘‘clearing agency,’’ a
registered security-based swap
execution facility performing this
function is not.
Similarly, Section 3(a)(23)(B)(iii)
provides that the term ‘‘clearing agency’’
does not include, among other things,
any dealer if such dealer would be
deemed to be a clearing agency solely by
reason of functions performed by such
institution as part of customary
brokerage or dealing activities, or solely
by reason of acting on behalf of a
clearing agency or a participant therein
in connection with the furnishing by the
clearing agency of services to its
participants or the use of services of the
clearing agency by its participants.11 As
with security-based swap execution
facilities, the Exchange Act definition of
‘‘clearing agency’’ does not provide an
exclusion for a registered security-based
swap dealer.12 Section 3(a)(71) of the
Exchange Act defines ‘‘security-based
swap dealer’’ as any person that: (i)
Holds itself out as a dealer in securitybased 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 it to be
commonly known in the trade as a
dealer or market maker in securitybased swaps.13 These functions are
9 The Exchange Act definition of ‘‘security-based
swap execution facility’’ states that a security-based
swap execution facility is not a national securities
exchange. 15 U.S.C. 78c(a)(77).
10 A registered security-based swap execution
facility may facilitate trade processing of any
security-based swap. See 15 U.S.C. 78c–4(b)(2).
11 15 U.S.C. 78c(a)(23)(B).
12 See 15 U.S.C. 78c(a)(5) (defining ‘‘dealer’’ to
exclude a dealer for security-based swaps, other
than security-based swaps with or for persons that
are not eligible contract participants); see also,
supra, note 3 (discussing the same).
13 15 U.S.C. 78c(a)(71). In 2012, the Commission
and the Commodity Futures Trading Commission
further defined a number of terms defining the
intermediaries in the swap and security-based swap
markets, including ‘‘security-based swap dealer.’’
See Release No. 34–66868 (Apr. 27, 2012), 77 FR
30596 (May 23, 2012) (‘‘Entity Definitions adopting
release’’). Among other things, the release adopted
17 CFR 240.3a71–1 through 3a71–5, which further
define ‘‘security-based swap dealer.’’ Furthermore,
the definition of ‘‘dealer’’ in Section 3(a)(5) of the
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similar to those provided by a dealer for
securities that are not security-based
swaps.14 Accordingly, although a dealer
performing these functions is excluded
from the definition of ‘‘clearing agency,’’
a registered security-based swap dealer
performing the same functions is not.15
To address the disparate treatment of
similarly situated entities performing
potential clearing agency functions, the
Commission proposed Rule 17Ad–24 in
2011.16 The Commission explained that
the rule would avoid imposing
overlapping or duplicative requirements
on these entities with marginal or no
benefit to safeguarding securities and
funds and protecting investors.17 As
described in the proposing release,18
Rule 17Ad–24 would provide
exemptions from the Exchange Act term
‘‘clearing agency’’ for certain activities
of registered security-based swap
dealers and registered security-based
swap execution facilities that are also
clearing agency functions, mirroring the
exclusions from the definition described
above for national securities exchanges
and dealers. A person acting as a
security-based swap dealer may make
payments or deliveries or both in
connection with transactions in
securities, in a manner that could
require that person to register as a
clearing agency under the Exchange
Act.19 In particular, over the life of a
security-based swap transaction, a
security-based swap dealer may
facilitate the transfer of collateral,
periodic fixed amount payments, or
termination payments between the
counterparties to a transaction, which
would constitute making payments or
deliveries or both in connection with
transactions in securities under the
‘‘clearing agency’’ definition. Similarly,
Exchange Act provides that an entity transacting as
a dealer in security-based swaps would not need to
separately register with the Commission as a brokerdealer so long as its security-based swap
transactions are solely with persons that satisfy the
definition of ‘‘eligible contract participant.’’ See 17
U.S.C. 78c(a)(5) (defining ‘‘dealer’’); 17 U.S.C.
78(a)(65) (defining ‘‘eligible contract participant’’ by
reference to Section 1a(18) of the Commodity
Exchange Act (7 U.S.C. 1a(18)).
14 See supra note 3 (noting that, in contrast to the
definition of ‘‘dealer’’ in Section 3(a)(5) of the
Exchange Act, Section 3(a)(71)(D) of the Exchange
Act and 17 CFR 240.3a71–2(a) thereunder contain
an exception from the definition of ‘‘security-based
swap dealer’’ for any entity that engages in a de
minimis quantity of security-based swap dealing in
connection with transactions with or on behalf of
its customers).
15 See supra note 2 (noting the adoption of final
rules for security-based swap dealers in 2019 and
the compliance date for registration of November 1,
2021).
16 See proposing release, supra note 6.
17 Id. at 14531.
18 See id. at 14494–95.
19 Compare 15 U.S.C. 78c(a)(71) with 15 U.S.C.
78c(a)(23).
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a security-based swap execution facility
that provides 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
also may provide 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, in a manner that could
require that entity to register as a
clearing agency.20
The Commission received one
comment regarding the proposed rule,21
as discussed in Part II.B below. The
Commission is now adopting Rule
17Ad–24, as discussed in Part II.C
below.
II. New Rule 17Ad–24
A. Proposed Rule Text
Proposed Rule 17Ad-24 provided that
a registered security-based swap dealer
and a registered security-based swap
execution facility shall be exempt from
inclusion in the term ‘‘clearing agency,’’
as defined in section 3(a)(23)(A) of the
Act, where such registered securitybased swap dealer or registered securitybased swap execution facility would be
deemed to be a clearing agency solely by
reason of functions performed by such
institution as part of customary dealing
activities or providing facilities for
comparison of data respecting the terms
of settlement of securities transactions
effected on such registered securitybased swap execution facility,
respectively, or acting on behalf of a
clearing agency or participant therein in
connection with the furnishing by the
clearing agency of services to its
participants or the use of services of the
clearing agency by its participants.
B. Comment Received
One commenter agreed with the
Commission’s proposed approach that a
security-based swap execution facility
not be required to register as a clearing
agency solely because it performs trade
data comparison as part of the trade
execution process for security-based
swaps.22 However, the commenter also
stated that a security-based swap
execution facility should not have a
blanket exemption from clearing agency
20 Compare 15 U.S.C. 78c(a)(77) with 15 U.S.C.
78c(a)(23).
21 See Letter from Jeff Gooch, Chief Executive
Officer, MarkitSERV (Apr. 29, 2011) (‘‘MarkitSERV
Letter’’). The comment letter is available on the
Commission’s website at https://www.sec.gov/
comments/s7-08-11/s70811.shtml.
22 See MarkitSERV Letter.
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registration for activities related to
matching or trade verification services
because, in the commenter’s view, such
an approach would result in the rule
applying differently to third-party
providers of such services than it would
to a security-based swap execution
facility.23
By its terms, proposed Rule 17Ad–24
would not provide a blanket exemption
from clearing agency registration to a
security-based swap execution facility
to provide matching or trade verification
services that otherwise are clearing
agency functions as defined in the
Exchange Act. Rather, the Commission’s
approach under Rule 17Ad–24 specifies
that a registered security-based swap
execution facility would not be required
to register as a clearing agency solely
based upon the fact that such an entity
provides facilities for comparison of
data respecting the terms of settlement
of securities transactions effected on
such registered security-based swap
execution facility.24 As noted in the
proposing release and restated here,25
were a security-based swap execution
facility to engage in activity that is
outside the scope of the exemption
provided in Rule 17Ad–24 and that falls
within the definition of ‘‘clearing
agency’’ under the Exchange Act, it
would be required to register as a
clearing agency or obtain a separate
exemption from clearing agency
registration.26
C. Final Rule
Pursuant to the Commission’s
authority under Section 36 of the
Exchange Act,27 the Commission is
adopting Rule 17Ad–24, and the
Commission is making two
modifications from the proposal. First,
since the Commission proposed Rule
17Ad–24, the Commission adopted 17
CFR 240.3a71–2 to provide an exception
from the definition of ‘‘security-based
swap dealer’’ to any entity that engages
23 See
id. at 6.
approach is consistent with the approach
that applies to a national securities exchange when
performing the same activity for transactions in
securities that are not security-based swaps.
25 See proposing release, supra note 6, at 14495.
26 See id. For example, with respect to
transactions in securities that are not security-based
swaps, the Commission has explained that
‘‘matching’’ is a clearing agency function. Release
No. 34–39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13,
1998).
27 15 U.S.C. 78mm. Section 36 of the Exchange
Act authorizes the Commission to conditionally or
unconditionally exempt any person, security, or
transaction, or any class of classes of persons,
securities, or transactions, from any provision or
provisions of the Exchange Act or any rule or
regulation 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.
24 This
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in a de minimis quantity of securitybased swap dealing activity in
connection with transactions with or on
behalf of its customers.28 In adopting
the de minimis exception, the
Commission explained that the
exception should be interpreted to
address amounts of dealing activity that
are sufficiently small that they do not
warrant registration to address concerns
implicated by the regulations governing
swap dealers and security-based swap
dealers.29 The Commission similarly
noted in proposing Rule 17Ad–24 that
the exemptions in the rule are intended
to avoid imposing requirements with
marginal or no benefit to safeguarding
securities and funds and protecting
investors.30 Accordingly, the
Commission is adding persons eligible
for this exception under 17 CFR
240.3a71–2 to the exemption in Rule
17Ad–24 because imposing clearing
agency registration on persons solely to
regulate functions performed by such
persons as part of customary dealing
activity for security-based swaps, and
where that dealing activity is
sufficiently small that it does not
warrant registration as a security-based
swap dealer, would present only
marginal or no benefit to safeguarding
securities and funds and protecting
investors. Second, to improve clarity
and readability, the Commission is
dividing the rule text into
subparagraphs (a) and (b).
Accordingly, new Rule 17Ad–24
provides that a registered security-based
swap dealer, a registered security-based
swap execution facility, or an entity
engaging in dealing activity in securitybased swaps that is eligible for an
exception under 17 CFR 240.3a71–2(a)
(or subject to the period set forth in 17
CFR 240.3a71–2(b)) 31 is exempt from
inclusion in the term ‘‘clearing agency,’’
as defined in Section 3(a)(23)(A) of the
Exchange Act, where such registered
security-based swap dealer, registered
security-based swap execution facility,
or entity engaging in dealing activity in
security-based swaps that is eligible for
an exception under 17 CFR 240.3a71–
2(a) (or subject to the period set forth in
17 CFR 240.3a71–2(b)) would be
deemed to be a clearing agency solely by
28 See
supra notes 3 and 14 and accompanying
text.
29 See
Entity Definitions adopting release, supra
note 13, at 30626.
30 See proposing release, supra note 6, at 14531.
31 See supra note 3 (providing the text of 17 CFR
240.3a71–2(a) and (b)). Accordingly, an entity
subject to the period set forth in 17 CFR 240.3a71–
2(b) will continue to be exempt from inclusion in
the term ‘‘clearing agency’’ during the period after
it is no longer able to able to rely on the de minimis
exception but before it is deemed to be a securitybased swap dealer.
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reason of: (a) Functions performed by
such institution as part of customary
dealing activities or providing facilities
for comparison of data respecting the
terms of settlement of securities
transactions effected on such registered
security-based swap execution facility,
respectively, or (b) acting on behalf of a
clearing agency or participant therein in
connection with the furnishing by the
clearing agency of services to its
participants or the use of services of the
clearing agency by its participants.
In addition, as noted above, the
Commission has granted a temporary
exemption from the registration
requirement for security-based swap
execution facilities. The temporary
exemption from the registration
requirement for security-based swap
execution facilities will expire on the
earliest compliance date set forth in any
of the final rules regarding registration
of security-based swap execution
facilities.32 To the extent an entity
relying on the temporary exemption
from the registration requirement for
security-based swap execution facilities
also performs the activities of a
registered security-based swap
execution facility as described in Rule
17Ad–24, the Commission notes that it
has provided a separate, temporary
exemption from clearing agency
registration for entities providing certain
clearing services for security-based
swaps, including trade matching
services.33
III. Economic Analysis
The Commission is sensitive to the
economic consequences and effects of
the adopted amendments, including
their benefits and costs. Under Section
3(f) of the Exchange Act, whenever the
Commission engages in rulemaking
under the Exchange Act and is required
to consider or determine whether an
action is necessary or appropriate in the
public interest, it must consider, in
addition to the protection of investors,
whether the action will promote
efficiency, competition, and capital
formation.34 Section 23(a)(2) of the
Exchange Act also prohibits the
Commission from adopting any rule that
would impose a burden on competition
not necessary or appropriate in
furtherance of the purposes of the
Exchange Act.35
The Commission is exempting entities
engaging in dealing activity in securitybased swaps and registered security32 See
supra note 1.
Release No. 34–64796 (July 1, 2011), 76 FR
39963, 39964 (July 7, 2011).
34 See 15 U.S.C. 78c(f).
35 See 15 U.S.C. 78w(a)(2).
33 See
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based swap execution facilities from
inclusion in the term ‘‘clearing agency’’
under the Exchange Act for the
following functions: (a) Performing
customary dealing activities or
providing facilities for the comparison
of data respecting the settlement of
securities transactions; or (b) acting on
behalf of a clearing agency or
participant in connection with the
furnishing of clearing services.36
Section 3(a)(23)(B) of the Exchange Act
excludes national securities exchanges
and securities dealers from the
definition of ‘‘clearing agency,’’ to limit
the potential for overlapping or
duplicative requirements that may
otherwise be imposed on these
regulated entities. Entities engaging in
dealing activity in security-based swaps
and security-based swap execution
facilities perform similar functions for
the security-based swap market as
securities dealers and national securities
exchanges perform for the general
securities industry. Accordingly, new
Rule 17Ad–24 is intended to avoid
imposing requirements on these entities
with marginal or no benefit to
safeguarding securities and funds and
protecting investors by mirroring the
existing exemption from the definition
of ‘‘clearing agency’’ for entities
engaging in dealing activity in securitybased swaps and security-based swap
execution facilities.37 Under new Rule
17Ad–24, these entities will not have to
expend additional resources
determining their registration
requirements, registering as a clearing
agency, or meeting the standards
required of registered clearing agencies
as long as their activities do not fall
outside the scope of the exemption in
new Rule 17Ad–24. Excluding either
entities engaging in dealing activity in
security-based swaps or security-based
swap execution facilities from the
requirements applicable to clearing
agencies should not hinder the DoddFrank Act’s goals of greater transparency
and financial stability of the securitybased swap market because the
Commission has or will have a
regulatory framework for these entities
targeted to dealing activity in securitybased swaps or the functions performed
by security-based swap execution
facilities, rather than incidental
36 See supra Part II.C (setting forth the final rule
text). For purposes of this economic analysis,
‘‘entities engaging in dealing activity in securitybased swaps’’ includes both registered securitybased swap dealers and entities engaging in dealing
activity in security-based swaps that are eligible for
an exception under 17 CFR 240.3a71–2(a) (or
subject to the period set forth in 17 CFR 240.3a71–
2(b)).
37 See supra note 5 and accompanying text.
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functions that may be similar to those
performed by a clearing agency. Just as
de minimis amounts of dealing activity
are sufficiently small so as not to
warrant registration to address concerns
implicated by the regulations governing
security-based swap dealers, they are
also sufficiently small such that they do
not implicate the concerns
underpinning the regulations governing
clearing agencies.
A. Baseline
To assess the economic impact of new
Rule 17Ad–24, the Commission is using
as its baseline the security-based swap
market as it exists at the time of this
release. This analysis uses existing
Commission analyses of security-based
swap market in rules adopted pursuant
to Title VII of the Dodd-Frank Act,
updated using data from the DTCC
Derivatives Repository Limited Trade
Information Warehouse (‘‘TIW’’) to
calendar year 2019.38 The data available
to the Commission from TIW do not
encompass those transactions that both:
(i) Do not involve U.S. counterparties,
and (ii) are based on non-U.S. reference
entities.
The Commission estimates, based on
an analysis of TIW data that out of more
than 4,000 entities engaged in single
name CDS activity worldwide in 2019,
potentially 50 entities may engage in
dealing activity that would exceed the
de minimis threshold, and thus
ultimately have to register as securitybased swap dealers.39 Ten entities that
engaged in dealing activity had less than
$3 billion of notional transacted in
single-name credit default swaps, so
they could use the de minimis
exception for the definition of ‘‘securitybased swap dealer.’’ 40
In addition, eighteen swap execution
facilities have permanent or temporary
registration with the Commodity
Futures Trading Commission.41 Of
those, nine allow trading of credit
default swap indices; if these nine allow
trading of single-name credit default
swaps, they would be required to
register as security-based swap
38 See,
e.g., infra note 40; supra note 13.
Release No. 34–75611 (Aug. 14, 2015), 80
FR 48963, 49000 (Aug. 14, 2015). The estimate has
been updated for data for calendar year 2019.
40 See Entity Definitions adopting release, supra
note 13, at 30636. To identify dealing activity, the
Commission counted the number of entities that
had three or more counterparties in a calendar year
that were not recognized as dealers by the
International Swaps and Derivatives Association.
The estimate has been updated with data for
calendar year 2019.
41 CFTC, Trading Organizations—Swap Execution
Facilities (SEF), https://sirt.cftc.gov/SIRT/
SIRT.aspx?Topic=SwapExecutionFacilities.
39 See
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execution facilities with the
Commission.42
Security-based swap dealers must
register with the Commission and
comply with prudential and conduct
standards of the Dodd-Frank Act.43
Security-based swap dealers are subject
to a registration and regulatory
framework that is tailored to the
functions they serve and risks they pose.
These risks, and the corresponding
Commission analysis of costs and
benefits of the ensuring requirements,
are discussed in the Security-Based
Swap Entity Registration, SecurityBased Swap Recordkeeping and
Reporting, Security-Based Swap Capital,
Margin, and Segregation, and SecurityBased Swap Business Conduct
Standards releases.44 Entities that
engage in dealing activity in securitybased swaps below the de minimis
threshold of $3 billion of notional
activity in a twelve-month period are
excepted from the definition of
‘‘security-based swap dealer.’’ 45 The
Dodd-Frank Act also requires securitybased swap-execution facilities, as
therein defined, to be registered with
and comply with prudential and
42 Compare BGC Swap Execution Facility, https://
www.bgcsef.com/; Bloomberg Professional Swap
Execution Facility Historical Data, https://
data.bloombergsef.com/; GFI Swaps Exchange
Trade Data, https://www.gfigroup.com/markets/gfisef/trade-data/; ICE Swap Trade, https://
www.theice.com/swap-trade; MarketAxess Credit
Default Swaps, https://www.marketaxess.com/
trade/credit-default-swaps; tpSEF CDS Data,
https://www.tpinformation.com/In-Depth-Data/
Credit/Credit-Default-Swaps; Tradeweb and
Dealerweb Swap Execution Facilities, https://
www.tradeweb.com/our-markets/market-regulation/
sef/; TraditionSEF Daily Activity, https://
www.traditionsef.com/market-activity/ (which
allow trading of credit default swap indices), with
360T Swap Execution Facilitiy, https://
www.360t.com/trading-solutions/sef/; Cboe Swap
Execution Facility, https://markets.cboe.com/
global/fx/sef/; Clearmarkets CM–SEF Center,
https://www.clear-markets.com/cm-sef-centre/;
LatAmSEF Market Activity, https://latamsef.com/
marketactivity.phtml; LedgerX, https://
www.ledgerx.com/; NEX SEF Data, https://
www.nexsef.com/; Refinitiv SEF Volumes, https://
www.refinitiv.com/en/products/sef-swap-executionfacility#sef-volumes; SwapEx, https://
www.swapex.com/swapex/market-data/NDF/;
TeraExchange Instruments, https://
teraexchange.com/Home/Instruments (which do
not host trading of credit default swap indices).
43 Id.
44 See Release Nos. 34–756711 (Aug. 5, 2015), 80
FR 48963 (Aug. 14, 2015) (‘‘Security-Based Swap
Entity Registration’’); 34–87782 (Dec. 18, 2019), 85
FR 6270 (Feb. 4, 2020) (‘‘Risk Mitigation
Techniques’’); 34–87005 (Sep. 19, 2019), 84 FR
68550 (Dec. 16, 2019) (‘‘Security-Based Swap
Recordkeeping and Reporting’’); 34–86175 (Jun. 21,
2019), 84 FR 43872 (Aug. 22, 2019) (‘‘SecurityBased Swap Capital, Margin, and Segregation’’); 34–
77617 (Apr. 14, 2016), 81 FR 29959 (May 13, 2016)
(‘‘Security-Based Swap Business Conduct
Standards’’).
45 See Entity Definitions adopting release, supra
note 13, at 30639.
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conduct standards to be set forth by the
Commission.46
B. Consideration of Benefits, Costs, and
the Effect on Competition, Efficiency,
and Capital Formation
The exemption in new Rule 17Ad–24
is designed to avoid imposing
requirements with marginal or no
benefit to safeguarding securities and
funds and protecting investors on
entities engaging in dealing activity in
security-based swaps and security-based
swap execution facilities, which will
benefit these entities since they will not
be required to register as a clearing
agency or comply with the
Commission’s requirements for clearing
agencies. Since these types of entities
also each have their own registration
and regulatory frameworks or are
exempt due to a de minimis level of
activity,47 the Commission does not
expect new Rule 17Ad–24 to impose
substantial costs, and there should be
minimal impacts on transparency and
financial stability. Lastly, new Rule
17Ad–24 may improve competition and
efficiency in the security-based swap
dealer and security-based swap
execution facility markets.
The cost savings to both entities
engaging in dealing activity in securitybased swaps and security-based swap
execution facilities under new Rule
17Ad–24 are likely to be significant.
New Rule 17Ad–24 will benefit entities
engaging in dealing activity in securitybased swaps and security-based swap
execution facilities to the extent that
additional clarity regarding registration
requirements reduces the costs they may
incur to determine which requirements
apply to their activities. Furthermore,
although no entities engaging in dealing
activity in security-based swaps or
security-based swap execution facilities
are currently registered as clearing
agencies with the Commission,
exempted entities engaging in dealing
activity in security-based swaps and
future exempted security-based swap
execution facilities and security-based
swap dealers will not have to incur
registration and compliance costs for
clearing agencies.48 Many of the costs of
complying with requirements for
clearing agencies involve collecting
information, and the Commission has
estimated the monetized burden of these
standards per clearing agency at $0.5
million in initial costs and $1.2 million
46 See
15 U.S.C. 78c–4.
supra notes 44, 46, and accompanying text.
48 Though a registered clearing agency may be
affiliated with a security-based swap execution
facility, none of the registered clearing agencies are
either a registered security-based swap dealer or
security-based swap execution facility.
47 See
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7641
in annual ongoing costs, adjusted to
2020 dollars.49 Absent the exemption,
entities engaging in dealing activity in
security-based swaps and security-based
swap execution facilities may have to
incur these costs. However, as existing
clearing agencies follow the Principles
for Financial Market Infrastructures,
many of the Commission’s requirements
for clearing agencies had minimal
additional per-entity costs.50 Since these
requirements are not common practice
for entities engaging in dealing activity
in security-based swaps and securitybased swap execution facilities,
applying the Commission’s clearing
agency requirements to these entities
would likely have higher per-entity
costs than the Commission’s past
estimates for clearing agencies.51 The
Commission does not expect either
security-based swap execution facilities
or security-based swap dealers will face
new costs from relying on new Rule
17Ad–24.
The Commission also does not expect
new Rule 17Ad–24 to impose costs on
security-based swap markets. Many of
the requirements that apply to registered
security-based swap dealers, such as
recordkeeping, governance, margin, and
capital requirements, cover risks that
overlap with those facing clearing
agencies.52 Other aspects of clearing
agency regulation, such as standards
addressing settlement risk or
participation requirements, are either
not applicable to entities engaging in
49 See Clearing Agency Standards adopting
release, supra note 4, at 66273. The estimates were
updated on a per entity basis using SIFMA’s
Management & Professional Earnings in the
Securities Industry 2013, modified to account for an
1,800-hour work year; multiplied by 5.35 to account
for bonuses, firm size, employee benefits and
overhead.
Because the exempted activities are not among
the core central counterparty or central securities
depository functions of a clearing agency, securitybased swap execution facilities and security-based
swap dealers would not unduly benefit from
avoiding the higher standards of a ‘‘covered clearing
agency.’’ See generally Release No. 34–78961 (Apr
9, 2020), 85 FR 28853 (May 14, 2020) (adopting an
amendment to the definition of ‘‘covered clearing
agency’’ such that ‘‘covered clearing agency’’ means
a clearing agency that provides the services of a
central counterparty or central securities
depository).
50 See Clearing Agency Standards adopting
release, supra note 4, at 66274.
51 However, many of the clearing agency
requirements would not apply to entities engaging
in dealing activity and security-based swap
execution facilities because these entities are not
likely to provide central counterparty or central
securities depository services, which are the focus
of the compliance costs associated with the SEC’s
regulatory framework for registered clearing
agencies.
52 The Commission has exempted entities that
engage in security-based swap dealing activity
below the de minimis threshold from these
requirements since these entities do not implicate
the concerns that these requirements address.
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Federal Register / Vol. 86, No. 19 / Monday, February 1, 2021 / Rules and Regulations
dealing activity in security-based swaps
or may place an undue burden on access
to this market.53 In crafting the securitybased swap dealer requirements, the
Commission has considered the benefits
for financial stability as well as the
burden on competition and the
promotion of efficiency, competition,
and capital formation.54 As such, in the
Commission’s view, applying
requirements for clearing agencies to
entities engaging in dealing activity in
security-based swaps for performing
customary dealing activity is not
necessary to achieve the goals of the
Dodd-Frank Act.
Similarly, security-based swap
execution facilities will have to register
with the Commission and abide by the
standards listed in the Dodd-Frank Act,
as implemented by future Commission
rules.55 Providing data to participants to
compare settlement terms or acting on
behalf of a clearing agency to facilitate
clearing services to the security-based
swap execution facilities’ customers,
while related to clearing and settlement,
does not expose the security-based swap
execution facility to market volatility, so
the Commission does not believe that
these activities alone justify requiring
security-based swap execution facilities
to adopt the risk management practices
required of clearing agencies.
The cost savings associated with new
Rule 17Ad–24 may promote
competition among entities engaging in
dealing activity in security-based swaps
and security-based swap execution
facilities. For example, new Rule 17Ad–
24 may lower barriers to entry for
entities engaging in dealing activity in
security-based swaps, promoting
competition among liquidity providers
in the security-based swap market.
Similarly, lower costs for security-based
swap execution facilities that provide
trade processing services should
increase competition in providing these
services, which may reduce the price
and/or increase the quality of these
services. To the extent that new Rule
17Ad–24 increases the availability of
53 See Clearing Agency Standards adopting
release, supra note 4, at 66242–43. In particular,
security-based swap dealers do not have members
like clearing agencies do. Requiring that they accept
any participant that has net capital above $50
million may unduly restrict their ability to mitigate
risks and function as a dealer.
54 See, e.g., Risk Mitigation Techniques adopting
release, supra note 44, at 6390 (requiring certain
risk mitigation techniques for registered securitybased swap dealers who hold uncleared swaps
because ‘‘the risks of the counterparties’ failure to
manage credit risk adequately may not become
apparent until the onset of a financial crisis,’’ as
well as discussing the rule’s burden on competition
and promotion of efficiency, competition, and
capital formation).
55 See 15 U.S.C. 78c–4.
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and competition between either
liquidity providers or trade execution
services, it may marginally improve
efficiency of these services. The
Commission does not anticipate new
Rule 17Ad–24 to have a substantial
impact on capital formation.
IV. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) imposes certain requirements
on Federal agencies in connection with
the conducting or sponsoring of any
‘‘collection of information.’’ 56 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. Further, 44 U.S.C. 3507(a)
provides that, before adopting or
revising a collection of information
requirement, an agency must, among
other things, publish notice in the
Federal Register stating that the agency
has submitted the proposed collection
of information to the Office of
Management and Budget (‘‘OMB’’) and
setting forth certain required
information, including (i) a title for the
collection of information; (ii) a summary
of the collection of information; (iii) a
brief description of the need for the
information and the proposed use of the
information; (iv) a description of the
likely respondents and proposed
frequency of response to the collection
of information; (v) an estimate of the
paperwork burden that shall result from
the collection of information; and (vi)
notice that comments may be submitted
to the agency and director of OMB.57
The proposing release provided notice
that Rule 17Ad–24 does not impose
recordkeeping or information collection
requirements and would not be a
‘‘collection of information’’ within the
meaning of the PRA. The Commission
received no comments in response, and
the Commission continues to believe
that Rule 17Ad-24 does not impose a
recordkeeping burden.
determine the impact of such
rulemaking on ‘‘small entities.’’ 60 The
Commission certified in the proposing
release, pursuant to Section 605(b) of
the RFA, that Rule 17Ad–24 would not,
if adopted, have a significant impact on
a substantial number of small entities.61
The Commission received no comments
on this certification.
Because the exemptions provided in
Rule 17Ad–24 ensure that certain
activities of registered security-based
swap dealers, registered security-based
swap execution facilities, and entities
engaging in dealing activity in securitybased swaps that are eligible for an
exception under 17 CFR 240.3a71–2(a)
(or subject to the period set forth in 17
CFR 240.3a71–2(b)) do not trigger the
requirement to register as a clearing
agency,62 the Commission certifies that
Rule 17Ad–24 will not have a
significant economic impact on a
substantial number of small entities.
VI. Other Matters
If any of the provisions of this rule, or
the application thereof to any person or
circumstance, is held to be invalid, such
invalidity shall not affect other
provisions or application of such
provisions to other persons or
circumstances that can be given effect
without the invalid provision or
application.
Pursuant to the Congressional Review
Act,63 the Office of Information and
Regulatory Affairs has designated these
rules as not a ‘‘major rule,’’ as defined
by 5 U.S.C. 804(2).
VII. Statutory Authority
Pursuant to the Exchange Act,
particularly Sections 17A and 36
thereof, 15 U.S.C. 78q–1 and 15 U.S.C.
78mm, the Commission is adopting Rule
17Ad–24.
List of Subjects in 17 CFR Part 240
V. Regulatory Flexibility Act
Certification
Reporting and recordkeeping
requirements, Securities.
The Regulatory Flexibility Act
(‘‘RFA’’) requires the Commission, in
promulgating rules, to consider the
impact of those rules on small entities.58
Section 603(a) of the Administrative
Procedure Act,59 as amended by the
RFA, generally requires the Commission
to undertake a regulatory flexibility
analysis of all proposed rules to
Text of Amendment
56 See
44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
44 U.S.C. 3507(a)(1)(D); see also 5 CFR
1320.5(a)(1)(iv).
58 See 5 U.S.C. 601 et seq.
59 5 U.S.C. 603(a).
57 See
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In accordance with the foregoing, title
17, chapter II of the Code of Federal
Regulations is amended as follows:
60 Section 601(b) of the RFA permits agencies to
formulate their own definitions of ‘‘small entities.’’
See 5 U.S.C. 601(b). The Commission has adopted
definitions for the term ‘‘small entity’’ for the
purposes of rulemaking in accordance with the
RFA. These definitions, as relevant to this
rulemaking, are set forth in 17 CFR 240.0–10.
61 See 5 U.S.C. 605(b).
62 See supra Part III.
63 5 U.S.C. 801 et seq.
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Federal Register / Vol. 86, No. 19 / Monday, February 1, 2021 / Rules and Regulations
Dated: December 16, 2020.
Vanessa A. Countryman,
Secretary.
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
[FR Doc. 2020–28194 Filed 1–29–21; 8:45 am]
1. The general authority citation for
part 240 continues to read, in part, as
follows:
■
BILLING CODE 8011–01–P
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, 78dd, 78ll,
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–
3, 80b–4, 80b–11, and 7201 et seq., and 8302;
7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18
U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat.
1376 (2010); and Pub. L. 112–106, sec. 503
and 602, 126 Stat. 326 (2012), unless
otherwise noted.
DEPARTMENT OF ENERGY
*
*
*
*
*
2. Section 240.17Ad–24 is added to
read as follows:
■
§ 240.17Ad–24 Exemption from clearing
agency definition for certain registered
security-based swap dealers, registered
security-based swap execution facilities,
and entities engaging in dealing activity in
security-based swaps that are eligible for
an exception under § 240.3a71–2(a) (or
subject to the period set forth in § 240.3a71–
2(b)).
A registered security-based swap
dealer, a registered security-based swap
execution facility, or an entity engaging
in dealing activity in security-based
swaps that is eligible for an exception
under § 240.3a71–2(a) (or subject to the
period set forth in § 240.3a71–2(b)) shall
be exempt from inclusion in the term
‘‘clearing agency,’’ as defined in section
3(a)(23)(A) of the Act, where such
registered security-based swap dealer,
registered security-based swap
execution facility, or entity engaging in
dealing activity in security-based swaps
that is eligible for an exception under
§ 240.3a71–2(a) (or subject to the period
set forth in § 240.3a71–2(b)) would be
deemed to be a clearing agency solely by
reason of:
(a) Functions performed by such
institution as part of customary dealing
activities or providing facilities for
comparison of data respecting the terms
of settlement of securities transactions
effected on such registered securitybased swap execution facility,
respectively; or
(b) Acting on behalf of a clearing
agency or participant therein in
connection with the furnishing by the
clearing agency of services to its
participants or the use of services of the
clearing agency by its participants.
By the Commission.
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Federal Energy Regulatory
Commission
18 CFR Parts 153 and 157
[Docket No. RM20–15–001; Order No. 871–
A]
Limiting Authorizations To Proceed
With Construction Activities Pending
Rehearing
Federal Energy Regulatory
Commission.
ACTION: Order addressing arguments
raised on rehearing and clarification,
and providing for additional briefing.
AGENCY:
On rehearing, the Federal
Energy Regulatory Commission
(Commission) modifies Order No. 871,
which amended its regulations to
preclude the issuance of authorizations
to proceed with construction activities
with respect to natural gas facilities
authorized by order issued pursuant to
section 3 or section 7 of the Natural Gas
Act until either the time for filing a
request for rehearing of such order has
passed with no rehearing request being
filed or the Commission has acted on
the merits of any rehearing request. The
Commission provides for further
briefing on the issues raised in the
rehearing requests.
DATES: The effective date of the
document published on July 6, 2020 (85
FR 40113) is confirmed: August 5, 2020.
FOR FURTHER INFORMATION CONTACT: Tara
DiJohn, Office of the General Counsel,
Federal Energy Regulatory Commission,
888 First Street NE, Washington, DC
20426, (202) 502–8671, tara.dijohn@
ferc.gov.
SUMMARY:
SUPPLEMENTARY INFORMATION:
1. On June 9, 2020, the Federal Energy
Regulatory Commission (Commission)
issued Order No. 871, which is a final
rule that precludes the issuance of
authorizations to proceed with
construction activities with respect to a
Natural Gas Act (NGA) section 3
authorization or section 7(c) certificate
order until the Commission acts on the
merits of any timely-filed request for
rehearing or the time for filing such a
request has passed.1 On July 9, 2020, the
1 Limiting Authorizations to Proceed with
Construction Activities Pending Rehearing, Order
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7643
Interstate Natural Gas Association of
America (INGAA) requested
clarification or, in the alternative,
rehearing, and Kinder Morgan, Inc.
Natural Gas Entities 2 (Kinder Morgan)
and TC Energy Corporation (TC Energy)
requested rehearing of Order No. 871.
2. Pursuant to Allegheny Defense
Project v. FERC,3 the rehearing requests
filed in this proceeding may be deemed
denied by operation of law. However, as
permitted by section 19(a) of the NGA,4
we are modifying the discussion in
Order No. 871 and providing for
additional briefing, as discussed below.5
I. Background
3. In Order No. 871, the Commission
explained that historically, due to the
complex nature of the matters raised on
rehearing of orders granting
authorizations under NGA sections 3
and 7, the Commission had often issued
an order (known as a tolling order) by
the thirtieth day following the filing of
a rehearing request, allowing itself
additional time to provide thoughtful,
well-considered attention to the issues
raised on rehearing.
4. In order to balance its commitment
to expeditiously responding to parties’
concerns in comprehensive orders on
rehearing and the serious concerns
posed by the possibility of construction
proceeding prior to the completion of
agency review, the Commission, in
Order No. 871, exercised its discretion
by amending its regulations to add new
§ 157.23, which precludes the issuance
of authorizations to proceed with
construction of projects authorized
under NGA sections 3 and 7 during the
period for filing request for rehearing of
No. 871, 85 FR 40113 (July 6, 2020), 171 FERC
¶ 61,201 (2020).
2 The Kinder Morgan Gas Entities include:
Natural Gas Pipeline Company of America LLC;
Tennessee Gas Pipeline Company, L.L.C.; Southern
Natural Gas Company, L.L.C.; Colorado Interstate
Gas Company, L.L.C.; Wyoming Interstate
Company, L.L.C.; El Paso Natural Gas Company,
L.L.C.; Mojave Pipeline Company, L.L.C.; Bear
Creek Storage Company, L.L.C.; Cheyenne Plains
Gas Pipeline Company, LLC; Elba Express
Company, L.L.C.; Kinder Morgan Louisiana
Pipeline LLC; Southern LNG Company, L.L.C.; and
TransColorado Gas Transmission Company LLC.
3 964 F.3d 1 (D.C. Cir. 2020) (en banc)
(Allegheny).
4 15 U.S.C. 717r(a) (‘‘Until the record in a
proceeding shall have been filed in a court of
appeals, as provided in subsection (b), the
Commission may at any time, upon reasonable
notice and in such manner as it shall deem proper,
modify or set aside, in whole or in part, any finding
or order made or issued by it under the provisions
of this chapter.’’).
5 Allegheny, 964 F.3d at 16–17.
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]]>Agencies
[Federal Register Volume 86, Number 19 (Monday, February 1, 2021)]
[Rules and Regulations]
[Pages 7637-7643]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28194]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-90667; File No. S7-08-11]
RIN 3235-AK74
Exemption From the Definition of ``Clearing Agency'' for Certain
Activities of Security-Based Swap Dealers and Security-Based Swap
Execution Facilities
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting a rule pursuant to Section 36 of the Securities Exchange Act
of 1934 (``Exchange Act'') to exempt from the definition of ``clearing
agency'' in Section 3(a)(23) of the Exchange Act certain activities of
a registered security-based swap dealer, a registered security-based
swap execution facility, and a person engaging in dealing activity in
security-based swaps that is eligible for an exception from
registration as a security-based swap dealer because the quantity of
dealing activity is de minimis.
DATES: Effective date: April 2, 2021.
FOR FURTHER INFORMATION CONTACT: Matthew Lee, Assistant Director, or
Jesse Capelle, Special Counsel, Office of Clearance and Settlement,
Division of Trading and Markets, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-7010, at (202) 551-5710.
SUPPLEMENTARY INFORMATION: The Commission is adopting 17 CFR 240.17Ad-
24 (``Rule 17Ad-24'') to exempt certain activities of a registered
security-based swap execution facility,\1\ a registered security-based
swap dealer,\2\ and an entity that is eligible for an exception under
17 CFR 240.3a71-2(a) (or subject to the period set forth in 17 CFR
240.3a71-2(b)) \3\ from the definition of ``clearing agency.''
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\1\ 15 U.S.C. 78c-4(a) (setting forth the registration
requirement for security-based swap execution facilities). The
Commission has not yet adopted rules regarding the registration of
security-based swap execution facilities. The Commission has granted
a temporary exemption from the registration requirement for
security-based swap execution facilities. See Release No. 34-64678
(June 15, 2011), 76 FR 36287, 36292-93, 36306 (June 22, 2011). This
exemption will expire on the earliest compliance date set forth in
any of the final rules regarding registration of security-based swap
execution facilities. See id. at 36292-93, 36306.
\2\ 15 U.S.C. 78o-10(a)(1); see also Release No. 34-75611 (Aug.
5, 2015), 80 FR 48964, 48988 (Aug. 14, 2015). A security-based swap
market participant that meets the definition of ``security-based
swap dealer'' as of August 6, 2021 is required to register with the
Commission no later than November 1, 2021. See Release No. 34-87780
(Dec. 18, 2019), 85 FR 6270, 6345-46 (Feb. 4, 2020).
\3\ In contrast to the definition of ``dealer'' in Section
3(a)(5) of the Exchange Act, Section 3(a)(71)(D) of the Exchange Act
and 17 CFR 240.3a71-2(a) thereunder contain an exception from the
definition of ``security-based swap dealer'' for any entity that
engages in a de minimis quantity of security-based swap dealing in
connection with transactions with or on behalf of its customers. See
15 U.S.C. 78c(a)(71)(D); 17 CFR 240.3a71-2(a). In addition, 17 CFR
240.3a71-2(b) provides that a person that has not registered as a
security-based swap dealer by virtue of satisfying the requirements
of paragraph (a) of the rule, but that no longer can take advantage
of the de minimis exception, will be deemed not to be a security-
based swap dealer under section 3(a)(71) of the Act (15 U.S.C.
78c(a)(71)) and subject to the requirements of section 15F of the
Act (15 U.S.C. 78o-10) and the rules, regulations and
interpretations issued thereunder until the earlier of the date on
which it submits a complete application for registration pursuant to
section 15F(b) (15 U.S.C. 78o-10(b)) or two months after the end of
the month in which that person becomes no longer able to take
advantage of the exception.
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Table of Contents
I. Background
II. New Rule 17Ad-24
A. Proposed Rule Text
B. Comment Received
C. Final Rule
III. Economic Analysis
A. Baseline
B. Consideration of Benefits, Costs, and the Effect on
Competition, Efficiency, and Capital Formation
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act Certification
VI. Other Matters
VII. Statutory Authority
I. Background
The term ``clearing agency'' is broadly defined in Section
3(a)(23)(A) of the Exchange Act and includes a variety of functions.\4\
Section 3(a)(23)(B) of the Exchange Act excludes a number of
[[Page 7638]]
entities and activities from the definition of ``clearing agency,''
including certain activities of, among other types of market
intermediaries, national securities exchanges and securities dealers
that are also clearing agency functions.\5\ These exclusions are
designed to limit the potential for overlapping or duplicative
requirements that may otherwise be imposed on these regulated
entities.\6\
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\4\ Specifically, the term ``clearing agency'' includes, among
other things, any person who acts as an intermediary in making
payments or deliveries or both in connection with transactions in
securities or that provides the 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. The
definition also includes any person, such as a securities
depository, who (i) 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, or (ii) otherwise permits or facilitates
the settlement of securities transactions or the hypothecation or
lending of securities without physical delivery of securities
certificates. 15 U.S.C. 78c(a)(23)(A); see also Release Nos. 34-
71699 (Mar. 12, 2014), 79 FR 16865 (Mar. 26, 2014), corrected at 79
FR 29507, 29510-11 (May 22, 2014); 34-68080 (Oct. 22, 2012), 77 FR
66219, 66221-22 (Nov. 2, 2012) (``Clearing Agency Standards adopting
release'') (discussing the same).
\5\ See 15 U.S.C. 78c(a)(23)(B).
\6\ Release No. 34-64017 (Mar. 3, 2011), 76 FR 14472, 14531
(Mar. 16, 2011) (``proposing release'').
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Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act'') created new categories of
entities in the security-based swap market that may perform clearing
agency functions similar to the functions performed by entities
excluded from the definition of ``clearing agency'' in Section
3(a)(23)(B) of the Exchange Act in the traditional securities markets.
However, Title VII did not amend the scope of the term ``clearing
agency'' to address these new types of financial intermediaries for the
security-based swap markets or their potential clearing agency
functions, even if those new intermediaries perform similar functions
as entities excluded from the ``clearing agency'' definition, such as a
national securities exchange or a securities dealer. As a result,
certain activities performed for security-based swaps by security-based
swap dealers and security-based swap execution facilities are also
clearing agency functions that trigger the requirement to either
register as a clearing agency or obtain an exemption from registration
as a clearing agency, while the same activities performed for
securities that are not security-based swaps do not carry the same
legal and regulatory implications.\7\
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\7\ See 15 U.S.C. 78q-1(b)(1).
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Specifically, Section 3(a)(23)(B)(ii) of the Exchange Act provides
that the term ``clearing agency'' does not include, among other things,
any national securities exchange solely by reason of its providing
facilities for comparison of data respecting the terms of settlement of
securities transactions effected on such exchange.\8\ As noted above,
the Dodd-Frank Act did not amend the Exchange Act definition of
``clearing agency'' to provide a comparable exclusion for a registered
security-based swap execution facility. A security-based swap execution
facility is 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.\9\ This function, similar to that provided by a national
securities exchange, facilitates the execution of a security-based swap
transaction between two counterparties by providing facilities for the
comparison of data respecting the terms of settlement of that
transaction.\10\ Accordingly, although a national securities exchange
performing this clearing agency function is excluded under Section
3(a)(23)(B)(ii) from the definition of ``clearing agency,'' a
registered security-based swap execution facility performing this
function is not.
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\8\ 15 U.S.C. 78c(a)(23)(B).
\9\ The Exchange Act definition of ``security-based swap
execution facility'' states that a security-based swap execution
facility is not a national securities exchange. 15 U.S.C.
78c(a)(77).
\10\ A registered security-based swap execution facility may
facilitate trade processing of any security-based swap. See 15
U.S.C. 78c-4(b)(2).
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Similarly, Section 3(a)(23)(B)(iii) provides that the term
``clearing agency'' does not include, among other things, any dealer if
such dealer would be deemed to be a clearing agency solely by reason of
functions performed by such institution as part of customary brokerage
or dealing activities, or solely by reason of acting on behalf of a
clearing agency or a participant therein in connection with the
furnishing by the clearing agency of services to its participants or
the use of services of the clearing agency by its participants.\11\ As
with security-based swap execution facilities, the Exchange Act
definition of ``clearing agency'' does not provide an exclusion for a
registered security-based swap dealer.\12\ Section 3(a)(71) of the
Exchange Act defines ``security-based swap dealer'' 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 it to be
commonly known in the trade as a dealer or market maker in security-
based swaps.\13\ These functions are similar to those provided by a
dealer for securities that are not security-based swaps.\14\
Accordingly, although a dealer performing these functions is excluded
from the definition of ``clearing agency,'' a registered security-based
swap dealer performing the same functions is not.\15\
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\11\ 15 U.S.C. 78c(a)(23)(B).
\12\ See 15 U.S.C. 78c(a)(5) (defining ``dealer'' to exclude a
dealer for security-based swaps, other than security-based swaps
with or for persons that are not eligible contract participants);
see also, supra, note 3 (discussing the same).
\13\ 15 U.S.C. 78c(a)(71). In 2012, the Commission and the
Commodity Futures Trading Commission further defined a number of
terms defining the intermediaries in the swap and security-based
swap markets, including ``security-based swap dealer.'' See Release
No. 34-66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (``Entity
Definitions adopting release''). Among other things, the release
adopted 17 CFR 240.3a71-1 through 3a71-5, which further define
``security-based swap dealer.'' Furthermore, the definition of
``dealer'' in Section 3(a)(5) of the Exchange Act provides that an
entity transacting as a dealer in security-based swaps would not
need to separately register with the Commission as a broker-dealer
so long as its security-based swap transactions are solely with
persons that satisfy the definition of ``eligible contract
participant.'' See 17 U.S.C. 78c(a)(5) (defining ``dealer''); 17
U.S.C. 78(a)(65) (defining ``eligible contract participant'' by
reference to Section 1a(18) of the Commodity Exchange Act (7 U.S.C.
1a(18)).
\14\ See supra note 3 (noting that, in contrast to the
definition of ``dealer'' in Section 3(a)(5) of the Exchange Act,
Section 3(a)(71)(D) of the Exchange Act and 17 CFR 240.3a71-2(a)
thereunder contain an exception from the definition of ``security-
based swap dealer'' for any entity that engages in a de minimis
quantity of security-based swap dealing in connection with
transactions with or on behalf of its customers).
\15\ See supra note 2 (noting the adoption of final rules for
security-based swap dealers in 2019 and the compliance date for
registration of November 1, 2021).
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To address the disparate treatment of similarly situated entities
performing potential clearing agency functions, the Commission proposed
Rule 17Ad-24 in 2011.\16\ The Commission explained that the rule would
avoid imposing overlapping or duplicative requirements on these
entities with marginal or no benefit to safeguarding securities and
funds and protecting investors.\17\ As described in the proposing
release,\18\ Rule 17Ad-24 would provide exemptions from the Exchange
Act term ``clearing agency'' for certain activities of registered
security-based swap dealers and registered security-based swap
execution facilities that are also clearing agency functions, mirroring
the exclusions from the definition described above for national
securities exchanges and dealers. A person acting as a security-based
swap dealer may make payments or deliveries or both in connection with
transactions in securities, in a manner that could require that person
to register as a clearing agency under the Exchange Act.\19\ In
particular, over the life of a security-based swap transaction, a
security-based swap dealer may facilitate the transfer of collateral,
periodic fixed amount payments, or termination payments between the
counterparties to a transaction, which would constitute making payments
or deliveries or both in connection with transactions in securities
under the ``clearing agency'' definition. Similarly,
[[Page 7639]]
a security-based swap execution facility that provides 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 also may provide
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, in a manner that could require that entity to
register as a clearing agency.\20\
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\16\ See proposing release, supra note 6.
\17\ Id. at 14531.
\18\ See id. at 14494-95.
\19\ Compare 15 U.S.C. 78c(a)(71) with 15 U.S.C. 78c(a)(23).
\20\ Compare 15 U.S.C. 78c(a)(77) with 15 U.S.C. 78c(a)(23).
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The Commission received one comment regarding the proposed
rule,\21\ as discussed in Part II.B below. The Commission is now
adopting Rule 17Ad-24, as discussed in Part II.C below.
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\21\ See Letter from Jeff Gooch, Chief Executive Officer,
MarkitSERV (Apr. 29, 2011) (``MarkitSERV Letter''). The comment
letter is available on the Commission's website at https://www.sec.gov/comments/s7-08-11/s70811.shtml.
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II. New Rule 17Ad-24
A. Proposed Rule Text
Proposed Rule 17Ad-24 provided that a registered security-based
swap dealer and a registered security-based swap execution facility
shall be exempt from inclusion in the term ``clearing agency,'' as
defined in section 3(a)(23)(A) of the Act, where such registered
security-based swap dealer or registered security-based swap execution
facility would be deemed to be a clearing agency solely by reason of
functions performed by such institution as part of customary dealing
activities or providing facilities for comparison of data respecting
the terms of settlement of securities transactions effected on such
registered security-based swap execution facility, respectively, or
acting on behalf of a clearing agency or participant therein in
connection with the furnishing by the clearing agency of services to
its participants or the use of services of the clearing agency by its
participants.
B. Comment Received
One commenter agreed with the Commission's proposed approach that a
security-based swap execution facility not be required to register as a
clearing agency solely because it performs trade data comparison as
part of the trade execution process for security-based swaps.\22\
However, the commenter also stated that a security-based swap execution
facility should not have a blanket exemption from clearing agency
registration for activities related to matching or trade verification
services because, in the commenter's view, such an approach would
result in the rule applying differently to third-party providers of
such services than it would to a security-based swap execution
facility.\23\
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\22\ See MarkitSERV Letter.
\23\ See id. at 6.
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By its terms, proposed Rule 17Ad-24 would not provide a blanket
exemption from clearing agency registration to a security-based swap
execution facility to provide matching or trade verification services
that otherwise are clearing agency functions as defined in the Exchange
Act. Rather, the Commission's approach under Rule 17Ad-24 specifies
that a registered security-based swap execution facility would not be
required to register as a clearing agency solely based upon the fact
that such an entity provides facilities for comparison of data
respecting the terms of settlement of securities transactions effected
on such registered security-based swap execution facility.\24\ As noted
in the proposing release and restated here,\25\ were a security-based
swap execution facility to engage in activity that is outside the scope
of the exemption provided in Rule 17Ad-24 and that falls within the
definition of ``clearing agency'' under the Exchange Act, it would be
required to register as a clearing agency or obtain a separate
exemption from clearing agency registration.\26\
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\24\ This approach is consistent with the approach that applies
to a national securities exchange when performing the same activity
for transactions in securities that are not security-based swaps.
\25\ See proposing release, supra note 6, at 14495.
\26\ See id. For example, with respect to transactions in
securities that are not security-based swaps, the Commission has
explained that ``matching'' is a clearing agency function. Release
No. 34-39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13, 1998).
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C. Final Rule
Pursuant to the Commission's authority under Section 36 of the
Exchange Act,\27\ the Commission is adopting Rule 17Ad-24, and the
Commission is making two modifications from the proposal. First, since
the Commission proposed Rule 17Ad-24, the Commission adopted 17 CFR
240.3a71-2 to provide an exception from the definition of ``security-
based swap dealer'' to any entity that engages in a de minimis quantity
of security-based swap dealing activity in connection with transactions
with or on behalf of its customers.\28\ In adopting the de minimis
exception, the Commission explained that the exception should be
interpreted to address amounts of dealing activity that are
sufficiently small that they do not warrant registration to address
concerns implicated by the regulations governing swap dealers and
security-based swap dealers.\29\ The Commission similarly noted in
proposing Rule 17Ad-24 that the exemptions in the rule are intended to
avoid imposing requirements with marginal or no benefit to safeguarding
securities and funds and protecting investors.\30\ Accordingly, the
Commission is adding persons eligible for this exception under 17 CFR
240.3a71-2 to the exemption in Rule 17Ad-24 because imposing clearing
agency registration on persons solely to regulate functions performed
by such persons as part of customary dealing activity for security-
based swaps, and where that dealing activity is sufficiently small that
it does not warrant registration as a security-based swap dealer, would
present only marginal or no benefit to safeguarding securities and
funds and protecting investors. Second, to improve clarity and
readability, the Commission is dividing the rule text into
subparagraphs (a) and (b).
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\27\ 15 U.S.C. 78mm. Section 36 of the Exchange Act authorizes
the Commission to conditionally or unconditionally exempt any
person, security, or transaction, or any class of classes of
persons, securities, or transactions, from any provision or
provisions of the Exchange Act or any rule or regulation 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.
\28\ See supra notes 3 and 14 and accompanying text.
\29\ See Entity Definitions adopting release, supra note 13, at
30626.
\30\ See proposing release, supra note 6, at 14531.
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Accordingly, new Rule 17Ad-24 provides that a registered security-
based swap dealer, a registered security-based swap execution facility,
or an entity engaging in dealing activity in security-based swaps that
is eligible for an exception under 17 CFR 240.3a71-2(a) (or subject to
the period set forth in 17 CFR 240.3a71-2(b)) \31\ is exempt from
inclusion in the term ``clearing agency,'' as defined in Section
3(a)(23)(A) of the Exchange Act, where such registered security-based
swap dealer, registered security-based swap execution facility, or
entity engaging in dealing activity in security-based swaps that is
eligible for an exception under 17 CFR 240.3a71-2(a) (or subject to the
period set forth in 17 CFR 240.3a71-2(b)) would be deemed to be a
clearing agency solely by
[[Page 7640]]
reason of: (a) Functions performed by such institution as part of
customary dealing activities or providing facilities for comparison of
data respecting the terms of settlement of securities transactions
effected on such registered security-based swap execution facility,
respectively, or (b) acting on behalf of a clearing agency or
participant therein in connection with the furnishing by the clearing
agency of services to its participants or the use of services of the
clearing agency by its participants.
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\31\ See supra note 3 (providing the text of 17 CFR 240.3a71-
2(a) and (b)). Accordingly, an entity subject to the period set
forth in 17 CFR 240.3a71-2(b) will continue to be exempt from
inclusion in the term ``clearing agency'' during the period after it
is no longer able to able to rely on the de minimis exception but
before it is deemed to be a security-based swap dealer.
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In addition, as noted above, the Commission has granted a temporary
exemption from the registration requirement for security-based swap
execution facilities. The temporary exemption from the registration
requirement for security-based swap execution facilities will expire on
the earliest compliance date set forth in any of the final rules
regarding registration of security-based swap execution facilities.\32\
To the extent an entity relying on the temporary exemption from the
registration requirement for security-based swap execution facilities
also performs the activities of a registered security-based swap
execution facility as described in Rule 17Ad-24, the Commission notes
that it has provided a separate, temporary exemption from clearing
agency registration for entities providing certain clearing services
for security-based swaps, including trade matching services.\33\
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\32\ See supra note 1.
\33\ See Release No. 34-64796 (July 1, 2011), 76 FR 39963, 39964
(July 7, 2011).
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III. Economic Analysis
The Commission is sensitive to the economic consequences and
effects of the adopted amendments, including their benefits and costs.
Under Section 3(f) of the Exchange Act, whenever the Commission engages
in rulemaking under the Exchange Act and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, it must consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.\34\ Section 23(a)(2) of the Exchange Act also prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\35\
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\34\ See 15 U.S.C. 78c(f).
\35\ See 15 U.S.C. 78w(a)(2).
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The Commission is exempting entities engaging in dealing activity
in security-based swaps and registered security-based swap execution
facilities from inclusion in the term ``clearing agency'' under the
Exchange Act for the following functions: (a) Performing customary
dealing activities or providing facilities for the comparison of data
respecting the settlement of securities transactions; or (b) acting on
behalf of a clearing agency or participant in connection with the
furnishing of clearing services.\36\ Section 3(a)(23)(B) of the
Exchange Act excludes national securities exchanges and securities
dealers from the definition of ``clearing agency,'' to limit the
potential for overlapping or duplicative requirements that may
otherwise be imposed on these regulated entities. Entities engaging in
dealing activity in security-based swaps and security-based swap
execution facilities perform similar functions for the security-based
swap market as securities dealers and national securities exchanges
perform for the general securities industry. Accordingly, new Rule
17Ad-24 is intended to avoid imposing requirements on these entities
with marginal or no benefit to safeguarding securities and funds and
protecting investors by mirroring the existing exemption from the
definition of ``clearing agency'' for entities engaging in dealing
activity in security-based swaps and security-based swap execution
facilities.\37\ Under new Rule 17Ad-24, these entities will not have to
expend additional resources determining their registration
requirements, registering as a clearing agency, or meeting the
standards required of registered clearing agencies as long as their
activities do not fall outside the scope of the exemption in new Rule
17Ad-24. Excluding either entities engaging in dealing activity in
security-based swaps or security-based swap execution facilities from
the requirements applicable to clearing agencies should not hinder the
Dodd-Frank Act's goals of greater transparency and financial stability
of the security-based swap market because the Commission has or will
have a regulatory framework for these entities targeted to dealing
activity in security-based swaps or the functions performed by
security-based swap execution facilities, rather than incidental
functions that may be similar to those performed by a clearing agency.
Just as de minimis amounts of dealing activity are sufficiently small
so as not to warrant registration to address concerns implicated by the
regulations governing security-based swap dealers, they are also
sufficiently small such that they do not implicate the concerns
underpinning the regulations governing clearing agencies.
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\36\ See supra Part II.C (setting forth the final rule text).
For purposes of this economic analysis, ``entities engaging in
dealing activity in security-based swaps'' includes both registered
security-based swap dealers and entities engaging in dealing
activity in security-based swaps that are eligible for an exception
under 17 CFR 240.3a71-2(a) (or subject to the period set forth in 17
CFR 240.3a71-2(b)).
\37\ See supra note 5 and accompanying text.
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A. Baseline
To assess the economic impact of new Rule 17Ad-24, the Commission
is using as its baseline the security-based swap market as it exists at
the time of this release. This analysis uses existing Commission
analyses of security-based swap market in rules adopted pursuant to
Title VII of the Dodd-Frank Act, updated using data from the DTCC
Derivatives Repository Limited Trade Information Warehouse (``TIW'') to
calendar year 2019.\38\ The data available to the Commission from TIW
do not encompass those transactions that both: (i) Do not involve U.S.
counterparties, and (ii) are based on non-U.S. reference entities.
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\38\ See, e.g., infra note 40; supra note 13.
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The Commission estimates, based on an analysis of TIW data that out
of more than 4,000 entities engaged in single name CDS activity
worldwide in 2019, potentially 50 entities may engage in dealing
activity that would exceed the de minimis threshold, and thus
ultimately have to register as security-based swap dealers.\39\ Ten
entities that engaged in dealing activity had less than $3 billion of
notional transacted in single-name credit default swaps, so they could
use the de minimis exception for the definition of ``security-based
swap dealer.'' \40\
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\39\ See Release No. 34-75611 (Aug. 14, 2015), 80 FR 48963,
49000 (Aug. 14, 2015). The estimate has been updated for data for
calendar year 2019.
\40\ See Entity Definitions adopting release, supra note 13, at
30636. To identify dealing activity, the Commission counted the
number of entities that had three or more counterparties in a
calendar year that were not recognized as dealers by the
International Swaps and Derivatives Association. The estimate has
been updated with data for calendar year 2019.
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In addition, eighteen swap execution facilities have permanent or
temporary registration with the Commodity Futures Trading
Commission.\41\ Of those, nine allow trading of credit default swap
indices; if these nine allow trading of single-name credit default
swaps, they would be required to register as security-based swap
[[Page 7641]]
execution facilities with the Commission.\42\
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\41\ CFTC, Trading Organizations--Swap Execution Facilities
(SEF), https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities.
\42\ Compare BGC Swap Execution Facility, https://www.bgcsef.com/
; Bloomberg Professional Swap Execution Facility Historical Data,
https://data.bloombergsef.com/; GFI Swaps Exchange Trade Data,
https://www.gfigroup.com/markets/gfi-sef/trade-data/; ICE Swap Trade,
https://www.theice.com/swap-trade; MarketAxess Credit Default Swaps,
https://www.marketaxess.com/trade/credit-default-swaps; tpSEF CDS
Data, https://www.tpinformation.com/In-Depth-Data/Credit/Credit-Default-Swaps; Tradeweb and Dealerweb Swap Execution Facilities,
https://www.tradeweb.com/our-markets/market-regulation/sef/;
TraditionSEF Daily Activity, https://www.traditionsef.com/market-activity/ (which allow trading of credit default swap indices), with
360T Swap Execution Facilitiy, https://www.360t.com/trading-solutions/sef/; Cboe Swap Execution Facility, https://markets.cboe.com/global/fx/sef/; Clearmarkets CM-SEF Center, https://www.clear-markets.com/cm-sef-centre/; LatAmSEF Market Activity,
https://latamsef.com/marketactivity.phtml; LedgerX, https://www.ledgerx.com/; NEX SEF Data, https://www.nexsef.com/; Refinitiv
SEF Volumes, https://www.refinitiv.com/en/products/sef-swap-execution-facility#sef-volumes; SwapEx, https://www.swapex.com/swapex/market-data/NDF/; TeraExchange Instruments, https://teraexchange.com/Home/Instruments (which do not host trading of
credit default swap indices).
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Security-based swap dealers must register with the Commission and
comply with prudential and conduct standards of the Dodd-Frank Act.\43\
Security-based swap dealers are subject to a registration and
regulatory framework that is tailored to the functions they serve and
risks they pose. These risks, and the corresponding Commission analysis
of costs and benefits of the ensuring requirements, are discussed in
the Security-Based Swap Entity Registration, Security-Based Swap
Recordkeeping and Reporting, Security-Based Swap Capital, Margin, and
Segregation, and Security-Based Swap Business Conduct Standards
releases.\44\ Entities that engage in dealing activity in security-
based swaps below the de minimis threshold of $3 billion of notional
activity in a twelve-month period are excepted from the definition of
``security-based swap dealer.'' \45\ The Dodd-Frank Act also requires
security-based swap-execution facilities, as therein defined, to be
registered with and comply with prudential and conduct standards to be
set forth by the Commission.\46\
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\43\ Id.
\44\ See Release Nos. 34-756711 (Aug. 5, 2015), 80 FR 48963
(Aug. 14, 2015) (``Security-Based Swap Entity Registration''); 34-
87782 (Dec. 18, 2019), 85 FR 6270 (Feb. 4, 2020) (``Risk Mitigation
Techniques''); 34-87005 (Sep. 19, 2019), 84 FR 68550 (Dec. 16, 2019)
(``Security-Based Swap Recordkeeping and Reporting''); 34-86175
(Jun. 21, 2019), 84 FR 43872 (Aug. 22, 2019) (``Security-Based Swap
Capital, Margin, and Segregation''); 34-77617 (Apr. 14, 2016), 81 FR
29959 (May 13, 2016) (``Security-Based Swap Business Conduct
Standards'').
\45\ See Entity Definitions adopting release, supra note 13, at
30639.
\46\ See 15 U.S.C. 78c-4.
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B. Consideration of Benefits, Costs, and the Effect on Competition,
Efficiency, and Capital Formation
The exemption in new Rule 17Ad-24 is designed to avoid imposing
requirements with marginal or no benefit to safeguarding securities and
funds and protecting investors on entities engaging in dealing activity
in security-based swaps and security-based swap execution facilities,
which will benefit these entities since they will not be required to
register as a clearing agency or comply with the Commission's
requirements for clearing agencies. Since these types of entities also
each have their own registration and regulatory frameworks or are
exempt due to a de minimis level of activity,\47\ the Commission does
not expect new Rule 17Ad-24 to impose substantial costs, and there
should be minimal impacts on transparency and financial stability.
Lastly, new Rule 17Ad-24 may improve competition and efficiency in the
security-based swap dealer and security-based swap execution facility
markets.
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\47\ See supra notes 44, 46, and accompanying text.
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The cost savings to both entities engaging in dealing activity in
security-based swaps and security-based swap execution facilities under
new Rule 17Ad-24 are likely to be significant. New Rule 17Ad-24 will
benefit entities engaging in dealing activity in security-based swaps
and security-based swap execution facilities to the extent that
additional clarity regarding registration requirements reduces the
costs they may incur to determine which requirements apply to their
activities. Furthermore, although no entities engaging in dealing
activity in security-based swaps or security-based swap execution
facilities are currently registered as clearing agencies with the
Commission, exempted entities engaging in dealing activity in security-
based swaps and future exempted security-based swap execution
facilities and security-based swap dealers will not have to incur
registration and compliance costs for clearing agencies.\48\ Many of
the costs of complying with requirements for clearing agencies involve
collecting information, and the Commission has estimated the monetized
burden of these standards per clearing agency at $0.5 million in
initial costs and $1.2 million in annual ongoing costs, adjusted to
2020 dollars.\49\ Absent the exemption, entities engaging in dealing
activity in security-based swaps and security-based swap execution
facilities may have to incur these costs. However, as existing clearing
agencies follow the Principles for Financial Market Infrastructures,
many of the Commission's requirements for clearing agencies had minimal
additional per-entity costs.\50\ Since these requirements are not
common practice for entities engaging in dealing activity in security-
based swaps and security-based swap execution facilities, applying the
Commission's clearing agency requirements to these entities would
likely have higher per-entity costs than the Commission's past
estimates for clearing agencies.\51\ The Commission does not expect
either security-based swap execution facilities or security-based swap
dealers will face new costs from relying on new Rule 17Ad-24.
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\48\ Though a registered clearing agency may be affiliated with
a security-based swap execution facility, none of the registered
clearing agencies are either a registered security-based swap dealer
or security-based swap execution facility.
\49\ See Clearing Agency Standards adopting release, supra note
4, at 66273. The estimates were updated on a per entity basis using
SIFMA's Management & Professional Earnings in the Securities
Industry 2013, modified to account for an 1,800-hour work year;
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
Because the exempted activities are not among the core central
counterparty or central securities depository functions of a
clearing agency, security-based swap execution facilities and
security-based swap dealers would not unduly benefit from avoiding
the higher standards of a ``covered clearing agency.'' See generally
Release No. 34-78961 (Apr 9, 2020), 85 FR 28853 (May 14, 2020)
(adopting an amendment to the definition of ``covered clearing
agency'' such that ``covered clearing agency'' means a clearing
agency that provides the services of a central counterparty or
central securities depository).
\50\ See Clearing Agency Standards adopting release, supra note
4, at 66274.
\51\ However, many of the clearing agency requirements would not
apply to entities engaging in dealing activity and security-based
swap execution facilities because these entities are not likely to
provide central counterparty or central securities depository
services, which are the focus of the compliance costs associated
with the SEC's regulatory framework for registered clearing
agencies.
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The Commission also does not expect new Rule 17Ad-24 to impose
costs on security-based swap markets. Many of the requirements that
apply to registered security-based swap dealers, such as recordkeeping,
governance, margin, and capital requirements, cover risks that overlap
with those facing clearing agencies.\52\ Other aspects of clearing
agency regulation, such as standards addressing settlement risk or
participation requirements, are either not applicable to entities
engaging in
[[Page 7642]]
dealing activity in security-based swaps or may place an undue burden
on access to this market.\53\ In crafting the security-based swap
dealer requirements, the Commission has considered the benefits for
financial stability as well as the burden on competition and the
promotion of efficiency, competition, and capital formation.\54\ As
such, in the Commission's view, applying requirements for clearing
agencies to entities engaging in dealing activity in security-based
swaps for performing customary dealing activity is not necessary to
achieve the goals of the Dodd-Frank Act.
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\52\ The Commission has exempted entities that engage in
security-based swap dealing activity below the de minimis threshold
from these requirements since these entities do not implicate the
concerns that these requirements address.
\53\ See Clearing Agency Standards adopting release, supra note
4, at 66242-43. In particular, security-based swap dealers do not
have members like clearing agencies do. Requiring that they accept
any participant that has net capital above $50 million may unduly
restrict their ability to mitigate risks and function as a dealer.
\54\ See, e.g., Risk Mitigation Techniques adopting release,
supra note 44, at 6390 (requiring certain risk mitigation techniques
for registered security-based swap dealers who hold uncleared swaps
because ``the risks of the counterparties' failure to manage credit
risk adequately may not become apparent until the onset of a
financial crisis,'' as well as discussing the rule's burden on
competition and promotion of efficiency, competition, and capital
formation).
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Similarly, security-based swap execution facilities will have to
register with the Commission and abide by the standards listed in the
Dodd-Frank Act, as implemented by future Commission rules.\55\
Providing data to participants to compare settlement terms or acting on
behalf of a clearing agency to facilitate clearing services to the
security-based swap execution facilities' customers, while related to
clearing and settlement, does not expose the security-based swap
execution facility to market volatility, so the Commission does not
believe that these activities alone justify requiring security-based
swap execution facilities to adopt the risk management practices
required of clearing agencies.
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\55\ See 15 U.S.C. 78c-4.
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The cost savings associated with new Rule 17Ad-24 may promote
competition among entities engaging in dealing activity in security-
based swaps and security-based swap execution facilities. For example,
new Rule 17Ad-24 may lower barriers to entry for entities engaging in
dealing activity in security-based swaps, promoting competition among
liquidity providers in the security-based swap market. Similarly, lower
costs for security-based swap execution facilities that provide trade
processing services should increase competition in providing these
services, which may reduce the price and/or increase the quality of
these services. To the extent that new Rule 17Ad-24 increases the
availability of and competition between either liquidity providers or
trade execution services, it may marginally improve efficiency of these
services. The Commission does not anticipate new Rule 17Ad-24 to have a
substantial impact on capital formation.
IV. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') imposes certain
requirements on Federal agencies in connection with the conducting or
sponsoring of any ``collection of information.'' \56\ 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. Further, 44 U.S.C. 3507(a) provides that, before adopting or
revising a collection of information requirement, an agency must, among
other things, publish notice in the Federal Register stating that the
agency has submitted the proposed collection of information to the
Office of Management and Budget (``OMB'') and setting forth certain
required information, including (i) a title for the collection of
information; (ii) a summary of the collection of information; (iii) a
brief description of the need for the information and the proposed use
of the information; (iv) a description of the likely respondents and
proposed frequency of response to the collection of information; (v) an
estimate of the paperwork burden that shall result from the collection
of information; and (vi) notice that comments may be submitted to the
agency and director of OMB.\57\
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\56\ See 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
\57\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR
1320.5(a)(1)(iv).
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The proposing release provided notice that Rule 17Ad-24 does not
impose recordkeeping or information collection requirements and would
not be a ``collection of information'' within the meaning of the PRA.
The Commission received no comments in response, and the Commission
continues to believe that Rule 17Ad-24 does not impose a recordkeeping
burden.
V. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\58\ Section 603(a) of the Administrative Procedure Act,\59\
as amended by the RFA, generally requires the Commission to undertake a
regulatory flexibility analysis of all proposed rules to determine the
impact of such rulemaking on ``small entities.'' \60\ The Commission
certified in the proposing release, pursuant to Section 605(b) of the
RFA, that Rule 17Ad-24 would not, if adopted, have a significant impact
on a substantial number of small entities.\61\ The Commission received
no comments on this certification.
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\58\ See 5 U.S.C. 601 et seq.
\59\ 5 U.S.C. 603(a).
\60\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted definitions for the term ``small entity''
for the purposes of rulemaking in accordance with the RFA. These
definitions, as relevant to this rulemaking, are set forth in 17 CFR
240.0-10.
\61\ See 5 U.S.C. 605(b).
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Because the exemptions provided in Rule 17Ad-24 ensure that certain
activities of registered security-based swap dealers, registered
security-based swap execution facilities, and entities engaging in
dealing activity in security-based swaps that are eligible for an
exception under 17 CFR 240.3a71-2(a) (or subject to the period set
forth in 17 CFR 240.3a71-2(b)) do not trigger the requirement to
register as a clearing agency,\62\ the Commission certifies that Rule
17Ad-24 will not have a significant economic impact on a substantial
number of small entities.
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\62\ See supra Part III.
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VI. Other Matters
If any of the provisions of this rule, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
Pursuant to the Congressional Review Act,\63\ the Office of
Information and Regulatory Affairs has designated these rules as not a
``major rule,'' as defined by 5 U.S.C. 804(2).
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\63\ 5 U.S.C. 801 et seq.
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VII. Statutory Authority
Pursuant to the Exchange Act, particularly Sections 17A and 36
thereof, 15 U.S.C. 78q-1 and 15 U.S.C. 78mm, the Commission is adopting
Rule 17Ad-24.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of Amendment
In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations is amended as follows:
[[Page 7643]]
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The general authority citation for part 240 continues to read, in
part, 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, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Section 240.17Ad-24 is added to read as follows:
Sec. 240.17Ad-24 Exemption from clearing agency definition for
certain registered security-based swap dealers, registered security-
based swap execution facilities, and entities engaging in dealing
activity in security-based swaps that are eligible for an exception
under Sec. 240.3a71-2(a) (or subject to the period set forth in Sec.
240.3a71-2(b)).
A registered security-based swap dealer, a registered security-
based swap execution facility, or an entity engaging in dealing
activity in security-based swaps that is eligible for an exception
under Sec. 240.3a71-2(a) (or subject to the period set forth in Sec.
240.3a71-2(b)) shall be exempt from inclusion in the term ``clearing
agency,'' as defined in section 3(a)(23)(A) of the Act, where such
registered security-based swap dealer, registered security-based swap
execution facility, or entity engaging in dealing activity in security-
based swaps that is eligible for an exception under Sec. 240.3a71-2(a)
(or subject to the period set forth in Sec. 240.3a71-2(b)) would be
deemed to be a clearing agency solely by reason of:
(a) Functions performed by such institution as part of customary
dealing activities or providing facilities for comparison of data
respecting the terms of settlement of securities transactions effected
on such registered security-based swap execution facility,
respectively; or
(b) Acting on behalf of a clearing agency or participant therein in
connection with the furnishing by the clearing agency of services to
its participants or the use of services of the clearing agency by its
participants.
By the Commission.
Dated: December 16, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-28194 Filed 1-29-21; 8:45 am]
BILLING CODE 8011-01-P
